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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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)
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 NO X
--- ---
The number of shares of the registrant's common stock outstanding on December
11, 2000, was 5,857,879 shares.
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HAWKER PACIFIC AEROSPACE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2000 1999
------------ ------------
ASSETS
Current assets
Cash $ 3,626,000 $ 2,227,000
Trade accounts receivable, net 11,775,000 18,246,000
Other receivables 58,000 260,000
Inventories 27,021,000 24,680,000
Prepaid expenses 1,060,000 550,000
------------ ------------
Total current assets 43,540,000 45,963,000
Equipment and leasehold improvements, net 14,286,000 13,822,000
Exchange assets, net 34,634,000 37,613,000
------------ ------------
Total fixed assets 48,920,000 51,435,000
Other assets 1,671,000 5,765,000
------------ ------------
Total assets $ 94,131,000 $103,163,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 53,891,000 $ 52,617,000
Accounts payable 9,133,000 13,402,000
Deferred revenue 2,534,000 3,397,000
Accrued payroll and employee benefits 2,940,000 1,495,000
Accrued expenses and other current liabilities 5,576,000 4,186,000
Current portion of notes payable 2,945,000 623,000
Preferred stock dividends payable 193,000 --
------------ ------------
Total current liabilities 77,212,000 75,720,000
Notes payable
Bank note 5,007,000 5,617,000
Related party 3,919,000 2,500,000
------------ ------------
Total long term debt 8,926,000 8,117,000
Deferred taxes 1,912,000 --
Commitments and contingencies
Redeemable convertible preferred stock
5,000,000 shares authorized; issued and outstanding:
300 shares; $3,750,000 redemption value 3,750,000 1,792,000
Shareholders' equity
Common stock: 20,000,000 shares authorized; issued and
outstanding: 5,857,653 and 5,822,222 at September 30, 2000,
and December 31, 1999, respectively 25,526,000 22,384,000
Accumulated deficit (17,733,000) (3,474,000)
Accumulated other comprehensive loss (5,462,000) (1,376,000)
------------ ------------
Total shareholders' equity 2,331,000 17,534,000
------------ ------------
Total liabilities and shareholders' equity $ 94,131,000 $103,163,000
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
-2-
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
September 30
------------
2000 1999
------------- -----------
Revenue $ 18,533,000 $23,472,000
Cost of revenue 17,529,000 18,508,000
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Gross margin 1,004,000 4,964,000
Selling, general and administrative expense 2,915,000 2,496,000
------------- -----------
Income (loss) from operations (1,911,000) 2,468,000
Interest expense, net (2,560,000) (1,636,000)
Other expense (1,808,000) --
------------- -----------
Income (loss) before income taxes (6,279,000) 832,000
Provision for income taxes 4,797,000 314,000
------------- -----------
Net income (loss) ($11,076,000) $ 518,000
============= ===========
Preferred stock dividend (60,000) --
------------- -----------
Net income (loss) available to common shareholders ($11,136,000) $ 518,000
============= ===========
Earnings (loss) per common share - basic ($ 1.90) $ 0.09
Earnings (loss) per common share - diluted ($ 1.90) $ 0.09
Weighted average shares outstanding - basic 5,854,789 5,822,222
Weighted average shares outstanding - diluted 5,854,789 5,826,725
See accompanying Notes to Condensed Consolidated Financial Statements
-3-
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine months ended
September 30
--------------
2000 1999
-------------- -------------
Revenue $ 60,320,000 $ 57,061,000
Cost of revenue 51,846,000 49,403,000
-------------- -------------
Gross margin 8,474,000 7,658,000
Selling, general and administrative expense 8,028,000 7,213,000
-------------- -------------
Income from operations 446,000 445,000
Interest expense, net (6,550,000) (4,292,000)
Other expense (1,894,000) --
-------------- -------------
Loss before income taxes (7,998,000) (3,847,000)
Provision (benefit) for income taxes 4,108,000 (1,423,000)
-------------- -------------
Net loss ($ 12,106,000) ($ 2,424,000)
============== =============
Accretion of discount and redemption premium
on preferred stock (1,960,000) --
Preferred stock dividend (193,000) --
-------------- -------------
Net loss available to common shareholders ($14,259,000) ($ 2,424,000)
============== =============
Loss per common share - basic and diluted ($ 2.44) ($ 0.42)
Weighted average shares outstanding - basic and diluted 5,833,999 5,822,222
See accompanying Notes to Condensed Consolidated Financial Statements
-4-
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months
ended
September 30
--------------
2000 1999
-------------- -------------
Operating Activities
Net loss ($ 12,106,000) ($2.424.000)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Deferred income taxes 4,372,000 (1,415,000)
Depreciation 1,599,000 1,291,000
Amortization 1,690,000 1,949,000
Other non-cash items -- (102,000)
Changes in operating assets and liabilities:
Accounts receivable and other receivables 6,341,000 (1,181,000)
Inventory (2,885,000) 903,000
Other assets 1,010,000 1,110,000
Accounts payable (4,629,000) 1,549,000
Deferred revenue (874,000) 2,305,000
Accrued liabilities 2,377,000 428,000
-------------- -------------
Cash provided by (used in) operating activities (3,105,000) 4,413,000
Investing Activities
Purchases of equipment,
leasehold improvements and landing gear (3,157,000) (13,700,000)
-------------- -------------
Cash used in investing activities (3,157,000) (13,700,000)
Financing Activities
Principal payments on bank notes (613,000) (4,959,000)
Principal payments under related party note (2,500,000) --
Borrowings on related party note 6,244,000 --
Borrowings on line of credit 1,274,000 17,037,000
Deferred offering costs -- (126,000)
Issuance of common stock and warrants 3,142,000 --
Deferred acquisition and loan fee expense 114,000 133,000
-------------- -------------
Cash provided by financing activities 7,661,000 12,085,000
-------------- -------------
Increase in cash 1,399,000 2,798,000
Cash at beginning of period 2,227,000 560,000
-------------- -------------
Cash at end of period $ 3,626,000 $ 3,358,000
============== =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 5,472,000 $ 3,424,000
Income taxes 17,000 --
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
Common Stock Other
--------------------------- Accumulated Comprehensive
# of Shares Amount Deficit Loss Total
------------ ------------ ------------- -------------- -------------
Balances at
December 31, 1999 5,822,222 $22,384,000 ($3,474,000) ($1,376,000) $17,534,000
Net loss (12,106,000) (12,106,000)
Foreign currency
translation adjustment (4,086,000) (4,086,000)
-------------
Comprehensive loss (16,192,000)
Issuance of common stock 35,431 32,000 32,000
Preferred stock dividend (193,000) (193,000)
Accretion of discount and
redemption premium on
preferred stock (1,960,000) (1,960,000)
Issuance of 2,500,000
warrants 3,110,000 3,110,000
- -----------------------------------------------------------------------------------------------------------
Balances at
September 30, 2000 5,857,653 $25,526,000 ($17,733,000) ($5,462,000) $ 2,331,000
=========== =========== ============ ============= ============
See accompanying Notes to Condensed Consolidated Financial Statements
-6-
HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Interim Condensed Financial Statements
During interim periods, Hawker Pacific Aerospace (the "Company") follows the
accounting policies set forth in its Annual Report to Shareholders and applies
appropriate interim financial reporting standards, as indicated below. Users of
financial information produced for interim periods are encouraged to refer to
the notes contained in the Annual Report to Shareholders when reviewing interim
financial results.
Interim financial reporting standards require management to make estimates that
are based on assumptions regarding the outcome of future events and
circumstances not known at the present time, including the use of estimated
effective tax rates. Inevitably, some assumptions may not materialize and
unanticipated events and circumstances may occur which vary from those estimates
and such variations may significantly affect the Company's future results.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with the
Securities and Exchange Commission's requirements of Form 10-Q and contain all
adjustments of a normal and recurring nature which are necessary to present
fairly the financial position of the Company as of September 30, 2000, and
December 31, 1999, and the results of its operations and cash flows for the
three month and nine month periods ended September 30, 2000 and 1999.
Contingencies
The Company is occasionally party to various legal proceedings incidental to its
business. Based on facts now known to the Company, management is not aware of
any matters that are not adequately provided for, covered by insurance or which
involve such amounts that would materially and adversely affect the consolidated
results of operations and cash flows or financial position of the Company.
Earnings (Loss) per Share
Basic earnings (loss) per share are based upon the weighted average number of
common shares outstanding. The weighted average common shares used in
calculating basic earnings (loss) per share were 5,854,789 and 5,822,222 for the
three months ended September 30, 2000 and 1999, respectively, and 5,833,999 and
5,822,222 for the nine months ended September 30, 2000 and 1999, respectively.
Diluted earnings (loss) per share are based on the number of shares used in the
basic earnings (loss) per share calculation plus the dilutive effects of stock
options and the conversion of preferred shares under the treasury stock method.
The weighted average common shares used in calculating diluted earnings (loss)
per share were 5,854,789 and 5,826,725 for the three months ended September 30,
2000 and 1999, respectively, and 5,833,999 and 5,822,222 for the nine months
ended September 30, 2000 and 1999, respectively.
Options to purchase 836,044 shares of common stock at exercise prices between
$2.25 and $9.88 were outstanding and vested during the third quarter of 2000.
None of these were included in the computation of diluted earnings (loss) per
share either because the exercise price was greater than the average market
price of the common shares, or the Company incurred a loss for the period and
the effect would therefore be antidilutive.
Inventories
Inventories are comprised of the following:
September 30, December 31,
2000 1999
----------- -----------
Purchased parts and assemblies $20,584,000 $20,246,000
Work in process 6,437,000 4,434,000
----------- -----------
$27,021,000 $24,680,000
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-7-
HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", with an
effective date no later than the fourth quarter of the Company's fiscal year
2000. The Company believes that the adoption of SAB No. 101 will not have a
material effect on its consolidated results of operations.
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" will be effective for the Company
starting in fiscal year 2001. SFAS No. 133 requires that all derivatives be
measured at their fair value, and recognized as assets or liabilities in the
consolidated balance sheet. The Company does not currently use any derivative
instruments, and therefore does not expect adoption to result in a material
effect on its financial position or results of operations.
Forward Looking Statements
Statements included in this filing which are not historical in nature are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward looking statements regarding the
Company's future performance and financial results are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those set forth for a variety of reasons. Factors that may impact such forward
looking statements include, among others, the success of the Company's strategic
operating plans, changes in the condition of the industry or the economy,
management of growth, customer concentration, customer credit risks,
competition, foreign currency fluctuations and the effectiveness of improvement
initiatives in the Company's United Kingdom subsidiary.
2. LINE 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 (the "Heller Agreement") provided a $55.0
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 were to expire in five years. At September 30, 2000, the interest rate for
all three loans was 12%, and the Company's borrowing base was $55.0 million, of
which $53.9 million had been advanced.
On September 20, 2000, the Company and Heller executed an amendment to the
Heller Agreement. The amendment extended certain covenant provisions of prior
amendments to November 3, 2000, and also established a prepayment fee of
$300,000. In consideration of the extension provided by this amendment, Heller
charged the Company additional fees of $520,000 in the third quarter.
The Heller facility was terminated and paid in full on October 30, 2000, upon
the closing of a new senior Loan Facility with Landesbank Hessen-Thuringen
Girozentrale ("Helaba"), as mandated arranger and agent, and Kreditanstalt fur
Wiederaufbrau ("KfW"), as co-arranger. The $65 million Loan Facility is
comprised of two five-year term notes, with funding of 14 million British pounds
to Hawker Pacific Aerospace Ltd., the Company's United Kingdom subsidiary, and
$45 million to the U.S. parent company, Hawker Pacific Aerospace. After paying
all Heller obligations, and closing fees and other costs, the Company had $3.2
million remaining to be applied to general working capital.
The weighted average interest rate for the LIBOR-based Loan Facility is
currently set at approximately 9.25%, one-quarter of a percent below prime. No
principal payments are required during the first year of the Loan Facility, and
only $10 million of principal payments are required on the U.S. term note during
years two through five. Financial covenants for the Loan facility do not
commence until one year after the closing date, and are based solely on the
performance of the U.S. parent company.
-8-
HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. STOCK PURCHASE AND SUBORDINATED DEBT
On September 20, 2000, the Company, certain shareholders of the Company, Heller
and Lufthansa Technik AG ("LHT") executed the following events. LHT, a wholly-
owned subsidiary of German Lufthansa Airlines, is one of the world's foremost
providers of aviation maintenance services. The Company was not a party to the
private transactions described in the next two paragraphs.
LHT entered into a Stock Purchase Agreement with six shareholders of the Company
under which LHT: (i) purchased 2,336,495 shares of common stock of the Company
for $4.12 per share, for a total purchase price of $9,626,359; and (ii) received
the right to nominate three members of the Board of Directors of the Company.
LHT entered into a Stock Purchase Agreement (the "Preferred Purchase Agreement")
with certain other shareholders of the Company for the purchase of all 300
shares of the Company's 8% Series C redeemable convertible preferred stock for
$3,790,000 (see footnote 4 below for additional detail).
LHT entered into a Loan Agreement with the Company, and provided the Company
subordinated debt of $9,300,000, at an interest rate of 11% per annum, for a
term of three years. Pursuant to this Loan Agreement, LHT received warrants for
2,500,000 shares of common stock for $4.25 per share (see footnote 5 below for
additional detail). The Company and LHT also entered into a Voting and Indemnity
Agreement in which LHT agreed to vote its shares in favor of the warrants and
the Company agreed to indemnify LHT for any losses associated with it so voting.
LHT entered into a Shareholders Rights and Voting Agreement with the Company and
certain officers (the "Shareholders") under which LHT acquired: (i) the voting
rights with respect to 196,342 common shares and 129,786 options to acquire
common stock held by the Shareholders; (ii) the right to increase the number of
directors of the Company from seven to nine; (iii) a right of first refusal
prior to any sale of common stock by the Shareholders; and (iv) the agreement of
the Shareholders to vote their shares in favor of the warrants issued to LHT.
In connection with the transactions above, the Company incurred expenses of
$1,808,000 during the quarter.
4. REDEEMABLE CONVERTIBLE 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
Series C, 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 Series C.
In connection with the issuance of Series C, the Company issued a warrant to the
Series C holder to purchase 125,000 shares of common stock at $7.37 per share.
The warrant was valued at $286,000. Series C also contains a redemption feature
that calls for the Series C to be redeemed, under certain circumstances, for
125% of the stated value ($3,750,000) and as such Series C was accreted to
$3,750,000 over the 180 day period from December 1999 until June 2000. This
accretion was 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 was amortized over the 180 day period from December
1999 to June 2000, and charged to retained earnings, similar to a preferred
dividend, as a reduction of earnings (loss) available to common shareholders.
The Company accrued $60,000 of dividends payable on Series C during the third
quarter.
As a result of the Preferred Purchase Agreement described in footnote 3, LHT
acquired all of the Company's issued and outstanding preferred shares. These
Series C preferred shares are convertible into common stock based on a variable
conversion formula. As of December 1, 2000, conversion would yield 1,195,537
common shares.
On December 11, 2000, LHT waived all of its redemption rights for the Series C
preferred shares. As a result of this waiver, the preferred stock will be
reclassified to Shareholders' Equity at December 31, 2000.
-9-
HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. ISSUANCE OF WARRANTS
On September 20, 2000, in connection with the transactions described in footnote
3 above, the Company issued LHT 2,500,000 warrants to purchase common stock at
$4.25 per share, exercisable within one year after date of issuance. The
exercise of these warrants is subject to the approval of the shareholders of the
Company at a Shareholders Meeting to be held in January 2001.
The proceeds of $9,300,000 generated from the subordinated debt and the issuance
of the warrants were allocated based on their fair relative values. The fair
value of the warrants was estimated as of the date of the agreement using the
Black-Scholes pricing model with the following assumptions:
Risk-free interest rate 5.47%
Dividend yield 0%
Expected stock price volatility 75.0%
Expected warrant life 1 year
Based on these assumptions, the value of the warrants was determined to be
$3,110,000, which appears both as an addition to shareholders' equity and a
discount to the related party long term debt. This $3.1 million loan discount
will be amortized to interest expense over the life of the loan (3 years).
6. DEFERRED TAXES
The Company recognized an income tax charge of $4,797,000 during the third
quarter as a result of applying a valuation allowance of $5,976,000 to its
deferred tax asset, resulting in a total net deferred tax liability of
$1,912,000 as of September 30, 2000. The deferred tax asset primarily represents
the tax benefit related to future utilization of the Company's available net
operating loss carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not the
deferred tax assets will not be fully realized. The Company evaluates the
adequacy of the valuation allowance and the realizability of the deferred tax
asset on an ongoing basis.
7. SEGMENT INFORMATION
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 September 30 2000 1999 2000 1999 2000 1999
- ------------------- ----------- ----------- ----------- ----------- ----------- ------------
Total assets $49,274,000 $51,290,000 $44,857,000 $49,697,000 $94,131,000 $100,987,000
Total long-lived assets (net of accum.
depreciation and amortization) 18,089,000 20,040,000 30,831,000 37,019,000 48,920,000 57,059,000
For the quarter ended September 30
- ----------------------------------
Revenue by location of operations 13,897,000 17,008,000 4,636,000 6,464,000 18,533,000 23,472,000
Income (loss) before income tax (1,825,000) 1,078,000 (4,454,000) (560,000) (6,279,000) 518,000
-10-
HAWKER PACIFIC AEROSPACE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
This quarterly management discussion is intended to provide further information
to our shareholders about recent transactions which we believe will
significantly enhance the Company's future results of operations. These
transactions include a new strategic relationship with one of the foremost
providers of aviation maintenance services in the world; and a favorable senior
loan refinancing.
Strategic Transaction. On September 20, 2000, the Company, certain of its
shareholders, its former senior lender, and Lufthansa Technik AG ("LHT")
executed a series of separate transactions in which LHT received: (i) voting
control of 43% of the Company's common stock; (ii) ownership of 100% of the
Company's preferred shares; (iii) three of seven seats on our Board; and (iv)
warrants, subject to shareholder approval, to purchase up to 2,500,000 common
shares. The Company received: (i) $9.3 million of subordinated debt; (ii) a
stronger Board with substantial aerospace industry experience; (iii) critically
important support in refinancing our senior debt; and (iv) a new relationship
with a market leader in our aviation maintenance, repair and overhaul segment.
The new LHT relationship has already strengthened the Company's financial
position, and the two companies are currently developing joint operating, sales
and marketing plans to better serve their combined customer base. LHT operates a
landing gear and hydromechanics overhaul facility in Hamburg which is the
world's largest landing gear shop associated with an airline. LHT's Hamburg
facility will now work in close coordination with our operations in London, Los
Angeles and Amsterdam to serve the worldwide market. The additional work from
this new relationship, especially in Europe, should provide a meaningful
increase in volume and fixed cost absorption that would result in a significant
financial benefit to our emerging UK operation.
Our relationship with LHT may also provide a number of favorable financial
benefits. LHT's influence has already served to help us secure a very favorable
loan facility. More importantly, the elimination of substantial loan fees, costs
and above-market interest charged by our former lender will provide a material
savings going forward.
We will also have the financial power of a multi-billion dollar company standing
behind us in the event that additional capital resources are required. Any
further funding would of course have to be approved by LHT, but without this
relationship our growth prospects would have been much more limited as the
Company's highly leveraged capital structure could not have supported more debt
for additional rotable assets and equipment. Another financial benefit from the
LHT relationship is expected to occur in January 2001 as many of our insurance
policies are to be merged into LHT coverage at a reduced cost.
We anticipate two actions by LHT which will provide further material savings
during 2001. First, within the next month LHT is expected to convert its
preferred shares into common. This will eliminate $240,000 of annual preferred
dividends. Second, LHT has indicated its intent to exercise up to 2,500,000 of
its Hawker warrants after shareholder approval in January 2001. After the
preferred conversion, LHT will have voting control of approximately 53% of our
common shares and, as LHT has indicated that it will vote in favor of approving
the warrants, we believe that shareholder approval will be obtained. The
decision and timing for preferred conversion and the warrant exercise remain
solely at the discretion of LHT, but LHT has tentatively indicated that it
intends to cancel the $9.3 million subordinated debt, and its associated accrued
interest payable, as partial payment of the $10.6 million warrant exercise
price. Benefits of the warrant exercise would include a substantial increase to
the Company's equity, and a reduction in the ratio of debt to equity. More
importantly, cancellation of the subordinated note will save us almost $2
million of interest.
Senior Loan Refinancing. On October 30, 2000, with LHT's influence and
assistance, we closed a $65 million loan facility with two German banks. The
LIBOR-based interest rate, currently set at about one-quarter of a percent below
prime, was much more competitive than others available from U.S.-based lending
institutions.
The facility was established as two five-year term notes, rather than the more
typical asset-based loan that would have required continual borrowing base
valuation, asset appraisals, and availability restrictions on rotable assets
shipped to foreign countries. These benefits will save the Company a
considerable sum of money during future years.
-11-
HAWKER PACIFIC AEROSPACE
We also received favorable repayment terms, as no principal payments are
required during the first year of the facility, and only $10 million of
principal is required to be paid during the remainder of the five-year term.
The most important benefit, however, of the new loan facility is that it ended
an almost two-year period of loan violation costs, additional fees and legal
expenses, and above-market interest charges from the Company's former senior
lender. These additional costs amounted to $1.4 million during 1999, and $2.0
million through October 2000. The removal of these costs will result in a
favorable comparative improvement in 2001, which will be partially offset by the
higher debt balance.
Summary of Financial Results. The large third quarter loss was principally
caused by: (i) two non-recurring items; (ii) several changes in estimates; and
(iii) an indeterminate adverse impact on both revenue and margin as a result of
parts shortages and delays caused by the Company's tight cash position
throughout 2000. During the three month and nine month reporting periods, these
special charges amounted to approximately $10.7 million and $11.6 million,
respectively, not including the adverse impact in each period related to our
cash position. These special charges are summarized below.
- -------------------------------------------------------------------------------------------------------------------------
3 months ended 9 months ended
September 30, September 30,
SPECIAL CHARGES (US$ 000's) 2000 2000
- -------------------------------------------------------------------------------------------------------------------------
Non-recurring items:
LHT transaction costs 1,808 1,894
Additional Heller fees and costs 978 1,712
-------- --------
2,786 3,606
Changes in estimates:
Valuation allowance on deferred tax asset 5,976 5,976
Allowance for doubtful accounts 847 877
UK anticipated loss on long-term sales commitments 711 711
UK property taxes 418 418
-------- --------
7,952 7,982
------------------ ------------------
Total Special Charges 10,738 11,588
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The valuation allowance of approximately $6 million was recorded to reduce the
value of the Company's deferred tax asset. A significant portion of our deferred
tax asset represents the benefit from future income taxes the Company will not
have to pay because of net operating losses in prior years. Even though the
Company believes its operations could generate sufficient income in future years
to use a major portion of the net operating losses before they expire, we also
believe that our losses in the last few years now introduce the need for a
valuation allowance on a portion of the deferred tax asset. As the Company
generates income during future years, we expect that we will be able to
gradually reverse a major portion of this valuation allowance.
The costs related to the LHT transaction and the additional costs and fees
charged by Heller, the Company's former senior lender, will not be present in
any future period. The allowance for doubtful accounts was recorded as a result
of management's concerns about the collectability of certain accounts. As can be
seen by comparing the allowance for doubtful accounts in the third quarter with
the amount recorded through September year-to-date, the third quarter allowance
was unusually high.
In our UK operation we have revised our estimate for property taxes based on
additional evidence received from the applicable governmental authority. We have
also revised our estimate for future sales commitments, and have established an
accrual for all anticipated losses on existing long-term contracts through 2007.
This accrual became necessary because of the slower-than-expected progress of
our UK subsidiary during 2000, and especially during the third quarter. Since
the relocation of the UK facility was completed during late-1999 and early-2000,
we have noticed gradual improvement in selected areas of UK operating results,
but this improvement leveled off in mid-2000, and actually declined during the
third quarter. Management therefore concluded that a leadership change was
necessary, and in November 2000 the managing director and the operations
director of the UK subsidiary were terminated.
The role of operations director will be assumed by a seasoned operations
executive from LHT, who has assumed responsibilities as UK chief operating
officer in early December 2000. The managing director position will be filled by
the Company's president and chief executive officer for several months before a
search for a replacement
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HAWKER PACIFIC AEROSPACE
commences. The Company's president and chief executive officer has previously
managed the Company's highly profitable Sun Valley operation, and he intends to
implement many of the same procedures and operating controls which have been
proven effective in Sun Valley before turning over the reins to a new managing
director. The Company believes these two experienced operations professionals
will reinvigorate the continuous improvement process in our UK operation.
Accordingly, the Company does not believe that the recent losses incurred in our
UK subsidiary are necessarily indicative of the results of operations which may
be expected after 2000.
Liquidity and Capital Resources
Cash used in operations during the first nine months of 2000 amounted to a
deficit of $3.1 million, due primarily to the reduction of payables and the
adverse operating conditions. The Company's operations have been adversely and
materially affected by cash shortages throughout 2000. As a result of the LHT
loan transaction and the senior refinancing, the Company received additional
funds for general working capital purposes of $5.4 and $3.2 million,
respectively. These cash infusions have recently eliminated the adverse effect
on operations, and the Company does not project any further material impact on
operating results for liquidity reasons during the next twelve months.
Accounts receivable decreased by $6.3 million during the first nine months of
2000 primarily because of the $4.2 million landing gear sale in December 1999,
and lower than normal levels of revenue during the third quarter of 2000.
Accounts payable decreased by $4.6 million during the first nine months of 2000
as almost all discretionary funds received though the LHT loan transaction and
senior refinancing were applied to accounts payable.
The Company believes its liquidity position is now stable, but not yet
comfortable. As the Company expects improved operating results during 2001, and
a gradually increasing cash surplus from operations in ensuing quarters, the
Company expects its liquidity position will continue to slowly improve. The
Company therefore believes that cash provided by operations will be sufficient
to meet the Company's operating and capital needs for the next twelve months.
Results of Operations
The following analysis compares the Company's results of operations for the
quarter and nine months ended September 30, 2000, with the quarter and nine
months ended September 30, 1999.
Revenue for the quarter decreased by $4.9 million, or 21%, to $18.5 million from
$23.5 million in the comparable period of 1999. Revenue for the nine months
increased by $3.3 million, or 6%, to $60.3 million from $57.1 million in the
first nine months of 1999. Most of the revenue growth occurred in the Sun Valley
division, which recorded a year-to-date increase in revenue of 12% to $44.6
million from $39.9 million in 1999. Revenue growth was developed mostly from new
landing gear contracts and increased component services.
Revenue in the UK operation decreased by 9% year-to-date to $15.6 million from
$17.2 million in 1999. Most of this comparative revenue decrease occurred in the
third quarter because 1999 third quarter revenue was unusually high, and the
Company's tight cash position throughout fiscal year 2000 continued to affect
purchasing, resulting in lower levels of revenue. More than half of the 9% year-
to-date revenue decrease, however, resulted solely from the decline in value of
the British pound against the dollar, which results in decreased dollar revenue
for consolidation purposes.
Cost of revenue for the third quarter and nine months was unusually high as a
result of poor operating results in the UK operation, and the revised estimates
for long-term contract losses and property taxes in the UK. Our Sun Valley unit
recorded its highest percentage of gross margin in the last six quarters, but
our UK unit recorded its lowest percentage of quarterly gross margin since
inception. As discussed in the Overview section above, the Company has recently
made certain changes which it believes will result in a significant increase in
UK gross margin during 2001. Additional reasons for this expected improvement
include the implementation of numerous cost reduction initiatives from a
recently completed study of margin differences between the Sun Valley and UK
facilities, increased volume from new customers and the potential for work
transfer from LHT, other staffing changes in the UK management team, more
effective purchasing practices, and improved controls and procedures.
Operating expenses increased from $2.5 million in the third quarter of last year
to $2.9 million in the third quarter of 2000. Operating expenses for the first
nine months of 2000 similarly increased to $8.0 million from $7.2 million in the
prior comparable period. These increases resulted primarily from increases to
the allowance for doubtful accounts, and higher insurance costs, commissions and
travel expense.
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HAWKER PACIFIC AEROSPACE
Interest expense for the quarter and nine months increased by $0.9 million and
$2.3 million, respectively, as a result of increased borrowings on the line of
credit, an increased rate of interest, and additional financing costs charged by
the Company's former senior lender.
The Company recorded a net loss for the quarter of $11.1 million, as compared
with net income in the prior comparable period of $0.5 million. The Company also
recorded a year-to-date net loss of $12.1 million, as compared to a net loss of
$2.4 million for the prior comparable period. After accretion of preferred stock
discounts and dividends, the basic and diluted loss per common share for the
quarter and nine months was $1.90 and $2.44, respectively. For the reasons
stated above, the Company does not believe that these operating results will be
representative of future results of operations after 2000.
Forward Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of
the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Quarterly Report and in the Company's
various filings with the Securities and Exchange Commission, including without
limitation the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1999.
This discussion and analysis should be read in conjunction with the Company's
financial statements and related notes thereto included herein, and with the
information set forth under Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Annual Report on Form 10-
K/A for the year ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in certain
prices and rates on the Company's financial results and condition, primarily
foreign currency exchange rates and interest rates on borrowings. The Company
does not utilize derivative instruments in managing its exposure to such
changes.
Foreign Currency Risk. The Company has international operations in the United
Kingdom and the Netherlands, but does not conduct a significant amount of
business in Dutch guilders. The British pound has gradually declined in value
against the dollar during 1999 and 2000, causing the Company to incur $940,000
and $4,086,000 of foreign currency translation loss during 1999 and the first
nine months of 2000, respectively. These unrealized translation losses are
recorded in accumulated other comprehensive loss on the balance sheet, and do
not currently affect the Company's operating results.
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 historically used currency hedges, but is currently
considering a currency hedge for the British pound.
Interest Rate Risk. The Company has two long-term notes payable, each of which
currently carries an interest rate which varies in accordance with the US and UK
LIBOR rates. As these LIBOR rates vary, the Company may be subject to
potentially material fluctuations in its debt service. One of the term notes, in
the amount of 14 million British pounds, was secured in this currency to serve
as a natural hedge against further devaluation of the pound.
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HAWKER PACIFIC AEROSPACE
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 12, 2000, the Company held its annual meeting of shareholders. The only
item voted on by the Company's shareholders was the election of seven directors
of the Company to serve until the next annual meeting of shareholders, or until
their successors are duly elected and qualified. The following seven directors
of the Company were all re-elected to continue their terms: Daniel J. Lubeck,
Mellon C. Baird, Scott W. Hartman, David L. Lokken, John G. Makoff, Joel F.
McIntyre, and Daniel C. Toomey, Jr.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.53 Credit Agreement between Hawker Pacific Aerospace, Landesbank
Hessen-Thuringen Girozentrale and Kreditanstalt fur Wiederaufbrau,
dated October 30, 2000
10.54 Facility Agreement between Hawker Pacific Aerospace Ltd., Landesbank
Hessen-Thuringen Girozentrale and Kreditanstalt fur Wiederaufbrau,
dated October 30, 2000
27 Financial Data Schedule
(b) Form 8-K
No reports were filed on Form 8-K during the quarter ended September 30,
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAWKER PACIFIC AEROSPACE
Date: December 12, 2000 By /s/ Philip M. Panzera
-------------------------
Philip M. Panzera
Executive Vice President
(Principal Financial and Accounting Officer)
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