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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 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)
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 March 5, 2001 was approximately
$11,873,000. The number of shares of common stock outstanding on March 5,
2001, was 7,023,723 shares.
DOCUMENTS INCORPORATED BY REFERENCE
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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TABLE OF CONTENTS
Page
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PART I
Item 1. Business........................................... 3
Item 2. Properties......................................... 11
Item 3. Legal Proceedings.................................. 11
Item 4. Submission of Matters to a Vote of
Security Holders.............................. 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters............... 12
Item 6. Selected Financial Data............................ 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 15
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk............................ 18
Item 8. Financial Statements and Supplementary Data........ 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....... 20
PART III Omitted - (Incorporated by reference to Proxy
statement to be filed no later than April 30, 2001). 20
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K....................... 21
FINANCIAL STATEMENTS
Index to Financial Statements...................... 21
Report of Independent Auditors - FY 2000........... 25
Report of Independent Auditors - FY's 1999 & 1998.. 26
Consolidated Balance Sheets........................ 27
Consolidated Statements of Operations.............. 28
Consolidated Statement of Changes in
Shareholders' Equity (Deficit).................... 29
Consolidated Statement of Cash Flows............... 30
Notes to Consolidated Financial Statements......... 32
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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.
Lufthansa Technik AG ("LHT") has a controlling interest in Hawker Pacific
Aerospace LHT, the Company's majority shareholder, is a wholly-owned
subsidiary of Deutsche Lufthansa, one of the largest airlines in Europe.
LHT is the technical and maintenance arm of Lufthansa, but also generates
about half of its almost $2 billion in annual revenue by offering repair
and overhaul services to the rest of the aviation industry. LHT is, in
fact, a leading provider of outsourced aviation maintenance worldwide.
The Company is organized into two divisions and one wholly-owned
subsidiary. The Company's principal operating division and headquarters is
located in Sun Valley (Los Angeles), California. The Company's Hawker
Pacific Aerospace, Ltd., subsidiary operates a major overhaul facility in
Hayes (London) in the United Kingdom. The Company also operates a small
hydraulic repair facility in Amsterdam, The Netherlands.
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 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. 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
On September 20, 2000, Lufthansa Technik AG ("LHT") acquired a
controlling interest in the Company upon executing the following series of
transactions with the Company, and certain of its shareholders. For
additional detail on these transactions, see also Note 7 to the
Consolidated Financial Statements.
LHT acquired its controlling interest in a private transaction by
purchasing 40% of the Company's common stock from certain shareholders
affiliated with Unique Investment Corporation. LHT also purchased all
outstanding shares of the Company's Series C convertible preferred stock
from the private investor group that provided such funding to
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the Company in December 1999. These preferred shares and a portion of the
accrued dividends were converted into common shares in December 2000. LHT
is entitled to additional accrued dividends of approximately $96,000.
LHT also entered into a Shareholders Rights and Voting Agreement with the
Company and certain of its officers under which LHT acquired certain voting
and corporate rights. In addition, LHT provided the Company $9.3 million of
subordinated debt, in exchange for which it received warrants to purchase
up to 2,500,000 shares of the Company's common stock at an exercise price
of $4.25 per share. The exercise of these warrants is subject to approval
by the shareholders of the Company at the next Annual Meeting of
Shareholders. On March 16, 2001, the principal and accrued interest on this
debt was converted into 3,136,952 common shares pursuant to the terms of
the debt exchange agreement entered into with LHT, dated February 6, 2001.
The conversion price for this transaction of $3.125 per share was set equal
to the market price of the Company's common stock at the time of the
conversion agreement. As a result of these transactions, LHT now owns or
controls approximately 67% of the outstanding common stock of the Company.
For additional detail regarding these transactions, and other related
agreements, please see Part III of this Form 10-K, which information is
incorporated by reference.
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 2000 Current Market Outlook (the
"Boeing Outlook") projects that global air travel will increase by 58%
through the year 2009. 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 more than double before 2019, from
13,670 aircraft at the end of 1999 to 31,755 aircraft in 2019.
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.
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 proprietary management
information system that enables it to comply with its customers' contract
specifications and enables its customers to
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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.
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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 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.
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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. During 2000, over 65% of the
Company's landing gear business was 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.
Government Contracts. 2000 and 1999 sales to the United States
government and its agencies represented approximately 5.0% and 3.6%,
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 five year term, and is renewable on an annual basis. The Company has
performed these services for the last twelve years, and has recently bid
for and been awarded the contract for fiscal years 2001 through 2005.
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 which have accounted for more than 10% of
sales during the last three years are: (i) in 2000, Federal Express
(18.8%), American Airlines (14.9%), and British Airways (12.7%), (ii) in
1999, British Airways (19.2%) and Federal Express (13.8%); and (iii) in
1998, British Airways (22.3%) and Federal Express (17.5%).
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, shop-loading
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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.
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 29% of total 2000 purchases. Messier and Dunlop
each accounted for 11% of total 2000 materials purchases. No other supplier
during 2000 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.
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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.
The Company's new relationship with LHT is expected to strengthen the
Company's sales and marketing efforts. The opportunity for Hawker Pacific
to draw on the experience, knowledge and resources of the over 100 people
in the LHT Hamburg Technical Sales group has significantly broadened our
market exposure.
Marketing. 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 Amsterdam facility, the Company believes it will be able
to provide customers with a full range of repair and overhaul services in
Europe. With facilities located in the United Kingdom, California and The
Netherlands, the Company believes that it is positioned to pursue
additional growth opportunities in both the European and Asian aviation
aftermarkets.
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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. 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 more than double 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 drives and
integrated drive generators. The Company's new relationship with LHT also
offers many new opportunities for growth in conjunction with other LHT
operations.
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.
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 operations in Amsterdam, 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.
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Employees and Employee Training
As of December 31, 2000, the Company had 488 full-time employees, of whom
292 are employed at the Company's Sun Valley headquarters and repair facility,
185 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, 104 employees, representing 21% 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 have had a substantial effect on the
market price of individual 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.
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, legal, governmental, environmental and
technological factors, as well as competitive pricing and market conditions,
customer concentration, foreign currency risk, and the Company's continuing
ability to: acquire adequate and reasonably inventory, successfully manage rapid
growth, meet increasing requirements for capital, and successfully develop its
UK subsidiary into a profitable operation. There can be no assurance that future
developments affecting the Company will be those anticipated by management.
Because of the factors listed above, as well as other factors beyond the control
of the Company, actual results may differ from those in the forward looking
statements. The Company undertakes no obligation to update or revise and
forward-looking information, whether as a result of new information, future
developments, or otherwise.
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
Sun Valley facility occupies 193,000 square feet in eight buildings, which are
held pursuant to various long-term leases that expire 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, England, about four miles from Heathrow Airport. The lease on this
facility expires in 2024.
The Company's operation in The Netherlands 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 involved in various administrative claims or litigation
from time to time in the ordinary course of business. At the present time, there
are no material legal proceedings against the Company, or its subsidiary.
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 2000.
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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.
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 4.8
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
2nd Quarter 3.31 8.25
3rd Quarter 3.94 7.50
4th Quarter 2.63 5.88
As of March 2, 2001, the Company's common stock was held by 27
shareholders of record, and owned beneficially by an estimated 977 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 intends to reinvest future earnings, if any, in the development and
expansion of its business.
Nasdaq Listing. In December 2000 the Company reported that its net tangible
assets had dropped below the $4 million maintenance standard required to remain
listed on the Nasdaq National Market. The Company has been in discussions with
Nasdaq since that time with regard to curing this deficiency.
The Company and LHT have executed two measures to increase the Company's
net tangible assets in order to comply with the Nasdaq requirement. In December
2000, LHT voluntarily converted its preferred share holdings to common shares,
and in March 2001 LHT further assisted the Company by converting approximately
$9.8 million of debt and accrued interest into equity (for additional detail on
these transactions, please refer to Notes 5, 7 and 14 to the Consolidated
Financial Statements). These transactions have had the effect of increasing the
Company's net tangible assets above the $4 million Nasdaq maintenance standard.
The Company has received a written determination from the Nasdaq Listing
Qualifications Panel. The Panel concluded that the Company presented a
definitive plan to regain compliance with the $4 million net tangible assets
requirement. Nasdaq has therefore determined to continue the Company's listing,
pursuant to the following exception. Prior to March 31, 2001, the Company must
issue its Annual Report on Form 10-K with a pro forma balance sheet reflecting
the increase in net tangible assets after the LHT debt conversion. For this pro
forma balance sheet only, Nasdaq has required that the Company report at least
$5.5 million of net tangible assets. In addition, prior to May 15, 2001, the
Company must file its first quarter Form 10-Q, evidencing continued compliance
with the standard $4 million net tangible assets requirement. On March 6, 2001,
the Company mailed a notice to all of its shareholders informing them about the
debt conversion, and our status with regard to our NASDAQ listing.
The Nasdaq Panel decision may be reviewed by the Nasdaq Listing and Hearing
Review Council. The Nasdaq Panel has also reserved the right to modify, extend
or terminate the exception upon review of the 10-K and 10-Q
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filings, or upon any material change in the Company's financial or operational
character during the exception period.
The Company has filed in this Form 10-K, at Exhibit 99.1, the required pro
forma balance sheet evidencing $6.2 million of net tangible assets.
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 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 certain 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 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 balance sheet data as
of December 31, 2000, and the statement of operations data for the year ended
December 31, 2000, are derived from the financial statements of the Company,
which have been audited by Deloitte & Touche 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 the period.
Successor Predecessor
-------------------------------------------------------- --------------------------
Year ended December 31, Two months Ten months
-------------------------------------------------------- ended ended
(In thousands, Pro forma Dec 31, Oct 31,
except per share data) 2000 1999 1998 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $77,059 $82,318 $65,151 $41,042 $39,004 $6,705 $32,299
Income (loss) before extra-
ordinary item (18,494) (2,260) (1,598) 788 (1,523) 469 (1,606)
Income (loss) per common
share before extraordinary item (3.36) (0.44) (0.28) 0.25 (0.48) 0.15 --
Income (loss) to common
shareholders (20,747) (2,533) (2,198) 788 (1,523) 469 (1,606)
Net income (loss) per
common share (3.49) (0.44) (0.39) 0.25 (0.48) 0.15 --
Total assets 97,999 103,163 87,237 40,898 35,178 -- --
Total long-term debt and
redeemable preferred stock 70,135 9,909 2,500 17,700 19,150 -- --
In 2000 the Company recorded several large charges which adversely affected
the year. These expenses, which aggregate to $19,258,000, included: deferred tax
asset valuation allowances of $9,823,000; a provision for anticipated losses
on certain UK contracts of $2,196,000; additional fees, costs and
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incremental default interest of $2,060,000 from the Company's former senior
lender; miscellaneous expense for change of control costs of $1,883,000; several
unusually high credit memo's, and increased bad debt and warranty expenses in
the UK operation of $1,025,000; fixed asset write-downs of $830,000; the write-
off of deferred loan fees of $793,000; and severance costs of approximately
$648,000.
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. 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 included 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.
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.
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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations-Overview
In fiscal year 2000 the Company's United Kingdom subsidiary experienced
many operating problems, while the Company's Sun Valley division continued to
perform strongly. Revenue for the year ended December 31, 2000, decreased by
$5.3 million from 1999, although this decrease is readily accounted for when
consideration is given to a $4.2 million asset sale in 1999, and a sharp drop in
the British pound-US dollar exchange rate which decreased the amount of UK
revenue available after translation.
As discussed more fully below, the UK operation performed poorly this past
year, but the principal reasons for the large net loss in 2000 include: deferred
tax asset valuation allowances of $9,823,000; a provision for anticipated losses
on certain UK contracts of $2,196,000; additional fees, costs and incremental
default interest of $2,060,000 charged by the Company's former senior lender;
miscellaneous expense for change of control costs of $1,883,000; several
unusually high credit memos, and increased bad debt and warranty expenses in the
UK operation of $1,025,000; fixed asset write-downs of $830,000; the write-off
of deferred loan fees of $793,000; and severance costs of approximately
$648,000.
These expenses, as discussed below, aggregate to $19,258,000 of the
$19,287,000 net loss for fiscal year 2000. While certain of these charges may be
present in the future, the Company does not believe that these charges will
normally recur, or will be present to a similar extent in 2001.
While every year generally has its share of unexpected expenses, the
Company believes that 2000 was a decidedly abnormal year, and will not be
indicative of the Company's prospects or results of operations in the future.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue. Revenue for fiscal year 2000 decreased by $5,259,000, or 6%, from
$82,318,000 to $77,059,000. Revenue in the Sun Valley location increased by $3.8
million, while revenue generated from the Company's UK subsidiary decreased by
$9.1 million.
The revenue gains in 2000 at the Sun Valley location were recorded in the
Company's landing gear product lines, which increased by 13% to $33,512,000. The
significant loss of revenue at the Company's UK location resulted principally
from several factors. In 1999 the UK operation sold a B747 landing gear for
$4,200,000, but had no corresponding asset sale in 2000. In addition, the
British pound weakened against the dollar during 2000, and the amount of UK
revenue therefore translated to $1,103,000 fewer dollars upon consolidation.
Finally, certain of the Company's larger customers had slower overhaul schedules
in 2000. The Company does not believe that the reduction in revenue during 2000
is evidence of a future trend.
Cost of Revenue and Gross Margin. Cost of revenue was adversely affected
because of higher than anticipated material and labor costs, and a $2.2 million
provision established to reserve estimated losses on certain UK contracts
through 2007. Management considered the provision necessary as a result of
significantly slower than expected improvement in UK operating initiatives to
improve labor efficiency and reduce material costs and overhead. During 2000 Sun
Valley continued to earn respectable gross margins almost identical with the
level achieved in 1999.
On a consolidated basis, gross margin in both 1998 and 1999 fiscal years
were strongly affected by the UK acquisition, integration and relocation, while
2000 was adversely affected by the performance of the UK subsidiary, the
provision for anticipated losses, and an $830,000 write-down of two landing gear
exchange assets to reduce book value to market. In late 2000, the Company
effected a change in key senior management positions in the UK operation, and
increased its support for the UK unit with several extended assignments of
experienced Sun Valley personnel. Commencing in December 2000, the Company's
chief executive officer has assumed direct responsibility for the UK operation
for a contemplated period of six months. The UK unit has also retained the
services of a very experienced chief operating officer, and certain additional
staffing changes have been made to improve organizational effectiveness. For
these reasons, the operating loss recorded in the UK subsidiary during 2000 is
not considered indicative of the results of operations which the Company expects
in the future.
-15-
Selling, General and Administrative Expense. Selling expense for 2000
increased by 2% to $3,371,000, while general and administrative expense
increased by $645,000, or 9%, to $7,721,000. This variance is solely
attributable to the $648,000 in severance obligations related to changes in UK
management personnel.
Interest Expense. Interest expense increased from $6,001,000 in 1999 to
$8,772,000 in 2000 as a result of additional fees, costs and default interest
charges from the Company's former senior lender. Such additional costs amounted
to $2,060,000 during fiscal year 2000.
Income Tax Provision. During 2000 the Company recorded $9.8 million of
valuation allowances to reduce the value of its deferred tax assets. The
principal portion of the Company's deferred tax assets reflects the estimated
benefit from future income taxes the Company will not have to pay because of
prior net operating losses. If the Company generates income during future years,
management expects that the Company will be able to gradually reverse a major
portion of these valuation allowances.
As a result of establishing these valuation allowances, the Company
recorded no tax benefit for the loss in 2000, and also recorded additional tax
expense of $4.1 million. At the current time, the Company does not expect to
record any income tax expense or benefit during 2001.
Extraordinary Item. In October 2000 the Company incurred charges of
$793,000 related to the write-off of deferred loan fees and prepayment penalties
to retire the Company's former senior credit facility.
Net Loss. The net loss for fiscal year 2000 was $19,287,000, as compared
with a net loss in 1999 of $2,260,000. The net loss to common shareholders for
2000 was $20,747,000, or $3.49 per share, after the extraordinary item and
reduction for preferred stock accretion, as compared to $2,533,000, or $0.44 per
share in 1999.
Quarter Ended December 31, 2000, Compared to Quarter Ended December 31, 1999
Revenue. Revenue in the fourth quarter of 2000 decreased to $16,739,000
from the 42-year record high level of $25,256,000 set in the fourth quarter of
1999. Quarterly revenue was substantially lower than the prior comparable period
for the same three reasons discussed in the fiscal year Revenue section above:
the large 1999 asset sale; the pound-dollar exchange rate, and the slow
schedules of certain UK customers.
Expenses. Fourth quarter expenses were fairly typical, with the following
exceptions: deferred tax valuation allowances of $3,847,000; a provision for
anticipated losses on certain UK contracts of $1,485,000; the write-off of
deferred loan fees of $793,000; a fixed asset write-down of $630,000; severance
costs of approximately $575,000; several unusually high credit memos, and
increased bad debt and warranty expenses in the UK unit of $148,000; and
additional fees, costs and incremental default interest of $114,000 from the
Company's former senior lender.
Net Loss. The expenses described above aggregated to $7,592,000, as
compared with the $7,181,000 net loss ($1.05 per share) reported for the period.
The net loss for the fourth quarter of 2000 increased by $7,345,000 from net
income of $164,000 ($0.03 per share) in the fourth quarter of 1999.
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.
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.
-16-
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 was
paying a default rate of 11.5% in early 2000.
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.
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. 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 of a B747 landing gear shipset.
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 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.
Liquidity And Capital Resources
Accounts receivable decreased during 2000 from $18.5 million to $15.0
million. This decrease is primarily attributable to a December 1999 billing for
a $4.2 million B747 shipset sale. Inventories increased by $2.7 million during
2000 to support additional customer requirements.
In October 2000 the line of credit with Heller Financial, Inc., was
retired. This improved the Company's current ratio to approximately 1.9 at the
end of 2000. The Heller facility was replaced by two five-year term notes
totaling $65 million. These notes were obtained from two German banks through
the assistance of Lufthansa Technik AG ("LHT"). The two notes have favorable
terms, including a current interest rate lower than the prime rate, no principal
payments for one year, simple financial covenants based only on Sun Valley
performance, and the requirement to repay only $10 million of principal before
the end of the term.
-17-
This new senior debt facility helped to improve the Company's cash position
during 2000, and will further provide two material comparative differences in
2001: a reduction in interest expense, and the elimination of the default fees
and costs charged by Heller during the last two years.
In September 2000, the Company received $9.3 million of subordinated debt
funding from LHT. These proceeds were used to retire the $2,500,000 note payable
and certain fees due to a related party, pay a portion of the Heller obligation,
cover certain costs related to the September 2000 transactions with LHT, and
improve general working capital. The LHT note and its accrued interest were
converted into common equity on March 16, 2001. This conversion has helped to
reduce the Company's highly leveraged position, and is expected to save the
Company over $1 million of interest expense annually.
The new senior loan facility and the additional funds received from LHT
have strengthened the Company's cash position. The UK operation is expected to
become cash-positive during 2001, and until such time the Company's cash
position is expected to remain tight, but manageable, principally by controlling
the timing of larger capital expenditures. The Company believes that cash
provided from operations, along with the additional funding described above
will continue to provide sufficient liquidity to meet the Company's cash
requirements for the next twelve months.
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.
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, legal, governmental, environmental and technological factors, as
well as competitive pricing and market conditions, customer concentration,
foreign currency risk, and the Company's continuing ability to: acquire adequate
and reasonably inventory, successfully manage rapid growth, meet increasing
requirements for capital, and successfully develop its UK subsidiary into a
profitable operation. There can be no assurance that future developments
affecting the Company will be those anticipated by management. Because of the
factors listed above, as well as other factors beyond the control of the
Company, actual results may differ from those in the forward looking statements.
The Company undertakes no obligation to update or revise and forward-looking
information, whether as a result of new information, future developments, or
otherwise.
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, 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
revenue in that country.
-18-
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. To date, the Company has not seen the need for currency hedging
transactions in the ordinary course of business. The Company has, however,
denominated a significant portion of its new senior debt facility in British
pounds to serve as a natural hedge. For additional discussion on foreign
currency exchange risk as it relates to the Company's operations, please refer
to Note 1 to the Consolidated Financial Statements--Foreign Currency
Translation.
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 2001
consolidated revenue may be received by the Company's UK subsidiary in British
pounds sterling.
Throughout 2000 and the first quarter of 2001, 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 receivables from the UK operation will become less valuable.
The Company's payment for the 1998 purchase of British Airways assets (the
"BA Acquisition") was denominated in British 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. This swap agreement was cancelled in 1999.
The Company will continue to evaluate hedging strategies 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. As of December 31, 2000, the Company was not a party to
any hedge contracts.
Interest Rate Risk. The Company's senior debt facility carries an interest
rate which varies in accordance with the US and UK LIBOR. The Company is subject
to potentially material fluctuations in its debt service as the LIBOR changes.
The extent of this risk is not quantifiable or predictable. For additional
information, please refer to Note 1 to the Consolidated Financial Statements--
Fair Value of Financial Instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements for the year ended December 31, 2000,
the report thereon of Deloitte & Touche LLP dated March 2, 2001, except for Note
14, as to which the date is March 16, 2001, and the Notes to Consolidated
Financial Statements are included under Part IV, Item 14 of this Form 10-K. The
Consolidated Financial Statements for the years ended December 31, 1999 and
1998, and the Notes to such financial statements are also included under Part
IV, Item 14 of this Form 10-K. The report of Ernst & Young LLP dated February
11, 2000, except for paragraph 5 of Note 5, for which the date is April 5, 2000,
on such 1999 and 1998 financial statements, is included under Part IV, Item 14,
of this Form 10-K.
-19-
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 27, 2000, the Company dismissed Ernst & Young LLP ("E&Y") as
its independent accountants. The reports of E&Y on the Company's financial
statements for fiscal years 1999 and 1998 did not contain an adverse opinion or
a disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles. The decision to replace E&Y was approved
by the Company's Audit Committee of its Board of Directors. During fiscal years
1999 and 1998 and the subsequent interim periods, there were no disagreements
with E&Y on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of E&Y would have caused it to make reference
to the subject matter of the disagreement(s) in connection with its report.
During fiscal years 1999 and 1998 there were no reportable events (as defined in
Item 304(a)(1)(v) of Securities and Exchange Commission Regulation S-K).
Effective, November 21, 2000, the Board of Directors of the Company engaged
Deloitte & Touche LLP as the principal accountants to audit the Company's
financial statements for the fiscal year ended December 31, 2000. No other event
requiring disclosure has occurred.
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 U.S. Securities and Exchange Commission pursuant to Regulation
14A within 120 days after the close of the Company's fiscal year.
-20-
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 for the year ended December 31, 2000..................... 25
Report of Independent Auditors for the years ended December 31, 1999 and
December 31, 1998....................................................................... 26
Consolidated Balance Sheets as of December 31, 2000 and 1999............................ 27
Consolidated Statements of Operations for the years ended December 31, 2000,
December 31, 1999 and December 31, 1998................................................. 28
Consolidated Statements of Changes in Shareholders' Equity(Deficit) for the years ended
December 31, 2000, December 31, 1999 and December 31, 1998.............................. 29
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
December 31, 1999 and December 31, 1998................................................. 30
Notes to Consolidated Financial Statements.............................................. 32
Note 1 - Summary of Significant Accounting Policies.................................. 32
Note 2 - Inventories................................................................. 36
Note 3 - Fixed Assets................................................................ 36
Note 4 - Income Taxes................................................................ 37
Note 5 - Lines of Credit and Notes Payable........................................... 38
Note 6 - Commitments and Contingencies............................................... 41
Note 7 - Related Party Transactions.................................................. 41
Note 8 - Stock Option Plan........................................................... 42
Note 9 - Employee Benefit Plans...................................................... 45
Note 10 - Redeemable Preferred Stock................................................. 46
Note 11 - Shareholders' Equity (Deficit)............................................. 47
Note 12 - Non-monetary Exchange Transaction.......................................... 47
Note 13 - Segment Information........................................................ 48
Note 14 - Subsequent Event........................................................... 48
Schedule II. Valuation and qualifying accounts.......................................... 49
(b) Reports on Form 8-K
During the fourth quarter of fiscal year 2000, two reports were filed on
Form 8-K. No financial statements were filed with either report.
On October 5, 2000, the Company filed a Form 8-K to report on a series of
transactions between the Company, its senior lender, certain of its
shareholders and Lufthansa Technik AG. For additional detail, see Note 7 to
the Consolidated Financial Statements.
On November 22, 2000, the Company filed a Form 8-K to report a change in
registrant's certifying accountant. For additional detail, see Item 9 of
this Form 10-K.
-21-
(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)
10.4 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)
10.9 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)
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)
-22-
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)
10.21 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)
10.31 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)
10.35 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)
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 (11)
10.42C Waiver and Amendment No. 4 to Loan and Security Agreement, dated
March 27, 2000 (11)
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)
10.46 Management Incentive Program Agreements, dated February 4, 2000 (12)
-23-
10.47 Loan Agreement, dated September 20, 2000, between Hawker Pacific
Aerospace and Lufthansa Technik AG (13)
10.48 Voting and Indemnity Agreement, dated September 20, 2000, between
Hawker Pacific Aerospace and Lufthansa Technik AG (13)
10.49 Shareholders Rights and Voting Agreement, dated September 20, 2000,
between Hawker Pacific Aerospace, The Shareholders Listed and
Lufthansa Technik AG (13)
10.50 Promissory Note, dated September 20, 2000, between Hawker Pacific
Aerospace and Lufthansa Technik AG (13)
10.51 Warrant issued by Hawker Pacific Aerospace to Lufthansa Technik AG,
dated September 20, 2000 (13)
10.52 Registration Rights Agreement, dated September 20, 2000, between
Hawker Pacific Aerospace and Lufthansa Technik AG (13)
10.53 Credit Agreement between Hawker Pacific Aerospace, Landesbank
Hessen-Thuringen Girozentrale and
Kreditanstalt fur Wiederaufbrau, dated October 30, 2000 (14)
10.54 Facility Agreement between Hawker Pacific Aerospace Ltd., Landesbank
Hessen-Thuringen Girozentrale and Kreditanstalt fur Wiederaufbrau,
dated October 30, 2000 (14)
10.55 Letter Agreement between Hawker Pacific Aerospace and Lufthansa
Technik AG re Exchange of Promissory Note, dated February 6, 2001
21.1 Subsidiaries of Registrant
23.2 Consent of Ernst & Young LLP, dated March 16, 2001
99.1 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
January 31, 2001
_______________________________
+ Portions of exhibits deleted and filed separately with the U.S.
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 U.S. Securities and Exchange Commission on
March 23, 1999, and incorporated herein by reference
(7) Previously filed with the U.S. 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
(11) Previously filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1999, and incorporated herein by
reference
(12) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, and incorporated
herein by reference
(13) Previously filed as an exhibit to the Company's Report on Form 8-K,
dated September 20, 2000
(14) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, and incorporated
herein by reference
(d) Financial Statement Schedules
Schedule II -- Valuation And Qualifying Accounts, has been included
herein under Item 14(a) above.
-24-
Report of Independent Auditors - Fiscal Year 2000
To the Board of Directors and Shareholders of
Hawker Pacific Aerospace
We have audited the accompanying consolidated balance sheet of Hawker
Pacific Aerospace and subsidiary as of December 31, 2000, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit) and cash flows for the year then ended. Our audit also included
the financial statement schedule listed in the index at Item 14 for the
year ended December 31, 2000. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hawker Pacific Aerospace
and subsidiary at December 31, 2000, and the results of their operations
and their cash flows for year ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the financial statements taken as a whole, presents fairly in
all material respects the information set forth herein.
Deloitte & Touche LLP
Los Angeles, California
March 2, 2001, except for Note 14
as to which the date is March 16, 2001
-25-
Report of Independent Auditors - Fiscal Years 1999 and 1998
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 two 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 the results of their operations
and their cash flows for each of the two 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 (not presented separately herein),
for which the date is April 5, 2000
-26-
CONSOLIDATED BALANCE SHEETS
At December 31, 2000 1999
- --------------------------------------------------------------------------------------------------
Assets
Current assets
Cash $ 3,349,000 $ 2,227,000
Accounts receivable, less allowance for
doubtful accounts of $1,038,000 and $324,000
at December 31, 2000 and 1999, respectively 14,954,000 18,506,000
Inventories 27,398,000 24,680,000
Prepaid expenses 855,000 550,000
Deferred taxes 1,668,000 531,000
------------ ------------
Total current assets 48,224,000 46,494,000
Equipment and leasehold improvements, net 14,232,000 13,822,000
Exchange assets, net 33,816,000 37,613,000
------------ ------------
Total fixed assets 48,048,000 51,435,000
Other assets 1,727,000 5,234,000
------------ ------------
Total assets $ 97,999,000 $103,163,000
==================================================================================================
Liabilities and Shareholders' Equity (Deficit)
Current liabilities
Line of credit $ -- $ 52,617,000
Accounts payable 9,962,000 13,402,000
Deferred revenue 5,199,000 3,397,000
Accrued payroll and employee benefits 1,826,000 1,495,000
Accrued expenses and other liabilities 6,082,000 4,186,000
Current portion of note payable to related party 2,334,000 623,000
------------ ------------
Total current liabilities 25,403,000 75,720,000
Notes payable
Bank note 65,956,000 5,617,000
Related party 4,179,000 2,500,000
------------ ------------
70,135,000 8,117,000
Deferred Taxes 2,980,000 --
Commitments and contingencies
Redeemable convertible preferred stock:
5,000,000 shares authorized; issued and outstanding:
-0- and 300 shares at December 31, 2000 and 1999,
respectively; $3,750,000 redemption amount at
December 31, 1999 -- 1,792,000
Shareholders' equity (deficit)
Common stock: 20,000,000 shares authorized;
issued and outstanding: 7,022,265 and 5,822,222 shares
at December 31, 2000 and 1999, respectively 28,682,000 22,384,000
Accumulated deficit (24,221,000) (3,474,000)
Accumulated other comprehensive loss (4,980,000) (1,376,000)
------------ ------------
Total shareholders' equity (deficit) (519,000) 17,534,000
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 97,999,000 $103,163,000
===================================================================================================
See Accompanying Notes to Consolidated Financial Statements
-27-
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------
Revenue $ 77,059,000 $ 82,318,000 $ 65,151,000
Cost of revenue 69,704,000 69,197,000 55,059,000
------------- ------------- ------------
Gross margin 7,355,000 13,121,000 10,092,000
Operating expense
Selling expense 3,371,000 3,296,000 3,621,000
General and administrative expense 7,721,000 7,076,000 6,143,000
------------- ------------- ------------
Total operating expense 11,092,000 10,372,000 9,764,000
------------- ------------- ------------
Income (loss) from operations (3,737,000) 2,749,000 328,000
Other income (expense)
Interest expense (8,772,000) (6,001,000) (3,402,000)
Miscellaneous income (expense), net (1,883,000) (76,000) 74,000
------------- ------------- ------------
Total other expense (10,655,000) (6,077,000) (3,328,000)
------------- ------------- ------------
Loss before income
tax expense (benefit) and
extraordinary item (14,392,000) (3,328,000) (3,000,000)
Income tax expense (benefit) 4,102,000 (1,068,000) (1,402,000)
------------- ------------- ------------
Loss before extraordinary item (18,494,000) (2,260,000) (1,598,000)
Extraordinary loss on early
extinguishment of debt, net of
tax benefit of $354,000 in 1998 (793,000) -- (600,000)
------------- ------------- ------------
Net loss (19,287,000) (2,260,000) (2,198,000)
Accretion of discount and redemption
premium on preferred stock (1,210,000) (273,000) --
Preferred stock dividends (250,000) -- --
------------- ------------- ------------
Loss to common shareholders ($20,747,000) ($ 2,533,000) ($2,198,000)
============= ============= ============
Loss per common share
before extraordinary item: basic
and diluted ($3.36) ($0.44) ($0.28)
Extraordinary item (0.13) -- (0.11)
Loss per common share:
basic and diluted ($3.49) ($ 0.44) ($ 0.39)
============= ============= ============
Weighted average common
and common equivalent
shares outstanding 5,938,606 5,822,222 5,622,770
============================================================================================
See Accompanying Notes to Consolidated Financial Statements
-28-
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
Retained
Preferred Stock Common Stock Earnings Other
-------------------------- ---------------------------- (Accumulated Comprehensive
Shares Amount Shares Amount Deficit) Income (loss) Total
-----------------------------------------------------------------------------------------------------
Balance at December 31,
1997 400 $ 2,000,000 2,972,222 $ 1,040,000 $1,257,000 $ -- $ 4,297,000
Net loss -- -- -- -- (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 -- -- -- -- (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 -- -- 750,000
Issuance of warrant
to preferred
stock
shareholders -- -- -- 286,000 -- -- 286,000
Issuance of warrant
as cost
related to
preferred stock -- -- -- 240,000 -- -- 240,000
Accretion of discount
and redemption
premium on
preferred stock -- -- -- -- (273,000) -- (273,000)
-----------------------------------------------------------------------------------------------------
Balance at December 31,
1999 -- -- 5,822,222 22,384,000 (3,474,000) (1,376,000) 17,534,000
Net loss -- -- -- -- (19,287,000) -- (19,287,000)
Foreign currency
translation -- -- -- -- -- (3,604,000) (3,604,000)
------------
Comprehensive loss -- -- -- -- -- -- (22,891,000)
Issuance of 2,500,000
warrants -- -- -- 3,110,000 -- -- 3,110,000
Preferred stock
dividend accrued -- -- -- -- (250,000) -- (250,000)
Conversion of
redeemable preferred stock
to common -- -- 1,106,982 3,750,000 -- -- 3,750,000
Reclassification of
redemption premium upon
conversion of
preferred stock -- -- -- (750,000) 750,000 -- --
Conversion of
dividends on preferred stock
to common -- -- 57,404 156,000 -- -- 156,000
Accretion of discount
and redemption premium on
preferred stock -- -- -- -- (1,960,000) -- (1,960,000)
Stock option exercise -- -- 35,657 32,000 -- -- 32,000
-----------------------------------------------------------------------------------------------------
Balance at December 31,
2000 -- -- 7,022,265 $28,682,000 ($24,221,000) ($4,980,000) ($519,000)
==================================================================================================================================
See Accompanying Notes to Consolidated Financial Statements
-29-
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss ($19,287,000) ($2,260,000) ($2,198,000)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Extraordinary loss 793,000 -- 954,000
Deferred income taxes 4,052,000 (533,000) (1,771,000)
Depreciation and amortization 4,797,000 4,057,000 3,207,000
Amortization of loan discount 313,000 -- --
Bad debt expense 983,000 50,000 158,000
Write-down of exchange assets 830,000 -- --
Gain on the sale of machinery,
equipment and landing gear -- (1,648,000) --
Proceeds from sale of landing gear -- 4,734,000 --
Changes in operating assets and liabilities:
Accounts and other receivables 1,784,000 (6,361,000) (5,144,000)
Inventory (3,702,000) (3,242,000) (4,870,000)
Prepaid expenses and other
current assets (370,000) 63,000 (377,000)
Accounts payable (2,795,000) 1,049,000 5,225,000
Deferred revenue 2,125,000 2,365,000 175,000
Accrued liabilities 2,873,000 2,913,000 1,546,000
------------ ----------- -----------
Cash provided by (used in) operating
activities (7,604,000) 1,187,000 (3,095,000)
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment, leasehold
improvements and landing gear (5,885,000) (12,216,000) (7,427,000)
Purchase of equipment and landing gear
from British Airways -- -- (26,585,000)
Purchase of inventory from British Airways -- -- (1,961,000)
Other assets 1,496,000 (680,000) (1,162,000)
------------ ----------- -----------
Cash used in investing activities (4,389,000) (12,896,000) (37,135,000)
- -----------------------------------------------------------------------------------------------
(continued)
-30-
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
For the year ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Borrowings under bank note $ 60,350,000 $15,431,000 $ 38,766,000
Principal payments on bank note (53,541,000) (5,041,000) (40,136,000)
Principal payment on related party note (2,500,000) -- (4,000,000)
Borrowing under related party note 9,300,000 -- --
Borrowings/payments on line of credit, net -- -- 28,656,000
Proceeds from equity offering -- -- 20,800,000
Deferred offering costs -- -- (1,966,000)
Deferred financing cost (526,000) 191,000 (1,490,000)
Issuance of preferred stock -- 2,795,000 --
Exercise of stock options 32,000 -- --
------------ ----------- ------------
Cash provided by financing activities 13,115,000 13,376,000 40,630,000
- --------------------------------------------------------------------------------------------------
Increase in cash 1,122,000 1,667,000 400,000
Cash, beginning of period 2,227,000 560,000 160,000
------------ ----------- ------------
Cash, end of period $ 3,349,000 $ 2,227,000 $ 560,000
==================================================================================================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 7,076,000 $ 5,492,000 $ 3,291,000
Income taxes 12,000 9,000 81,000
Non-cash items:
In December 2000, Series C preferred
stock, with a redemption value of
$3,750,000, was converted into
1,106,982 shares of common stock $ 3,000,000 -- --
In December 2000, accrued dividends
of $156,000 on Series C preferred
stock were converted into 57,404
shares of common stock $ 156,000 -- --
- --------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
31
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. The Company is organized into two divisions, with facilities in Sun
Valley and Amsterdam, and a wholly owned subsidiary, 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 start up
operations in the UK, the Company incurred losses and negative cash flows from
operating activities in 2000 which resulted in an accumulated deficit at
December 31, 2000. Management's plans with respect to these conditions include
carefully managing cash flow, improving the operations in the United Kingdom,
and converting its debt with Lufthansa Technik AG ("LHT") to common shares.
LHT Transactions. On September 20, 2000, LHT acquired a controlling interest
in the Company upon executing the following series of transactions with the
Company, its senior lender, and certain of its shareholders (see also Note 7).
LHT is a wholly-owned subsidiary of Deutsche Lufthansa, one of the largest
airlines in Europe. LHT is the technical and maintenance arm of Lufthansa, but
also generates about half of its almost $2 billion in annual revenue by offering
repair and overhaul services to the rest of the aviation industry.
LHT acquired its controlling interest in a private transaction by purchasing
40% of the Company's common stock from certain shareholders affiliated with
Unique Investment Corporation. LHT also purchased all outstanding shares of the
Company's Series C convertible preferred stock from the private investor group
that provided such funding to the Company in December 1999.
LHT also entered into a Shareholders Rights and Voting Agreement with the
Company and certain of its officers under which LHT acquired certain voting and
corporate rights. In addition, LHT assisted the Company by providing $10 million
in junior participation to the Company's senior lender until such time as the
senior credit facility could be refinanced. LHT subsequently assisted the
Company in securing a new senior debt facility in October 2000.
LHT also provided the Company $9.3 million of subordinated debt, in exchange
for which it received warrants to purchase up to 2,500,000 shares of the
Company's common stock at an exercise price of $4.25. The issuance of these
warrants is subject to approval by the shareholders of the Company at the next
Annual Meeting of Shareholders.
In December 2000, LHT converted all of its Series C preferred stock and
accrued dividends into common shares (see also Note 10). On March 16, 2001, LHT
converted all subordinated debt and accrued interest owed to it by the Company,
approximately $9.8 million, into common shares (see also Note 14). LHT currently
owns or controls approximately 67% of the Company's outstanding common shares.
Acquisition of Assets from British Airways. On February 4, 1998, the Company
completed its acquisition of the BA Assets (the "BA Acquisition"). 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 exchange 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 exchange asset value.
32
As part of the BA Acquisition, the Company and British Airways entered into a
seven-year exclusive service agreement on February 4, 1998, under which the
Company provides 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, 2000,
there were 104 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.
Recognition of Revenue
The Company generates revenue primarily from repair and overhaul services. In
some cases, overhaul revenue includes exchange fees which compensate the Company
for the carrying cost of its exchange assets. The Company also generates revenue
from the sale and distribution of spare parts, and the manufacturing of certain
aircraft components. The revenue derived from spare parts sales and
manufacturing are each individually less than 10% of total revenue.
Revenue for repair and overhaul services involving an exchange is recognized
when the job is complete. Exchange fees are recognized upon the shipment of the
Company's exchange asset to the customer. Revenue for repair and overhaul
services not involving an exchange is recognized when the completed item is
shipped to the customer.
The Company is allowed under certain of its contracts to invoice customers
prior to the completion of the overhaul. Such invoices are credited to deferred
revenue until the overhaul is complete. Revenue from spare parts sales and
manufacturing is recognized at the time of shipment.
Provision for Anticipated Losses on Contracts
The Company records a current charge to cost of revenue when it is anticipated
that the total estimated costs will exceed the total estimated revenue over the
life of the contract. The amount of the provision is the excess of cost over
revenue for every overhaul event anticipated during the contract term.
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 2000, three customers accounted for 19%, 15%, and 13% of the Company's
revenue, and represented 12%, 6%, and 10%, respectively, of the accounts
receivable balance at December 31, 2000. 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, those same three customers accounted for 22%, 18%, and 10% of the
Company's revenue, and represented 25%, 19%, and 5% of the accounts receivable
balance at December 31, 1998.
Major Vendors. During 2000, three vendors accounted for $11,823,000,
$4,588,000, and $4,587,000, or 29%, 11%, and 11% of total purchases for the
year. 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.
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.
33
Provisions for potentially obsolete or slow-moving inventory are
made based on management's analysis of inventory levels, turnover and
future usage forecasts.
Exchange Assets
Landing gear and other exchange assets are accounted for as fixed assets at
cost and are depreciated over their estimated useful lives to their respective
salvage values. These exchange assets principally include various large
commercial jet landing gear shipsets, and flap tracks and carriages. Exchange
assets are held for the purpose of exchanging the asset with a customer to allow
the customer's aircraft to return to service in the shortest possible time.
Certain of the Company's contracts could not have been obtained without
sufficient exchange assets to meet the customer's requirements.
After the landing gear shipset is exchanged and the customer is billed for the
established cost of the overhaul, the landing gear shipset from the customer is
overhauled and returned to the Company's exchange asset pool. The estimated
useful lives of these exchange assets range from 10 to 15 years depending on the
age of the aircraft type, and the Company's estimate of how many years of
overhaul demand remain. Depreciation expense is recorded as a cost of revenue
using the straight-line depreciation method.
The Company reviews the carrying value of an exchange asset for impairment
whenever events and circumstances indicate that the carrying value of such asset
may not be recoverable from the estimated future cash flows expected from its
use and eventual disposition. If the undiscounted expected future cash flows are
less than the carrying value, an impairment loss is recognized equal to the
amount by which the carrying value exceeds the fair value of the asset.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are recorded at cost. Expenditures for
repairs are expensed as incurred, and additions and betterments are capitalized.
Depreciation expense is determined 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
The Company reviews the carrying value of equipment and leasehold improvements
for impairment whenever events and circumstances indicate that the carrying
value of such assets may not be recoverable from the estimated future cash flows
expected from their use and eventual disposition. If the undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to the amount by which the carrying value exceeds the fair
value of the asset.
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 (deficit). Transaction gains and losses, other than on
inter-company accounts deemed to be permanent in nature, are included in net
income in the period they occur.
Realized and unrealized foreign exchange gains recognized in earnings amounted
to $425,000, $71,000 and $99,000 for the years ended December 31, 1998, 1999 and
2000, respectively.
Loss per Share
Basic and diluted loss per common share is computed based upon the weighted
average number of common shares outstanding for the period. Diluted loss per
common share reflects the potential dilution that could occur if certain
securities were exercised or converted into common stock. None of these were
included in the computation
34
of diluted 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, and the effect would therefore be antidilutive. Basic loss per share
is the same as diluted loss per share for all periods presented. The number of
shares used in the calculation of basic and diluted loss per share is 5,622,770,
5,822,222 and 5,938,606 for the years ended December 31, 1998, 1999 and 2000,
respectively. Net loss used in the calculation of basic and diluted loss per
share has been adjusted for the accretion of the discount and redemption premium
on the preferred stock in order to derive net loss to common shareholders.
Fair Value of Financial Instruments
As defined by Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments, the Company's financial instruments
principally consist of accounts receivable, accounts payable, notes payable to a
bank, and, through March 16, 2001, a note payable to a related party. 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 notes payable to a bank approximate their fair market value since
these financial instruments carry a floating interest rate. The fair market
value of the retired note payable to a related party approximated its carrying
value based on the current market rate for such debt, and the discount applied
against the note payable as a result of the warrants issued to the related
party.
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, warranty accruals, deferred tax asset valuation allowances, and a
provision for anticipated losses on future work covered by contracts performed
at the Company's UK operation. 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
established 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 The Netherlands.
New Accounting Pronouncements
As of October 1, 2000, the Company adopted Staff Accounting Bulletin 101,
Revenue Recognition ("SAB 101"). SAB 101 provides guidance on applying generally
accepted accounting principles to revenue recognition issues in financial
statements. The Company recognizes revenue when it is realizable and earned. The
adoption of SAB 101 did not have a significant impact on the financial position,
results of operations, or cash flows of the company.
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended ("SFAS 133"), is effective for
all fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company has adopted SFAS 133 effective
January 1, 2001. Management does not expect the adoption of SFAS 133 to have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal
2000 presentation.
35
2. INVENTORIES
Inventories are comprised of the following.
December 31,
--------------------------
2000 1999
----------- -----------
Purchased parts and assemblies $20,543,000 $20,246,000
Work-in-process 6,855,000 4,434,000
----------- -----------
$27,398,000 $24,680,000
=========== ===========
3. FIXED ASSETS
Equipment, leasehold improvements, and exchange assets at cost, consist of
the following.
December 31,
--------------------------
2000 1999
----------- -----------
Leasehold improvements $ 9,153,000 $ 7,034,000
Machinery and equipment 8,598,000 8,525,000
Tooling 614,000 580,000
Furniture and fixtures 287,000 278,000
Vehicles 37,000 38,000
Computer equipment 1,672,000 1,591,000
----------- -----------
20,361,000 18,046,000
Less: accumulated depreciation (6,129,000) (4,224,000)
----------- -----------
Total equipment and leasehold improvements, net $14,232,000 $13,822,000
Exchange assets $39,764,000 $41,459,000
Less: accumulated depreciation (5,948,000) (3,846,000)
----------- -----------
Total exchange assets, net $33,816,000 $37,613,000
Total Fixed Assets, net $48,048,000 $51,435,000
=========== ===========
During 2000, the Company recorded a non-cash charge of $830,000 related to
the write-down of two landing gear exchange assets to their fair value.
36
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,
---------------------------
2000 1999
----------- -----------
Deferred tax assets
Net operating loss carryforwards $15,633,000 $ 9,322,000
Inventory valuation accruals 639,000 575,000
Accounts receivable valuation accruals 417,000 154,000
Employee benefits and compensation 202,000 197,000
Product and service warranties 146,000 76,000
Accrued expenses 268,000 --
State tax credits 94,000 94,000
Other items, net 160,000 29,000
----------- -----------
Total deferred tax assets 17,559,000 10,447,000
Less valuation allowance (9,823,000) --
----------- -----------
Net deferred tax assets 7,736,000 10,447,000
=========== ===========
Deferred tax liabilities
Depreciation and amortization methods
Difference in fixed assets basis due to
accelerated depreciation and tax
deferred exchanges 8,790,000 7,441,000
Other items, net 258,000 594,000
----------- ------------
Total deferred tax liabilities 9,048,000 8,035,000
----------- ------------
Net deferred tax assets (liabilities) ($ 1,312,000) $ 2,412,000
=========== ===========
Deferred tax assets and liabilities are reflected in the Company's balance
sheets as follows.
December 31,
---------------------------
2000 1999
----------- -----------
Current deferred tax assets $ 1,668,000 $ 531,000
Non-current deferred tax assets (liabilities) (2,980,000) 1,881,000
----------- -----------
Net deferred tax assets (liabilities) ($1,312,000) $ 2,412,000
=========== ===========
Non-current deferred tax assets for 1999 are included in "Other assets" on
the Consolidated Balance Sheets.
The Company has net operating loss carryforwards for federal tax purposes of
$42,280,000, which expire in the years 2005 to 2020. The Company also has state
net operating loss carryforwards of $14,220,000, which expire in the years 2001
to 2005. Utilization of net operating loss carryforwards are subject to
limitation as a result of changes in ownership. Such limitations are not
anticipated to have a material impact on the Company's ability to utilize such
net operating loss carryforwards.
37
Significant components of income tax expense (benefit) are as follows.
For the year ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------
Current:
Federal ($ 39,000) $ 19,000 $ --
State 89,000 1,000 1,000
----------- ------------- -------------
50,000 20,000 1,000
Deferred:
Federal 3,636,000 (1,364,000) (1,114,000)
State 416,000 276,000 (289,000)
----------- ------------- -------------
4,052,000 (1,088,000) (1,403,000)
----------- ------------- -------------
Income tax expense (benefit) $4,102,000 ($ 1,068,000) ($ 1,402,000)
=========== ============= =============
For the years ended December 31, 1998 and 1999 reductions were made in the
valuation reserve of approximately $434,000 and $225,000, respectively, of which
$170,000 for 1998 were credited against goodwill. During the year ended December
31, 2000, the Company established a $9,823,000 valuation allowance for a portion
of its deferred tax asset, which was previously established for the tax benefit
related to future utilization of the Company' net operating loss carryforward.
The following table reconciles the statutory federal income tax rate to the
effective tax rate, as a percentage of income before tax.
For the year ended December 31, 2000 1999 1998
- --------------------------------------------------------------
Statutory federal income tax rate (34%) (34%) (34%)
Nondeductible expenses -- 1% 7%
State income taxes, net of
federal benefit 2% 5% (10%)
Change in valuation reserve 59% (7%) (10%)
Other -- 3% --
------- ------- -------
Effective tax rate 27% (32%) (47%)
5. LINE OF CREDIT AND NOTES PAYABLE
Prior Senior Credit Facility. 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 were to 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
December 31, 1998, as an extraordinary item net of related tax benefit of
$354,000.
The interest rate on all three Heller instruments was set at prime plus 2.5%,
or 12% from May 2000 until the termination of the facility. During 1999 the
Company made principal payments of $0.6 million and $4.5 million on Term Loans A
and B, respectively. During 2000 the Company made principal payments of $3.7
million and $2.5 million on Term Loans A and B respectively.
On September 20, 2000, the Company and Heller executed an amendment to the
Heller Agreement, and the Company paid $6.0 million of the Heller obligation
with proceeds from the LHT loan. 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. The company recorded an
extraordinary loss of $793,000 during 2000 in order to extinguish the Heller
debt.
Current Senior Loan Facility. The Heller facility was terminated and paid in
full on October 31, 2000, upon the closing of a new senior Loan Facility with
Landesbank Hessen-Thuringen Girozentrale ("Helaba"), as mandated arranger and
agent, and Kreditan-stalt fur Wiederaufbrau ("KfW"), as co-arranger. The $65
million Loan Facility is
38
comprised of two five-year term notes, with funding of $45 million to Hawker
Pacific Aerospace, and 14 million British pounds to Hawker Pacific Aerospace,
Ltd., the Company's United Kingdom subsidiary. 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 US and UK notes of the Loan Facility carry interest rates set quarterly at
the respective LIBOR rate for each country, plus 2.70 basis points. The weighted
average interest rate for both notes at December 31, 2000, was approximately
9.3%. No principal payments are required during the first year of the Loan
Facility, and only $10 million of principal payments are required on the US 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 US company.
Subordinated Debt Facility. On September 20, 2000, LHT provided the Company a
$9.3 million note to assist the Company in meeting its obligations to Heller,
retire the Unique debt and related fees, pay certain transaction-related costs,
and to enhance the Company's general working capital. The three-year note was
subordinated to both the Heller and Helaba senior facilities. The note accrued
interest at the greater of 10% or the US LIBOR rate plus 5%, provided that such
amount did not exceed 11% or the maximum amount allowable by law. Accrued
interest was payable every six months commencing in September 2001. The interest
rate in effect during the term of the loan was 11%. Principal was payable in
three payments of 25%, 25% and 50% at the end of years one, two and three,
respectively.
In consideration of the favorable interest rate and terms of the note, the
Company also issued LHT warrants to purchase up to 2,500,000 shares of common
stock. For additional detail on the warrants, please refer to Note 7, Related
Party Transactions. For additional detail on the debt facility, please refer to
Note 7 and Note 14, Subsequent Events.
39
The Company's long-term notes payable balance consists of the following.
December 31,
----------------------------
2000 1999
----------------------------
Note payable to a financial institution, secured by all the
Company's assets, interest accrues and is payable quarterly at
LIBOR plus 2.7% per annum. 5-year term note, with
$10,000,000 of principal payable in years 2 through 5,
and the balance payable on October 30, 2005. $65,909,000 --
Note payable to a related party, interest accrues monthly
at the lesser of 11%, or the greater of 5% plus LIBOR or 10%
per annum, interest payments due semi-annually, beginning in
September 2001. Interest rate at December 31, 2000 was 11%;
subordinated to the note payable above, maturing at the
end of the third year, with the first principal payment of 25%
due after one year. 9,300,000 --
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, 1999 and 2000,
was 11.0 %. Retired October 30, 2000. -- $3,669,000
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, 1999 and 2000,
was 11.0 %. Retired October 30, 2000. -- 2,500,000
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. Retired September 20, 2000. -- 2,500,000
Note payable to a financial institution, payable in quarterly
installments of $4,700 per quarter, including interest, maturing
in 2006. 56,000 71,000
------------ ----------
Total amounts owed under notes payable 75,265,000 8,740,000
Less discount on note payable to related party (2,796,000) --
Less current portion (2,334,000) (623,000)
------------ ----------
Total long-term notes payable $70,135,000 $8,117,000
============ ==========
Maturity of notes payable as of December 31, 2000, is summarized as follows.
2001 $ 2,334,000
2002 3,834,000
2003 7,409,000
2004 3,009,000
2005 58,668,000
2006 11,000
-----------
$75,265,000
===========
40
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 2024, and which
contain certain escalation clauses based on various inflation indexes.
Future minimum rental payments as of December 31, 2000, are summarized as
follows.
2001 $ 3,174,000
2002 3,091,000
2003 3,035,000
2004 2,900,000
2005 and thereafter 40,493,000
-----------
$52,693,000
===========
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 $3,266,000,
$3,204,000, and $2,898,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
Employment Agreements
The Company is obligated under certain management employment contracts
through October 31, 2001. Future minimum salary expense related to these
contracts is $1,158,000.
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 its former parent company, BTR plc, for certain
asserted claims against the Company.
Litigation
The Company is from time to time involved in various lawsuits, claims and
inquiries, which the Company believes are routine to the nature of its
business. The Company is not, however, currently involved in any
litigation, or subject to any claim which has not been provided for, which
would have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
7. RELATED PARTY TRANSACTIONS
On September 20, 2000, LHT entered into a Loan Agreement with the Company,
and provided the Company subordinated debt of $9,300,000, at an interest
rate of up to 11% per annum, for a term of three years (see also Note 5,
Line of Credit and Notes Payable). In consideration of the favorable terms
of this Loan Agreement, LHT also received warrants, exercisable for one
year, to purchase up to 2,500,000 shares of common stock for $4.25 per
share. The exercise of these warrants is subject to shareholder approval at
the next Annual Meeting of Shareholders. 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.
On September 20, 2000, 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
$1,883,000 in 2000, which are included in the Consolidated Statement of
Operations under miscellaneous expenses.
- 41 -
The proceeds of $9,300,000 received 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 was recorded as an increase to shareholders' equity
and a discount to the related party note payable.
In December 2000, LHT voluntarily converted all of its Series C preferred
stock and accrued dividends into 1,164,386 shares of common stock (see
Note 10, Redeemable Preferred Stock).
In the ordinary course of business, the Company enters into
subcontracting transactions with LHT to provide overhaul services. During
2000, the company generated revenue of $465,000 from LHT, and received cash
payments totaling $175,000.
In the ordinary course of business, the Company pays sales commissions to
a company which is also a shareholder of the Company. For the years ended
December 31, 1998, 1999, and 2000, the Company paid $408,000, $439,000,
and $198,000, respectively, in commissions and reimbursed expenses to this
related party.
As described in Note 5, at December 31, 1999, the Company had a
$2,500,000 note payable to Unique Investment Corporation ("Unique"), an
entity controlled by certain shareholders and directors of the Company at
that time (the "Unique Shareholders"). This note and accrued interest was
repaid in full on October 31, 2000. Interest expense on this note for the
years ended December 31, 1998, 1999, and 2000, amounted to $601,000,
$295,000 and $311,228, respectively.
In September 1997, the Company and Unique entered into a management
services agreement (the "Management Services Agreement") pursuant to which,
upon the consummation of the public offering for the Company, Unique became
entitled to receive $150,000 per year, payable monthly, for certain
management services rendered to the Company. No management fees were paid
to Unique during 1998. During 1999 and 2000, $150,000 and $131,250 were
incurred for Unique for management services rendered. The Management
Services Agreement terminated upon the sale by the Unique Shareholders of
2,336,495 common shares to LHT on September 20, 2000, at which time the
Company paid a $150,000 termination fee to Unique.
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.
42
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 became fully vested
and exercisable upon the change in control on September 20, 2000.
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 ("SFAS 123"). 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 SFAS 123, net income and earnings
per share would have been reported as the pro forma amounts indicated below
for the years ended December 31, 2000, 1999 and 1998.
2000 1999 1998
------------ ----------- -----------
Reported loss to common shareholders ($20,747,000) ($2,533,000) ($2,198,000)
Pro forma loss to common shareholders ($21,496,000) ($3,079,000) ($2,695,000)
Reported diluted loss per share ($3.49) ($0.44) ($0.39)
Pro forma diluted loss per share ($3.62) ($0.53) ($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
for each of the years ended December 31, 2000, 1999, and 1998.
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 2000 is not considered representative of the pro forma
effect on net income in future years because it does not take into account
future grants, or the timing of the grants of prior options. Pro forma
information in future years will reflect the amortization of a larger
number of stock options granted in several succeeding years.
43
A summary of the Company's outstanding options, and changes therein, for
the years ended December 31, 1998, 1999 and 2000, 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 $ 1.96
- -----------------------------------------------------------------------------------------------------------------------
2000
----
Options outstanding at beginning of year 582,940 $ 5.49
Options granted 30,000 5.14
Options cancelled (51,402) (4.81)
Options exercised (7,400) (3.56)
-----------
Options outstanding at end of year 554,138 5.56
===========
Options exercisable at end of year 458,879 5.76
Weighted average fair value of options
granted during the year $ 3.47
- -----------------------------------------------------------------------------------------------------------------------
The following table provides data on stock options outstanding and
exercisable at December 31, 2000.
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------- -----------------------------------
Weighted-Average Weighted
Range of Remaining Weighted Average Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------- ----------------- --------------------- ---------------- ------------- -------------------
$2.13-2.99 20,000 8.5 $ 2.22 20,000 $2.22
$3.00-6.99 288,107 7.8 $ 3.77 202,756 $3.62
$7.00-7.99 43,261 7.7 $ 7.00 43,261 $7.00
$8.00-8.99 187,909 6.9 $ 8.00 182,955 $8.00
$9.00-9.88 14,861 7.2 $ 9.88 9,907 $9.88
------- ---------
554,138 7.6 $ 5.56 458,879 $5.76
======= =========
- 44 -
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.
Effective January 1, 1999, the Company adopted a defined benefit
pension plan (the "UK Plan") to provide retirement benefits to its
employees. This contributory plan covers substantially all employees of the
Company who have completed a minimum of six month's service. Pursuant to
plan provisions, normal retirement benefits are equal to the participant's
credited eligible service, times either 1.67% or 1.79% (depending on
benefit scale) of the participant's retiring pay. Retiring pay is based on
basic pay less a deductible (in most cases, 15% of basic pay). The plan
also provides for early retirement and certain death and disability
benefits. Participants pay contributions equal to either 5.25% or 7.25%
(depending on benefit scale) of their basic pay (net of the deductible)
with the Company paying the balance of the cost. The Company's funding
policy for the plan is to contribute amounts sufficient to meet the minimum
funding requirements of the UK Pensions Act 1995, plus such additional
amounts as the Company may determine to be appropriate so as to spread the
cost of providing benefits over participants' working lives with the
Company.
The net pension cost for the 1997 Plan and the UK Plan, for the years
ended December 31, 2000 and 1999, include the following components.
Pension Benefits
------------------------------
2000 1999
----------- -----------
Change in benefit obligation
Benefit obligation at beginning of year $10,242,000 $ 8,681,000
Service cost 901,000 754,000
Interest cost 608,000 525,000
Plan participants contributions 302,000 320,000
Actuarial (gains) losses (824,000) 177,000
Prior service costs -- --
Benefits paid (128,000) (19,000)
Exchange rate changes (641,000) (196,000)
----------- -----------
Benefit obligation at end of year $10,460,000 $10,242,000
----------- -----------
Change in plan assets
Fair value of plan assets at beginning of year $10,056,000 $ 7,735,000
Actual return on plan assets 69,000 1,605,000
Company contributions 690,000 611,000
Plan participants contributions 302,000 320,000
Benefits paid (128,000) (19,000)
Exchange rate changes (699,000) (196,000)
----------- -----------
Fair value of plan assets at end of year $10,290,000 $10,056,000
----------- -----------
Funded status of the plan (underfunded) (170,000) (186,000)
Unrecognized net actuarial losses (672,000) (655,000)
Unamortized prior service cost 643,000 677,000
----------- -----------
Accrued benefit cost ($ 199,000) ($ 164,000)
=========== ===========
The following table provides weighted average percentages of the rate
assumptions used in the determination of the net pension cost for the US
and UK defined benefit pension plans for the years ended December 31, 2000
and 1999.
2000 1999
--------- ---------
Discount rate 6.2% 5.8%
Rate of increase in compensation levels 3.4% 3.4%
Expected long-term rate of return on assets 7.9% 7.9%
The components of net periodic benefit costs for the years ended December 31,
2000 and 1999 are as follows.
2000 1999
--------- ---------
Service cost $ 901,000 $ 754,000
Interest cost 608,000 525,000
Expected return on plan assets (747,000) (625,000)
Amortization of prior service cost 34,000 34,000
Amortization of losses 2,000 1,000
--------- ---------
Net periodic benefit costs $ 798,000 $ 689,000
========= =========
- 45 -
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 fully vested immediately, while matching contributions from
the Company 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, 2000, 1999, and 1998, the Company's matching contribution
amounted to $231,000, $168,000, and $137,000, respectively. This amount was
expensed during the period and is included in the Consolidated Statement of
Operations.
Employees associated with the BA Acquisition continued to participate in
the BA pension plan through January 31, 1999. The Company incurred $286,000
and $436,000 of expense related to contributions to this plan for the years
ended December 31, 1999 and 1998, respectively. The Company had no further
obligation to the BA plan as of January 31, 1999.
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 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 also 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.
The Series C holder had a mandatory right of redemption under certain
circumstances. The redemption feature called for the preferred stock to be
redeemed for 125% of the stated value ($3,750,000) and as such the
preferred stock was accreted to $3,750,000 over a 180-day period from
December 1999 until June 2000. The issue also provided for a multiple-step
beneficial conversion feature, which was valued for financial statement
purposes at $750,000. The resulting discount on the Series C was amortized
over a 180-day period from December 1999 until June 2000, and was charged
to accumulated deficit, similar to a preferred dividend, as an increase to
the loss to common shareholders.
On September 20, 2000, LHT purchased all 300 shares of Series C preferred
stock from the preferred holder in a private transaction. On December 22
and 29, 2000, at LHT's election, these shares and a portion of the issue's
accrued dividends were converted into 1,164,386 shares of common stock at a
discounted price, as determined by the December 1999 stock purchase
agreement. In accordance with the terms of the stock purchase agreement,
all accrued dividends could not be paid at the time of conversion. The
Company will seek approval at the next Annual Meeting of Shareholders to
issue to LHT 35,582 common shares as final payment for the remaining
accrued dividends, otherwise the dividend will be paid in cash.
The accumulated accretion related to the redemption premium of $750,000
was reclassified from accumulated deficit to common stock at the time of
conversion. The amount of accretion related to the beneficial conversion
feature, conversion discount, associated warrants, and costs of issuance
which are included in the calculation of the loss per share to common
shareholders for the years ended December 31, 2000 and 1999, was $1,210,000
and $273,000, respectively.
- 46 -
11. SHAREHOLDERS' EQUITY (DEFICIT)
The following table summarizes the Company's common stock issued and
available at December 31, 2000:
Common
Shares Issued
Description of Instrument or Reserved
------------------------- -------------
Common stock outstanding 7,022,265
Series C convertible preferred stock dividend 35,582
Management options 111,265
Employee Incentive Stock Option Plan 442,873
Common stock warrants 347,716
----------
Total common stock issued or reserved 7,959,701
==========
Total common stock available 12,040,299
==========
12. 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. 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
-------------- --------------- -------------
2000
----
Total assets $51,975,000 $ 46,024,000 $ 97,999,000
Total long-lived assets, net 17,575,000 30,473,000 48,048,000
Revenue by location of operations 58,854,000 18,205,000 77,059,000
Loss before income tax benefit (2,646,000) (11,746,000) (14,392,000)
1999
----
Total assets $50,113,000 $ 53,050,000 $103,163,000
Total long-lived assets, net 19,669,000 31,766,000 51,435,000
Revenue by location of operations 54,977,000 27,341,000 82,318,000
Income (loss) before income tax expense (benefit) 1,553,000 (4,881,000) (3,328,000)
1998
----
Total assets $46,202,000 $ 41,035,000 $ 87,237,000
Total long-lived assets, net 17,097,000 30,078,000 47,175,000
Revenue by location of operations 49,232,000 15,919,000 65,151,000
Loss before income tax benefit (382,000) (2,618,000) (3,000,000)
The Company generated revenue from customers located outside of the
United States of $26,660,000, $37,329,000 and, $24,693,000, of which
$10,802,000, $9,988,000 and $8,312,000 were revenues generated from the
Company's United States location for the years ended December 31, 1998,
1999 and 2000, respectively.
- 47 -
13. SELECTED QUARTERLY DATA (Unaudited)
The following table provides selected quarterly financial data for the last
two fiscal years (US$ thousands, except per share amounts).
Year ended December 31, 2000
--------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter For Year
-------- -------- --------- -------- ---------
Revenue $21,488 $20,299 $ 18,533 $16,739 $ 77,059
Gross margin (A), (B), (C) 4,066 3,404 1,004 (1,119) 7,355
Loss before extraordinary item (D) (351) (679) (11,076) (6,388) (18,494)
Net loss (351) (679) (11,076) (7,181) (19,287)
Loss to common shareholders (1,552) (1,570) (11,136) (6,489) (20,747)
Loss per common share before
extraordinary item: basic and diluted (0.27) (0.27) (1.90) (0.92) (3.36)
Loss per common share: basic and diluted ($0.27) ($0.27) ($1.90) ($1.05) ($3.49)
- -------------------------------------------------------------------------------------------------------
Year ended December 31, 1999
--------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter For Year
-------- -------- --------- -------- ---------
Revenue $16,195 $17,395 $ 23,472 $25,256 $ 82,318
Gross margin (E), (F) 3,399 (704) 4,964 5,462 13,121
Income (loss) before extraordinary item 40 (2,982) 518 164 (2,260)
Net income (loss) 40 (2,982) 518 164 (2,260)
Income (loss) to common shareholders 40 (2,982) 518 (109) (2,533)
Income (loss) per common share before
extraordinary item: basic and diluted 0.01 (0.51) 0.09 (0.03) (0.44)
Income (loss) per common share: basic and diluted $ 0.01 ($0.51) $ 0.09 ($0.03) ($0.44)
- -------------------------------------------------------------------------------------------------------
(A) During 2000 the Company recorded provisions for anticipated losses on
certain of the UK customer contracts in the amount of $711,000, or $0.12
per share, in the third quarter, and $1,485,000, or $0.24 per share, in the
fourth quarter.
(B) During 2000 the Company recorded write downs of certain landing gear
exchange assets in the third quarter of $200,000, or $0.03 per share, and
the fourth quarter of $630,000, or $0.10 per share.
(C) During 2000 the Company recorded various expenses related to the change of
control, primarily charged in the third quarter of $1,809,000, or $0.31 per
share.
(D) During 2000 the Company recorded expenses related to a tax valuation
allowance adjustment in the third quarter of $5,976,000, or $1.02 per
share, and the fourth quarter of $3,847,000 or $0.62 per share.
(E) During 1999 the Company recorded costs associated with the relocation of
the UK facility in the fourth quarter of $1,299,000 ($882,000 after tax, or
$0.15 per share)
(F) During 1999 the Company recorded an inventory adjustment of $826,000 in the
second quarter ($561,000 after tax, or $0.10 per share).
See Management's Discussion and Analysis of Financial Condition and Results
of Operations for further discussion.
14. SUBSEQUENT EVENTS
On February 6, 2001, the Company and LHT entered into an agreement to
convert from debt to common equity approximately $9.8 million of principal
and accrued interest owed under the LHT note payable. See Notes 5 and 7 for
additional detail regarding this note.
The conversion rate of $3.125 per common share was set equal to the then-
current market price, and was determined by the average of the closing bid
prices on the five trading days immediately preceding the date of the
agreement. The note was subsequently cancelled on March 16, 2001, upon the
issuance to LHT of 3,136,952 shares of common stock. Upon cancellation of
the note, shareholders' equity increased by $7,203,000 (representing the
note carrying value of $6,700,000 plus accrued interest of $503,000).
48
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, 1998 $147,000 $158,000 $28,000 ($32,000) $ 301,000
Year ended December 31, 1999 301,000 50,000 -- (27,000) 324,000
Year ended December 31, 2000 324,000 983,000 -- (269,000) 1,038,000
(a) Represents amounts written-off against the allowance for doubtful
accounts.
- --------------------------------------------------------------------------------
Reserve for Excess and Slow-moving Inventory
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, 1998 $1,015,000 $ 750,000 $ -- -- $1,765,000
Year ended December 31, 1999 1,765,000 (337,000) -- -- 1,428,000
Year ended December 31, 2000 1,428,000 320,000 -- (45,000) 1,703,000
(a) Represents amounts written-off against the excess and slow-moving
inventory reserve.
- --------------------------------------------------------------------------------
- 49 -
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.
Date: March 16, 2001 HAWKER PACIFIC AEROSPACE
By /s/ Philip M. Panzera
-------------------------------
Philip M. Panzera
Executive Vice President
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
/s/ Wolfgang Mayrhuber Chairman of the Board March 16, 2001
- ----------------------------------
Wolfgang Mayrhuber
/s/ David L. Lokken President, Chief Executive March 16, 2001
- ----------------------------------
David L. Lokken Officer and Director
/s/ Mellon C. Baird Director March 16, 2001
- ----------------------------------
Mellon C. Baird
/s/ Gerald Gallus Director March 16, 2001
- ----------------------------------
Dr. Gerald Gallus
/s/ Laurans A. Mendelson Director March 16, 2001
- ----------------------------------
Laurans A. Mendelson
/s/ Joel F. McIntyre Director March 16, 2001
- ----------------------------------
Joel F. McIntyre
/s/ James C. Stoecker Director March 16, 2001
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James C. Stoecker
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