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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 0-29490
HAWKER PACIFIC AEROSPACE
(Exact name of registrant as specified in its charter)
California 95-3528840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11240 Sherman Way, Sun Valley, California 91352
(Address of principal executive offices) (Zip Code)
(818) 765-6201
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The number of shares of the registrant's common stock outstanding on April 25,
2001, was 10,160,675 shares.
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HAWKER PACIFIC AEROSPACE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
ASSETS 2001 2000
------------ ------------
Current assets
Cash $ 1,422,000 $ 3,349,000
Accounts receivable, less allowance for doubtful
accounts of $489,000 and $1,038,000 at
March 31, 2001 and December 31, 2000 14,977,000 14,954,000
Inventories 31,140,000 27,398,000
Prepaid expenses 1,167,000 855,000
Deferred taxes 1,668,000 1,668,000
------------ ------------
Total current assets 50,374,000 48,224,000
Equipment and leasehold improvements, net 13,262,000 14,232,000
Exchange assets, net 32,278,000 33,816,000
------------ ------------
Total fixed assets 45,540,000 48,048,000
Other assets 1,769,000 1,727,000
------------ ------------
Total assets $ 97,683,000 $ 97,999,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable $ 10,667,000 $ 9,962,000
Deferred revenue 7,260,000 5,199,000
Accrued payroll and employee benefits 1,801,000 1,826,000
Accrued expenses and other liabilities 5,103,000 6,091,000
Current portion of note payable to related party -- 2,325,000
------------ ------------
Total current liabilities 24,831,000 25,403,000
Long-term debt
Bank note 64,894,000 65,956,000
Note payable to related party -- 4,179,000
------------ ------------
Total long-term debt 64,894,000 70,135,000
Deferred taxes 3,043,000 2,980,000
Commitments and contingencies
Shareholders' equity (deficit)
Common stock: 20,000,000 shares authorized;
issued and outstanding: 10,160,675 and 7,022,265 at
March 31, 2001, and December 31, 2000, respectively 35,934,000 28,682,000
Accumulated deficit (25,296,000) (24,221,000)
Accumulated other comprehensive loss (5,723,000) (4,980,000)
------------ ------------
Total shareholders' equity (deficit) 4,915,000 (519,000)
Total liabilities and shareholders' equity (deficit) $ 97,683,000 $ 97,999,000
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
March 31
--------
2001 2000
------------- -------------
Revenue $ 18,920,000 $ 21,488,000
Cost of revenue 14,911,000 17,422,000
------------- -------------
Gross margin 4,009,000 4,066,000
Selling, general and administrative expense 3,074,000 2,883,000
------------- -------------
Income from operations 935,000 1,183,000
Interest expense, net (2,010,000) (1,702,000)
Miscellaneous expense -- (66,000)
------------- -------------
Loss before income taxes (1,075,000) (585,000)
Income tax benefit -- (234,000)
------------- -------------
Net loss (1,075,000) (351,000)
Accretion of discount and redemption premium
on preferred stock -- (1,127,000)
Preferred stock dividend -- (74,000)
------------- -------------
Net loss available to common shareholders ($ 1,075,000) ($ 1,552,000)
============= =============
Loss per common share: basic and diluted ($0.14) ($0.27)
Number of shares: basic and diluted 7,580,772 5,822,392
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(unaudited)
Other
Common Stock Accumulated Comprehensive
# of Shares Amount Deficit Loss Total
----------- ------------ ------------- -------------- ------------
Balances at
December 31, 2000 7,022,265 $28,682,000 ($24,221,000) ($4,980,000) $ (519,000)
Net loss -- -- (1,075,000) -- (1,075,000)
Foreign currency
translation -- -- -- (743,000) (743,000)
-----------
Comprehensive loss -- -- -- -- (1,818,000)
Stock option exercise 1,458 -- -- -- --
Issuance of common stock 3,136,952 7,252,000 -- -- 7,252,000
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Balances at
March 31, 2001 10,160,675 $35,934,000 ($25,296,000) ($5,723,000) $ 4,915,000
=========== ============ ============ ============= ===========
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
March 31
--------
2001 2000
------------- -----------
Operating Activities
Net loss ($ 1,075,000) $ (351,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred income taxes -- (244,000)
Depreciation and amortization 1,128,000 1,119,000
Amortization of loan discounts 245,000 --
Bad debt expense 15,000 13,000
Changes in operating assets and liabilities:
Accounts receivable and other receivables (397,000) 3,222,000
Inventory (4,328,000) (3,703,000)
Prepaid expenses and other current assets (350,000) 660,000
Accounts payable 937,000 131,000
Deferred revenue 2,376,000 1,581,000
Accrued liabilities (248,000) 682,000
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Cash provided by (used in) operating activities (1,697,000) 3,110,000
Investing Activities
Purchases of equipment, leasehold improvements and landing gear (150,000) (2,863,000)
Deposits for construction in progress (80,000) (59,000)
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Cash used in investing activities (230,000) (2,922,000)
Financing Activities
Principal payments on bank notes -- (1,533,000)
Borrowings on line of credit -- 1,168,000
Issuance of common stock -- 2,000
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Cash used in financing activities -- (363,000)
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Decrease in cash (1,927,000) (175,000)
Cash, beginning of period 3,349,000 2,227,000
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Cash, end of period $ 1,422,000 $ 2,052,000
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Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 1,484,000 $ 1,645,000
Income taxes -- 10,000
Non-cash items
Conversion of principal due on the LHT
note payable into common stock $ 6,749,000 --
Conversion of interest due on the LHT
note payable into common stock $ 503,000 --
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Interim Condensed Financial Statements
During interim periods, Hawker Pacific Aerospace (the "Company") follows the
accounting policies set forth in its Annual Report to Shareholders and applies
appropriate interim financial reporting standards, as indicated below. Users of
financial information produced for interim periods are encouraged to refer to
the notes contained in the Annual Report on Form 10-K for fiscal year 2000 when
reviewing interim financial results.
The preparation of interim financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Significant estimates and assumptions include the accounts
receivable allowance for doubtful accounts, a provision for potentially excess
or slow-moving inventory, warranty accruals, deferred tax asset valuation
allowances, and a provision for anticipated losses on future work covered by
contracts performed at the Company's UK operation. Actual results may differ
from those estimates. Certain prior year amounts have been reclassified to
conform to the fiscal 2001 presentation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with the
Securities and Exchange Commission's requirements for Form 10-Q and contain all
adjustments of a normal and recurring nature that are necessary to present
fairly the financial position of the Company as of March 31, 2001, and December
31, 2000, and the results of its operations and cash flows for the three month
periods ended March 31, 2001 and 2000.
Contingencies
The Company is from time to time involved in various lawsuits, claims and
inquiries, which the Company believes are routine to the nature of its business.
The Company is not, however, currently involved in any litigation, or subject to
any claim that has not been provided for, or that would have a material adverse
effect on the financial position, results of operation or cash flow of the
Company.
There are various environmental remediation actions that have involved the area
surrounding the Company's Sun Valley facility. The Company has the right to be
indemnified by its former parent company, BTR plc, for certain asserted claims
against the Company.
Earnings per Share
Basic and diluted loss per 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. 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 for the three months
ended March 31, 2001 and 2000, respectively, is 7,580,772 and 5,822,392. Net
loss used in the calculation of basic and diluted loss per share for the three
months ended March 31, 2000, has been adjusted for the accretion of the discount
and redemption premium on the preferred stock in order to derive net loss
available to common shareholders.
Options to purchase 814,004 shares of common stock at exercise prices between
$2.25 and $9.88 were outstanding and vested during the first quarter of 2001.
None of these were included in the computation 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, therefore, the
effect would be antidilutive.
Recent Accounting Pronouncements
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 adopted SFAS 133 effective
January 1, 2001. The adoption of SFAS 133 did not have a significant impact on
the financial position, results of operations or cash flow of the Company.
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HAWKER PACIFIC AEROSPACE
2. INVENTORIES
Inventories are comprised of the following:
March 31, December 31,
2001 2000
----------- -----------
Purchased parts and assemblies $21,399,000 $20,543,000
Work in process 9,741,000 6,855,000
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$31,140,000 $27,398,000
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3. RELATED PARTY TRANSACTIONS
On February 6, 2001, the Company and Lufthansa Technik AG ("LHT") entered into
an agreement to convert from debt to common equity $9,300,000 of principal and
$503,000 of accrued interest owed pursuant to the LHT note payable.
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 $7,252,000 (representing the note carrying value of $6,749,000 plus
accrued interest of $503,000).
During the first quarter of 2001, LHT paid the Company $417,000 for overhaul
services, and purchased $11,000 of spare parts.
4. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information", sets forth standards for public
companies relating to the reporting of financial and descriptive information
about business segments and enterprise-wide operations. The Company operates in
one segment. The following table sets forth certain geographic information
related to the Company's operations.
United States United Kingdom Consolidated
As of March 31 2001 2000 2001 2000 2001 2000
- -------------- ----------- ----------- ----------- ----------- ----------- ------------
Total assets $50,456,000 $53,383,000 $47,227,000 $50,659,000 $97,683,000 $104,042,000
Total fixed assets (net of
depreciation and amortization) 17,141,000 19,347,000 28,399,000 33,358,000 45,540,000 52,705,000
For the quarter ended March 31
- ------------------------------
Revenue by location of operations 14,189,000 15,362,000 4,731,000 6,126,000 18,920,000 21,488,000
Income (loss) before income taxes 210,000 274,000 (1,285,000) (859,000) (1,075,000) (585,000)
The Company generated revenue from customers located outside of the United
States of $7,106,000 and $8,418,000 for the quarters ended March 31, 2001 and
2000, respectively.
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HAWKER PACIFIC AEROSPACE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following analysis compares the Company's results of operations for the
quarter ended March 31, 2001, with the quarter ended March 31, 2000.
Revenue for the quarter decreased by 12% to $18,920,000 from $21,488,000 for the
comparable period in 2000. This decrease occurred primarily in landing gear
sales, as the Company's schedule for long-term contract work during 2001 is
relatively light in the first and second quarters, and much heavier in the third
and fourth quarters. This is not indicative of a trend, or any seasonality, but
merely reflects the fact that overhaul schedules are not evenly distributed
throughout the four quarters of 2001. Even though more of the overhaul work is
skewed toward the latter half of the year, the Company still expects that
consolidated revenue for 2001 will exceed the 2000 result.
Cost of revenue decreased by 14% to $14,911,000 from $17,422,000 in the first
quarter of 2000. Sun Valley cost of revenue decreased by 12%, or $1,355,000,
from the prior comparable quarter, while UK cost of revenue decreased by 19%, or
$1,157,000. These lower costs were primarily related to the lower level of
revenue for the quarter. Cost of revenue for the first quarter of 2001 included
a $260,000 increase to the provision for anticipated losses on certain UK
contracts and a $160,000 increase in warranty expense. These additional costs
were offset by a $185,000 reduction in property taxes payable, and a $280,000
reduction in the allowance for doubtful accounts, as certain invoices previously
reserved were collected.
Gross margin for the first quarter remained relatively stable as compared with
the first quarter of last year. Gross margin was anticipated to be low in the
first quarter, as well as the second quarter of 2001, because the product mix
for landing gear overhauls is also skewed, with more of the Company's lower
margin aircraft types in the first two quarters. The UK operation, under new
management, has improved turn-around times for landing gear overhauls, and
implemented a number of effective cost savings initiatives. The Company expects
that these changes will result in improved landing gear margins for this unit
after the second quarter of 2001.
Selling, general and administrative expense for the first quarter increased by
$191,000 from $2,883,000 in 2000 to $3,074,000 in 2001. This increase was
attributable to increased marketing costs.
Interest expense for the quarter increased by $308,000, primarily as a result of
$246,000 of amortization of the discount on the Company's note payable to
Lufthansa Technik AG ("LHT"). This loan was converted into equity on March 16,
2001, and the discount amortization, along with $256,000 per quarter in interest
on the loan, will not be present going forward.
As a result of the lower levels of revenue and margin, and the increase in
marketing costs, the Company recorded a net loss for the quarter of $1,075,000,
as compared with a net loss of $351,000 in the first quarter of 2000. The
Company has not recorded any tax benefit for this net loss, and the valuation
allowance for the Company's deferred tax assets was therefore increased by
$372,000. The net loss available to common shareholders in the first quarter was
$1,075,000, or $0.14 per basic and diluted share, as compared with $1,552,000,
or $0.27 per basic and diluted share, in the prior year.
There are three developing trends during 2001 that the Company expects will
provide improved operating results during the latter half of the year. Based on
known overhaul schedules, revenue is expected to increase during the third and
fourth quarters. The product mix of customers and aircraft types is also known
to be more favorable in the second half of this year. The Company further
expects that increased efficiencies in labor and reduced material costs, as well
as increased absorption on the higher sales volume expected, will improve
margins in the UK operation.
Liquidity and Capital Resources
The following analysis compares material changes in the Company's financial
position from December 31, 2000, to March 31, 2001.
Inventories increased by $3.7 million during the first quarter of 2001,
primarily as a result of a higher level of work in process at the end of the
quarter. The increase in work available in-house generated an increase in
deferred revenue of $2.1 million. Principally as a result of the increase in
inventory and the net loss for the period, the Company's operating activities
used cash of $1.7 million during the first quarter of 2001.
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HAWKER PACIFIC AEROSPACE
On March 16, 2001, LHT converted into common stock approximately $9.8 million of
principal and accrued interest due to it under a note payable with the Company.
This conversion will save the Company approximately $1.0 million in annual
interest, and it has eliminated a comparable amount of annual amortization of
the discount on this note payable.
The Company believes that its cash position will remain tight but manageable
during the second and third quarters of 2001. The Company further expects that
the increased levels of revenue and margin expected in the latter half of 2001,
as discussed above, will improve the Company's cash liquidity subsequent to the
third quarter of this year. The Company is considering other means of raising
capital, including asset sales where appropriate. The Company is also presently
in discussions with its senior lender and LHT regarding a proposed line of
credit from LHT. The contemplated line of credit, in the amount of 5.2 million
British pounds (approximately $7.5 million), would be provided to the Company's
UK operation to support higher levels of revenue in the UK, and to supplement
cash available for capital investment in both the UK and Sun Valley operations.
The Company can provide no assurances that the line of credit with LHT will be
approved, or funded in that amount. If the line of credit is not implemented,
the Company believes that funds provided from operations, and asset sales if
necessary, will be sufficient to meet the Company's cash requirements for the
next twelve months.
Forward Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of
the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward looking statements.
The forward looking statements contained in this 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 priced
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 any forward-looking information, whether as a result of new
information, future developments, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in certain
prices and rates on the Company's financial results and condition, primarily
foreign currency exchange rates and interest rates on borrowings. The Company
does not utilize derivative instruments in managing its exposure to such
changes.
Foreign Currency Risk. The Company has operations in the UK and the
Netherlands, and also conducts business with customers in many other countries
worldwide. These activities may generate gains and losses as a result of
currency fluctuations, and may require translation adjustments to the value of
certain assets in the Company's foreign operations. Foreign currency exchange
rates could also cause the Company's services to become relatively more
expensive in particular countries, leading to a reduction in revenue in that
country.
The Company reduces foreign currency risk by generally requiring that customers
pay for the services of the Company's foreign operating units in the currency of
the country where the operating unit is located. The Company also does not
routinely exchange material sums of money between the operating units.
If the US dollar continues to strengthen against the British pound, sales from
the Company's UK subsidiary will provide less consolidated revenue. A strong
dollar also increases material costs for the Company's UK operation, which
purchases a significant portion of its materials from US suppliers. In addition,
the value of the Company's intercompany receivables from the UK operation will
become less valuable. The Company is currently considering hedging strategies to
mitigate the impact in this currency.
Interest Rate Risk. The Company's debt facilities carry interest rates that
vary in accordance with the US and UK LIBOR. The Company is subject to
potentially material fluctuations in its debt service as the LIBOR changes. The
extent of this risk is not quantifiable or predictable.
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HAWKER PACIFIC AEROSPACE
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On March 16, 2001, the Company sold and issued to LHT 3,136,952 shares of
its common stock in a private transaction in exchange for LHT's surrender and
cancellation of $9,803,000 of principal and accrued interest owing to LHT under
the Loan Agreement entered into between the Company and LHT in September 2000.
The exchange price of the common stock was $3.125 per share, which equaled the
average of the closing bid prices of the common stock as reported on the Nasdaq
Stock Market on the five trading days preceding February 6, 2001, which was the
date of the agreement between LHT and the Company to carry out the exchange of
shares for indebtedness. In completing the exchange, the Company relied upon the
private placement exemption afforded under Section 4(2) of the Securities Act of
1933 for transactions not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Form 8-K
No reports were filed on Form 8-K during the quarter ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAWKER PACIFIC AEROSPACE
Date: May 14, 2001 By /s/ Philip M. Panzera
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Philip M. Panzera
Executive Vice President
(Principal Financial and Accounting Officer)
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