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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 0-29490
HAWKER PACIFIC AEROSPACE
(Exact name of registrant as specified in its charter)
California 95-3528840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11240 Sherman Way, Sun Valley, California 91352
(Address of principal executive offices) (Zip Code)
(818) 765-6201
(Registrant's Telephone Number, Including Area Code)
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 November
12, 1999, was 5,822,222 shares.
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HAWKER PACIFIC AEROSPACE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
ASSETS 1999 1998
------------- ------------
Current assets
Cash $ 3,358,000 $ 560,000
Trade accounts receivable, net 13,442,000 12,303,000
Other receivables 154,000 114,000
Inventories 20,607,000 21,645,000
Prepaid expenses 553,000 617,000
------------ -----------
Total current assets 38,114,000 35,239,000
Equipment and leasehold improvements, net 15,496,000 9,298,000
Exchange assets, net 41,563,000 37,877,000
Deferred taxes 3,367,000 1,916,000
Deferred financing costs 790,000 798,000
Construction in progress 0 982,000
Other assets 1,657,000 1,127,000
------------ -----------
Total assets $100,987,000 $87,237,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 13,748,000 $12,171,000
Accrued liabilities 6,436,000 3,698,000
Line of credit 54,222,000 37,185,000
Current portion of notes payable 6,321,000 11,280,000
------------ -----------
Total current liabilities 80,727,000 64,334,000
Long-term debt 2,500,000 2,500,000
Shareholders' equity 17,760,000 20,403,000
------------ -----------
Total liabilities and shareholders' equity $100,987,000 $87,237,000
============ ===========
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
September 30
------------
1999 1998
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Revenue $23,472,000 $16,494,000
Cost of revenue 18,508,000 13,673,000
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Gross margin 4,964,000 2,821,000
Selling, general and administrative expense 2,496,000 1,868,000
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Income from operations 2,468,000 953,000
Interest expense (1,636,000) (903,000)
----------- -----------
Income before income taxes 832,000 50,000
Income tax expense 314,000 18,000
----------- -----------
Net income $ 518,000 $ 32,000
=========== ===========
Earnings per common share - basic $ 0.09 $ 0.01
Earnings per common share - diluted $ 0.09 $ 0.01
Number of shares - basic 5,822,222 5,822,222
Number of shares - diluted 5,826,725 5,886,653
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine months ended
September 30
------------
1999 1998
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Revenue $ 57,061,000 $47,533,000
Cost of revenue 49,403,000 37,776,000
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Gross margin 7,658,000 9,757,000
Selling, general and administrative expense 7,213,000 5,958,000
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Income from operations 445,000 3,799,000
Interest expense (4,292,000) (2,352,000)
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Income (loss) before income taxes (3,847,000) 1,447,000
Income tax expense (benefit) (1,423,000) 23,000
------------- -----------
Net income (loss) ($ 2,424,000) $ 1,424,000
============= ===========
Earnings (loss) per common share - basic ($ 0.42) $ 0.26
Earnings (loss) per common share - diluted ($ 0.42) $ 0.25
Number of shares - basic 5,822,222 5,555,555
Number of shares - diluted 5,822,222 5,681,120
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
September 30
------------
1999 1998
-------------- ------------------
Operating Activities
Net income ($ 2,424,000) $ 1,424,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes (1,415,000) (106,000)
Depreciation 1,291,000 1,105,000
Amortization 1,949,000 1,097,000
Other non-cash items (102,000) --
Changes in operating assets and liabilities:
Accounts receivable and other receivables (1,181,000) (3,688,000)
Inventory 903,000 (4,451,000)
Prepaid expenses and other current assets 1,110,000 (288,000)
Accounts payable 1,549,000 1,611,000
Deferred revenue 2,305,000 79,000
Accrued liabilities 428,000 3,065,000
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Cash provided by (used in) operating activities 4,413,000 (152,000)
Investing Activities
Purchase of equipment, leasehold improvements and landing gear (13,700,000) (5,826,000)
Purchase of equipment and rotables from British Airways -- (23,599,000)
Purchase of inventory from British Airways -- (1,962,000)
Purchase of other assets -- 79,000
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Cash used in investing activities (13,700,000) (31,308,000)
Financing Activities
Borrowings under bank note -- 13,285,000
Principal payments on bank notes (4,959,000) (103,000)
Principle payments on related party note (1,500,000)
Borrowings/payments on line of credit 17,037,000 2,316,000
Proceeds from equity offering -- 20,800,000
Deferred offering costs (126,000) (1,966,000)
Deferred acquisition and loan fee expenses 133,000 (209,000)
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Cash provided by financing activities 12,085,000 32,623,000
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Increase in cash 2,798,000 1,163,000
Cash, beginning of period 560,000 160,000
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Cash, end of period $ 3,358,000 $ 1,323,000
============= ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 3,424,000 $ 2,367,000
Income taxes -- 2,879,000
See accompanying Notes to Condensed Consolidated Financial Statements
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HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
Common Stock Other
---------------------------- Accumulated Comprehensive
# of Shares Amount Deficit Income (Loss) Total
------------- ------------ ------------ -------------- -------------
Balances at
December 31, 1998 5,822,222 $21,108,000 ($941,000) $ 236,000 $20,403,000
Net loss (2,424,000) (2,424,000)
Foreign currency
translation adjustment (219,000) (219,000)
------------
Comprehensive loss (2,643,000)
---------- ----------- ----------- ------------- ------------
Balances at
September 30, 1999 5,822,222 $21,108,000 ($3,365,000) $ 17,000 $17,760,000
========== =========== =========== ============= ============
See accompanying Notes to Consolidated Condensed 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 to Shareholders when reviewing interim
financial results.
Interim financial reporting standards require management to make estimates that
are based on assumptions regarding the outcome of future events and
circumstances not known at the present time, including the use of estimated
effective tax rates. Inevitably, some assumptions may not materialize and
unanticipated events and circumstances may occur which vary from those estimates
and such variations may significantly affect the Company's future results.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with the
Securities and Exchange Commission's requirements for Form 10-Q and contain all
adjustments of a normal and recurring nature which are necessary to present
fairly the financial position of the Company as of September 30, 1999, and
December 31, 1998, and the results of its operations and cash flows for the
three month and/or nine month periods ended September 30, 1999 and 1998.
Contingencies
The Company is party to various legal proceedings incidental to its business.
Certain claims, suits and complaints arising in the ordinary course of business
have been filed or are pending against the Company. Based on facts now known to
the Company, management believes all such matters are adequately provided for,
covered by insurance or, if not so covered or provided for, are without merit,
or involve such amounts that would not materially adversely affect the
consolidated results of operations and cash flows or financial position of the
Company.
Earnings (Loss) per Share
Basic earnings (loss) per share are based upon the weighted average number of
common shares outstanding. The weighted average common shares used in
calculating basic earnings per share were 5,822,222 and 5,822,222 for the three
months ended September 30, 1999 and 1998, respectively, and 5,822,222 and
5,555,555 for the nine months ended September 30, 1999 and 1998, respectively.
Diluted earnings per share are based on the number of shares used in the basic
earnings per share calculation plus the dilutive effects of stock options under
the treasury stock method. The weighted average of common and common equivalent
shares used in calculating diluted earnings per share were 5,826,725 and
5,886,653, for the three months ended September 30, 1999 and 1998, respectively,
and 5,822,222 and 5,681,120, for the nine months ended September 30, 1999 and
1998, respectively.
Inventories
Inventories are comprised of the following:
September 30, December 31,
1999 1998
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Purchased parts and assemblies $18,929,000 $19,251,000
Work in process 1,678,000 2,394,000
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$20,607,000 $21,645,000
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Forward Looking Statements
Statements included in this filing which are not historical in nature are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward looking statements regarding the
Company's future performance and financial results are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those set forth for a variety of reasons. Factors that may impact such forward
looking statements include, among others, changes in the condition of the
industry, changes in general economic conditions and the success of the
Company's strategic operating plans.
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HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. INITIAL PUBLIC OFFERING
On February 3, 1998, the Company completed an initial public offering of
2,766,667 shares of the Company's common stock. The Company received net
proceeds of approximately $18.1 million, net of expenses of approximately $2.7
million. The Company used approximately $9.2 million of the net proceeds to fund
a portion of the purchase price for certain assets of British Airways as
discussed in Note 3, and approximately $7.6 million to repay a portion of the
revolving and term debt previously outstanding under the Company's credit
facility. The balance of the net proceeds has been used for working capital
purposes.
3. ACQUISITIONS
On February 4, 1998, the Company completed the acquisition of certain assets of
the British Airways landing gear repair and overhaul operation for a purchase
price of approximately $19.5 million. This acquisition resulted in the formation
of a wholly owned subsidiary in the United Kingdom, Hawker Pacific Aerospace
Ltd., which has been operational since that date.
4. LINE OF CREDIT AND NOTES PAYABLE
On December 22, 1998, the Company secured a $66.3 million senior credit facility
from Heller Financial, Inc., and NMB-Heller Limited (collectively, "Heller").
The Loan and Security Agreement (the "Heller Agreement") provided a $55.0
million revolving line of credit, a Term Loan A in the amount of $4.3 million,
and a Term Loan B in the amount of $7.0 million. The revolver and both term
loans expire in five years.
Availability for the $55.0 million revolving line of credit may be limited by
borrowing base criteria related to levels of accounts receivable, inventory and
exchange assets. At October 31, 1999, the Company's borrowing base was $55.0
million, of which $54.4 million had been advanced, leaving remaining
availability of $0.6 million.
On October 21, 1999, the Company and Heller executed an amendment to the Heller
Agreement. As a result of this amendment, the Company is no longer in violation
of certain financial covenants. Effective as of this date, the rate of interest
on the revolver and term loans was increased by 1% to prime plus 2.5%. The
Company has also agreed in the amendment to secure between $4 to $6 million of
additional junior capital, subordinated to the Heller obligation, by November
15, 1999. The Company is currently working with several financing sources, and
hopes to comply with this covenant shortly.
In October, Heller notified Hawker that it had undercharged the Company by
$425,000 in interest during the period from April through September 1999. This
amount was properly reclassified back to the second and third quarters. Heller
has also charged the Company approximately $100,000 in fees related to the
amendment, and required consultant services which amounted to an additional
$75,000. These two non-recurring charges were recorded in the fourth quarter.
5. 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
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 September 30 1999 1998 1999 1998 1999 1998
- ------------------------------------- ----------- -------------- ------------ ----------- ------------ ------------
Total assets $51,131,000 $46,202,000 $49,697,000 $41,035,000 $100,828,000 $87,237,000
Total long-lived assets (net of
depreciation and amortization) 20,040,000 16,496,000 37,019,000 30,190,000 57,059,000 46,686,000
For the quarter ended September 30
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Revenue by location of operations 17,008,000 11,625,000 6,464,000 4,869,000 23,472,000 16,494,000
Income (loss) before income tax 818,000 (113,000) (155,000) 145,000 663,000 32,000
The Company generated revenue from customers located outside of the United
States of $9,470,000 and $7,717,000 for the quarters ended September 30, 1999
and 1998, respectively.
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HAWKER PACIFIC AEROSPACE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Quarterly Report and in the Company's
various filings with the Securities and Exchange Commission, including without
limitation the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes thereto included herein, and
with the information set forth under Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
Relocation of United Kingdom Subsidiary
From May through July 1999 the Company relocated its UK subsidiary from its
prior location in a British Airways maintenance facility. The new state-of-the-
art facility is completely operational with the exception of the plating shop,
which is undergoing new construction. Completion of this construction, and the
relocation of other plating shop elements, is scheduled for the end of December.
Until that time, the Company will incur an increase in operating costs as
overhaul items occasionally have to be transferred between the two facilities
for plating operations.
Material Changes in Financial Condition
The following analysis compares material changes in the Company's financial
position from December 31, 1998, to September 30, 1999.
Net fixed assets increased by $6.2 million during 1999 as a result of the
addition of $6.8 million in leasehold improvements principally related to the
new UK facility. Net exchange assets also increased by $3.7 million, as
additional landing gear rotable assets were purchased to meet increasing
customer requirements. In the aggregate, total fixed assets increased by $9.9
million to $57.1 million.
The Company has drawn $17.0 million on its revolving line of credit during the
first three quarters of 1999. Of this amount, $5.0 million was used to reduce
principal balances on Term Loans A and B. The remaining $12.0 million,
supplemented by cash provided from operations, was used to purchase $13.7
million in equipment, leasehold improvements and exchange assets. At October 31,
1999, the Company had $0.6 million remaining available on its line of credit.
On October 21, 1999, the Company and Heller executed an amendment to the Heller
Agreement. As a result of this amendment, the Company is no longer in violation
of certain financial covenants. Effective as of this date, the rate of interest
on the revolver and term loans was increased by 1% to prime plus 2.5%. The
Company has also agreed in the amendment to secure between $4 to $6 million of
additional junior capital, subordinated to the Heller obligation, by November
15, 1999. The Company is currently working with several financing sources, and
hopes to comply with this covenant shortly.
In October, Heller notified Hawker that it had undercharged the Company by
$425,000 in interest during the period from April through September 1999. This
amount was properly reclassified back to the second and third quarters. Heller
has also charged the Company approximately $100,000 in fees related to the
amendment, and required consultant services which amounted to an additional
$75,000. The Company has also incurred approximately $125,000 in fees to First
Union Security, Inc., who was recently retained to advise the Company's Board of
Directors on alternatives for maximizing shareholder value. These non-recurring
charges, aggregating to $300,000, were recorded in the fourth quarter.
Despite the adverse impact of the UK relocation, the Company generated $4.4
million of operating cash flow during the first three quarters. While the
Company is currently meeting all of its cash obligations, supplemental funding
will be necessary during the next twelve months for planned capital expenditures
and rotable purchases to support higher levels of projected revenue.
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HAWKER PACIFIC AEROSPACE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Material Changes in Results of Operations
The following analysis compares the Company's results of operations for the
quarter and nine months ended September 30, 1999, with the quarter and nine
months ended September 30, 1998. Year-to-date comparisons below should take into
consideration the fact that the Company's United Kingdom subsidiary began
operations on February 4, 1998.
Revenue in the third quarter increased by 42% to $23.5 million from $16.5
million in 1998. Revenue for the nine months increased by 20% to $57.1 million,
as compared with $47.5 million in the prior comparable period. For the quarter,
most of the revenue gain was recorded in the Company's Sun Valley operation,
which increased revenue by $5.4 million (46%). For the nine months, the majority
of the revenue increase occurred in the UK unit, which increased revenue by 57%
to $17.2 million.
Cost of revenue for the third quarter and nine months was adversely affected by
the UK relocation, as many operating hours were lost, and the Company had to
outsource many jobs to meet customer requirements. This impact was partially
offset by capitalized relocation-related overhead expenses. The gross margin
percentage for the quarter improved to 21.1% from 17.1%. Year-to-date, however,
the UK relocation caused the gross margin percentage to decrease to 13.4% from
20.5% in the prior comparable period. Sun Valley results of operations continue
to significantly exceed the Company's 1999 Business Plan in revenue, gross
margin, operating income and net income.
Third quarter and year-to-date selling, general and administrative expense
increased primarily because of additional costs associated with the UK
operation. The Company also incurred a material amount of additional Heller
costs and legal fees related to the default on its senior credit facility.
Interest expense increased by $0.7 million for the quarter, and $1.9 million for
the nine months, as a result of increased borrowings on the Company's line of
credit.
The Company recorded net income for the quarter of $518,000, as compared with
$32,000 in the third quarter of last year. For the nine months, the Company
recorded a net loss of $2,424,000, down from net income of $1,424,000 in the
prior comparable period. Management believes that the year-to-date impact of the
UK relocation on the Company's operating results reported herein are
transitional, non-recurring, and not indicative of the results of operations
which may be expected in future periods.
Year 2000 Issue
The year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculation or
system failures.
The Company has completed its Year 2000 preparedness program, and the Company's
products and services do not require any further remediation to be Year 2000
compliant. The Company has also completed an evaluation of the readiness status
of its significant suppliers and subcontractors, and has not discovered any
problems that would affect the Company's operations. All communication systems
within the Company are Year 2000 compliant, and the Company has developed a
contingency plan to handle any unanticipated year 2000 problems.
The Company has incurred total costs of approximately $200,000 to address Year
2000 issues during 1999. Given the nature of the Company's repair and overhaul
operations, management does not believe that the Year 2000 issue presents a
material exposure as it relates to the Company's products, services or
operations.
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 United Kingdom and the
Netherlands. The currencies of these two countries have been relatively stable
as compared with the U.S. dollar. The Company manages foreign currency risk, in
part, by generally requiring that customers pay for the services of the
Company's foreign operating units in the currency
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HAWKER PACIFIC AEROSPACE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
of the country where the operating unit is located. The Company also does not
routinely exchange material sums of money between the operating units. The
Company does not currently see the need for currency hedging transactions in the
ordinary course of business.
Interest Rate Risk. The Company's senior credit facility is comprised of two
notes payable and a revolving line of credit, each of which currently carries an
interest rate which varies in accordance with a Base Rate equal to the higher of
the Federal Reserve prime rate, or the Federal Funds Effective Rate. The Company
is subject to potentially material fluctuations in its debt service if the Base
Rate should change significantly.
In February 1998, to reduce the impact of changes in interest rates on the
Company's debt facility, the Company entered into an interest rate swap
agreement. The swap agreement changed interest rate exposure to a fixed amount
on a portion of the debt.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 4, 1999, the Company held its annual meeting of shareholders. The only
item voted on by the Company's shareholders was the election of seven directors
of the Company to serve until the next annual meeting of shareholders, or until
their successors are duly elected and qualified. The following seven directors
of the Company were all re-elected to continue their terms: Daniel J. Lubeck,
Mellon C. Baird, Scott W. Hartman, David L. Lokken, John G. Makoff, Joel F.
McIntyre, and Daniel C. Toomey, Jr. Each director received 5,552,309 votes
"for" election, and zero votes "against", with 194,506 abstentions, and zero
non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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
27 Financial Data Schedule
(b) Form 8-K
No reports were filed on Form 8-K during the quarter ended September 30, 1999.
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: November 12, 1999 By /s/ Philip M. Panzera
______________________________
Philip M. Panzera
Executive Vice President
(Principal Financial and Accounting Officer)
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