- - ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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
August 12, 1998 was 5,822,222 shares.
- - ------------------------------------------------------------------------------
HAWKER PACIFIC AEROSPACE
Report on Form 10-Q
For the Quarter Ended June 30, 1998
Table of Contents
Page
----
Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets... . . . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Income - Three Months . . . . . . . . 4
Consolidated Condensed Statements of Income - Six Months . . . . . . . . . 5
Consolidated Condensed Statements of Cash Flows. . . . . . . . . . . . . . 6
Consolidated Condensed Statements of Shareholder's Equity. . . . . . . . . 7
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 11
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exhibit 27.1 - Financial Data Schedule
2
HAWKER PACIFIC AEROSPACE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30 December 31
1998 1997
--------------- ----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash $ 574,000 $ 160,000
Accounts receivable 14,246,000 7,351,000
Other receivables 85,000 80,000
Inventories 20,445,000 14,814,000
Prepaid expenses and other current assets 636,000 240,000
------------- -------------
Total current assets 35,986,000 22,645,000
Equipment and leasehold improvements, net 9,569,000 5,083,000
Landing gear exchange, net 32,652,000 11,067,000
Goodwill, net - 145,000
Deferred financing costs, net 497,000 262,000
Deferred offering costs - 766,000
Deferred taxes 157,000 -
Other assets 343,000 930,000
------------- -------------
$ 79,204,000 $ 40,898,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,967,000 $ 6,946,000
Line of credit 10,470,000 8,529,000
Accrued liabilities 8,886,000 1,976,000
Current portion of long term debt 1,830,000 1,450,000
------------- -------------
Total current liabilities 26,153,000 18,901,000
------------- -------------
Long-term debt 29,054,000 17,700,000
Shareholders' equity 23,997,000 4,297,000
------------- -------------
Total Liabilities and Shareholders' Equity $ 79,204,000 $ 40,898,000
------------- -------------
------------- -------------
See accompanying Notes to Consolidated Condensed Financial Statements
3
HAWKER PACIFIC AEROSPACE
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
June 30
----------------------------------
1998 1997
-------------- --------------
Revenues $ 17,372,000 $ 10,544,000
Cost of revenues 13,632,000 8,149,000
-------------- --------------
Gross profit 3,740,000 2,395,000
Selling, general and administrative expenses 2,228,000 1,399,000
-------------- --------------
Income from operations 1,512,000 996,000
Net interest expense (801,000) (592,000)
-------------- --------------
Income before provision (benefit) for income taxes 711,000 404,000
Provision for (benefit) income taxes (254,000) 151,000
-------------- --------------
Net income $ 965,000 $ 253,000
-------------- --------------
-------------- --------------
Earnings per common share $ .17 $ .08
-------------- --------------
-------------- --------------
Earnings per common share - assuming dilution $ .16 $ .08
-------------- --------------
-------------- --------------
See accompanying Notes to Consolidated Condensed Financial Statements
4
HAWKER PACIFIC AEROSPACE
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
June 30
-------------------------------
1998 1997
----------- ----------------
Revenues $ 31,039,000 $ 20,358,000
Cost of revenues 24,102,000 15,680,000
------------ ------------
Gross profit 6,937,000 4,678,000
Selling, general and administrative expenses 4,090,000 2,794,000
------------ ------------
Income from operations 2,847,000 1,884,000
Net interest expense (1,449,000) (1,171,000)
------------ ------------
Income before provision (benefit) for income taxes 1,398,000 713,000
Provision (benefit) for income taxes 5,000 265,000
------------ ------------
Net income $ 1,393,000 $ 448,000
------------ ------------
------------ ------------
Earnings per common share $ .26 $ .14
------------ ------------
------------ ------------
Earnings per common share - assuming dilution $ .25 $ .14
------------ ------------
------------ ------------
See accompanying Notes to Consolidated Condensed Financial Statements
5
HAWKER PACIFIC AEROSPACE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
1998 1997
--------- ------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income .............................. $1,393,000 $ 448,000
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities:
Deferred income taxes.................. (12,000) 279,000
Depreciation........................... 637,000 353,000
Amortization........................... 657,000 254,000
Changes in operating assets and
liabilities:
Accounts receivable.................... (6,900,000) 737,000
Inventory.............................. (3,669,000) 128,000
Prepaid expenses and other current
assets............................... (396,000) (304,000)
Accounts payable....................... (1,979,000) (883,000)
Deferred revenue....................... 690,000 (866,000)
Accrued liabilities.................... 3,341,000 (732,000)
----------- ---------
Cash provided by (used in) operating
activities........................... (6,238,000) (586,000)
INVESTING ACTIVITIES
Purchase of equipment, leasehold
improvements and landing gear.......... (5,360,000) (495,000)
Purchase of equipment and landing gear
from BA................................ (18,887,000) --
Purchase of BA inventory................. (1,962,000) --
Other assets............................. 587,000 (39,000)
----------- ---------
Cash used in investing activities........ (25,622,000) (534,000)
FINANCING ACTIVITIES
Borrowing under bank note................ 13,285,000 --
Principal payments on bank note.......... (51,000) (425,000)
Principal payments on related party
note................................... (1,500,000) --
Borrowings/payments on line of credit,
net.................................... 1,941,000 600,000
Deferred offering costs.................. (1,966,000) --
Deferred loan fees....................... (235,000) --
Net proceeds from equity offering........ 20,800,000 --
----------- ---------
Cash provided by financing activities.... 32,274,000 175,000
Increase (decrease) in cash.............. 414,000 (945,000)
Cash, beginning of period................ 160,000 1,055,000
----------- ---------
Cash, end of period...................... $ 574,000 $ 110,000
----------- ---------
----------- ---------
Supplemental disclosure of cash flow
information:
Noncash investing and financing
activities
Purchase of landing gear from BA...... $2,879,000 $ --
SEE ACCOMPANYING NOTES.
6
HAWKER PACIFIC AEROSPACE
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Preferred Stock Common Stock
-------------------- ------------------------ Other
Number of Retained Comprehensive
Shares Amount Shares Amount Earnings Income Total
------ ----------- --------- ----------- ---------- ------------- -----------
Balance at December 31, 1997 400 $ 2,000,000 2,972,222 $ 1,040,000 $ 1,257,000 - $ 4,297,000
Net income for the period - - - - 1,393,000 - 1,393,000
Foreign currency translation
adjustment (unaudited) - - - - - 239,000 239,000
----------
Comprehensive Income
(unaudited) - - - - - - 1,632,000
Conversion of preferred stock
(unaudited) (400) (2,000,000) 250,000 2,000,000 - - -
Issuance of common stock
(unaudited) - - 2,600,000 18,068,000 - - 18,068,000
---- ---------- --------- ----------- ----------- --------- -----------
Balance at June 30, 1998
(unaudited) $ - $ - 5,822,222 $21,108,000 $ 2,650,000 $ 239,000 $23,997,000
---- ---------- --------- ----------- ----------- --------- -----------
---- ---------- --------- ----------- ----------- --------- -----------
See accompanying Notes to Consolidated Condensed Financial Statements
7
HAWKER PACIFIC AEROSPACE
NOTES TO CONSOLIDATED CONDENSED 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. 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 consolidated condensed
financial statements of the Company have been prepared in accordance with the
Securities and Exchange Commission's requirements of form 10-Q and contain all
adjustments, of a normal and recurring nature, which are necessary to present
fairly the financial position of the Company as of June 30, 1998, and the
results of its operations and cash flows for the three and six month periods
ended June 30, 1998 and 1997.
CONTINGENCIES
The Company is party to various legal and environmental 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 PER SHARE
Basic earnings per share are based upon the weighted average number of common
shares outstanding including the 250,000 shares issued upon the automatic
conversion of the convertible preferred stock as if the conversion occurred at
the beginning of the periods presented. The weighted average common shares used
in calculating basic earnings per share were 5,822,222 and 3,120,603 for the
three months ended June 30 1998 and 1997, respectively and 5,420,012 and
3,120,603 for the six months then ended, respectively. Diluted earnings per
share is 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 6,023,152 and 3,120,603, for the
three months ended June 30, 1998 and 1997, respectively and 5,573,074 and
3,120,603 for the six months then ended, respectively.
STOCK SPLITS
The information set forth herein reflects a 579.48618 for one stock split
effected in November 1997 and a one for .9907406 reverse stock split effected in
January 1998. All references in the accompanying financial statements and notes
to the number of shares of common stock and per common share amounts have been
retroactively adjusted to reflect the stock splits.
8
HAWKER PACIFIC AEROSPACE
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (continued)
(Unaudited)
INVENTORIES
Inventories are comprised of the following:
June 30
------------------------------
1998 1997
------------- -------------
Purchased parts and assemblies $ 18,615,000 $ 10,106,000
Work-in-process 1,830,000 2,716,000
------------- -------------
$ 20,445,000 $ 12,822,000
------------- -------------
------------- -------------
INCOME TAXES
The tax provision for the three months and six months ended June 30, 1998
includes a benefit of approximately $514,000 resulting from the reduction of
the deferred tax valuation allowance.
RECENTLY ISSUED ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. However, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Under Statement 130, the Company has elected to report other
comprehensive income, which includes unrealized gains or losses on the Company's
foreign currency translation adjustments, within the Statement of Shareholder
Equity. Comprehensive income for the quarter and six months ended June 30, 1997
was the same as net income for the period.
During the quarter and six months ended June 30, 1998, total comprehensive
income amounted to $821,000 and $1,632,000, respectively.
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 in the forward looking statements due to a variety of factors.
Factors that may impact such forward looking statements include, among other,
changes in the condition of the industry, changes in general economic conditions
and the success of the Company's strategic operating plans.
2. ACQUISITIONS
On February 4, 1998, the Company completed the acquisition of certain assets
("BA Assets") of the British Airways plc landing gear operation (the "BA
Acquisition") for a purchase price of approximately $19.5 million, (including
acquisition related expenses) excluding a 747-400 landing gear rotable asset
that was acquired during the second quarter of fiscal 1998 for approximately
$2.9 million. The BA assets consisted of $1.9 million in inventory, $4.0
million in machinery and equipment and $13.6 million in landing gear rotable
assets. Transaction expenses of $1.1 million were capitalized as part of the
landing gear rotable asset value.
3. NOTES PAYABLE
On January 23, 1998, the Company and Bank of America National Trust and
Savings Association ("Bank of America") entered into the Amended and Restated
Business Loan Agreement (the "Amended Loan Agreement"), which agreement
increased the maximum amount of credit available to the Company from $26.5
million to $45.5 million. The credit facilities of the Amended Loan
Agreement became available upon the completion of the Company's initial
public offering and consummation of the BA Acquisition. The Company
9
used approximately $9.2 million of the proceeds available under the Amended
Loan Agreement to fund a portion of the purchase price of the BA Assets. The
Amended Loan Agreement provides the Company with a $15.0 million revolving
line of credit, a $24.5 million term loan, and a $6.0 million capital
expenditure facility. The revolving line of credit matures in January 2001,
and the term loan and capital expenditure facilities mature in January 2005.
The Amended Loan Agreement is secured by a lien on all of the assets of the
Company, including the BA Assets. At the Company's election, the rate of
interest on each of the three facilities available under the Amended Loan
Agreement is either Bank of America's reference rate or the inter-bank
eurodollar rates on either, at the Company's option, the London market or the
Cayman Islands market.
4. INITIAL PUBLIC OFFERING
On February 3, 1998, the Company completed an initial public offering (the
"Initial Public Offering") of 2,766,667 shares of the Company's common stock
("Common Stock"). Of the 2,766,667 shares of Common Stock sold in the Initial
Public Offering, 2,600,000 shares were sold by the Company and 166,667 shares
were sold by a principal shareholder of the Company. The principal
shareholder sold 415,000 additional shares of Common Stock pursuant to the
exercise of an over-allotment option granted to the underwriters by the
principal shareholder. The Company received net proceeds of approximately
$18.1 million net of expenses of approximately $2.7 million. The Company used
approximately $9.2 million of the net proceeds to fund a portion of the
purchase price for certain assets of British Airways as discussed 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 $1.3 million in net proceeds has been used for working capital purposes.
10
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 fiscal year ended
December 31, 1997.
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 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
periods indicated:
(unaudited) (unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
Landing gear repairs $ 11,131,000 $ 5,027,000 $ 19,122,000 $ 9,388,000
Hydromechanics repairs 3,926,000 3,621,000 8,788,000 8,134,000
Spares & other 2,315,000 1,896,000 3,129,000 2,836,000
------------- ------------ ------------- -------------
Total revenue 17,372,000 10,544,000 31,039,000 20,358,000
Gross profit 3,740,000 2,395,000 6,937,000 4,678,000
Selling, general and
administrative expense 2,228,000 1,399,000 4,090,000 2,794,000
------------- ------------ ------------- -------------
Income from operations 1,512,000 996,000 2,847,000 1,884,000
Net interest expense (801,000) (592,000) (1,449,000) (1,171,000)
------------- ------------ ------------- -------------
Income before provision (benefit) for
income taxes 711,000 404,000 1,398,000 713,000
Provision (benefit) for income taxes (254,000) 151,000 5,000 265,000
------------- ------------ ------------- -------------
Net income $ 965,000 $ 253,000 $ 1,393,000 $ 448,000
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
Revenues in the second quarter increased 64.8% to $17.4 million compared with
$10.5 million for the same period in 1997. Revenues increased 52.5% to $31.0
million for the six months ended June 30, 1998 compared to $20.4 million for
the same period in 1997. Internal growth from new business accounted for
28.8% of this increase in the quarter and 23.8% of the increase for the six
months ended June 30, 1998. External growth from the acquisition of British
Airways' landing gear operation accounted for 36.0% of the increase in
revenue in the second quarter and 28.7% of the increase for the six months
ended June 30, 1998. The British Airways' landing gear operation acquisition
was completed on February 4, 1998 and was accounted for using the purchase
method of accounting. Landing gear repair
11
services is the fastest growing segment for the Company. Landing gear repair
services revenue, which represented 47.7% of total revenues in the second
quarter of 1997 increased 121.4% from $5.0 million in that period to $11.1
million in the second quarter of 1998 and accounted for 64.1% of total
revenues. Landing gear repair services revenue, which represented $9.4
million, or 46.1% of total revenues for the six months ended June 30, 1997,
increased 103.7% to $19.1 million, or 61.6% of total revenues for the six
months ended June 30, 1998. The increase in landing gear services revenue was
due in part to new long-term contracts with American Airlines Inc. ("American
Airlines"), British Airways plc ("British Airways"), United Parcel Services,
British Midland Engineering Services and Canadian Airlines International Ltd.
in addition to further penetration at Federal Express Corporation ("FedEx")
to support their MD10 freighter conversion program and their fleet of Airbus
A310 aircraft.
Gross profit increased 56.1% to $3.7 million for the quarter ended June 30,
1998 compared to $2.4 million for the same period in 1997. Gross profit
increased 48.3% to $6.9 million in the six months ended June 30, 1998
compared to $4.7 million for the same period in 1997. Gross profit as a
percent of revenues in the second quarter of 1998 was 21.5% compared to 22.7%
in the comparable period in 1997. The decline in gross profit margins is
attributable to certain costs incurred at the new United Kingdom operation,
which began operations in February 1998. These costs included expenses
incurred to outsource United Kingdom landing gear services to the Company's
repair facility in California, which significantly increased freight
expenses, in addition to increased subcontracted expenses with other United
Kingdom landing gear repair stations.
Selling, general and administrative expenses increased 59.3% to $2.2 million
for the quarter ended June 30, 1998 compared to $1.4 million for the same
period in 1997. Selling, general and administrative expenses increased 46.4%
to $4.1 million for the six months ended June 30, 1998 compared to $2.8
million for the same period in 1997. As a percent of revenues, selling,
general and administrative expenses declined to 12.8% in the second quarter
from 13.3% in the same period in 1997. Expenses during the second quarter and
six months ended June 30, 1998 included expenses related to the new United
Kingdom operation and outside consultant costs relating to the pending
relocation of such operations to a new facility. The Company expects to enter
into a long-term lease agreement and begin construction on the new facility
in the third quarter of 1998. Completion and relocation is expected to occur
in the second quarter of 1999.
Operating income increased 51.8% to $1.5 million for the quarter ended June
30, 1998 compared to $1.0 million for the same period in 1997. Operating
income increased 51.1% to $2.8 million for the six months ended June 30, 1998
compared to $1.9 million for the same period in 1997. As a percent of
revenue, operating income declined to 8.7% in the second quarter compared to
9.4% in the comparable period in 1997. As a percent of revenue, operating
income declined slightly in the first half of 1998 to 9.2% compared to 9.3%
in the first half of 1997. The decline is a result of increased expenses
related to the integration of the new United Kingdom operations offset by
reductions in selling, general and administrative expenses as a percentage of
total revenue.
Net interest expense increased 35.3% to $0.8 million for the second quarter
ended June 30, 1998 compared to $0.6 million for the same period in 1997.
Interest expense increased 23.7% to $1.4 million for the six months ended
June 30, 1998 compared to $1.2 million for the same period in 1997. This
increase is a result of increased borrowings to fund expansion of existing
business and to fund the acquisition of the United Kingdom operation. As a
percent of revenue, net interest expense declined to 4.6% in the second quarter
of 1998 compared to 5.6% in the comparable period in 1997. Interest income
was not significant for either period.
Income tax provision for the second quarter included a reversal of $514,000
for a previously recorded deferred tax valuation allowance. The effective
tax rate for the six months ended June 30, 1998, excluding this one-time tax
benefit was 37.1% compared to 37.2% for the same period in 1997. The
deferred tax valuation allowance was a previously recorded allowance against
the potential future benefit of net operating loss carry-forwards and other
deferred tax assets, net of deferred tax liabilities.
Net income in the quarter ended June 30, 1998 increased 281.4% to $1.0
million compared to $0.3 million for the same period in 1997. Excluding the
reversal of the previously recorded deferred tax valuation allowance, net
income would have increased 78.3% to $0.5 million in the second quarter of
1998 over the comparable period in 1997. Net income in the six months ended
June 30, 1998 increased 210.9% to $1.4 million compared to $0.4 million for
the same period in 1997. Excluding the effect of the reversal of the
previously recorded deferred tax valuation allowance, net income would have
increased 96.2% to $0.9 million in the first half of 1998 over the same period
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital and funds for capital expenditures have been provided by cash
generated from operations, borrowings on the Company's credit facilities, and
cash generated from the sale of Common Stock.
Contemporaneously with the Initial Public Offering and the BA Acquisition,
the Company entered into the Amended Loan Agreement, which increased the
maximum amount of credit available to the Company from $26.5 million to $45.5
million. The Company used approximately $9.2 million of the proceeds
available under the Amended Loan Agreement to fund a portion of the purchase
price of the BA Assets. The Amended Loan Agreement provides the Company with
a $15.0 million revolving line of credit, a $24.5 million term loan, and a
$6.0 million capital expenditure facility. The revolving line of credit
matures in January 2001, and the term loan and capital expenditure facilities
mature in January 2005. The Amended Loan Agreement is secured by a lien on
all of the assets of the Company, including the BA Assets. At the Company's
election, the rate of interest on each of the three facilities available
under the Amended Loan Agreement is either Bank of America's reference rate
or the inter-bank eurodollar rates on either, at the Company's option, the
London market or the Cayman Islands market. As of June 30, 1998, there was
$36.4 million outstanding under the Amended Loan Agreement.
On February 3, 1998, the Company completed its Initial Public Offering and
received net proceeds of $18.1 million. A portion of the net proceeds,
together with proceeds from the Amended Loan Agreement were used to acquire
the BA Assets. The balance of the net offering proceeds was used to pay down
indebtedness and for working capital.
Net cash used in operating activities was $6.2 million for six months ended
June 30, 1998 compared to $0.6 million for the same period in 1997. The
increased use of cash relates to increases in working capital to support the
new United Kingdom operation. Accounts receivable increased as a result of
higher revenues and inventory was increased to cover production requirements
related to new contracts, including contracts with British Airways, American
Airlines and Airbus landing gear contracts for Federal Express.
12
Approximately $2.9 million is to be paid to British Airways plc during the
third quarter of 1998 as part of the acquisition described in Note 2 to the
Financial Statements which will be funded by borrowings against the revolving
credit line and cash flow from operations.
Working capital and current ratio were $9.8 million and 1.4 for the second
quarter ended June 30, 1998, respectively. Working capital increased $2.5
million from June 30, 1997. The ratio of total debt to equity improved to
1.7 for the quarter ended June 30, 1998 from 6.4 at June 30, 1997. This
improvement is the result of the increased equity from the public offering
consummated in the first quarter of 1998.
RISK FACTORS
AVIATION INDUSTRY RISKS
The Company derives all of its sales and operating income from the services
and parts that it provides to its customers in the aviation industry.
Therefore, the Company's business is directly affected by economic factors
and other trends that affect its customers in the aviation industry,
including a possible decrease in aviation activity, a decrease in outsourcing
by aircraft operators or a decrease in market growth. When such economic and
other factors adversely affect the aviation industry, they tend to reduce the
overall demand for the Company's products and services, thereby decreasing
the Company's sales and operating income. There can be no assurance that
economic and other factors that might affect the aviation industry will not
adversely affect the Company's results of operations.
FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company's operating results are affected by a number of factors,
including the timing of orders for the repair and overhaul of landing gear
and fulfillment of such contracts, 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. Although the Company has secured several long-term agreements
to service multiple aircraft, the Company receives sales under these
agreements only when it actually performs a repair or overhaul. Because the
average time between landing gear overhauls is seven years for an aircraft,
the work orders that the Company receives and the number of repairs or
overhauls that the Company performs in particular periods may vary
significantly, causing the Company's quarterly sales and results of
operations to fluctuate substantially. The Company is unable to predict the
timing of the actual receipt of such orders and, as a result, significant
variations between forecasts and actual orders will often occur. In addition,
the Company's need to make significant expenditures to support new aircraft
in advance of generating revenues from repairing or overhauling such aircraft
may cause the Company's quarterly operating results to fluctuate.
Furthermore, the rescheduling of the shipment of any large order, or portion
thereof, or any production difficulties or delays by the Company, could have
a material adverse effect on the Company's quarterly operating results.
ESTABLISHMENT OF UNITED KINGDOM OPERATIONS
In February 1998, the Company consummated the BA Acquisition and established
its operations in the United Kingdom. Before the BA Acquisition, the Company
had no history or experience operating in the United Kingdom. Accordingly,
establishing operations in the United Kingdom will subject the Company to all
of the risks inherent in the establishment of a new business enterprise.
These include, without limitation, the need to establish manufacturing,
marketing and administrative capabilities, the need to integrate the
Company's United Kingdom operations into the Company's existing operations,
the need to implement the Company's management information systems in its new
location, the need to locate and move into a new facility, unanticipated
marketing problems, new competitive pressures and expenses. There can be no
assurance that the risks inherent in establishing the United Kingdom
operations will not have a material adverse effect on the Company's business,
financial condition and results of operations.
SUBSTANTIAL COMPETITION
Numerous companies compete with the Company in the aviation services
industry. The Company primarily competes with various repair and overhaul
organizations, which include the service divisions of original equipment
manufacturers ("OEMs"), the maintenance departments or divisions of large
commercial airlines (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, Revima, a
company organized and operating under the laws of France, and Dowty Aerospace
Aviation Services. The Company's major competitors in its hydromechanical
components business include AAR and OEMs such as Sundstrand Corporation,
Inc., Aeroquip Vickers, Inc., Parker-Hannifin Corporation, Messier-Bugatti
and Lucas. The Company expects that competition in its industry will increase
substantially as a result of industry consolidations and alliances in
response to the trend in the aviation industry toward outsourcing of repair
and overhaul services. In addition, as the Company moves into new geographic
or product markets it will encounter new competition.
The Company believes that the primary competitive factors in its marketplace
are quality, price, rapid turnaround time and industry experience. Certain of
the Company's competitors have substantially greater financial, technical,
marketing and other resources than the Company. These competitors may have
the ability to adapt more quickly to changes in customer requirements, may
have stronger customer relationships and greater name recognition and may
devote greater resources to the development, promotion and sale of their
products than the Company. There can be no assurance that competitive
pressures will not materially and adversely affect the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's growth strategy is based in part on the Company's ability to
expand its international operations, which will require significant
management attention and financial resources. The Company currently has
divisions in the United Kingdom and the Netherlands and plans to expand
further its international customer base. There can be no assurance that the
Company's efforts to expand operations internationally will be successful.
Failure to increase revenue in international markets could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, international operations are subject to a number of
risks, including longer receivable collection periods and greater difficulty
in accounts receivable collections, unexpected changes in regulatory
requirements, foreign currency fluctuations, import and export restrictions
and tariffs, difficulties and costs of staffing and managing foreign
operations, potentially adverse tax consequences, political instability, the
burdens of complying with multiple, potentially conflicting laws and the
impact of business cycles and economic instability outside the United States.
Moreover, the Company's operating results could also be adversely affected by
seasonality of international sales, which are typically lower in Asia in the
first calendar quarter and in Europe in the third calendar quarter. In
addition, inflation in such countries could increase the Company's expenses.
These international factors could have a material adverse effect on future
sales of the Company's products to international end-users and, consequently,
on the Company's business, financial condition and results of operations.
FOREIGN CURRENCY RISKS
The Company's sales are principally denominated in United States dollars and
British pounds and to some extent in Dutch guilders. The Company makes
substantial inventory purchases in French francs from such suppliers as
Messier-Bugatti, Societe D'Applications Des Machines Motrices ("SAMM") and
Eurocopter France. The Company's Netherlands facility's inventory purchases
are primarily United States dollar denominated, while sales and operating
expenses are partially denominated in Dutch guilders. To date, the Company's
business has not been significantly affected by currency fluctuations or
inflation. However, the Company conducts business in the Netherlands and in
the United Kingdom, and thus fluctuations in currency exchange rates could
cause the Company's products to become relatively more expensive in
particular countries, leading to a reduction in sales in that country. As a
result of the BA Acquisition, the Company may engage in additional foreign
currency denominated sales or pay material amounts of expenses in foreign
currencies that may generate gains and losses due to currency fluctuations.
The Company's operating results could be adversely affected by such
fluctuations.
GOVERNMENT REGULATION
The Company is highly regulated worldwide by the Federal Aviation
Administration ("FAA"), the Joint Airworthiness Authority ("JAA"), a
consortium of European regulatory authorities, and various other foreign
regulatory authorities, including the Dutch Air Agency, which regulates the
Company's Netherlands' operations and the Civil Aviation Authority, which
regulates the Company's United Kingdom operations. These regulatory
authorities require aircraft to be maintained under continuous condition
monitoring programs and to periodically undergo thorough inspections. In
addition, all parts must be certified by the FAA and equivalent regulatory
agencies in foreign countries and conformed to regulatory standards before
they are installed 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. If material
authorizations or approvals were revoked or suspended, the Company's
operations would be materially and adversely affected. As the Company
attempts to commence operations in countries in which it has not previously
operated, it will need to obtain new certifications and approvals, and any
delay or failure in attaining such certifications or approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if in the future new and more stringent
regulations are adopted by foreign or domestic regulatory agencies, the
Company's business may be materially and adversely affected.
DEPENDENCE ON KEY SUPPLIERS
The Company purchases landing gear spare parts and components for a variety
of fixed wing aircraft and helicopters. The Company has separate ten-year
agreements that each expires in October 2006 with (i) Dunlop Limited,
Aviation Division, (ii) Dunlop Limited, Precision Rubber and (iii) Dunlop
Equipment Division (collectively, "Dunlop"). Under two of these agreements,
the Company is entitled to purchase, at a discount from list price, Dunlop
parts for resale and for use in the repair and overhaul of a variety of fixed
wing aircraft and helicopters. For the years ended December 31, 1996 and
1997, the Company's single largest supplier was Dunlop, accounting for
approximately $5.6 million (27.0%) and $4.3 million (19.3%), respectively, of
the spare parts and components that the Company purchased in such periods.
During the six months ended June 30, 1998, Boeing was the single largest
supplier, accounting for $5.8 million (19.2%) of the spare parts and
components that the Company purchased. Dunlop was the second largest
supplier, accounting for $2.3 million (7.7%) of the spare parts and
components that the Company purchased during the six months ended June 30,
1998. Failure by any one of these divisions of Dunlop to renew its agreement
on similar terms when it expires could have a material adverse affect on the
Company's business, financial condition and results of operations. In
addition, the Company has agreements with Messier-Bugatti, SAMM and
Eurocopter France that enable the Company to purchase new aircraft parts at
discounts from list price. Many of the Company's supplier agreements, other
than its agreements with Dunlop, are short-term and can be terminated by the
suppliers upon providing 90 days prior written notice. A decision by any one
of these suppliers to terminate their agreements would eliminate the
competitive advantage the Company derives therefrom and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SHORTAGES OF SUPPLY; INVENTORY OBSOLESCENCE
The Company's inventory consists principally of new, overhauled, serviceable
and repairable aircraft landing gear parts and components that it purchases
primarily from OEMs, parts resellers and customers. The Company believes it
maintains a sufficient supply of inventory to meet its current and
immediately foreseeable production schedule. However, the Company may fail to
order sufficient parts in advance to meet its work requirements, a particular
part may be unavailable when the Company needs it from its suppliers or the
Company unexpectedly may receive one or more large orders simultaneously for
repair and overhaul services. As a result, the Company may on occasion face
parts shortages that delay its production schedule and prevent it from
meeting required turnaround times. Delays or failure to meet turnaround times
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, regulatory standards may
change in the future, causing parts which are currently included in the
Company's inventory to be scrapped or modified. Aircraft manufacturers may
also develop new parts to be used in lieu of parts already contained in the
Company's inventory. In all such cases, to the extent that the Company has
such parts or excess parts in its inventory, their value will be reduced,
which would adversely affect the Company's financial condition.
CUSTOMER CONCENTRATION; CONCENTRATION OF CREDIT RISKS
A small number of customers have historically accounted for a substantial
part of the Company's revenue in any given fiscal period. Sales derived from
FedEx and the United States Coast Guard (the "USCG") accounted for 18.4%, and
11.2%, respectively, of product sales for the year ended December 31, 1996
and 19.3% and 6.5%, respectively, of product sales for the year ended
December 31, 1997. Sales derived from British Airways, FedEx, American
Airlines and the USCG accounted for 20.3%, 19.3%, 10.4% and 5.2%,
respectively, of the Company's total revenue during the six months ended June
30, 1998. Some of the Company's long-term service agreements may be
terminated by the customers upon providing the Company with 90 days prior
written notice, and the Company's agreement with the USCG is subject to
termination at any time at the convenience of the government. In addition,
the Company's sales are made primarily on the basis of purchase orders rather
than long-term agreements. The Company expects that a small number of
customers will continue to account for a substantial portion of its sales for
the foreseeable future. As a result, the Company's business, financial
condition and results of operations could be materially adversely affected by
the decision of a single customer to cease using the Company's products. In
addition, there can be no assurance that sales from customers that have
accounted for significant sales in past periods, individually or as a group,
will continue, or if continued, will reach or exceed historical levels in any
future period.
As of June 30, 1998, 16.7% and 27.2% of the Company's total accounts
receivable were associated with FedEx and British Airways, respectively. As a
result of the BA Acquisition, British Airways accounts for a significant
percentage of both the Company's product sales and accounts receivable.
Although the Company has not had any material difficulties in collecting its
accounts receivable during the past three years, the Company cannot ensure
that it will not have difficulty collecting receivables in the future. Any
inability by the Company to collect material amounts of receivables under its
service agreements could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS RELATING TO ACQUISITION STRATEGY
In the future, the Company may attempt to grow by acquiring other service and
parts providers whose operations or inventories complement or expand the
Company's existing repair and overhaul businesses or whose strategic
locations enable the Company to expand into new geographic markets. The
Company's ability to grow by acquisition depends upon, and may be limited by,
the availability of suitable acquisition candidates and the Company's capital
resources. Acquisitions involve risks that could adversely affect the
Company's operating results, including the assimilation of the operations and
personnel of acquired companies, the potential amortization of acquired
intangible assets and the potential loss of key employees of acquired
companies. Although the Company investigates the operations and assets that
it acquires, there may be liabilities that the Company fails or is unable to
discover, and for which the Company as a successor owner or operator may be
liable. In addition, costs and charges, including legal and accounting fees
and reserves and write-downs relating to an acquisition, may be incurred by
the Company or may be reported in connection with any such acquisition. There
can be no assurance that the Company will be able to consummate acquisitions
on satisfactory terms, or at all, or that it will be successful in
integrating any such acquisitions into its operations.
ENVIRONMENTAL REGULATIONS
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 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. This extensive
regulatory framework imposes significant compliance burdens and risks on the
Company and, as a result, substantially affects its operational costs. In
addition, the Company may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its facilities
without regard to whether or not the Company knew of, or caused, the release
of such substances. The Company believes that it currently is in material
compliance with applicable laws and regulations and is not aware of any
material environmental problem at any of its current or former facilities.
There can be no assurance, however, that its prior activities did not create
a material problem for which the Company could be responsible or that future
uses or conditions (including, without limitation, changes in applicable
environmental laws and regulation, or an increase in the amount of hazardous
substances generated by the Company's operations) will not result in any
material environmental liability to the Company and materially and adversely
affect the Company's financial condition and results of operations. The
Company's plating operations, which use a number of hazardous materials and
generate a significant volume of hazardous waste, increase the Company's
regulatory compliance burden and compound the risk that the Company may
encounter a material environmental problem in the future. Furthermore,
compliance with laws and regulations in foreign countries in which the
Company locates its operations may cause future increases in the Company's
operating costs or otherwise adversely affect the Company's results of
operations or financial condition.
In August 1997 and January 1998, two separate lawsuits were filed by various
individuals against Lockheed Martin Corporation and various other parties,
including the Company, in the Los Angeles Superior Court pleading various
causes of action in connection with certain alleged injuries caused by toxic
and carcinogenic chemicals allegedly released by the defendants in the
Burbank and Glendale areas of Los Angeles County, California. The individual
plaintiffs seek unspecified compensatory and punitive damages. The Company
does not believe that it caused the release of toxic and carcinogenic
chemicals alleged in the complaints and BTR has assumed the defense and has
agreed to indemnify the Company in connection with such claims.
PRODUCT AND SERVICE LIABILITY RISKS
The Company's business exposes it to possible claims for personal injury,
death or property damage which may result from the failure or malfunction of
landing gear, hydromechanical components or aircraft spare parts repaired or
overhauled by the Company. Many factors beyond the Company's control could
lead to liability claims, including the failure of the aircraft on which
landing gear or hydromechanical components overhauled by the Company is
installed, the reliability of the customer's operators of the aircraft and
the maintenance of the aircraft by the customers. The Company currently has
in force aviation products liability and premises insurance in the amount of
$500 million, which the Company believes provides coverage in amounts and on
terms that are generally consistent with industry practice. The Company has
not experienced any material product liability claims related to its
products. However, the Company may be subject to a material loss to the
extent that a claim is made against the Company that is not covered in whole
or in part by insurance and for which any third-party indemnification is not
available. There can be no assurance that the amount of product liability
insurance that the Company carries at the time a product liability claim may
be made will be sufficient to protect the Company. A product liability claim
in excess of the amount of insurance carried by the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that insurance
coverages can be maintained in the future at an acceptable cost.
DEPENDENCE ON KEY PERSONNEL
The continued success of the Company depends to a large degree upon the
services of certain of its executive officers and upon the Company's ability
to attract and retain qualified managerial and technical personnel
experienced in the various operations of the Company's business. Loss of the
services of such employees, particularly David L. Lokken, President and Chief
Executive Officer, Brian S. Aune, Vice President and Chief Financial Officer,
Brian S. Carr, Managing Director of Sun Valley Operations, or Michael A.
Riley, Vice President Hydromechanical Business Unit, could adversely affect
the operations of the Company. The Company has entered into an employment
agreement expiring October 31, 2001 with Mr. Lokken and into employment
agreements expiring October 31, 1999 with Messrs. Aune, Carr and Riley. The
Company has obtained key person insurance on the life of Mr. Lokken in the
amount of $1,000,000. There can be no assurance that the proceeds of such
insurance will be sufficient to compensate the Company in the event that Mr.
Lokken dies. Competition for qualified technical personnel is intense and
from time to time, the Company has experienced difficulty in attracting and
retaining personnel skilled in its repair and overhaul operations. There can
be no assurance that these individuals will continue employment with the
Company. The loss of certain key personnel could have a material adverse
effect on the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING SHAREHOLDERS AND ANTI-TAKEOVER PROVISIONS
As of August 1, 1998, the five shareholders (the "Unique Shareholders") of
Unique Investment Corporation ("Unique") owned in the aggregate approximately
40.4% of the Company's Common Stock. The directors and executive officers of
the Company beneficially owned approximately 24.9% of the Company's Common
Stock. By virtue of such ownership, the Unique Shareholders together with the
executive officers of the Company will have effective control over all
matters requiring a vote of shareholders, including the election of a
majority of directors. The ownership positions of the existing shareholders,
together with the authorization of blank check preferred stock and the
implementation, if certain conditions are met, of a staggered board and
elimination of cumulative voting in the Company's Amended and Restated
Articles of Incorporation and Amended and Restated Bylaws, may have the
effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Company's Common Stock at a premium over
the market price of the Common Stock, and may adversely affect the market
price of the Common Stock.
YEAR 2000 COMPLIANCE
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. 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 believes that its mainframe database and operating systems are year
2000 compliant. However, certain of the Company's software applications
currently are coded using two digits rather than four to define the
applicable year. The Company is systematically modifying such software
applications to be coded as four digits and anticipates such modifications to
be completed by March 1999. The Company plans to replace its telephone system
at an estimated cost of approximately $100,000 and any other non-information
technology systems by July 1999 to be year 2000 compliant. In addition, the
Company is working with its external suppliers, vendors and service providers
to ensure that their systems will be able to support and interact with the
Company's server and network. The Company has not quantified the total costs
required to become year 2000 compliant, but does not expect such costs to be
material. As of June 30, 1998, the total costs incurred to address the
Company's year 2000 issues have not been material. However, if the Company,
its customers or vendors are unable to resolve such processing issues in a
timely manner, it could have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
Accordingly, the Company plans to devote the necessary resources to becoming
year 2000 compliant in a timely manner and is currently working to create a
contingency plan by July 1999 to handle any year 2000 problems.
EUROPEAN MONETARY UNIT
A single currency called the euro will be introduced in Europe on January 1,
1999. The Company does not believe the introduction of the euro will have a
material effect on the Company's business, financial condition and results of
operations.
13
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Exhibit Description
- - ------- -------------------
10.1 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.
10.2 Statement of Terms and Conditions of Employment, dated May 12, 1998
between Hawker Pacific Aerospace, Limited and Richard Adey.
27 Financial Data Schedule
___________________
(b) Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 1998.
14
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: August 14, 1998 By /s/ Scott W. Hartman
----------------------------
Scott W. Hartman
CHAIRMAN OF THE BOARD
Date: August 14, 1998 By /s/ David L. Lokken
----------------------------
David L. Lokken
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 14, 1998 By /s/ Brian S. Aune
----------------------------
Brian S. Aune
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
15