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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 SEPTEMBER 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
November 11, 1998 was 5,822,222 shares.
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HAWKER PACIFIC AEROSPACE
Report on Form 10-Q
For the Quarter Ended September 30, 1998
Table of Contents
Page
----
Cover Page ....................................................... 1
Table of Contents................................................. 2
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Income -
Three Months.......................................... 4
Condensed Consolidated Statements of Income -
Nine Months.......................................... 5
Condensed Consolidated Statements of Cash Flows.......... 6
Condensed Consolidated Statements of
Shareholders' Equity................................ 7
Notes to Condensed Consolidated Financial Statements..... 8
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 11
Item 3 - Defaults by the Company upon its Senior Securities... 16
Item 4 - Submission of Matters to a Vote of Security Holders.. 16
Item 5 - Other Information.................................... 16
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K..................... 17
Signatures ....................................................... 18
Exhibit 27.1 - Financial Data Schedule
2
HAWKER PACIFIC AEROSPACE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 December 31
1998 1997
------------- ------------
ASSETS
Current Assets
Cash $ 1,323,000 $ 160,000
Accounts receivable 10,999,000 7,351,000
Other receivables 120,000 80,000
Inventories 21,227,000 14,814,000
Prepaid expenses and other current assets 528,000 240,000
------------- ------------
Total Current Assets 34,197,000 22,645,000
Equipment and leasehold improvements, net 9,526,000 5,083,000
Landing gear exchange assets, net 37,160,000 11,067,000
Goodwill, net - 145,000
Deferred financing costs, net 471,000 262,000
Deferred offering costs - 766,000
Deferred taxes 251,000 -
Other assets 851,000 930,000
------------- ------------
Total Assets $ 82,456,000 $ 40,898,000
------------- ------------
------------- ------------
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 8,557,000 $ 6,946,000
Line of credit 10,845,000 8,529,000
Accrued liabilities 7,999,000 1,976,000
Current portion of long term debt 2,642,000 1,450,000
------------- ------------
Total Current Liabilities 30,043,000 18,901,000
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Long-term Debt 28,190,000 17,700,000
Shareholders' Equity 24,223,000 4,297,000
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Total Liabilities and Shareholders' Equity $ 82,456,000 $ 40,898,000
------------- ------------
------------- ------------
See accompanying Notes to Condensed Consolidated Financial Statements
3
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30
----------------------------
1998 1997
------------- ------------
Revenue $ 16,494,000 $ 9,702,000
Cost of revenues 13,673,000 7,403,000
------------- ------------
Gross margin 2,821,000 2,299,000
Selling, general and administrative expenses 1,868,000 1,324,000
------------- ------------
Income from operations 953,000 975,000
Interest expense, net (903,000) (631,000)
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Income before provision for income taxes 50,000 344,000
Provision for income taxes 18,000 127,000
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Net income $ 32,000 $ 217,000
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------------- ------------
Earnings per common share $ 0.01 $ 0.07
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------------- ------------
Earnings per common share - assuming dilution $ 0.01 $ 0.07
------------- ------------
------------- ------------
See accompanying Notes to Condensed Consolidated Financial Statements
4
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
September 30
---------------------------
1998 1997
------------ ------------
Revenue $ 47,533,000 $ 30,060,000
Cost of revenues 37,776,000 23,083,000
------------- ------------
Gross margin 9,757,000 6,977,000
Selling, general and administrative expenses 5,958,000 4,118,000
------------- ------------
Income from operations 3,799,000 2,859,000
Interest expense, net (2,352,000) (1,802,000)
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Income before provision for income taxes 1,447,000 1,057,000
Provision for income taxes 23,000 392,000
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Net Income $ 1,424,000 $ 665,000
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Earnings per common share $ 0.26 $ 0.21
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Earnings per common share - assuming dilution $ 0.25 $ 0.21
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See accompanying Notes to Condensed Consolidated Financial Statements
5
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
-------------------------------
1998 1997
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OPERATING ACTIVITIES
Net Income $ 1,424,000 $ 665,000
Adjustments to reconcile net income to net cash used in
operating activities:
Deferred income taxes (106,000) 391,000
Depreciation 1,105,000 537,000
Amortization 1,097,000 329,000
Loss on sale of machinery, equipment and landing gear - (78,000)
Changes in operating assets and liabilities:
Accounts receivable (3,688,000) (476,000)
Inventory (4,451,000) (1,371,000)
Prepaid expenses and other current assets (288,000) 7,000
Accounts payable 1,611,000 552,000
Deferred revenue 79,000 (766,000)
Accrued liabilities 3,065,000 (766,000)
------------- ------------
Cash used in operating activities (152,000) (976,000)
INVESTING ACTIVITIES
Purchases of equipment, leasehold improvements and landing gear (5,826,000) (1,438,000)
Proceeds from disposals of fixed assets - 250,000
Purchase of equipment and landing gear from British Airways (23,599,000) -
Purchase of British Airways' inventory (1,962,000) -
Other assets 79,000 (388,000)
------------- ------------
Cash used in investing activities (31,308,000) (1,576,000)
FINANCING ACTIVITIES
Borrowing under bank note 13,285,000 (637,000)
Principal payments on bank note (103,000)
Principal payments on related party note (1,500,000)
Borrowings/payments on line of credit, net 2,316,000 2,150,000
Offering costs (1,966,000) (143,000)
Acquisition and loan fees expenses (209,000) (337,000)
Proceeds from equity offering 20,800,000 -
Contributions to capital - 500,000
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Cash provided by financing activities 32,623,000 1,533,000
Increase (decrease) in cash 1,163,000 (1,019,000)
Cash, beginning of period 160,000 1,055,000
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Cash, end of period $ 1,323,000 $ 36,000
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Supplemental disclosure of cash flow information:
Noncash investing and financing activities
Purchase of landing gear from British Airways $ 2,879,000 $ -
See accompanying Notes to Condensed Consolidated Financial Statements
6
HAWKER PACIFIC AEROSPACE
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
Preferred Stock Common Stock
------------------------- ---------------------- Other
# of # 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 - - - - 1,424,000 - 1,424,000
Foreign currency translation - - - - - 434,000 434,000
---------- ------------ --------- ---------- ------------ ------------- ------------
Comprehensive income - - - - - - 1,858,000
Conversion of preferred stock (400) (2,000,000) 250,000 2,000,000 - - -
Issuance of common stock - - 2,600,000 18,068,000 - - 18,068,000
---------- ------------ --------- ---------- ------------ ------------- ------------
Balance as of
September 30, 1998 - $ - 5,822,222 $21,108,000 $ 2,681,000 $ 434,000 $ 24,223,000
---------- ------------- --------- ---------- ------------ ------------- ------------
---------- ------------- --------- ---------- ------------ ------------- ------------
See accompanying Notes to Condensed Consolidated Financial Statements
7
HAWKER PACIFIC AEROSPACE
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
Interim Condensed Financial Statements
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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 condensed consolidated
financial statements of the Company have been prepared in accordance with the
Securities and Exchange Commission's requirements of Form 10-Q and contain all
adjustments, of a normal and recurring nature, which are necessary to present
fairly the financial position of the Company as of September 30, 1998, and the
results of its operations and cash flows for the three and nine month periods
ended September 30, 1998 and 1997. The results of operations for the period
ended September 30, 1998 are not necessarily indicative of the operating results
for the full fiscal year.
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 3,170,708 for the
three months ended September 30, 1998 and 1997, respectively and 5,555,555 and
3,170,708 for the nine 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 5,886,653 and 3,170,708, for the
three months ended September 30, 1998 and 1997, respectively and 5,681,120 and
3,170,708 for the nine months then ended.
Stock Splits
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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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Inventories
- -----------
Inventories are comprised of the following:
September 30, December 31,
1998 1997
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Purchased parts and assemblies $ 19,103,000 $ 11,961,000
Work-in-process 2,124,000 2,853,000
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$ 21,227,000 $ 14,814,000
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Income Taxes
- ------------
The tax provision for the nine months ended September 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 Shareholders'
Equity. Comprehensive income for the quarter and nine months ended
September 30, 1997 was the same as net income for the period.
During the quarter and nine months ended September 30, 1998, total comprehensive
income amounted to $226,000 and $1,858,000, 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 others,
changes in the condition of the industry, changes in general economic
conditions, the success of the Company's strategic operating plans and the
length of time necessary to integrate the Company's UK operations.
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 of inventory, $4.0
million of machinery and equipment and $13.6 million of landing gear rotable
assets. Transaction expenses of $1.1 million were capitalized as part of the
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 used approximately $9.2
9
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
"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 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 2,
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
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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:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- --------------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(unaudited) (unaudited)
Landing gear repairs $10,635,000 $4,326,000 $29,758,000 $13,715,000
Hydromechanics repairs 4,359,000 4,022,000 13,146,000 12,155,000
Spares & other 1,500,000 1,354,000 4,629,000 4,190,000
---------- ---------- ----------- -----------
Total revenue 16,494,000 9,702,000 47,533,000 30,060,000
Gross profit 2,821,000 2,299,000 9,757,000 6,977,000
Selling, general and
administrative expense 1,868,000 1,324,000 5,958,000 4,118,000
---------- ---------- ----------- -----------
Income from operations 953,000 975,000 3,799,000 2,859,000
Interest expense, net (903,000) (631,000) (2,352,000) (1,802,000)
---------- ---------- ----------- -----------
Income before provision
for income taxes 50,000 344,000 1,447,000 1,057,000
Provision for income taxes 18,000 127,000 23,000 392,000
---------- ---------- ----------- -----------
Net income $ 32,000 $ 217,000 $ 1,424,000 $ 665,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Revenues in the third quarter increased 70.0% to $16.5 million compared with
$9.7 million for the same period in 1997. Revenues increased 58.1% to $47.5
million for the nine months ended September 30, 1998 compared to $30.1 million
for the same period in 1997. Internal growth from new business accounted for
19.7% of this increase in the quarter and 22.5% of the increase for the nine
months ended September 30, 1998. External growth from the acquisition of
British Airways' landing gear operation accounted for 50.3% of the increase in
revenue in the third quarter and 35.6% of the increase for the nine months ended
September 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.
11
Landing gear repair services is the fastest growing segment for the
Company. Landing gear services revenue, which represented 44.5% of total
revenues in the third quarter of 1997 increased 145.8% from $4.3 million in that
period to $10.6 million in the third quarter of 1998. Landing gear repair
services revenue, which represented $13.7 million or 45.6% of total revenues for
the nine months ended September 30, 1997, increased 117.0% to $29.8 million, or
62.6% of total revenues for the nine months ended September 30, 1998. The
increase in landing gear services revenue was due in part to new long-term
contracts with American Airlines Inc. ("American Airlines"), American Trans Air,
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 22.7% to $2.8 million for the quarter ended September 30,
1998 compared to $2.3 million for the same period in 1997. Gross profit
increased 39.8% to $9.8 million in the nine months ended September 30, 1998
compared to $7.0 million for the same period in 1997. Gross profit as a percent
of revenues in the third quarter of 1998 was 17.1% compared to 23.7% 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. Labor related issues in the UK increased costs for
recruitment and training and, in order to meet customer delivery schedules, the
UK subcontracted its landing gear maintenance to both third party vendors and
the Company's California facility, which caused increased transatlantic freight
expense and unabsorbed fixed costs. Another factor contributing to lower
earnings was slippage of revenue out of the third quarter into future periods on
existing long-term contracts. Although this deferral of revenue will benefit
future periods, it did negatively impact third quarter margins since fixed costs
were amortized over a smaller revenue base.
Selling, general and administrative expenses increased 41.1% to $1.9 million for
the quarter ended September 30, 1998 compared to $1.3 million for the same
period in 1997. Selling, general and administrative expenses increased 44.7% to
$6.0 million for the nine months ended September 30, 1998 compared to $4.1
million for the same period in 1997. As a percent of revenues, selling, general
and administrative expenses declined to 11.3% in the third quarter from 13.6% in
the same period in 1997. Selling, general and administrative expense in the
third quarter included a foreign exchange benefit and the reclassification of
previously recorded expenses in the UK operation.
Operating income was constant at $1.0 million for the quarter ended September
30, 1998 compared to $1.0 million for the same period in 1997. Operating income
increased 32.9% to $3.8 million for the nine months ended September 30, 1998
compared to $2.9 million for the same period in 1997. As a percent of revenue,
operating income declined to 5.8% in the third quarter compared to 10.0% in the
comparable period in 1997. As a percent of revenue, operating income declined in
the nine months ended September 30, 1998 to 8.0% compared to 9.5% in the same
period in 1997.
Net interest expense increased 43.1% to $903,000 for the third quarter ended
September 30, 1998 compared to $631,000 for the same period in 1997. Interest
expense increased 30.5% to $2.4 million for the nine months ended September 30,
1998 compared to $1.8 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 5.5% in the third quarter of 1998 compared to
6.5% 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 nine months ended September 30, 1998, excluding this one-time tax
benefit was 37.1%, unchanged from 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 for the quarter ended September 30, 1998 declined 85.3% to $32,000
compared to $217,000 for the same period in 1997. Net income for the nine
months ended September 30, 1998 increased 114.1% to $1.4 million compared to
$665,000 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 36.8% to $910,000 for the nine month period ended at September 30,
1998 over the same period in 1997.
12
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 September 30, 1998, there
was $36.7 million outstanding under the Amended Loan Agreement. In
connection with obtaining certain waivers from Bank of America (see Part II,
Item 3), the Company and Bank of America agreed to increase the interest rate
on the loan agreement.
On February 3, 1998, the Company completed its initial public offering of
2,600,000 shares of Common Stock and received net proceeds from the offering of
$18.1 million. A portion of the net proceeds, together with proceeds from the
Amended Loan Agreement was used to acquire the BA Assets. The balance of the
net offering proceeds was used to pay down existing indebtedness and for working
capital.
Net cash used in operating activities was $819,000 for nine months ended
September 30, 1998 compared to $976,000 for the same period in 1997. 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.
Approximately $3.0 million is to be paid to British Airways plc during the
fourth 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.
The Company is in the process of negotiating a refinancing of its existing
senior credit facilities to increase its lines of credit from $46.5 million to
$65.0 million and anticipates completing this transaction in the fourth quarter
of 1998. Proceeds from this new credit facility, if obtained, will be used to
retire all existing senior and subordinated debt and complete the final
acquisition payment of approximately $3.0 million to British Airways. The
Company anticipates drawing $47.0 million upon closing the $65.0 million credit
facility. In connection with this refinance, the Company anticipates incurring
a significant non-recurring charge in the fourth quarter. The Company can not
provide any assurance that the new credit facility will close or will close when
anticipated. If the Company is not able to close this new line of credit it
will need to seek additional financing to meet its cash requirements for the
next 12 months. Based on previous discussions of alternative financing
structures, the Company believes it will be able to secure financing in a timely
manner.
During the next 12 months, the Company anticipates incurring significant
expenses related to the relocation of the UK operation to a new facility. These
expenses include costs for tenant improvements, moving expenses and construction
of a plating shop. Additionally, the Company expects to make significant
investments in landing gear rotable assets to support both existing and
projected future business. The Company believes that cash flow generated by
operations, along with the remaining availability of its current or prospective
lines of credit, will continue to provide sufficient funds to meet the Company's
capital and operating cash requirements for the next 12 months.
The Company entered into an agreement to lease a new facility in the UK and will
begin construction on that facility in the fourth quarter of 1998. Completion
and relocation is expected to occur in the second quarter of 1999.
Working capital and current ratio were $4.2 million and 1.1 for the third
quarter ended September 30, 1998, respectively. Working capital increased $0.5
million from December 31, 1997. The ratio of total debt to equity improved to
1.7 for the quarter ended September 30, 1998 compared to 6.4% at December 31,
1997. This improvement is the result of the increased equity from the public
offering consummated in the first quarter of 1998.
13
RISK FACTORS
For a full discussion of the risk factors see the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 and the Company's report on Form
10-Q for the period ended June 30, 1998.
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. Any delays or changes, either by the Company or customer, in
scheduled repairs or overhauls may cause quarterly results to be significantly
impacted. 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, delays in
achieving operating efficiency, 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 operations.
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 September 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
14
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.
15
PART II - OTHER INFORMATION
ITEM 3. Defaults by the Company Upon Its Senior Securities
At September 30, 1998, the Company was in default on its senior credit
facilities with Bank of America NT & SA, by failing to maintain specified ratios
for senior debt to EBITDA and fixed charge coverage. Senior debt to EBITDA was
4.37:1.00 at September 30, 1998, which exceeded the specified ratio of
4.00:1.00. Fixed charge coverage was 1.28:1.00, which was below the specified
ratio of 1.40:1.00. Bank of America has provided a waiver to the Company with
respect to these financial covenants. The Company was also in violation of its
requirement to submit an audited opening balance sheet with respect to its
public offering and UK acquisition. Bank of America has agreed to waive the
requirement and accept in lieu thereof the unaudited pro forma condensed
consolidated balance sheet attached to the Company's 1997 audited financial
statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Hawker Pacific Aerospace was duly called
and held on July 29, 1998 at Hawker Pacific Aerospace, 11240 Sherman Way, Sun
Valley, CA 91352.
Proxies for the meeting were solicited on behalf of the Board of Directors of
the Company. There was no solicitation in opposition to the Board of Directors'
nominees for election as directors as listed in the Proxy Statement and all
nominees were elected.
At the meeting, votes were cast upon the Proposals described in the Proxy
Statement for the meeting (filed with the Securities and Exchange Commission
pursuant to Regulation 14A and incorporated herein by reference) as follows:
Proposal 1 - Election of directors for the ensuing year.
Name For Withheld Vote
- ---- --- -------------
Scott W. Hartman 5,521,632 1,800
David L. Lokken 5,521,632 1,800
Daniel Lubeck 5,521,632 1,800
John G. Makoff 5,521,632 1,800
Joel F. McIntyre 5,521,332 2,100
Daniel C. Toomey, Jr. 5,521,332 2,100
Mellon C. Baird 5,521,632 1,800
ITEM 5. Other Information
On September 30, 1998 Richard Adey resigned his position as Managing Director of
Hawker Pacific Aerospace, Limited.
On October 12, 1998 Dennis Biety accepted a position as Managing Director of
Hawker Pacific Aerospace, Limited and Head of European Operations for Hawker
Pacific Aerospace.
16
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Exhibit Description
- ------- -------------------
10.6 Statement of Terms and Conditions of Employment, dated October 1,
1998 by and between Hawker Pacific Aerospace and Philip Panzera
10.7 Statement of Terms and Conditions of Employment, dated October
12, 1998 by and between Hawker Pacific Aerospace and Dennis Biety
27 Financial Data Schedule
- -------------------
(b) Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 1998.
17
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 11, 1998 By /s/ David L. Lokken
-------------------------------
David L. Lokken
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: November 11, 1998 By /s/ Brian S. Aune
---------------------------------
Brian S. Aune
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
18