10-Q 1 v77016e10-q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER: 0-29490 HAWKER PACIFIC AEROSPACE (Exact name of registrant as specified in its charter) CALIFORNIA 95-3528840 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11240 SHERMAN WAY, SUN VALLEY, CALIFORNIA 91352 (Address of principal executive offices) (Zip Code) (818) 765-6201 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve 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 ninety days. YES [X] NO [ ] The number of shares of the registrant's common stock outstanding on October 15, 2001, was 10,160,675 shares. ================================================================================ HAWKER PACIFIC AEROSPACE PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying Notes to Condensed Consolidated Financial Statements -2- HAWKER PACIFIC AEROSPACE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements -3- HAWKER PACIFIC AEROSPACE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements -4- HAWKER PACIFIC AEROSPACE CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements -5- HAWKER PACIFIC AEROSPACE CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements -6- HAWKER PACIFIC AEROSPACE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION Interim Condensed Financial Statements During interim periods, Hawker Pacific Aerospace ("Hawker US") and its wholly-owned United Kingdom subsidiary, Hawker Pacific Aerospace Ltd. ("Hawker UK") (collectively, the "Company"), follow the accounting policies set forth in its Annual Report on Form 10-K, and apply appropriate interim financial reporting standards, as indicated below. Users of these condensed consolidated interim financial statements are encouraged to refer to the notes contained in the Annual Report on Form 10-K for fiscal year 2000 when reviewing such interim financial results. The preparation of interim financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Significant estimates and assumptions include the accounts receivable allowance for doubtful accounts, a provision for potentially excess or slow-moving inventory, warranty accruals, deferred tax asset valuation allowances, and a provision for anticipated losses on future work covered by contracts performed at Hawker UK. Actual results may differ from those estimates. Certain prior year amounts have been reclassified to conform to the fiscal 2001 presentation. In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the Securities and Exchange Commission's requirements for Form 10-Q and contain all adjustments of a normal and recurring nature that are necessary to present fairly the financial position of the Company as of September 30, 2001 and December 31, 2000, the results of its operations for the three and nine months ended September 30, 2001 and 2000, and its cash flows for the nine months ended September 30, 2001 and 2000. Contingencies On October 1, 2001, First Union Securities Inc. was awarded $989,000 in an arbitrated claim against the Company. First Union provided investment banking services to the Company and the claim sought payment of their fee for those services. Pursuant to an indemnification agreement, the Company ceded control of the First Union claim to a group of individual shareholders associated with Unique Investment Corporation (the "Unique Sellers"), and the Unique Sellers agreed to indemnify the Company for any costs related to the claim in excess of $250,000. The Company paid First Union the $989,000 award in October 2001. As of October 22, 2001, the Unique Sellers had not honored their indemnification agreement, and the Company filed an arbitration claim to enforce the terms of the agreement (see Note 7 for further information). The Company is also involved from time to time in various lawsuits, claims and inquiries, which the Company believes are routine to the nature of its business. Except as described above, the Company is not currently involved in any litigation or subject to any claim that has not been provided for, or that would have a material adverse effect on the financial position, results of operation or cash flow of the Company. Loss per Share Basic and diluted loss per common share is computed based upon the weighted average number of common shares outstanding for the period. The number of shares used in the calculation of basic and diluted loss per share for the three months ended September 30, 2001 and 2000 was 10,160,675 and 5,854,789, respectively. The number of shares used in the calculation of basic and diluted loss per share for the nine months ended September 30, 2001 and 2000 was 9,310,157 and 5,833,999, respectively. The effect of dilutive securities was not included in the computation of diluted loss per share for the three months and the nine months ended September 30, 2001 because the effect would have been antidilutive. Options to purchase 810,804 shares of common stock at exercise prices between $3.38 and $9.88 and 595,246 shares of common stock at exercise prices between $6.88 and $9.88 were outstanding during 2001 and 2000, respectively -7- HAWKER PACIFIC AEROSPACE and were excluded from the computation of diluted loss per share as the exercise price was greater than the average market price of the common shares. Accordingly, basic loss per share is the same as diluted loss per share for all periods presented. Recent Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets" were issued in June 2001. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after September 30, 2001. There are also transition provisions that apply to certain business combinations completed before July 1, 2001. SFAS 142, which becomes effective for the Company on January 1, 2002, includes requirements to test goodwill and indefinite-lived intangible assets for impairment rather than amortize them. The Company does not, however, currently carry any goodwill or indefinite-lived intangible assets on its balance sheet, as such, the Company does not believe that these standards will have a material impact on the financial position, results of operations or cash flow of the Company. 2. INVENTORIES Inventories are comprised of the following:

3. NOTE PAYABLE TO RELATED PARTY On June 8, 2001, the Company's majority shareholder, Lufthansa Technik AG ("LHT"), provided a revolving line of credit to Hawker UK. The facility, which may be drawn up to an aggregate amount of 5,200,000 British pounds sterling ($7,564,000 at November 9, 2001), is currently scheduled for repayment in June 2002 (see Note 7). Amounts advanced under the facility bear interest, payable monthly, at a daily average rate based on the London Sterling Overnight Index Average ("SONIA"), plus a 270 basis point margin (approximately 8% as of September 30, 2001). Proceeds from the facility are being used for capital investment and additional working capital at Hawker UK. As of November 9, 2001, 290,000 pounds ($422,000) remained available on the line of credit. 4. RELATED PARTY TRANSACTIONS During the third quarter of 2001, the Company received $38,000 from LHT for overhaul services rendered, and purchased $139,000 of spare parts from LHT. 5. PROVISION FOR ANTICIPATED LOSSES ON CONTRACTS The Company records a current charge to cost of revenue whenever it is anticipated that the total estimated costs will exceed the total estimated revenue over the life of a contract. The amount of the provision is the excess of cost over revenue for every overhaul event for which the Company anticipates a loss during the contract term. As each overhaul event is completed in the future, the specific portion of the provision previously accrued for that overhaul is utilized. This provision has been recorded for certain contracts performed at Hawker UK, and includes anticipated losses on overhaul events based on management's estimates. During the three months ended September 30, 2001, $907,000 was utilized from the provision, and $414,000 was added to the provision. This addition to the provision was recorded based on decreased revenue projections as a result of the events of September 11, 2001. A reduction in sales volume would result in lower overhead absorption and higher pro rata costs for the remaining jobs. -8- HAWKER PACIFIC AEROSPACE During the nine months ended September 30, 2001, $1,715,000 was utilized from the provision, and $2,320,000 was added to the provision. Additional reasons for the year-to-date increase in the provision include changes in the number and timing of overhauls by certain customers, changes in the estimate of future overhaul costs, and the addition of certain new contracts. As of September 30, 2001, the remaining provision amounts to $2,807,000. 6. SEGMENT INFORMATION SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, sets forth standards relating to the reporting of financial and descriptive information about business segments and enterprise-wide operations. The Company operates in one segment. The following table sets forth certain geographic information related to the Company's operations.

Revenue from customers located outside the United States amounted to $12,700,000 and $7,052,000 for the quarters ended September 30, 2001 and 2000, respectively. 7. SUBSEQUENT EVENTS As noted in Note 1 above, on October 1, 2001, First Union Securities Inc. was awarded $989,000 in an arbitrated claim against the Company which arose out of a series of transactions with LHT in September 2000. Pursuant to an indemnification agreement, the Company ceded control of the First Union claim to a group of individual shareholders associated with Unique Investment Corporation (the "Unique Sellers") who agreed to indemnify the Company for any costs related to the claim in excess of $250,000. The Company incurred its $250,000 obligation under the First Union claim during fiscal 2000. As of September 30, 2001, the Company has recorded the $989,000 arbitration award and an additional $32,000 in other related costs in Other Liabilities. The Company has also recorded the corresponding claim receivable of $1,021,000 in Other Receivables to represent the aggregate indemnification obligation owed to the Company by the Unique Sellers. In October 2001, the Company paid First Union the $989,000 award. On October 22, 2001, the Company filed an arbitration claim for indemnification from the Unique Sellers pursuant to an indemnification agreement. The Company believes it is probable that it will prevail in the arbitration and that neither the arbitration award nor the indemnification proceeds would have any prospective impact on the Company's Statement of Operations. Amounts advanced under the LHT line of credit are currently scheduled for repayment in June 2002. In a letter dated October 12, 2001, LHT agreed that it will extend the term of the credit line by one year if Hawker UK lacks sufficient funds to repay the loan in June 2002. -9- HAWKER PACIFIC AEROSPACE ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW OF CURRENT RESULTS During the third quarter of 2001, the Company continued to show improved financial results, as compared with both the same quarter of the prior year and the first two quarters of the current year. Revenue during the quarter increased by 22% versus the same quarter of the prior year, gross margin more than tripled, and the Company's net loss decreased from $11 million to $1 million. The improvement also resulted from decreased interest expense, the absence of certain charges in the corresponding period of the prior year and improved operating performance of the Company's subsidiary in London ("Hawker UK"). Hawker UK has continued to increase sales, reduce its operating and material costs, improve labor efficiencies and accelerate turn-around times. As discussed in previous quarterly filings this year, the Company's overhaul schedule during 2001 was projected to heavier in the third and fourth quarters compared to the first two quarters due to an uneven distribution of work throughout the year caused solely by customer schedules. Third quarter revenue was 12% higher than the average revenue level of the first two quarters. Prior to the September 11th terrorist attacks, the Company had also projected fourth quarter revenue to be higher than the third quarter, but the Company has now revised this projection downward. The following section addresses the Company's current expectations regarding the impact of the attacks on the Company's future results of operations. OUTLOOK At this time, the Company is unable to determine with certainty the potential impact on future revenues resulting from the aftermath of the September 11 terrorist attacks in the United States. Air travel in the United States has declined substantially since September 11, and the additional political and economic uncertainties resulting from the attacks have contributed to a general worsening of the already sluggish United States economy. Since the attacks, many airlines have announced significant cutbacks in their scheduled flights. Many airlines also have announced plans to accelerate the retirement of older aircraft and to consider deferring delivery of new aircraft. Following September 11, some of the Company's customers grounded aircraft on which the Company was scheduled to provide maintenance, which will adversely affect the Company's fourth quarter revenues. The Company anticipates that fourth quarter revenue will be lower than in the third quarter as a result of these developments. The long-term effect on the Company depends upon a number of factors, including the duration of the current decline in air travel worldwide and the current economic slowdown in the United States, the extent to which the Company's customers determine to retire or ground additional aircraft, and possible future terrorist attacks, which can not be predicted. If a significant number of additional aircraft are retired or grounded, the Company's future revenues would be adversely affected. It is also possible, however, that ongoing cost-cutting measures by air carriers will lead to more outsourcing of repair and maintenance work, which may have a favorable impact on future revenues of the Company. In the meantime, the Company is continuing to implement steps to reorganize and strengthen its component services business which the Company believes may have a favorable impact on future revenues. RESULTS OF OPERATIONS The following analysis compares the Company's results of operations for the quarter and nine months ended September 30, 2001, with the quarter and nine months ended September 30, 2000. Third quarter revenue increased by 22% to $22,530,000 from $18,533,000 in the third quarter of 2000, while year-to-date revenue increased by 4% to $62,674,000 from $60,320,000 in the prior comparable period. The quarterly revenue increase occurred primarily in sales of landing gear overhaul services at the UK facility. Landing gear revenue for the nine months decreased from the prior year, as customer schedules for overhaul work during fiscal year 2001 were relatively light in the first and second quarters. -10- HAWKER PACIFIC AEROSPACE Cost of revenue for the quarter increased to $19,484,000 from $17,529,000 in the third quarter of 2000, an 11% increase as compared with the 22% increase in revenue. The reduction in cost of revenue as a percentage of sales was primarily attributable to the improved operating efficiencies at Hawker UK, which were partially offset by reduced margins at the Company's Sun Valley facility. Sun Valley margin in the third quarter declined from the prior comparable period because both the product mix and the overhaul schedule during most of fiscal year 2000 were highly favorable, resulting in the division's best ever performance. During the third quarter of 2001, $907,000 of the provision for anticipated losses on certain Hawker UK contracts was utilized, and $414,000 was added to the provision. Year-to-date cost of revenue increased to $54,778,000 from $51,846,000 in the corresponding period of 2000, a 6% increase as compared with a 4% increase in revenue. Year-to-date changes in cost of revenue paralleled quarterly results, with improved operating efficiencies in Hawker UK, and less favorable results in Sun Valley. During 2001 to date, $1,715,000 of the provision for anticipated losses on certain Hawker UK contracts was utilized, and $2,320,000 was added to the provision. The increases to the provision for both the quarter and nine months resulted from changes in the number and timing of overhauls by certain customers, and changes in the estimate of future overhaul costs. As of September 30, 2001, the accrued balance in the provision was $2,807,000. Selling, general and administrative expense for the third quarter of 2001 decreased to $2,794,000 from $2,915,000 in the prior comparable period. Year-to-date selling, general and administrative expense increased to $9,156,000 from $8,028,000 in the prior comparable period. The quarter and year-to-date results in 2000 included $978,000 and $1,712,000 of additional fees and costs charged by the Company's former senior lender. The year-to-date increase was also attributable to increased expenses for payroll, travel, commissions and recruitment, partially offset by a reduction in bad debt expense resulting from collections of previously reserved accounts. Interest expense for the quarter and nine months decreased by $1,331,000 and $1,991,000, respectively, primarily as a result of lower interest rates on the Company's senior loan facilities. Other expense was favorably affected during 2001 as $1,808,000 and $1,894,000 were recorded during the third quarter and nine months of 2000 for costs associated with the LHT transactions in September 2000. For the reasons above, the Company posted a net loss for the quarter of $977,000, or $0.10 per common share, as compared with a net loss of $11,136,000, or $1.90 per common share, in the third quarter of 2000. The year-to-date net loss decreased to $5,799,000, or $0.62 per common share, as compared with $14,259,000, or $2.44 per common share for the first nine months of 2000. The Company has not recorded any tax benefit for pre-tax losses this year, and the valuation allowance applied against the Company's deferred tax assets was therefore increased during 2001 by $2,165,000 to $10,507,000. LIQUIDITY AND CAPITAL RESOURCES The following analysis compares material changes in the Company's financial position from December 31, 2000, to September 30, 2001. With an increase in overhaul work in process during the first nine months of 2001, inventories increased by $4,669,000 and deferred revenue increased by $1,598,000. Primarily as a result of the $5,799,000 year-to-date loss, the Company used cash in operating activities of $5,413,000. This deficit was covered by $5,327,000 of advances on the LHT line of credit. As of November 9, 2001, the Company has 290,000 pounds ($422,000) available on the line of credit. Amounts advanced under the LHT line of credit are currently scheduled for repayment in June 2002. In a letter dated October 12, 2001, LHT agreed that it will extend the term of the credit line by one year if Hawker UK lacks sufficient funds to repay the loan in June 2002. -11- HAWKER PACIFIC AEROSPACE The Company has recorded a $1,021,000 claim receivable at September 30, 2001, with regard to an indemnification obligation owed to the Company by certain former shareholders (see Note 7 to the condensed consolidated financial statements for additional information). The Company has filed a claim in arbitration to enforce the indemnification obligation, and believes it is probable that it will collect the indemnified costs. The Company expects that its cash liquidity will remain tight but manageable over the next few quarters. In order to maintain liquidity, the Company intends to make full use of the LHT credit line. The Company is also discussing with LHT, the possibility of increasing this credit line, but can make no assurances that this will occur, and the Company may also consider asset sales if necessary. If the credit line is extended until June 2003, as the Company expects, the Company believes that with this credit line, together with the potential increase in the credit line and/or assets sales, that the Company will have sufficient funds to meet its cash requirements for the next twelve months. FORWARD-LOOKING STATEMENTS This Quarterly Report contains forward-looking statements within the meaning of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995, such as statements of the Company's plans, objectives, expectations and intentions, that involve risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements. The forward-looking statements contained in this document involve risks and uncertainties that may affect the Company's operations, markets, services, prices and other factors, as more fully discussed elsewhere and in other Company filings with the U.S. Securities and Exchange Commission. These risks and uncertainties include, but are not limited to: economic, legal, governmental, environmental and technological factors; the impact of the September 11th terrorist attacks on the airline industry, the economy and insurance rates; the potential for additional adverse impact from terrorist attacks and/or war; the outcome of the pending arbitration against the Unique Sellers; competitive pricing and market conditions; customer concentration; foreign currency risk; and the Company's continuing ability to acquire adequate and reasonably priced inventory, successfully manage rapid growth, meet increasing requirements for capital, and successfully develop Hawker UK into a profitable operation. There can be no assurance that future developments affecting the Company will be those anticipated by management. Because of the factors listed above, many of which are beyond the control of the Company, actual results may differ from those in the forward-looking statements. The Company disclaims any intent or obligation to update or revise any forward-looking information, whether as a result of new information, future developments, or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk refers to the potential effects of unfavorable changes in certain prices and rates on the Company's financial results and condition, primarily foreign currency exchange rates and interest rates on borrowings. The Company does not utilize derivative instruments in managing its exposure to such changes. Foreign Currency Risk. The Company has foreign operations in the UK and the Netherlands, and also conducts business with customers in many other countries worldwide. These activities may generate gains and losses as a result of currency fluctuations, and may require translation adjustments to the value of certain assets in the Company's foreign operations. Foreign currency exchange rates could also cause the Company's services to become relatively more expensive in particular countries, leading to a reduction in revenue in that country. The Company reduces foreign currency risk by generally requiring that customers pay for the services of the Company's foreign operating units in the currency of the country where the operating unit is located. The Company periodically exchanges material sums of money between the operating units. If the US dollar strengthens against the British pound, Hawker UK sales will provide less consolidated revenue. A strong dollar also increases material costs for Hawker UK, which purchases a significant portion of its materials from US suppliers. In addition, the value of the Company's intercompany receivables from Hawker UK will become less valuable. The Company is currently considering hedging strategies to mitigate exchange rate fluctuations in this currency. Interest Rate Risk. The Company's debt facilities carry interest rates that vary in accordance with the SONIA and US/UK LIBOR. The Company is subject to potentially material fluctuations in its debt service as these market rates change. The extent of this risk is not quantifiable or predictable. -12- HAWKER PACIFIC AEROSPACE PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 14, 2001, the Company held its annual meeting of shareholders. The following three proposals were approved by the Company's shareholders, with each proposal receiving 6,661,532 affirmative votes. No proposal received any votes against or withheld, and there were no abstentions or broker non-votes. 1. All current directors were re-elected to a classified Board. Mellon C. Baird, David L. Lokken, Joel F. McIntyre, and Laurans A. Mendelson were elected to serve in Class I, with a term ending in 2002. August W. Henningsen, Dr. Peter Jansen, and James C. Stoecker were elected to serve in Class II, with a term ending in 2003. 2. The issuance of a warrant to LHT to purchase up to 2,500,000 shares of the Company's common stock at a price of $4.25 was approved. This warrant was issued in consideration of a $9.3 million subordinated loan from LHT to the Company in September 2000. 3. The issuance to LHT of 35,582 shares of the Company's common stock was approved. This issuance was in payment of the remaining portion of the accrued and unpaid dividends on the Company's 8% Series C Convertible Preferred Stock that was converted by LHT into common shares of the Company in December 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.59 Letter agreement re terms of employment with James R. Bennett, dated September 26, 2001 10.60 Fourth Amendment to Employment Agreement with Philip M. Panzera, dated September 28, 2001

(b) Form 8-K No reports were filed on Form 8-K during the quarter ended September 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HAWKER PACIFIC AEROSPACE Date: November 14, 2001 By /s/ James R. Bennett -------------------------------------------- James R. Bennett Chief Financial Officer (Principal Financial and Accounting Officer) -13-

HAWKER PACIFIC AEROSPACE 10-Q