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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of each class)
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 NO X
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The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 12, 1998, was approximately
$26,503,460. The number of shares of common stock outstanding on March 12,
1998 was 5,822,222 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
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ITEM 1. BUSINESS
GENERAL
Hawker Pacific Aerospace ("Hawker Pacific" or the "Company") repairs and
overhauls aircraft and helicopter landing gear, hydromechanical components
and wheels, brakes and braking system components for a diverse international
customer base, including commercial airlines, air cargo operators, domestic
government agencies, aircraft leasing companies, aircraft parts distributors
and original equipment manufacturers ("OEMs"). In addition, the Company
distributes and sells new and overhauled spare parts and components for both
fixed wing aircraft and helicopters. During the year ended December 31,
1997, the Company had in excess of 440 customers, several of which have
entered into long-term service contracts with the Company, including Federal
Express Corporation ("FedEx"), American Airlines, Inc. ("American Airlines"),
the United States Coast Guard (the "USCG"), and US Airways, Inc. ("US
Airways"). On February 4, 1998, the Company completed its acquisition (the
"BA Acquisition") of substantially all of the assets of the landing gear
repair and overhaul operations (the "BA Assets") of British Airways plc
("British Airways"). The Company believes the BA Acquisition will provide it
with a base in the United Kingdom from which to expand its international
repair and overhaul operations significantly and position itself to become
the global leader in its markets. See "--Recent Developments."
The Company believes it is well positioned to benefit from the following
aviation industry trends that are driving increased demand for third-party
repair, overhaul and spare parts inventory management services: (i) the
increase in worldwide air traffic associated with the addition of new
aircraft and more frequent use of existing aircraft; (ii) the outsourcing by
aircraft operators of services previously handled internally; (iii) the
break-up of monopolistic aircraft maintenance consortiums; and (iv) an
increase in regulatory pressure and consumer emphasis on the traceability of
aircraft parts.
Hawker Pacific was incorporated in 1980 in California as a distributor
of aircraft parts and certain other consumer products and began providing
aircraft repair and overhaul services in 1987. In November 1996, BTR Dunlop,
Inc. sold all of the outstanding capital stock of the Company to certain of
the Company's current shareholders. See "Certain Relationships and Related
Transactions." Unless the context otherwise requires, all references
henceforth to the "Company" or "Hawker Pacific" shall also include Hawker
Pacific Aerospace Limited, a wholly-owned United Kingdom subsidiary formed in
November 1997. The Company's principal executive offices are located at
11240 Sherman Way, Sun Valley, California 91352, and its telephone number is
(818) 765-6201.
RECENT DEVELOPMENTS
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") through several underwriters represented by
EVEREN Securities, Inc. and The Seidler Companies Incorporated. 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 Registration Statement
for the Offering (Registration No. 333-40295) was declared effective by the
Securities and Exchange Commission (the "SEC") on January 29, 1998. The
Company received net proceeds of approximately $17.8 million net of expenses
of approximately $3.0 million. The Company used approximately $9.2 million
of the net proceeds to fund a portion of the purchase price for the BA Assets
and approximately $7.6 million to repay a portion of the revolving and term
debt previously outstanding under the Company's credit facility. The Company
intends to use the remaining net proceeds for working capital and general
corporate purposes.
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In November 1997, the Company effected a 579.48618 for one stock split
of its outstanding Common Stock and in January 1998, effected a one for
.9907406 reverse stock split of its outstanding Common Stock. Immediately
before the closing of the Offering, all of the outstanding shares of the
Company's Series A Preferred Stock were converted into an aggregate of
250,000 shares of Common Stock. Unless otherwise indicated, the information
set forth in this Annual Report reflects such stock split and reverse stock
split of the Common Stock and the conversion of the Series A Preferred Stock.
ACQUISITION OF CERTAIN ASSETS OF BRITISH AIRWAYS. On February 4, 1998
(the "Acquisition Date"), the Company completed its acquisition of the BA
Assets. The BA Assets represent the assets of British Airways Engineering
used to service landing gear primarily on British Airways' aircraft. The
purchase price for the BA Assets was approximately L11.3 million
(approximately $18.5 million at the Acquisition Date), subject to adjustment
to reflect certain changes to the quantity and condition of the assets
purchased and the potential purchase of one landing gear shipset priced at
L1.8 million ($2.9 million at the Acquisition Date.) As part of the BA
Acquisition, the Company and British Airways entered into a seven-year
exclusive service agreement on February 4, 1998 for the Company to provide
landing gear and related repair and overhaul services to substantially all of
the aircraft currently operated by British Airways.
MARKET AND INDUSTRY OVERVIEW
The aviation aftermarket consists of the servicing and support of
aircraft after delivery of aircraft to operators by OEMs. The Company
provides aftermarket landing gear repair and overhaul services and related
spare parts to a variety of customers in the aviation industry. In March
1997, Dillon Read & Co., Inc. ("Dillon Read") estimated the current global
aviation aftermarket to be $47 billion annually and projected that it would
grow to $60 billion by the year 2000.
INCREASED AVIATION ACTIVITY. Boeing's 1997 Current Market Outlook (the
"Boeing Outlook") projects that global air travel will increase by 75%
through the year 2006. Average passenger seat miles flown are also expected
to increase significantly over the next few years. Further, many new
airlines are expected to commence operations in the United States and abroad,
especially in China and other Asian nations where only a small percentage of
the population has flown to date. In order to accommodate growing demand,
aircraft operators will be required to increase the size of their aircraft
fleets. The Boeing Outlook projects that the global fleet of aircraft will
grow from 11,500 aircraft at the end of 1996 to over 16,000 aircraft in 2006
and 23,000 aircraft in 2016. Increases in passenger travel, air cargo
services and the number of aircraft in service increase the demand for repair
and overhaul services. In addition, the Federal Aviation Administration (the
"FAA") requires aircraft landing gear to be overhauled every seven to ten
years. As a result, the growth in the number of aircraft over the past 15
years is expected to create immediate and consistent demand for landing gear
repair and overhaul services, which will most likely continue as the number
of new aircraft in service grows. Further, because start-up airlines
generally do not invest in the infrastructure necessary to service their
aircraft, such airlines outsource all or most of their repair and overhaul
services.
OUTSOURCING OF REPAIR AND OVERHAUL SERVICES. While the overall air
transportation industry has grown significantly over the past decade,
commercial airlines have not experienced consistent earnings growth over the
same period. As a result, many aircraft operators have recognized
outsourcing as an opportunity to reduce operating costs, working capital
investment and turnaround time. In March 1997, Dillon Read estimated the
outsourced military and government market to be $9 billion and the third
party market to be $12 billion. Outsourcing allows aircraft operators to
benefit from the expertise of service providers such as the Company who have
developed specialized repair techniques and achieved economies of scale
unavailable to individual operators. Additionally, outsourcing allows
aircraft operators to limit their capital investment in infrastructure and
personnel by eliminating the need for the equipment, sophisticated
information systems technology and inventory required to repair and overhaul
landing gear and hydromechanical components effectively. Dillon Read also
estimated in March 1997 that approximately 40%, 35% and 95%, respectively, of
commercial, military and general aviation functions are currently outsourced.
Having recently awarded
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to the Company large contracts for outsourcing of repair and overhaul
services, American Airlines and British Airways exemplify this growing trend.
As aircraft operators continue to become more cost and value conscious, the
Company expects the trend toward outsourcing to continue.
BREAK-UP OF MONOPOLISTIC AIRCRAFT MAINTENANCE CONSORTIUMS. Until
recently, European aircraft operators attempted to realize cost savings by
forming repair consortiums to provide maintenance, repair and overhaul
services for their aircraft. Within these repair consortiums, each member
was responsible for providing the consortium's other members with
maintenance, repair and overhaul services for certain specified aircraft
components. Over time, these members have begun subcontracting their
maintenance, repair and overhaul services to independent service providers
whom they subject to a competitive bidding process to obtain the work. The
Company believes that this trend will provide it with opportunities to expand
substantially its European customer base.
GREATER EMPHASIS ON TRACEABILITY. Due to concerns regarding unapproved
aircraft spare parts, regulatory authorities have focused on the level of
documentation which must be maintained on aircraft spare parts. As a result,
aircraft operators increasingly demand that third party service providers
provide complete traceability of all parts used in the repair and overhaul
process. The sophistication required to track the parts histories of an
inventory consisting of thousands of aircraft spare parts is considerable.
For example, an overhaul of a 747 aircraft shipset requires the handling and
tracking of over 2,500 parts. This has required companies to invest heavily
in information systems technology. The Company has developed and maintains a
proprietary management information system that enables it to comply with its
customer's contract specifications and enables its customers to comply with
governmental regulations concerning traceability of spare parts.
COMPANY OPERATIONS
REPAIR AND OVERHAUL
The primary reasons for removing landing gear or hydromechanical
components from an aircraft for servicing are: (i) the number of takeoffs and
landings or years since a landing gear's last overhaul have reached the time
between overhaul limit and it must be overhauled or (ii) the landing gear or
hydromechanical component has been damaged or is not performing optimally.
The cost of servicing landing gear or hydromechanical components that have
been removed varies depending upon the age and type of aircraft and the
extent of the repairs being performed.
Each overhaul of landing gear can involve numerous separate parts and
work orders. For example, the Boeing 737 nose landing gear calls for over
290 parts and related work orders while the Boeing 747-200 nose gear calls
for over 650 parts and related work orders. Generally, the Company performs
these overhauls in approximately six to eight weeks. Hydromechanical
component overhauls can involve 200 or more parts and over 25 separate work
orders and are performed in approximately two to four weeks. In order to
achieve this throughput, the Company must perform many parallel processes and
integrate numerous components just before final assembly. Completing this
complex overhaul work within the time constraints set by aircraft operators
has led the Company to develop a highly managed systems-driven process, which
is facilitated by its highly specialized management information systems
described in more detail below. The stages of the overhaul process include
the following:
DISASSEMBLY, CLEANING AND INSPECTION. Upon receiving a landing gear
shipset or a hydromechanical component, the Company's technicians disassemble
the unit into its parts, a process which requires special tooling and
expertise. Each part is completely cleaned to allow for comprehensive
inspection, testing and evaluation of part size, structural integrity and
material tolerances. The Company uses a detailed checklist and reporting
procedure to create a work order documenting the state of each part inspected
and indicating the extent of repair or overhaul to be performed. Technicians
tag all parts which need to be replaced or
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reworked and electronically prepare bills of material and requisitions to the
Company's parts and production departments for inventory and scheduling
purposes. An internal sales order is created concurrently with the work
order for shipping, pricing, billing and delivery purposes. The Company
utilizes its management information system throughout this process to reduce
the amount of detailed inspection time required. See "--Management
Information Systems and Quality Assurance."
The work completed in the disassembly and inspection process enables the
Company to obtain detailed information concerning which parts can be reused
or repaired and which must be replaced, as well as the approximate labor
needed to complete the job. The Company's computer system identifies and
tracks the parts and associated work orders from each landing gear or
hydromechanical component throughout the overhaul process in order to
maintain the integrity of the landing gear or hydromechanical component the
Company services. Shop travelers provide a complete, detailed listing of all
repair and overhaul work steps and processes. Once disassembled, the
individual parts are washed, visually inspected for obvious damage and
permanently identified using the internal work order number assigned to that
delivery order. Major and minor parts are then processed for engineering
evaluation and disposition of required repair work steps.
PARTS REWORK, REPLACEMENT AND REASSEMBLY. The next phase of an overhaul
involves reworking existing parts to specifications set by the Company's
customers. This entails a combination of machining, plating, heat treatment,
metal reshaping, surface finishing and restoration of organic finish. At
this phase, each part is accompanied by the customized bar-coded traveler
which facilitates the computerized prioritization and tracking of a part
through the rework phase. Tight control is maintained over scheduling for
each part, enabling the Company to remain within its required turnaround
time. The Company performs the majority of the repair and overhaul
procedures in its facilities using proprietary or specialized repair
techniques. In addition, the Company utilizes in-house manufacturing
capabilities to fabricate certain parts used in the overhaul process that are
otherwise difficult to obtain. If a part cannot be reclaimed, the Company
may install either a new part or a previously-reworked part from inventory.
The Company maintains an inventory of serviceable parts that it has reworked
for this purpose. Overhauling parts or using serviceable parts from
inventory in lieu of new parts generally lowers customer costs and increases
the Company's margins in comparison to an overhaul that consists of
exclusively new spare parts. In addition, these manufacturing and service
capabilities are integral to the Company's competitive position because they
enable the Company to maintain or increase the quality of work performed and
significantly reduce cost and turnaround time relative to its competitors.
INSPECTION AND SHIPPING. After completing the rework phase of the
overhaul/repair process, each part is delivered to the assembly area where
the end unit is assembled, tested and final inspection is completed. Once
the end unit assembly has been accepted through final inspection it is moved
to shipping, where it is packaged and prepared for dispatch.
PRICING. The Company offers its customers different pricing
arrangements for its repair and overhaul services. Pricing generally depends
on the volume and complexity of the work performed, the kind and number of
new or remanufactured spare parts used in the repair or overhaul and the
required turnaround time. For many of its customers, the Company exchanges a
previously overhauled shipset from its inventory for an as-removed shipset
from customer's aircraft upon which the Company charges the customer a fixed
overhaul fee. Upon completing the overhaul of the as-removed shipset, the
Company charges the customer an additional fee for spare parts or extra
services required to overhaul the landing gear to the customer's
specifications. The Company typically bills a substantial portion of the
repair and overhaul fee to the customer up-front upon receiving its
as-removed shipset and generally receives payment for this portion of the
overhaul fee before completing the overhaul. When the Company overhauls a
shipset without exchanging an overhauled gear assembly from its inventory,
the Company charges one fee, which includes all parts and labor charges, upon
delivering the overhauled shipset to the operator. Pursuant to the Company's
standard payment terms, invoices are due within 30 days after receipt. The
Company typically offers a discount of up to 1.5% on payment made within 13
days of receipt of an invoice.
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With certain of its customers for whom the Company regularly provides
parts and services on entire fleets or large numbers of aircraft, the Company
utilizes a flat fee fixed price arrangement which it typically sets forth in
long-term service agreements. Pursuant to the Company's service agreements,
the Company performs repair and overhaul services on a scheduled or as-needed
basis. Pricing depends on the volume and type of aircraft landing gear or
hydromechanical component to be serviced and the required turnaround time.
Under its long-term service agreements, the Company is able to plan in
advance for equipment and inventory requirements and can achieve efficiencies
in labor hours and materials usage relative to the estimate on which the
contract price was based.
PARTS DISTRIBUTION
GENERAL. Aircraft spare parts are classified within the industry as (i)
factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v)
as-removed. A factory new or new surplus part is one that has never been
installed or used. Factory new parts are purchased from manufacturers or
their authorized distributors. New surplus parts are purchased from excess
stock of airlines, repair facilities or other distributors. An overhauled
part has been disassembled, inspected, repaired, reassembled and tested by a
licensed repair facility. An aircraft spare part is classified serviceable
if it is repaired by a licensed repair facility rather than completely
disassembled as in an overhaul. A part may also be classified serviceable if
it is removed by the operator from an aircraft or engine while operating
under an approved maintenance program and is functional and meets any
manufacturer or time and cycle restrictions applicable to the part. A
factory new, new surplus, overhauled or serviceable part designation
indicates that the part can be immediately utilized on an aircraft. A part
in as-removed condition requires functional testing, repair or overhaul by a
licensed facility prior to being returned to service in an aircraft.
PARTS SALES. The Company sells factory new, FAA-approved parts
manufactured by approximately 80 OEMs, including Societe D'Application Des
Machines Motrices ("SAMM"), Dunlop Equipment Division, Parker Hannifin
Corporation ("Parker Hannifin") and Messier-Bugatti and overhauled aircraft
spare parts to a diverse base of customers in the aviation industry. The
Company believes that it provides customers with value added parts
distribution services by offering immediate availability, broad product
lines, technical assistance and additional services.
CUSTOMERS
COMMERCIAL. During the year ended December 31, 1997, the Company served
a broad base of over 440 domestic and international customers in the aviation
industry. The Company's customers include FedEx, American Airlines, US
Airways, United Air Lines, Inc., Continental Airlines, Inc., Continental
Express, Inc. and Westair Commuter Airlines, Inc. The Company's largest
customer, FedEx, accounted for approximately 18.4% of its sales for the year
ended December 31, 1996 and 19.3% for the year ended December 31, 1997. In
1994, the Company entered into an agreement with FedEx, which has been
amended to extend the term to 2007 and to expand the Company's services to
include additional types of aircraft, to provide spare parts and repair and
overhaul services at a fixed price for most aircraft in FedEx's fleet. The
Company also has a seven-year exclusive agreement with American Airlines
expiring in June 30, 2005 to service landing gear on all Boeing 757 aircraft
within its fleet on a flat-fee basis. The Company believes that the
long-term relationships that it has developed with many of its customers
provide the Company with an ongoing base of business and an excellent source
of new business opportunities.
GOVERNMENT CONTRACTS. Sales to the United States government and its
agencies were approximately $4,491,000 (11.5% of revenues) and $2,714,000
(6.6% of revenues) in the years ended December 31, 1996 and December 31,
1997, respectively. The Company's largest government customer has been the
USCG with which the Company has an agreement to provide repair and overhaul
services and spare parts on an as-needed, fixed price basis for the USCG's
Dauphin II helicopters. The agreement is for a one-year term which the USCG
may renew for additional one-year terms through the year 2000. For the years
ended December 31,
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1996 and December 31, 1997, sales to the USCG accounted for approximately
11.2% and 6.5%, respectively, of the Company's revenues. Because government
sales are subject to competitive bidding and government funding, there can be
no assurance that such sales will continue at previous levels. Although the
Company's government contracts are subject to termination at the election of
the government, in the event of such a termination, the Company would be
entitled to recover from the government all allowable costs incurred by the
Company through the date of termination.
MATERIAL CUSTOMERS. FedEx and the USCG were the only customers who
accounted for 10% or more of the Company's total revenues for the year ended
December 31, 1996 (pro forma), and FedEx was the only customer who accounted
for 10% or more of the Company's total revenues for the year ended December
31, 1997. See "--Risk Factors--Customer Concentration; Concentration of
Credit Risks."
The Company does not consider backlog meaningful to its business.
MANAGEMENT INFORMATION SYSTEMS AND QUALITY ASSURANCE
The Company utilizes its management information systems to shorten
turnaround times for customer orders, increase output, improve inventory
management and reduce costs by eliminating duplication of work and reducing
errors in ordering of parts. The system consists of an automated inspection
and routing system, a material resources planning module, a bar-coded shop
floor control module, an inventory control and parts tracing module, a
tooling calibration module and a general accounting module.
The system enables the Company to shorten lead times, increase output
and improve inventory management by allowing the Company to manage and
control the process of detailed parts inspection, materials requisitioning
and work order scheduling and release. The system's database contains much
of the information required to perform landing gear inspection activities,
including illustrated parts catalogues, parts specifications and other
technical data. This has largely eliminated the need to update parts
catalogues manually and allows an inspector using a personal computer located
at his workstation to (i) refer to computer based parts manuals and
catalogues to identify needed parts, (ii) access inventory to check on the
availability of needed parts, (iii) requisition needed parts from inventory
and (iv) create and record an audit trail for all inspected parts and
processes. These features of the system have substantially reduced total
detailed inspection time required in the overhaul process.
Using the system, all materials utilized and labor performed in
connection with a work order are recorded using bar code scanners located
throughout the Company's facility. Work order travelers are generated upon
commencement of a repair or overhaul and accompany the separate parts of each
landing gear or hydromechanical component throughout the overhaul process.
After each stage of the process is completed, the employee who performed the
work records, using the bar code system, the date of completion, his or her
employee identification number, critical dimensions and the quantity
processed, accepted or rejected. For each repair or overhaul that it
performs, the Company records all essential operations and tests conducted,
inspection data on all components repaired, overhauled or exchanged for new
components and the sources of all materials issued during the course of the
work. This function allows the company to provide more accurate cost and
timing estimates to customers, facilitates faster and more accurate
preparation of customer invoices and forms the basis of the Company's
comprehensive quality assurance program. In addition, shoploading and
material requisition personnel receive more accurate planning data. Using
the system, management can plan for material requirements in advance so that
required materials for a specific unit are on hand in time to facilitate
on-time delivery and based upon sales forecasts and actual orders can
optimize daily manpower and materials utilization.
EQUIPMENT MAINTENANCE AND TOOLING
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The Company performs all of the maintenance and repair on the equipment
used in the repair and overhaul process. The Company's maintenance personnel
perform various regularly scheduled maintenance procedures on the Company's
equipment on a weekly, monthly and annual basis, and shift operators perform
daily preventive maintenance. Precision measurement accessories installed on
certain machines, which require periodic calibration, are maintained and
serviced by approved vendors and closely monitored by the Company.
The Company invests significant material and resources to design and
construct tooling and fixtures to support its current product line and
improve the efficiency of the repair and overhaul process.
Manufacturer-designed tooling is typically limited to specialized tools to
aid in the disassembly, assembly and testing of a landing gear assembly, such
as spanner wrenches and seal installation tools. From time to time, the
Company's employees may develop modifications to existing tooling or ideas
for new tooling and fixtures in order to accomplish a specific machining or
testing operation or to improve the performance of the overhaul process.
Tooling and fixtures used in machining and plating operations are conceived,
designed and fabricated in-house by the technical personnel involved in the
Company's daily operations to improve the labor efficiency of a process and
reduce the cost of performing a repetitive process. The Company believes
that its ability to design and fabricate tooling used in its operations
allows it to maximize efficiencies and enables its customers to realize cost
savings and improved turnaround time.
SUPPLIERS AND PROCUREMENT PRACTICES
The primary sources of parts and components for the Company's overhaul
operations and parts distribution business are domestic and foreign airlines,
OEMs and aircraft leasing companies. The supply of parts and components for
the Company's aftermarket sales is affected by the availability of excess
inventories that typically become available for purchase as a result of new
aircraft purchases by commercial airlines, which reduce the airline's need
for spares supporting the aircraft that have been replaced. Aftermarket
supply is also affected by the availability of new parts from OEMs and the
availability of older, surplus aircraft that can be purchased for the value
of the major parts and components. Although the Company does not have fixed
agreements with the majority of its suppliers, it is frequently able to
obtain significant price discounts from many of its suppliers because of the
volume and regularity of its purchases. The Company has ten-year agreements
with Dunlop Limited, Aviation Division and Dunlop Equipment Division
(collectively, "Dunlop") that enable it to purchase Dunlop parts at a
discount from list price 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 December 31, 1997, Dunlop accounted for approximately
27% and 19.3%, respectively, of the total dollar amount of parts purchased by
the Company. The Company also has agreements with Messier-Bugatti, SAMM and
Eurocopter France that enable the Company to purchase new aircraft parts at
discounts from list price.
Although the Company does not have agreements with many of its suppliers
and competes with other parts distributors for production capacity, the
Company believes that its sources of supply and its relationships with its
suppliers are satisfactory. While the loss of any one supplier could have a
material adverse effect on the Company until alternative suppliers are
located and have commenced providing products, alternative suppliers exist
for substantially all of the parts purchased by the Company. See "--Risk
Factors--Dependence on Key Suppliers."
The Company has developed procurement practices to ensure that all
supplies received conform to contract specifications. For cost, quality
control and efficiency reasons, the Company generally purchases supplies only
from vendors with whom the Company has on-going relationships and/or whom the
Company's customers have previously approved. The Company has qualified
second sources or has identified alternate sources for all of its supplies.
However, the inability or delay in obtaining needed parts on a timely basis
could have a material adverse effect on the Company. The Company chooses it
vendors primarily based on the quality of the parts supplied and record for
on-time performance. The Company regularly evaluates and audits its approved
vendors based on their performance. Repeated failures to comply with the
Company's
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quality and delivery requirements may ultimately cause the Company to remove
a vendor from its approved vendor list.
SALES AND MARKETING
The Company's sales and marketing strategy is designed to target
commercial and government customers with large fleets of aircraft that
require regular repair and overhaul of landing gear parts and components. In
recent years, the Company has significantly expanded its direct sales efforts
toward the goal of increasing its sales from its existing customer base as
well as attracting new customers. In particular, the Company focuses its
sales efforts on encouraging its existing and prospective customers to enter
into long-term agreements with the Company for the repair and overhaul of
landing gear on all aircraft within a fleet, or alternatively, to engage the
Company to perform repair and overhaul services on several aircraft at once.
In its sales and marketing efforts, the Company emphasizes its competitive
strengths, including its superior quality of service, competitive pricing,
rapid turnaround time and extensive industry experience.
The Company markets and sells its products and services worldwide both
directly through an in-house sales staff and indirectly through a network of
independent sales representatives which at December 31, 1997 consisted of
approximately 11 employees and 11 sales representatives, respectively. Air
Resources, Inc., an aviation sales representative agency ("Air Resources"),
markets and sells the Company's products and services to a number of domestic
airlines in return for a commission on sales made through Air Resources'
efforts. The Company's domestic sales are conducted primarily by Air
Resources, which focuses its efforts on major domestic commercial carriers,
as well as the Company's in-house sales force. The Company conducts its
international sales and marketing through a number of independent agencies
based worldwide in such countries as France, Sweden, Mexico and India.
Additionally, senior management plays an active role in marketing several of
the Company's product lines. The Company's President and Chief Executive
Officer, David L. Lokken oversees its sales activities, while the Company's
indirect and direct sales representatives report directly to Brian S. Carr,
Managing Director of Sun Valley Operations, for landing gear sales and
Michael A. Riley, Vice President-Hydromechanical Business Unit, for
hydromechanical component sales. The Company's sales staff works closely
with engineering and customer support personnel to provide cost effective
solutions to maintaining landing gear, stressing the Company's repair and
overhaul engineering expertise, turnaround times and component overhauling
capabilities.
In addition, the Company actively participates in many of the major
aviation industry gatherings and air shows and hosts groups of aircraft
operators at technical and other meetings. In certain instances, the Company
bids on government contracts for certain lines through its government
contracts department, which coordinates with the Company's sales and
marketing team.
GROWTH STRATEGY
The key elements of the Company's growth strategy include the following:
PURSUE ADDITIONAL INTERNATIONAL GROWTH OPPORTUNITIES. The Company
believes that the international aviation aftermarket presents the greatest
potential for substantial growth. With the hydromechanical repair and
overhaul services that it performs from its Netherlands facility and the
large air transport repair and overhaul operations that it has established
through the recent BA Acquisition, the Company believes it will be able to
provide customers with a full range of repair and overhaul services in
Europe. In addition, the Company believes that the break-up of aircraft
maintenance consortiums will create opportunities for the Company to expand
its European, Middle Eastern and Asian customer bases. With facilities
located in the United Kingdom and California, the Company believes that it
will be geographically positioned to pursue additional growth opportunities
in both the European and Asian aviation aftermarkets.
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FOCUS ON LONG-TERM SERVICE AGREEMENTS. Through increased sales and
marketing efforts, the Company is actively seeking to enter into long-term
service agreements with its existing and potential customers to provide its
services for all of their respective aircraft. A recent example of the
Company's success in this area includes the Company's September 1997
seven-year exclusive agreement with American Airlines to service landing gear
on all Boeing 757 aircraft within its fleet. While long-term agreements are
often terminable on short notice, the Company believes that securing
long-term service agreements with customers will provide it with a more
predictable and consistent flow of business and enable it to improve its
profit margins from fixed wing operations.
EXPAND EXISTING OPERATIONS. Hawker Pacific seeks to increase sales and
operating income by marketing its landing gear repair and overhaul services
to new and existing customers and expanding its hydromechanical component
product lines. Boeing projects that the global fleet of aircraft will grow
from 11,500 aircraft at the end of 1996 to over 16,000 aircraft in 2006 and
23,000 aircraft in 2016. The Company plans to expand its landing gear repair
and overhaul operations in order to capitalize on this growth trend. Because
the Company believes that improved profit margins in fixed wing operations
are primarily a function of increased volume, it plans to expand its capacity
to perform fixed wing landing gear repair and overhaul services. The Company
also intends to expand its hydromechanical component service offerings
particularly through increased capabilities resulting from the BA
Acquisition. The Company recently began to offer repair and overhaul of
constant speed drive-integrated drive generators after having expended
minimal funds to initiate these operations.
ACCELERATE GROWTH THROUGH ACQUISITION. The Company intends to evaluate
and pursue strategically located companies with technology, equipment and
inventory that complement or expand the Company's existing operations and
that may enable it to expand into new geographic or product markets. In
particular, the Company seeks to acquire companies that will enable it to
expand its international operations or to increase its product offerings.
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 arms of OEMs, the maintenance
departments or divisions of large air carriers (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 ("AAR"), 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 Sunstrand, 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, the ability to perform repairs and overhauls
within a rapid and reliable 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 or results of operations. See "--Risk
Factors--Substantial Competition."
GOVERNMENT REGULATION
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The Company is highly regulated worldwide by the FAA, the Joint
Airworthiness Authority, a consortium of European regulatory authorities (the
"JAA"), 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 all aircraft to be
maintained under continuous condition monitoring programs and periodically to
undergo thorough inspection. 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 conditions and results of operations. In
addition, if new and more stringent regulations are adopted by foreign or
domestic regulatory agencies or oversight of the aviation industry is
increased in the future the Company's business may be materially and
adversely affected. See "--Risk Factors--Government Regulation."
ENVIRONMENTAL MATTERS AND PROCEEDINGS
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 "EPA"), 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 regulations, 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 significant 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. See "--Risk Factors--Environmental
Regulations."
In October 1993, the United States of America and the State of
California each filed lawsuits in the United States District Court for the
Central District of California, against the Company and the owners (the
"Owners") of one of the Company's facilities (the "Site"). The lawsuits (the
"SFVB Actions") alleged that the groundwater in the San Fernando Valley Basin
("SFVB") had been contaminated with volatile organic compounds and other
hazardous substances released from the Site, requiring costly investigation,
evaluation and remediation efforts for which the Company and the Owners were
liable. In February 1997, the Company
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entered into settlements with the United States of America and State of
California pursuant to which the Company paid the EPA $382,500 and the State
of California $40,950 in June 1997. The Company believes that it will not be
liable to the United States government or the State of California for any
future costs related to this matter, and the California Regional Water
Quality Control Board recently notified the Company of its conclusion that
soil contamination at the Site does not represent a significant threat to
groundwater quality and cannot be determined with certainty. BTR Dunlop,
Inc., the former owner of the Company ("BTR"), has agreed to indemnify the
Company against any future amounts for which the Company may be responsible
in connection with the SFVB Actions. See "Certain Transactions--Acquisition
of the Company from BTR."
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 area 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 believes that it shall
be entitled to indemnification from BTR in the event the Company is held
responsible for any damages in connection therewith. See "Legal Proceedings."
EMPLOYEES AND EMPLOYEE TRAINING
As of December 31, 1997, the Company had 239 employees of whom
approximately 15 are in management, 54 are engineering and technical
personnel, 132 are direct labor personnel, 11 are in sales and marketing and
27 are administrative personnel. The Company is not currently a party to any
collective bargaining agreements. In connection with the BA Acquisition,
however, the Company is required to enter into collective bargaining
agreements in the United Kingdom. The Company believes that its
relationships with its employees are generally good.
Each of the Company's technical employees receives specific training in
the individual repair and overhaul functions that he or she performs, in
addition to comprehensive general training in total quality management
procedures, statistical process control and material resource planning. The
Company also regularly conducts in-house training programs, which the
Company's management designs using standard industry practice manuals, for
its technical and engineering employees on a number of subjects, including
materials handling, corrosion prevention and control, surface tension etch
inspection and shot peening.
RISK FACTORS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995.
THIS ANNUAL 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 SECTION
ENTITLED "RISK FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS ANNUAL
REPORT. IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS ANNUAL
REPORT, PERSONS WHO MAY OWN OR INTEND TO OWN SECURITIES OF THE COMPANY SHOULD
CAREFULLY CONSIDER THE FOLLOWING 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
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aviation activity, a decrease in outsourcing by aircraft operators or the
failure of projected market growth to materialize or continue. 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. See
"Business--Market and Industry Overview."
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, 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.
RISKS RELATING TO ACQUISITION STRATEGY; ESTABLISHMENT OF UNITED KINGDOM
OPERATIONS
In February 1998, the Company acquired the BA Assets using approximately
$9.2 million of the proceeds from the Offering. See "Business--Recent
Developments--Acquisition of Certain Assets of British Airways" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources." 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, including the BA
Acquisition. The Company evaluates acquisition opportunities from time to
time, but the Company has not entered into any commitments or binding
agreements to date, except with respect to the BA 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, including the BA Acquisition, into its operations.
The Company has 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. The likelihood of the success of the Company's United Kingdom
operations must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection
with a new business. These include, without limitation, the need to
establish manufacturing, marketing and administrative capabilities, the need
to implement the Company's management information systems in its new
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location, the need to locate and move into a new facility, unanticipated
marketing problems, new competitive pressures and expenses.
RISKS ASSOCIATED WITH EXPANSION OF INTERNATIONAL OPERATIONS
The Company's growth strategy is based in large part on the Company's
ability to expand its international operations, which will require
significant management attention and financial resources. The Company
currently has a division in the Netherlands, and through the BA Acquisition,
the Company 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 intentional end-users and, consequently, the Company's business,
operating results and financial condition.
The Company's sales are principally denominated in United States dollars
and to some extent in Dutch guilders, and the Company expects to make
material sales in British pounds as a result of the BA Acquisition. The
Company makes substantial inventory purchases in French francs from such
suppliers as Messier-Bugatti, Societe D'Applications Des Machines Motrices
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 expects to conduct business 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 or as result of inflation in
particular countries where material expenses are incurred.
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 arms of 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 Sunstrand, 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.
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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 or results of operations. See
"Business--Competition."
GOVERNMENT REGULATION
The Company is highly regulated worldwide by the Federal Aviation
Administration, the Joint Airworthiness Authority, 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 inspection. 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 conditions 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
10-year agreements that each expire in October 2006 with (i) Dunlop Limited,
Aviation Division, (ii) Dunlop Limited, Precision Rubber and (iii) Dunlop
Equipment Division. 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 $5,634,000
(27%) and $4,301,000 (19.3%), respectively, of the spare parts and components
that the Company purchased in such periods. 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.
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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 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. 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. See
"Business--Customers."
At December 31, 1997, 18.9% and 6.1%, respectively of the Company's
total accounts receivable were associated with two customers, FedEx and
British Airways. At December 31, 1996, 7.4% and 9.3%, respectively of the
Company's total accounts receivable were associated with FedEx and the USCG.
As a result of the BA Acquisition, British Airways accounts for a significant
percentage of both the Company's products 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.
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 EPA, 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
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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. See
"Business--Environmental Matters and Proceedings" and "Legal Proceedings."
PRODUCT 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, 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 Lokken, President and Chief
Executive Officer, Brian Aune, Vice President and Chief Financial Officer,
Brian Carr, Managing Director of Sun Valley Operations, or Michael 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
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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. See "Business--Employees and Employee Training" and
"Directors and Executive Officers of the Registrant."
CURRENT DEPENDENCE ON PRIMARY FACILITIES; RISK ASSOCIATED WITH FACILITIES
REORGANIZATION
The Company's ability to manufacture repair parts and components and to
perform its repair and overhaul operations depends upon the use of the
Company's machinery and equipment at its Sun Valley, California, facility.
Accordingly, any material disruption in the operations of its Sun Valley,
California facility would have a material adverse effect on the Company's
business, financial condition and results of operations. Such interruption
or disruption could occur due to malfunctions in machinery or equipment, or
to natural disasters, such as earthquakes or fires.
The Company is in the process of expanding its plating operations at its
Sun Valley facilities, which is not expected to be completed until the end of
1998. Any failure or delay in the expansion of its plating operations as
currently planned, however, could significantly impair the Company's ability
to manage its rapid growth and could have a material adverse affect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources" and "Properties."
CONTROL BY EXISTING SHAREHOLDERS AND ANTI-TAKEOVER PROVISIONS
As of March 12, 1998, the five shareholders (the "Unique Shareholders")
of Unique Investment Corporation ("Unique") beneficially owned in the
aggregate approximately 40.4% of the Company's outstanding Common Stock, and
by virtue of such ownership, 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. See "Security Ownership of Certain Beneficial Owners and
Management."
STOCK PRICE VOLATILITY
In recent years, the stock market has experienced significant price and
volume fluctuations. These fluctuations, which are often unrelated to the
operating performances of specific companies, have had a substantial effect
on the market price of stocks, particularly for many small capitalization
companies. Accordingly, the factors described in this Risk Factors section
or market conditions in general may cause the market price of the Company's
Common Stock to fluctuate, perhaps substantially.
ITEM 2. PROPERTIES
The Company's principal executive offices and production facilities are
located in Sun Valley, California. The Company occupies the premises,
comprising approximately 193,000 square feet and nine buildings pursuant to
various long-term leases that expire on dates ranging between 2004 and 2010
and require the Company to make monthly rent payments ranging from $4,727 to
$38,200.
The Company also leases a facility comprising approximately 8,000 square
feet near Amsterdam, Netherlands from which it performs, hydraulic repairs on
rotor and fixed wing aircraft. The lease expires
18.
<PAGE>
in 1998 after which the Company plans to move to new and larger facilities.
The Company believes that a facility will be available on terms acceptable to
the Company.
The Company believes that its facilities satisfy its current needs. As
part of its internal growth strategy, however, the Company in early 1998
reorganized and reconfigured its Sun Valley, California location to meet its
growth needs and increase the efficiency of its operations. Beginning in
1998, the Company also plans to expand its plating operations at its Sun
Valley facility. In addition, the Company is currently looking for a
facility in the United Kingdom to house its new United Kingdom operations.
Any failure or delay in completing the expansion of plating operations as
currently planned, or locating and organizing a facility in the United
Kingdom, however, could significantly impair the Company's ability to manage
its growth and could have a material adverse affect on the Company's
business, financial condition and results of operations. See "--Risk
Factors--Risk Associated With Facilities Reorganization" and "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
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 area 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 believes that it shall
be entitled to indemnification from BTR in the event the Company is held
responsible for any damages in connection therewith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1997,
the shareholders of the Company approved the following matters: (i) the
implementation of the Company's 1997 Stock Option Plan; (ii) the grant of
Management Stock Options to the Company's executive officers; (iii) the
adoption of the Company's Amended and Restated Bylaws; (iv) the conversion of
Melanie L. Bastian's shares of Series A Preferred Stock into shares of Common
Stock; and (v) the adoption of the Amended and Restated Articles of
Incorporation of the Company which, among other things, provided for the
change in the Company's name, increased the number of authorized shares of
the Company's common and preferred stock and effectuated a 579.481618 for one
stock split of the outstanding Common Stock. Each of these matters was
approved by all of the Company's shareholders by unanimous written consent.
19.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "HPAC." The high and low bid prices as reported by The Nasdaq Stock
Market during the period from January 29, 1998, the date public trading of the
Company's Common Stock commenced, to March 12, 1998 were $11.125 and $8.00,
respectively. Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Before January 29, 1998, there was no
established public trading market for the Company's Common Stock.
As of March 12, 1998, there were 15 holders of record of the Company's
Common Stock, which management believes held beneficially for over 400 holders.
The Company has not paid cash dividends on its Common Stock since its
inception and has no current plans to pay dividends on its Common Stock in
the foreseeable future. The Company intends to reinvest future earnings, if
any, in the development and expansion of its business. The Company's current
bank credit facility prohibits the payment of dividends. Any future
determination to pay dividends will depend upon the Company's combined
results of operations, financial condition and capital requirements and such
other factors deemed relevant by the Company's Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a table of recent option grants and sales of unregistered
securities:
<TABLE>
<CAPTION>
EFFECTIVE DATE
OF ISSUANCE ISSUED TO NUMBER AND TYPE OF SECURITY CONSIDERATION
- - -------------- --------- --------------------------- -------------
<S> <C> <C> <C>
November 1997 Four executive officers Options to Purchase 115,365 Services Rendered
shares at $8
February 1998 A principal shareholder 250,000 shares of Conversion of 400 shares
Common Stock of Series A Preferred Stock
issued in connection with
the BTR Transaction, for
which Ms. Bastian paid $2,000,000
November 1997 Employee Stock Options Options to purchase Services rendered
to employees, including 259,572 shares at $8
four executive officers
September 30, 1997 A principal shareholder 49,948 shares of $500,000
Common Stock
October 10, 1997 A principal shareholder 51,671 shares of $500,000
Common Stock
</TABLE>
The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act
of 1933, as amended, by virtue of Section 4(2) thereof as transactions not
involving public offerings. No underwriters were engaged in connection with
any of the foregoing offers or sales of securities and no commissions were paid
in connection with such sales.
20.
<PAGE>
USE OF PROCEEDS
On January 29, 1998, the Company commenced the initial public offering
of 2,766,667 shares of its Common Stock, pursuant to the Company's
Registration Statement on Form S-1, as amended (the "Registration Statement")
(Registration No. 333-40295), which was declared effective under the
Securities Act of 1933, as amended, by the Securities and Exchange Commission
on January 29, 1998. The underwriters of the Offering were represented by
EVEREN Securities, Inc. and The Seidler Companies Incorporated, acting as
managing underwriters. All 2,600,000 shares of Common Stock registered under
the Registration Statement for the account of the Company (consisting of an
aggregate offering price of $20,800,000) and all 166,667 shares registered
for the account of the selling shareholder (consisting of an aggregate
offering price of $1,333,336) were sold in the Offering. In addition, on
February 24, 1998 the underwriters exercised their option to purchase 415,000
additional shares of Common Stock to cover over-allotments in connection with
the Offering. All of the 415,000 shares of Common Stock sold pursuant to the
over-allotment option were registered for the account of the selling
shareholder of the Company (consisting of an aggregate offering price of
$3,320,000). The Offering has terminated.
The Company incurred the following expenses in connection with the
Offering (excluding expenses incurred by the selling shareholder):
<TABLE>
<CAPTION>
Category of Expense Amount of Expense
- - ------------------- -----------------
<S> <C>
Underwriting discounts
and commissions $1,456,000
Finders' fees -0-
Expenses paid to or for
underwriters 221,000
Other expenses 1,323,000
----------
Total expenses $3,000,000
----------
----------
</TABLE>
None of the expenses incurred by the Company in connection with the Offering
was paid to directors, officers, ten percent shareholders or affiliates of
the Company.
Of the total net proceeds in the amount of approximately $17.8 million
received by the Company from its sale of 2,600,000 shares of Common Stock in
the Offering, the following amounts were used from the date of the Offering
through March 12, 1998:
<TABLE>
<CAPTION>
Category of Use Amount of Use
- - --------------- -------------
<S> <C>
Acquisition of other businesses $9.2 million
Repayment of Indebtedness $7.6 million
Working capital $1.0 million
</TABLE>
None of the net proceeds to the Company of the Offering was paid to
directors, officers, ten percent shareholders or affiliates of the Company.
Other than the use of $9.2 million and $7.6 million of the net proceeds from
the Offering for the BA Acquisition and the repayment of indebtedness,
respectively, instead of $11 million and $6 million as described in the
Registration Statement, the foregoing use of proceeds does not represent a
material change from the use of proceeds as described in the Registration
Statement.
21.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain financial data which should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere herein. For
the years ended December 31, 1993, 1994, 1995 and the ten months ended
October 31, 1996 the Company was a wholly owned subsidiary of BTR Dunlop
Holdings, Inc. and is presented below as the "Predecessor" financial data.
Effective November 1, 1996, the Company was acquired by the Unique
Shareholders and the Company's executive officers. All financial data
subsequent to October 31, 1996 is presented below as the "Successor"
financial data.
The balance sheet data as of December 31, 1995, 1996 and 1997 and the
statement of operations data for the fiscal year ended December 31, 1995, the
ten months ended October 31, 1996, two months ended December 31, 1996 and
year ended December 31, 1997 are derived from the financial statements of the
Company which have been audited by Ernest & Young LLP, independent
accountants, and are included elsewhere herein. The balance sheet data as of
December 31, 1993 and 1994 and the statement of operations for the year ended
December 31, 1993 and 1994 are derived from unaudited financial statements,
which are not presented elsewhere herein. The pro forma statements of
operations data for the year ended December 31, 1996 are derived from the
unaudited pro forma statement of operations included elsewhere herein. The
unaudited financial statements have been prepared by the Company on a basis
consistent with the Company's audited financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the Company's
results of operations for the period.
<TABLE>
<CAPTION>
Predecessor(1) Successor(1)
------------------------------------------------ ---------------------------------------
Ten Months Two Months
Year Ended December 31, Ended Ended Year Ended December 31,
---------------------------------- October 31, December 31, -------------------------
1993(2) 1994(2) 1995(3) 1996(4) 1996 1996 1997
------- -------- -------- ----------- ------------- ---------- -----------
(Pro forma)(4)(5)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATION DATA: (In thousands, except share and per share data)
Revenues.............................. $29,757 $31,743 $35,012 $32,299 $ 6,705 $ 39,004 $ 40,042
Cost of revenues...................... 25,055 24,825 28,993 27,027 4,599 31,799 31,430
------- -------- -------- ----------- ------------- ---------- -----------
Gross profit.......................... 4,702 6,918 6,019 5,272 2,106 7,205 9,612
Selling, general and
administrative(6).................... 3,861 5,332 4,837 5,044 1,059 6,161 5,897
Restructuring charges(4).............. - - - 1,196 - 1,196 -
------- -------- -------- ----------- ------------- ---------- -----------
Income (loss) from operations......... 842 1,586 1,182 (968) 1,047 (152) 3,715
Interest expense, net................. (1,033) (507) (1,598) (1,609) (196) (2,305) (2,428)
Miscellaneous (net)................... - - - - - - (32)
------- -------- -------- ----------- ------------- ---------- -----------
(192) 1,079 (416) (2,577) 851 (2,457) 1,255
Income tax expense (benefit)(7)....... (24) 29 (680) (971) 382 (934) 467
------- -------- -------- ----------- ------------- ---------- -----------
Net income (loss)..................... $ 168 $ 1,050 $ 264 $(1,606) $ 469 $ (1,523) $ 788
------- -------- -------- ----------- ------------- ---------- -----------
------- -------- -------- ----------- ------------- ---------- -----------
Pro forma net income (loss) per
share................................ 0.15 $ (0.48) $ 0.25
------------- ---------- -----------
------------- ---------- -----------
Weighted average shares outstanding... 3,170,551 3,170,551 3,145,079
<CAPTION>
Predecessor (1) Successor (1)
--------------------------------- ---------------------
December 31, December 31
--------------------------------- ---------------------
1993 1994 1995 1996 1997
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... 4,070 9,966 $13,289 7,225 3,744
Total assets.......................... 22,802 25,865 35,455 35,178 40,898
Total long-term debt (excluding
current portion...................... 13,754 21,404 27,310 19,150 17,700
Total shareholders' equity............ 266 (1,182) (917) 2,509 4,297
</TABLE>
22.
<PAGE>
- - ----------------------
(1) Predecessor information represents the historical financial data of the
Company when it was owned by BTR. Successor information represents the
historical financial data after the BTR Transaction. See "Certain
Transactions -- Acquisition of the Company from BTR" and Note 1 of Notes
to Financial Statements.
(2) Effective January 1, 1994 certain assets, liabilities and operations of
Dunlop Aviation were merged into the Company. The merger was treated
similarly to a pooling of interest for accounting purposes and,
accordingly, the financial data as of and for the year ended December 31,
1993 includes those assets, liabilities and operations as if the merger
occurred on January 1, 1993. Included in selling, general and
administrative expenses for the year ended December 31, 1994 are
approximately $501,000 of merger related expenses.
(3) Fiscal 1995 includes a non-recurring charge to cost of revenues of
$927,000 for disposal of inventory related to the Dunlop Merger which had
operations in Chatsworth, CA and Miami, FL. Fiscal 1995 also includes a
net gain of approximately $300,000 included in selling, general and
administrative expenses, which represents an operating expense of $700,000
offset by an insurance reimbursement of $1,000,000 related to the EPA
Claim for which the Company has been fully indemnified by BTR. The
estimated total net cost of the EPA Claim recorded in fiscal 1995 was
based on the information available at that time. See "Business --
Environmental Matters and Proceedings" and Notes 1 and 6 of Notes to
Financial Statements.
(4) Restructuring charges during the ten months ended October 31, 1996 relate
to costs incurred to shut down discontinued operations of Dunlop Miami.
See Note 10 of Notes to Financial Statements. In addition, the ten months
ended October 31, 1996 and the pro forma year ended December 31, 1996
include a non-recurring charge of $489,000 to cost of revenues for the
disposal of inventory related to the shutdown of Dunlop Miami and a non-
recurring charge to cost of revenues of $574,000 for non-productive
inventory of the Company.
(5) The pro forma presentation gives effect to the BTR Transaction as though
it had occurred on January 1, 1996.
(6) Included in selling, general and administrative expenses for the ten
months ended October 31, 1996 and the pro forma year ended December 31,
1996 are expenditures related to the EPA Claim of approximately $947,000.
For the years ended December 31, 1993 and 1994 selling, general and
administrative expenses included $122,000 and $410,000, respectively, for
expenditures related to the EPA Claim. No such costs were incurred during
the two months ended December 31, 1996 or the year ended December 31,
1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
(7) Income tax expenses for the two months ended December 31, 1996 and the
year ended December 31, 1997 include provisions of $382,000 and $467,000,
respectively, primarily due to changes in deferred tax assets. No tax is
actually payable for such provisions. See Note 4 of Notes to Financial
Statements.
23.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO AND THE OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. WHEN USED IN THE
FOLLOWING DISCUSSIONS, THE WORDS "BELIEVES", "ANTICIPATES", "INTENDS",
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED,
INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "BUSINESS--RISK FACTORS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.
OVERVIEW
CORPORATE HISTORY. The Company commenced operations in August 1980 as a
California "C" corporation to provide aircraft parts sales to the aviation
industry and began providing repair and overhaul services in 1987. In 1991,
BTR, a United Kingdom company, acquired the Company, and in January 1994, BTR
merged the Company with the operations of another wholly owned subsidiary of
BTR, Dunlop Aviation, Inc., which had operations in Chatsworth, California
and Miami, Florida. The more profitable operations of Dunlop were absorbed
into the Company's Sun Valley, California operation to achieve economies of
scale and full service capability. The Company closed Dunlop Chatsworth in
February 1994 and, as a result, incurred significant integration expenses
during that year. The Company incurred inventory obsolescence costs during
1995 and closed Dunlop Miami in 1996 and, as a result, incurred restructuring
expenses and inventory valuation charges during 1996. These charges
adversely impacted financial results for 1994, 1995 and 1996. In November
1996, BTR sold the Company for $29.8 million to Aqhawk, Inc., an entity
wholly-owned by the shareholders of Unique Investment Corporation and the
Company's executive officers.
RECENT EVENTS. On February 3, 1998, the Company completed an initial
public offering of 2,766,667 shares of Common Stock at an offering price of
$8 per share. The Company received net proceeds from the offering of $18.3
million. $9.2 million of this amount, together with proceeds from the
Company's amended loan agreement with Bank of America National Trust and
Savings Association, were used to acquire British Airways' landing gear
operation in the United Kingdom for approximately $18.5 million. This
acquisition will be accounted for as a purchase of assets. The balance of
the net offering proceeds was used to pay down existing indebtedness and for
working capital. See "Liquidity and Capital Resources."
EXPANSION INTO WIDE-BODY COMMERCIAL AIRCRAFT. The Company's operating
strategy has been to increase higher margin wide-body landing gear repair and
overhaul services. In that regard, revenues for the years ended December 31,
1997, December 31, 1996 (pro forma) and December 31, 1995 increased 20.2%,
51.5% and 30.7%, respectively, over their respective prior years. The
increases resulted from the Company's $6.3 million capital investment program
in 1994 and 1995 to expand landing gear repair capabilities for wide-body
aircraft, such as the Boeing 747, 757, 767, DC10, MD10 and MD11, and Airbus
models A310 and A320. These expenditures included expenses for facility
improvements, purchase of machinery to handle larger landing gear and the
purchase of rotable assets (i.e., landing gear shipsets exchanged with
customers for an exchange fee).
The Company's efforts to increase its wide-body business led to a number
of key new contracts. On September 9, 1997, the Company signed a seven-year
exclusive contract to provide wide-body landing gear repair and overhaul
services to American Airlines, Inc. to service landing gear on all Boeing 757
aircraft within its fleet. Performance under this new contract began in
February 1998. In December 1997, the Company entered into an amendment to its
existing contract with FedEx to extend the term of the contract to 2007.
This amendment includes service of FedEx's fleet of Airbus A310 aircraft and
FedEx's program to convert DC10 passenger aircraft to MD10 cargo carriers.
24.
<PAGE>
In February 1998, in connection with the purchase of the British Airways
landing gear operations, the Company entered into an exclusive seven-year
service agreement to provide landing gear, flap track and flap carriage
repair and overhaul services to substantially all of the aircraft operated by
British Airways.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for
the periods indicated.
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ -------------------
$ % $ % $ %
------- ------ ------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $35,012 100.0% $39,004 100.0% $41,042 100.0%
Cost of revenues 28,993 82.8% 31,799 81.5% 31,430 76.6%
------- ------ ------- ------ ------- ------
Gross profit 6,019 17.2% 7,205 18.5% 9,612 23.4%
Selling general and administrative expenses 4,837 13.8% 6,161 15.8% 5,897 14.4%
Restructuring charges related to closure of
Dunlop Miami operations - - 1,196 3.1% - -
------- ------ ------- ------ ------- ------
Operating income (loss) 1,182 3.4% (152) -0.4% 3,715 9.0%
Interest expense, net (1,598) -4.6% (2,305) -5.9% (2,428) -5.8%
Other expense, net - - - - (32) -0.1%
------- ------ ------- ------ ------- ------
Income (loss) before income taxes (416) -1.2% (2,457) -6.3% 1,255 3.1%
Income tax expense (benefit) (680) -1.9% (934) -2.4% 467 1.1%
------- ------ ------- ------ ------- ------
Net income (loss) $ 264 0.7% $(1,523) -3.9% $ 788 2.0%
------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31,
1996
REVENUES. Revenues for the year ended December 31, 1997 increased
$2,038,000 or 5.2% to $41,042,000 from $39,004,000 for the year ended
December 31, 1996. The increase was a result of a 20.2% increase in landing
gear repair and overhaul services offset by reductions resulting from the
Company's closure of the Dunlop Miami operations and rationalization of
unprofitable product lines. Landing gear repair and overhaul revenues
increased to $18,927,000 and accounted for 46.1% of total revenues for 1997,
as compared to $15,745,000 or 40.4% of total revenues for 1996. The increase
in landing gear repair and overhaul revenues was attributable to increases in
business from FedEx's MD10 freighter conversion program and new wide-body
repair and overhaul business from British Airways and American Airlines.
Fixed wing aircraft and helicopter repair and overhaul declined 0.9% to
$13,195,000 or 32.1% of total revenues for 1997 from $13,310,000 or 34.1% of
total revenues for 1996. This decline was attributable to a reduction in
helicopter repair and overhaul business from the USCG, in part due to the
modifications performed by the Company in 1996 and 1997 to extend the time
between overhauls for the USCG fleet of Dauphin II helicopters. Wheels,
brakes and braking system component repair and overhaul increased 9.8% to
$5,393,000 or 13.1% of total revenues for 1997 from $4,913,000 or 12.6% of
total revenues for 1996.
For the year ended December 31, 1997, repair and overhaul services
accounted for 92.5% of total revenues, as compared to 90.2% for 1996.
Revenues from spare parts distribution and sales accounted for 7.5% of total
revenues for 1997, as compared to 8.6% for 1996. This decline was a result
of the Company's decision to close the Dunlop Miami operations and
discontinue the low margin Dunlop aircraft tire distribution business, which
contributed to improvements in operating profits.
25.
<PAGE>
GROSS PROFIT. Gross profit for the year ended December 31, 1997
increased 33.4% to $9,612,000 from $7,205,000 for 1996. Gross profit as a
percent of revenues increased to 23.4% for the year ended December 31, 1997
compared to 18.5% for 1996. This increase was primarily due to (i) improved
throughput and economies of scale achieved from increased revenues in
wide-body landing gear repair and overhaul services, (ii) development of the
Company's higher margin fixed wing aircraft and helicopter hydromechanics
products and (iii) discontinuing the unprofitable Dunlop Miami operations,
which adversely impacted gross profit in 1996 as a result of charges to cost
of revenues for non-productive inventory.
Gross profit for the year ended December 31, 1996 included a nonrecurring
charge of $489,000 to dispose of certain obsolete and non-productive
inventory related to closing Dunlop Miami and a charge of $574,000 primarily
related to other non-productive inventory at the Company's Sun Valley
operations, including inventory related to Dunlop Aviation. Excluding these
charges, gross profit would have been $8,268,000 or 21.2% of revenues for the
year ended December 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1997 decreased
$264,000 or 4.3% to $5,897,000 from $6,161,000 for the year ended December
31, 1996. Selling, general and administrative expense decreased as a percent
of revenues to 14.4% from 15.8% for the prior year. This decrease was due to
$947,000 of costs related to the EPA Claim in 1996 that were not incurred in
1997. BTR indemnified the Company for costs incurred in connection with the
EPA Claim. This decrease was offset by additional costs incurred in 1997
resulting from (i) the Company's efforts to expand its international market
presence through sales representatives located in Europe, the Middle East and
China, (ii) management fees paid to Unique Investment Corporation and (iii)
expenses incurred in connection with developing the Company's relationship
with British Airways. Excluding the $947,000 charge, selling, general and
administrative expenses would have been $5,214,000 or 13.4% of revenues for
the year ended December 31, 1996.
OPERATING INCOME. Operating income for the year ended December 31, 1997
increased $3,867,000 to $3,715,000 or 9.1% of total revenues compared to an
operating loss of $152,000 for 1996. Operating income for the year ended
December 31, 1996 was negatively impacted by nonrecurring restructuring
charges of $1,196,000 and charges to cost of revenues of $1,063,000 related
to the closure of the Dunlop Miami and $947,000 in costs related to the EPA
claim. Excluding these charges, pro forma operating income for the year ended
December 31, 1996 would have been $3,054,000 or 7.8% of revenues.
INCOME TAXES. Income taxes for the year ended December 31, 1997 were
$467,000 compared to an income tax benefit of $934,000 for the year ended
December 31, 1996. The effective tax rate for the year ended December 31,
1997 was 37.2% compared to 38.0% for 1996. The effective tax rate for
the periods differs from the federal statutory rate of 34.0% due to certain
nondeductible expenses. At December 31, 1997, the Company had net operating
loss carryforwards of $7,892,000. The utilization of these operating loss
carryforwards is limited due to changes in the Company's ownership in
November 1996. At December 31, 1997, the Company had a valuation reserve of
$659,000 for the deferred tax assets. To the extent the Company generates
sufficient income, the Company anticipates that this reserve will be reversed
in 1998 as a reduction to the tax expense, thereby reducing the effective tax
rate in 1998.
NET INCOME. As a result of the factors described above, net income for
the year ended December 31, 1997 of $788,000 represents an increase of
$2,311,000 from the net loss of $1,523,000 for the year ended December 31,
1996.
PRO FORMA YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995
REVENUES. Revenues for the year ended December 31, 1996 increased 11.4%
to $39,004,000 from $35,012,000 for 1995. Repair and overhaul service
revenues for 1996 accounted
26.
<PAGE>
for 90.2% of revenues, as compared to 84.0% of revenues for 1995. Revenues
for spare parts distribution and sales accounted for 8.6% of total revenues
for 1996, as compared to 13.8% for 1995. The increase in repair revenue as a
percentage of total revenue was a result of the Company's decision to
discontinue the low margin Dunlop Miami aircraft tire spare parts
distribution business in May 1996.
Revenues from landing gear repair and overhaul increased 51.5% to
$15,745,000 or 40.4% of total revenues in 1996, compared to $10,394,000 or
29.7% of total revenues for 1995. This increase in revenues for landing gear
repair and overhaul was attributable to increased volume from the Company's
largest customer, FedEx, and to new wide-body repair and overhaul business
from other customers including US Airways, Inc., Air Canada, Trans World
Airlines and American Airlines.
Fixed wing aircraft and helicopter hydromechanics repair and overhaul
increased 12.7% to $13,310,000 or 34.1% of total revenues for 1996, as
compared to $11,811,000 or 33.7% of 1995 revenues. This increase in revenues
was attributable to increases in helicopter repair and overhaul business from
the U.S. Coast Guard for 1996. The Dunlop Miami operation, which operated at
a loss was closed in May 1996 and contributed $2,048,000 or 5.3% of total
revenues for 1996 compared to $7,404,000 or 21.1% of revenues for 1995.
GROSS PROFIT. Gross profit for 1996 increased 19.7% to $7,205,000 for
1996 from $6,019,000 for 1995. Gross profit increased as a percent of
revenues to 18.5% for 1996 compared to 17.2% for 1995. This increase was
primarily due to (i) a 51.5% increase in revenues from landing gear repair
and overhaul services, (ii) further development of higher margin fixed wing
aircraft and helicopter hydromechanics products and (iii) discontinuing the
unprofitable Dunlop Miami operations.
Gross profit for 1996 included a nonrecurring charge of $489,000 to
dispose of certain obsolete and non-productive inventory related to closing
the Dunlop Miami operations and a charge of $574,000 primarily related to
other obsolete and non-productive inventory related to Dunlop Aviation at the
Company's Sun Valley operations. Excluding these charges, gross profit would
have been $8,268,000 or 21.2% of revenue for 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1996 increased $1,324,000 or 27.4% to $6,161,000
from $4,837,000 for 1995. This was a result of the Company's efforts to
expand its international market presence through overseas representatives in
Europe, the Middle East and China. In addition, 1996 included $947,000 of
costs related to the EPA Claim, and 1995 included a net gain of approximately
$300,000 due to an insurance reimbursement of $1,000,000 for legal defense
costs related to the EPA Claim, for which the Company has been fully
indemnified by BTR. Selling, general and administrative expense increased as
a percent of revenues to 15.8% for 1996 from 13.8% for 1995 as a result of
the above items offset by increased revenues in 1996 over 1995.
OPERATING INCOME. Operating income for 1996 declined $1,334,000 to a
loss of $152,000 or 0.4% of revenues, as compared to an operating income of
$1,182,000 for 1995. Operating income for 1996 was negatively impacted by
nonrecurring restructuring charges of $1,196,000 and charges to cost of
revenues of $1,063,000 related to closing the Dunlop Miami operation and
$947,000 in costs related to the EPA Claim. Excluding these charges, pro
forma operating income for 1996 would have been $3,054,000 or 7.8% of
revenues.
NET INTEREST EXPENSES. Net interest expense for 1996 increased by 44.2%
to $2,305,000 from $1,598,000 for 1995. Interest expense for 1996 has been
adjusted, on a pro forma basis, to give effect to the BTR Transaction as if
it happened on January 1, 1996. As a result of this pro forma adjustment,
interest expense was increased to give effect to the Company's existing
credit facilities, which are at higher interest rates than charged by BTR for
inter-company advances. Interest income was not significant in either period.
27.
<PAGE>
INCOME TAXES. The income tax benefit for 1996 was $934,000 compared to an
income tax benefit of $680,000 for 1995. The effective tax rate for 1996 was
38.0% compared to 163.5% for 1995. The effective tax rate for 1995 includes
a benefit of $525,000 from the reduction of a deferred tax valuation
allowance that was no longer required since the Company was part of a
consolidated group, and the deferred tax assets became recoverable.
NET INCOME. As a result of the factors described above, the net loss for
1996 of $1,523,000 represented a decrease of $1,787,000 from net income of
$264,000 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
Since the BTR Transaction, the Company's working capital and funds for
capital expenditures have been provided by cash generated from operations,
borrowings under the Company's working capital credit facilities and cash
received from the sale of Common Stock. In November 1996, the Company
entered into a loan agreement with Bank of America National Trust and Savings
Association ("Bank of America") for a $10.0 million revolving line of credit,
a $13.5 million term loan and a $3.0 million capital expenditures facility.
A portion of the credit facility and the entire term loan were used to
finance partially the acquisition of the Company from BTR. At the Company's
election, each of the facilities under the agreement bears interest at a
fixed bank reference rate or variable rate above IBOR. As of December 31,
1997, $8.5 million was outstanding under the revolving credit facility, and
$12.7 million was outstanding under the term loan.
On January 23, 1998, the Company and 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 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 three years,
and the term loan and capital expenditure facilities mature in seven years.
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.
In connection with the BA Acquisition, the Company and British Airways
have agreed to enter into the exclusive seven-year Services Agreement, which
the Company anticipates will result in substantial revenue from the repair
and overhaul services and related spare parts sales to support the aircraft
operated by British Airways. The Company also expects to incur additional
operating and interest costs as a result of the BA Acquisition. Such
increases in operating costs will include additional depreciation expense
associated with the allocation of the purchase price to the assets acquired,
additional rent expense associated with leasing facilities in the United
Kingdom and additional salary and overhead costs associated with establishing
operations to support British Airways utilizing the BA Assets. In addition,
interest expense will increase due to the initial borrowing to fund the
acquisition of the BA Assets and subsequent borrowings for working capital
and to fund capital expenditures.
Cash provided (used) by the Company for operating activities amounted to
$(4,223,000), $(230,000) and $322,000 for the year ended December 31, 1995,
the ten months ended October 31, 1996 and the year ended December 31, 1997,
respectively. Cash used by the Company for investing activities amounted to
$4,114,000, $1,199,000 and $3,464,000 for the year ended December 31, 1995,
the ten months ended October 31, 1996 and the year ended December 31, 1997,
respectively. These activities were for the purchase of machinery, leasehold
improvements and landing gear rotable assets, net of proceeds received for
disposal of equipment and rotable
28.
<PAGE>
assets. In September 1997, the Company acquired $3.2 million in Boeing 757
rotable assets and inventory from American Airlines in connection with the
seven-year exclusive contract to support American Airlines' fleet. A deposit
of 10% of the $3.2 million was made to American Airlines in September 1997.
The balance payable of $2.9 million was included in accounts payable and is
due to American Airlines when work under the contract commences in February
1998. The Company plans to pay this balance from additional borrowings under
the Company's Amended Loan Agreement. The Company also plans to use $1.5
million from funds provided under its Amended Loan Agreement to repay a
portion of the $6.5 million subordinated debt owed to a principal shareholder
of the Company.
Cash provided by the Company for financing activities in 1995 primarily
related to additional borrowings from the Company's parent, BTR, for
investments in wide-body Boeing 747 and DC10 landing gear shipsets and
working capital. Cash generated for financing activities in the two months
ended December 31, 1996 primarily related to the borrowings under the current
credit facilities and the issuance of preferred stock for $2.0 million to
fund the acquisition of the Company from BTR. Cash provided from financing
activities for the year ended December 31, 1997 related to borrowings to fund
leasehold improvements at a new facility, expenditures to increase landing
gear repair and overhaul capacity and the acquisition of landing gear rotable
assets.
In April 1997, the Company entered into a 13-year lease for a 77,800
square foot facility adjacent to its existing location in Sun Valley,
California. Occupancy costs under the Company's existing facilities in Sun
Valley and in the Netherlands amount to approximately $1.1 million per year.
See Note 7 of Notes to Financial Statements. The Company is seeking to lease
a newly constructed facility in the United Kingdom in connection with the BA
Acquisition, and has identified two possible construction sites. The
Services Agreement with British Airways permits the Company to occupy
temporarily the premises in which the BA Assets are currently housed through
December 31, 1999. Rent payments aggregating L1.8 million ($2.9 million at
December 31, 1997) for the period from June 1, 1998 through June 30 1999,
will be paid to British Airways on a monthly basis, whether or not the
Company continues to occupy the premises during such period. Beginning July
1, 1999, rental amounts will increase to L8,500 ($13,900 at December 31,
1997) per day, which amount will be proportionately reduced as the Company
returns space to British Airways. Assuming the Company can enter into a lease
or begin construction of a new facility by April 1998, the Company believes
it will be able to relocate a substantial portion of the facilities during
the first half of 1999, but that plating operations as well as certain other
areas will remain at the British airways location through at least the third
quarter of 1999. The Company has budgeted approximately $1.4 million in
occupancy expenses for the remainder of 1998 following the BA Acquisition,
although there can be no assurance that this estimate will not be exceeded.
The Company anticipates making capital expenditures of approximately $3.2
million during fiscal 1998 at its Sun Valley operations for plating shop
expansion, rotable assets, landing gear handling equipment and leasehold
improvements to expand the Company's repair and overhaul capacity. This
expansion is a continuation of the Company's 1997 facilities expansion, which
included a significant increase in square footage primarily devoted to
landing gear repair and overhaul in addition to expansion of its Constant
Speed Drive and Integrated Drive Generator Shop. The majority of the
expenditure in 1998 and 1999 will be to expand the electro-plating shop
capacity at the Sun Valley operations. This expenditure will be financed from
cash flow from operations and borrowings under new credit facilities.
In connection with the BA Acquisition, the Company anticipates making
capital expenditures of approximately $1.3 million in 1998 for the purchase
of rotable assets and $3 million in 1999 to relocate the British Airways'
landing gear operations to a new facility, which include expenditures for
leasehold improvements, handling equipment and machinery and an
electro-plating shop. Capital expenditures related to the new facility in the
United Kingdom will be financed from cash flow from operations and borrowings
under new credit facilities. In connection with the BA Acquisition, the
Company anticipates it will capitalize
29.
<PAGE>
approximately $1.0 million of manufacturing expenses incurred at its new
United Kingdom operations to overhaul and make serviceable the landing gear
rotable assets it acquired from British Airways in 1998.
The Company believes that funds generated from operations, the net
proceeds of the Offering and available borrowings under new credit facilities
will be sufficient to meet operating needs and other capital equipment
requirements of the Company for the year ending December 31, 1998.
FOREIGN EXCHANGE
To date, the Company's business has not been significantly affected by
currency fluctuations. However, the Company conducts business in the
Netherlands and will conduct business in the United Kingdom and thus
fluctuations in currency exchange rate could cause the Company's products to
become relatively more expensive in particular countries, leading to a
reduction in revenues in that country.
The Company makes substantial inventory purchases in French francs from
such suppliers as Messier-Dowty, SAMM and Eurocopter France. During 1996 and
1997, the United States dollar has strengthened against the French franc,
creating a favorable exchange rate variance for the Company. The Company's
Netherlands facility's transactions are primarily United States dollar
denominated for inventory purchases while revenues and operating expenses are
partially in Dutch guilder. The Company's revenues are primarily denominated
in United States dollars and to some extent in Dutch guilders, and the
Company expects to make material sales in British pounds sterling following
the BA Acquisition.
The Company's payment of the purchase price for the BA Acquisition was
denominated in pounds. To hedge against the fluctuation of pounds to dollars,
the Company had entered into a transaction, which permitted it to purchase
approximately $17 million of pounds at a rate of 1.6373 dollars per pound.
The balance of the purchase price was not hedged, although the spot rate when
the BA Acquisition was completed was similar to the forward hedge rate. The
Company will continue to evaluate hedging options in the future. Upon
completion 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.
QUARTERLY REVENUES FLUCTUATIONS
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 revenues under those
agreements only when it actually performs a repair or overhaul. Because the
average time between landing gear overhauls is seven years, 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 revenues 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. Furthermore, the rescheduling
of the shipment of any large orders, or portion thereof, or any production
difficulties or delays by the Company, could impact the Company's quarterly
operating results.
INFLATION
Although the Company cannot accurately anticipate the effect of inflation
on its operations, the Company does not believe that inflation has had, or is
likely in the foreseeable future to have, a material effect on its results of
operations or financial condition.
30.
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YEAR 2000
The Company is currently working to resolve the potential impact of the
year 2000 on the processing of date-sensitve 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. Based on
preliminary information, costs of addressing potential problems are currently
not expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if
the Company, its customers or vendors are unable to resolve such processing
issues in a timely manner, it could result in a material financial risk.
Accordingly, the Company plans to devote the necessary resources to resolve
all significant year 2000 issues in a timely manner.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to Part IV, Item 14 of this Form 10-K for the
information required by Item 8.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth certain information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott W. Hartman........................... 34 Chairman of the Board(1)(2)(4)
David L. Lokken............................ 51 President, Chief Executive Officer and Director(2)(4)
Brian S. Aune.............................. 42 Vice President and Chief Financial Officer
Brian S. Carr.............................. 40 Managing Director of Sun Valley Operations
Richard Adey............................... 39 Managing Director of United Kingdom Operations
Michael A. Riley........................... 51 Vice President--Hydromechanical Business Unit
Daniel J. Lubeck........................... 35 Secretary and Director(2)
John G. Makoff............................. 34 Director
Joel F. McIntyre........................... 59 Director(1)(3)
Daniel C. Toomey, Jr....................... 34 Director(1)(3)
Mellon C. Baird............................ 67 Director(3)(4)
</TABLE>
- - --------------------
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
(4) Member of Executive Committee
SCOTT W. HARTMAN became a director of the Company in December 1996 and
became Chairman of the Board of the Company in March 1997. Since March 1995,
Mr. Hartman has served as Chief Operating Officer of Unique. From December
1993 until he joined Unique, Mr. Hartman served as Chief Executive Officer of
Nucor World Industries, a private holding company. From December 1991 until
December 1993, Mr. Hartman served as a Vice President of Business Development
for City National Bank, and from May 1983 until he joined City National Bank,
he held various management positions with Emerson Electric Company. Mr.
Hartman earned a B.S. from Indiana University.
DAVID L. LOKKEN joined the Company in May 1989 as Executive Vice
President and Chief Operating Officer and has served as President and Chief
Executive Officer of the Company since June 1993. From November 1985 until
he joined the Company, Mr. Lokken served a Vice President and General Manager
of Cleveland Pneumatic's Product Service Division. Mr. Lokken holds a B.S.
in Electrical Engineering from North Dakota State University and an M.B.A.
from Arizona State University.
BRIAN S. AUNE joined the Company as Vice President of Finance and
Administration in 1992 and has served as Vice President and Chief Financial
Officer of the Company since August 1994. Before joining the Company, Mr.
Aune held various finance and management positions with Dunlop Aviation, BEI
Motion Systems Electronics and Eastman Kodak. Mr. Aune has a B.A. in
Accounting from Eastern Washington University and an M.B.A. from the
University of San Diego.
BRIAN S. CARR became Managing Director of Sun Valley Operations in
November 1997 after having served as Vice President-Landing Gear Business
Unit since he joined the Company in January 1993. From 1980 until he joined
the Company, Mr. Carr held various engineering, technical sales and
management
32.
<PAGE>
positions with Cleveland Pneumatic's Product Service Division and Dowty
Aerospace. Mr. Carr holds a B.S. in Aerospace Engineering Technology from
Kent State University.
RICHARD ADEY became the Company's Managing Director of United Kingdom
Operations following the BA Acquisition. Since March 1996, Mr. Adey has been
a Senior Manager for British Airways Engineering, in charge of overhauling
landing gear, flap tracks and flap carriages on British Airways' aircraft.
From 1994 until he joined British Airways Engineering, Mr. Adey served as
Operations Director for Woodhead Manufacturing Ltd. From 1984 through 1993,
Mr. Adey served as a Senior Consultant with Coopers & Lybrand, specializing
in operations management and process improvement within commercial
organizations. Mr. Adey holds a BSc in Production Engineering and Engineering
Management from the University of Nottingham and an MSc in Manufacturing
Technology and Business Management from Cranfield Institute.
MICHAEL A. RILEY joined the Company's predecessor as Vice President of
Marketing in October 1989 and has served as Vice President-Hydromechanical
Business Unit since January 1994. From 1982 until he joined the Company, Mr.
Riley held various positions in the aerospace/aircraft industry with Abex
Aerospace and Dunlop Aviation. Mr. Riley served as a helicopter pilot in the
United States Navy and received a B.S. in Engineering from the United States
Naval Academy, Annapolis, Maryland.
DANIEL J. LUBECK joined the Company as Secretary and a director in
December 1996. Since July 1996, Mr. Lubeck has served as President of
Unique. From March 1993 until he joined Unique, Mr. Lubeck was an attorney
with McIntyre, Borgess & Burns, a multi-service law firm, after having worked
as an attorney with Paul, Hastings, Janofsky & Walker from 1987 until 1992
and with Manatt, Phelps & Philips, LLP from 1992 until 1993. Mr. Lubeck
earned a J.D. from University of Southern California and holds a B.A. from
University of California San Diego.
JOHN G. MAKOFF became a director of the Company in December 1996. Mr.
Makoff founded Unique in June 1993 and currently serves as its Chief
Executive Officer. From June 1991 until he founded Unique, Mr. Makoff served
as Manager for Computerland of Pasadena, Inc., a computer reseller. Mr.
Makoff holds a B.A. from Lewis & Clark University.
JOEL F. MCINTYRE became a director of the Company in February 1998.
From 1963 through 1993, Mr. McIntyre was an attorney with the law firm of
Paul, Hastings, Janofsky and Walker. In 1993, Mr. McIntyre founded the law
firm of McIntyre, Borges & Burns LLP and currently serves as its Managing
Partner. Mr. McIntyre currently serves on the Board of Directors of
International Aluminum Corporation, a publicly-held company. Mr. McIntyre
received a B.A. from Stanford University in 1960 and J.D. from University of
California, Los Angeles in 1963.
DANIEL C. TOOMEY, JR. became a director of the Company in February 1998.
Since January 1998, Mr. Toomey has served as the President and Chief
Executive Officer of Nomadix, LLC. Mr. Toomey served as Vice President and
Chief Financial Officer of Eltron International, Inc., a publicly-held
company ("Eltron"), from October 1992 until December 1997. From 1987 until
he joined Eltron, Mr. Toomey was employed with Arthur Andersen LLP, where he
served as Manager in the Enterprise Division of its Woodland Hills,
California office. Mr. Toomey received a B.A. from the University of
California, Los Angeles in 1986.
MELLON C. BAIRD became a director of the Company in March 1998. Mr.
Baird has served as Chairman, President and Chief Executive Officer of Delfin
Systems since 1990. From 1987 to 1989, Mr. Baird served as President and
Chief Executive Officer of Tracor, Inc., a privately-held company ("Tracor").
From 1986 until 1987, Mr. Baird served as President, Chief Operating Officer
and a director of Tracor, a publicly-held company. Mr. Baird currently
serves on the Board of Directors of Software Spectrum, Inc. and
33.
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EDO Corporation, which are both publicly-held companies. Mr. Baird received
a B.B.A. and an M.B.A. from University of North Texas in 1956 and 1961,
respectively.
BOARD COMMITTEES
In November 1997, the Board of Directors established an Audit Committee
and a Compensation Committee. The Audit Committee is composed of Messrs.
McIntyre, Toomey and Baird. The functions of the Audit Committee include
recommending to the Board the selection and retention of independent
auditors, reviewing the scope of the annual audit undertaken by the Company's
independent auditors and the progress and results of their work and reviewing
the financial statements of the Company and its internal accounting and
auditing procedures. The Compensation Committee is composed of Messrs.
Hartman, McIntyre and Toomey. The functions of the Compensation Committee
include establishing the compensation of the Chief Executive Officer,
reviewing and approving executive compensation policies and practices,
reviewing salaries and bonuses for certain executive officers of the Company,
administering the Company's employee stock option plans and considering such
other matters as may from time to time be delegated to the Compensation
Committee by the Board of Directors. The function of the Nominating
Committee, which consists of Messrs. Hartman, Lokken and Lubeck, is to select
the slate of directors to be presented to the shareholders for election at
the annual meeting of the shareholders of the Company. The Board of
Directors has also established an Executive Committee to advise the Company
on strategic planning matters. The Executive Committee is composed of
Messrs. Hartman, Lokken and Baird.
The Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors of the Company. See "Executive
Compensation--Employment Arrangements." The Company's Directors serve until
the next annual meeting of shareholders or until successors are elected and
qualified.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, as well as persons who own more
than ten percent of the Company's Common Stock, to file with the SEC initial
reports of beneficial ownership and reports of changes in beneficial
ownership of the Common Stock. Directors, executive officers and
greater-than-ten-percent shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of copies of reports filed with the SEC and
submitted to the Company, the Company believes that all of the Company's
directors, executive officers and greater-than-ten-percent shareholders filed
all required reports on a timely basis upon and after the consummation of the
Offering.
34.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation earned or accrued
during the years ended December 31, 1995, 1996 and 1997 by the Company's Chief
Executive Officer and the Company's three other most highly compensated
executive officers whose total salary and bonus during such year exceeded
$100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER
--------------------------- ---- -------- -------- -----------
<S> <C> <C> <C> <C>
David L. Lokken................................... 1997 $233,147 $44,358
Chief Executive Officer 1996 192,566 67,125 $173,220(2)
1995 184,256 -
Brian S. Aune..................................... 1997 $117,302 $21,097
Chief Financial Officer 1996 98,440 28,763
1995 100,509 -
Brian S. Carr..................................... 1997 $125,156 $21,097
Managing Director of Sun Valley Operations 1996 111,258 26,910
1995 104,785 -
Michael A. Riley.................................. 1997 $113,430 $18,663
Vice President-Hydromechanical Business Unit 1996 95,584 23,550
1995 93,335 -
</TABLE>
- - -----------------------
(1) Bonus amounts are shown in the year accrued.
(2) Nonrecurring payment made for services rendered in connection with BTR's
sale of the Company, of which 31% was paid in 1996 and 69% was paid in
1997.
EMPLOYMENT ARRANGEMENTS
In November 1996, the Company entered into an employment agreement with
David L. Lokken pursuant to which Mr. Lokken agreed to serve as the Company's
President and Chief Executive Officer. The employment agreement is for an
initial term of five years and as amended in 1997 provides for an annual base
salary of $205,000, a performance bonus to be awarded in accordance with the
terms and conditions of a separate Management Incentive Compensation Plan,
and a monthly automobile allowance of $1,500. Pursuant to the employment
agreement, the Company may terminate Mr. Lokken's employment with or without
cause at any time before its term expires upon providing written notice. In
the event the Company terminates Mr. Lokken's employment without cause, Mr.
Lokken would be entitled to receive a severance amount equal to his annual
base salary for the greater of two years or the balance of the term of his
employment agreement and a bonus for the year of termination. In the event
of a termination by reason of Mr. Lokken's death or permanent disability, his
legal representative will be entitled to receive his annual base salary for
the remaining term of his employment agreement.
In November 1996, the Company also entered into employment agreements
with each of Brian S. Aune, the Company's Vice President and Chief Financial
Officer, Brian S. Carr, the Company's Managing Director of Sun Valley
Operations, and Michael A. Riley, the Company's Vice
President-Hydromechanical Business Unit. The employment agreements are each
for an initial term of three years and as amended in 1997 provide for annual
base salaries of $130,000, $130,000 and $115,000, respectively, performance
bonuses to be awarded in accordance with the terms and conditions of a
separate Management Incentive Compensation Plan, and monthly automobile
allowances of $750. In the event the Company terminates their employment
without cause, Messrs. Aune, Carr and Riley would each be entitled to receive
a severance amount equal to
35.
<PAGE>
his respective annual base salary for the greater of one year or the balance
of the term of his employment agreement and a bonus for the year of
termination. In the event of a termination by reason of Messrs. Aune's,
Carr's or Riley's death or permanent disability, his legal representative
will be entitled to receive his annual base salary for the remaining term of
his employment agreement.
In addition, pursuant to each of their amended employment agreements, in
the event of, or termination following, a change in control of the Company,
as defined in the agreements, Mr. Lokken and each of Messrs. Aune, Carr and
Riley would be entitled to receive 18 and 12 months' salary, respectively,
based on the total annual salary then in effect paid according to a schedule
to be determined at the time such event occurs.
DIRECTOR COMPENSATION
Each non-employee director receives a cash fee of $1,500 per regular and
special Board meeting attended in person and $1,000 per telephonic Board
meeting and an additional $500 per month for being a member of one or more
committees of the Board. Each non-employee director is expected to receive,
as additional director compensation, such number of options as determined by
the Board to purchase shares of Common Stock per year at an exercise price
equal to the fair market value of the Common Stock on the date of grant. In
January 1998, Daniel C. Toomey, Jr. and Joel F. McIntyre were each granted
five-year options to purchase up to 14,861 shares, exercisable at the initial
public offering price per share, vesting 33 1/3% per year beginning on the
first anniversary of the effective date of the Offering. In March 1998, the
Company granted Mellon C. Baird five-year options to purchase up to 14,861
shares, exercisable at the then market price, vesting 33 1/3% per year
beginning on the first anniversary of the date of grant. The directors are
also reimbursed for expenses incurred in connection with the performance of
services as directors.
36.
<PAGE>
STOCK OPTIONS
The following table sets forth certain information with respect to stock
options granted by the Company to the Named Executive Officers during the
fiscal year ended December 31, 1997:
OPTION GRANT TABLE
OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-------------------------------------------------------------------------- ----------------------
NUMBER OF
SHARES OF % OF TOTAL
COMMON STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE
NAME GRANTED FISCAL YEAR ($/SH)(3) EXPIRATION DATE 5% 10%
---- ------------ ------------ --------- ---------------------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
David L. Lokken 187,471(1) 50.0% $8.00 72,105 on November 14, 2002 605,682 634,524
115,366 on November 14, 2003 969,074 1,015,220
Brian S. Aune 43,261(2) 11.5% $8.00 14,420 on November 14, 2002 121,128 126,896
28,841 on November 14, 2003 242,264 253,800
Brian S. Carr 43,261(2) 11.5% $8.00 14,420 on November 14, 2002 121,128 126,896
28,841 on November 14, 2003 242,264 253,800
Michael A. Riley 43,261(2) 11.5% $8.00 14,420 on November 14, 2002 121,128 126,896
28,841 on November 14, 2003 242,264 253,800
</TABLE>
- - --------------------
(1) 72,105 of these options were fully vested and exercisable on the date of
grant and are for a term of five years. 115,536 of these options are
for a term of six years, subject to earlier termination in certain
events related to termination of employment, and vest at the rate of 5%
every three months after the grant date so that all of the options will
be fully vested and exercisable on the fifth anniversary of the grant
date.
(2) 14,420 of these options were fully vested and exercisable on the date of
grant and are for a term of five years. 28,861 of these options are for
a term of six years, subject to earlier termination in certain events
related to termination of employment, and vest at the rate of 5% every
three months after the grant date so that all of the options will be
fully vested and exercisable on the fifth anniversary of the grant date.
(3) The exercise price and tax withholding related to exercise may be paid
by delivery of already owned shares or by offset of the underlying
shares, subject to certain conditions. With respect to options granted
under the Company's 1997 Stock Option Plan, the stock option committee
retains discretion, subject to plan limits, to modify the terms of
outstanding options and to reprice the options.
37.
<PAGE>
The following table sets forth certain information with respect to stock
option exercises by the Named Executive Officers during fiscal year 1997 and
held by them as of December 31, 1997:
OPTION EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
SHARES AT YEAR-END AT YEAR-END(1)
ACQUIRED -------------- --------------
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- -------- -------- -------------- --------------
<S> <C> <C> <C> <C>
David L. Lokken - - 72,105/115,366 0/0
Brian S. Aune - - 14,420/28,841 0/0
Brian S. Carr - - 14,420/28,841 0/0
Michael A. Riley - - 14,420/28,841 0/0
</TABLE>
- - ------------------------
(1) Amounts are shown as the positive spread between the exercise price and
the fair market value (based on the initial public offering price of $8.00
per share). At year-end the Company's Common Stock was not traded on an
established public trading market.
MANAGEMENT STOCK OPTIONS
In November 1997, the Board of Directors granted five-year management
stock options to purchase an aggregate of 115,365 shares of Common Stock to
David L. Lokken, Brian S. Aune, Brian S. Carr, and Michael A. Riley. These
options are in addition to those granted under the 1997 Stock Option Plan
described below. All of these options are vested and are exercisable at $8.00
per share.
STOCK OPTION PLAN
In November 1997, the Board of Directors adopted the Company's 1997
Stock Option Plan (the "1997 Plan"). The 1997 Plan, which was approved by the
Company's shareholders in November 1997, provides for the grant of options to
directors, officers, other employees and consultants of the Company to
purchase up to an aggregate of 634,514 shares of Common Stock. The purpose of
the 1997 Plan is to provide participants with incentives that will encourage
them to acquire a proprietary interest in, and continue to provide services
to, the Company. The 1997 Plan is to be administered by the Board of
Directors, or a committee of the Board, which has discretion to select
optionees and to establish the terms and conditions of each option, subject
to the provisions of the 1997 Plan. Options granted under the 1997 Plan may
be "incentive stock options" as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or nonqualified options.
The exercise price of incentive stock options may not be less than the
fair market value of Common Stock as of the date of grant (110% of the fair
market value if the grant is to an employee who owns more than 10% of the
total combined voting power of all classes of capital stock of the Company).
The Code currently limits to $100,000 the aggregate value of Common Stock
that may be acquired in any one year pursuant to incentive stock options
under the 1997 Plan or any other option plan adopted by the Company.
Nonqualified options may be granted under the 1997 Plan at an exercise price
of not less than 85% of the fair market value of the Common Stock on the date
of grant. Nonqualified options may be granted without regard
38.
<PAGE>
to any restriction on the amount of Common Stock that may be acquired
pursuant to such options in any one year. Options may not be exercised more
than ten years after the date of grant (five years after the date of grant if
the grant is an incentive stock option to an employee who owns more than 10%
of the total combined voting power of all classes of capital stock of the
Company). Options granted under the 1997 Plan generally are nontransferable,
but transfers may be permitted under certain circumstances in the discretion
of the administrator. Shares subject to options that expire unexercised under
the 1997 Plan will once again become available for future grant under the
1997 Plan. The number of options outstanding and the exercise price thereof
are subject to adjustment in the case of certain transactions such as
mergers, recapitalizations, stock splits or stock dividends. The 1997 Plan is
effective for ten years, unless sooner terminated or suspended.
In November 1997, the Board of Directors of the Company granted six-year
options to purchase an aggregate of 259,572 shares of Common Stock under the
1997 Plan, of which 230,730 were granted to David L. Lokken, Brian S. Aune,
Brian S. Carr, Michael A. Riley and Richard Adey. All of these options are
exercisable at the initial public offering price per share. The options
generally will be subject to vesting and will become exercisable at a rate of
5% per quarter from the date of grant, subject to the optionee's continuing
employment with the Company. Each of the option agreements for Messrs.
Lokken, Aune, Carr, Riley and Adey provides that all options will become
fully vested and exercisable upon a change in control of the Company, as
defined in the agreements.
In general, upon termination of employment of an optionee, all options
granted to such person which are not exercisable on the date of such
termination will immediately terminate, and any options that are exercisable
will terminate not less than three months (six months in the case of
termination by reason of death or disability) following termination of
employment.
To the extent nonqualified options are granted under the 1997 Plan, the
Company intends to issue such options with an exercise price of not less than
the market price of the Common Stock on the date of grant.
EMPLOYEE DEFINED BENEFIT PLAN
GENERAL. On January 1, 1997 the Board of Directors adopted the Employee
Defined Benefit Pension Plan (the "Pension Plan") for the benefit of the
eligible employees of the Company. The primary purpose of the Pension Plan is
to provide a retirement benefit for participating employees. All employees of
the Company are eligible to participate in the Pension Plan on the January
1st next following their date of hire. Employees who are covered by
collective bargaining units and whose retirement benefits are the subject of
good faith bargaining, however, are not eligible to participate in the
Pension Plan.
ADMINISTRATION. The Pension Plan is administered by a committee (the
"Plan Committee") whose members are appointed by the Board of Directors of
the Company. The Plan Committee oversees the day-to-day administration of the
Pension Plan and has the authority to take action and make rules and
regulations necessary to carry out the purposes of the Pension Plan.
NORMAL RETIREMENT BENEFITS AND VESTING. The Pension Plan provides for
employer contributions only. Each year, the Company makes a contribution to
the pension plan equal to the minimum funding requirement sufficient to fund
for the benefits being accrued under the Pension Plan for the year. The
Pension Plan provides for a normal retirement benefit payable on a monthly
basis for the lifetime of the participant. The normal retirement benefit is
equal to the participant's credited benefit service (up to a maximum of 35
years) times the sum of 0.75% of the participant's final average monthly
compensation plus 0.65% of such compensation in excess of the participant's
average monthly wage. However, the benefit actually payable from the Pension
Plan will be reduced for any benefits payable (or paid) with respect to
service credited from the Defined Benefit Pension Plan of the Company's
predecessor.
39.
<PAGE>
For purposes of calculating a participant's normal retirement benefits,
average monthly compensation is defined in the Pension Plan as average monthly
compensation during the five consecutive plan years of the participant's
employment which yields the highest average compensation.
No maximum monthly benefit payable under the Pension Plan is to exceed the
applicable Internal Revenue Code Section 415 limit ($10,416.67 for 1997)
adjusted actuarially to reflect a participant's retirement age if the
retirement age is other than the social security retirement age. The monthly
retirement benefit payable by the Pension Plan is a benefit payable in the form
of a straight life annuity with no ancillary benefits. For a participant who is
to receive benefits other than in the form of a straight life annuity, the
monthly retirement benefit will be adjusted to an equivalent benefit in the
form of a straight life annuity on an actuarial equivalent basis.
A participant becomes fully vested in his accrued benefits under the
Pension Plan upon attainment of normal retirement age (age 65), permanent
disability, death or the termination of the Pension Plan. If a participant
terminates employment with the Company prior to retirement, death or
disability, the vested interest he has in accrued benefits under the Pension
Plan is based on years of service, with 0% vesting for less than five years of
service and 100% vesting after five or more years of service.
PENSION PLAN INVESTMENTS. The Committee selects vehicles for the
investment of plan assets. The Committee then directs the trustee to invest
employer contributions in the investment option selected by the Committee under
the Pension Plan.
PENSION PLAN AMENDMENT OR TERMINATION. Under the terms of the Pension
Plan, the Company reserves the right to amend or terminate the Pension Plan at
any time and in any manner. No amendment or termination, however, may deprive a
participant of any benefit accrued under the Pension Plan prior to the
effective date of the amendment or termination.
ESTIMATED MONTHLY BENEFITS. The following table sets forth the estimated
monthly benefits under the Pension Plan, without regard to any offsetting
benefit which may be payable from the Defined Benefit Pension Plans of the
Company's predecessors for service prior to January 1, 1997, based on the
current benefit structure and assuming the participant's current age is 50.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
REMUNERATION 15 20 25 30 35
- - ------------ ------ ------ ------ ------ ------
YEARS OF SERVICE
----------------
<S> <C> <C> <C> <C> <C>
$125,000...... $1,743 $2,323 $2,904 $3,485 $4,066
150,000...... 2,180 2,907 3,633 4,360 5,087
175,000...... 2,355 3,140 3,925 4,710 5,495
200,000...... 2,355 3,140 3,925 4,710 5,495
225,000...... 2,355 3,140 3,925 4,710 5,495
250,000...... 2,355 3,140 3,925 4,710 5,495
300,000...... 2,355 3,140 3,925 4,710 5,495
400,000...... 2,355 3,140 3,925 4,710 5,495
450,000...... 2,355 3,140 3,925 4,710 5,495
500,000...... 2,355 3,140 3,925 4,710 5,495
</TABLE>
The compensation covered by the Pension Plan includes basic salary or
wages, overtime payments, bonuses, commissions and all other direct current
compensation but does not include contributions by the Company to Social
Security, benefits from stock options (whether qualified or not), contributions
to this or any other retirement plans or programs or the value of any other
fringe benefits provided at the expense of the Company. For benefit calculation
purposes, a "highest five-year" average of compensation is used.
40.
<PAGE>
Benefits are paid as straight-life annuities with no subsidies or effects.
The compensation covered by the Pension Plan for all of the Named Executives
was limited to $160,000 in accordance with Section 401(a)(17) of the Code.
The years of credited service for each Named Executive Officer who
participates in the Pension Plan are as follows:
<TABLE>
<CAPTION>
NAME YEARS
- - ---- -------
<S> <C>
Dave Lokken.......................................... 9 years
Brian Aune........................................... 6 years
Brian Carr........................................... 5 years
Michael Riley........................................ 8 years
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In November 1997, Joel McIntyre, Scott Hartman and Daniel Toomey were
appointed to serve on the Compensation Committee of the Company's Board of
Directors. Mr. McIntyre, who is a Director of the Company and also a member of
its Audit Committee is a member of the law firm of McIntyre, Borges & Burns LLP
("McIntyre, Borges & Burns"). During the 12 months ended December 31, 1997,
the Company paid McIntyre, Borges & Burns approximately $4,700 for legal
services rendered. Mr. Hartman, who is Chairman of the Company's Board of
Directors is a principal of Unique. During the 12 months ended December 31,
1997, the Company paid Unique $330,000 in management fees and reimbursable
expenses.
41.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock as
of March 12, 1998 by: (i) each person known by the Company to beneficially own
5% or more of the outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer of the Company, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Number of Shares of Percentage of
Name and Address(1) Common Stock(2) Outstanding(2)
- - ------------------------------------------- ------------------- --------------
<S> <C> <C>
Melanie L. Bastian......................... 961,252 16.5%
John G. Makoff............................. 444,943 7.6
Daniel J. Lubeck........................... 330,120 5.7
Scott W. Hartman........................... 330,120 5.7
David L. Lokken(3)......................... 221,403 3.8
Brian S. Aune(4)........................... 44,568 *
Brian S. Carr(4)........................... 44,568 *
Michael A. Riley(4)........................ 44,568 *
Daniel C. Toomey, Jr....................... 2,000 *
Joel F. McIntyre........................... 0 --
Mellon C. Baird............................ 0 --
All directors and executive officers
as a group (11 persons).................. 1,463,732 24.6
</TABLE>
- - ----------------------
* Less than 1%.
(1) The address for all persons is c/o the Company at 11240 Sherman Way, Sun
Valley, California 91352.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities. Shares of Common Stock
subject to options currently exercisable, or exercisable within 60 days of
March 12, 1998, are deemed outstanding for computing the percentage of the
person holding such options but are not deemed outstanding for computing
the percentage of any other person. Except as indicated by footnote and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
(3) Includes 77,873 shares issuable upon exercise of vested options to
purchase common stock.
(4) Includes 15,862 shares issuable upon exercise of vested options to
purchase common stock.
42.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective November 1, 1996, Aqhawk, an entity wholly-owned by the
shareholders of Unique and the Company's executive officers ("Aqhawk"),
purchased all of the outstanding capital stock of the Company from BTR (the
"BTR Transaction"). The purchase price Aqhawk paid was $29,802,861, consisting
of (i) $18,828,841 obtained through debt financing provided by Bank of America
to the Company (the "Bank of America Loan"), which then loaned such amount to
Aqhawk, (ii) $6,500,000 obtained through a subordinated note (the "Subordinated
Note") provided by Melanie Bastian, a principal shareholder and the former
Chairman of the Company, to Unique which then loaned such amount to Aqhawk,
(iii) $2,000,000 obtained in return for the issuance to Ms. Bastian of
400 shares of Preferred Stock of Aqhawk, and (iv) the remaining amount obtained
through cash provided by the Company. In December 1996, Aqhawk was merged with
the Company. In the merger, each two shares of common stock of Aqhawk were
converted into one share of common stock of the Company, and each share of
preferred stock was converted into one share of preferred stock of the Company.
In connection with the BTR Transaction, BTR entered into an Environmental
Indemnity Agreement pursuant to which it agreed to indemnify Aqhawk and the
Company against losses arising from any finding that the Company or Aqhawk is
liable for the handling, storage and disposal of hazardous substances on,
around or originating from the Company's facilities that existed on or before
November 1, 1996, including any future amounts for which the Company may be
responsible in connection with the SFVB Actions. See "Business--Environmental
Matters and Proceedings." BTR and its subsidiary also agreed not to compete
against the Company in the repair and overhaul of aircraft landing gear for a
period of three years following the BTR Transaction. In addition, BTR granted
the Company an exclusive, worldwide, royalty-free license to use the Hawker
Pacific logo and name, for as long as the Company continues to use such marks,
in connection with the repair and overhaul of aircraft landing gear and a
non-exclusive right to use the logo and name for the same period in connection
with all other operations of the Company.
To obtain a portion of the purchase price paid for the Company in
connection with the BTR Transaction, in November 1996, the Company issued the
Subordinated Note in the aggregate principal amount of $6.5 million. The
Subordinated Note bears interest at the rate of 11.8% per annum paid monthly
and matures January 1, 2001. The Company has agreed to use $1.5 million of the
funds provided by the Amended Loan Agreement to repay a portion of the
$6.5 million Subordinated Note. The remaining balance of the Subordinated Note
has been replaced by a new $5 million promissory note. The new note bears
interest at a fixed rate of 11.8% per annum, requires the Company to make
monthly payments of interest only, and matures on the earlier of June 30, 2005
or 180 days after the termination of the Amended Loan Agreement.
Pursuant to a Limited Guaranty dated as of November 27, 1996 by Melanie L.
Bastian in favor of Bank of America, in connection with the Bank of America
Loan, Ms. Bastian guaranteed the Company's payment obligations, and the
shareholders of the Company pledged as collateral for the loan all of their
capital stock of the Company. Ms. Bastian's guarantee and the pledges were
released upon the consummation of the Offering.
As of September 30, 1997, all of the Company's issued and outstanding
shares of preferred stock were held by Ms. Bastian. Upon the closing of the
Offering all of the outstanding shares of preferred stock were converted into
250,000 shares of Common Stock.
In September and October 1997, Ms. Bastian purchased an aggregate of
101,619 shares of Common Stock for $1,000,000 ($9.84 per share).
The Company and Unique entered into a management agreement dated March 1,
1997 (the "Old Management Agreement"), pursuant to which the Company paid
Unique management fees and reimbursable expenses totalling approximately
$330,000 during the year ended December 31, 1997. In November 1997,
43.
<PAGE>
the Company and Unique entered into a new management services agreement (the
"Management Services Agreement") pursuant to which, upon the consummation of
the Offering, the Old Management Agreement was terminated, and Unique became
entitled to receive $150,000 per year payable monthly commencing in January
1999 for certain management services to be rendered to the Company. The
Management Services Agreement will terminate upon the Company's completing an
additional underwritten public offering in which selling shareholders offer
25% or more in such offering.
The Company also entered into a mergers and acquisitions agreement dated
as of September 2, 1997 with Unique pursuant to which Unique received $300,000
upon the closing of the BA Acquisition for services provided in connection with
the acquisition. Amounts paid under the Old Management Agreement during 1998
were credited against this $300,000.
During the 12 months ended December 31, 1997, the Company paid McIntyre,
Borges & Burns approximately $4,700 for legal services rendered. Joel F.
McIntyre is a director of the Company and is a member of the law firm of
McIntyre, Borges & Burns.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) AND (2) FINANCIAL STATEMENTS AND SCHEDULES:
The following financial statements of Hawker Pacific Aerospace are
included in this Report:
Balance Sheets--December 31, 1995, 1996 and 1997
Statements of Operations--Year ended December 31, 1995, ten months ended
October 31, 1996, two months ended December 31, 1996 and the year ended
December 31, 1997
Statements of Changes in Stockholders' Equity--Years ended December 31,
1996 and 1997
Statements of Cash Flows--Year ended December 31, 1995, ten months ended
October 31, 1996, two months ended December 31, 1996 and the year ended
December 31, 1997
Notes to Financial Statements--December 31, 1997
The following financial statement schedule of Hawker Pacific Aerospace is
included in Item 14(d):
Schedule II Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) FORM 8-K
No reports on Form 8-K were filed by the registrant during the fourth
quarter of fiscal 1997.
(c) EXHIBITS
44.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT DESCRIPTION
- - ------- -----------------------------------------------------------------------
<S> <C>
2.1 Agreement relating to the Sale and Purchase of part of the
Business of British Airways plc dated December 20, 1997 by and
among the Company, Hawker Pacific Aerospace Limited and British
Airways plc., and related Landing Gear Overhaul Services
Agreement.(1)+
3.1 Amended and Restated Articles of Incorporation of the
Company.(1)
3.2 Amended and Restated Bylaws of the Company.(1)
3.3 Certificate of Amendment to the Amended and Restated Articles of
Incorporation of the Company.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 1997 Stock Option Plan and forms of Stock Option Agreements.(1)
10.1A Amendment No. 1 to 1997 Stock Option Plan.(1)
10.2 Employment Agreement dated November 1, 1996 between the Company
and David L. Lokken.(1)
10.2A First Amendment to Employment Agreement for David L. Lokken.(1)
10.3 Employment Agreement dated November 1, 1996 between the Company
and Brian S. Aune.(1)
10.3A First Amendment to Employment Agreement for Brian S. Aune.(1)
10.4 Employment Agreement dated November 1, 1996 between the Company
and Brian S. Carr.(1)
10.4A First Amendment to Employment Agreement for Brian S. Carr.(1)
10.5 Employment Agreement dated November 1, 1996 between the Company
and Michael A. Riley.(1)
10.5A First Amendment to Employment Agreement for Michael A. Riley.(1)
10.6 Form of Indemnity Agreement for directors and executive officers
of the Company.(1)
10.7 Business Loan Agreement dated November 27, 1996 between the
Company and Bank of America National Trust and Savings
Association.(1)
10.7A Amendment No. 1 to Business Loan Agreement between the Company
and Bank of America National Trust and Savings Association.(1)
10.8 Agreement of Purchase and Sale of Stock effective as of
November 1, 1996 by and among BTR Dunlop, Inc., BTR, Inc., the
Company and Aqhawk, Inc.(1)
10.9 Repair, Overhaul, Exchange, Warranty and Distribution Agreement
dated November 1, 1996 between the Company and Dunlop Limited,
Aviation Division.(1)+
10.10 Distribution Agreement dated November 1, 1996 between the
Company and Dunlop Limited, Precision Rubber.(1)
45.
<PAGE>
10.11 Repair, Overhaul, Exchange, Warranty and Distribution Agreement
dated November 1, 1996 between the Company and Dunlop Equipment
Division.(1)+
10.12 Repair Services Agreement dated September 9, 1997 between the
Company and American Airlines, Inc.(1)+
10.13 Award/Contract dated September 20, 1995 issued by USCG Aircraft
Repair and Supply Center to the Company.(1)+
10.14 Maintenance Services Agreement dated August 19, 1994 between the
Company and Federal Express Corporation.(1)+
10.15 Lease Agreement dated March 31, 1997 by and between the Company
and Industrial Centers Corp.(1)
10.15A First Amendment to Lease Agreement dated March 31, 1997 by and
between the Company and Industrial Centers Corp.
10.16 Management Services Agreement dated November 14, 1997 between
the Company and Unique Investment Corp.(1)
10.17 Mergers and Acquisitions Agreement dated September 2, 1997
between the Company and Unique Investment Corp.(1)
10.17A Form of First Amendment to Mergers and Acquisitions Agreement
between the Company and Unique Investment Corp.(1)
10.18 Subordinated Note for $6,500,000 in favor of Unique Investment
Corp.(1)
10.19 Amended and Restated Subordinated Promissory Note dated February
3, 1998 in favor of Unique Investment Corp.
10.20 Certified Translation of Rental Agreement between Mr. C. G.
Kortenoever and Flight Accessory Services.(1)
10.21 Lease Agreement dated July 28, 1994 by and between the Company
and Industrial Bowling Corp.(1)
10.21A First Amendment to Lease Agreement dated July 28, 1994 by and
between the Company and Industrial Bowling Corp.
10.22 Lease Agreement dated July 28, 1994 by and between the Company
and Industrial Bowling Corp.(1)
10.23 Lease Agreement dated July 28, 1994 by and between the Company
and Industrial Bowling Corp.(1)
10.24 Lease Agreement dated July 28, 1994 by and between the Company
and Industrial Bowling Corp.(1)
10.25 Lease Agreement dated June 24, 1997 by and between the Company
and Allstate Insurance Company.(1)
10.25A First Amendment to Lease Agreement between the Company and
Allstate Insurance Company.
46.
<PAGE>
10.26 Lease Agreement dated November 21, 1994 by and between the
Company and Gordon N. Wagner and Peggy M. Wagner, and Joseph W.
Basinger and Viola Marie Basinger.(1)
10.27 Amended and Restated Business Loan Agreement dated January 23,
1998 between the Company and Bank of America National Trust and
Savings Association.
10.28 Security Agreement dated January 23, 1998 by the Company in
favor of Bank of America National Trust and Savings Association.
10.29 Pledge Agreement dated January 23, 1998 by the Company in favor
of Bank of America National Trust and Savings Association.
10.30 Subordination Agreement dated January 23, 1998 by and among the
Company, Hawker Pacific Aerospace Limited, Bank of America
National Trust and Savings Association, Melanie L. Bastian and
Unique Investment Corporation.
21.1 Subsidiaries of the Company.(1)
27.1 Financial Data Schedule
</TABLE>
- - ---------------------
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Previously filed as exhibits to the Company's Registration Statement on
Form S-1, as amended (Registration No. 333-40295), and incorporated herein
by reference.
(d) FINANCIAL STATEMENT SCHEDULES
HAWKER PACIFIC AEROSPACE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - ---------------------------------- ---------- ---------------------------- ------------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other the End of
Description of Period Expenses Accounts Deductions Period
- - ---------------------------------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
Year Ended December 31, 1995 $111,000 $ 50,000 -- $(122,000)(a) $ 39,000
Ten Months Ended October 31, 1996 39,000 345,000 -- (188,000)(a) 196,000
SUCCESSOR
Two Months Ended December 31, 1996 196,000 -- -- (129,000)(a) 67,000
Year Ended December 31, 1997 67,000 167,000 -- (87,000)(a) 147,000
</TABLE>
- - --------------------------
(a) Represents amounts written-off against the allowance for doubtful
accounts, list of recoveries and reversals.
47.
<PAGE>
Hawker Pacific Aerospace
INDEX TO FINANCIAL STATEMENTS
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . F-2
Audited Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . . . . F-5
Statements of Changes in Stockholders' Equity. . . . . . F-6
Statements of Cash Flows . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements. . . . . . . . . . . . . . F-9
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Hawker Pacific Aerospace
We have audited the accompanying balance sheet of Hawker Pacific Aerospace a
wholly-owned subsidiary of BTR Dunlop Holdings, Inc. (the "Predecessor") as
of December 31, 1995, and the related statements of operations, and cash
flows for the year ended December 31, 1995 and the ten months ended October
31, 1996. We have also audited the accompanying balance sheets of Hawker
Pacific Aerospace (the "Successor") as of December 31, 1996 and 1997, and the
related statements of operations, changes in stockholders' equity and cash
flows for the two months ended December 31, 1996 and the year ended December
31, 1997. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Predecessor's and Successor's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hawker Pacific Aerospace as
the Predecessor and Successor companies, at December 31, 1995, 1996 and 1997,
and the results of their operations and their cash flows for the year ended
December 31, 1995, the ten months ended October 31, 1996, the two months
ended December 31, 1996, and the year ended December 31, 1997, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Woodland Hills, California
February 13, 1998
F-2
<PAGE>
Hawker Pacific Aerospace
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- ----------------------------
DECEMBER 31 DECEMBER 31
1995 1996 1997
--------------- ----------------------------
<S> <C> <C> <C>
Current assets:
Cash $ 399,000 $ 1,055,000 $ 160,000
Accounts receivable, less allowance for
doubtful accounts of $39,000, $67,000 and
$147,000 at December 31, 1995, 1996 and
1997, respectively 6,392,000 6,336,000 7,351,000
Accounts receivable from affiliates 624,000 - -
Other receivables 1,086,000 59,000 80,000
Inventories 13,446,000 12,950,000 14,814,000
Prepaid expenses and other current assets 404,000 344,000 240,000
--------------- ------------- -----------
Total current assets 22,351,000 20,744,000 22,645,000
Equipment and leasehold improvements, net 4,871,000 4,719,000 5,083,000
Landing gear exchange, less accumulated
amortization of $422,000, $61,000 and
$375,000 at December 31, 1995, 1996
and 1997, respectively 7,479,000 8,654,000 11,067,000
Goodwill, less accumulated amortization of
$17,000 and $25,000 at December 31, 1996
and 1997, respectively - 620,000 145,000
Deferred taxes 680,000 - -
Deferred financing costs - 325,000 262,000
Deferred offering costs - - 766,000
Other assets 74,000 116,000 930,000
--------------- ------------- -----------
$ 35,455,000 $35,178,000 $40,898,000
--------------- ------------- -----------
--------------- ------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Hawker Pacific Aerospace
Balance Sheets (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------- ----------------------------
DECEMBER 31 DECEMBER 31
1995 1996 1997
--------------- ----------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 2,536,000 $ 3,806,000 $ 6,946,000
Accounts payable to affiliates 1,365,000 - -
Line of credit - 5,329,000 8,529,000
Deferred revenue 1,299,000 1,593,000 848,000
Accrued payroll and employee benefits 511,000 809,000 812,000
Environmental remediation 234,000 657,000 -
Accrued expenses and other liabilities 1,012,000 475,000 316,000
Current portion of notes payable 2,105,000 850,000 1,450,000
------------ ----------- -----------
Total current liabilities 9,062,000 13,519,000 18,901,000
Due to parent and affiliates 27,310,000 - -
Notes payable:
Bank note - 12,650,000 11,200,000
Related party - 6,500,000 6,500,000
------------ ----------- -----------
- 19,150,000 17,700,000
Commitments and contingencies
Stockholders' equity:
Preferred stock - Series A, $5,000 per share
liquidation preference, non-voting, 400
shares authorized, issued and outstanding - 2,000,000 2,000,000
Common stock - 20,000,000 shares authorized,
2,870,603 and 2,972,222 shares issued and
outstanding at December 31, 1996 and 1997,
respectively 500,000 40,000 1,040,000
Additional paid-in capital 4,126,000 - -
Retained earnings (deficit) (5,543,000) 469,000 1,257,000
------------ ----------- -----------
Total stockholders' equity (deficiency) (917,000) 2,509,000 4,297,000
------------ ----------- -----------
Total liabilities and stockholders' equity
(deficiency) $35,455,000 $35,178,000 $40,898,000
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Hawker Pacific Aerospace
Statements of Operations
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------- ----------------------------------
YEAR TEN MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31 OCTOBER 31 DECEMBER 31 DECEMBER 31
1995 1996 1996 1997
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $35,012,000 $32,299,000 $6,705,000 $41,042,000
Cost of revenues 28,993,000 27,027,000 4,599,000 31,430,000
----------- ----------- ---------- -----------
Gross profit 6,019,000 5,272,000 2,106,000 9,612,000
----------- ----------- ---------- -----------
Operating expenses:
Selling expenses 2,858,000 2,248,000 525,000 3,191,000
General and administrative expenses 1,979,000 2,796,000 534,000 2,706,000
Restructuring charges - 1,196,000 - -
----------- ----------- ---------- -----------
Total operating expenses 4,837,000 6,240,000 1,059,000 5,897,000
----------- ----------- ---------- -----------
Income (loss) from operations 1,182,000 (968,000) 1,047,000 3,715,000
Other (expense) income:
Interest expense (1,598,000) (1,609,000) (203,000) (2,431,000)
Interest income - - 7,000 3,000
Other expense, net - - - (32,000)
----------- ----------- ---------- -----------
Total other (expense) income (1,598,000) (1,609,000) (196,000) (2,460,000)
----------- ----------- ---------- -----------
Income (loss) before income
tax provision (benefit) (416,000) (2,577,000) 851,000 1,255,000
Income tax provision (benefit) (680,000) (971,000) 382,000 467,000
----------- ----------- ---------- -----------
Net income (loss) $ 264,000 $(1,606,000) $ 469,000 $ 788,000
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Earnings per common share -
basic and diluted $ 0.15 $ 0.25
---------- -----------
Weighted average common ---------- -----------
and common equivalent
shares outstanding 3,170,551 3,145,079
---------- -----------
---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Hawker Pacific Aerospace
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- ----------------------- Retained
Shares Amount Shares Amount Earnings Total
----------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1996 - $ - - $ - $ - $ -
Issuance of Preferred Stock 400 2,000,000 - - - 2,000,000
Issuance of Common Stock to
founders - - 2,640,955 - - -
Issuance of Common Stock to
management - - 229,648 40,000 - 40,000
Net income for the period - - - - 469,000 469,000
---- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1996 400 2,000,000 2,870,603 40,000 469,000 2,509,000
Issuance of Common Stock - - 101,619 1,000,000 - 1,000,000
Net income for the year - - - - 788,000 788,000
---- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1997 400 $2,000,000 2,972,222 $1,040,000 $1,257,000 $4,297,000
---- ---------- --------- ---------- ---------- ----------
---- ---------- --------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Hawker Pacific Aerospace
Statements of Cash Flows
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------- ----------------------------------
YEAR TEN MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31 OCTOBER 31 DECEMBER 31 DECEMBER 31
1995 1996 1996 1997
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 264,000 $(1,606,000) $ 469,000 $ 788,000
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Deferred income taxes (680,000) (971,000) 382,000 466,000
Depreciation 680,000 525,000 183,000 741,000
Amortization 174,000 294,000 17,000 463,000
Non cash restructuring charge - 561,000 - -
Stock compensation - - 40,000 -
(Gain) loss on the sale of machinery,
equipment and landing gear 332,000 - - (78,000)
Changes in operating assets and liabilities:
Accounts receivable (1,773,000) 1,771,000 (103,000) (1,036,000)
Inventory (4,433,000) 1,156,000 (901,000) (185,000)
Prepaid expenses and other
current assets (101,000) (72,000) 21,000 104,000
Accounts payable (397,000) (2,681,000) 2,195,000 622,000
Deferred revenue 1,029,000 532,000 115,000 (745,000)
Accrued liabilities 682,000 261,000 (139,000) (818,000)
----------- ----------- ---------- -----------
Cash provided by (used in) operating
activities (4,223,000) (230,000) 2,279,000 322,000
INVESTING ACTIVITIES
Purchase of equipment, leasehold
improvements and landing gear (4,479,000) (1,173,000) (155,000) (2,890,000)
Proceeds from disposals of equipment,
leasehold improvements and landing gear 350,000 - - 250,000
Other assets 15,000 (26,000) - (824,000)
Acquisition of Predecessor - - (28,398,000) -
----------- ----------- ---------- -----------
Cash used in investing activities (4,114,000) (1,199,000) (28,553,000) (3,464,000)
</TABLE>
F-7
<PAGE>
Hawker Pacific Aerospace
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------- ----------------------------------
YEAR TEN MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31 OCTOBER 31 DECEMBER 31 DECEMBER 31
1995 1996 1996 1997
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Borrowing under bank note $ - $ - $13,500,000 $ -
Principal payments on bank note - - - (850,000)
Borrowing on note payable to related party - - 6,500,000 -
Borrowings/payments on line of credit, net - - (1,287,000) 3,200,000
Initial borrowing under line of credit - - 6,616,000 -
Borrowings/payments on due to Parent and 8,010,000 2,193,000 - -
affiliates (net)
Deferred offering costs - - - (766,000)
Deferred financing cost - - - (337,000)
Issuance of preferred stock - - 2,000,000 -
Contributions to capital - 242,000 - 1,000,000
----------- ----------- ----------- ----------
Cash provided by financing activities 8,010,000 2,435,000 27,329,000 2,247,000
Increase (decrease) in cash (327,000) 1,006,000 1,055,000 (895,000)
Cash, beginning of period 726,000 399,000 - 1,055,000
----------- ----------- ----------- ----------
Cash, end of period $ 399,000 $1,405,000 $ 1,055,000 $ 160,000
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $1,574,000 $ 1,279,000 $ 193,000 $2,261,000
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Income taxes $ 44,000 $ 20,000 $ - $ 3,000
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
Noncash investing and financing activities
Acquisition of Predecessor:
Fair market value of assets acquired $ - $ - $34,973,000 $ -
Fair market value of liabilities assumed - - (5,170,000) -
Less cash received - - (1,405,000) -
----------- ----------- ----------- ----------
Net cash paid $ - $ - $28,398,000 $ -
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Hawker Pacific Aerospace, formerly known as Hawker Pacific, Inc. (the
"Company") is a California Corporation with headquarters in Sun Valley,
California, with satellite facilities in the Netherlands and, through May 31,
1996, Miami, Florida. The Company repairs and overhauls aircraft and
helicopter landing gear, hydromechanical components, and wheels, brakes and
braking system components for a diverse international customer base,
including commercial airlines, air cargo operators, domestic government
agencies, aircraft leasing companies, aircraft parts distributors, and
original equipment manufacturers. In addition, the Company distributes and
sells new and overhauled spare parts and components for both fixed wing and
helicopters.
ORGANIZATION AND BASIS OF PRESENTATION
The Company operated as a subsidiary of BTR Dunlop Holdings, Inc., a Delaware
Corporation, from December 21, 1994 to October 31, 1996. BTR Dunlop Holdings,
Inc. was a subsidiary of BTR plc, a United Kingdom company (collectively, the
"Parent").
Effective January 1, 1994, the Company merged its operations with certain
operations of Dunlop Aviation, Inc., a subsidiary of the Parent. The merger
was a combination of companies under common control and was accounted for
similar to the pooling of interests method of accounting.
Pursuant to an Agreement of Purchase and Sale of Stock, AqHawk, Inc.
purchased all of the Company's outstanding stock from BTR plc effective as of
November 1, 1996 (the "Acquisition"). AqHawk, Inc. was formed as a holding
company for the sole purpose of acquiring the stock of the Company and was
subsequently merged into the Company. The acquisition has been accounted for
under the purchase accounting method. The aggregate purchase price was
approximately $29,800,000, which includes the cost of the acquisition. The
aggregate purchase price was allocated to the assets of the Company, based
upon estimates of their respective fair market values. The excess of purchase
price over the fair values of the net assets acquired was $1,019,000 and was
recorded as goodwill. Goodwill has been subsequently reduced for the
reduction of certain allowances on deferred taxes and amortization.
F-9
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
The financial statements as of December 31, 1995 and for the year ended
December 31, and 1995 and the ten months ended October 31, 1996 are presented
under the historical cost basis of the Company, as a wholly owned subsidiary
of BTR Dunlop Holdings, Inc., the predecessor Company (the "Predecessor").
The financial statements as of December 31, 1996 and 1997, and for the two
months ended December 31, 1996 and the year ended December 31, 1997 are
presented under the new basis of the successor company (the "Successor")
established in the Acquisition.
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 $17.8 million net of
expenses of approximately $3.0 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 13, and approximately
$7.6 million to repay a portion of the revolving and term debt previously
outstanding under the Company's credit facility.
In connection with the initial public offering, the Company effected a
579.48618 for one stock split of the Company's Common Stock in November 1997
and a one for .9907406 reverse stock split in January 1998. All references in
the accompanying financial statements to the number of shares of Common
Stock, per common share amounts have been retroactively adjusted to reflect
the stock splits. All of the Company's Series A Preferred Stock were
converted into an aggregate of 250,000 shares of common stock. In addition,
the Company's capital structure was changed to reflect 20,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock authorized. The Board of
Directors has authority to fix the rights, preferences, privileges and
restrictions, including voting rights, of those shares without any future
vote or action by the shareholders.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information combines the results of
operations of the Successor and Predecessor as if the Acquisition had
occurred on January 1, 1996 and includes certain pro forma adjustments to the
historical operating results for amortization of goodwill, depreciation and
amortization of fixed assets and interest expense. The pro forma information
is presented for illustrative purposes only, and is not necessarily
indicative of what the actual results of operations would have been during
such periods or representative of future operations.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31
1996
-------------
(Unaudited)
<S> <C>
Revenues $39,004,000
Net loss (1,523,000)
Net loss per share (0.48)
</TABLE>
F-10
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LANDING GEAR EXCHANGE
Landing gear and other rotable assets are accounted for as fixed assets at
cost and are depreciated over their estimated useful lives to their
respective salvage values. These assets include various airplane, wing, body
and nose landing gear shipsets. Landing gear and other rotable assets are
held for purposes of exchanging the assets for a customer's landing gear or
other part needing repair or overhaul. As the landing gear is exchanged and
the customer is billed for the cost of the repair, the landing gear or other
parts are typically repaired and overhauled and maintained as property of the
Company for future exchanges. The estimated useful lives range from 10 to 15
years depending on the age of the aircraft and projected marketability of the
exchange gear over time. Amortization expense is recorded as a component of
cost of revenues using the straight-line amortization method.
RECOGNITION OF REVENUE
The Company generates revenue primarily from repair and overhaul services. In
some cases repair and overhaul services include exchange fees for the
exchange of the Company's landing gear or other parts for the customer's
landing gear or other parts needing repair or overhaul services. The Company
also generates revenues from the sale and distribution of spare parts.
Spare parts sales and exchange fee revenues are each individually less than
10% of total revenues.
Revenues for repair and overhaul services not involving an exchange
transaction are recognized when the job is complete. Deferred revenue is
principally comprised of customer prepayments and progress billings related
to the overhaul and repair of landing gear and other services which are in
process. Revenues from spare parts sales are recognized at the time of
shipment. Landing gear exchange fees are recognized on shipment of the
exchanged gear to the customer. Revenues for repair and overhaul service
involving an exchange are recognized when the cost of repairing the part
received from the customer are known and billable.
F-11
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF RISK
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK - The Company performs
credit evaluations and analysis of amounts due from its customers; however,
the Company generally does not require collateral. Credit losses have been
within management's expectations and an estimate of uncollectible accounts
has been provided for in the financial statements.
One customer accounted for 19.3% of the Company's total revenues for the year
ended December 31, 1997 and represented 18.9% of the accounts receivable
balance at December 31, 1997.
One customer accounted for 13.1% of the Company's total revenues for the two
month period ended December 31, 1996 and represented 7.4% of the accounts
receivable balance at December 31, 1996.
Revenues from two customers, who individually accounted for greater than 10%
of total revenues, were 19.6% and 11.7%, respectively, of the Company's total
revenues for the ten month period ended October 31, 1996.
Revenues from two customers, who individually accounted for greater than 10%
of total revenues, were 17.1% and 10.0%, respectively, of the Company's total
revenues for the year ended December 31, 1995 and accounted for 9.9% and
11.3%, respectively, of the accounts receivable balance at December 31, 1995.
MAJOR VENDORS - Three vendors accounted for $9,283,000 of the Company's total
purchases during the year ended December 31, 1997.
Three vendors accounted for $1,901,000 of the Company's total purchases for
the two month period ended December 31, 1996.
Two vendors accounted for $7,030,000 of the Company's total purchases during
the ten month period ended October 31, 1996.
One vendor accounted for $5,005,000 of the Company's total purchases for the
year ended December 31, 1995.
F-12
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market. Purchased parts and
assemblies are valued based on the weighted average cost. Work-in-process
inventories include purchased parts, direct labor and factory overhead.
Provisions for potentially obsolete or slow moving inventory are made based
on management's analysis of inventory levels, turnover and future revenue
forecasts.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Depreciation
expense is being provided using the straight-line method based on the
following estimated useful lives:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------ -------------------
<S> <C> <C>
Leasehold improvements Lesser of life of Lesser of life of
lease or asset lease or asset
Machinery and equipment 13.3 years 8 years
Tooling 13.3 years 5 years
Furniture and fixtures 7 years 5 years
Vehicles 5 years 3 years
Computer equipment 5 years 3 years
</TABLE>
Expenditures for repairs are expensed as incurred and additions, renewals and
betterments are capitalized.
GOODWILL
In connection with the purchase of the Company by AqHawk, Inc. as previously
described, the Company recorded goodwill which represents the excess of the
purchase price over the estimated fair value of the net assets acquired. The
Company is amortizing goodwill using the straight-line method over a period
of 15 years. The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate indicate that
expected future cash flows for the business may not be sufficient to support
recorded goodwill.
F-13
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL (CONTINUED)
At December 31, 1996 and 1997, goodwill was reduced by $382,000 and $466,000,
respectively, due to the realization of certain deferred tax assets and the
corresponding reduction of the valuation allowance established in the
allocation of the purchase price of the Acquisition.
FOREIGN REVENUES
The Company generated revenues from customers located outside of the United
States of $5,616,000, $4,493,000, $1,517,000 and $11,856,000, of which
$3,368,000, $2,887,000, $1,191,000 and $9,901,000 were revenues generated
from the Company's United States location for the year ended December 31,
1995, the ten months ended October 31, 1996, and the two months ended
December 31, 1996 and the year ended December 31, 1997, respectively.
Realized and unrealized foreign exchange gains (losses) amounted to $161,000,
$33,000, ($3,000) and $298,000 for the year ended December 31, 1995, the ten
months ended October 31, 1996, the two months ended December 31, 1996 and the
year ended December 31, 1997.
ENVIRONMENTAL EXPENSE AND INCOME RECOVERY
Included in general and administrative expense for the year ended December
31, 1995, and the ten months ended October 31, 1996, is $717,000 and
$947,000, respectively, of legal fees and settlement cost associated with
investigating, defending and settling the environmental remediation matter
discussed in Note 7. In addition, for the year ended December 31, 1995,
general and administrative expense has been reduced by insurance recoveries
of $1,000,000. There were no corresponding costs incurred in the two months
ended December 31, 1996 or the year ended December 31, 1997.
EARNINGS PER SHARE
Earnings per common share are computed based on the weighted average number
of shares outstanding during each period. The weighted average number of
shares outstanding give effect to the stock split and conversion of preferred
stock discussed in Note 1 as if they had occurred on November 1, 1996.
F-14
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE (CONTINUED)
During 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). Pursuant to SFAS No. 128,
basic earnings (loss) per common share are computed based upon the weighted
average number of common shares outstanding for the period. Diluted earnings
per common share reflects the potential dilution that could occur if certain
securities were exercised or converted into common stock. The adoption of
SFAS No. 128 did not result in a restatement of earnings (loss) per common
share for the periods presented in the financial statements. Basic earnings
(loss) per share under SFAS No. 128 is the same as diluted earnings (loss)
per share for all periods presented and includes 250,000 shares issued upon
the conversion of the preferred stock discussed in Note 1, as if converted at
the beginning of the period. The number of shares used in the calculation of
basic and diluted earnings per share was 3,170,551 and 3,145,079 for the two
months ended December 31, 1996 and the year ended December 31, 1997,
respectively.
Options to purchase 374,937 shares of common stock at $8 per share (the
initial public offering price) were outstanding during 1997 but were not
included in the compulation of diluted earnings per share because the
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments principally consist of accounts
receivable, accounts payable, line of credit, note payable to a bank, and
notes payable to a related party as defined by Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments." The carrying value of accounts receivable and accounts payable
approximate of their fair value due to the short-term nature of these
instruments. The carrying value of the line of credit and note payable to a
bank approximates its fair market value since these financial instruments
carry a floating interest rate. The fair market value of the note payable to
a related party approximated its carrying value based on current market rates
for such debt.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results may differ from those estimates.
F-15
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
2. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- --------------------------
DECEMBER 31 DECEMBER 31
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Purchased parts and assemblies $10,658,000 $ 9,722,000 $11,961,000
Work-in-process 2,788,000 3,228,000 2,853,000
----------- ----------- -----------
$13,446,000 $12,950,000 $14,814,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements, at cost, consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- --------------------------
DECEMBER 31 DECEMBER 31
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Leasehold improvements $1,331,000 $1,009,000 $1,575,000
Machinery and equipment 5,354,000 3,202,000 3,394,000
Tooling 641,000 308,000 356,000
Furniture and fixtures 342,000 72,000 199,000
Vehicles 31,000 30,000 30,000
Computer equipment 1,301,000 209,000 384,000
---------- ---------- ----------
9,000,000 4,830,000 5,938,000
Less: Accumulated depreciation 4,129,000 111,000 855,000
---------- ---------- ----------
$4,871,000 $4,719,000 $5,083,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4. INCOME TAXES
The tax provision of the Predecessor has been computed as if the Predecessor
filed a separate income tax return. For the period ending December 31, 1995, the
taxable income of the Predecessor was included in the consolidated Federal and
State tax returns of its Parent. Under a tax sharing arrangement with its
Parent, the Predecessor's deferred tax assets were expected to be recoverable
against the current or future earnings of the
F-16
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
Predecessor or its Parent. Accordingly, the deferred tax valuation allowance
for certain deferred taxes recoverable through the consolidated tax return of
the Parent was reduced resulting in a net deferred tax benefit for the year
ended December 31, 1995.
For the two months ended December 31, 1996, and the year ended December 31,
1997, the tax provision has been computed on a stand-alone basis. A full
valuation allowance for the Successor's net deferred tax assets was provided
at the Acquisition date as an adjustment to goodwill due to future
uncertainty concerning the ultimate realization of the net deferred tax
asset. To the extent the deferred tax assets of the Successor are realized
the related reduction in the valuation allowance will be recorded as a
reduction to goodwill until goodwill is eliminated and then as a reduction of
income tax expense.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- --------------------------
DECEMBER 31 DECEMBER 31
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,026,000 $ 1,953,000 $3,013,000
Inventory valuation accruals 942,000 1,449,000 439,000
Accounts receivable valuation accruals 17,000 131,000 64,000
Environmental remediation accruals 102,000 285,000 -
Employee benefits and compensation 135,000 195,000 169,000
Product and service warranties 109,000 82,000 70,000
State tax credits - - 127,000
Other items, net 335,000 351,000 76,000
----------- ----------- ----------
Total deferred tax assets 4,666,000 4,446,000 3,958,000
Less valuation allowance (1,824,000) (1,427,000) (659,000)
----------- ----------- ----------
Net deferred tax asset 2,842,000 3,019,000 3,299,000
</TABLE>
F-17
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------- --------------------------
DECEMBER 31 DECEMBER 31
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization
methods $1,977,000 $2,474,000 $2,789,000
Property, equipment and landing gear
exchange asset basis adjustments - 445,000 445,000
Other items, net 185,000 100,000 65,000
---------- ---------- ----------
Total deferred tax liabilities 2,162,000 3,019,000 3,299,000
---------- ---------- ----------
Net deferred tax asset after allowance $ 680,000 $ - $ -
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Significant components of the provision for taxes based on income are
as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------- ----------------------------------
YEAR TEN MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31 OCTOBER 31 DECEMBER 31 DECEMBER 31
1995 1996 1996 1997
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ $ - $ -
State - - - 1,000
--------- --------- -------- ---------
- - - 1,000
Deferred:
Federal (504,000) (746,000) 277,000 466,000
State (176,000) (225,000) 105,000 -
--------- --------- -------- ---------
(680,000) (971,000) 382,000 466,000
--------- --------- -------- ---------
(Benefit) provision for taxes $(680,000) $(971,000) $382,000 $467,000
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
The tax provision (benefit) for the year ended December 31, 1995, includes a
benefit of $525,000, resulting from the reduction of the deferred tax
valuation allowance.
For the two months ended December 31, 1996 and the year ended December 31,
1997, reductions of the valuation reserve of approximately $382,000 and
$466,000, respectively, resulted in equivalent reductions of goodwill. For
the year ended December 31, 1997 deferred tax assets of $302,000, were
determined not to be realizable and were charged directly against the
valuation allowance.
F-18
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
A reconciliation of the statutory federal income tax rate to the effective tax
rate, as a percentage of income before tax, is as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------------- ----------------------------------
YEAR TEN MONTHS TWO MONTHS YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31 OCTOBER 31 DECEMBER 31 DECEMBER 31
1995 1996 1996 1997
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate (34)% (34)% 34% 34%
Nondeductible expenses 13 2 3 3
State income taxes, net of
federal benefit (4) (6) 8 -
Decrease in valuation reserve (139) - - -
------- ------ ---- ----
Effective tax rate (164)% (38)% 45% 37%
------- ------ ---- ----
------- ------ ---- ----
</TABLE>
The Company has net operating loss carryforwards for federal tax purposes of
$7,892,000 which expire in the years 2007 to 2012. The Company also has state
net operating loss carryforwards of $3,548,000 which expire in the years 1999
to 2002. Utilization of the net operating losses may be limited as a result
of limitations due to changes in ownership.
5. SUCCESSOR LINES OF CREDIT AND NOTES PAYABLE
The Company has a revolving line of credit agreement with a bank which
permits borrowings up to the lesser of $10,000,000 or a borrowing base of 85%
of accounts receivable plus the lesser of $6,000,000 or 50% of the value of
acceptable inventory. The line of credit agreement also includes a facility
for up to $2,000,000 in letters of credit. The line of credit expires
November 30, 1999, and bears interest at either the "offshore rate" plus 1.5%
or the bank's reference rate, at the option of the Company. The weighted
average interest rate on borrowing outstanding under the line of credit was
7.56% at December 31, 1997. The Company had available borrowings of $427,000
at December 31, 1997 under this agreement.
The line of credit agreement contains certain covenants which include, but
are not limited to, quick ratio, fixed charge coverage ratio, profitability,
and dividend and capital investment limitations. The line of credit is
collateralized by all personal property of the Company and guaranteed by a
Shareholder of the Company.
F-19
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
5. SUCCESSOR LINES OF CREDIT AND NOTES PAYABLE (CONTINUED)
The Company also has a shipset purchase line of credit from a bank up to
$3,000,000 to finance a portion of the purchase price for landing gear used
in the ordinary course of business. This line is payable in monthly
installments equal to one eighty fourth of the initial amount of the loan
plus interest at either the offshore rate plus 1.875% or at the bank's
reference rate, subject to the same terms and conditions as the bank line of
credit. The shipset purchase line of credit matures November 30, 1998. At
December 31, 1996 and 1997, there were no amounts outstanding under the
shipset purchase line of credit.
On February 3, 1998, the Company completed its Amended Loan Agreement with
Bank of America. This agreement increases the credit available to the Company
from $26.5 million to $45.5 million. The Amended Loan Agreement provides the
Company with a $15 million revolving line of credit, subject to limitations
based on collateral, a $24.5 million dollar term loan and a $6 million
capital expenditure facility. The revolving line of credit matures in three
years, and the term loan and capital expenditure facilities mature in seven
years. At the Company's election, the rate of interest on each of the three
facilities is either Bank of America's reference rate or the interbank
eurodollar rates on either the London market or the Cayman Islands market.
The Company's note payable balance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1997
-------------- --------------
<S> <C> <C>
Note payable to a bank, payable in quarterly
installments increasing from $212,500 in 1997
to $625,000 in 2002, plus interest at either
the offshore rate plus 1.875% or the bank's
reference rate, subject to the same terms and
conditions as the line of credit, maturing
December 31, 2003. The interest rate in effect
at December 31, 1997 was 7.6% $13,500,000 $12,650,000
Note payable to related party, interest accrues
monthly at 11.8% per annum, interest payments
due monthly equal to the lesser of the accrued
interest or excess cash flow as defined,
subordinated to the line of credit, term loan
and capital expenditure loan, quarterly
principal payments of $700,000 scheduled to begin
in January 2004, through December 2006. 6,500,000 6,500,000
----------- -----------
20,000,000 19,150,000
Less current portion 850,000 1,450,000
----------- -----------
$19,150,000 $17,700,000
----------- -----------
----------- -----------
</TABLE>
F-20
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
5. SUCCESSOR LINES OF CREDIT AND NOTES PAYABLE (CONTINUED)
Maturity of notes payable as of December 31, 1997, is summarized as follows:
<TABLE>
<S> <C>
1998 $1,450,000
1999 1,700,000
2000 2,250,000
2001 2,250,000
2002 2,500,000
2003 and thereafter 9,000,000
-----------
$19,150,000
-----------
-----------
</TABLE>
The Company entered into an interest rate swap agreement (the "Swap
Agreement") to reduce the impact of changes in interest rates in its floating
rate long term debt. The Swap Agreement dated January 13, 1997 has an initial
notional amount of $6,750,000 reducing to $2,781,000 through the expiration
date of December 31, 2001. The Company is required to pay interest on the
notional amount at the rate of 6.65% and receives from the bank a percentage
of the notional amount based on a floating interest rate. The Swap Agreement
effectively reduces its interest rate exposure to a fixed rate of 6.65% on
the notional amount. The notional amount at December 31, 1997 was $6,325,000.
The floating interest rate in effect under the Swap Agreement at December 31,
1997 was 5.87%. The Swap Agreement had a negative fair market value of
$128,000 at December 31, 1997.
With the Amended Loan Agreement the Company entered into another interest
rate swap agreement (the "Swap Agreement") to reduce the impact of changes in
interest rates in its floating-rate long-term debt. The Swap Agreement dated
February 19, 1998 has an initial notional amount of $14,700,000 reducing to
$8,550,000 through the expiration date of March 28, 2002. The Company is
required to pay interest on the notional amount at the rate of 6.39% and
receives from the bank a percentage of the notional amount based on a
floating interest rate. The Swap Agreement effectively reduces its interest
rate exposure to a fixed rate of 6.39% of the notional amount. The floating
interest rate in effect under the Swap Agreement is 5.625%.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities, certain office equipment and a vehicle
under operating lease agreements, which expire through May 2010 and contain
certain escalation clauses based on various inflation indexes. Future minimum
rental payments as of December 31, 1997, are summarized as follows:
F-21
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES (CONTINUED)
<TABLE>
<S> <C>
1998 $ 1,165,000
1999 1,158,000
2000 1,158,000
2001 1,165,000
2002 1,120,000
2003 and thereafter 5,621,000
-----------
$11,387,000
-----------
-----------
</TABLE>
The Company entered into a 13-year operating lease for additional office
space and warehouse facilities during July 1997. In addition, significant
leasehold improvement costs were incurred during the year ended December 31,
1997.
The Company incurred rent expense of approximately $980,000, $586,000,
$109,000 and $795,000 for the year ended December 31, 1995, the ten months
ended October 31, 1996, the two months ended December 31, 1996, and the year
ended December 31, 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company is obligated under certain management employment contracts
through October 31, 2001. Future minimum salary expense related to these
contracts are summarized as follows:
<TABLE>
<S> <C>
1998 $ 575,000
1999 575,000
2000 200,000
2001 200,000
----------
$1,550,000
----------
----------
</TABLE>
ENVIRONMENTAL REMEDIATION
During 1993, the Company and other parties became defendants in a United
States Environmental Protection Agency and State of California lawsuit (the
"Plaintiffs") alleging violations of certain environmental regulations
related to the contamination of ground water in the San Fernando Valley Basin
that resulted from the release of
F-22
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
hazardous substances. During 1996, the Company recorded additional reserves
related to this matter
F-23
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ENVIRONMENTAL REMEDIATION (CONTINUED)
for total reserves of $657,000 at October 31, 1996 and December 31, 1996. The
Company has been indemnified by BTR plc for any claims related to this matter
in excess of the amount recorded. The amount recorded at December 31, 1996
represented the Company's portion of a settlement that was reached with the
Plaintiffs during 1997.
LITIGATION
The Company is involved in various lawsuits, claims and inquiries, which the
Company believes are routine to the nature of the business. In the opinion of
management, the resolution of these matters will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
7. RELATED PARTY TRANSACTIONS
SALES AND PURCHASES
The Predecessor Company generated revenue and purchased goods and services
from its Parent and various subsidiaries of its Parent (collectively the
Affiliates). Certain long term purchase agreements with the Affiliates have
continued under the Successor company.
Total revenues for the year ended December 31, 1995 and the ten months ended
October 31, 1996 from the Affiliates were approximately $552,000 and
$331,000, respectively.
Total purchases for the year ended December 31, 1995 and the ten months ended
October 31, 1996 from the affiliates were approximately $6,820,000 and
$5,437,000, respectively.
In the ordinary course of business, the Successor pays sales commissions to a
company which is also a shareholder of the Successor. During the period from
January 1, 1997 through December 31, 1997, the Successor paid $556,000 of
commissions and reimbursed expenses to this related party.
F-24
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES PAYABLE TO RELATED PARTY
As more fully described in Note 5, the Successor is subject to a note payable
to a company controlled by shareholders of the Successor for $6,500,000 which
is included in notes payable on the balance sheets. Interest expense on this
note payable for the two months ended December 31, 1996 and the year ended
December 31, 1997 amounted to $74,000 and $767,000, respectively.
DUE TO PARENT AND AFFILIATES
The Predecessor generally funded its operations through borrowings from the
Parent through October 31, 1996. The Predecessor made payments against such
borrowings based on cash availability although there were no contractual
payment terms. Amounts classified as current in the balance sheet at December
31, 1995 represent the estimated amount of the borrowing paid from working
capital as of December 31, 1995. During the year ended December 31, 1995 and
the ten months ended October 31, 1996, the weighted average interest rate was
5.6% and 4.9%, respectively. During the year ended December 31, 1995 and the
ten months ended October 31, 1996, the average borrowings outstanding on the
due to Parent and affiliates were approximately $28,624,000 and $32,978,000,
respectively, and Company recognized interest expense on borrowings from its
Parent and affiliates of $1,598,000, and $1,609,000, respectively. All
borrowing amounts due to Parent and affiliates were settled in connection
with the November 1, 1996 acquisition of the Company.
MANAGEMENT FEE
The Company has an agreement (the "Old Management Agreement") with Unique
Investment Corporation ("UIC") to pay a management fee of $25,000 per month.
Certain shareholders of the Company are related parties to UIC. The Company
paid $50,000 to UIC during the period from November 1, 1996 through December
31, 1996, and $300,000 during the period from January 1, 1997 through
December 31, 1997.
In September 1997, the Company and Unique entered into a new management
services agreement (the "New Management Services Agreement") pursuant to
which, upon the consummation of the anticipated Offering, the Old Management
Agreement will be terminated, and Unique will be entitled to receive $150,000
per year payable monthly commencing in January 1999 for certain management
services rendered to the Company.
F-25
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
MANAGEMENT FEE (CONTINUED)
The New Management Services Agreement will terminate upon the Company
completing an underwritten public offering in which selling shareholders
offer 25% or more of the Common Stock sold in such offering.
In September 1997, the Company also entered into a mergers and acquisitions
agreement with Unique pursuant to which Unique is entitled to receive
$300,000 upon the closing of the BA Acquisition for services provided in
connection with the acquisition.
PARENT COMPANY ALLOCATION OF EXPENSES
The Predecessor received a charge from its Parent for certain insurance
(i.e., workers' compensation, product liability, group medical, etc.) and
employee benefit program expenses that were contracted and paid by the Parent
and allocated to the various subsidiaries. Management believes these
allocations approximate the amounts that would have been incurred had the
Predecessor operated on a stand-alone basis. Included in general and
administrative expense and cost of revenues is $436,000 and $1,504,000 for
the year ended December 31, 1995 and the ten months ended October 31, 1996,
respectively, of costs charged to the Predecessor by the Parent for these
programs.
WARRANTY REIMBURSEMENT FROM PARENT
The Predecessor had an arrangement with the Parent whereby certain warranty
costs incurred by the Predecessor for the failure of parts purchased from the
Parent or its affiliates were reimbursed to the Predecessor. For the year
ended December 31, 1995, the Predecessor received $184,000 for reimbursement
of warranty costs incurred by the Predecessor.
8. STOCK OPTION PLAN
In November 1997, the Board of Directors adopted the Company's 1997 Stock
Option Plan (the "1997 Plan"). The 1997 Plan, provides for the grant of
options to directors, officers, other employees and consultants of the
Company to purchase up to an aggregate of 634,514 shares of Common Stock. The
purpose of the 1997 Plan is to provide participants with incentives that will
encourage them to acquire a proprietary interest in,
F-26
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
8. STOCK OPTION PLAN (CONTINUED)
and continue to provide services to, the Company. Options granted under the
1997 Plan may be "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
options.
The exercise price of any incentive stock options granted may not be less
than 100% of the fair market value of Common Stock as of the date of grant
(110% of the fair market value if the grant is to an employee who owns more
than 10% of the total combined voting power of all classes of capital stock
of the Company). Nonqualified options may be granted under the 1997 Plan at
an exercise price of not less than 85% of the fair market value of the Common
Stock on the date of grant. Options may not be exercised more than ten years
after the date of grant (five years after the date of grant if the grant is
an incentive stock option to an employee who owns more than 10% of the
total combined voting power of all classes of capital stock of the Company).
The number of options outstanding and the exercise price thereof are subject
to adjustments in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends.
In November 1997, the Board of Directors of the Company granted six-year
options to purchase 259,572 shares of Common Stock under the 1997 Plan. All
of these options are exercisable at the initial public offering price per
share. The options generally will be subject to vesting and will become
exercisable at a rate of 5% per quarter from the date of grant, subject to
the optionee's continuing employment with the Company. Certain options become
fully vested and exercisable upon a change in control as defined.
In addition, in November 1997, the Board of Directors granted five-year
management stock options to purchase an aggregate of 115,365 shares of Common
Stock. All of these options are vested and are exercisable at the initial
public offering price per share.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, the Company adopted a defined benefit pension plan
(the 1997 Plan) to provide retirement benefits to its employees. This
non-contributory plan covers substantially all employees of the Company as of
the effective date of the plan. Pursuant to plan provisions, normal monthly
retirement benefits are equal to the participant's credited benefit service
(up to a maximum of 35 years) times the sum of 0.75% of the participant's
final average monthly compensation plus 0.65% of such compensation in excess
of the participant's covered average monthly wage. The plan also provides for
early retirement and certain death and disability benefits. The Company's
funding policy
F-27
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
for the plans is to contribute amounts sufficient to meet the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, plus any
additional amounts which the Company may determine to be appropriate.
For the year ended December 31, 1995 the Company recorded net periodic
pension expense of $166,000 and during the ten months ended October 31, 1996
the Company recorded a net periodic pension expense of $234,000 as part of
the allocated charges from the Parent.
The net pension cost for Company-sponsored defined benefit pension plan for
the year ended December 31, 1997 included the following components:
<TABLE>
<CAPTION>
SUCCESSOR
-------------
YEAR ENDED
DECEMBER 31
1997
-------------
<S> <C>
Service cost $ 94,000
Interest cost 54,000
Net amortization and deferral 34,000
--------
Net pension cost $182,000
--------
</TABLE>
F-28
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
The reconciliation of the funded status of the defined benefit pension plan
is as follows:
<TABLE>
<CAPTION>
SUCCESSOR
-------------
YEAR ENDED
DECEMBER 31
1997
-------------
<S> <C>
Actuarial present value of benefits:
Vested benefits $ (159,000)
Nonvested benefits (101,000)
-----------
Accumulated benefit obligation (260,000)
Effect of projected future compensation increases (780,000)
-----------
Projected benefit obligation (1,040,000)
Fair value of plan assets -
-----------
Projected benefit obligation in excess of plan assets (1,040,000)
Unrecognized prior service cost 745,000
Unrecognized net losses 113,000
Minimum pension liability (78,000)
-----------
Pension liability $ (260,000)
-----------
-----------
</TABLE>
The Company made no contributions to the Plans during the year ended December
31, 1997.
The assumptions used in the determination of the net pension cost for the
defined benefit pension plan were as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Discount rate 7%
Rate of increase in compensation levels 3%
Expected long-term rate of return on assets 7%
</TABLE>
Effective January 1, 1997, the Company also adopted a defined contribution
401(k) retirement savings plan which covers substantially all employees of
the Company. Plan participants are allowed to contribute up to 15% of their
base annual compensation and are entitled to receive a company match equal to
50% of the participant's contribution up to a maximum of 6% of the
participant's annual base compensation. Participant contributions to the plan
are immediately fully vested while company matching contributions are subject
to a five-year vesting period. All contributions to the plan are
F-29
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
held in a separate trust account. During the year ended December 31, 1997,
the Company's matching contribution amounted to $137,000. This amount was
expensed during the period and is included in the statement of operations.
10. RESTRUCTURING CHARGES
The Predecessor closed its facility in Miami, Florida during May 1996. This
closure and the transfer of certain fixed assets and inventory to the Sun
Valley, California facility resulted in a nonrecurring restructuring charge
of $1,196,000 in the statement of operations for the ten months ended October
31, 1996. The nonrecurring charge primarily includes costs incurred related
to fixed and other asset write-offs of approximately $600,000, payroll and
severance of approximately $190,000, moving and integration costs of
approximately $243,000 and the balance for facility and other charges.
Additionally, the Company recorded Miami related inventory write-offs of
approximately $489,000, which were charged to cost of sales during the ten
months ended October 31, 1996. Revenues and operating income of Miami,
Florida operations which will not be continued were approximately as follows
for the year ended December 31, 1995 and the ten months ended October 31,
1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Revenue $7,404,000 $2,049,000
Operating income (loss) (74,000) (40,000)
</TABLE>
11. STOCKHOLDERS EQUITY
Aqhawk, Inc., was formed on November 1, 1996 with the issuance of 400 shares
of Series A Preferred Stock to an individual for $2,000,000 and the issuance
of 5,741,206 shares of Common Stock to the same individual, certain
shareholders of UIC and management of the Company. Effective November 1, 1996
Aqhawk, Inc., merged with the Company through the issuance of 2,870,603
shares of Common Stock of the Company in exchange for the 5,741,206 shares of
Common Stock of Aqhawk, Inc., and the issuance of 400 shares of Series A
Preferred Stock of the Company for 400 shares of Preferred Stock of Aqhawk,
Inc. A value of $40,000 was assigned to 229,648 shares of Common Stock issued
to management and such amount was expensed as compensation expense in the two
months ended December 31, 1996.
In 1997 the Company received $1,000,000 for the issuance of 101,619 shares of
F-30
<PAGE>
Hawker Pacific Aerospace
Notes to Financial Statements (continued)
11. STOCKHOLDERS EQUITY (CONTINUED)
the Company's Common Stock. The capital infusion was made pursuant to an
agreement under which the majority shareholder had agreed to provide to the
Company up to $1,000,000 in return for Common Stock. The Series A Preferred
Stock was converted into 250,000 shares of Common Stock in connection with
the Company's initial public offering.
12. NON-MONETARY EXCHANGE TRANSACTION
During the year ended December 31, 1997, the Company sold certain landing
gear with a book value of $1,240,000 for a different landing gear valued at
$1,800,000 and cash of $250,000. In connection with the exchange transaction
the Company recognized profit of $78,000 during the year ended December 31,
1997, representing the pro rata portion of the gain associated with the cash
received. The landing gear received in the exchange was recorded in the
amount of $1,068,000.
13. SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN ASSETS OF BRITISH AIRWAYS
On February 4, 1998 (the "Acquisition Date"), the Company completed its
acquisition of certain assets of British Airways ("BA Assets"). The BA Assets
represent the assets of British Airways Engineering used to service landing
gear primarily on British Airways' aircraft. The purchase price for the BA
Assets was approximately $18.5 million subject to adjustment to reflect
certain changes to the quantity and condition of the assets purchased and the
potential purchase of one landing gear shipset priced at approximately $2.9
million. As part of the BA Acquisition, the Company and British Airways
entered into a seven-year exclusive service agreement on February 4, 1998 for
the Company to provide landing gear and related repair and overhaul services
to substantially all of the aircraft currently operated by British Airways.
F-31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HAWKER PACIFIC AEROSPACE
By /s/ Scott W. Hartman
---------------------------
Scott W. Hartman
CHAIRMAN OF THE BOARD
Date: March 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/Scott W. Hartman
- - --------------------------- Chairman of the Board March 25, 1998
Scott W. Hartman
/s/David L. Lokken
- - --------------------------- President, Chief Executive March 25, 1998
David L. Lokken Officer and Director
(Principal Executive
Officer)
/s/Brian S. Aune
- - --------------------------- Vice President and Chief March 25, 1998
Brian S. Aune Financial Officer (Principal
Financial and Accounting
Officer)
/s/Daniel J. Lubeck
- - --------------------------- Secretary and Director March 25, 1998
Daniel J. Lubeck
/s/John G. Makoff
- - --------------------------- Director March 25, 1998
John G. Makoff
/s/Joel F. McIntyre
- - --------------------------- Director March 25, 1998
Joel F. McIntyre
/s/Daniel C. Toomey, Jr.
- - --------------------------- Director March 25, 1998
Daniel C. Toomey, Jr.
/s/Mellon C. Baird
- - --------------------------- Director March 25, 1998
Mellon C. Baird
<PAGE>
Exhibit 10.15A
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment (this "Amendment") is entered into as of
December 15, 1997 by and between Industrial Centers Corp. ("Lessor") and
Hawker Pacific Aerospace (formerly Hawker Pacific, Inc.), a California
corporation ("Lessee"), in order to amend that certain Lease Agreement, dated
March 31, 1997 (the "Lease"), between Lessor and Lessee as herein set forth:
12. ASSIGNMENT AND SUBLETTING. Section 12.1(b) is hereby amended to read
in its entirety as follows:
"(b) A change in control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis of twenty-five percent
(25%) or more of the voting control of Lessee, other than any bona-fide
underwritten public offering of Lessee's securities registered under the
Securities Act of 1933, as amended, or any securities issued pursuant to
Lessee's employee stock option plans, shall constitute a change in control
for this purpose."
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
LESSOR:
Industrial Centers Corp.
By: /s/ Bradley D. Howard
----------------------------------
Name: Bradley D. Howard
--------------------------------
Title: President
-------------------------------
LESSEE:
HAWKER PACIFIC AEROSPACE
By: /s/ Brian S. Aune
----------------------------------
Brian S. Aune
Chief Financial Officer
<PAGE>
AMENDED AND RESTATED SUBORDINATED PROMISSORY NOTE
THIS INSTRUMENT IS SUBJECT TO A DEBT SUBORDINATION AGREEMENT
IN FAVOR OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION DATED JANUARY 23, 1998.
$5,000,000 Orange County, California
February 3, 1998
FOR VALUE RECEIVED, the undersigned, Hawker Pacific Aerospace, a
California corporation ("Borrower"), promises to pay to Unique Investment
Corporation, a California corporation ("Lender"), or order, at such place as
Lender from time to time may designate, the principal sum of Five Million
Dollars ($5,000,000), together with interest on the unpaid principal balance as
set forth herein, with principal and interest payable at the times and in the
manner set forth in this Note. Reference is made to the Amended and Restated
Business Loan Agreement, dated January 23, 1998 (the "Loan Agreement"), between
Borrower and Bank of America National Trust and Savings Association ("Bank").
This Amended and Restated Subordinated Promissory Note is the Subordinated Note
referred to in the Loan Agreement.
1. MATURITY. The entire unpaid principal balance of this Note shall be
due and payable on the earlier of (i) 180 days after the termination of the Loan
Agreement or (ii) June 30, 2005 (the "Maturity Date").
2. INTEREST. Interest on the unpaid balance of this Note shall accrue at
the rate of 11.8% per annum from the date hereof through the Maturity Date, and
shall accrue on the basis of actual days based on a 365-day year. Interest
shall be payable monthly in arrears on the tenth day of each calendar month;
provided, however, the first such payment shall be for the period commencing as
of the date hereof and ending on February 28, 1998.
3. NO PREPAYMENT PENALTY.
At no time shall Borrower be charged a prepayment penalty or yield
maintenance fee of any kind.
4. BLOCKING RIGHTS.
During the period commencing on the date hereof and ending upon the
Maturity Date, should an Event of Default (as defined in the Loan Agreement)
occur under the Loan Agreement, Bank shall have the right by delivering written
notice thereof to Borrower and
<PAGE>
Lender to (i) block all payments hereunder and (ii) to prevent Lender from
exercising any of its rights and remedies hereunder in the event of such
blockage of payments all as set forth in the Subordination Agreement, dated as
of the date hereof, between Borrower, Lender, Bank, Melanie L. Bastian, and
Hawker Pacific Aerospace Limited.
5. DEFAULT.
In the event of any default in the performance or observance of any
covenant or obligation of Borrower under this Note, Lender may elect, without
notice or demand to Borrower, to declare all principal and accrued and unpaid
interest under this Note immediately due and payable. Any failure of Lender to
make such election following a default or defaults shall not constitute a waiver
of Lender's right to make the election in the event of any subsequent default.
6. LATE PAYMENT CHARGE.
If any payment under this Note (whether of principal or interest or both,
and including the payment due on the Maturity Date or upon any acceleration of
this Note) is not paid within ten (10) days after the date on which it is due,
Borrower shall pay to Lender, in addition to the delinquent payment and without
any requirement of notice or demand by Lender, a late payment charge equal to
two percent (2%) of the amount of the delinquent payment. Borrower expressly
acknowledges and agrees that the foregoing late payment charge is reasonable
under the circumstances existing on the date of this Note, that it would be
extremely difficult and impractical to fix Lender's actual damages arising out
of any late payment and that the foregoing late payment charge shall be presumed
to be the actual amount of such damages incurred by Lender. No provision in
this Note (including without limitation the provisions for a late payment
charge) shall be construed as in any way excusing Borrower from its obligation
to make each payment under this Note promptly when due. All payments made
hereunder shall be applied first to late payment charges and accrued but unpaid
interest until all such charges and interest are paid, and then to principal.
7. COSTS OF COLLECTION.
Borrower agrees to pay all costs and expenses incurred by Lender, including
without limitation attorneys' fees and costs, in the event (i) this Note or any
portion of this Note is placed for collection; (ii) suit is instituted to
collect this Note or any portion of this Note; (iii) any bankruptcy, insolvency,
reorganization proceeding or receivership involving Borrower or any affiliate of
Borrower occurs in which Lender is required to appear, or from which Lender is
required to seek relief; and/or (iv) Lender
2.
<PAGE>
is required to engage an attorney to cause Borrower to comply with any of the
provisions hereof.
8. CERTAIN WAIVERS.
Borrower and all endorsers jointly and severally waive diligence, grace,
demand, presentment for payment, exhibition of this Note, protest, notice of
protest, notice of dishonor, notice of demand, notice of nonpayment, and any and
all exemption rights against the indebtedness evidenced by this Note, and agree
to any and all extensions or renewals from time to time without notice and to
any partial payments of this Note made before or after maturity and that no such
extension, renewal or partial payment shall release any one or all of them from
the obligation of payment of this Note or any installment of this Note, and
consent to offsets of any sums owed to any one or all of them by Lender at any
time.
9. CONSTRUCTION OF NOTE.
Headings in this Note are solely for convenience and are not to be referred
to in construing this Note. All references to paragraphs are to paragraphs in
this Note. This Note shall be governed by, interpreted and enforced under and
according to the laws of the State of California. If a law which applies to
this Note and sets maximum interest rates and loan charges is finally
interpreted so that the interest or other loan charges collected or to be
collected in connection with this Note exceed the lawful limits, then (i) such
interest or loan charge shall thereafter be reduced to the permitted limit and
(ii) any sums already collected from Borrower which exceed the permitted limit
will be refunded to Borrower. Lender may choose to make this refund by reducing
the principal owed under this Note or by making a direct payment to Borrower.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF NOTE.
In the event of the loss, theft or destruction of this Note, upon
Borrower's receipt of a reasonably satisfactory indemnification agreement
executed in favor of Borrower by the party who held this Note immediately prior
to its loss, theft or destruction, or in the event of the mutilation of this
Note, upon surrender to the Borrower of the mutilated Note, Borrower shall
execute and deliver to the holder a new promissory note in form and content
identical to this Note in lieu of the lost, stolen, destroyed or mutilated Note.
11. NOTICES.
All notices and other communications pertaining hereto shall be in writing
and shall be deemed to have been duly given when delivered personally, or two
days after being sent via overnight
3.
<PAGE>
courier, postage prepaid, to the following addresses or to such other address or
addresses as Borrower or Lender may from to time designate in writing:
To Borrower:
11240 Sherman Way
Sun Valley, California 91352
Attention: David L. Lokken
To Lender:
1831 South Ritchey Street
Santa Ana, California 92705
Attention: Daniel J. Lubeck
IN WITNESS WHEREOF, this Note has been duly executed and delivered by
Borrower on and as of the date first above written.
BORROWER:
Hawker Pacific Aerospace,
a California corporation
By: /s/ David L. Lokken
----------------------------------
David L. Lokken,
President
4.
<PAGE>
Exhibit 10.21
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment (this "Amendment") is entered into as of
December 15, 1997 by and between Industrial Centers Corp. (formerly Industrial
Bowling Corp.) ("Lessor") and Hawker Pacific Aerospace (formerly Hawker
Pacific, Inc.), a California corporation ("Lessee"), in order to amend that
certain Lease Agreement, dated July 28, 1994 (the "Lease"), between Lessor and
Lessee as herein set forth:
1. ASSIGNMENT AND SUBLETTING. Section 12.1(b) is hereby amended to read
in its entirety as follows:
"(b) A change in control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis of twenty-five percent
(25%) or more of the voting control of Lessee, other than any bona fide
underwritten public offering of Lessee's securities registered under the
Securities Act of 1933, as amended, or any securities issued pursuant to
Lessee's employee stock option plans, shall constitute a change in control
for this purpose."
2. FULL FORCE AND EFFECT. By its execution of this Amendment, Lessor
confirms that the Lease is in full force in effect and that no default
occurred thereunder in connection with the purchase by Aqhawk, Inc. of all of
the outstanding capital stock of Hawker from BTR Dunlop, Inc. in November
1996.
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
LESSOR:
Industrial Centers Corp.
By: /s/ Bradley D. Howard
---------------------------------
Name: Bradley D. Howard
-------------------------------
Title: President
------------------------------
LESSEE:
HAWKER PACIFIC AEROSPACE
By: /s/ Brian S. Aune
---------------------------------
Brian S. Aune
Chief Financial Officer
<PAGE>
Exhibit 10.25A
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment (this "Amendment") is entered into as of January __,
1997 by and between Allstate Insurance Company, an Illinois Insurance
Corporation ("Lessor"), and Hawker Pacific Aerospace (formerly Hawker
Pacific, Inc.), a California corporation ("Lessee"), in order to amend that
certain Lease Agreement, dated June 24, 1997 (the "Lease"), between Lessor
and Lessee as herein set forth:
12. ASSIGNMENT AND SUBLETTING. Section 12.1(b) is hereby amended to read
in its entirety as follows:
"(b) A change in control of Lessee shall constitute an assignment
requiring consent. The transfer, on a cumulative basis of twenty-five percent
(25%) or more of the voting control of Lessee, other than any bona fide
underwritten public offering of Lessee's securities registered under the
Securities Act of 1933, as amended, or any securities issued pursuant to
Lessee's employee benefit plans, shall constitute a change in control for this
purpose."
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
LESSOR:
ALLSTATE INSURANCE COMPANY
By: /s/ George A. Pandoleon
----------------------------------
Name: George A. Pandoleon
--------------------------------
Title: Authorized Signatory
-------------------------------
LESSEE:
HAWKER PACIFIC AEROSPACE
By: /s/ Brian S. Aune
----------------------------------
Brian S. Aune
Chief Financial Officer
<PAGE>
AMENDED AND RESTATED BUSINESS LOAN AGREEMENT
January 23, 1998
between
HAWKER PACIFIC AEROSPACE, a California corporation,
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. LINE OF CREDIT (FACILITY NO.1). . . . . . . . . . . . . . . . . . . . . 12
2.1 Line of Credit Amount . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2 Availability Period . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.3 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.4 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.5 Repayment Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.6 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. TERM LOAN (FACILITY NO. 2). . . . . . . . . . . . . . . . . . . . . . . 15
3.1 Loan Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2 Availability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.4 Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.5 Repayment Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.6 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . 16
4. CAPITAL EXPENDITURE FACILITY (FACILITY NO.3). . . . . . . . . . . . . . 16
4.1 Capital Expenditure Loans . . . . . . . . . . . . . . . . . . . . . . . 16
5. OPTIONAL INTEREST RATE. . . . . . . . . . . . . . . . . . . . . . . . . 18
5.1 Optional Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.2 Offshore Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6. FEES, EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.1 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.3 Reimbursement Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7. COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.1 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.2 Guarantees; Personal Property Supporting Guarantees. . . . . . . . . . 22
7.3 Future Subsidiaries and Collateral. . . . . . . . . . . . . . . . . . . 22
7.4 Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
i
<PAGE>
8. DISBURSEMENTS, PAYMENTS AND COSTS . . . . . . . . . . . . . . . . . . . 23
8.1 Requests for Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.2 Disbursements and Payments. . . . . . . . . . . . . . . . . . . . . . . 23
8.3 Telephone and Telefax Authorization . . . . . . . . . . . . . . . . . . 23
8.4 Direct Debit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.5 Direct Debit (Line of Credit) . . . . . . . . . . . . . . . . . . . . . 24
8.6 Banking Days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.7 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.8 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.9 Interest Calculation. . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.10 Default Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.11 Overdrafts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.12 Collections on Accounts Receivable. . . . . . . . . . . . . . . . . . . 26
9. CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.1 Authorizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.2 Incumbency Certificates; Governing Documents. . . . . . . . . . . . . 27
9.3 Security Agreements, Etc. . . . . . . . . . . . . . . . . . . . . . . . 27
9.4 Evidence of Priority. . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.5 Consent to Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.7 Business Interruption Insurance . . . . . . . . . . . . . . . . . . . . 27
9.8 Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.9 Subordination Agreement . . . . . . . . . . . . . . . . . . . . . . . . 27
9.10 Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . 27
9.11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.12 Legal Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.13 Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.14 Payment of Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.16 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.17 Certain Financial Information . . . . . . . . . . . . . . . . . . . . . 28
9.23 Other Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
10. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . 29
10.1 Organization of Borrower and its Subsidiaries . . . . . . . . . . . . . 29
10.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ii
<PAGE>
10.3 Enforceable Agreement . . . . . . . . . . . . . . . . . . . . . . . . 30
10.4 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.5 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.6 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . 30
10.7 Lawsuits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10.8 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.9 Permits, Franchises. . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.10 Other Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.11 Income Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.12 No Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.13 Merchantable Inventory . . . . . . . . . . . . . . . . . . . . . . . . 31
10.14 ERISA Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.15 Location of Borrower and its Subsidiaries. . . . . . . . . . . . . . . 32
10.16 Certain Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 32
10.17 The Acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.18 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.19 Governmental Regulation. . . . . . . . . . . . . . . . . . . . . . . . 33
10.20 Copyrights, Patents, Trademarks and Licenses, etc. . . . . . . . . . . 33
10.21 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
10.22 Year 2000 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 33
11. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.1 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.2 Use of Proceeds: Ineligible Securities. . . . . . . . . . . . . . . . 34
11.3 Financial and Other Information . . . . . . . . . . . . . . . . . . . 34
11.4 Senior Funded Debt to Adjusted EBITDA . . . . . . . . . . . . . . . . 37
11.5 Fixed Charge Coverage Ratio . .. . . . . . . . . . . . . . . . . . . . 37
11.6 Profitability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.7 Other Debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.8 Other Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
11.9 Capital Expenditures for Rotable Gears . . . . . . . . . . . . . . . . 39
11.10 Capital Expenditures for Other Assets. . . . . . . . . . . . . . . . . 39
11.11 Dividends and Other Payments . . . . . . . . . . . . . . . . . . . . . 40
11.12 Loans to Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.13 Notices to Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.14 Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.15 Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.16 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.17 Preservation of Rights . . . . . . . . . . . . . . . . . . . . . . . . 41
11.18 Maintenance of Properties. . . . . . . . . . . . . . . . . . . . . . . 41
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11.19 Perfection of Liens . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.20 Places of Business. . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.21 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.22 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(a) Insurance Covering Collateral . . . . . . . . . . . . . . 42
(b) General Business Insurance. . . . . . . . . . . . . . . . 42
(c) Evidence of Insurance . . . . . . . . . . . . . . . . . . 42
11.23 Additional Negative Covenants . . . . . . . . . . . . . . . . . . . . 42
11.24 ERISA Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.25 Inspection of Property and Books and Records. . . . . . . . . . . . . 43
11.26 Environmental Laws. . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.27 Collection of Accounts. . . . . . . . . . . . . . . . . . . . . . . . 43
11.28 Amendment to the Environmental Indemnities. . . . . . . . . . . . . . 44
11.29 Capitalization of HP UK . . . . . . . . . . . . . . . . . . . . . . . 44
12. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.1 Failure to Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.2 Lien Priority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.3 Loan Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12.4 False Informat. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.5 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.6 Receivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.7 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.8 Government Action . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.9 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . 45
12.10 Cross-default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.11 Other Bank Agreements . . . . . . . . . . . . . . . . . . . . . . . . 46
12.12 ERISA Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
12.13 Environmental Indemnity Breach. . . . . . . . . . . . . . . . . . . . 46
12.14 Change in Control or Management . . . . . . . . . . . . . . . . . . . 46
12.15 Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.16 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
12.17 Other Breach Under Agreement. . . . . . . . . . . . . . . . . . . . . 47
13. ENFORCING THIS AGREEMENT; MISCELLANEOUS. . . . . . . . . . . . . . . . 48
13.1 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
13.2 California Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
13.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 48
13.4 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
13.5 Severability; Waivers. . . . . . . . . . . . . . . . . . . . . . . . . 50
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13.6 Administration Costs . . . . . . . . . . . . . . . . . . . . . . . . . 50
13.7 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
13.8 One Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
13.9 Disposition of Schedules, Reports, Etc. Delivered by Borrower. . . . . 51
13.10 Returned Merchandise . . . . . . . . . . . . . . . . . . . . . . . . . 51
13.11 Verification of Receivables. . . . . . . . . . . . . . . . . . . . . . 51
13.12 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
13.13 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
13.14 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
13.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
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AMENDED AND RESTATED BUSINESS LOAN AGREEMENT
This Amended and Restated Business Loan Agreement (this
"Agreement") dated as January 23, 1998 is entered into between BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK") and HAWKER PACIFIC
AEROSPACE, a California corporation ("BORROWER"), and amends and restates in
its entirety the Business Loan Agreement (the "Existing Loan Agreement")
dated November 27, 1996 between the Bank and Borrower (acting under its
former name, Hawker Pacific, Inc.). Borrower and Bank hereby agree as
follows:
1. DEFINITIONS
In addition to the terms defined elsewhere in this Agreement, the following
terms have the meanings indicated for the purposes of this Agreement:
"ACCEPTABLE RECEIVABLE" means an account receivable which satisfies the
following requirements:
(a) The account has resulted from the sale of goods or the
performance of services by Borrower or HP UK in the ordinary course of
their business.
(b) There are no conditions which must be satisfied before
Borrower or HP UK is entitled to receive payment of the account. Accounts
arising from COD sales, consignments or guaranteed sales are not
acceptable.
(c) The debtor upon the account does not claim any defense
to payment and has not asserted any counterclaims or offsets against
Borrower or its Subsidiaries. To the extent any credit balances exist in
favor of the debtor, such credit balances shall be deducted from the
account balance.
(d) The account represents a genuine obligation of the debtor
for goods sold and accepted by the debtor, or for services performed for
and accepted by the debtor.
(e) Borrower or HP UK has sent an invoice to the debtor in the
amount of the account.
(f) The account is owned by Borrower or HP UK free of any title
defects or any liens or interests of others except the security interest in
favor of Bank.
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(g) The debtor upon the account is not any of the following:
(i) an employee, affiliate, parent or Subsidiary of
Borrower or HP UK, or an entity which has common officers or directors
with Borrower or HP UK.
(ii) any government or any agency or department of any
nation other than an account of Borrower arising out of the Coast Guard
Contract (and then only to the extent that Borrower has caused an
effective assignment of the Coast Guard Contract to occur under the
Federal Assignment of Claims Act assigning the interest of Bank in the
Coast Guard Contract, to the satisfaction of Bank), and any other contract
with the United States of America or its agencies and instrumentalities
which is reasonably acceptable to Bank and as to which such a filing has
been completed.
(iii) any person or entity located in a foreign country
(other than accounts owed to Borrower from debtors located in the Canadian
provinces of Quebec, Ontario, British Columbia, Saskatchewan and Manitoba)
unless the account is supported by a letter of credit issued by a bank
acceptable to Bank or by FCIA insurance or other credit insurance
acceptable to Bank in its sole discretion, and in the case of accounts
receivable owed by account debtors located in the United Kingdom, debtors
whose accounts are owed to HP UK.
(iv) any person or entity to whom Borrower or any of its
Subsidiaries are obligated for goods purchased or services performed (but
only to the extent of such obligation).
(h) The account is not in default. An account will be
considered in default if any of the following occur:
(i) The account is not paid within the 90 day period
starting on its original invoice date or, in the case of accounts owed
by any Major Customer, the 120 day period starting on its original
invoice date (it being understood that the entire amount of such
accounts which is not paid within the foregoing periods shall be
excluded from Borrower's and HP UK's gross accounts receivable balance
without regard to any credit balances due to the account debtor with
respect to any such account);
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<PAGE>
(ii) The debtor obligated upon the account suspends
business, makes a general assignment for the benefit of creditors, or
fails to pay its debts generally as they come due; or
(iii) Any petition is filed by or against the debtor
obligated upon the account under any bankruptcy law or any other law
or laws for the relief of debtors;
(i) The account is not the obligation of a debtor who is in
default (as defined in (h) above) on 25% or more of the total accounts
upon which such debtor is obligated (or, in the case of any Major
Customer, 15% or more of the total accounts upon which such debtor is
obligated).
(j) The account does not arise from the sale of goods which
remain in Borrower's or HP UK's possession or control.
(k) The account is not evidenced by a promissory note or
chattel paper.
(l) The account is otherwise acceptable to Bank.
In addition to the foregoing limitations, the dollar amount of accounts
included as Acceptable Receivables which are the obligations of a single
debtor shall not exceed 20% of Borrower's and HP UK's consolidated gross
accounts receivable at that time, PROVIDED THAT (i) such concentration
limit for Federal Express will be 30%, and (ii) such concentration limit
for British Airways will be 40%, in each case unless and until 15% of the
gross accounts receivable of Borrower and HP UK from such account debtor
remain unpaid for 90 days past their respective original invoice dates.
To the extent the total accounts owed by any debtor exceeds that debtor's
concentration limit pursuant to this paragraph, the amount of any such
excess shall be excluded.
"ACCEPTABLE INVENTORY" means inventory which satisfies the following
requirements:
(a) The inventory is owned by Borrower or HP UK free of
any title defects or any liens or interests of others except the security
interest in favor of Bank.
(b) In the case of inventory of Borrower, the inventory is
permanently located at United States domestic locations of Borrower which
Borrower has disclosed to Bank, as to which Bank has an appropriate
Uniform Commercial Code financing statement on file, and which is
otherwise acceptable to Bank. In the case of inventory of HP UK, the
inventory is permanently located at a location in England disclosed to
Bank,
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<PAGE>
and is subject to a first priority floating charge in favor of
Bank. In either case, if the inventory is covered by a negotiable
document of title (such as a warehouse receipt) that document must be
delivered to Bank. Inventory which is in transit (including but not
limited to inventory in transit between locations of Borrower and its
Subsidiaries and any used exchange parts shipped from Borrower's or
HP UK's customer but which have not reached their respective locations
described above) is not acceptable unless it is covered by a commercial
Letter of Credit issued by Bank and the seller of the inventory is
required to present shipping or title documents to Bank as a condition
to obtaining payment.
(c) The inventory is held for sale in the ordinary course of
Borrower's and HP UK's business and is of good and merchantable quality.
Inventory which is obsolete, unsalable, damaged, defective, discontinued,
slow-moving or excess inventory, or which has been returned by the buyer,
is not acceptable. For purposes of this clause (c), inventory shall be
considered slow moving if Borrower and HP UK have not sold inventory or
otherwise dealt in of that type within a 12 month period. Inventory shall
be considered "excess inventory" if Borrower's and HP UK's supply of
inventory of that type is in excess of the amount which is salable within a
24 month period, as determined by Bank given Borrower's and HP UK's
historical sales information. Work-in-process shall not be considered
Acceptable Inventory except to the extent that the same consists of
purchased parts allocated to work orders but not yet in assembly which are
identified as such to the reasonable satisfaction of the Bank. Display
items, and packing and shipping materials and supplies are not acceptable
inventory and are excluded.
(d) The inventory is not placed on consignment or otherwise
placed with the customer or on the customer's premises.
(f) The inventory does not consist of freight or duty.
(g) The inventory consists of property other than rotable
gears or Shipsets.
(h) The inventory is otherwise acceptable to Bank.
"ACQUISITION" means the acquisition by HP UK of the UK Business on the
Closing Date pursuant to the Acquisition Agreement.
"ACQUISITION AGREEMENT" means that certain Agreement relating to the Sale
and Purchase of part of the Business of British Airways Plc among Borrower,
HP UK and British Airways dated as of 20th December, 1997, as in effect on
the date of this Agreement.
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"ADJUSTED EBITDA" means, as of each date of determination, EBITDA for the
four Fiscal Quarter period ending on that date, EXCEPT THAT (i) as of the
Fiscal Quarter ending March 31, 1998, Adjusted EBITDA shall be EBITDA for
that Fiscal Quarter plus $5,700,000, (ii) as of the Fiscal Quarter ending
June 30, 1998, Adjusted EBITDA shall be EBITDA for the two Fiscal Quarter
period then ending plus $4,300,000, and (iii) as of the Fiscal Quarter
ending September 30, 1998, Adjusted EBITDA shall be EBITDA for the three
Fiscal Quarter period then ending plus $2,400,000.
"AMR SHIPSET PAYABLE" means trade accounts payable net of deposits payable
to American Airlines in the amount of $2,854,373.
"BASTIAN" means Melanie L. Bastian, an individual residing in Orem, Utah.
"BORROWER" means Hawker Pacific Aerospace, a California corporation
formerly known as Hawker Pacific, Inc., its successors and permitted
assigns.
"BORROWER DEBENTURE" means a Debenture of even date herewith executed by
Borrower providing for a floating charge upon all assets of Borrower which
may hereafter be located in the United Kingdom, the terms of which are
subject to and controlled by the Security Agreement.
"BORROWER SECURITY AGREEMENT" means that certain Security Agreement of even
date herewith made by Borrower in favor of Bank, as at any time amended.
"BORROWING BASE" means the sum of:
(a) 85% of the balance due on the aggregate amount of the
Acceptable Receivables; and
(b) The lesser 50% of the value of Acceptable Inventory
or the Inventory Limit. In determining the value of Acceptable Inventory
to be included in the Borrowing Base, Bank will use the lowest of (i)
Borrower's or HP UK's cost, (ii) Borrower's or HP UK's estimated market
value, or (iii) Bank's independent determination of the resale value of
such inventory in such quantities and on such terms as Bank deems
appropriate.
"BORROWING BASE CERTIFICATE" is defined in Section 11.3(e).
"BRITISH AIRWAYS" means British Airways Plc, an English company.
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<PAGE>
"BRITISH AIRWAYS ENVIRONMENTAL INDEMNITY" means the representations,
warranties, covenants and indemnities as to environmental matters made by
British Airways in favor of Borrower and HP UK in the Acquisition
Agreement, including without limitation those set forth in Section 2.2 of
Schedule 3 thereto.
"BTR ENVIRONMENTAL INDEMNITY" means that certain environmental indemnity
dated as of November 27, 1996 made in favor of Borrower by BTR Dunlop,
Inc., a Delaware corporation.
"CAPITAL EXPENDITURE LOANS" means loans to Borrower made pursuant to
Facility No. 3, as described in Section 4.
"CASH FLOW" means, for any period, EBITDA for that period, MINUS state and
federal income taxes payable in cash by Borrower and its Subsidiaries with
respect to income earned during that period, and net cash taxes payable in
the current period for fiscal years prior to that period.
"CLOSING DATE" means the date upon which each of the conditions precedent
set forth in Section 9 of this Agreement are satisfied or waived in writing
by Bank and the initial loans under this Agreement are funded.
"COAST GUARD CONTRACT" means that certain Contract No. DTCG38-95-D-20018
dated September 20, 1995, between Borrower and the United States Coast
Guard Aircraft Repair and Supply Center, as amended from time to time.
"COMMITMENT FEE RATE" means (a) during the period from the Closing Date
through the day prior to the commencement of the initial Pricing Period,
0.50% per annum, and (b) during each Pricing Period, the percentage per
annum set forth below opposite the Leverage Ratio as of the last day of the
Fiscal Quarter ending 45 days prior to the start of that Pricing Period:
LEVERAGE RATIO COMMITMENT FEE RATE
Less than 2.00:1.00 0.25%
Equal to or greater than
2.00:1.00, but less than
2.50:1.00 0.35%
Equal to or greater than
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<PAGE>
2.50:1.00, but less than
3.00:1.00 0.375%
Equal to or greater than
3.00:1.00 0.50%
"DEFAULT" means any event or circumstance which, with the giving of notice
or the passage of time, or both, would constitute an Event of Default.
"EBITDA" means, for any period, the sum (without duplication) of (a) the
consolidated net income of Borrower and its Subsidiaries for that period,
PLUS (b) the amount of state and federal taxes paid or payable with respect
to such net income, PLUS (c) depreciation and amortization expense of
Borrower and its Subsidiaries, MINUS (d) gains (and PLUS losses) associated
with the sale of fixed assets to the extent included in such net income,
MINUS (e) extraordinary gains during that period, PLUS (f) interest expense
of Borrower and its Subsidiaries during that fiscal period, in each case
for that period, determined in accordance with generally accepted
accounting principles, consistently applied.
"ENVIRONMENTAL CLAIMS" means all claims, however asserted, by any
governmental authority or other person alleging potential liability or
responsibility for violation of any Environmental Law, or for release or
injury to the environment.
"ENVIRONMENTAL LAWS" means all federal, state or local laws, statutes,
common law duties, rules, regulations, ordinances and codes, together with
all administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any governmental
authorities, in each case relating to environmental, health, safety and
land use matters.
"EVENT OF DEFAULT" means any of the circumstances or events constituting
defaults hereunder and listed in Section 12.
"FACILITY NO. 1 OUTSTANDING AMOUNT" has the meaning set forth in Section
2.1(b).
"FACILITY NO. 1 UNUSED AMOUNT" means, as of each date of determination, the
difference between (i) $15,000,000, and (ii) the Facility No. 1 Outstanding
Amount.
"FIXED CHARGES" for any period, means the sum of (a) gross interest expense
paid or payable by Borrower and its Subsidiaries in cash (including
interest on the Subordinated Note), plus (b) scheduled principal payments
on indebtedness of Borrower and its
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<PAGE>
Subsidiaries for borrowed money and capital leases, PLUS (c) for each
fiscal quarter during that period during which no scheduled payments are
required to be made with respect to the Facility No. 2, $750,000.
"HP UK" means Hawker Pacific Aerospace Limited, a company organized under
the laws of England and Wales (registered No. 3459428), its successors
and permitted assigns.
"HP UK GUARANTY" means the Composite Guarantee and Debenture of even date
herewith executed by HP UK in favor of the Bank, as at any time amended.
"INELIGIBLE SECURITIES" means securities which may not be underwritten or
dealt in by member banks of the Federal Reserve System under Section 16 of
Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended.
"INITIAL PUBLIC OFFERING" means the initial Public Offering of the common
stock of Borrower conducted prior to the Closing Date pursuant to the
Registration Statement on Form S-1 (Reg. No. 333-40295), as amended, filed
by Borrower with the Securities and Exchange Commission.
"INTERCOMPANY DEBENTURE" means a Debenture of even date herewith made by HP
UK in favor of Borrower in a form acceptable to the Bank, the lien of which
shall be subject to a Deed of Priorities of even date therewith among Bank,
Borrower and HP UK.
"INTERCOMPANY NOTE" means that certain $20,000,000 promissory note of even
date herewith made by HP UK in favor of Borrower and pledged to the Bank.
"INVENTORY LIMIT" means, as of each date of determination of the Borrowing
Base, an amount equal to 75% of the revenues of Borrower and its
Subsidiaries for the then most recently ending three month period for which
Borrower has reported such revenues on its latest Borrowing Base
Certificate.
"LETTER OF CREDIT" means any of the standby or commercial letters of credit
issued by Bank for the account of Borrower pursuant to Section 2.6.
"LEVERAGE RATIO" means, as of the last day of each fiscal quarter of
Borrower, the ratio of (a) Senior Funded Debt as of that date to (b)
Adjusted EBITDA as of that date.
"LOAN DOCUMENTS" means this Agreement, the Borrower Security Agreement, the
Lockbox Agreements, the Intercompany Note, each Letter of Credit, the
Pledge
8
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Agreement, the HP UK Guaranty, the Deed of Priorities among Borrower, HP
UK and the Bank, each interest and currency hedging agreement entered into
between the Bank and Borrower, and each other instrument, document and
agreement now or hereafter executed by Borrower, Bastian, or any of
their respective shareholders or affiliates in connection with this
Agreement.
"LOCKBOX" means post office boxes established by Borrower and HP UK
pursuant to the Lockbox Agreements.
"LOCKBOX ACCOUNTS" means the blocked bank deposit accounts established by
Borrower and HP UK with Bank subject to the first priority lien of Bank
into which remittances to a Lockbox are deposited on a daily basis.
"LOCKBOX AGREEMENT" means each agreement establishing a Lockbox or Lockbox
Account, in any event providing for (i) the deposit of all remittances with
respect to accounts receivable of Borrower and HP UK to the Lockboxes, (ii)
the deposit of remittances received in the Lockboxes to a Lockbox Account,
and (iii) a first priority lien in favor of Bank with respect to the
contents of the Lockbox and each Lockbox Account.
"MAJOR CUSTOMER" means, collectively, American Airlines, United Airlines,
British Airways and Federal Express Corporation and their affiliated
business entities.
"NET PROCEEDS" means the amount received by Borrower by reason of any
Public Offering, after deduction of all actual and reasonably estimated
associated fees and transactional expenses.
"OFFSHORE RATE MARGIN" means (a) during the period from the Closing Date
through the day prior to the commencement of the initial Pricing Period,
1.75%, and (b) during each Pricing Period, the percentage set forth below
opposite the Leverage Ratio as of the last day of the Fiscal Quarter ending
45days prior to the start of that Pricing Period:
LEVERAGE RATIO OFFSHORE RATE MARGIN
Less than 2.00:1.00 1.00%
Equal to or greater than
2.00:1.00, but less than
2.50:1.00 1.25%
Equal to or greater than
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2.50:1.00, but less than
3.00:1.00 1.50%
Equal to or greater than
3.00:1.00 1.75%
"PERMITTED MANAGEMENT FEES" means fees payable to Unique, in equal
installments and not less frequently than quarterly, in an annual amount
not to exceed (i) $300,000 during 1998 and (ii) $150,000 in each subsequent
year.
"PLEDGE AGREEMENT" means the Pledge Agreement of even date herewith made by
Borrower in favor of Bank to secure the obligations and indebtedness under
this Agreement, pursuant to which 100% of the capital stock of HP UK and
the Intercompany Note shall be pledged by Borrower to Bank, as at any time
amended.
"PRICING PERIOD" means the period beginning May 15, 1998 and ending on
August 14, 1998, and each of the subsequent and concurrent three month
periods beginning on August 15, November 15, February 14 and May 15 during
the term of this Agreement.
"PUBLIC OFFERING" means each offer and sale by Borrower of capital stock of
Borrower pursuant to a registration statement filed with the Securities and
Exchange Commission other than a registration on Form S-8, and includes the
Initial Public Offering.
"REFERENCE RATE" is the rate of interest publicly announced from time to
time by Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by Bank based on various factors, including Bank's
costs and desired return, general economic conditions and other factors,
and is used as a reference point for pricing some loans. Bank may price
loans to its customers at, above, or below the Reference Rate. Any change
in the Reference Rate shall take effect at the opening of business on the
day specified in the public announcement of a change in Bank's Reference
Rate.
"REFERENCE RATE MARGIN" means (a) during the period from the Closing Date
through the day prior to the commencement of the initial Pricing Period,
0.50%, and (b) during each Pricing Period, the percentage set forth below
opposite the Leverage Ratio as of the last day of the Fiscal Quarter ending
45 days prior to the start of that Pricing Period:
LEVERAGE RATIO REFERENCE RATE MARGIN
Less than 2.50:1.00 0%
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<PAGE>
Equal to or greater than
2.50:1.00, but less than
3.00:1.00 0.25%
Equal to or greater than
3.00:1.00 0.50%.
"SENIOR FUNDED DEBT" means, as of each date of determination, and without
duplication, the principal amount of (a) all indebtedness of Borrower and
its Subsidiaries for borrowed money, (b) all obligations of Borrower and
its Subsidiaries with respect to capital leases, (c) all obligations of
Borrower and its Subsidiaries with respect to standby letters of credit,
and (d) all guarantees and other contingent obligations with respect to any
of the foregoing items, OTHER than the Subordinated Note.
"SHIPSET" means a landing gear core set for a fixed wing or rotor equipped
aircraft.
"SUBORDINATED NOTE" means that certain $5,000,000 Amended and Restated
Subordinated Promissory Note dated as of the date hereof made by Borrower
in favor of Unique, as at any time amended.
"SUBORDINATION AGREEMENT" means that certain Amended and Restated
Subordination Agreement of even date herewith executed by Bastian, Unique,
Borrower, HP UK and Bank, as at any time amended, pursuant to which all
obligations of Borrower to Bastian and Unique have been subordinated to the
Intercompany Note and the Loan Documents.
"SUBSIDIARY" means, as of any date of determination and with respect to any
person, any corporation or partnership (whether or not, in either case,
characterized as such or as a "joint venture"), whether now existing or
hereafter organized or acquired: (a) in the case of a corporation, of which
a majority of the securities having ordinary voting power for the election
of directors or other governing body (other than securities having such
power only by reason of the happening of a contingency) are at the time
beneficially owned by such person or one or more Subsidiaries of such
person, or (b) in the case of a partnership, of which a majority of the
partnership or other ownership interests are at the time beneficially owned
by such person or one or more of its Subsidiaries.
"UK BUSINESS" means the landing gear repair and overhaul business purchased
from British Airways pursuant to the Acquisition Agreement.
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"UK LOCKBOX AGREEMENT" means [[describe after consultation with UK
Counsel]]
"UNIQUE" means Unique Investment Corporation, a Utah corporation, its
successors and assigns.
2. LINE OF CREDIT (FACILITY NO.1).
2.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, Bank
will provide a line of credit ("FACILITY NO. 1") to Borrower. The
maximum amount of the line of credit (the "FACILITY NO. 1 COMMITMENT")
is equal to the lesser of (i) $15,000,000 or (ii) the Borrowing Base.
(b) This is a revolving line of credit for advances with
a within-line facility for Letters of Credit (the maximum effective
amount of which shall not exceed $2,000,000 at any time). During the
availability period, Borrower may repay principal amounts and reborrow
them, to the extent of the excess from time to time of (i) the Facility
No. 1 Commitment over (ii) the outstanding principal balance of the line
of credit under Facility No. 1 PLUS the outstanding amounts of any
Letters of Credit, including amounts drawn on Letters of Credit and not
yet reimbursed (such aggregate amount being the "FACILITY NO. 1
OUTSTANDING AMOUNT").
(c) Each advance must be for at least $100,000 or, if
less, for the Facility No. 1 Unused Amount.
(d) Borrower agrees not to permit the Facility No. 1
Outstanding Amount to at any time exceed the Facility No. 1 Commitment.
If Borrower exceeds this limit (including without limitation, because of
any decrease in the Borrowing Base), Borrower will immediately pay the
excess to Bank upon Bank's demand.
2.2 AVAILABILITY PERIOD. The line of credit is available
between the date of this Agreement and January 30, 2001 (the "FACILITY
NO. 1 EXPIRATION DATE"), provided that Bank will not be required to make
any advances or issue any Letters of Credit under Facility No. 1 if any
Default or Event of Default exists under this Agreement.
2.3 PURPOSE. The line of credit shall be used to partially
finance the Acquisition (by means of an advance under the Intercompany
Note), and for working capital for operations of Borrower and HP UK and
for the issuance of Letters of Credit thereafter.
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2.4 INTEREST RATE.
(a) Unless Borrower elects an optional interest rate in
the manner described in Section 5, loans under Facility No. 1 shall bear
interest at Bank's Reference Rate.
(b) Borrower may prepay the loans under Facility No. 1 in
full or in part at any time in an amount not less than $10,000 (or the
remaining principal balance under Facility No. 1), subject to the limits
set forth in Section 5.
2.5 REPAYMENT TERMS
(a) Borrower will pay all accrued unpaid interest on the
last business day of each calendar month commencing on January 31, 1998
and upon the termination of the Facility No. 1 Commitment.
(b) Borrower will repay in full all principal and any
unpaid interest or other charges outstanding under this line of credit
no later than the Facility No. 1 Expiration Date. Interest on any amount
bearing interest at an Offshore Rate (as defined in Section 5) shall be
paid on the earliest of the last day of each calendar month, at the end
of the applicable interest period, and in any event on the Facility No.
1 Expiration Date.
2.6 LETTERS OF CREDIT. The Facility No. 1 line of credit may be
used for the issuance of Letters of Credit, provided that the aggregate
effective face amount of all outstanding Letters of Credit PLUS the
amount of any unpaid reimbursement obligations of Borrower thereunder
shall not exceed $2,000,000 at any time. The within line amount for
Letters of Credit shall be used for the issuance of:
(i) commercial Letters of Credit in a form and having
beneficiaries acceptable to Bank. Each such Letter of Credit shall
have a maximum maturity of 180 days but in any event shall not
extend beyond the Facility No. 1 Expiration Date. Each commercial
Letter of Credit will require drafts payable at sight;
(ii) standby Letters of Credit having beneficiaries and
terms acceptable to Bank with a maximum maturity of 365 days but not to
extend beyond the Facility No. 1 Expiration Date, PROVIDED that standby
Letters of Credit in support of workers compensation obligations shall not
exceed $750,000 at any time. Standby Letters of Credit may contain
provisions allowing for their automatic extension unless Bank is
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notified, within thirty days of their scheduled expiration, of their
non-renewal, provided that they shall in no event extend beyond the
Facility No. 1 Expiration Date.
Borrower agrees:
(a) any sum drawn under a Letter of Credit may, at the
option of Bank, be added to the principal amount outstanding under
Facility No. 1. The amount will bear interest at the Reference Rate and
shall be payable upon demand.
(b) if an Event of Default exists, to pay to Bank an
amount equal to the aggregate effective face amount of all outstanding
Letters of Credit, and all amounts which remain unreimbursed with
respect to Letters of Credit to be applied to such unreimbursed amounts
or held as cash collateral for the obligations of Borrower under such
Letters of Credit.
(c) the issuance of any Letter of Credit and any
amendment to a Letter of Credit is subject to Bank's written approval
and must be in form and substance acceptable to Bank and in favor of a
beneficiary acceptable to Bank.
(d) to sign Bank's form Application and Agreement for
Commercial Letter of Credit or Application and Agreement for Standby
Letter of Credit, as applicable.
(e) to pay a letter of credit fee with respect to each
standby Letter of Credit in an amount equal to the greater of (i) $1000
per annum (or, if higher, then Bank's generally applicable minimum
issuance fee for standby letters of credit), or (ii) the then applicable
Offshore Rate Margin per annum calculated on the face amount thereof ,
in each case payable upon issuance and thereafter quarterly in advance,
provided that, if there is a Default or Event of Default exists under
this Agreement, at Bank's option, the amount of the fee shall be
increased to 4.5% per annum.
(f) to pay any issuance fees with respect to commercial
Letters of Credit, and any amendment and/or other fees with respect to
commercial Letters of Credit and/or standby Letters of Credit that Bank
notifies Borrower will be charged for issuing and processing Letters of
Credit for Borrower, in accordance with Bank's typical schedule of fees.
(g) to allow Bank to automatically charge its checking
account or other deposit accounts for applicable fees, discounts, and other
charges.
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3. TERM LOAN (FACILITY NO. 2).
3.1 LOAN AMOUNT. Subject to the fulfillment of the conditions
precedent set forth in Section 9, Bank agrees to provide a term loan
("FACILITY NO. 2") to Borrower in the amount of $24,500,000 on the Closing
Date, PROVIDED THAT in the event that the Initial Public Offering yields Net
Proceeds which are in excess of $22,000,000, then the amount of the Facility
No. 2 term loan will be reduced to an amount not less than $22,000,000 by the
amount of such excess.
3.2 AVAILABILITY. The Facility No. 2 term loan will be made in
a single disbursement on the Closing Date.
3.3 PURPOSE. The proceeds of the Facility No. 2 term loan shall
be (i) loaned by Borrower to HP UK via the Intercompany Note and shall be
used to partially finance the Acquisition and (ii) used by Borrower to
refinance certain obligations under the Existing Loan Agreement and to
refinance the AMR Shipset Payable.
3.4 INTEREST RATE
(a) Unless Borrower elects an optional interest rate in the
manner described in Section 5, loans under Facility No. 2 shall bear
interest rate at Bank's Reference Rate.
(b) Borrower may voluntarily prepay the loan in full or in
part at any time in amounts which are not less than $100,000 (subject
to its concurrent payment of applicable termination fees described in
Section 5). Each such prepayment will be applied to the most remote
installment of principal outstanding under Facility No. 2.
3.5 REPAYMENT TERMS
(a) Borrower will pay all accrued unpaid interest on
January 31, 1998, and then monthly on the last business day of each
calendar month thereafter and upon any payment of all or part of the
principal of the loan with respect to the amount being paid. Interest
on any amount bearing interest with respect to an Offshore Rate shall
be paid on the earlier of the last day of each calendar month, at the
end of the applicable interest period, and in any event on the December
31, 2004.
(b) Borrower will repay principal in successive quarterly
installments beginning on March 31, 1999 and on the last calendar day
of each successive June,
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September, December and March in the following amounts (or such lesser
amount as may then be outstanding):
YEAR DURING
WHICH DUE AMOUNT OF EACH INSTALLMENT
1999 $ 812,500
2000 812,500
2001 937,500
2002 1,062,500
2003 1,187,500
2004 1,312,500.
3.6 MANDATORY PREPAYMENTS. In addition to the other scheduled
payments of principal required hereunder, Borrower shall repay an amount of
principal outstanding under Facility No. 2 equal to:
(a) 100% of the net after-tax cash proceeds in excess of $200,000, in
the aggregate, received or receivable during each fiscal year from sales,
leases or other transfers by Borrower or its Subsidiaries of equipment or
other fixed assets unless, during the 180 day period following such sale,
lease or other transfer (or, if earlier, the date upon which any Event of
Default occurs), such cash proceeds are reinvested in similar equipment or
replacement fixed assets. Each such repayment shall be made on the 180th
day following the date upon which the sale is consummated, and shall be
applied to the outstanding installments of Facility No. 2 in inverse order
of their maturity, PROVIDED that if an Event of Default sooner occurs,
Borrower shall immediately repay the Facility No. 2 by the amount of the
unreinvested cash proceeds of such sale, transfer or other leases.
(b) concurrently with the consummation of the related Public Offering,
50% of the Net Proceeds from any offering, subsequent to the Initial Public
Offering, of the capital stock of Borrower.
If and to the extent that, as of the date of any prepayment required under
this Section, Facility No. 2 has been repaid in full, Borrower shall instead
make like prepayments of any outstanding obligations under Facility No. 3, to
be applied to installments due under Facility No. 3 in the inverse order of
their maturity.
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4. CAPITAL EXPENDITURE FACILITY (FACILITY NO.3).
4.1 CAPITAL EXPENDITURE LOANS.
(a) In addition to the other credit provided under this
Agreement, during the availability period set forth below, unless a Default
or Event of Default exists under this Agreement, Borrower may request
Capital Expenditure Loans from Bank in an aggregate principal amount not
to exceed $6,000,000. The availability period for such loans is from the
date of this Agreement through January 30, 2001. Any amount repaid with
respect to Capital Expenditure Loans may not be reborrowed.
(b) Unless Borrower elects an optional interest rate for
Capital Expenditure Loans in the manner described in Section 5, Capital
Expenditure Loans shall bear interest at Bank's Reference Rate. Interest
on Capital Expenditure Loans will be paid at the times set forth herein as
applicable to interest due in respect of Facility No. 2.
(c) Each Capital Expenditure Loan shall be used to finance a
portion of the purchase price for rotable gears or Shipsets for use in the
ordinary course of Borrower's business. All rotable gears and Shipsets
acquired with the proceeds of Capital Expenditure Loans shall be free and
clear of any security interests, liens, encumbrances or rights of others
except the security interests of Bank under any security agreements
required under this Agreement. Each request for a Capital Expenditure
Loan shall be accompanied by either (i) a copy of the purchase order or
invoice for the equipment to be purchased with the proceeds of the
advance, or (ii) a detailed cost schedule for the rotable gear or Shipset
constructed and such other information as Bank may reasonably require. The
amount of each Capital Expenditure Loan shall not exceed the lesser of (x)
the cash purchase price or cost to construct the rotable gear or Shipset or
(y) 70% of:
(i) if Bank in its discretion requests an appraisal, the
appraised value of the related rotable gear or Shipset (as
determined by a qualified independent appraiser approved by Bank); or
(ii) if Bank waives the requirement of such an appraisal,
the purchase price paid by Borrower or HP UK for the related rotable
gear or Shipset.
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(d) As conditions precedent to each Capital Expenditure
Loan which is made in connection with any capital expenditure which is
in excess of $1,000,000 or which results in the aggregate principal
amount of capital expenditures made during the then current fiscal year
being in excess of $1,500,000:
(i) Borrower will deliver to Bank evidence acceptable to
Bank of its compliance with all of the terms of this Agreement.
(ii) Borrower shall have delivered to Bank (and Bank shall
have completed its review of, and shall have approved ) each of the
following:
(x) pro forma financial statements in form and substance
acceptable to Bank demonstrating the pro forma effect of the
proposed capital expenditure for the twelve month period
following the date thereof, the proposed Capital Expenditure Loan
and other projected new financings, projected revenues and
working capital requirements related thereto demonstrating
projected compliance with all terms of this Agreement; and
(y) the contract entered into by Borrower or HP UK
which requires the purchase or assembly of additional Shipsets or
rotable gears.
(e) As conditions precedent to the making of Capital Expenditure
Loans which are, in the aggregate, in excess of $3,000,000, Borrower shall
have delivered its audited consolidated financial statements to Bank
demonstrating compliance with the terms of this Agreement and the other
Loan Documents as of the date thereof, and EBITDA of not less than
$10,000,000 during Borrower's fiscal year 1998.
(f) Borrower will repay principal of each Capital Expenditure
Loan made hereunder in successive equal quarterly installments
beginning on the March 31, June 30, September 30 or December 31 next
following the making of such loan, with all remaining principal and any
unpaid interest and charges then remaining outstanding under Facility No. 3
in any event being due and payable on December 31, 2004. Each quarterly
installment payment due under this clause (f) with respect to each Capital
Expenditure Loan shall be equal to one eighty-fourth of the initial amount
of the related Capital Expenditure Loan.
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5. OPTIONAL INTEREST RATE
5.1 OPTIONAL RATE. Provided that no Default or Event of Default
exists, Borrower may elect that Portions (as defined in Section 5.2(b)) of
the loans hereunder will bear interest at the Offshore Rate in accordance
with this Section 5. The Offshore Rate is a rate per annum based upon a year
of 360 days and the actual number of days elapsed. Interest will be paid on
the last day of each interest period, and, if the interest period is longer
than one month, then on the last business day of each calendar month during
the interest period. At the end of any interest period, the interest rate
will revert to the Reference Rate, unless Borrower has designated another
optional interest rate for the Portion. Subject to Section 8.10, no Portion
will be converted to a different interest rate during the applicable interest
period. Upon the occurrence of a Default or Event of Default under this
Agreement, Bank may terminate the availability of optional interest rates for
interest periods commencing after a Default or Event of Default occurs.
5.2 OFFSHORE RATE. The election of the Offshore Rate shall be
subject to the following terms and requirements:
(a) Borrower may select interest periods for Offshore Rate
loans which have durations of 1, 2, 3, 6, 9 or 12 months, provided that
no such interest period may be selected which would extend beyond the
maturity of the related facility or which would result in Borrower
being unable to make a scheduled payment of principal required
hereunder without prepayment of the related Portion (as defined below).
Borrower may select either the Cayman Islands eurodollar market or the
London Inter-bank eurodollar market as the market in which quotations
of Offshore Rates are obtained, provided that Borrower shall give the
Bank (i) not less than two business days' notice, by 11:00 a.m. on such
date, of its request for any loan to be made on the basis of an
interest rate quotation based upon the London Interbank eurodollar
market, and (ii) notice for loans based upon the Cayman Islands
eurodollar market not later than 11:00 a.m. on the relevant date. The
last day of the interest period will be determined by Bank using the
practices of the relevant offshore dollar inter-bank market.
(b) Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "PORTION". Each Offshore
Rate Portion will be for an amount not less than $500,000.
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The "OFFSHORE RATE" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by Bank as of the first day of the
interest period.)
Offshore Rate = OFFSHORE BASE RATE + Offshore Rate Margin
---------------------------
(1.00 - Reserve Percentage)
Where:
(i) "OFFSHORE BASE RATE" means either (a) the interest rate
(rounded upward to the nearest 1/16th of one percent) at which the
Bank's office in London, England, would offer U.S. dollar deposits
for the applicable interest period to other prime banks in the London
Interbank eurodollar market, or (b) the interest rate (rounded upward
to the nearest 1/16th of one percent) at which Bank's Grand Cayman
Branch, Grand Cayman, British West Indies or another branch office
of Bank selected by Bank, would offer U.S. dollar deposits for the
applicable interest period to other prime banks in the offshore
dollar inter-bank market.
(ii) "RESERVE PERCENTAGE" means the total of the maximum
reserve percentages for determining the reserves to be maintained
by member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The percentage
will be expressed as a decimal, and will include, but not be
limited to, marginal, emergency, supplemental, special, and other
reserve percentages.
(c) Subject to Section 5, Borrower may voluntarily prepay
any Offshore Rate Portion upon three banking days' advance written
notice delivered to Bank. Each prepayment of an Offshore Rate Portion,
whether voluntary, by reason of acceleration or otherwise, must be
accompanied by the amount of accrued interest on the amount prepaid, and
a prepayment fee as described below. A "PREPAYMENT" is a payment of an
amount on a date earlier than the scheduled payment date for such amount
as required by this Agreement. The prepayment fee shall be equal to the
amount (if any) by which:
(i) the additional interest which would have been
payable during the interest period on the amount prepaid had it not
been prepaid, EXCEEDS
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(ii) the interest which would have been recoverable by
Bank by placing the amount prepaid on deposit in the offshore
dollar market for a period starting on the date on which it was
prepaid and ending on the last day of the interest period for
such Portion (or the scheduled payment date for the amount
prepaid, if earlier).
(d) Bank will have no obligation to accept an election for
an Offshore Rate Portion if any of the following described events has
occurred and is continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the interest period, of an Offshore Rate Portion
are not available in the offshore Dollar inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the
cost of an Offshore Rate Portion.
6. FEES, EXPENSES
6.1 FEES
(a) FACILITY FEE. On the Closing Date, Borrower shall pay a
facility fee of $100,000 to Bank (net of any credits then applicable
thereto).
(b) COMMITMENT FEES. Borrower agrees to pay to Bank a
commitment fee equal to (a) the sum of (i) Facility No. 1 Unused Amount,
and (ii) the undisbursed portion of Facility No. 3, TIMES (b) the then
applicable Commitment Fee Rate, quarterly in arrears on the last day of
each calendar quarter. The amount of the commitment fees payable
hereunder shall not be reduced if any portion of the Facility No. 1 or
Facility No. 3 is unavailable to Borrower because of borrowing base
limitations or otherwise.
(c) EARLY TERMINATION FEE. In the event that Borrower
prepays any portion of the principal outstanding under the Facility No.
2 term loan, or terminates Facility No. 1 or Facility No. 3 prior to the
date when due or their termination dates (other than as a result of
mandatory prepayments of Facility No. 2 and Facility No. 3 made in
accordance with Section 3.6 or voluntarily prepayments made out of
Borrower's operating cash flow), then Borrower will concurrently pay to
Bank an early termination fee in an amount equal to (i) until the first
anniversary of the Closing Date, 0.75% of the amount of the Facilities so
repaid or terminated, and (ii) thereafter through the second anniversary
of the Closing Date, 0.50% of the Facilities so repaid or terminated.
The Bank hereby confirms that no "Early Termination Fee" is payable under
the Existing
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Loan Agreement by reason of the execution of this Agreement and the other
transactions contemplated to occur on
the Closing Date.
6.2 EXPENSES.
Borrower agrees to immediately repay Bank for expenses that
include, but are not limited to, filing, recording and search fees,
appraisal fees, title report fees, documentation fees, environmental review
and audit expenses.
6.3 REIMBURSEMENT COSTS.
(a) Borrower agrees to reimburse Bank for any expenses it
incurs in the preparation, closing and enforcement of this Agreement
and any agreement or instrument required by this Agreement, and by
reason of the due diligence conducted by Bank and its agents and experts
in connection herewith or therewith, and any proposed amendment or waiver
of the terms hereof or thereof. Expenses include, but are not limited to,
reasonable attorneys' fees, including any allocated costs of Bank's
in-house counsel and Bank's domestic and English external counsel.
(b) Borrower agrees to reimburse Bank for the cost of periodic
audits and appraisals of the property collateral securing this Agreement,
at such intervals as Bank may reasonably require. These audits and
appraisals may be performed by employees of Bank or by independent
appraisers.
7. COLLATERAL
7.1 PERSONAL PROPERTY. Borrower's obligations to Bank under
this Agreement will be secured by all personal property Borrower now owns or
will own in the future. The collateral is further defined in Borrower
Security Agreement. All personal property collateral securing any other
present or future obligations of Borrower to Bank shall also secure this
Agreement.
7.2 GUARANTEES; PERSONAL PROPERTY SUPPORTING GUARANTEES. The
obligations of Borrower under this Agreement and the Loan Documents are
guaranteed by HP UK pursuant to the HP UK Guaranty, which provides for fixed
and floating charges upon substantially all of the assets of HP UK. HP UK
has entered into the UK Lockbox Agreement to secure its obligations under the
UK Guaranty. Pursuant to the Pledge Agreement, Borrower has pledged 100% of
the capital stock of HP UK and the Intercompany Note to the Bank to secure
its obligations under this Agreement and the other Loan Documents. Borrower
has also executed the Borrower Security Agreement to secure its obligations
hereunder and under the other Loan Documents.
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7.3 FUTURE SUBSIDIARIES AND COLLATERAL. In the event that Borrower
hereafter forms or acquires any new Subsidiaries, or Borrower or any of its
Subsidiaries hereafter moves any collateral for the obligations under the
Loan Documents or acquires any new property or assets which are not subject
to the lien of the Loan Documents, then Borrower shall, and shall cause each
such Subsidiary, concurrently with the occurrence of any such event:
(a) to deliver to the Bank a guaranty of the obligations of Borrower under
this Agreement executed by any such new Subsidiary, together with 100% of
the capital stock of such Subsidiary in pledge to secure the obligations
under this Agreement;
(b) deliver to the Bank such security agreements, mortgages, debentures,
financing statements or other similar collateral assignments as the Bank
may reasonably request to grant to the Bank a first priority perfected lien
in such property; and
(c) any and all landlord consents, opinions, certificates and other
assurances as the Bank may request.
7.4 SUBORDINATION. The obligations of Borrower to Bastian and Unique
shall be subordinate and junior in right of payment to the obligations of
Borrower to Bank, in the manner and to the extent set forth in the
Subordination Agreement.
8. DISBURSEMENTS, PAYMENTS AND COSTS
8.1 REQUESTS FOR CREDIT. Each request for an extension of credit will
be made in writing in a manner acceptable to Bank, or by another means
acceptable to Bank. By requesting any extension of credit under this
Agreement, Borrower shall be deemed to have reaffirmed that each
representation and warranty set forth in this Agreement and the other Loan
Documents (other than those which expressly relate only to a specific date)
is true and correct as of the date of the making of the requested loan or the
issuance of the requested Letter of Credit, and that no Default or Event of
Default exists, in each case after giving effect to the making or issuance
thereof. If requested by Bank, Borrower will provide written assurances to
Bank of the accuracy of each such representation and warranty prior to the
making of any requested Loan or the issuance of any requested Letter of
Credit.
8.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by Bank and each
payment by Borrower will be:
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(a) made through Bank's South Orange County Regional Commercial
Banking Office in Costa Mesa, California or other branch location
selected by Bank from time to time;
(b) made for the account of Bank's branch selected by Bank from time
to time;
(c) evidenced by records kept by Bank. In addition, Bank may, at
its discretion, require Borrower to sign one or more promissory notes.
8.3 TELEPHONE AND TELEFAX AUTHORIZATION
(a) Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates or the
issuance of Letters of Credit given by any one of the individual signers
of this Agreement or a person or persons authorized by any one of the
individuals signing this Agreement on behalf of Borrower.
(b) Advances will be deposited in and repayments will be withdrawn
from Borrower's account number 1458126057, or such other accounts of
Borrower with Bank as designated in writing by Borrower.
(c) Borrower will provide written confirmation to Bank of any
telephone or telefax instructions within one business day. If there is
a discrepancy and Bank has already acted on the instructions, the
telephone or telefax instructions will prevail over the written
confirmation.
(d) Borrower indemnifies and excuses Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone or telefax instructions it
reasonably believes are made by any individual authorized by Borrower to
give such instructions. This indemnity and excuse will survive the
termination of this Agreement.
8.4 DIRECT DEBIT
(a) Borrower agrees that interest and principal payments and fees
will be deducted automatically on the due date from Borrower's account
number 1458126057, or such other of Borrower's accounts with Bank as
designated in writing by Borrower.
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(b) Bank will debit the account on the dates the payments become
due. If a due date does not fall on a banking day, Bank will debit the
account on the first banking day following the due date.
(c) Borrower will maintain sufficient funds in the account on the
dates Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date Bank enters any debit
authorized by this Agreement, the debit will be reversed.
8.5 DIRECT DEBIT (LINE OF CREDIT)
(a) Borrower agrees that Bank may create advances under the line of
credit to pay interest, principal payments, and any fees that are due
under this Agreement.
(b) Bank will create any such advances on the dates the payments
become due. If a due date does not fall on a banking day, Bank will
create the advance on the first banking day following the due date.
(c) If the creation of an advance under the line of credit causes
the total amount of credit outstanding under the line to exceed the
limitations set forth in this Agreement, Borrower will immediately pay
the excess to Bank upon Bank's demand.
8.6 BANKING DAYS. Unless otherwise provided in this Agreement, a
banking day is a day other than a Saturday or a Sunday on which Bank is open
for business in California. For amounts bearing interest at the Offshore
Rate described in Section 5, a banking day is a day other than a Saturday or
a Sunday on which Bank is open for business in California and dealing in
offshore dollars. All payments and disbursements which would be due on a day
which is not a banking day will be due on the next banking day. All payments
received on a day which is not a banking day will be applied to the credit on
the next banking day.
8.7 TAXES. If any payments to Bank under this Agreement are made from
outside the United States, Borrower will not deduct any foreign taxes from
any payments it makes to Bank. If any such taxes are imposed on any payments
made by Borrower (including payments under this Section), Borrower will pay
the taxes and will also pay to Bank, at the time interest is paid, any
additional amount which Bank specifies as necessary to preserve the after-tax
yield Bank would have received if such taxes had not been imposed. Borrower
will confirm that it has paid the taxes by giving Bank official tax receipts
(or notarized copies) within 30 days after the due date.
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8.8 ADDITIONAL COSTS. Borrower will pay Bank, on demand, for Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks
or a class of all national banks. The costs and losses will be allocated to
the loan in a manner determined by Bank, using any reasonable method. The
costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to Bank's assets and
commitments for credit.
8.9 INTEREST CALCULATION. All interest and fees under this Agreement
will be computed on the basis of a 360-day year and the actual number of days
elapsed. This results in more interest or a higher fee than if a 365-day year
is used.
8.10 DEFAULT RATE. Upon the occurrence and during the continuation of
any Default or Event of Default under this Agreement, advances under this
Agreement will at the sole option of Bank bear interest at a rate (the
"DEFAULT RATE") which is 3.0 percentage points per annum higher than the rate
of interest otherwise provided under this Agreement. The Default Rate shall
apply not only to principal but to payments of interest and fees which are
not paid when due. This may result in a compounding of interest. The
imposition of the Default Rate by Bank will not constitute a waiver of any
default.
8.11 OVERDRAFTS. At Bank's sole option in each instance, Bank may do
one of the following:
(a) Bank may make advances under this Agreement to prevent or
cover an overdraft on any account of Borrower or HP UK with Bank. Each
such advance will accrue interest from the date of the advance or the date
on which the account is overdrawn, whichever occurs first, at the interest
rate described in this Agreement.
(b) Bank may reduce the amount of credit otherwise available
under this Agreement by the amount of any overdraft on any account of
Borrower or HP UK with Bank.
This Section shall not be deemed to authorize Borrower or HP UK to create
overdrafts on any of their accounts with Bank.
8.12 COLLECTIONS ON ACCOUNTS RECEIVABLE. Prior to the occurrence of
any Default or Event of Default, all proceeds of collections of Borrower's
accounts receivable
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received in the Lockboxes shall be collected by Bank and deposited into a the
relevant Lockbox Account, and all proceeds of collections of HP UK's accounts
receivable shall be deposited directly into the relevant Lockbox Account.
Prior to the occurrence of any Default or Event of Default, Bank shall remit
any funds collected in the Lockbox Account to Borrower's or HP UK's checking
account or other deposit accounts maintained by Borrower or HP UK in
accordance with the terms of the Lockbox Agreement. Upon the occurrence and
during the continuance of any Default or Event of Default, collections in the
Lockbox Account shall be credited to interest, principal, and other sums owed
to Bank under this Agreement in the order and proportion determined by Bank
in its sole discretion. All such credits will be conditioned upon collection
and any returned items may, at Bank's option, be charged to Borrower and HP
UK.
9. CONDITIONS
Bank must receive the following items, in form and substance acceptable
to Bank, before it is required to make the initial loans or issue the initial
Letters of Credit under this Agreement:
9.1 AUTHORIZATIONS. Evidence that the execution, delivery and
performance by Borrower and HP UK of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
9.2 INCUMBENCY CERTIFICATES; GOVERNING DOCUMENTS. Incumbency
certificates for Borrower and HP UK, together with true, correct and complete
copy of Borrower's and HP UK's articles of incorporation and bylaws or other
organizational papers, certificates of good standing with respect to Borrower
issued by the California Secretary of State's office and the California
Franchise Tax Board, and evidence of the due formation and existence of HP UK
acceptable to the Bank.
9.3 SECURITY AGREEMENTS, ETC. The Borrower Security Agreement, the
Pledge Agreement, the Lockbox Agreements, the Intercompany Debenture and the
Borrower Debenture, each duly executed by Borrower or HP UK, as required,
together with the collateral pledged thereunder and such other assignments,
instruments, financing statements and fixture filings as Bank requires.
9.4 EVIDENCE OF PRIORITY. Evidence that all security interests and
liens to be established in favor of Bank pursuant hereto are valid,
enforceable, and prior to all others' rights and interests (other than the
purchase money liens disclosed on the UCC search provided to Bank), except
those to which Bank explicitly consents in writing.
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9.5 CONSENT TO REMOVAL. A Landlord's Consent from the owner of each
parcel of real property leased by Borrower or HP UK.
9.6 INSURANCE. Evidence of insurance coverage, as required in Section
11.24 of this Agreement.
9.7 BUSINESS INTERRUPTION INSURANCE. Evidence of a business
interruption insurance policy for at least $4,000,000 with an insurer
acceptable to Bank, and with Bank named as an additional loss payee.
9.8 GUARANTY. The HP UK Guaranty.
9.9 SUBORDINATION AGREEMENT. The Subordination Agreement shall have
been executed by all parties thereto.
9.10 INITIAL PUBLIC OFFERING. Evidence acceptable to Bank of the
completion of the Initial Public Offering and the receipt by Borrower of Net
Proceeds thereof in an amount which is not less than $17,500,000.
9.11 ACQUISITION. A certificate executed by a senior officer of
Borrower certifying that the attached copies of the Acquisition Agreement,
the Landing Gear Overhaul Services Agreement with British Airways, and the
British Airways Environmental Indemnity are true, correct and complete,
together with evidence that the Acquisition is in a position to concurrently
close in accordance with the Acquisition Agreement and all applicable laws
and in a manner acceptable to Bank.
9.12 LEGAL OPINIONS. Written opinions from legal counsel for Borrower
and HP UK, covering such matters as Bank may require, including the
organization, authority and good standing of Borrower and HP UK, the due
execution and delivery of all Loan Documents, the valid, binding and
enforceable nature of the Loan Documents against Borrower and HP UK, and the
possession by Borrower and HP UK of all necessary certificates, permits and
licenses which are required to conduct its business as presently conducted,
including a valid certificate from the Civil Aviation Authority.
9.13 APPRAISAL. An appraisal (by an appraiser acceptable to Bank, and
in form and scope acceptable to Bank) of the fixed assets of the UK Business
with results satisfactory to Bank and in any event providing for an orderly
liquidation value (after liquidation costs) of rotable gear sets and eligible
machinery and equipment of not less than $12,000,000.
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9.14 PAYMENT OF FEES. Payment of all accrued and unpaid expenses
incurred by Bank as required by Sections 6.2 and 6.3.
9.15 MATERIAL CONTRACTS. A Certificate of a senior officer of Borrower
certifying that there have been no material amendments to Borrower's
contracts with Federal Express, Inc., BTR Dunlop, Inc. and its affiliates and
the Coast Guard Contract since November 27, 1996, and that the attached copy
of Borrower's long term supply contract with American Airlines is true and
correct.
9.16 CONSENTS. Executed consents and agreements in form and substance
acceptable to Bank from (a) each party whose agreement or consent to the
Acquisition or any other transaction contemplated hereby is required by any
material agreement to which Borrower or any of its Subsidiaries is a party,
(b) each party to any material contract allowing termination upon any change
in control of Borrower or any of its Subsidiaries, and (c) which are
otherwise deemed necessary by Bank.
9.17 CERTAIN FINANCIAL INFORMATION.
(a) A certificate of an officer of Borrower setting forth all
revisions (if any) that have been made to the five year annual financial
projections for Borrower previously delivered to Bank.
(b) Pro forma pre-closing and post-closing balance sheets
reflecting all adjustments necessary or desirable to reflect the effects of
the Acquisition.
(c) A final sources and uses statement with respect to the
Acquisition.
(d) the British Airways services schedule and agreement for 1998.
9.18 YEAR 2000 COMPLIANCE. Borrower shall have completed a Year 2000
questionnaire and a comprehensive action plan acceptable to Bank for dealing
with computer related problems associated with the year 2000.
9.19 BORROWING BASE. Borrower shall have delivered the initial
Borrowing Base Certificate hereunder as of December 31, 1997.
9.20 MIS PLAN. Borrower shall have developed and delivered to Bank an
acceptable plan in relation to the management information systems for HP UK.
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9.21 TAX LETTER. Borrower shall have delivered a copy of a letter
addressed to Borrower by Ernst & Young LLP as to the availability and
limitations of certain net operating loss carry-forwards in existence prior
to the Initial Public Offering as deductions for inclusion in Borrower's
federal and state income tax returns, and such report shall be acceptable to
Bank.
9.22 ENVIRONMENTAL PERMITS. Copies of documents establishing, to the
satisfaction of the Bank, that all environmental permits necessary for HP UK
to operate the business acquired pursuant to the Acquisition Agreement at its
present Heathrow Airport location have been obtained, including without
limitation extensions of the following permits:
Environmental Agency Authorization (Cadmium Plating Process) No. A00130
Local Authority Authorization (Painting Process) EPA B3\26
Approval (Thames Water Utilities Consent) HS119A
9.23 CIVIL AIR PERMIT. Evidence acceptable to to the Bank that HP UK
has received all necessary permits from the United Kingdom's Civil Aviation
Authority.
9.24 OTHER ITEMS. Any other items that Bank reasonably requires.
10. REPRESENTATIONS AND WARRANTIES
When Borrower signs this Agreement, and until Bank is repaid in full,
Borrower makes the following representations and warranties as to itself and
its Subsidiaries. Each request for an extension of credit hereunder
constitutes a renewed representation and warranty to Bank:
10.1 ORGANIZATION OF BORROWER AND ITS SUBSIDIARIES. Borrower and each
of its Subsidiaries are corporations duly formed, existing and in good
standing under the laws of their respective jurisdictions of formation.
Schedule 1 hereto correctly details the ownership of Borrower as of the
Closing Date (separately listing each of the persons owning interests in
Borrower prior to the consummation of the Initial Public Offering). The form
of organization, number of shares of capital stock issued and outstanding,
and ownership of each Subsidiary of Borrower are properly described on
Schedule 1.
10.2 AUTHORIZATION. This Agreement, the Loan Documents and any
instrument or agreement required hereunder or thereunder, are within
Borrower's and it Subsidiaries respective powers, have been duly authorized,
and do not conflict with any of their respective organizational papers.
10.3 ENFORCEABLE AGREEMENT. This Agreement and the other Loan Documents
are the legal, valid and binding agreements of Borrower and each other party
thereto, enforceable against Borrower and each such other party in accordance
with their respective terms, and any
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instrument or agreement required hereunder, when executed and delivered, will
be similarly legal, valid, binding and enforceable.
10.4 GOOD STANDING. In each state in which Borrower and its
Subsidiaries do business, they are properly licensed, in good standing, and,
where required, in compliance with fictitious name statutes. HP UK is
properly licensed and in good standing under the laws of England.
10.5 NO CONFLICTS. This Agreement and the other Loan Documents do not
conflict with any law, agreement, or obligation by which Borrower, its
Subsidiaries or any of their affiliates are bound.
10.6 FINANCIAL INFORMATION. All financial and other information that
has been or will be supplied to Bank, including pursuant to Section 9 of this
Agreement, is:
(a) sufficiently complete to give Bank accurate knowledge of
Borrower's and its Subsidiaries financial condition.
(b) in compliance with all government regulations that apply.
Since the date of the financial statements of Borrower delivered pursuant
hereto for the period ending November 30, 1997, there has been no material
adverse change in the assets, consolidated financial condition, business or
prospects of Borrower and its Subsidiaries. Each of the projections
delivered by Borrower to Bank are, to the best knowledge of Borrower, based
upon assumptions which are reasonable and internally consistent, and are
consistent with all facts known to Borrower (subject to the uncertainties
inherent in all projections).
10.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending
or threatened against Borrower or its Subsidiaries which, if adversely
decided, would impair Borrower's consolidated financial condition or ability
to repay the obligations hereunder.
10.8 COLLATERAL. All collateral required in this Agreement is owned (or
is being concurrently acquired) by the grantor of the security interest free
of any title defects or any liens or interests of others, except those which
have been explicitly approved by Bank in writing.
10.9 PERMITS, FRANCHISES. Borrower and its Subsidiaries possess all
permits, memberships, franchises, contracts and licenses required and all
trademark rights, trade name rights, patent rights and fictitious name rights
necessary to enable them to conduct the business in which they are now
engaged.
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10.10 OTHER OBLIGATIONS. Borrower and its Subsidiaries are not in
default on any obligation for borrowed money, any purchase money obligation
or any other material lease, commitment, contract, instrument or obligation.
10.11 INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of the income tax payable by Borrower and its
Subsidiaries with respect to any year.
10.12 NO EVENT OF DEFAULT. There is no event which is, or with notice
or lapse of time or both would be, a Default or Event of Default under this
Agreement or any of the other Loan Documents.
10.13 MERCHANTABLE INVENTORY. All inventory which is included in the
Borrowing Base is of good and merchantable quality and free from material
defects.
10.14 ERISA PLANS.
(a) Borrower and each of its ERISA Affiliates have fulfilled their
obligations, if any, under the minimum funding standards of ERISA and the
Code with respect to each Plan and is in compliance in all material
respects with the presently applicable provisions of ERISA and the Code,
and has not incurred any liability with respect to any Plan under Title
IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA
for which the PBGC requires 30 day notice.
(c) No action by Borrower or any of its ERISA Affiliates to terminate
or withdraw from any Plan has been taken and no notice of intent to
terminate a Plan has been filed under Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under
Section 4042 of ERISA, and no event has occurred or condition exists which
might constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of
this Agreement:
(i) "CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
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(ii) "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time.
(iii) "ERISA AFFILIATE" means, with respect to any person, any
other person (or any trade or business, whether or not incorporated)
that is under common control with that person within the meaning of
Section 414 of the Code.
(iv) "PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
(v) "PLAN" means any employee pension benefit plan
maintained or contributed to by any Borrower and insured by the
Pension Benefit Guaranty Corporation under Title IV of ERISA.
10.15 LOCATION OF BORROWER AND ITS SUBSIDIARIES. Borrower's only place
of business (other than its location in the Netherlands) and chief executive
office is located at the address listed under Borrower's signature on this
Agreement. HP UK's sole business location and the location of its chief
executive offices is located at Number 1 London Road, Southampton S015 2AE
England or at another location disclosed in writing to the Bank as such.
10.16 CERTAIN COLLATERAL.
(a) Each deposit account maintained by Borrower and its Subsidiaries
as of the Closing Date is described on Schedule 1 hereto. Borrower has
notified Bank in writing of each deposit account opening by Borrower or any
of its Subsidiaries following the Closing Date.
(b) Borrower and its Subsidiaries do not own any patents,
trademarks or other intellectual property which is not described on
Schedule 1 hereto.
(c) Each Shipset which Borrower or any of its Subsidiaries has
received in exchange from one of its customers is Borrower's or such
Subsidiary's sole property, free and clear of all liens and rights of
others, including without limitation any and all liens and other rights of
lenders to customers of Borrower and its Subsidiaries which whom such
Shipsets have been exchanged.
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(d) Each of the assets described in the appraisal of the UK Business
delivered to Bank shall be purchased pursuant to the Acquisition
Agreement and, as of the Closing Date, has not suffered any material
deterioration in value since the date of such appraisal.
10.17 THE ACQUISITION. The Acquisition has been consummated
concurrently with the Closing Date in accordance with the Acquisition
Agreement and all applicable laws.
10.18 ENVIRONMENTAL. Borrower, its Subsidiaries and their operations
are in material compliance with all Environmental Laws. Borrower and its
Subsidiaries have no knowledge of any Environmental Claims that, either
individually or in the aggregate, could reasonably be expected to have a
material adverse effect upon their condition or their ability to repay the
obligations evidenced by this Agreement and the other Loan Documents.
10.19 GOVERNMENTAL REGULATION. Neither Borrower nor any person
controlling Borrower is an "Investment Company" within the meaning of the
Investment Company Act of 1940. Borrower is not subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, any state public utilities code, or any other
Federal or state statute or regulation limiting its ability to incur
indebtedness.
10.20 COPYRIGHTS, PATENTS, TRADEMARKS AND LICENSES, ETC. Borrower and
its Subsidiaries own or are licensed or otherwise have the right to use all
of the patents, trademarks, service marks, trade names, copyrights,
contractual franchises, authorizations and other rights that are reasonably
necessary for the operation of their business, without conflict with the
rights of any other person.
10.21 CONTRACTS. Borrower and its Subsidiaries have not entered into any
material contracts during the three month period immediately preceding the
Closing Date which have not been disclosed to Bank in writing.
10.22 YEAR 2000 COMPLIANCE. Borrower and its Subsidiaries have
implemented a comprehensive program to address the "year 2000 problem" (that
is, the risk that computer applications may not be able to properly perform
date-sensitive functions after December 31, 1999) and expect to resolve on a
timely basis any material year 2000 problem. Borrower and its Subsidiaries
have also made inquiry of each supplier, vendor and customer of Borrower and
its Subsidiaries that is of material importance to the financial well-being
of Borrower and its Subsidiaries with respect to the "year 2000 problem". On
the basis of that inquiry, Borrower believes that each such supplier, vendor
and customer will resolve any material year 2000 problem on a timely basis.
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10.23 LANDLORD CONSENTS. The landlord consents delivered to Bank with
respect to Borrower's premises in Sun Valley, California, have been delivered
from each lessor of the real property comprising that facility.
11. COVENANTS
Borrower agrees, so long as credit is available under this Agreement
and until Bank is repaid in full, unless Bank otherwise agrees in writing,
Borrower shall, and shall cause each of its Subsidiaries:
11.1 USE OF PROCEEDS. To use the proceeds of the credit provided
hereunder (a) on the Closing Date to (i) refinance the obligations under the
Existing Loan Agreement (including a repayment of the Facility No. 1
thereunder in an amount which is not less than $2,000,000), (ii) to repay a
$1,500,000 portion of the Subordinated Note (leaving a principal balance of
not less than $5,000,000), (iii) to repay in full the AMR Shipset Payable,
and (iv) to partially finance the Acquisition (by means of the loan to HP UK
evidenced by the Intercompany Note) and (b) thereafter for the working
capital needs of Borrower and HP UK, for Letters of Credit, and, in the case
of the Capital Expenditure Loans, only for the purposes approved in
connection with each such loan.
11.2 USE OF PROCEEDS: INELIGIBLE SECURITIES. Not to use, directly or
indirectly, any portion of the proceeds of the credit (including any Letters
of Credit) for any of the following purposes:
(a) knowingly to purchase Ineligible Securities from BA Securities,
Inc. (the "ARRANGER") during any period in which the Arranger makes a
market in such Ineligible Securities; or
(b) knowingly to purchase during the underwriting or placement period
Ineligible Securities being underwritten or privately placed by the
Arranger; or
(c) to make payments of principal, interest or dividends on Ineligible
Securities underwritten or privately placed by the Arranger and issued by
or for the benefit of any Borrower or any affiliate of any Borrower.
11.3 FINANCIAL AND OTHER INFORMATION. To provide the following
financial information and statements and other information:
(a) Within 90 days following the end of each fiscal year of Borrower,
Borrower's consolidated annual financial statements. These financial
statements must be
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audited (with an unqualified opinion) by Ernst & Young, LLP or another
nationally recognized firm of independent public accountants reasonably
acceptable to Bank and must be accompanied by a management letter prepared
by such auditors.
(b) Within 30 days following the end of each calendar month (including
the last calendar month in each fiscal year), Borrower's monthly
consolidated and consolidating financial statements showing results for
that month and for a year to date basis, PROVIDED THAT if no Default or
Event of Default has then occurred, following the delivery of Borrower's
audited financial statements for the fiscal year ending December 31, 1998,
Borrower shall instead, within 45 days following the end of each fiscal
quarter (including the last fiscal quarter in each fiscal year) deliver its
quarterly consolidated and consolidating financial statements showing
results for that fiscal quarter and on a year to date basis. In either
case, these financial statements may be Borrower prepared, and shall
include a comparison to plan and prior year on a monthly and year to date
basis.
(c) If requested by Bank, copies of Borrower's federal income tax
return, promptly and in any event within 15 days of filing, and copies of
any extensions of the filing date.
(d) Within the period provided for in clause (a) (in relation to
Borrower's audited statements and giving effect to any adjustments from the
unaudited statements made therein) and promptly and in any event within
45 days following the last day of each fiscal quarter (in relation to the
unaudited statements and including the last fiscal quarter in each fiscal
year) a compliance certificate signed by an authorized financial officer of
Borrower setting forth information and computations (in sufficient detail)
to establish (x) that Borrower is in compliance with all financial
covenants at the end of the period covered by the financial statements then
being furnished, and (y) whether there existed as of the date of such
financial statements and whether there exists as of the date of the
certificate, any Default or Event of Default under this Agreement and,
(iii) if any such Default or Event of Default exists, specifying the
nature thereof and the action Borrower is taking and propose to take with
respect thereto.
(e) A borrowing base certificate ("Borrowing Base Certificate")
setting forth the respective amounts of Acceptable Receivables and
Acceptable Inventory and a calculation of the Borrowing Base as of the
last day of each month within 20 days after month end and, if requested
by Bank copies of the invoices or the record of invoices from each
Borrower's and HP UK's sales journal for such Acceptable Receivables,
copies of the delivery receipts, purchase orders, shipping instructions,
bills of lading and other documentation pertaining to such Acceptable
Receivables.
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(f) (Statements showing an aging and reconciliation of Borrower's
and HP UK's receivables within 20 days after the end of each month.
(g) A statement showing an aging of accounts payable within 20 days
after the end of each month.
(h) If Bank requires Borrower and its Subsidiaries to deliver the
proceeds of accounts receivable to Bank upon collection by Borrower and
its Subsidiaries, a schedule of the amounts so collected and delivered
to Bank.
(i) An inventory summary report and listing within 20 days after
the end of each month, including a description of the inventory, its
location and cost, and such other information and collateral reports as
Bank may require.
(j) A listing of the names and addresses, telephone numbers and
principal contacts of all debtors obligated upon Borrower's and its
Subsidiaries accounts receivable semi-annually within 20 days following
the last day of the second and fourth fiscal quarters in each of
Borrower's fiscal years.
(k) 30 days prior to each fiscal year end, updated annual financial
projections for Borrower and its Subsidiaries through December 31, 2004,
and quarterly financial projections through the subsequent fiscal year.
(l) Within 90 days following the Closing Date, an audited opening
consolidated balance sheet of Borrower prepared by Ernst & Young LLP.
(m) Promptly upon Bank's request, such other statements, lists of
property and accounts, budgets, forecasts or reports as to Borrower as
Bank may reasonably request.
(n) Annually and in any event not later than January 1 of each
year, commencing with January 1, 1998, an environmental compliance audit
prepared by consultants acceptable to Bank, which audit shall (i) be
prepared at the sole cost and expense of Borrower and (ii) detail areas
of environmental non-compliance, types of environmental permits and
licenses required and held by Borrower, and upgrades to programs, permits
and licenses required or to be considered by Borrower due to changes in
environmental regulations. The environmental compliance audit shall
identify, to a degree of certainty "more likely than not" any conditions
or operations that meet the foregoing criteria.
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(q) Promptly and in any event within 5 days following the filing
thereof, copies of Borrower's reports on Form 10-K and Form 10-Q and
all other material reports filed by Borrower with the Securities and
Exchange Commission.
(r) On a monthly basis until HPUK has vacated the Heathrow Airport
location leased from British Airways, not later than the 5th day of each
calendar month, (i) a copy of a receipt issued by British Airways for rent
paid with respect to that location for that calendar month and (ii) a
narrative description of the progress of Borrower's and HP UK's efforts to
relocate the operations of HP UK from Heathrow Airport, and an update of
the timetable for that relocation.
(s) Promptly upon Bank's request, such other information as
Bank may reasonably request.
11.4 SENIOR FUNDED DEBT TO ADJUSTED EBITDA. As of the last day of each
Fiscal Quarter described below, to maintain a ratio of (a) Senior Funded Debt
as of the last day of such Fiscal Quarter to (b) Adjusted EBITDA, which is
not greater than the ratio set forth opposite the period in which such Fiscal
Quarter ends:
FISCAL QUARTERS ENDED MAXIMUM RATIO
--------------------- -------------
March 31, 1998 and June 30, 1998 3.85:1.00
September 30, 1998 3.50:1.00
December 31, 1998 through September 30, 1999 3.25:1.00
December 31, 1999 through September 30, 2000 3.00:1.00
December 31, 2000 through September 30, 2001 2.75:1.00
Thereafter 2.50:1.00.
11.5 FIXED CHARGE COVERAGE RATIO. To maintain, as of the last day of
each Fiscal Quarter set forth below, a ratio of (a) Cash Flow to (b) Fixed
Charges which is not less
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than the ratio set forth opposite the period in which such Fiscal Quarter
ends, calculated quarterly on a fiscal year to date basis through December
31, 1998 and on a rolling four quarter basis thereafter.
PERIOD MINIMUM RATIO
------ -------------
March 31, 1998 and June 30, 1998 1.20:1.00
September 30, 1998 and December 31, 1998 1.40:1.00
Thereafter 1.50:1.00
11.6 PROFITABILITY. To maintain a positive net income before taxes and
extraordinary income on a cumulative basis for each period of two consecutive
fiscal quarters following the Closing Date.
11.7 OTHER DEBTS. Not to have outstanding or incur any direct or
contingent liabilities of any kind or lease obligations or swap or similar
hedge agreement obligations (other than to Bank), or become liable for the
liabilities of others, without Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and leases in existence on the date of this Agreement
disclosed in writing to Bank on Schedule 1.
(e) Additional debts and lease obligations for the acquisition of
fixed or capital assets in the ordinary course of Borrower's business, in
an aggregate amount not to exceed $750,000 at any one time outstanding.
(f) the unsecured subordinated debt evidenced by the Subordinated
Note on then Closing Date.
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11.8 OTHER LIENS. Not to create, assume, or allow any security
interest, encumbrance or judicial or other lien (each a "LIEN") on property
Borrower now or later owns, except:
(a) Liens in favor of Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement and
disclosed in writing to Bank on Schedule 1.
(d) Additional purchase money security interests in personal
property acquired using indebtedness of the type described in Section
11.7(e).
11.9 CAPITAL EXPENDITURES FOR ROTABLE GEARS. Not to make or
commit to make capital expenditures (including any amount expended with
respect to capital leases) for the purchase or lease of rotable gears in any
fiscal year (net of the amount received from the sale of rotable gears) which
are in excess of the amount set forth below opposite that fiscal year:
FISCAL YEAR AMOUNT.
1998 3,000,000
1999 and each subsequent
fiscal year 3,500,000.
11.10 CAPITAL EXPENDITURES FOR OTHER ASSETS. Not to make or
commit to make capital expenditures (including any amount expended with
respect to capital leases) for any assets (other than expenditures for the
purchase or lease of rotable gears which are permitted by Section 11.9) in
any fiscal year which are in excess of the amount set forth below opposite
that fiscal year:
FISCAL YEAR AMOUNT.
1998 $4,500,000
1999 2,500,000
Each subsequent fiscal year 2,000,000;
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PROVIDED that in the event that Borrower and its Subsidiaries expend less
than the amount allotted above during the 1998 fiscal year, the unexpended
amount, not to exceed $2,250,000, may be carried over to the 1999 fiscal year.
11.11 DIVIDENDS AND OTHER PAYMENTS. Not to declare or pay any
dividends or other distributions on any of Borrower's shares, or make any
loan or investment having the effect of making any such dividend or
distribution, and not to purchase, redeem or otherwise acquire for value any
of Borrower's shares, or create any sinking fund in relation thereto, and not
to make other payments to Unique, Bastian or their respective affiliates,
including without limitation management fees, except that Borrower may pay
Permitted Management Fees when no Default or Event of Default exists or would
result therefrom.
11.12 LOANS TO OFFICERS. Not to make any loans, advances or
other extensions of credit to Borrower's or its Subsidiaries' executives,
officers, or directors or shareholders (or any relatives of any of the
foregoing), other than amounts which do not exceed $10,000, in the aggregate,
at any time.
11.13 NOTICES TO BANK. To promptly notify Bank in writing of:
(a) any lawsuit over $100,000 against Borrower or any of
its Subsidiaries.
(b) any substantial dispute between Borrower and its
Subsidiaries and any government authority.
(c) any known failure to comply with this Agreement or
the other Loan Documents.
(d) any material adverse change in Borrower's and its
Subsidiaries financial condition or operations.
(e) any change in the name, legal structure, place of
business, or chief executive office of Borrower or any of its
Subsidiaries.
(f) any pending or threatened environmental investigation
or proceeding not previously disclosed to Bank in writing involving
Borrower, its Subsidiaries or any of the real property upon which their
operations are located.
11.14 BOOKS AND RECORDS. To maintain adequate books and records.
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11.15 AUDITS. To allow Bank and its agents to inspect Borrower's
and its Subsidiaries properties and examine, audit and make copies of books
and records at any reasonable time, provided that if no Default or Event of
Default exists, Bank will provide prior verbal or written notice of its
intention to exercise its rights under this Section not later than the
business day prior to its exercise and, if requested by Borrower, will
provide written confirmation of any such verbal notice. If any of Borrower's
or its Subsidiaries properties, books or records are in the possession of a
third party, Borrower authorizes that third party to permit Bank or its
agents to have access to perform inspections or audits and to respond to
Bank's requests for information concerning such properties, books and
records. Bank has no duty to inspect Borrower's properties or to examine,
audit or copy books and records and Bank shall not incur any obligation or
liability by reason of not making any such inspection or inquiry. In the
event that Bank inspects Borrower's properties or examines, audits or copies
books and records, Bank will be acting solely for the purposes of protecting
Bank's security and preserving Bank's rights under this Agreement. Neither
Borrower nor any other party is entitled to rely on any inspection or other
inquiry by Bank. Bank owes no duty of care to protect Borrower or any other
party against, or to inform Borrower or any other party of, any adverse
condition that may be observed as affecting Borrower's properties or
premises, or Borrower's business. Bank may in its discretion disclose to
Borrower or any other party any findings made as a result of, or in
connection with, any inspection of Borrower's properties.
11.16 COMPLIANCE WITH LAWS. To comply with the laws (including
any fictitious name statute), regulations, and orders of any government body
with authority over the business of Borrower and its Subsidiaries.
11.17 PRESERVATION OF RIGHTS. To use commercially reasonable
efforts to maintain and preserve all rights, privileges, and franchises
Borrower and its Subsidiaries now have.
11.18 MAINTENANCE OF PROPERTIES. To make any repairs, renewals,
or replacements to the properties of Borrower and its Subsidiaries which are
necessary to keep the same in good working condition.
11.19 PERFECTION OF LIENS. To help Bank perfect and protect its
security interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens.
11.20 PLACES OF BUSINESS. Not to open additional business locations
or store property having a value in excess of $10,000 at any location not
disclosed to Bank in writing.
11.21 COOPERATION. To take any action reasonably requested by
Bank to carry out the intent of this Agreement.
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11.22 INSURANCE.
(a) INSURANCE COVERING COLLATERAL. To maintain all risk
property damage insurance policies covering the tangible property
comprising the collateral. Each insurance policy must be for the full
replacement cost of the collateral and include a replacement cost
endorsement. The insurance must be issued by an insurance company
acceptable to Bank and must include a lender's loss payable endorsement
in favor of Bank in a form acceptable to Bank.
(b) GENERAL BUSINESS INSURANCE. To maintain insurance
acceptable to Bank as to amount, nature and carrier covering property
damage (including loss of use and occupancy) to any of Borrower's and
its Subsidiaries' properties, public liability insurance including
coverage for contractual liability, product liability and workers'
compensation, and any other insurance which is usual for Borrower's and
its Subsidiaries' business.
(c) EVIDENCE OF INSURANCE. Upon the request of Bank, to
deliver to Bank a copy of each insurance policy, or, if permitted by
Bank, a certificate of insurance listing all insurance in force.
11.23 ADDITIONAL NEGATIVE COVENANTS. Not to, without Bank's
written consent:
(a) engage in any business activities substantially
different from Borrower's and its Subsidiaries' present business.
(b) liquidate or dissolve Borrower's or any Subsidiary's
business or adopt a plan to take any such action.
(c) enter into any consolidation, merger, pool, joint
venture, syndicate, or other combination.
(d) without the prior written consent of Bank (no to be
unreasonably withheld or delayed), lease, or dispose of any assets of
Borrower or its Subsidiaries which have an aggregate value in excess of
$100,000 in any year, other than sales and leases of inventory in the
ordinary course of business.
(e) acquire or purchase a business or its assets.
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(f) sell or otherwise dispose of any assets for less than
fair market value or enter into any sale and leaseback agreement
covering any of Borrower's fixed or capital assets.
(g) voluntarily suspend Borrower's business for any
period.
11.24 ERISA PLANS. To give prompt written notice to Bank of:
(a) The occurrence of any reportable event under Section
4043(b) of ERISA for which the PBGC requires 30 day notice.
(b) Any action by Borrower to terminate or withdraw from
a Plan or the filing of any notice of intent to terminate under Section
4041 of ERISA.
(c) Any notice of noncompliance made with respect to a
Plan under Section 4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a
Plan under Section 4042 of ERISA.
11.25 INSPECTION OF PROPERTY AND BOOKS AND RECORDS. To maintain proper
books of record and account, in which full, true and correct entries
consistently applied shall be made of all financial transactions and matters
involving the assets and business of Borrower and its Subsidiaries. The
financial statements of Borrower and its Subsidiaries shall, in addition, be
in conformity with generally accepted accounting principles, consistently
applied. Borrower shall, and shall cause its Subsidiaries to, permit
representatives and independent contractors of Bank to visit and inspect any
of their properties, to examine their corporate, financial and operating
records, and make copies thereof or abstracts therefrom, and to discuss their
affairs, finances and accounts with their respective directors, officers, and
independent public accountants, all without unreasonably interfering with the
normal operations of Borrower and its Subsidiaries, and all at such times
during normal business hours and as often as may be reasonably desired,
provided that if no Default or Event of Default exists, Bank will provide
prior verbal or written notice of its intention to exercise its rights under
this Section not later than the business day prior to its exercise and, if
requested by Borrower, will provide written confirmation of any such verbal
notice.
11.26 ENVIRONMENTAL LAWS. To conduct its operations and keep and
maintain its property in compliance with all Environmental Laws. Borrower
and its Subsidiaries will maintain all required records and procedures in
relation to its environmental compliance programs.
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11.27 COLLECTION OF ACCOUNTS. To instruct all account debtors with
respect to accounts owed to Borrower and HP UK to remit their payments to the
appropriate Lockbox or directly to the appropriate Lockbox Account. All
amounts remitted to the Lockbox shall be credited to the Lockbox Account
after allowing for the number of clearance days specified by the agreements
establishing the Lockbox. Borrower shall also:
(a) Cause all collections which are received by Borrower and HP
UK, whether in cash or otherwise, to be deposited by Borrower and HP UK as
and when received in kind (except for any endorsement necessary to vest
title to any instrument in Bank) into the appropriate Lockbox Accounts;
(b) unless otherwise agreed by Bank, either (i) maintain all of
Borrower's and its Subsidiaries' deposit account relationships with Bank,
or (ii) cause the granting to Bank of perfected first priority liens in all
depositary accounts maintained by Borrower and its Subsidiaries pursuant
to documents acceptable to Bank.
11.28 AMENDMENT TO THE ENVIRONMENTAL INDEMNITIES. Not to amend or modify
the BTR Environmental Indemnity or the British Airways Environmental Indemnity
in any respect without the prior written consent of Bank.
11.29 CAPITALIZATION OF HP UK. Use or permit the use of any funds loaned
by Bank to Borrower to be subscribed for shares of capital stock of HP UK or
otherwise used in a manner which could result in the HP Guaranty being
"financial assistance" within the meaning of the Companies Act under English
law, or permit HP UK to issue any preferred stock.
11.30 SWAP ARRANGEMENTS. To enter into contracts for interest rate
protection for Borrower with respect to not less than 60% of the projected
outstanding principal balance of Facility No. 2 for a period of not less than
four years, and with other terms, conditions and counterparties reasonably
acceptable to Bank within 30 days following the Closing Date.
11.31 INVESTMENTS IN SUBSIDIARIES. Not to make any investment in HP UK
following the Closing Date which is not evidenced by the Intercompany Note, or
make any investment in any new Subsidiary unless, concurrently therewith,
Borrower causes all of the issued and outstanding capital stock or other equity
securities of such Subsidiary to be pledged to the Bank and causes such
Subsidiary to issue a guarantee of the obligations under the Loan Documents
secured by all of its assets, in each case pursuant to agreements reasonably
acceptable to the Bank.
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11.32 NEW PREMISES. Prior to entering into any lease of any real
property, deliver to Bank any landlord consents, estoppels and subordinations as
the Bank may reasonably request from the landlords of such premises, and from
any other person who, by reason of Borrower's or its Subsidiaries' tenancy, may
have claims against the assets of Borrower and its Subsidiaries located on such
premises.
12. DEFAULT
If any of the following events occur, Bank may declare Borrower in
default, stop making any additional credit available to Borrower, require
Borrower to repay their entire debt immediately and without prior notice, or any
combination of the foregoing. If an event described in Section 12.5, occurs
with respect to Borrower or any of its Subsidiaries then the entire debt
outstanding under this Agreement will automatically be due immediately.
12.1 FAILURE TO PAY. Borrower or any of its Subsidiaries fails
to make a payment under this Agreement or the other Loan Documents when due.
12.2 LIEN PRIORITY. Bank fails to have an enforceable first lien
(except for any prior liens to which Bank has consented in writing) on or
security interest in any property given as security for this Agreement or any
of the Loan Documents.
12.3 LOAN DOCUMENTS. Any party to any Loan Document seeks to
terminate, revoke or rescind its liability thereunder, or asserts in writing
that its liability is terminated, revoked or rescinded, or any Loan Document
ceases to be in full force and effect (except in accordance with its express
terms) or is declared by a court of competent jurisdiction to be null and
void, invalid or unenforceable in any respect.
12.4 FALSE INFORMATION. Borrower, any of its Subsidiaries or
Unique has furnished to Bank false, materially incorrect or misleading
information or representations, including any information which omits any
fact which is required to make the information not materially misleading.
12.5 BANKRUPTCY. Borrower or any of its Subsidiaries files a
bankruptcy petition, a bankruptcy petition is filed against Borrower or any
of its Subsidiaries, or Borrower or any of its Subsidiaries, any Subsidiary
of Borrower takes any corporate action or other stpes are taken or legal or
other proceedings are started for its winding up, dissolution or
reorganization, or for the appointment of a receiver, administrator,
administrative receiver, trustee or similar officer for its or any portion of
its assets, or Borrower or any of its Subsidiaries makes a general assignment
for the benefit of creditors. An Event of Default under this Section 12.5
will be deemed cured if any such bankruptcy petition filed is dismissed
within a period of 60 days after
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the filing; PROVIDED, HOWEVER, that Bank will not be obligated to extend any
additional credit to Borrower during that period.
12.6 RECEIVERS. A receiver or similar official is appointed for
Borrower's or any of its Subsidiaries business, or the business is terminated.
12.7 JUDGMENTS. Any judgments or arbitration awards are entered
against Borrower or any of its Subsidiaries, or Borrower or any of its
Subsidiaries enters into any settlement agreements with respect to any
litigation or arbitration, which are either (i) in an aggregate amount of
$500,000 or more in excess of any insurance coverage, or (ii) absent
procurement of a stay of execution, such judgments or arbitration awards
remain unsatisfied for thirty calendar days after the date of the entry
thereof, or in any event later than five days prior to the date of any
proposed sale thereunder.
12.8 GOVERNMENT ACTION. Any government authority takes action
that Bank believes materially adversely affects Borrower's and its
Subsidiaries consolidated financial condition or ability to repay the
obligations under this Agreement.
12.9 MATERIAL ADVERSE CHANGE. There occurs any material adverse
change occurs in the consolidated financial condition, properties or
prospects of Borrower and its Subsidiaries, or their ability to repay their
respective obligations. Borrower acknowledges that termination of Borrower
or any of its Subsidiaries contracts or relationships with any Major Customer
may be considered to be such material adverse effect depending on the factual
context then in existence.
12.10 CROSS-DEFAULT. Borrower or any of its Subsidiaries (a)
fails to make any payment in respect of any indebtedness, capital lease or
contingent obligation when due (whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise); or (b) fails to perform or
observe any other condition or covenant, or any other event shall occur or
condition exist, under any agreement or instrument relating to any
indebtedness, capital lease or contingent obligation, in each case if the
effect of such failure, event or condition is to cause, or to permit the
holder or holders of any indebtedness, capital lease or contingent obligation
(or a trustee or agent on behalf of such holder or holders) to cause
indebtedness or capital leases in an amount which exceeds $250,000 to be
declared to be due and payable prior to their stated maturity, or any such
contingent obligation to become payable or cash collateral in respect thereof
in an amount in excess of $250,000 to be demanded.
12.11 OTHER BANK AGREEMENTS. Borrower or any of its Subsidiaries
fails to meet the conditions of, or fails to perform any obligation under any
other agreement it has with Bank or any affiliate of Bank in any material
respect.
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12.12 ERISA PLANS. The occurrence of any one or more of the
following events with respect to Borrower or any of its ERISA Affiliates,
provided such event or events could reasonably be expected, in the judgment
of Bank, to subject Borrower or any of its ERISA Affiliates to any tax,
penalty or liability (or any combination of the foregoing) which, in the
aggregate, could have a material adverse effect on the financial condition of
Borrower and its Subsidiaries with respect to a Plan:
(a) A reportable event shall occur with respect to a Plan
which is, in the reasonable judgment of Bank likely to result in the
termination of such Plan for purposes of Title IV of ERISA.
(b) Any Plan termination (or commencement of proceedings to
terminate a Plan) or Borrower's full or partial withdrawal from a Plan.
12.13 ENVIRONMENTAL INDEMNITY BREACH. British Airways or BTR
Dunlop, Inc. fails to honor within 15 days of written request therefor any
obligation payable by Borrower which is within the scope of the British
Airways Environmental Indemnity or the BTR Environmental Indemnity which
requires the immediate payment by Borrower of an amount in excess of $500,000.
12.14 CHANGE IN CONTROL OR MANAGEMENT. Any of the following occurs
(a) All or substantially all of the assets of Borrower or
any of its Subsidiaries are sold, leased or otherwise disposed of (in a
single transaction or in a series of related transactions);
(b) The persons owning equity interests in Borrower as of
the day to the Initial Public Offering as described as "prior
shareholders" in Schedule 1, or members of their immediate families or
trusts for the benefit of members of their immediate families, fail to
own, beneficially and of record, and control the power to vote, 35% of
the equity securities of Borrower entitled to ordinary voting power
during the three year period following the Closing Date, or 30%
thereafter; or
(c) Any person or entity or "affiliated group" (other than
existing shareholders described on Schedule 1) acquires more than 30% of
the equity securities of Borrower entitled to ordinary voting power;
(d) Less than a majority of those persons constituting the
board of directors of Borrower as of the Closing Date fail to remain as
members of the board of directors of Borrower; or
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(e) David Lokken, Brian Aune, Brian Carr or Michael Riley ceases to
be actively involved on a full time basis in their current capacities as
executive level employees of Borrower at any time and a replacement
acceptable to Bank is not appointed (or another plan for replacement which
is acceptable to the Bank is not in place) within 90 days.
(f) Richard Adey ceases to be actively involved on a full time basis
in his current capacity as managing director of HP UK at any time during
the two year period following the Closing Date and a replacement acceptable
to Bank is not appointed (or another plan for replacement which is
acceptable to the Bank is not in place) within 90 days.
12.15 SUBORDINATION. Bastian, Unique or Borrower asserts in writing
that the Subordinated Note (or the "Bastian Note" referred to in the
Subordination Agreement") is not subordinated in accordance with the terms of
the Subordination Agreement.
12.16 BALANCE SHEET. The audited opening balance sheet prepared by
Ernst & Young and delivered pursuant to Section 11.3(m) varies, in any material
respect, from the unaudited opening balance sheet submitted to Bank prior to the
Closing Date.
12.17 OTHER BREACH UNDER AGREEMENT. Borrower, HP UK, Unique or
Bastian fail to meet the conditions of, or fails to perform any obligation
under, any term of this Agreement or the other Loan Documents not specifically
referred to in this Article.
12.18 LICENCES, CERTIFICATES, PERMITS AND OTHER AUTHORIZATIONS.
Borrower and its Subsidiaries cease to hold any license, certificate, permit or
other authorization from any governmental or quasi-governmental authority which
is necessary for the effective conduct of their business as presently or
properly conducted.
13. ENFORCING THIS AGREEMENT; MISCELLANEOUS
13.1 GAAP. Except as otherwise stated in this Agreement, all
financial information provided to Bank and all financial covenants will be made
under generally accepted accounting principles, consistently applied.
13.2 CALIFORNIA LAW. This Agreement is governed by California law.
13.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on Borrower's
and Bank's successors and assignees. Borrower agrees that it may not assign
this Agreement without Bank's prior written consent, and that any purported
assignment by Borrower without that consent shall be VOID ab initio. BANK MAY
SELL PARTICIPATIONS IN OR ASSIGN THIS LOAN, PROVIDED that when no Default or
Event of Default exists, Bank will obtain Borrower's prior written consent to
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any such assignment or participation, not to be unreasonably withheld. In
furtherance of its rights under this Section, Bank may exchange financial
information about Borrower with actual or potential participants or assignees.
If a participation is sold or the loan is assigned, the purchaser will have the
right of set-off against Borrower.
13.4 ARBITRATION.
(a) This Section concerns the resolution of any controversies
or claims between Borrower and any of its Subsidiaries and the Bank,
including but not limited to those that arise from:
(i) This Agreement (including any renewals, extensions
or modifications of this Agreement);
(ii) Any document, agreement or procedure related to or
delivered in connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business
conducted between Borrower, its Subsidiaries and Bank, including
claims for injury to persons, property or business interests (torts);
PROVIDED that the Bank shall be entitled to resolve any controversies
or claims which arise under the HP UK Guaranty, and each other Loan
Document which states that it is governed by the laws of England,
Wales or the United Kingdom, without reference to arbitration and (in
the event that any controversy or claim under the Loan Documents
involves both arbitrable claims and claims subject to the laws of
England, Wales or the United Kingdom exempt from arbitration as
aforesaid), shall be entitled to sever from the arbitrable claims and
independently enforce pursuant to such laws the claims subject to the
laws of England, Wales and the United Kingdom.
(b) At the request of Borrower, any relevant Subsidiary or Bank,
any such controversies or claims will be settled by arbitration in
accordance with the United States Arbitration Act. The United States
Arbitration Act will apply even though this Agreement provides that it is
governed by California law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration and will be conducted within Los Angeles County, California.
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(d) For purposes of the application of the statute of
limitations, the filing of an arbitration pursuant to this Section is the
equivalent of the filing of a lawsuit, and any claim or controversy which
may be arbitrated under this Section is subject to any applicable statute
of limitations. The arbitrators will have the authority to decide whether
any such claim or controversy is barred by the statute of limitations and,
if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable,
the arbitrators will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may
be submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the
controversy or claim, at the time of the proposed submission to
arbitration, arises from or relates to an obligation to Bank secured by
real property located in California. In this case, both Borrower and Bank
must consent to submission of the claim or controversy to arbitration. If
all parties do not consent to arbitration, the controversy or claim will be
settled as follows:
(i) Borrower and Bank will designate a referee (or a
panel of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees)
will be appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel)
will be an active attorney or a retired judge; and
(iv) The award that results from the decision of the
referee (or the panel) will be entered as a judgment in the court that
appointed the referee, in accordance with the provisions of California
Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of Borrower or Bank
to:
(i) exercise self-help remedies such as setoff;
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(ii) foreclose against or sell any real or personal
property collateral; or
(iii) act in a court of law, before, during or after the
arbitration proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(iv) The pursuit of or a successful action for interim,
additional or supplementary remedies, or the filing of a court action,
does not constitute a waiver of the right of Borrower or Bank,
including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit. However, if the
controversy or claim arises from or relates to an obligation to Bank
which is secured by real property located in California at the time of
the proposed submission to arbitration, this right is limited
according to the provision above requiring the consent of both
Borrower and Bank to seek resolution through arbitration.
13.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. Bank retains all
rights, even if it makes a loan after Default or Event of Default. If Bank
waives a Default or event of Default, it may enforce a later Default or Event of
Default. Any consent or waiver under this Agreement must be in writing.
13.6 ADMINISTRATION COSTS. Borrower shall pay Bank for all
reasonable costs incurred by Bank in connection with administering this
Agreement.
13.7 ATTORNEYS' FEES. Borrower shall reimburse Bank for any
reasonable costs and attorneys' fees incurred by Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this Section, "attorneys' fees" includes the allocated costs of Bank's
in-house counsel.
13.8 ONE AGREEMENT. This Agreement and any security or other
agreements referred to in this Agreement, collectively:
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(a) represent the sum of the understandings and agreements
between Bank and Borrower concerning this credit;
(b) replace any prior oral or written agreements between Bank
and Borrower concerning this credit; and
(c) are intended by Bank and Borrower as the final, complete
and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
This Section shall not be construed to terminate or otherwise affect
the Landlord Consents, the Assignment of Monies Due and to Become Due dated
December 5, 1996 (regarding Contract DTGC-38-95-D-20018 with the United States
Coast Guard), the Authorization and Agreement for Account Management Services
dated November 27, 1996 between Borrower and Bank, each Landlord Consent and
Agreement, and any other instrument, document or agreement executed by Borrower
and AqHawk in connection with the Existing Loan Agreement (each of which shall
continue to be in full force and effect and accrue to the benefit of the Bank),
PROVIDED that it is expressly agreed and understood that the Limited Guaranty
dated as of November 27, 1996 executed by Melanie L. Bastian with respect to the
Existing Loan Agreement, and (ii) the Pledge Agreement dated as of November 27,
1996 made by the shareholders in Borrower in favor of the Bank, are each
terminated and deemed to be of no further force and effect as of the Closing
Date.
13.9 DISPOSITION OF SCHEDULES, REPORTS, ETC. DELIVERED BY BORROWER.
Bank will not be obligated to return any schedules, invoices, statements,
budgets, forecasts, reports or other papers delivered by Borrower or HP UK.
Bank will destroy or otherwise dispose of such materials at such time as Bank,
in its discretion, deems appropriate.
13.10 RETURNED MERCHANDISE. Until Bank exercises its rights to
collect the accounts receivable as provided under any security agreement
required under this Agreement, Borrower and its Subsidiaries may continue its
present policies for returned merchandise and adjustments. Credit adjustments
with respect to returned merchandise shall be made immediately upon receipt of
the merchandise by Borrower or its Subsidiaries or upon such other disposition
of the merchandise by the debtor in accordance with Borrower's or its
Subsidiaries' instructions. If a credit adjustment is made with respect to any
Acceptable Receivable, the amount of such adjustment shall no longer be included
in the amount of such Acceptable Receivable in computing the Borrowing Base.
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13.11 VERIFICATION OF RECEIVABLES. Bank may at any time, either
orally or in writing, request confirmation from any debtor of the current amount
and status of the accounts receivable upon which such debtor is obligated.
13.12 INDEMNIFICATION. Borrower shall defend and indemnify the Bank
and its officers, directors, employees and agents (each, an "Indemnified
Person"), against all claims, damages, liabilities and expenses which may be
incurred by or asserted against any of them (except by Borrower) in connection
with this Agreement, the other Loan Documents and the transactions contemplated
herein, in the other Loan Documents and in the Acquisition Agreement, or which
are related thereto, and for any reasonable legal or other expenses incurred in
connection with investigating, defending or participating in any such loss,
claim, damage, liability or action or other proceeding, whether commenced or
threatened (including without limitation the allocated cost of in-house
attorneys and staff), or in any way relating to the extension of the financing
contemplated by this Agreement or from any use or intended use of any of the
proceeds thereof except, in the case of any Indemnified Person, to the extent
any such loss, claim, damage or liability results from the gross negligence or
willful misconduct of such Indemnified Person. Without limitation on the
foregoing, Borrower will indemnify and hold harmless Bank and each other
Indemnified Person from any loss, or liability directly or indirectly arising
out of the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of any materials which
described as "hazardous" or "toxic" under or which are governed by any
Environmental Laws, irrespective of whether such materials are on, under or
about Borrower's premises. The indemnities under this Section will survive the
termination of this Agreement and the repayment of all obligations of Borrower
hereunder.
13.13 NOTICES. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses as
Bank and Borrower may specify from time to time in writing.
13.14 HEADINGS. Article and Section headings are for reference only
and shall not affect the interpretation or meaning of any provisions of this
Agreement.
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13.15 COUNTERPARTS. This Agreement may be executed in as many
counterparts as necessary or convenient, and by the different parties on
separate counterparts each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
agreement.
This Agreement is executed as of the date stated at the top of the first page
hereof.
BANK OF AMERICA NATIONAL HAWKER PACIFIC AEROSPACE, a
TRUST AND SAVINGS ASSOCIATION California corporation
By /s/ [ILLEGIBLE] By /s/ Scott Hartman
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Title Vice President Title Chairman
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By /s/ [ILLEGIBLE] By /s/ Brian Aune
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Title Vice President & Manager Title CFO
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Address where notices to Address where notices to
Bank are to be sent: Borrower are to be sent:
675 Anton Boulevard, Second Floor Hawker Pacific Aerospace
Costa Mesa, California 92626 11240 Sherman Way
Attention: Deborah Miller, Vice President Sun Valley, California 91352
Attention: David Lokken
With a copy to:
Unique Investment Corporation
1380 Vernon Street
Anaheim, California 92805
Attention: Daniel J. Lubeck
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Schedule 1 to Business Loan Agreement
Deposit Accounts
BANK ACCOUNT NO.
Intellectual Property
PATENTS
TRADEMARKS
COPYRIGHTS
PERSONS OWNING INTERESTS IN BORROWER
NAME PERCENTAGE OWNERSHIP NO. OF SHARES
SUBSIDIARIES
Name Number of Shares Form of Organization
EXISTING DEBTS, CONTINGENT OBLIGATIONS AND LEASES.
EXISTING LIENS.
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SECURITY AGREEMENT
This SECURITY AGREEMENT ("Agreement"), dated as of January 23,
1998, is made by HAWKER PACIFIC AEROSPACE, a California corporation
("Grantor"), in favor of BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as the Bank under the Loan Agreement referred to below ("Secured
Party"). Terms defined in the Loan Agreement (as hereinafter defined) and
not otherwise defined in this Agreement are used herein with the same
meanings.
RECITALS
A. Pursuant to the Amended and Restated Business Loan Agreement
of even date herewith by and among Grantor, as Borrower, and Secured Party,
as Bank (as such agreement may from time to time be amended, extended,
renewed, supplemented or otherwise modified, the "Loan Agreement"), Secured
Party has agreed to extend certain credit facilities to Grantor.
B. The Loan Agreement provides, as a condition of the
availability of such credit facilities on the Closing Date, that Grantor
shall enter into this Agreement and shall grant security interests to Secured
Party as herein provided.
AGREEMENT
NOW, THEREFORE, in order to induce Bank to extend the
aforementioned credit facilities, and for other good and valuable
consideration, the receipt and adequacy of which hereby is acknowledged,
Grantor hereby represents, warrants, covenants, agrees, assigns and grants as
follows:
1. DEFINITIONS. This Agreement is the Borrower Security
Agreement referred to in the Loan Agreement. This Agreement is one of the
Loan Documents referred to in the Loan Agreement. Terms defined in the
California Uniform Commercial Code and not otherwise defined in this
Agreement or in the Loan Agreement shall have the meanings defined for those
terms in the California Uniform Commercial Code. As used in this Agreement,
the following terms shall have the meanings respectively set forth after each:
"ADVANCE" means any advance made or to be made by Bank to Grantor
as provided in ARTICLE 2, and INCLUDES advances made under Facility No. 1,
Facility No.
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2, any Capital Expenditure Loan made pursuant to Facility No. 3 and all
Letters of Credit issued by Bank for the account of Grantor.
"AFFILIATE" means, as to any Person, any other Person which
indirectly controls, or is under common control with, or is controlled by,
such Person. As used in this definition, "control" (and the correlative
terms, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the direction
of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise); PROVIDED
that, in any event, any Person that owns, directly or indirectly, 10% or more
of the securities having ordinary voting power for the election of directors
or other governing body of a corporation that has more than 100 record
holders of such securities, or 10% or more of the partnership or other
ownership interests of any other Person that has more than 100 record holders
of such interests, will be deemed to control such corporation or other Person.
"COLLATERAL" means and includes all present and future right, title
and interest of Grantor, in or to any Property or assets whatsoever, and all
rights and powers of Grantor to transfer any interest in or to any Property
or assets whatsoever, INCLUDING, without limitation, any and all of the
following property:
(a) All present and future accounts, accounts receivable,
agreements, contracts, leases, contract rights, rights to payment,
instruments, documents, chattel paper, security agreements, guaranties,
letters of credit, undertakings, surety bonds, insurance policies (whether
or not required by the terms of the Loan Documents), notes and drafts, and
all forms of obligations owing to Grantor or in which Grantor may have any
interest, however created or arising and whether or not earned by
performance;
(b) All present and future general intangibles, all tax refunds
of every kind and nature to which Grantor now or hereafter may become
entitled, however arising, all other refunds, and all deposits, reserves,
loans, royalties, cost savings, deferred payments, goodwill, choses in
action, liquidated damages, rights to indemnification, trade secrets,
computer programs, software, customer lists, trademarks, trade names,
patents, licenses, copyrights, technology, processes, proprietary
information and insurance proceeds of which Grantor is a beneficiary;
(c) All present and future deposit accounts of Grantor,
INCLUDING, without limitation, any demand, time, savings, passbook or like
account maintained by Grantor with any bank, savings and loan association,
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credit union or like organization, and all cash and cash equivalents of
Grantor, whether or not deposited in any such deposit account;
(d) All present and future books and records, INCLUDING, without
limitation, books of account and ledgers of every kind and nature, all
electronically recorded data relating to Grantor or the business thereof,
all receptacles and containers for such records, and all files and
correspondence;
(e) All present and future goods, INCLUDING, without limitation,
all consumer goods, farm products, inventory, equipment, gaming devices and
associated equipment, machinery, tools, molds, dies, furniture,
furnishings, fixtures, trade fixtures, motor vehicles and all other goods
used in connection with or in the conduct of Grantor's business;
(f) All present and future inventory and merchandise, INCLUDING,
without limitation, all present and future goods held for sale or lease or
to be furnished under a contract of service, all raw materials, work in
process and finished goods, all packing materials, supplies and containers
relating to or used in connection with any of the foregoing, and all bills
of lading, warehouse receipts or documents of title relating to any of the
foregoing;
(g) All present and future stocks, bonds, debentures,
securities, subscription rights, options, warrants, puts, calls,
certificates, partnership interests, limited liability company interests,
joint venture interests, investments and/or brokerage accounts and all
rights, preferences, privileges, dividends, distributions, redemption
payments, or liquidation payments with respect thereto;
(h) All present and future accessions, appurtenances,
components, repairs, repair parts, spare parts, replacements,
substitutions, additions, issue and/or improvements to or of or with
respect to any of the foregoing;
(i) All other tangible and intangible property of Grantor;
(j) All rights, remedies, powers and/or privileges of Grantor
with respect to any of the foregoing; and
(k) Any and all proceeds and products of any of the foregoing,
INCLUDING, without limitation, all money, accounts, general intangibles,
deposit accounts, documents, instruments, chattel paper, goods, insurance
proceeds, and
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any other tangible or intangible property received upon the
sale or disposition of any of the foregoing;
PROVIDED that the term "COLLATERAL", as used in this Agreement, shall NOT
include the following: (i) interests pledged pursuant to the Pledge
Agreement; or (ii) real property or any interest therein.
"GOVERNMENTAL AGENCY" means (a) any international, foreign,
federal, state, county or municipal government, or political subdivision
thereof, (b) any governmental or quasi-governmental agency, authority, board,
bureau, commission, department, instrumentality or public body, or (c) any
court or administrative tribunal.
"LAWS" means, collectively, all international, foreign, federal,
state and local statutes, treaties, rules, regulations, ordinances, codes and
administrative or judicial precedents.
"LOAN" means the aggregate of the Advances made at any one time by
Bank pursuant to ARTICLE 2.
"PERSON" means any entity, whether an individual, trustee,
corporation, general partnership, limited partnership, joint stock company,
trust, estate, unincorporated organization, business association, firm, joint
venture, Governmental Agency, or otherwise.
"PROPERTY" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"SECURED OBLIGATIONS" means any and all present and future
obligations of any type or nature of Grantor to Secured Party arising under
or relating to (a) the Loan Agreement and the other Loan Documents including
all obligations with respect to Loans or Letters of Credit made under the
Loan Agreement and obligations under the Loan Documents executed in
connection therewith, (b) interest rate swaps and other hedging arrangements
entered into by Bank and Grantor, (c) the documents governing each other
credit facility hereafter made available to Grantor or guarantied by Grantor,
whether due or to become due, matured or unmatured, liquidated or
unliquidated, or contingent or noncontingent, INCLUDING obligations of
performance as well as obligations of payment, and INCLUDING interest that
accrues after the commencement of any bankruptcy or insolvency proceeding by
or against Grantor.
2. FURTHER ASSURANCES. At any time and from time to time at the
request of Secured Party, Grantor shall execute and deliver to Secured Party
all such financing statements and other instruments and documents in form and
substance
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satisfactory to Secured Party as shall be necessary or desirable to fully
perfect, when filed and/or recorded, Secured Party's security interests
granted pursuant to SECTION 3 of this Agreement. At any time and from time
to time, Secured Party shall be entitled to file and/or record any or all
such financing statements, instruments and documents held by it, and any or
all such further financing statements, documents and instruments, and to take
all such other actions, as Secured Party may deem appropriate to perfect and
to maintain perfected the security interests granted in SECTION 3 of this
Agreement. Before and after the occurrence of any Event of Default, at
Secured Party's request, Grantor shall execute all such further financing
statements, instruments and documents, and shall do all such further acts and
things, as may be deemed necessary or desirable by Secured Party to create
and perfect, and to continue and preserve, an indefeasible security interest
in the Collateral in favor of Secured Party, or the priority thereof. With
respect to any Collateral consisting of certificated securities, instruments,
documents, certificates of title or the like, as to which Secured Party's
security interest need be perfected by, or the priority thereof need be
assured by, possession of such Collateral, Grantor will upon demand of
Secured Party deliver possession of same in pledge to Secured Party. With
respect to any Collateral consisting of securities, instruments, partnership,
joint venture or limited liability company interests or the like, Grantor
hereby consents and agrees that the issuers of, or obligors on, any such
Collateral, or any registrar or transfer agent or trustee for any such
Collateral, shall be entitled to accept the provisions of this Agreement as
conclusive evidence of the right of Secured Party to effect any transfer or
exercise any right hereunder or with respect to any such Collateral,
notwithstanding any other notice or direction to the contrary heretofore or
hereafter given by Grantor or any other Person to such issuers or such
obligors or to any such registrar or transfer agent or trustee.
3. SECURITY AGREEMENT. For valuable consideration, Grantor
hereby assigns and pledges to Secured Party, and grants to Secured Party a
security interest in, all presently existing and hereafter acquired
Collateral, as security for the timely payment and performance of the Secured
Obligations, and each of them. This Agreement is a continuing and
irrevocable agreement and all the rights, powers, privileges and remedies
hereunder shall apply to any and all Secured Obligations, including those
arising under successive transactions which shall either continue the Secured
Obligations, increase or decrease them and notwithstanding the bankruptcy of
any Grantor or any other Person or any other event or proceeding affecting
any Person.
4. GRANTOR'S REPRESENTATIONS, WARRANTIES AND AGREEMENTS. EXCEPT
as otherwise disclosed to Secured Party in writing concurrently herewith,
Grantor represents, warrants and agrees that: (a) Grantor will pay, prior to
delinquency, all taxes, charges, Liens and assessments against the
Collateral, EXCEPT such as are timely contested in good faith, and upon its
failure to pay or so contest such taxes, charges,
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Liens and assessments, Secured Party, after an Event of Default, at its
option may pay any of them, and Secured Party shall be the sole judge of the
legality or validity thereof and the amount necessary to discharge the same;
(b) the Collateral will not be used for any unlawful purpose or in violation
of any Laws in any material respect, nor used in any way that will void or
impair any insurance required to be carried in connection therewith; (c)
Grantor will, to the extent consistent with good business practice, keep the
portion of the Collateral owned by it in reasonably good repair, working
order and condition, and from time to time make all needful and proper
repairs, renewals, replacements, additions and improvements thereto and, as
appropriate and applicable, will otherwise deal with such portion of the
Collateral in all such ways as are considered good practice by owners of like
Property; (d) Grantor will take all reasonable steps to preserve and protect
the Collateral; (e) Grantor will maintain, with responsible insurance
companies, insurance covering the Collateral against such insurable losses as
is required by the Loan Agreement, and will cause Secured Party to be
designated as an additional insured and loss payee with respect to all
insurance (whether or not required by the Loan Agreement), will obtain the
written agreement of the insurers that such insurance shall not be canceled,
terminated or materially modified to the detriment of Secured Party without
at least 30 days prior written notice to Secured Party, and will furnish
copies of such insurance policies or certificates to Secured Party promptly
upon request therefor; (f) Grantor will promptly notify Secured Party in
writing in the event of any substantial or material damage to the Collateral
(considered as a whole) from any source whatsoever, and, EXCEPT for the
disposition of collections and other proceeds of the Collateral permitted by
SECTION 7 hereof, Grantor will not remove or permit to be removed any part of
the Collateral from its places of business without the prior written consent
of Secured Party, EXCEPT for such items of the Collateral as are removed in
the ordinary course of business or in connection with any transaction or
disposition otherwise permitted by the Loan Documents; and (g) in the event
Grantor changes its name or its address as either are set forth herein or in
the Loan Agreement, Grantor will notify Secured Party of such name and/or
address change promptly, but in any event, within five (5) days.
5. SECURED PARTY'S RIGHTS RE COLLATERAL. At any time (whether or
not an Event of Default has occurred), without notice or demand and at the
expense of Grantor with regard to the portion of the Collateral owned by it,
Secured Party may, to the extent it may be necessary or desirable to protect
the security hereunder, but Secured Party shall not be obligated to: (a) at
all reasonable times on reasonable notice, provided that if no Default or
Event of Default exists, Bank will provide one (1) business day prior written
or verbal notice of its intention to exercise its rights, and, if requested
by Borrower, will provide written confirmation of any such verbal notice,
enter upon any premises on which Collateral is situated and examine the same
or (b) perform any obligation of Grantor under this Agreement or any
obligation of any other Person under the Loan Documents. At any time and
from time to time, at the
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expense of Grantor, Secured Party may, to the extent it may be necessary or
desirable to protect the security hereunder, but Secured Party shall not be
obligated to: (i) after an Event of Default, notify obligor on the Collateral
that the Collateral has been assigned to Secured Party; and (ii) at any time
and from time to time request from obligors on the Collateral, in the name of
Grantor or in the name of Secured Party, information concerning the
Collateral and the amounts owing thereon, PROVIDED, HOWEVER, that any such
action which involves communicating with customers of Grantor shall be
carried out by Secured Party through such Grantor's independent auditors
unless Secured Party shall then have the right directly to notify obligors on
the Collateral as provided in SECTION 9. Grantor shall maintain books and
records pertaining to the Collateral in such detail, form and scope as
Secured Party shall reasonably require consistent with Secured Party's
interests hereunder. Grantor shall at any time at Secured Party's request
mark the Collateral and/or Grantor's ledger cards, books of account and other
records relating to the Collateral with appropriate notations reasonably
satisfactory to Secured Party disclosing that they are subject to Secured
Party's security interests. Secured Party shall be under no duty or
obligation whatsoever to take any action to preserve any rights of or against
any prior or other parties in connection with the Collateral, to exercise any
voting rights or managerial rights with respect to any Collateral, whether or
not an Event of Default shall have occurred, or to make or give any
presentments, demands for performance, notices of non-performance, protests,
notices of protests, notices of dishonor or notices of any other nature
whatsoever in connection with the Collateral or the Secured Obligations.
Secured Party shall be under no duty or obligation whatsoever to take any
action to protect or preserve the Collateral or any rights of Grantor
therein, or to make collections or enforce payment thereon, or to participate
in any foreclosure or other proceeding in connection therewith.
6. COLLECTIONS ON THE COLLATERAL. EXCEPT as otherwise provided
in any Loan Document, Grantor shall have the right to use and to continue to
make collections on and receive dividends and other proceeds of all of the
Collateral in the ordinary course of business so long as no Event of Default
shall have occurred and be continuing. Upon the occurrence and during the
continuance of an Event of Default, at the option of Secured Party, Grantor's
right to make collections on and receive dividends and other proceeds of the
Collateral and to use or dispose of such collections and proceeds shall
terminate, and any and all dividends, proceeds and collections, including all
partial or total prepayments, then held or thereafter received on or on
account of the Collateral will be held or received by Grantor in trust for
Secured Party and immediately delivered in kind to Secured Party. Any
remittance received by Grantor from any Person shall be presumed to relate to
the Collateral and to be subject to Secured Party's security interests. Upon
the occurrence and during the continuance of an Event of Default, Secured
Party shall have the right at all times to receive, receipt for, endorse,
assign, deposit and deliver, in the name of Secured Party or in the name
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of Grantor, any and all checks, notes, drafts and other instruments for the
payment of money constituting proceeds of or otherwise relating to the
Collateral; and Grantor hereby authorizes Secured Party to affix, by
facsimile signature or otherwise, the general or special endorsement of it,
in such manner as Secured Party shall deem advisable, to any such instrument
in the event the same has been delivered to or obtained by Secured Party
without appropriate endorsement, and Secured Party and any collecting bank
are hereby authorized to consider such endorsement to be a sufficient, valid
and effective endorsement by Grantor, to the same extent as though it were
manually executed by the duly authorized officer of Grantor, regardless of by
whom or under what circumstances or by what authority such facsimile
signature or other endorsement actually is affixed, without duty of inquiry
or responsibility as to such matters, and Grantor hereby expressly waives
demand, presentment, protest and notice of protest or dishonor and all other
notices of every kind and nature with respect to any such instrument.
7. POSSESSION OF COLLATERAL BY SECURED PARTY. All the Collateral
now, heretofore or hereafter delivered to Secured Party shall be held by
Secured Party in its possession, custody and control. Any or all of the
Collateral delivered to Secured Party shall be held in an interest-bearing
account, which is in the form of cash or cash equivalent, and Secured Party
shall apply any such interest to payment of the Secured Obligations. Nothing
herein shall obligate Secured Party to obtain any particular return on the
Collateral. Upon the occurrence and during the continuance of an Event of
Default, whenever any of the Collateral is in Secured Party's possession,
custody or control, Secured Party may use, operate and consume the
Collateral, whether for the purpose of preserving and/or protecting the
Collateral, or for the purpose of performing any of Grantor's obligations
with respect thereto, or otherwise. Secured Party may at any time deliver or
redeliver the Collateral or any part thereof to Grantor, and the receipt of
any of the same by Grantor shall be complete and full acquittance for the
Collateral so delivered, and Secured Party thereafter shall be discharged
from any liability or responsibility therefor. So long as Secured Party
exercises reasonable care with respect to any Collateral in its possession,
custody or control, Secured Party shall have no liability for any loss of or
damage to such Collateral, and in no event shall Secured Party have liability
for any diminution in value of Collateral occasioned by economic or market
conditions or events. Secured Party shall be deemed to have exercised
reasonable care within the meaning of the preceding sentence if the
Collateral in the possession, custody or control of Secured Party is accorded
treatment substantially equal to that which Secured Party accords its own
property, it being understood that Secured Party shall not have any
responsibility for (a) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relating to any
Collateral, whether or not Secured Party has or is deemed to have knowledge
of such matters, or (b) taking any necessary steps to preserve rights against
any Person with respect to any Collateral.
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8. EVENTS OF DEFAULT. There shall be an Event of Default
hereunder upon the occurrence and during the continuance of an Event of
Default under the Loan Agreement.
9. RIGHTS UPON EVENT OF DEFAULT. Upon the occurrence and during
the continuance of an Event of Default, Secured Party shall have, in any
jurisdiction where enforcement hereof is sought, in addition to all other
rights and remedies that Secured Party may have under applicable Law or in
equity or under this Agreement (INCLUDING, without limitation, all rights set
forth in SECTION 5 hereof) or under any other Loan Document, all rights and
remedies of a secured party under the Uniform Commercial Code as enacted in
California and, in addition, the following rights and remedies, all of which
may be exercised with or without notice to Grantor and without affecting the
Secured Obligations of Grantor hereunder or under any other Loan Document, or
the enforceability of the Liens created hereby: (a) to foreclose the Liens
created hereunder or under any other agreement relating to any Collateral by
any available judicial procedure or without judicial process; (b) to enter
any premises where any Collateral may be located for the purpose of securing,
protecting, inventorying, appraising, inspecting, repairing, preserving,
storing, preparing, processing, taking possession of or removing the same;
(c) to sell, assign, lease or otherwise dispose of any Collateral or any part
thereof, either at public or private sale or at any broker's board, in lot or
in bulk, for cash, on credit or otherwise, with or without representations or
warranties and upon such terms as shall be acceptable to Secured Party; (d)
to notify obligors on the Collateral that the Collateral has been assigned to
Secured Party and that all payments thereon are to be made directly and
exclusively to Secured Party; (e) to collect by legal proceedings or
otherwise all dividends, distributions, interest, principal or other sums now
or hereafter payable upon or on account of the Collateral; (f) to cause the
Collateral to be registered in the name of Secured Party, as legal owner; (g)
to enter into any extension, reorganization, deposit, merger or consolidation
agreement, or any other agreement relating to or affecting the Collateral,
and in connection therewith Secured Party may deposit or surrender control of
the Collateral and/or accept other Property in exchange for the Collateral;
(h) to settle, compromise or release, on terms acceptable to Secured Party,
in whole or in part, any amounts owing on the Collateral and/or any disputes
with respect thereto; (i) to extend the time of payment, make allowances and
adjustments and issue credits in connection with the Collateral in the name
of Secured Party or in the name of Grantor; (j) to enforce payment and
prosecute any action or proceeding with respect to any or all of the
Collateral and take or bring, in the name of Secured Party or in the name of
Grantor, any and all steps, actions, suits or proceedings deemed by Secured
Party necessary or desirable to effect collection of or to realize upon the
Collateral, INCLUDING any judicial or nonjudicial foreclosure thereof or
thereon, and Grantor specifically consents to any nonjudicial foreclosure of
any or all of the Collateral or any other action taken by Secured Party which
may release any obligor
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from personal liability on any of the Collateral, and Grantor waives any
right not expressly provided for in this Agreement to receive notice of any
public or private judicial or nonjudicial sale or foreclosure of any security
or any of the Collateral; and any money or other Property received by Secured
Party in exchange for or on account of the Collateral, whether representing
collections or proceeds of Collateral, and whether resulting from voluntary
payments or foreclosure proceedings or other legal action taken by Secured
Party or Grantor may be applied by Secured Party without notice to Grantor to
the Secured Obligations in such order and manner as Secured Party in its sole
discretion shall determine; (k) to insure, process and preserve the
Collateral; (l) to exercise all rights, remedies, powers or privileges
provided under any of the Loan Documents; (m) to remove, from any premises
where the same may be located, the Collateral and any and all documents,
instruments, files and records, and any receptacles and cabinets containing
the same, relating to the Collateral, and Secured Party may, at the cost and
expense of Grantor, use such of its supplies, equipment, facilities and space
at its places of business as may be necessary or appropriate to properly
administer, process, store, control, prepare for sale or disposition and/or
sell or dispose of the Collateral or to properly administer and control the
handling of collections and realizations thereon, and Secured Party shall be
deemed to have a rent-free tenancy of any premises of Grantor for such
purposes and for such periods of time as reasonably required by Secured
Party; (n) to receive, open and dispose of all mail addressed to Grantor and
notify postal authorities to change the address for delivery thereof to such
address as Secured Party may designate; PROVIDED that Secured Party agrees
that it will promptly deliver over to Grantor such opened mail as does not
relate to the Collateral; and (o) to exercise all other rights, powers,
privileges and remedies of an owner of the Collateral; all at Secured Party's
sole option and as Secured Party in its sole discretion may deem advisable.
Grantor will, at Secured Party's request, assemble the Collateral and make it
available to Secured Party at places which Secured Party may reasonably
designate, whether at the premises of Grantor or elsewhere, and will make
available to Secured Party, free of cost, all premises, equipment and
facilities of Grantor for the purpose of Secured Party's taking possession of
the Collateral or storing same or removing or putting the Collateral in
salable form or selling or disposing of same.
Upon the occurrence and during the continuance of an Event of
Default, Secured Party also shall have the right, without notice or demand,
either in person, by agent or by a receiver to be appointed by a court (and
Grantor hereby expressly consents upon the occurrence and during the
continuance of an Event of Default to the appointment of such a receiver),
and without regard to the adequacy of any security for the Secured
Obligations, to take possession of the Collateral or any part thereof and to
collect and receive the rents, issues, profits, income and proceeds thereof.
Taking possession of the Collateral shall not cure or waive any Event of
Default or notice
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thereof or invalidate any act done pursuant to such notice. The rights,
remedies and powers of any receiver appointed by a court shall be as ordered
by said court.
Any public or private sale or other disposition of the Collateral
may be held at any office of Secured Party, or at Grantor's place of
business, or at any other place permitted by applicable Law, and without the
necessity of the Collateral's being within the view of prospective
purchasers. Secured Party may direct the order and manner of sale of the
Collateral, or portions thereof, as it in its sole and absolute discretion
may determine, and Grantor expressly waives any right to direct the order and
manner of sale of any Collateral. Secured Party or any Person on Secured
Party's behalf may bid and purchase at any such sale or other disposition.
The net cash proceeds resulting from the collection, liquidation, sale, lease
or other disposition of the Collateral shall be applied, first, to the
expenses (including reasonable attorneys' fees and disbursements) of
retaking, holding, storing, processing and preparing for sale or lease,
selling, leasing, collecting, liquidating and the like, and then to the
satisfaction of the Secured Obligations in such order as shall be determined
by Secured Party in its sole and absolute discretion. Grantor and any other
Person then obligated therefor shall pay to Secured Party on demand any
deficiency with regard thereto which may remain after such sale, disposition,
collection or liquidation of the Collateral.
Unless the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Secured Party will send or otherwise make available to Grantor reasonable
notice of the time and place of any public sale thereof or of the time on or
after which any private sale thereof is to be made. The requirement of
sending reasonable notice conclusively shall be met if such notice is mailed,
first class mail, postage prepaid, to Grantor at its address set forth in the
Loan Agreement, or delivered or otherwise sent to Grantor, at least five (5)
days before the date of the sale.
With respect to any Collateral consisting of securities,
partnership interests, joint venture interests, limited liability company
interests, Investments or the like, and whether or not any of such Collateral
has been effectively registered under the Securities Act of 1933, as amended,
or other applicable Laws, Secured Party may, in its sole and absolute
discretion, sell all or any part of such Collateral at private sale in such
manner and under such circumstances as Secured Party may deem necessary or
advisable in order that the sale may be lawfully conducted. Without limiting
the foregoing, Secured Party may (i) approach and negotiate with a limited
number of potential purchasers, and (ii) restrict the prospective bidders or
purchasers to persons who will represent and agree that they are purchasing
such Collateral for their own account for investment and not with a view to
the distribution or resale thereof. In the event that any such Collateral is
sold at private sale, Grantor agrees that if such Collateral is sold for a
price which Secured Party in good faith believes to be
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<PAGE>
reasonable under the circumstances then existing, then (a) the sale shall be
not be deemed to be commercially unreasonable by reason of price, (b) Grantor
shall not be entitled to a credit against the Secured Obligations in an
amount in excess of the purchase price, and (c) Secured Party shall not incur
any liability or responsibility to Grantor in connection therewith,
notwithstanding the possibility that a substantially higher price might have
been realized at a public sale. Grantor recognizes that a ready market may
not exist for such Collateral if it is not regularly traded on a recognized
securities exchange, and that a sale by Secured Party of any such Collateral
for an amount substantially less than a pro rata share of the fair market
value of the issuer's assets minus liabilities may be commercially reasonable
in view of the difficulties that may be encountered in attempting to sell a
large amount of such Collateral or Collateral that is privately traded.
Upon consummation of any sale of Collateral hereunder, Secured
Party shall have the right to assign, transfer and deliver to the purchaser
or purchasers thereof the Collateral so sold. Each such purchaser at any
such sale shall hold the Collateral so sold absolutely free from any claim or
right upon the part of Grantor or any other Person, and Grantor hereby waives
(to the extent permitted by applicable Laws) all rights of redemption, stay
and appraisal which it now has or may at any time in the future have under
any rule of Law or statute now existing or hereafter enacted.
10. ATTORNEY-IN-FACT. Grantor hereby irrevocably nominates and
appoints Secured Party as their attorney-in-fact for the following purposes:
(a) to do all acts and things which Secured Party may deem necessary or
advisable to perfect and continue perfected the security interests created by
this Agreement and, upon the occurrence and during the continuance of an
Event of Default, to preserve, process, develop, maintain and protect the
Collateral; (b) upon the occurrence and during the continuance of an Event of
Default, to do any and every act which Grantor is obligated to do under this
Agreement, at the expense of the Grantor and without any obligation to do so;
(c) to prepare, sign, file and/or record, for Grantor, in the name of
Grantor, any financing statement, application for registration, or like
paper, and to take any other action deemed by Secured Party necessary or
desirable in order to perfect or maintain perfected the security interests
granted hereby; and (d) upon the occurrence and during the continuance of an
Event of Default, to execute any and all papers and instruments and do all
other things necessary or desirable to preserve and protect the Collateral
and to protect Secured Party's security interests therein; PROVIDED, HOWEVER,
that Secured Party shall be under no obligation whatsoever to take any of the
foregoing actions, and, absent bad faith or actual malice, Secured Party
shall have no liability or responsibility for any act taken or omission with
respect thereto (other than Secured Party's own gross negligence or wilful
misconduct).
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<PAGE>
11. COSTS AND EXPENSES. Grantor agrees to pay to Secured Party
all costs and expenses (INCLUDING, without limitation, reasonable attorneys'
fees and disbursements, including allocated costs of in-house counsel),
incurred by Secured Party in the enforcement or attempted enforcement of this
Agreement, whether or not an action is filed in connection therewith, and in
connection with any waiver or amendment of any term or provision hereof. All
advances, charges, costs and expenses, INCLUDING reasonable attorneys' fees
and disbursements, incurred or paid by Secured Party in exercising any right,
privilege, power or remedy conferred by this Agreement (INCLUDING, without
limitation, the right to perform any Secured Obligation of Grantor under the
Loan Documents), or in the enforcement or attempted enforcement thereof,
shall be secured hereby and shall become a part of the Secured Obligations
and shall be paid to Secured Party by Grantor, immediately upon demand,
together with interest thereon at the Default Rate.
12. STATUTE OF LIMITATIONS AND OTHER LAWS. Until the Secured
Obligations shall have been paid and performed in full, the power of sale and
all other rights, privileges, powers and remedies granted to Secured Party
hereunder shall continue to exist and may be exercised by Secured Party at
any time and from time to time irrespective of the fact that any of the
Secured Obligations may have become barred by any statute of limitations.
Grantor expressly waives the benefit of any and all statutes of limitation,
and any and all Laws providing for exemption of property from execution or
for valuation and appraisal upon foreclosure, to the maximum extent permitted
by applicable Law.
13. OTHER AGREEMENTS. Nothing herein shall in any way modify or
limit the effect of terms or conditions set forth in any other security or
other agreement executed by Grantor or in connection with the Secured
Obligations, but each and every term and condition hereof shall be in
addition thereto. All provisions contained in the Loan Agreement or any
other Loan Document that apply to Loan Documents generally are fully
applicable to this Agreement and are incorporated herein by this reference.
14. CONTINUING EFFECT. This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Grantor for liquidation or reorganization, should Grantor become insolvent or
make an assignment for the benefit of creditors or should a receiver or trustee
be appointed for all or any significant part of Grantor's assets.
15. RELEASE OF GRANTOR. This Agreement and all Secured Obligations
of Grantor hereunder shall be released when all Secured Obligations have been
paid in full in cash or otherwise performed in full and when no portion of the
Commitments remain outstanding. Upon such release of Grantor's Secured
Obligations hereunder, Secured Party shall return any pledged Collateral to
Grantor, or to the Person or
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<PAGE>
Persons legally entitled thereto, and shall endorse, execute, deliver, record
and file all instruments and documents, and do all other acts and things,
reasonably required for the return of the Collateral to Grantor, or to the
Person or Persons legally entitled thereto, and to evidence or document the
release of Secured Party's interests arising under this Agreement, all as
reasonably requested by, and at the sole expense of, Grantor.
16. GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with and governed by the local laws of the State of California.
17. ATTORNEY'S FEES. In any action to enforce this Agreement, the
prevailing party shall be entitled to receive, in addition to any other
relief awarded by the tribunal, its attorney's fees and costs (including the
allocated fees and costs of internal counsel).
IN WITNESS WHEREOF, Grantor has executed this Agreement by its duly
authorized officer as of the date first written above.
"Grantor"
HAWKER PACIFIC AEROSPACE, a California
corporation
By: /s/ Brian Aune
------------------------------
CFO
------------------------------
[Name and Title]
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<PAGE>
ACCEPTED AND AGREED
AS OF THE DATE FIRST
ABOVE WRITTEN:
"Secured Party"
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION,
as Secured Party
By: /s/ [ILLEGIBLE]
---------------------------
Title: Vice President
------------------------
<PAGE>
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ("Agreement"), dated as of January 23, 1998, is
made by HAWKER PACIFIC AEROSPACE, a California corporation ("Grantor"), in favor
of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as lender under the
Loan Agreement referred to below ("Bank") with reference to the following
facts:
RECITALS
A. Pursuant to the Amended and Restated Business Loan Agreement of
even date herewith between Grantor, as borrower, and Bank (as such agreement may
from time to time be amended, extended, renewed, supplemented or otherwise
modified, the "Loan Agreement"), Bank has agreed to extend certain credit
facilities to Grantor.
B. The Loan Agreement provides, as a condition precedent to the
Bank's obligations to extend credit facilities to Grantor, that Grantor shall
enter into this Agreement, and shall pledge certain Pledged Collateral (as
defined herein) to Bank, all under the terms and conditions set forth in this
Agreement.
AGREEMENT
NOW, THEREFORE, in order to induce the Bank to extend credit
facilities to the Grantor under the Loan Agreement, and for other good and
valuable consideration, the receipt and adequacy of which hereby is
acknowledged, Grantor hereby represents, warrants, covenants, agrees, and
pledges as follows:
1. DEFINITIONS. Terms defined in the Loan Agreement and not otherwise
defined in this Agreement shall have the meanings given those terms in the Loan
Agreement as though set forth herein in full. The following terms shall have
the meanings respectively set forth after each:
"CERTIFICATES" means all certificates, instruments or other documents
now or hereafter representing or evidencing any Pledged Securities.
"PLEDGED COLLATERAL" means (i) any and all property of Grantor now or
hereafter pledged and delivered to Bank, (ii) the Pledged Securities and
the Certificates representing or evidencing same, and (iii) the
Intercompany Note, and any and all proceeds and products of any of the
foregoing, and any and all
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collections, dividends, distributions, redemption payments or
liquidation payments with respect to any of the foregoing, EXCEPT
dividends or distributions actually paid to the Grantor as
permitted under the terms of the Loan Agreement.
"PLEDGED SECURITIES" means (i) all shares of capital stock of Hawker
Pacific Aerospace Limited, an English company ("HP UK"), owned by Grantor;
(ii) any and all securities now or hereafter issued in substitution,
exchange or replacement therefor, or with respect thereto; (iii) any and
all warrants, options or other rights to subscribe to or acquire any
additional capital stock of HP UK; and (iv) any and all additional capital
stock of HP UK.
2. REPRESENTATIONS AND WARRANTIES.
(a) INCORPORATION OF TERMS. This Agreement is one of the Loan
Documents referred to in the Loan Agreement. All provisions contained in the
Loan Agreement that are applicable to the Loan Documents generally are fully
applicable to this Agreement and are incorporated herein by this reference as
though set forth in full.
(b) REPRESENTATIONS AND WARRANTIES OF GRANTOR. Grantor represents,
warrants and agrees that: (i) it has good title to the Pledged Collateral, free
from any liens, leases, encumbrances, defenses or other claims or restrictions
whatsoever; (ii) the security interest in the Pledged Collateral created hereby
constitutes a first, prior, and indefeasible security interest with respect to
such collateral; (iii) it has the right to transfer the Pledged Collateral
pursuant to this Agreement without restriction, and such collateral has been
duly and validly pledged to Bank in accordance with law; (iv) it shall provide
such additional endorsements, forms and writings and execute all documents and
take such other action as Bank deems necessary to create and perfect a security
interest in the Pledged Collateral or as Bank may at any time reasonably request
in connection with the administration or enforcement of this Agreement or the
administration of the Pledged Collateral.
3. CREATION OF SECURITY INTEREST.
(a) PLEDGE OF PLEDGED COLLATERAL. Grantor hereby pledges to Bank and
grants to Bank a security interest in and to all Pledged Collateral, together
with all products, proceeds, dividends, redemption payments, liquidation
payments, cash, instruments and other property, and any and all rights, titles,
interests, privileges, benefits and preferences appertaining or incidental to
the Pledged Collateral. The security interest and pledge created by this
Agreement shall continue in effect so long as any obligation is owed to Bank by
Grantor under the Loan Agreement.
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<PAGE>
(b) DELIVERY OF CERTAIN PLEDGED COLLATERAL. On or before the Closing
Date, Grantor shall pledge and deliver the Certificates representing 100% of the
issued and outstanding capital stock of HP UK, to Bank.
Following the Closing Date, additional Pledged Collateral may from
time to time be delivered to Bank as required pursuant to the Loan Agreement and
hereunder. All Certificates at any time delivered to Bank shall be in suitable
form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, all in form and substance
satisfactory to Bank. Bank shall hold all Certificates pledged hereunder
pursuant to this Agreement.
4. SECURITY FOR OBLIGATIONS. This Agreement and the pledge and security
interest granted herein secure the prompt payment, in full in cash, and full
performance of, all obligations of Grantor under the Loan Agreement and the
other Loan Documents.
5. FURTHER ASSURANCES. Grantor agrees that at any time, and from time to
time, at its own expense Grantor will promptly execute, deliver and file or
record all further financing statements, instruments and documents, and will
take all further actions that may be necessary or desirable, or that Bank
reasonably may request, in order to perfect and protect any pledge or security
interest granted hereby or to enable Bank to exercise and enforce its rights and
remedies hereunder with respect to any Pledged Collateral and to preserve,
protect and maintain the Pledged Collateral and the value thereof, including,
without limitation, payment of all taxes, assessments and other charges imposed
on or relating to the Pledged Collateral. Grantor hereby consents and agrees
that the issuers of, or obligors on, the Pledged Collateral, or any registrar or
transfer agent or trustee for any of the Pledged Collateral, shall be entitled
to accept the provisions of this Agreement as conclusive evidence of the right
of Bank to effect any transfer or exercise any right hereunder, notwithstanding
any other notice or direction to the contrary heretofore or hereafter given by
Grantor or any other Person to such issuers or such obligors or to any such
registrar or transfer agent or trustee.
6. VOTING RIGHTS; DIVIDENDS; ETC. So long as no Event of Default under
the Loan Agreement occurs and remains continuing:
(a) VOTING RIGHTS. Grantor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Securities, or any
part thereof, for any purpose not inconsistent with the terms of this Agreement,
the Loan Agreement, or the other Loan Documents; PROVIDED, HOWEVER, that Grantor
shall not exercise, or shall refrain from exercising, any such right if it would
result in a default or an Event of Default under the Loan Agreement.
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<PAGE>
(b) DIVIDEND AND DISTRIBUTION RIGHTS. Grantor shall be entitled to
receive and to retain and use only those dividends or distributions paid to
Grantor with respect to the Pledged Securities as permitted under the terms of
the Loan Agreement; PROVIDED, HOWEVER, that any and all such dividends or
distributions received in the form of capital stock shall be, and the
Certificates representing such capital stock forthwith shall be, delivered to
Bank to hold as Pledged Collateral and shall, if received by Grantor, be
received in trust for the benefit of Bank, be segregated from the other property
of Grantor, and forthwith be delivered to Bank as Pledged Collateral in the same
form as so received (with any necessary endorsements).
7. RIGHTS DURING EVENT OF DEFAULT. When an Event of Default under the
Loan Agreement or this Agreement has occurred and is continuing:
(a) VOTING, DIVIDEND, AND DISTRIBUTION RIGHTS. At the option of
Bank, all rights of Grantor to exercise the voting and other consensual rights
which it would otherwise be entitled to exercise pursuant to Section 6(a) above,
and to receive the dividends and distributions which it would otherwise be
authorized to receive and retain pursuant to Section 6(b) above, shall cease,
and all such rights shall thereupon become vested in Bank who shall thereupon
have the sole right to exercise such voting and other consensual rights and to
receive and to hold as Pledged Collateral such dividends and distributions.
Bank shall give notice thereof to Grantor; PROVIDED, HOWEVER, that (i) neither
the giving of such notice nor the receipt thereof by Grantor shall be a
condition to exercise of any rights of Bank hereunder, and (ii) Bank shall incur
no liability for failing to give such notice.
(b) DIVIDENDS AND DISTRIBUTIONS HELD IN TRUST. All dividends and
other distributions which are received by Grantor contrary to the provisions of
the Loan Agreement or this Agreement shall be received in trust for the benefit
of Bank, shall be segregated from other funds of Grantor, and forthwith shall be
paid over to Bank as Pledged Collateral in the same form as so received (with
any necessary endorsements).
(c) IRREVOCABLE PROXY. Grantor hereby revokes all previous proxies
with regard to the Pledged Securities and appoints Bank as its proxyholder to
attend and vote at any and all meetings of the shareholders of the corporations
which issued the Pledged Securities, and any adjournments thereof, held on or
after the date of the giving of this proxy and prior to the termination of this
proxy and to execute any and all written consents of shareholders of such
corporations executed on or after the date of the giving of this proxy and prior
to the termination of this proxy, with the same effect as if Grantor had
personally attended the meetings or had personally voted their shares or had
personally signed the written consents; PROVIDED, HOWEVER, that the proxyholder
shall have rights hereunder only upon the occurrence and during the
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<PAGE>
continuance of an Event of Default under the Loan Agreement, and that Bank
shall have instructed the proxyholder to exercise voting rights with
respect to the Pledged Securities or any of them. Grantor hereby
authorizes Bank to substitute another person as the proxyholder and,
upon the occurrence or during the continuance of any Event of Default
under the Loan Agreement, hereby authorizes and directs the proxyholder
to file this proxy and the substitution instrument with the secretary of
the appropriate corporation. This proxy is coupled with an interest and
is irrevocable until such time as all Secured Obligations have been paid
and performed in full.
8. TRANSFERS AND OTHER LIENS. Grantor agrees that, except as not
prohibited under the Loan Documents, it will not (i) sell, assign, exchange,
transfer or otherwise dispose of, or contract to sell, assign, exchange,
transfer or otherwise dispose of, or grant any option with respect to, any of
the Pledged Collateral, (ii) create or permit to exist any lien upon or with
respect to any of the Pledged Collateral, except for liens in favor of Bank, or
(iii) take any action with respect to the Pledged Collateral which is
inconsistent with the provisions or purposes of this Agreement or any other Loan
Document.
9. BANK APPOINTED ATTORNEY-IN-FACT. After the occurrence and during the
continuance of an Event of Default under the Loan Agreement, Grantor hereby
irrevocably appoints Bank as Grantor's attorney-in-fact, with full authority in
the place and stead of Grantor, and in the name of Grantor, or otherwise, from
time to time, in Bank's sole and absolute discretion to do any of the following
acts or things: (a) to do all acts and things and to execute all documents
necessary or advisable to perfect and continue perfected the security interests
created by this Agreement and to preserve, maintain and protect the Pledged
Collateral; (b) to do any and every act which Grantor is obligated to do under
this Agreement; (c) to prepare, sign, file and record, in Grantor's name, any
financing statement covering the Pledged Collateral; and (d) to endorse and
transfer the Pledged Collateral upon foreclosure by Bank; PROVIDED, HOWEVER,
that Bank shall be under no obligation whatsoever to take any of the foregoing
actions, and Bank shall have no liability or responsibility for any act (other
than Bank's own gross negligence or willful misconduct) or omission taken with
respect thereto. Grantor hereby agrees to repay immediately upon demand all
reasonable costs and expenses incurred or expended by Bank in exercising any
right or taking any action under this Agreement, together with interest as
provided for in the Loan Agreement.
10. BANK MAY PERFORM OBLIGATIONS. If Grantor fails to perform any
obligation contained herein, Bank may, but without any obligation to do so and
without notice to or demand upon Grantor, perform the same and take such other
action as Bank may deem necessary or desirable to protect the Pledged Collateral
or Bank's security interests therein, Bank being hereby authorized (without
limiting the
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<PAGE>
general nature of the authority hereinabove conferred) to pay, purchase,
contest and compromise any lien which in the reasonable judgment of Bank
appears to be prior or superior to Bank's security interests, and in
exercising any such powers and authority to pay necessary expense, employ
counsel and pay reasonable attorneys' fees. Grantor hereby agrees to repay
immediately upon demand all sums so expended by Bank, together with interest
from the date of expenditure at the rates provided for in the Loan Agreement.
Bank shall not be under any duty or obligation to (i) preserve, maintain or
protect the Pledged Collateral or any of any Grantor's rights or interest
therein, (ii) exercise any voting rights with respect to the Pledged
Collateral, whether or not an Event of Default under the Loan Agreement has
occurred or is continuing, or (iii) make or give any notices of default,
presentments, demands for performance, notices of nonperformance or dishonor,
protests, notices of protest or notice of any other nature whatsoever in
connection with the Pledged Collateral on behalf of Grantor or any other
Person having any interest therein; and Bank does not assume and shall not be
obligated to perform the obligations of Grantor, if any, with respect to the
Pledged Collateral.
11. REASONABLE CARE. Bank shall in all events be deemed to have
exercised reasonable care in the custody and preservation of the Pledged
Collateral in its possession if the Pledged Collateral is accorded treatment
substantially similar to that which Bank accords its own property, it being
understood that Bank shall not have any responsibility for (i) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Pledged Collateral, whether or not Bank has or
is deemed to have knowledge of such matters, or (ii) taking any necessary steps
to preserve rights against any Person with respect to any Pledged Collateral.
12. EVENTS OF DEFAULT AND REMEDIES.
(a) RIGHTS UPON EVENT OF DEFAULT. Upon the occurrence and during the
continuance of an Event of Default under the Loan Agreement, Grantor shall be in
default hereunder and Bank shall have in any jurisdiction where enforcement is
sought, in addition to all other rights and remedies that Bank may have under
this Agreement and under applicable law or in equity, all of its rights and
remedies as a secured party under the Uniform Commercial Code as enacted in any
such jurisdiction, and in addition the following rights and remedies, all of
which may be exercised with or without further notice to Grantor:
(1) to notify any issuer of any Pledged Securities, and any and
all other issuers of or obligors on any Pledged Collateral, that the same
has been pledged to Bank and that all dividends and other payments thereon
are to be made directly and exclusively to Bank; to renew, extend, modify,
amend,
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accelerate, accept partial payments on, make allowances and
adjustments and issue credits with respect to, release, settle,
compromise, compound, collect or otherwise liquidate, on terms
acceptable to Bank, in whole or in part, the Pledged Collateral and
any amounts owing thereon or any guaranty or security therefor; to
enter into any other agreement relating to or affecting the Pledged
Collateral; and to give all consents, waivers and ratification with
respect to the Pledged Collateral and exercise all other rights
(including voting rights), powers and remedies and otherwise act
with respect thereto as if Bank were the owner thereof;
(2) to enforce payment and prosecute any action or proceeding
with respect to any and all of the Pledged Collateral and take or bring, in
Bank's name or in the name of Grantor, all steps, actions, suits or
proceedings deemed by Bank necessary or desirable to effect collection of
or to realize upon the Pledged Collateral;
(3) in accordance with applicable law, to take possession of and
operate or control the Pledged Collateral with or without judicial process;
(4) to endorse, in the name of Grantor, all checks, notes,
drafts, money orders, instruments and other evidences of payment relating
to the Pledged Collateral;
(5) to transfer any or all of the Pledged Collateral into the
name of Bank or its nominee or nominees; and
(6) in accordance with applicable law, to foreclose the liens
and security interests created under this Agreement or under any other
agreement relating to the Pledged Collateral by any available judicial
procedure or without judicial process, and to sell, assign or otherwise
dispose of the Pledged Collateral or any part thereof, either at public or
private sale or at any broker's board or securities exchange, in lots or in
bulk, for cash, on credit or on future delivery, or otherwise, with or
without representations or warranties, and upon such terms as shall be
acceptable to Bank;
all at the sole option of and in the sole discretion of Bank.
(b) NOTICE OF SALE. Bank shall give Grantor at least five (5) days'
written notice of sale of all or any part of the Pledged Collateral. Any sale
of the Pledged Collateral shall be held at such time or times and at such place
or places as Bank may determine in the exercise of their sole and absolute
discretion. Bank may bid (which bid may be, in whole or in part, in the form of
cancellation of Secured Obli-
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<PAGE>
gations) for and purchase for the account of Bank or any nominee of Bank the
whole or any part of the Pledged Collateral. Bank shall not be obligated to
make any sale of the Pledged Collateral if it shall determine not to do so
regardless of the fact that notice of sale of the Pledged Collateral may have
been given. Bank may, without notice or publication, adjourn the sale from
time to time by announcement at the time and place fixed for sale, and such
sale may, without further notice, be made at the time and place to which the
same was so adjourned.
(c) PRIVATE SALES. Whether or not any of the Pledged Collateral has
been effectively registered under the Securities Act of 1933 or other applicable
laws, Bank may, in its sole and absolute discretion, sell all or any part of the
Pledged Collateral at private sale in such manner and under such circumstances
as Bank may deem necessary or advisable. Without limiting the foregoing, Bank
may (i) approach and negotiate with a limited number of potential purchasers,
and (ii) restrict the prospective bidders or purchasers to persons who will
represent and agree that they are purchasing the Pledged Collateral for their
own account for investment and not with a view to the distribution or resale
thereof. In the event that any of the Pledged Collateral is sold at private
sale, Grantor agrees that if the Pledged Collateral is sold for a price which
Bank in good faith believe to be reasonable, then (A) the sale shall be deemed
to be commercially reasonable in all respects, (B) Grantor shall not be entitled
to a credit against the Secured Obligations in an amount in excess of the
purchase price, and (C) Bank shall not incur any liability or responsibility to
Grantor in connection therewith, notwithstanding the possibility that a
substantially higher price might have been realized at a public sale. Grantor
recognizes that a ready market may not exist for Pledged Collateral which is not
regularly traded on a recognized securities exchange, and that a sale by Bank of
any such Pledged Collateral for an amount substantially less than a pro rata
share of the fair market value of the issuer's assets minus liabilities may be
commercially reasonable in view of the difficulties that may be encountered in
attempting to sell a large amount of Pledged Collateral or Pledged Collateral
that is privately traded.
(d) TITLE OF PURCHASERS. Upon consummation of any sale of Pledged
Collateral pursuant to this Section 12, Bank shall have the right to assign,
transfer and deliver to the purchaser or purchasers thereof the Pledged
Collateral so sold. Each such purchaser at any such sale shall hold the Pledged
Collateral sold absolutely free from any claim or right on the part of Grantor,
and Grantor hereby waives (to the extent permitted by applicable law) all rights
of redemption, stay and appraisal which they now have or may at any time in the
future have under any rule of law or statute now existing or hereafter enacted.
If the sale of all or any part of the Pledged Collateral is made on credit or
for future delivery, Bank shall not be required to apply any portion of the sale
price to the Secured Obligations until such amount actually is received by Bank,
and any Pledged Collateral so sold may be retained by Bank until
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<PAGE>
the sale price is paid in full by the purchaser or purchasers thereof. Bank
shall not incur any liability in case any such purchaser or purchasers shall
fail to pay for the Pledged Collateral so sold, and, in case of any such
failure, the Pledged Collateral may be sold again upon like notice.
(e) DISPOSITION OF PROCEEDS OF SALE. The net cash proceeds resulting
from the collection, liquidation, sale or other disposition of the Pledged
Collateral shall be applied, FIRST, to the reasonable costs and expenses
(including reasonable attorneys: fees) of retaking, holding, storing, processing
and preparing for sale, selling, collecting and liquidating the Pledged
Collateral, and the like; SECOND, to the satisfaction of all Secured
Obligations, with application as to any particular Secured Obligations to be in
the order set forth in the Loan Agreement or other Loan Documents; and, THIRD,
to all other indebtedness secured hereby in such order and manner as Bank in its
sole and absolute discretion may determine.
13. OTHER AGREEMENTS. Nothing herein shall in any way modify or limit the
effect of terms or conditions set forth in any other security or other agreement
in connection with the Secured Obligations, whether or not executed by the
Grantor, but each and every term and condition hereof shall be in addition
thereto.
14. COVENANT NOT TO ISSUE UNCERTIFICATED SECURITIES. Grantor represents
and warrants to Bank that all of the capital stock of and each of its Affiliates
that is a corporation is in certificated form (as contemplated by Article 8 of
the Uniform Commercial Code as enacted in California), and covenants to Bank
that it will not cause or permit any Affiliate to issue any capital stock in
uncertificated form or seek to convert all or any part of its existing capital
stock into uncertificated form (as contemplated by Article 8 of the Uniform
Commercial Code as enacted in California).
15. COVENANT NOT TO DILUTE INTERESTS OF BANK IN PLEDGED SECURITIES.
Grantor represents, warrants and covenants to Bank that it will not at any time
cause or permit any corporation whose securities constitute Pledged Collateral
to issue any additional capital stock, or any warrants, options or other rights
to acquire any additional capital stock PROVIDED that Grantor may cause or
permit management of Grantor to receive capital stock of Grantor and options to
acquire the same provided that concurrently with the issuance thereof the same
are delivered in pledge to the Bank hereunder.
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<PAGE>
IN WITNESS WHEREOF, Grantor has caused this Agreement to be duly
executed as of the date first above written.
"Grantor"
HAWKER PACIFIC AEROSPACE, a California
corporation
By: /s/ Brian Aune
---------------------------------
Brian Aune CFO
---------------------------------
Printed Name and Title
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<PAGE>
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT (the "AGREEMENT"), dated as of January 23,
1998, is entered into by and among HAWKER PACIFIC AEROSPACE, a California
corporation ("BORROWER"), HAWKER PACIFIC AEROSPACE LIMITED, an English company
("HP UK"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("BANK"),
MELANIE L. BASTIAN ("BASTIAN"), and UNIQUE INVESTMENTS CORPORATION, a Utah
corporation ("UNIQUE").
RECITALS
A. Pursuant to the Amended and Restated Business Loan Agreement of
even date herewith between Borrower and Bank (as at any time amended, the
"SENIOR LOAN AGREEMENT"), Bank is providing certain credit facilities to
Borrower.
B. Using the proceeds of a $6,500,000 subordinated loan from Bastian
(the "Bastian Loan"), Unique has heretofore made a $6,500,000 subordinated
loan to Borrower (the "Unique Loan"). Concurrently herewith, Unique will
receive a $1,500,000 principal repayment with respect to the Unique Loan from
Borrower and shall use such funds to make a $1,500,000 principal payment to
Bastian.
C. The remaining balance of $5,000,000 under the Bastian Loan shall be
evidenced by an Amended and Restated Subordinated Promissory Note of even
date herewith made by Unique in favor of Bastian (as in effect on the date of
this Agreement, the "BASTIAN NOTE"), a copy of which is attached hereto as
Exhibit A. The remaining balance of $5,000,000 under the Unique Loan shall
be evidenced by an Amended and Restated Subordinated Promissory Note of even
date herewith made by Borrower in favor of Unique (as in effect on the date
of this Agreement, the "UNIQUE NOTE"), a copy of which is attached hereto as
Exhibit B.
D. It is a condition precedent to the making of the loans under the
Senior Loan Agreement that Bastian and Unique enter into this Agreement, and
thereby subordinate the Bastian Loan, the Unique Loan and certain other
"Subordinated Debt" described herein to the obligations evidenced by the
Senior Loan Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS AND CONSTRUCTIONS. As used herein, the following terms shall
have the definitions set forth after each:
"ASSETS" means any interest of Borrower or HP UK in any kind of
property or asset, whether real, personal or mixed real and personal, or
whether tangible or intangible.
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"BANKRUPTCY CODE" means Title 11 of the United States Code, as
amended from time to time, or any successor statute.
"BORROWER" shall include both Hawker Pacific Aerospace and any
other person at any time assuming or otherwise becoming primarily liable for
all or any part of the obligations of Borrower under the Senior Loan
Documents, including without limitation any trustee or debtor-in-possession
in any bankruptcy or similar proceeding involving Borrower or such survivor.
"CODE" means the Uniform Commercial Code as codified in the State
of California or as codified in any other state the laws of which are
required by Section 9-103 thereof to be applied in connection with the issue
of perfection of security interests, as such statutes are in effect during
the term hereof. All terms used in this Agreement which are defined in the
Code shall be construed and defined in accordance with the meaning and
definition ascribed to such terms under the Code, unless another meaning is
specifically provided herein.
"COLLATERAL" means Assets with respect to which any Senior Creditor
or any Subordinated Creditor has a Lien.
"DISTRIBUTION OF ASSETS" means any distribution of Assets of any
kind or character, whether in cash, property, or securities, and whether in
respect of repayment of indebtedness or otherwise, including, but not limited
to, adequate protection payments under the Bankruptcy Code.
"HP UK" shall include both Hawker Pacific Aerospace Limited and any
other person at any time assuming or otherwise becoming primarily liable for
all or any part of the obligations of HP UK under the Senior Loan Documents,
including without limitation any trustee or debtor-in-possession in any
bankruptcy or similar proceeding involving HP UK or such survivor.
"LIEN" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, security interest, charge or
other encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to
give any security interest) and any agreement to give or refrain from giving
a lien, mortgage, pledge, hypothecation, assignment, deposit arrangement,
security interest, charge or other encumbrance of any kind.
"PERSON" means any natural person, sole proprietorship, general
partnership, limited partnership, joint venture, trust, unincorporated
organization, association, corporation, public authority, or any other
organization, irrespective of whether it is a legal entity.
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"SENIOR DEBT" means (i) all obligations of Borrower or any of its
Subsidiaries arising under or in connection with the Senior Loan Agreement or
any other Senior Loan Document; (ii) all obligations owed pursuant to any
interest rate or currency hedging arrangements or other derivative contracts
entered into with the Bank; (iii) all obligations of HP UK arising under or
in connection with the Intercompany Note referred to in the Loan Agreement,
and (iv) all renewals, extensions, refinancings, refundings, amendments,
restatements, supplements, and modifications of all of the foregoing
obligations.
"SENIOR DEFAULT" means any "Event of Default" as defined in the
Senior Loan Agreement.
"SENIOR LOAN DOCUMENTS" means the "Loan Documents" as defined in
the Senior Loan Agreement.
"SUBORDINATED CREDITORS" means Unique, Bastian, and any other
present or future holder of any Subordinated Debt.
"SUBORDINATED DEBT" means all indebtedness, claims, debts,
liabilities, or obligations (i) of Borrower arising under or in connection
with the Unique Note, (ii) of Unique arising under or in connection with the
Bastian Note, and (iii) of Borrower or HP UK otherwise owing to any
Subordinated Creditor of any kind whatsoever; in each case whatever nature,
character or description, and whether presently existing or arising
hereafter, including without limitation, all management and similar fees, all
contract and tort claims that a Subordinated Creditor may have in connection
therewith; together with interest and fees accruing thereon and costs and
expenses (including attorneys' fees and expenses) of collection thereof, and
all renewals, extensions, refinancings, refundings, amendments, restatements,
supplements, and modifications thereof.
2. SUBORDINATION.
2.1 DEBT. Each Subordinated Creditor covenants and agrees that all
payments of the Subordinated Debt shall be subordinated and junior in all
respects to the prior payment in full, in cash, of all Senior Debt except
that interest may be paid with respect to the Subordinated Debt and Permitted
Management Fees (as defined in the Loan Agreement) in accordance with Section
2.3 hereof. No Subordinated Creditor shall have or assert any claim with
respect to the Subordinated Debt until the payment in full and in cash of the
Senior Debt, except as explicitly permitted by Section 2.3 of this Agreement.
2.2 LIENS. Each Subordinated Creditor covenants and agrees that the
Subordinated Debt shall remain unsecured at all times; and that any lien or
security interest created in favor of such Subordinated Creditor
notwithstanding this Agreement
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shall be (a) held by such Subordinated Creditor in trust for the exclusive
benefit of Bank and the holders, from time to time, of the Senior Loan
Documents, and (b) terminated and released, or at Bank's election assigned to
Bank, immediately upon the demand of Bank and pursuant to documentation
satisfactory to Bank.
2.3 PERMITTED PAYMENTS. Notwithstanding the subordination of the
Subordinated Debt to the Senior Debt hereunder, (x) Unique may pay and
Bastian may accept scheduled payments of accrued interest coming due under
the Bastian Note, to the extent funded from payments to Unique permitted by
this Section 2.3; and (y) Borrower may pay and Unique may accept scheduled
monthly payments of accrued interest coming due under the Unique Note,
provided that:
(i) no such payment shall be made at any time after the occurrence
and during the pendency of any Senior Default or any of the other
prohibitions described in either Section 2.4.1 or Section 2.4.2;
(ii) the initial payment shall be made with respect to the calendar
month of March, 1998; and
(iii) Permitted Management Fees may be paid when no Senior Default
exists.
2.4 PRIORITY AND PAYMENT OVER OF PROCEEDS IN CERTAIN EVENTS.
2.4.1 SUBORDINATION ON DISSOLUTION, LIQUIDATION OR REORGANIZATION
OF BORROWER. Upon any Distribution of Assets in the event of any
dissolution or winding up or total or partial liquidation or
reorganization, whether voluntary or involuntary, or adjustment or
protection or relief or composition of Borrower or any of its Subsidiaries,
or of Borrower's or its Subsidiaries' debts, or in any bankruptcy,
insolvency, receivership, arrangement, reorganization, relief or other
proceeding of Borrower or its Subsidiaries, or upon an arrangement for the
benefit of creditors of Borrower or its Subsidiaries or any other
marshaling of the assets and liabilities of Borrower or its Subsidiaries:
(a) all amounts payable under or on account of the Senior Debt
shall first be paid in full, in cash or payment provided for in cash,
before the holders of Subordinated Debt shall be entitled to receive
any Distribution of Assets; and
(b) before any payment may be made on account of the
Subordinated Debt, any such Distribution of Assets to which Bastian
would be entitled, except for the provisions of this Section 2.4.1,
shall be made directly to Bank to the extent necessary to pay all
Senior Debt in full, in cash, after giving effect to any concurrent
payment or distribution
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to Bank. In the case of a non-cash Distribution of Assets with
respect to the Subordinated Debt which is delivered to Bank under
this Section 2.4.1, the Senior Debt shall be deemed satisfied in the
amount equal to the cash realized by Bank upon disposition of such
Distribution of Assets; until such disposition, the non-cash
Distribution of Assets shall be held as security for the Senior Debt.
Bank shall have no duty hereunder to sell or otherwise reduce to cash
any non-cash Distribution of Assets turned over by any Subordinated
Creditor in accordance with this Section 2.4.1 and shall have no
liability to any Subordinated Creditor with respect to any such sale
or other disposition, under the Code or otherwise, except for
liability arising from Bank's willful misconduct or gross negligence,
and such sale or other disposition shall not affect Bank's rights and
remedies hereunder.
Borrower and HP UK shall give prompt written notice to Bank and Bastian of
any Distribution of Assets of the nature described in this Section.
Bank is hereby irrevocably authorized and empowered (in its own
name or in the name of any or all Subordinated Creditors or otherwise), but
shall have no obligation, to demand, sue for, collect and receive every
Distribution of Assets and give acquittance therefor and to file claims and
proofs of claim in respect of the Subordinated Debt and take such other
action (including, without limitation, voting the Subordinated Debt or
enforcing any Lien securing payment of the Subordinated Debt) on behalf of
any or all Subordinated Creditors as it may deem necessary or advisable for
the exercise or enforcement of any of its rights or interests hereunder.
Each Subordinated Creditor shall promptly take such action as Bank may
request (i) to collect the Subordinated Debt for the account of Bank and to
file appropriate claims or proofs of claim in respect of the Subordinated
Debt; (ii) to execute and deliver to Bank such powers of attorney,
assignments, or other instruments as it. may request in order to enable it
to enforce any and all claims with respect to, and any Liens securing
payment of, the Subordinated Debt, and (iii) to collect and receive any and
all Distribution of Assets which may be payable or deliverable upon or with
respect to the Subordinated Debt.
2.4.2 SUBORDINATION ON SENIOR DEFAULT. If a Senior Default has
occurred and is continuing, no Subordinated Creditor may receive payment
under or on account of the Subordinated Debt, directly or indirectly, in
cash or other property or by set-off or in any other manner, commencing
upon the date of receipt by such Subordinated Creditor from Bank of a
notice of the Senior Default or its actual notice thereof. The prohibition
on Subordinated Debt payments shall end on the earlier of (a) the waiver of
the Senior Default by Bank, or (b) the cure of the Senior Default to the
satisfaction of Bank. Immediately following the termination of any such
prohibition, all payments of
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Subordinated Debt which, but for such prohibition, each Subordinated
Creditor would have been entitled to receive, shall be immediately due
and payable, to the extent not otherwise prohibited or limited by the
terms hereof.
3. FORBEARANCE AND STANDSTILL.
3.1 Until the Senior Debt is paid in full, in cash and the Senior
Loan Agreement is terminated or expires, or unless requested by Bank, no
Subordinated Creditor shall, without Bank's prior written consent, such
consent to be given or withheld in Bank's sole and absolute discretion: (a)
assert, collect or enforce the Subordinated Debt or any of the amounts due
thereunder, or exercise any right of set-off; (b) exercise its right of
possession of any Collateral or attach, seize, or realize upon any Collateral
or enforce any Lien against the Assets; (c) exercise any right under the
Code, including, but not limited to, the right of strict foreclosure, but
excluding the right of redemption; or (d) commence, or cause to commence,
prosecute or participate in (other than participate in an action, once
commenced, to protect and pursue its rights and remedies as, for example,
exercising its rights in a bankruptcy proceeding as described in Section 8
hereof) any administrative, legal or equitable action against Borrower or HP
UK or any administrative, legal or equitable action that might adversely
affect Borrower or HP UK or their respective interests, including, but not
limited to, the entry of a decree or order for relief in respect of either
Borrower or HP UK under Bankruptcy Code or any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect or the appointment
of a receiver, liquidator, custodian, trustee, sequestrator or similar
official of either Borrower or HP UK or for any substantial part of the
Assets, the commencement by either Borrower or HP UK of a voluntary case
under Bankruptcy Code or any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or the consent by either company to
the entry of an order for relief in an involuntary case under any such law,
or the consent by either company to the appointment of, or taking possession
by, a receiver, liquidator, trustee, custodian, sequestrator (or similar
official) or any of them for any substantial part of the Assets, or either
company's admission in writing of its inability to pay its debts generally,
or the making of any general assignment for the benefit of creditors, or the
failure generally by either company to pay its debts as they become due, or
the taking by either company of any action in furtherance of any of the
foregoing.
3.2 If any Subordinated Creditor, other than in accordance with
this Section 3, commences, prosecutes or participates in any suit, action or
proceeding against Borrower or HP UK or takes any other action in violation
of this Section 3, either company may interpose as a defense or a dilatory
plea the making of this Agreement and Bank may intervene and interpose such
defense or plea in such company's name.
3.3 Each Subordinated Creditor jointly and severally agrees that
it shall reimburse Bank upon demand for all fees and expenses Bank incurs in
connection
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with any breach by any Subordinated Creditor of this Section 3, including,
but not limited to, the fees and expenses incurred in removing from a
Subordinated Creditor's possession any Collateral or other Assets held in
breach of this Section 3.
4. DISPOSITION OF COLLATERAL. Upon any foreclosure upon, or
realization or collection in respect of any Collateral, all Senior Debt shall
first be satisfied in full in cash before any Subordinated Creditor shall be
entitled to receive or retain any proceeds or assets from such foreclosure,
realization or collection.
5. PAYMENTS AND/OR PROPERTY HELD IN TRUST. If (a) any payment or any
cash or noncash distribution is made to any Subordinated Creditor in
violation of this Agreement or (b) any cash or other property is received by
any Subordinated Creditor upon any disposition or other action with respect
to any of the Collateral, including, but not limited to, converting accounts
receivable, instruments and chattel paper to cash, in violation of this
Agreement, before the Senior Debt is paid in full, in cash, then such
Subordinated Creditor shall receive the same in trust for Bank's benefit and
shall forthwith remit it to Bank in the form in which it was received,
together with such endorsements or documents as may be necessary to
effectively negotiate or transfer the same, to the extent necessary to pay in
full, in cash, the Senior Debt, after giving effect to any other payment or
distribution with respect to the Senior Debt.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS. Each Subordinated
Creditor represents and warrants that it has not entered into any
subordination agreement with respect to the Subordinated Debt prior to the
execution and delivery of this Agreement. Each Subordinated Creditor
covenants not to enter into any subordination agreement with respect to the
Subordinated Debt without Bank's prior written consent, to be given or
withheld in Bank's sole and absolute discretion. Any such subsequent
subordination shall be, and shall be expressed to be, subject and subordinate
to the terms of this Agreement. Each Subordinated Creditor represents and
warrants that it has not previously assigned any interest in the Subordinated
Debt, that no other Person (whether as a joint holder of the Subordinated
Debt, participant or otherwise) owns any interest in the Subordinated Debt.
7. RIGHTS OF BANK NOT TO BE IMPAIRED, ETC.
7.1 No right of Bank to enforce the subordination and other terms
and conditions provided herein shall at any time in any way be prejudiced or
impaired by any act or failure to act by Bank, or by any non-compliance by
Borrower with the terms and provisions and covenants herein, regardless of
any knowledge thereof Bank may have or with which Bank may otherwise be
charged. Bank shall not be prejudiced in its right to enforce the
subordination and other terms and conditions of the Subordinated Debt by any
act or failure to act by Borrower, any Subordinated Creditor or any other
Person in custody of any of the Assets.
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7.2 Without limiting the generality of the foregoing, each
Subordinated Creditor, for the benefit of Bank, waives any right it may have
to require Bank to (a) proceed against any Person, including Borrower and HP
UK; (b) proceed against or exhaust any security held from Borrower or HP UK,
or any other Person; or (c) pursue any other remedy in Bank's power.
7.3 Each Subordinated Creditor further waives, for the benefit of
Bank, any defense or cause of action based upon or arising by reason of (a)
any disability or other defense of Borrower or HP UK or any other Person; (b)
the cessation or limitation from any cause whatsoever, other than payment in
full, of the Senior Debt; (c) any lack of authority of any officer, director,
partner, agent or any other Person acting or purporting to act on behalf of
Borrower or HP UK; (d) any act or omission by Bank which directly or
indirectly results in or aids the discharge of Borrower or HP UK from any
Senior Debt by operation of-law or otherwise; (e) any failure by Bank or its
agents to use reasonable care in the custody and preservation of Collateral
in the possession of Bank or its agents which directly or indirectly impairs
or diminishes the value of the Liens securing the Subordinated Debt; (f) any
failure by Bank to give notice to any Subordinated Creditor of a proposed
sale of any of the Collateral or to conduct a commercially reasonable sale of
any of the collateral; or (g) any failure by Bank or its agents to fulfill
any duty which may be owed to or asserted by any Subordinated Creditor with
respect to any of the Collateral.
7.4 Each Subordinated Creditor agrees that Bank shall have the
right to apply the proceeds of any disposition of Collateral in the manner
Bank determines, in its sole and absolute discretion, including, but not
limited to, payment of obligations of Borrower to Persons other than Bank and
the Subordinated Creditors, prior to full satisfaction of the Senior Debt and
the Subordinated Debt.
7.5 Each Subordinated Creditor agrees that (a) Bank shall have no
obligation to marshal any Collateral in favor of any Person; and (b) Bank
shall not be liable to any Subordinated Creditor for any action or failure to
act in exercising its rights and remedies under this Agreement, the Senior
Loan Documents or against any of the Collateral. Each Subordinated Creditor
further agrees, for the benefit of Bank, not to commence or prosecute any
cause of action against Bank with respect to the Collateral, any duty of Bank
to such Subordinated Creditor or otherwise arising with respect to the
Subordinated Debt or this Agreement for which the waivers contained herein
are not effective unless and until Bank has sold or otherwise disposed of all
the Collateral, and each Subordinated Creditor waives any right to recover
punitive or consequential damages in any such action.
7.6 Each Subordinated Creditor (a) consents to any extension or
renewal of the Liens securing the Senior Debt, (b) waives any right to cure
any Senior Default, whether by payment of any portion of the Senior Debt or
otherwise, (c) waives any right to set aside or otherwise legally challenge
any foreclosure sale or
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other exercise of rights and remedies by Bank, and (d) waives any right to
redeem any Collateral foreclosed or otherwise disposed of by Bank.
7.7 Each Subordinated Creditor agrees that Bank shall not be a
fiduciary or an agent of such Subordinated Creditor, or otherwise owe any
duty thereto, by virtue of any provision of this Agreement or Bank's
exercise, or failure to exercise, any right hereunder.
8. CONDUCT OF BANKRUPTCY PROCEEDING.
8.1 In any bankruptcy, insolvency, receivership or other similar
proceeding of Borrower or HP UK, each Subordinated Creditor hereby
irrevocably constitutes and appoints Bank its true and lawful attorney to act
in its name and stead:
8.1.1 To file the appropriate claim or claims in respect of
the Subordinated Debt on behalf of that Subordinated Creditor if that
Subordinated Creditor does not do so prior to 30 days before the expiration
of the time to file claims in such proceeding and if Bank elects, in its
sole and absolute discretion, to file such claim or claims; and
8.1.2 To accept or reject any plan of reorganization or
arrangement on behalf of that Subordinated Creditor and to otherwise vote
that Subordinated Creditor's claims in respect of any Subordinated Debt now
or hereafter owing from Borrower or HP UK in any manner which Bank deems
appropriate for the enforcement of its rights hereunder.
8.2 Each Subordinated Creditor agrees that Bank may consent to the
use of cash collateral or provide financing to Borrower or HP UK on such
terms and conditions and in such amounts as Bank, in its sole and absolute
discretion, may decide and that, in connection with such cash collateral
usage or such financing, Borrower or HP UK (or a trustee appointed for the
estates thereof) may grant to Bank Liens upon all Assets, which Liens (a)
shall secure payment of all Senior Debt (whether such Senior Debt arose prior
to the filing of the petition for relief under Bankruptcy Code or arise
thereafter); and (b) shall be superior in priority to the Liens held by any
Subordinated Creditor on the Assets. All allocations of payments between
Bank and the Subordinated Creditors shall, subject to any court order,
continue to be made after the filing of a petition under Bankruptcy Code on
the same basis that the payments were to be allocated prior to the date of
such filing. Each Subordinated Creditor agrees that they will not object to
or oppose a sale or other disposition of any Assets securing the Senior Debt
(or any portion thereof) free and clear of Liens or other claims of the
Subordinated Creditors under Section 363 of Bankruptcy Code or any other
provision of Bankruptcy Code if Bank has consented to such sale or
disposition of such Assets. Each Subordinated Creditor agrees not to assert
any right it may have to "adequate protection" of its Liens with respect to
any of the Assets in any bankruptcy proceeding
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and agrees that it will not seek to have the automatic stay lifted with
respect to such Liens, without Bank's prior written consent, given in its
sole and absolute discretion. Each Subordinated Creditor agrees not to
initiate or prosecute or encourage any other Person to initiate or prosecute
any claim, action or other proceeding (i) challenging the enforceability of
Bank's claim, (ii) challenging the enforceability of any Liens in Assets
securing the Senior Debt, or (iii) asserting any claims which Borrower or HP
UK may hold with respect to Bank.
9. MODIFICATION OF SUBORDINATED DEBT. No amendment or modification of
the Bastian Note, the Unique note, or any other agreement or instrument in
favor of a Subordinated Creditor shall directly or indirectly modify the
provisions of this Agreement in any manner which might terminate or impair
the subordination of the Subordinated Debt or the subordination of any Liens
granted thereunder in accordance with the terms of this Agreement. By way of
example, the Subordinated Creditors may not amend any of the foregoing
agreements or instruments to (a) increase the rate of interest with respect
to the Subordinated Debt, (b) accelerate the payment of principal or interest
or any other portion of the Subordinated Debt, or (c) increase any payments
due to any Subordinated Creditor thereunder.
10. SUBORDINATED DEBT ACCELERATION. In the event of any acceleration
of all or any portion of the Subordinated Debt and so long as such
acceleration shall continue, all Senior Debt shall be paid in full, in cash,
before any payment is made on account of the Subordinated Debt.
11. SUBROGATION. Upon the payment in full, in cash, of the Senior Debt
and the termination or expiration of the Senior Loan Agreement by the
Subordinated Creditors, the Subordinated Creditors shall be subrogated to the
rights of Bank to receive any Distribution of Assets made on account of the
Senior Debt to the extent that distributions otherwise payable to the
Subordinated Creditors have been applied to payment of Senior Debt, until the
Subordinated Debt shall be paid in full; and for the purposes of such
subrogation, no Distribution of Assets to Bank of any cash, property, or
securities to which the holders of Subordinated Debt would be entitled except
for the provisions hereof, and no payment paid over pursuant to the
provisions of Section 5 to Bank by the Subordinated Creditors shall, as among
Borrower, HP UK, their respective creditors, and the Subordinated Creditors,
be deemed to be a payment by Borrower and HP UK on account of such Senior
Debt. Bank shall have no liability to the Subordinated Creditors, and the
subordination and other provisions of this Agreement shall not be affected
by, any act or omission by Bank, prior to payment in full of the Senior Debt
and the termination or expiration of the Senior Loan Agreement, which affect
in any way the Subordinated Creditors' subrogation rights hereunder.
12. OBLIGATIONS OF BORROWER AND HP UK UNCONDITIONAL. Nothing contained
in this Agreement is intended to or shall, as among Borrower, HP UK or their
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respective creditors (other than Bank and the Subordinated Creditors): (a)
impair the obligations of Borrower and HP UK, which obligations are absolute
and unconditional, to pay the Subordinated Debt as and when the same shall
become due and payable in accordance with its terms; or (b) affect the
relative rights of the Subordinated Creditors and other creditors of
Borrower and HP UK (other than between the Subordinated Creditors and Bank).
13. FURTHER ASSURANCES. Each Subordinated Creditor shall mark all
evidence of the Subordinated Debt with a legend "THIS INSTRUMENT IS SUBJECT
TO A DEBT SUBORDINATION AGREEMENT IN FAVOR OF BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION DATED AS OF JANUARY __, 1998." Each Subordinated
Creditor agrees to take such actions and execute, acknowledge and deliver, or
cause to be executed, acknowledged and delivered, such documents as are
reasonably requested by Bank to effectuate and carry out the purposes of this
Agreement and the subordination provisions hereunder, so long as any such
acts are consistent with and do not impose terms of subordination more
onerous than the terms hereof.
14. MODIFICATION AND EXPANSION OF SENIOR DEBT. Notwithstanding any
term of the Subordinated Debt to the contrary, Bank may (a) grant extensions
of time of payment or performance of any Senior Debt, (b) make compromises
and settlements with Borrower and other Persons regarding any Senior Debt,
and (c) increase, expand and/or modify any Senior Debt without the consent of
the Subordinated Creditor, and without affecting this Agreement and its
rights hereunder. No action that Bank may take, or refrain from taking, with
respect to the Senior Debt or any Collateral therefor or any agreements in
connection therewith, shall affect this Agreement or Bank's rights hereunder.
15. DISCONTINUATION OF CREDIT. If, at any time hereafter, Bank shall,
in Bank's sole and absolute judgment, determine to discontinue the extension
of credit to Borrower, Bank may do so in accordance with the terms and
provisions of the Senior Loan Agreement. Such discontinuation
notwithstanding, this Agreement shall continue in full force and effect until
the Senior Debt shall have been paid in full in cash and the Senior Loan
Agreement terminates or expires.
16. CONTINUED EFFECTIVENESS OF SUBORDINATION. If, at any time after
payment in full of the Senior Debt in cash and the termination or expiration
of the Senior Loan Agreement any such payments must be disgorged by Bank for
any reason whatsoever (including, without limitation, the insolvency,
bankruptcy or reorganization of Borrower or HP UK) this Agreement and the
relative rights and priorities provided herein shall be reinstated as to all
such disgorged payments as though such payments had not been made and each
Subordinated Creditor shall immediately pay over or deliver to Bank all
payments and distributions received by the Subordinated Creditors to the
extent necessary to pay in full, in cash, all amounts payable in connection
with
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the Senior Debt as if this Agreement had remained in full force and effect;
provided, however, that the Subordinated Creditors shall not be required to
turn over such payments to the extent that the Subordinated Creditors have
also been required to disgorge Subordinated Debt payments to Borrower or HP
UK. If, at any time prior to payment in full of the Senior Debt in cash and
the termination or expiration of the Senior Loan Agreement any such payments
must be disgorged by Bank for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of Borrower or HP
UK) the Subordinated Creditors shall immediately pay over or deliver to Bank
all payments and distributions received by the Subordinated Creditors to the
extent necessary to pay in full, in cash, the disgorged payments; provided,
however, that the Subordinated Creditors shall not be required to turn over
such payments to the extent that the Subordinated Creditors have also been
required to disgorged Subordinated Debt payments to Borrower or HP UK. The
obligations of Borrower, HP UK and the Subordinated Creditors hereunder
shall continue irrespective of, and Borrower, HP UK and the Subordinated
Creditors hereby waive, so far as the law permits, any existing or future
statutes of limitations applicable thereto or applicable to the enforcement
of indebtedness and liability of Borrower or HP UK, and any Collateral
therefor.
17. ACCELERATION. If Borrower, HP UK or any Subordinated Creditor
violates any of the provisions of this Agreement, Bank may elect, by notice
in writing delivered to the Borrower, HP UK or the Subordinated Creditors, to
declare a Senior Default and cause all Senior Debt to become immediately due
and payable.
18. IMPAIRMENT OF SENIOR DEBT OR LIEN. No court or other action which
has the effect of voiding, impairing, equitably subordinating or otherwise
adversely affecting the Senior Debt or the Lien securing the Senior Debt,
whether upon the insolvency, bankruptcy or reorganization of Borrower, HP UK
or otherwise, shall affect Bank's rights hereunder or any of the Subordinated
Creditors' waivers, covenants or obligations hereunder.
19. BREACH OF DUTY OR OBLIGATION TO THE SUBORDINATED CREDITORS. No
breach by Bank of any duty or obligation owed to any Subordinated Creditor
(should any such duty exist), whether under this Agreement or otherwise, nor
any determination that Bank has any liability to the Subordinated Creditors,
whether under this Agreement or otherwise, shall affect Bank's rights
hereunder or any of the Subordinated Creditors' waivers, covenants or
obligations hereunder.
20. WAIVER OF JURY TRIAL. EACH OF THE SUBORDINATED CREDITORS, BANK, HP
UK AND Borrower EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER. EACH
PARTY HERETO HEREBY CONFIRMS THAT SUCH WAIVERS ARE INFORMED AND FREELY MADE.
-12-
<PAGE>
21. REMEDIES. Each Subordinating Creditor agrees and acknowledges that
any violation or threatened violation by the Subordinating Creditors of any
term of this Agreement will cause irreparable injury to Bank, that the remedy
at law of Bank for any such violation or threatened violation will be
inadequate and that Bank shall be entitled to obtain an injunction
prohibiting the continuance or reoccurrence of such violation or threatened
violation, and not in limitation of, any other rights or remedies available
at law or in equity. Each Subordinating Creditor hereby irrevocably waives
any defense based on the adequacy of a remedy at law which might be asserted
as a bar to such injunctive remedy.
22. AGREEMENT BY BORROWER. Borrower agrees that it will not, and it
will not permit any affiliate or subsidiary to, purchase, redeem or otherwise
acquire any of the Subordinated Debt or make any payment of any of the
Subordinated Debt, or take any other action, in contravention of the
provisions of this Agreement.
23. MISCELLANEOUS PROVISIONS.
23.1 NO THIRD PARTY BENEFICIARIES. All of the understandings,
covenants and agreements contained herein are solely for the benefit of Bank,
Unique Bastian (and their respective successors and assigns) and there are no
other persons which are intended to be benefitted in any way by this
Agreement.
23.2 NOTICES. All notices, demands and other communications which
a party may desire, or may be required, to give to another shall be in
writing, shall be delivered personally against receipt, or sent by recognized
overnight courier service, or mailed by registered or certified mail, return
receipt requested, postage prepaid, or sent by telex or telecopy, and shall
be addressed to the party to be notified as follows:
If to Bank: 675 Anton Boulevard, Second Floor
Costa Mesa, California 92626
If to c/o Unique Investment Corporation
Subordinated 1380 Vernon Street
Lenders: Anaheim, California 92805
If to As set forth in the Senior Loan Agreement
Borrower
or HP UK:
Any such notice, demand, or communication shall be deemed given when received
if personally delivered or sent by overnight courier, or when deposited in
the United States mails, postage prepaid, if sent by registered or certified
mail, or when answer back received, if sent by telex or telecopier. The
address for a party may be changed by notice given in accordance with this
subsection.
-13-
<PAGE>
23.3 CHOICE OF LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to the choice of laws or conflicts of laws principles thereof.
23.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon, and shall inure to the benefit of, the participants, transferees,
successors, and permitted assigns of the parties hereto. Each Subordinating
Creditor further agrees that if Borrower or HP UK is in the process of
refinancing a portion of the Senior Debt with a new lender, and if Bank makes
a request of the Subordinating Creditors, the Subordinating Creditors shall
agree to enter into a new subordination agreement with the new lender on
substantially the terms and conditions of this Agreement.
23.5 SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Agreement.
23.6 WAIVERS. No failure on the part of Bank to exercise, no
delay in exercising and no course of dealing with respect to, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder preclude any other or further exercise
thereof or the exercise of any other right.
23.7 ATTORNEYS' FEES. If it becomes necessary for Bank or the
Subordinating Creditors to commence any proceedings or actions to enforce the
provisions of this Agreement, the court or body before which the same shall
be brought shall award to the prevailing party therein all of its costs and
expenses in prosecuting such proceedings and actions, including attorneys'
fees, the usual and customary and lawfully recoverable court costs, and all
the expenses in connection therewith.
23.8 ENTIRE AGREEMENT; MODIFICATIONS. This Agreement contains all
of the terms and conditions agreed upon by the parties relating to its
subject matter and supersedes all prior and contemporaneous agreements,
negotiations, correspondence, understandings and communications of the
parties, whether oral or written, respecting that subject matter. No
modification, rescission, waiver, release, or amendment of any provision of
this Agreement shall be made, except by a written agreement signed by Bank
and the Subordinated Creditors.
23.9 COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which will constitute an original, and all of which,
taken together, shall constitute but one and the same agreement.
-14-
<PAGE>
23.10 AMENDMENTS TO NOTES. None of the parties to this Agreement
other than Bank shall enter into any amendment, modification or waiver with
respect to the Subordinated Debt without the express prior written consent of
the Bank.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the date first set forth above.
/s/ Melanie L. Bastian
- - ---------------------------------
MELANIE L. BASTIAN, an individual
HAWKER PACIFIC AEROSPACE
By: /s/ Brian Aune
------------------------------
Title: CFO
---------------------------
HAWKER PACIFIC AEROSPACE LIMITED
By: /s/ David L. Lokken
------------------------------
Title:
---------------------------
UNIQUE INVESTMENTS CORPORATION
By: /s/ [ILLEGIBLE]
------------------------------
Title: CFO
---------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
By: /s/ [ILLEGIBLE]
------------------------------
Title: Vice President
---------------------------
-15-
<PAGE>
[Attach Subordinated Notes]
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF HAWKER PACIFIC AEROSPACE FOR THE YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 160,000
<SECURITIES> 0
<RECEIVABLES> 7,498,000
<ALLOWANCES> 147,000
<INVENTORY> 14,814,000
<CURRENT-ASSETS> 22,645,000
<PP&E> 17,380,000
<DEPRECIATION> 1,230,000
<TOTAL-ASSETS> 40,898,000
<CURRENT-LIABILITIES> 18,901,000
<BONDS> 0
0
2,000,000
<COMMON> 1,040,000
<OTHER-SE> 1,257,000
<TOTAL-LIABILITY-AND-EQUITY> 40,898,000
<SALES> 41,042,000
<TOTAL-REVENUES> 41,042,000
<CGS> 31,430,000
<TOTAL-COSTS> 31,430,000
<OTHER-EXPENSES> 32,000
<LOSS-PROVISION> 147,000
<INTEREST-EXPENSE> 2,431,000
<INCOME-PRETAX> 1,255,000
<INCOME-TAX> 467,000
<INCOME-CONTINUING> 788,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 788,000
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
