<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1998
REGISTRATION NO. 333-40295
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HAWKER PACIFIC AEROSPACE
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 3728 95-3528840
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
------------------------------
11240 SHERMAN WAY
SUN VALLEY, CALIFORNIA 91352
(818) 765-6201
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
------------------------------
DAVID L. LOKKEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HAWKER PACIFIC AEROSPACE
11240 SHERMAN WAY
SUN VALLEY, CALIFORNIA 91352
TEL: (818) 765-6201
FAX: (818) 765-8073
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
YVONNE E. CHESTER, ESQ. MARK A. KLEIN, ESQ.
ROBERT E. BENFIELD, ESQ. SUSAN B. KALMAN, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION FRESHMAN, MARANTZ, ORLANSKI, COOPER &
KLEIN
1801 CENTURY PARK EAST, SUITE 1600 9100 WILSHIRE BOULEVARD, 8TH FLOOR
LOS ANGELES, CALIFORNIA 90067 BEVERLY HILLS, CALIFORNIA 90212
TEL. (310) 553-4441 TEL. (310) 273-1870
FAX. (310) 201-4746 FAX. (310) 274-8357
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act"), check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement of the earlier effective registration statement for the
same offering. /X/
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO]
2,766,667 SHARES
COMMON STOCK
------------------
Of the 2,766,667 shares of Common Stock offered hereby, 2,600,000 are being
sold by Hawker Pacific Aerospace, a California corporation ("Hawker Pacific" or
the "Company") and 166,667 are being sold by a shareholder of the Company (the
"Selling Shareholder"). See "Principal and Selling Shareholders." The Company
will not receive any proceeds from the sale of shares by the Selling
Shareholder. Prior to this offering (the "Offering"), there has been no public
market for the Common Stock of the Company. The initial public offering price is
$8 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price. Immediately following the
Offering, the shareholders of Unique Investment Corp. will beneficially own in
the aggregate approximately 47.5% (or 40.4% if the over-allotment option is
exercised in full) of the Company's outstanding Common Stock, and by virtue of
such ownership will have effective control over all matters requiring a vote of
shareholders, including the election of a majority of directors. See "Risk
Factors--Control by Existing Shareholders and Anti-Takeover Provisions." The
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "HPAC" subject to official notice of issuance.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
<S> <C> <C> <C> <C>
Per Share........................ $8.00 $0.56 $7.44 $7.44
Total(3)......................... $22,133,336 $1,549,333 $19,344,000 $1,240,002
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses estimated at $1,000,000 payable by the Company.
(3) The Selling Shareholder has granted to the Underwriters a 30-day option to
purchase up to an aggregate of 415,000 additional shares of Common Stock at
the price to the public less underwriting discounts and commissions for the
purpose of covering over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Selling Shareholder will be $25,453,336,
$1,781,733 and $4,327,602, respectively. See "Principal and Selling
Shareholders" and "Underwriting." The Company will not receive any portion
of the proceeds from the sale of the shares by the Selling Shareholder.
------------------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if issued by the Company and delivered to
and accepted by the Underwriters and subject to certain prior conditions
including the right of the Underwriters to reject any order in whole or in part.
It is expected that delivery of the shares of Common Stock will be made at the
offices of EVEREN Securities, Inc., or through the facilities of The Depository
Trust Company, New York, New York on or about February 3, 1998.
EVEREN SECURITIES, INC. THE SEIDLER COMPANIES
INCORPORATED
The date of this Prospectus is January 29, 1998.
<PAGE>
[ART WORK]
LANDING GEAR
Large air transport landing gear, which are comprised of thousands of
component parts and may stand over seven feet tall and require sophisticated
information systems technology, skilled labor and heavy machinery to complete
the repair and overhaul processes performed by the Company.
THE COMPANY'S BORING MILLS, PERFORMING TIGHT TOLERANCE MACHINING OF A
WIDEBODY LANDING GEAR COMPONENT
PLASTIC MEDIA BLASTING FOR EFFICIENT PAINT REMOVAL
PRECISION TRACKING
The Company utilizes advanced information systems including computerized
material requirements planning, bar-coded routing systems and electronic data
order processing.
These systems enable the Company to instantaneously track any job through
all repair operations and provide a direct link between facilities, allowing a
real-time view of work orders and associated material requirements.
DC10 MAIN LANDING GEAR ASSEMBLY, OVERHAULED BY HAWKER PACIFIC
SA365 DAUPHIN MAIN CONTROL
AS332 PUMA LOAD ABSORBING LANDING GEAR SHOCK STRUT
MD-11 WHEEL & TIRE ASSEMBLY
AS332 SUPER PUMA MAIN SERVO CONTROL
HYDROMECHANICS
Hawker Pacific's broad array of services include repair and overhaul of
hydraulic systems, flight controls, constant speed drives and integrated drive
generators for a variety of fixed wing aircraft and helicopters.
WHEELS TIRES & BRAKES
Hawker Pacific's United States facility offers one stop, full service wheel,
tire and brake (steel and carbon) overhaul and repair, "Aircraft On the Ground"
and technical support for a wide range of commercial and corporate aircraft.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN
RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
THE COMPANY
Hawker Pacific 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 nine months ended
September 30, 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, American Airlines, Inc., the United States Coast
Guard, and US Airways, Inc. On December 20, 1997, the Company entered into an
acquisition agreement to purchase, for approximately L13.0 million
(approximately $21.1 million at September 30, 1997), substantially all of the
assets of British Airways' landing gear repair and overhaul operations. The
Company expects to close the transaction immediately following completion of
this Offering using approximately $11 million of the net proceeds. As part of
the BA Acquisition, the Company and British Airways have agreed to enter into a
seven-year exclusive service agreement to provide landing gear and related
repair and overhaul services to substantially all of the aircraft currently
operated by British Airways. The Company believes that 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 "Acquisition of Certain Assets
of British Airways" and "Use of Proceeds."
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) an 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 and
customer emphasis on the traceability of aircraft parts.
GROWTH STRATEGY
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 will establish through the 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.
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
3
<PAGE>
customers will provide Hawker Pacific 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, margins
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 aircraft fleet will grow from
approximately 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. The Company
also intends to expand its hydromechanical component service offerings
particularly through increased capabilities resulting from the BA Acquisition.
SUPPLEMENT GROWTH THROUGH ACQUISITION. The Company intends to evaluate and
pursue strategically located acquisition prospects 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.
COMPETITIVE STRENGTHS
- STRONG MARKET POSITION. The Company through its predecessors has been
providing aftermarket products and services to the aviation industry for over 30
years and believes it has gained an international reputation for high quality
and reliability. The Company believes that its customers select Hawker Pacific
based on its superior quality of service, competitive pricing, rapid turnaround
time and extensive industry experience. Using its engineering expertise, the
Company has developed proprietary or specialized repair and overhaul equipment
and techniques, including the ability to manufacture certain replacement parts
in-house, that enable it to reduce costs in providing its customers with repair
and overhaul services.
- EXPERIENCED MANAGEMENT TEAM. The Company's senior executives have on
average over 20 years of industry experience and have served the Company for an
average of seven years. In addition, the Company believes that its customers
highly value the extensive experience of its 15 managers, who have served the
Company on average for 12 years.
- ADVANCED MANAGEMENT INFORMATION SYSTEMS. The Company has developed
proprietary systems to manage and schedule work flow and coordinate many aspects
of operations. The Company believes that its management information systems are
among the most advanced in its industry, permitting the Company to achieve
greater operating efficiencies, offer a higher level of customer service than
its competitors and provide complete 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 the Company's current
shareholders. See "Certain Transactions--Acquisition of the Company from BTR."
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.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered:
By the Company.............................................. 2,600,000 shares
By the Selling Shareholder.................................. 166,667 shares
Common Stock Outstanding after the Offering..................... 5,822,222 shares
Use of Proceeds................................................. The net proceeds will be used to finance a
portion of the BA Acquisition, to repay a
portion of certain indebtedness and for working
capital and general corporate purposes. See "Use
of Proceeds."
Risk Factors.................................................... Prospective investors should consider carefully
the factors set forth under "Risk Factors."
Nasdaq National Market Symbol................................... HPAC
</TABLE>
------------------------
"BA ASSETS" REFERS TO THE ASSETS OF BRITISH AIRWAYS PLC'S ("BRITISH
AIRWAYS") LANDING GEAR REPAIR AND OVERHAUL OPERATIONS TO BE ACQUIRED BY THE
COMPANY IMMEDIATELY FOLLOWING THE CLOSING OF THE OFFERING (THE "BA
ACQUISITION"). UNLESS OTHERWISE INDICATED, THE INFORMATION SET FORTH HEREIN (I)
REFLECTS A 579.48618 FOR ONE STOCK SPLIT EFFECTED IN NOVEMBER 1997 AND A ONE FOR
.9907406 REVERSE STOCK SPLIT EFFECTED IN JANUARY 1998, (II) ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, THE REPRESENTATIVES' WARRANTS TO
PURCHASE UP TO 222,716 SHARES OF COMMON STOCK, OR OPTIONS TO PURCHASE UP TO AN
AGGREGATE OF 749,879 SHARES OF COMMON STOCK GRANTED OR RESERVED UNDER THE
COMPANY'S 1997 STOCK OPTION PLAN AND PURSUANT TO MANAGEMENT STOCK OPTIONS
GRANTED IN NOVEMBER 1997, AND (III) GIVES EFFECT TO THE CONVERSION OF ALL
OUTSTANDING SHARES OF THE COMPANY'S SERIES A PREFERRED STOCK (THE "PREFERRED
STOCK") INTO 250,000 SHARES OF COMMON STOCK.
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
5
<PAGE>
SUMMARY FINANCIAL DATA
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
PREDECESSOR(1) SUCCESSOR(1)
-------------------------- -----------------------------------------------------------
YEAR TEN MONTHS TWO MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995(2) 1996(3) 1996 1996 1996 1997
------------- ----------- ------------ ---------------- ---------------- ---------
(PRO (PRO
FORMA)(3)(4) FORMA)(3)(4)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 35,012 $ 32,299 $ 6,705 $ 39,004 $ 29,567 $ 30,060
Cost of revenues............... 28,993 27,027 4,599 31,799 25,157 23,083
------------- ----------- ------------ ---------------- ---------------- ---------
Gross profit................... 6,019 5,272 2,106 7,205 4,410 6,977
Selling, general and
administrative(5)............ 4,837 5,044 1,059 6,161 4,406 4,118
Restructuring charges(3)....... -- 1,196 -- 1,196 1,196 --
------------- ----------- ------------ ---------------- ---------------- ---------
Income (loss) from
operations................... 1,182 (968) 1,047 (152) (1,192) 2,859
Interest expense, net.......... (1,598) (1,609) (196) (2,305) (1,734) (1,802)
Income tax expense
(benefit)(6)................. (680) (971) 382 (934) (1,112) 392
------------- ----------- ------------ ---------------- ---------------- ---------
Net income (loss).............. $ 264 $ (1,606) $ 469 $ (1,523) $ (1,814) $ 665
------------- ----------- ------------ ---------------- ---------------- ---------
------------- ----------- ------------ ---------------- ---------------- ---------
Pro forma net income (loss) per
share........................ $ 0.15 $ (0.48) $ (0.57) $ 0.21
------------ ---------------- ---------------- ---------
Weighted average shares
outstanding.................. 3,170,551 3,170,551 3,170,551 3,170,708
Pro forma supplemental net
income (loss) per share(7)... $ 0.13 $ (0.30) $ (0.40) $ 0.23
OPERATING AND OTHER DATA:
Capital expenditures........... $ 4,114 $ 1,199 $ 28,553 $ 1,576
Depreciation and
amortization................. 854 819 200 866
EBITDA(8)...................... 2,036 (149) 1,254 3,727
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED(9)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................ $ 5,582 $ 20,426
Total assets........................................................................... 39,399 51,451
Total long-term debt (excluding current portion)....................................... 18,063 14,563
Total shareholders' equity............................................................. 3,674 22,518
</TABLE>
- - ------------------------------
(1) Predecessor information represents the historical financial data of the
Company when it was owned by BTR Dunlop, Inc. ("BTR"). Successor information
represents the historical financial data after the acquisition of the
Company by its existing shareholders (the "BTR Transaction"). See "Certain
Transactions--Acquisition of the Company from BTR" and Note 1 of Notes to
Financial Statements.
(2) Fiscal 1995 includes a non-recurring charge to cost of revenues of $927,000
for disposal of inventory related to the merger (the "Dunlop Merger") of
certain operations of Dunlop Aviation, Inc., a wholly-owned subsidiary of
BTR Dunlop Holdings, Inc. ("Dunlop Aviation"), which had operations in
Chatsworth, CA ("Dunlop Chatsworth") and Miami, FL ("Dunlop Miami"). Fiscal
1995 also includes a net gain of approximately $300,000 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 an
environmental liability incurred by the Company (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 7 of Notes to Financial Statements.
(3) 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 the Financial Statements. In addition, the ten months
ended October 31, 1996, pro forma year ended December 31, 1996 and pro forma
nine months ended September 30, 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.
(4) The pro forma presentation gives effect to the BTR Transaction as though it
had occurred on January 1, 1996.
(5) Included in selling, general and administrative expenses for the ten months
ended October 31, 1996, the pro forma nine months ended September 30, 1996,
and the pro forma year ended December 31, 1996 are expenditures related to
the EPA Claim of
6
<PAGE>
$947,000. No such costs were incurred during the two months ended December
31, 1996 or the nine months ended September 30, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(6) Income tax expenses for the two months ended December 31, 1996 and nine
months ended September 30, 1997 include provisions of $382,000 and $391,000,
respectively, resulting from the reduction of deferred tax assets. No tax is
actually payable for such provisions. See Note 4 of Notes to Financial
Statements.
(7) Pro forma supplemental earnings per share reflect what earnings would have
been if the debt retired with the proceeds from the Offering had been
retired at the beginning of the period. The number of shares of Common Stock
to be sold in this Offering, the proceeds from which will be used to retire
debt (750,000 shares), are included in this calculation with a corresponding
reduction in interest expense. See Note 1 of Notes to Financial Statements.
(8) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not a measurement of income under generally accepted accounting principles
("GAAP"). EBITDA may not provide an accurate comparison among companies
because it is not necessarily computed identically by all companies. The use
of such information is intended only to supplement the conventional income
statement presentation and is not to be considered as an alternative to net
income, cash flows or any other indicator of the Company's operating
performance which is presented in accordance with GAAP.
(9) Adjusted to give effect to the receipt of the net proceeds from the sale by
the Company of 2,600,000 shares of Common Stock to be sold in this Offering
(at an initial public offering price of $8.00 per share), the receipt of
$500,000 in proceeds from the issuance of 51,671 shares of Common Stock in
October 1997, and the application of the estimated net proceeds to working
capital and repayment of a portion of certain debt. Does not give effect to
the BA Acquisition which is expected to be completed immediately following
the Offering. The Company plans to use approximately $11 million from the
proceeds of this Offering and approximately $11 million from its credit
facility to fund the purchase price of the BA Assets. See "Acquisition of
Certain Assets of British Airways" and "Use of Proceeds."
7
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS WHEN EVALUATING AN INVESTMENT IN
THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE
DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
AVIATION INDUSTRY RISKS
The Company derives all of its sales and operating income from the services
and parts that it provides to its customers in the aviation industry. Therefore,
the Company's business is directly affected by economic factors and other trends
that affect its customers in the aviation industry, including a possible
decrease in aviation activity, a decrease in outsourcing by aircraft operators
or 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
Immediately following completion of this Offering, the Company will acquire
the BA Assets using approximately $11 million of the proceeds from this
Offering. See "Acquisition of Certain Assets of British Airways," "Use of
Proceeds" 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
8
<PAGE>
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 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, including the
BA Acquisition, 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 following the BA Acquisition. The Company makes substantial
inventory purchases in French francs from such suppliers as Messier-Bugatti,
Societe D'Applications Des Machines Motrices ("SAMM") and Eurocopter France. The
Company's Netherlands facility's inventory purchases are primarily United States
dollar denominated, while sales and operating expenses are partially denominated
in Dutch guilders. To date, the Company's business has not been significantly
affected by currency fluctuations or inflation. However, the Company conducts
business in the Netherlands and 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. 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. 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.
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The Company's payment of the purchase price for the BA Acquisition is
denominated in pounds. To hedge against the fluctuation of pounds to dollars,
the Company has entered into a transaction which permits it to purchase
approximately $17 million of pounds at a rate of 1.6373 dollars per pound. The
balance of the purchase price has not been hedged and thus the purchase price in
United States dollars could increase or decrease depending on fluctuations of
pounds to dollars and the currency conversion factor in effect at the time the
BA Acquisition is consummated. See "Acquisition of Certain Assets of British
Airways" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations--Foreign Exchange."
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
Landing Gear Services Division of the B.F. Goodrich Company ("BFG"), the Landing
Gear Division of AAR Corporation ("AAR"), Revima, a company organized and
operating under the laws of France ("Revima") and Dowty Aerospace Aviation
Services ("Dowty"). The Company's major competitors in its hydromechanical
components business include AAR and OEMs such as Sunstrand, Aeroquip Vickers,
Inc. ("Vickers"), Parker-Hannifin Corporation ("Parker-Hannifin"),
Messier-Bugatti and Lucas. The Company expects that competition in its industry
will increase substantially as a result of industry consolidations and alliances
in response to the trend in the aviation industry toward outsourcing of repair
and overhaul services. In addition, as the Company moves into new geographic or
product markets it will encounter new competition.
The Company believes that the primary competitive factors in its marketplace
are quality, price, rapid turnaround time and industry experience. Certain of
the Company's competitors have substantially greater financial, technical,
marketing and other resources than the Company. These competitors may have the
ability to adapt more quickly to changes in customer requirements, may have
stronger customer relationships and greater name recognition and may devote
greater resources to the development, promotion and sale of their products than
the Company. There can be no assurance that competitive pressures will not
materially and adversely affect the Company's business, financial condition or
results of operations. See "Business--Competition."
GOVERNMENT REGULATION
The Company is highly regulated worldwide by the Federal Aviation
Administration ("FAA"), the Joint Airworthiness Authority, a consortium of
European regulatory authorities ("JAA"), and various other foreign regulatory
authorities, including the Dutch Air Agency, which regulates the Company's
Netherlands' operations. Upon completion of the BA Acquisition, the Company's
British operations will be regulated by the Civil Aviation Authority ("CAA").
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
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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 (collectively, "Dunlop"). Under two of these agreements, the Company is
entitled to purchase at a discount from list price Dunlop parts for resale and
for use in the repair and overhaul of a variety of fixed wing aircraft and
helicopters. For the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1997, the Company's single largest supplier was Dunlop,
accounting for approximately $5,005,000 (22.3%), $5,634,000 (27%) and $2,846,000
(18.7%), 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.
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
sales to Federal Express Corporation ("FedEx") and the United States Coast Guard
(the "USCG") accounted for 18.4%, and 11.2%, respectively, of product sales for
the year ended December 31, 1996 and 18.2% and 7.0%, respectively, of product
sales for the nine months ended September 30, 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
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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 September 30, 1997, 20.9% and 11.1%, respectively of the Company's total
accounts receivable were associated with two customers, FedEx and United Air
Lines, Inc. ("United Air Lines"). At December 31, 1996, 7.4% and 9.3%,
respectively of the Company's total accounts receivable were associated with
FedEx and the USCG. Following the BA Acquisition, the Company expects that
British Airways will account for a significant percentage of both its 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 United States Environmental Protection
Agency ("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 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."
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
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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 intends to obtain key
person insurance on the life of Mr. Lokken in the amount of $1,000,000 following
this Offering. There can be no assurance that the proceeds of such insurance
will be sufficient to compensate the Company in the event that Mr. Lokken dies.
Competition for qualified technical personnel is intense and from time to time,
the Company has experienced difficulty in attracting and retaining personnel
skilled in its repair and overhaul operations. There can be no assurance that
these individuals will continue employment with the Company. The loss of certain
key personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees and
Employee Training" and "Management."
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 reorganizing and reconfiguring its Sun
Valley facilities to meet its growth needs and increase the efficiency of its
operations. The Company expects to complete its facilities reorganization in
early 1998 and then plans to begin expanding its plating operations, which is
not expected to be completed until the end of 1998. Any failure or delay in
completing the reorganization of its facilities or 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 "Business-- Facilities."
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CONTROL BY EXISTING SHAREHOLDERS AND ANTI-TAKEOVER PROVISIONS
Prior to the Offering, the five shareholders (the "Unique Shareholders") of
Unique Investment Corp. ("Unique") beneficially owned approximately 90% of the
Company's outstanding Common Stock, and the executive officers of the Company
beneficially owned approximately 7.7% of the Company's outstanding Common Stock,
including vested management stock options to purchase 115,365 shares of Common
Stock. Upon consummation of the Offering, the Unique Shareholders will
beneficially own in the aggregate approximately 48.2% (or 40.3% if the
overallotment option is exercised in full) of the Company's outstanding Common
Stock, and by virtue of such ownership, will have effective control over all
matters requiring a vote of shareholders, including the election of a majority
of directors. The ownership positions of the existing shareholders, together
with the authorization of blank check preferred stock and the implementation, if
certain conditions are met, of a staggered board and elimination of cumulative
voting in the Company's Amended and Restated Articles of Incorporation and
Amended and Restated Bylaws, may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Company's Common Stock at a premium over the market price of the Common Stock
and may adversely affect the market price of the Common Stock. See "Principal
and Selling Shareholders" and "Description of Capital Stock."
BENEFITS OF OFFERING TO CURRENT SHAREHOLDERS AND MANAGEMENT
As a result of this Offering, based on an initial public offering price per
share of $8.00, the Company's existing shareholders, including certain members
of the Company's management, will realize an immediate increase of $2.68 in the
net tangible book value per share of their investment in the Company. See
"Dilution." The market price of the Common Stock held by the Company's existing
shareholders, including management, could increase significantly as a result of
this Offering. It is also expected that Melanie L. Bastian, a principal
shareholder of the Company and the Selling Shareholder in this Offering, will be
released from certain bank guarantees that she has heretofore provided for the
Company. See "Certain Transactions" and "Principal and Selling Shareholders."
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; STOCK PRICE
VOLATILITY
Prior to this Offering there has been no public market for the Common Stock,
and there can be no assurance that an active trading market for the Common Stock
will develop or be sustained after the Offering. The initial public offering
price has been determined by negotiations between the Company and the
representatives of the Underwriters and does not necessarily bear a relationship
to assets, book value, earnings history or other established criteria of value.
See "Underwriting." In addition, 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.
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors in this Offering will experience immediate and substantial
dilution in the net tangible book value of the shares of Common Stock in this
Offering. At an initial public offering price of $8.00 per share, purchasers of
the Common Stock offered hereby will incur dilution of $4.22 in the pro forma
net tangible book value per share of Common Stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, 3,055,555 shares of Common Stock
outstanding prior to this Offering (less any shares sold by the Selling
Shareholder upon exercise of the over-allotment option) will
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be "restricted securities" as that term is defined in Rule 144 under the
Securities Act. All of the restricted securities will become available for
immediate sale in the public market following the expiration of lock-up
agreements between certain security holders and the Representatives of the
Underwriters beginning 180 days after the date of this Prospectus, subject in
certain cases to the volume, holding period and other restrictions of Rule 144.
Sales of substantial amounts of Common Stock in the public market following this
Offering or even the potential of such sales could have an adverse effect on the
market price of the Common Stock.
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ACQUISITION OF CERTAIN ASSETS OF BRITISH AIRWAYS
On December 20, 1997, the Company signed a definitive acquisition agreement
(the "Acquisition Agreement") with British Airways to purchase the BA Assets,
which consist of substantially all of the assets of British Airways' landing
gear repair and overhaul operations. The Company expects to close the
transaction immediately following completion of this Offering. The Company plans
to use approximately $11 million from the net proceeds of this Offering to fund
a portion of the purchase price for the BA Assets. The balance of the purchase
price will be provided by the Company's credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The purchase price for the BA Assets is approximately L13.0 million
(approximately $21.1 million at September 30, 1997), subject to adjustment to
reflect certain changes to the quantity and condition of the assets purchased
and the potential exclusion of one landing gear shipset priced at L1.8 million
($2.9 million at September 30, 1997). To hedge against the fluctuation of pounds
to dollars, the Company has entered into a transaction which permits it to
purchase approximately $17 million of pounds at a rate of 1.6373 dollars per
pound. The balance of the purchase price has not been hedged and thus the
purchase price in United States dollars could increase or decrease depending on
fluctuations of pounds to dollars and the currency conversion factor in effect
at the time the BA Acquisition is consummated. See "Risk Factors-- Risks
Associated with Expansion of International Operations" and "Management's
Discussion and Analysis of Financial Conditions and Results of
Operation--Foreign Exchange." The BA Acquisition represents the purchase of
assets of British Airways Engineering used to service landing gear primarily on
British Airways' aircraft. The Company is acquiring assets utilized exclusively
to provide general repair and overhaul services for landing gear, flap tracks
and flap carriages, including machining and plating operations. The BA
Acquisition does not include British Airways' facilities or business support
functions, such as purchasing, accounting, human resources, management
information systems, quality assurance, training, transportation, property
management and legal, which are currently provided by British Airways'
centralized departments. As a result, the Company will be required to integrate
its support systems into the BA Assets and provide facilities for its United
Kingdom operations following the BA Acquisition. See "Risk Factors--Risks
Relating to Acquisition Strategy; Establishment of United Kingdom Operations."
The Company will not assume any debt or liabilities of British Airways
except liability for two contracts between British Airways and a supplier and a
third party customer, respectively. Under United Kingdom labor laws,
approximately 130 of British Airways' current employees (the "British Airways
Employees") will become employees of the Company. In addition, the Company has
agreed in the Acquisition Agreement to establish a new pension plan that
provides the British Airways Employees with the same benefits as those they
currently receive under British Airways' pension plan. The Acquisition Agreement
provides that British Airways and the Company will agree to indemnify one
another against certain losses that could arise as a result of the transfer of
the British Airways Employees.
As part of the BA Acquisition, the Company and British Airways have agreed
to enter into an exclusive seven-year Landing Gear Overhaul Services Agreement
(the "Services Agreement") with British Airways pursuant to which the Company
will agree to provide British Airways with landing gear, flap track and flap
carriage repair and overhaul services, and related spare parts and component
overhaul services for substantially all of the aircraft currently operated by
British Airways. In exchange for the Company's repair and overhaul services,
British Airways will pay the Company a fixed overhaul fee per individual landing
gear, flap track and flap carriage, and variable fees for "over and above" work
and other services. Repair and overhaul of spare parts and components will be
separately charged on a time and materials basis. In addition, the Services
Agreement will obligate British Airways to pay the Company an annual inventory
access fee based on the value of rotable spares which the Company is required to
dedicate to the support of British Airways' fleet, estimated to be L1.8 ($2.9
million at September 30, 1997) in the first year based upon the amount of
rotable inventory sold to the Company pursuant to the Acquisition Agreement,
which is expected to fluctuate over the term of the Services Agreement. The
Services Agreement provides that
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British Airways will have the right to terminate the Services Agreement with
respect to a specific type of aircraft or the entire agreement, in the event
that the Company's services fail to meet certain standard performance and
quality criteria. In addition, the Company will be required to indemnify British
Airways against losses arising from material breaches of the Services Agreement,
the Company's failure to comply with certain United Kingdom regulatory
requirements, willful or grossly negligent acts of the Company and infringement
of any intellectual property rights of third parties.
The Services Agreement provides that the Company will be permitted to occupy
temporarily the premises in which the BA Assets are currently housed while
relocating to a new United Kingdom facility. The Company will be required to
make monthly rental payments from June 1, 1998 through June 30, 1999 aggregating
L1.8 million ($2.9 million at September 30, 1997) to British Airways, which
amount is payable whether or not the Company continues to occupy the premises
during such period. In addition, commencing on July 1, 1999 through December 31,
1999 the Company will be required to make rental payments of L8,500 ($13,770 at
September 30, 1997) per day to British Airways if the Company occupies the
premises, which L8,500 per day rental will be proportionately reduced as the
Company returns space to British Airways. The Company anticipates that it will
need to occupy a portion of British Airways' premises until June 1999. The
Services Agreement provides that the Company will indemnify British Airways
against losses resulting from failure to comply with any United Kingdom
environmental laws or regulations, or any expenditures required to bring the
facilities in compliance with any such laws or regulations, while it occupies
British Airways' premises. It also provides that British Airways will indemnify
the Company against any losses resulting from any failure by British Airways to
comply with such environmental laws or regulations prior to the closing of the
BA Acquisition.
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USE OF PROCEEDS
The net proceeds to the Company from its sale of the 2,600,000 shares of
Common Stock offered hereby at an initial public offering price of $8 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be approximately
$18.3 million. The Company will not receive any proceeds from the sale of the
shares by the Selling Shareholder.
The Company intends to use approximately $11 million of the net proceeds to
fund a portion of the purchase price for the BA Assets and approximately $6
million to repay a portion of the revolving and term debt outstanding under the
Company's credit facility. See "Acquisition of Certain Assets of British
Airways," "Certain Transactions" and "Principal and Selling Shareholders." The
total balance outstanding under the credit facility was $20.3 million as of
September 30, 1997. Advances under the revolving portion of the credit facility
bear interest at the Inter-bank Offer Rate ("IBOR") plus 1.5% (7.51% at
September 30, 1997) and on the term debt portion of the credit facility bear
interest at the IBOR plus 1.875% (7.6% at September 30, 1997) and have been used
primarily to fund the BTR Transaction.
The Company has entered into an amended and restated business loan agreement
(the "Amended Loan Agreement") which increased the amount of its available
borrowings from $26.5 million to $45.5 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources." The Company plans to use $11 million from the proceeds of
this Offering and approximately $11 million from its credit facility to fund the
purchase price of the BA Assets. See "Acquisition of Certain Assets of British
Airways."
The Company intends to use the remaining net proceeds for working capital
and general corporate purposes. Prior to their eventual use, the net proceeds
will be invested in high quality, short-term investment instruments such as
short-term corporate investment grade or United States Government
interest-bearing securities.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since its
inception and has no current plans to pay dividends on the 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.
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CAPITALIZATION
The following table sets forth: (i) the actual short-term debt and
capitalization of the Company as of September 30, 1997; (ii) the pro forma
short-term debt and capitalization of the Company giving effect to the
conversion of the Company's outstanding shares of preferred stock into 250,000
additional shares of Common Stock and the receipt of $500,000 in proceeds from
the issuance of Common Stock in October 1997; and (iii) the pro forma
capitalization as adjusted to give effect to the sale of the 2,600,000 shares of
Common Stock offered by the Company hereby at an initial public offering price
of $8 per share and the application of the estimated net proceeds from the
Offering to working capital and the repayment of a portion of its bank debt.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
PRO FORMA
AS ADJUSTED
ACTUAL PRO FORMA (1)
--------- ----------- --------------
(IN THOUSANDS, EXCEPT SHARE
INFORMATION)
<S> <C> <C> <C>
Short-term debt.......................................................... $ 8,779 $ 8,779 $ 6,279
--------- ----------- -------
--------- ----------- -------
Long-term debt, less current portion..................................... $ 18,063 $ 18,063 $ 14,563
Shareholders' equity:
Series A Preferred Stock, $2,000,000 liquidation value; 400 shares
authorized; 400 shares issued and outstanding, actual; none issued
and outstanding pro forma and pro forma as adjusted.................. 2,000 -- --
Preferred Stock, no par value; 5,000,000 shares authorized pro forma
and pro forma as adjusted; none issued and outstanding............... -- -- --
Common Stock, no par value; (1) 20,000,000 shares authorized;
20,000,000 shares authorized pro forma and pro forma as adjusted;
2,920,551 shares issued and outstanding, actual; 3,222,222 issued and
outstanding, pro forma; 5,822,222 issued and outstanding, pro forma
as adjusted.......................................................... 540 3,040 21,384
Retained earnings...................................................... 1,134 1,134 1,134
--------- ----------- -------
Total shareholders' equity........................................... 3,674 4,174 22,518
--------- ----------- -------
Total capitalization............................................... $ 21,737 $ 22,237 $ 37,081
--------- ----------- -------
--------- ----------- -------
</TABLE>
- - ------------------------
(1) Does not give effect to the BA Acquisition. The Company has entered into the
Amended Loan Agreement to increase the amount of its available borrowings to
$45.5 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
Company plans to use approximately $11 million from the proceeds of this
Offering and approximately $11 million from its credit facility to fund the
purchase price of the BA Assets. Total pro forma as adjusted capitalization
as presented above at September 30, 1997, giving effect to the anticipated
new credit facility and the BA Acquisition, would be increased by
approximately $15 million. See "Acquisition of Certain Assets of British
Airways" and "Use of Proceeds."
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at September 30, 1997
(giving effect to the conversion of Preferred Stock outstanding as of September
30, 1997 into 250,000 shares of Common Stock at an initial public offering price
of $8.00 per share and the receipt of $500,000 in proceeds from the issuance of
51,671 shares of Common Stock in October 1997), was $3.5 million or $1.10 per
share. Pro forma net tangible book value per share is determined by dividing the
net tangible book value of the Company (total assets net of goodwill less total
liabilities of the Company) by the number of shares of Common Stock outstanding
(giving effect to the conversion of Preferred Stock outstanding as of September
30, 1997 into 250,000 shares of Common Stock). After giving effect to the sale
of 2,600,000 shares offered by the Company hereby at an initial public offering
price of $8 per share (after deduction of estimated underwriting discounts and
commissions and estimated offering expenses), the pro forma net tangible book
value of the Company as of September 30, 1997 would have been $22 million, or
$3.78 per share. This represents an immediate increase in the net tangible book
value of $2.68 per share to existing shareholders and an immediate dilution in
pro forma net tangible book value of $4.22 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price................................................. $ 8.00
Pro forma net tangible book value before this Offering...................... $ 1.10
Increase in net tangible book value attributable to this Offering........... 2.68
---------
Pro forma net tangible book value after this Offering......................... 3.78
---------
Dilution to new investors..................................................... $ 4.22
---------
---------
</TABLE>
The following table sets forth on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by the existing
shareholders and by purchasers of the shares of Common Stock offered hereby
(giving effect to the conversion of Preferred Stock outstanding as of September
30, 1997 into 250,000 shares of Common Stock and the sale of 2,600,000 shares by
the Company at an initial public offering price of $8.00 per share, before
deducting underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................... 3,222,222 55.3% $ 3,040,000 12.8% $ 0.94
New public investors................................ 2,600,000 44.7 20,800,000 87.2 $ 8.00
---------- ----- ------------- -----
Total............................................. 5,822,222 100.0% $ 23,840,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
20
<PAGE>
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 and 1996 and September 30,
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 nine months ended September 30, 1997 are derived from the financial
statements of the Company which have been audited by Ernst & Young LLP,
independent accountants, and are included elsewhere in this Prospectus. 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 nine months ended September 30,
1996 and the year ended December 31, 1996 is 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.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of results for the year ending December 31, 1997 or any
other future period.
<TABLE>
<CAPTION>
PREDECESSOR(1) SUCCESSOR(1)
------------------------------------- -------------------------------------------------------
TEN MONTHS NINE MONTHS
ENDED TWO MONTHS ENDED
YEAR ENDED DECEMBER 31, OCTOBER ENDED YEAR SEPTEMBER 30,
------------------------- 31, DECEMBER 31, ENDED --------------------
1993(2) 1994(2) 1995(3) 1996(4) 1996 DECEMBER 31, 1996 1996 1997
------- ------- ------- ---------- ------------ ----------------- --------- ---------
(PRO FORMA)(4)(5) (PRO FORMA)(4)(5)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATION DATA:
Revenues.................... $29,757 $31,743 $35,012 $32,299 $ 6,705 $ 39,004 $ 29,567 $ 30,060
Cost of revenues............ 25,055 24,825 28,993 27,027 4,599 31,799 25,157 23,083
------- ------- ------- ---------- ------------ ----------------- --------- ---------
Gross profit................ 4,702 6,918 6,019 5,272 2,106 7,205 4,410 6,977
Selling, general and
administrative(6)......... 3,861 5,332 4,837 5,044 1,059 6,161 4,406 4,118
Restructuring charges(4).... -- -- -- 1,196 -- 1,196 1,196 --
------- ------- ------- ---------- ------------ ----------------- --------- ---------
Income (loss) from
operations................ 842 1,586 1,182 (968) 1,047 (152) (1,192) 2,859
Interest expense, net....... (1,033) (507) (1,598) (1,609) (196) (2,305) (1,734) (1,802)
------- ------- ------- ---------- ------------ ----------------- --------- ---------
(192) 1,079 (416) (2,577) 851 (2,457) (2,926) 1,057
Income tax expense
(benefit)(7).............. (24) 29 (680) (971) 382 (934) (1,112) 392
------- ------- ------- ---------- ------------ ----------------- --------- ---------
Net income (loss)........... $ 168 $ 1,050 $ 264 $(1,606) $ 469 $ (1,523) $ (1,814) $ 665
------- ------- ------- ---------- ------------ ----------------- --------- ---------
------- ------- ------- ---------- ------------ ----------------- --------- ---------
Pro forma net income (loss)
per share................. $ 0.15 $ (0.48) $ (0.57) $ 0.21
------------ ----------------- --------- ---------
------------ ----------------- --------- ---------
Weighted average shares
outstanding............... 3,170,551 3,170,551 3,170,551 3,170,708
Pro forma supplemental net
income (loss) per
share(8).................. $ 0.13 $ (0.30) $ (0.40) $ 0.23
------------ ----------------- --------- ---------
------------ ----------------- --------- ---------
OPERATING AND OTHER DATA:
Capital expenditures........ $ 996 $ 4,114 $ 1,199 $ 28,553 $ 1,576
Depreciation and
Amortization.............. 756 854 819 200 866
EBITDA(9)................... 2,342 2,036 (149) 1,254 3,727
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR(1)
-------------------------------
SUCCESSOR(1)
DECEMBER 31, --------------------------
------------------------------- DECEMBER SEPTEMBER 30,
1993 1994 1995 31, 1996 1997
--------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 4,070 $ 9,966 $ 13,289 $ 7,225 $ 5,582
Total assets............................................. 22,802 25,865 35,455 35,178 39,399
Total long-term debt (excluding current portion)......... 13,754 21,404 27,310 19,150 18,063
Total shareholders' equity............................... 266 (1,182) (917) 2,509 3,674
</TABLE>
- - ------------------------------
(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 7 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, pro forma year ended December 31, 1996 and pro forma nine
months ended September 30, 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, the pro forma nine months ended September 30, 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 nine months ended September 30, 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 nine
months ended September 30, 1997 include provisions of $382,000 and $391,000,
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.
(8) Pro forma supplemental earnings per share reflects what earnings would have
been if the debt retired with the proceeds from the Offering had been
retired at the beginning of the period. The number of shares of Common Stock
to be sold in this Offering, the proceeds from which will be used to retire
debt (750,000 shares), are included in this calculation with a corresponding
reduction in interest expense. See Note 1 of Notes to Financial Statements.
(9) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not a measurement of income under generally accepted accounting principles
("GAAP"). EBITDA may not provide an accurate comparison among companies
because it is not necessarily computed by all companies in an identical
manner. The use of such information is intended only to supplement the
conventional statement of operations presentation and is not to be
considered as an alternative to net income, cash flows or any other
indicator of the Company's operating performance which is presented in
accordance with GAAP.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 PROSPECTUS. 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 "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 was organized in August 1980 as a California
corporation to provide aircraft parts distribution and 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 business 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 1994. 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 Unique Shareholders and the
Company's executive officers ("Aqhawk"). See "Certain Transactions--Acquisition
of the Company from BTR."
EXPANSION INTO WIDE-BODY COMMERCIAL AIRCRAFT. The Company's operating
strategy has been to increase higher margin large air transport landing gear
repair and overhaul services. In that regard, revenue for the years ended
December 31, 1996 (pro forma) and December 31, 1995 increased 51.5% and 30.7%,
respectively, over their respective prior years and 14.5% for the nine months
ended September 30, 1997 over the comparable period in 1996. This increase
resulted from the Company's $6.3 million capital investment program in 1994 and
1995 to expand its landing gear repair and overhaul capabilities to support
wide-body commercial aircraft, such as the Boeing models 747, 757, 767,
McDonnell Douglas models DC10, MD10 and MD11, and Airbus models A310 and A320.
These expenditures included expenses for facility improvements, purchase of
machinery and equipment to handle large landing gear components 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 have led to a
number of key new contracts. On September 9, 1997, the Company signed a
seven-year exclusive contract with American Airlines, Inc. ("American Airlines")
to service landing gear on all Boeing 757 aircraft within its fleet (the "AA
Fleet"). Performance under this new contract is anticipated to begin 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 and to include
support of FedEx's fleet of Airbus A310 aircraft and FedEx's program to convert
DC10 aircraft to MD10 cargo carriers.
As part of the BA Acquisition, the Company and British Airways have agreed
to enter into a seven-year exclusive service agreement to provide landing gear
and related component repair and overhaul services to substantially all of the
aircraft currently operated by British Airways.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement
of operations data (in thousands) of the Company.
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR -------------------------------------
--------------------
YEAR ENDED
YEAR ENDED DECEMBER NINE MONTHS ENDED
DECEMBER 31, 31, ------------------------
-------------------- ----------- SEPTEMBER SEPTEMBER
1994 1995 1996 30, 1996 30, 1997
--------- --------- ----------- ----------- -----------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C> <C>
Revenues................................. $ 31,743 $ 35,012 $ 39,004 $ 29,567 $ 30,060
Cost of revenues......................... 24,825 28,993 31,799 25,157 23,083
--------- --------- ----------- ----------- -----------
Gross profit............................. 6,918 6,019 7,205 4,410 6,977
Selling, general and administrative
expenses............................... 5,332 4,837 6,161 4,406 4,118
Restructuring charges related to closure
of Miami operations.................... -- -- 1,196 1,196 --
--------- --------- ----------- ----------- -----------
Operating income (loss).................. 1,586 1,182 (152) (1,192) 2,859
Interest expense, net.................... (507) (1,598) (2,305) (1,734) (1,802)
--------- --------- ----------- ----------- -----------
Income (loss) before income taxes........ 1,079 (416) (2,457) (2,926) 1,057
Income tax expense (benefit)............. 29 (680) (934) (1,112) 392
--------- --------- ----------- ----------- -----------
Net income (loss)........................ $ 1,050 $ 264 $ (1,523) $ (1,814) $ 665
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
</TABLE>
The following table sets forth, for the periods indicated, the percentage of
sales represented by certain items in the Company's statement of operations.
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------------------
NINE MONTHS ENDED
PREDECESSOR ----------------------------
---------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1997
---------- ---------- ------------ ------------- -------------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C> <C>
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 78.2 82.8 81.5 85.1 76.8
----- ----- ----- ----- -----
Gross profit.............................. 21.8 17.2 18.5 14.9 23.2
Selling, general and administrative
expenses................................ 16.8 13.8 15.8 14.9 13.7
Restructuring charges related to closure
of Miami operations..................... -- -- 3.1 4.0 --
----- ----- ----- ----- -----
Operating income (loss)................... 5.0 3.4 (0.4) (4.0) 9.5
Interest expense, net..................... (1.6) (4.6) (5.9) (5.9) (6.0)
----- ----- ----- ----- -----
Income (loss) before income taxes......... 3.4 (1.2) (6.3) (9.9) 3.5
Income tax expense (benefit).............. 0.1 (1.9) (2.4) (3.8) 1.3
----- ----- ----- ----- -----
Net income (loss)......................... 3.3% 0.7% (3.9)% (6.1)% 2.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
24
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues for the nine months ended September 30, 1997 increased
1.7% to $30,060,000 from $29,567,000 for the nine months ended September 30,
1996. Repair and overhaul revenues accounted for 91.1% of sales for the nine
months ended September 30, 1997, as compared to 89.5% for the comparable period
in 1996. Revenues from spare parts distribution and sales accounted for 7.7% of
total revenue for the nine months ended September 30, 1997, as compared to 9.1%
for the comparable period in 1996. This decline was a result of the Company's
decision to close Dunlop Miami and discontinue its low-margin tire distribution
agreement with Dunlop Aircraft Tyres, United Kingdom. Dunlop Miami contributed
$2,048,000 of revenues for the nine months ended September 30, 1996.
Large air transport landing gear repair and overhaul revenue increased 14.5%
to $13,715,000 and accounted for 45.6% of total revenues, as compared to
$11,978,000 or 40.5% of total revenue for the nine months ended September 30,
1996. This increase in landing gear repair and overhaul revenue 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 1.1% to
$9,755,000 or 32.5% of total revenues for the nine months ended September 30,
1997 from $9,859,000 or 33.3% of total revenues for the comparable period in
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 14.6% to $3,942,000 or 13.1% of total revenues for
the nine months ended September 30, 1997 from $3,439,000 or 11.6% of total
revenues for the comparable period in 1996.
GROSS PROFIT. Gross profit for the nine months ended September 30, 1997
increased 58.2% to $6,977,000 from $4,410,000 for the nine months ended
September 30, 1996. Gross profit as a percentage of sales increased to 23.2% for
the nine months ended September 30, 1997 compared to 14.9% for the comparable
period in the prior year. This increase was primarily due to (i) a 14.5%
increase in revenues from large air transport landing gear repair and overhaul
services, (ii) development of the Company's higher margin fixed wing aircraft
and helicopter hydromechanics products and (iii) discontinuation of Dunlop
Miami, which adversely impacted gross profit in 1996 as a result of charges to
cost of revenues for non-productive inventory.
Gross profit for the nine months ended 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 $5.5 million or 18.5% of revenues for the nine months ended
September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 1997 decreased
$288,000, or 6.5% to $4,118,000 from $4,406,000 for the nine months ended
September 30, 1996. Selling, general and administrative expense decreased as a
percentage of revenues to 13.7% from 14.9% for the comparable period in the
prior year. The decrease was due to approximately $947,000 of costs related to
the EPA Claim included in the pro forma nine months ended September 30, 1996 but
not included in the nine months ended September 30, 1997. BTR indemnified the
Company for costs incurred in connection with the EPA Claim. This decrease was
offset by additional costs incurred during the nine months ended September 30,
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 and (iii) expenses incurred in
connection with developing the Company's relationship with British Airways.
Excluding the $947,000
25
<PAGE>
charge, selling, general and administrative expenses would have been $3,459,000
or 11.7% of revenues for the nine months ended September 30, 1996.
OPERATING INCOME. Operating income for the nine months ended September 30,
1997 increased $4,051,000 to $2,859,000 or 9.5% of total revenues compared to an
operating loss of $1,192,000 for the comparable period in 1996. Operating income
for the nine months ended September 30, 1996 was negatively impacted by
nonrecurring restructuring charges of $1,196,000, charges to cost of revenues of
$1,063,000 related to the closure of Dunlop Miami and approximately $947,000 in
costs related to the EPA Claim. Excluding these charges, pro forma operating
income for the nine months ended September 30, 1996 would have been $2,014,000
or 6.8% of revenues.
NET INTEREST EXPENSE. Net interest expense for the nine months ended
September 30, 1997 increased $68,000, or 4.0%, to $1,802,000 from $1,734,000 for
the nine months ended September 30, 1996. This is a result of increased average
borrowings under the Company's working capital credit facilities as well as
additional indebtedness incurred in connection with the BTR Transaction.
Interest income was not significant in either period.
INCOME TAXES. Income taxes for the nine months ended September 30, 1997
were $392,000 compared to an income tax benefit of $1,112,000 for the comparable
period in the prior year. The effective tax rate for the nine months ended
September 30, 1997 was 37.0% compared to 38.0% for the comparable period in the
prior year. The effective tax rate for the periods differs from the federal
statutory tax rate of 34.0% due to certain nondeductible expenses. At September
30, 1997, the Company had net operating loss carry-forwards of $7,768,000. The
utilization of these operating loss carryforwards is limited due to changes in
the Company's ownership resulting from the BTR Transaction.
NET INCOME. As a result of the factors described above, the net income for
the nine months ended September 30, 1997 of $665,000 represents an increase of
$2,479,000 as compared to the net loss of $1,814,000 for the nine month's ended
September 30, 1996.
PRO FORMA YEAR ENDED DECEMBER 31, 1996 ("FISCAL 1996") COMPARED TO YEAR
ENDED DECEMBER 31, 1995 ("FISCAL 1995")
REVENUES. Revenues for Fiscal 1996 increased 11.4% to $39,004,000 from
$35,012,000 for Fiscal 1995. Repair and overhaul revenues accounted for 90.2% of
revenues for Fiscal 1996 as compared to 84.0% for Fiscal 1995. Revenues from
spare parts distribution and sales accounted for 8.6% of total revenues for
Fiscal 1996, as compared to 13.8% for Fiscal 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 and
distribution business in May 1996.
Revenues from large air transport landing gear repair and overhaul increased
51.5% to $15,745,000 or 40.4% of total revenues in Fiscal 1996, compared to
$10,394,000 or 29.7% of total revenues for Fiscal 1995. The increase in revenues
for landing gear repair and overhaul was attributable to increases in revenues
from the Company's largest customer, FedEx, and to new wide-body repair and
overhaul business from other customers including US Airways, Inc. ("US
Airways"), 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 Fiscal 1996, as
compared to $11,811,000 or 33.7% of Fiscal 1995 sales. This increase in revenues
was attributable to increases in helicopter repair and overhaul business from
the USCG for Fiscal 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
Fiscal 1996 compared to $7,404,000 or 21.1% of revenues for Fiscal 1995.
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GROSS PROFIT. Gross profit for Fiscal 1996 increased 19.7% to $7,205,000
from $6,019,000 for Fiscal 1995. Gross profit increased as a percentage of
revenues to 18.5% for Fiscal 1996 compared to 17.2% for Fiscal 1995. This
increase was primarily due to (i) a 51.5% increase in revenues from large air
transport landing gear repair and overhaul services, (ii) development of higher
margin fixed wing aircraft and helicopter hydromechanics products and (iii)
discontinuation of Dunlop Miami.
Gross profit for Fiscal 1996 included a nonrecurring charge of $489,000 to
dispose of certain non-productive inventory related to closing the Dunlop Miami
operations and a charge of $574,000 primarily related to other 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 Fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for Fiscal 1996 increased $1,324,000 or 27% to
$6,161,000 from $4,837,000 for Fiscal 1995. This was a result of the Company's
efforts to expand its international market presence through sales
representatives located in Europe, the Middle East and China. In addition,
Fiscal 1996 included approximately $947,000 of costs related to the EPA Claim,
and Fiscal 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 expenses increased as a percentage of revenues to 15.8% for
Fiscal 1996 from 13.8% for Fiscal 1995 as a result of the above items offset by
increased revenues in Fiscal 1996 over Fiscal 1995.
OPERATING INCOME. Operating income for Fiscal 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 Fiscal 1995. Operating income for Fiscal 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 winding down of the Dunlop Miami
operation and approximately $947,000 in costs related to the EPA Claim.
Excluding these charges, pro forma operating income for Fiscal 1996 would have
been $3,054,000 or 7.8% of revenues.
NET INTEREST EXPENSE. Net interest expense for Fiscal 1996 increased by
44.2% to $2,305,000 from $1,598,000 for Fiscal 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 to the Company by
BTR for inter-company advances. Interest income was not significant in either
period.
INCOME TAXES. The income tax benefit for Fiscal 1996 was $934,000 compared
to an income tax benefit of $680,000 for Fiscal 1995. The effective tax rate for
Fiscal 1996 was 38% compared to 164% for Fiscal 1995. The effective tax rate for
Fiscal 1995 includes a benefit of $525,000 from the reduction of a deferred tax
valuation allowance that was no longer required in 1995 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
Fiscal 1996 of $1,523,000 represented a decrease of $1,787,000 from net income
of $264,000 for Fiscal 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
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agreement bears interest at a fixed bank reference rate or variable rate above
IBOR. As of September 30, 1997, $7.5 million was outstanding under the revolving
credit facility, and $12.9 million was outstanding under the term loan.
On January 23, 1998, the Company and Bank of America entered into the
Amended Loan Agreement, which agreement increases 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 will become available to the Company
upon the consummation of the BA Acquisition, and the Company intends to use
approximately $11 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 million revolving line of credit,
a $24.5 million 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. 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. The Company plans to use
approximately $11 million from the proceeds of this Offering and approximately
$11 million from its credit facility to fund the purchase price of the BA
Assets. See "Acquisition of Certain Assets of British Airways" and "Use of
Proceeds."
As part of the BA Acquisition, the Company and British Airways have agreed
to enter into the Services Agreement which the Company anticipates will result
in substantial revenue from the repair and overhaul services and related spare
parts provided to the aircraft currently 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 using 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 (used) by the Company for operating activities amounted to
$(4,223,000), $(230,000) and $(976,000) for Fiscal 1995, the ten months ended
October 31, 1996 and the nine months ended September 30, 1997, respectively.
Cash used by the Company for investing activities amounted to $4,114,000,
$1,199,000 and $1,576,000 for Fiscal 1995, the ten months ended October 31, 1996
and the nine months ended September 30, 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
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 the AA Fleet. A deposit of 10% of the
$3.2 million was made to American Airlines in September 1997. The balance of
$2.8 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. See "Certain Transactions."
Cash provided by the Company from financing activities in Fiscal 1995 and the
ten months ended October 31, 1996 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 from 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 nine months ended September 30, 1997
related to leasehold improvements at a new facility and expenditures to increase
landing gear repair and overhaul capacity.
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In April 1997, the Company entered into a 13-year lease for a 77,800 square
foot facility adjacent to its existing location. Occupancy costs under the
Company's existing facilities in Sun Valley, California 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 or construct a facility in the
United Kingdom in connection with the BA Acquisition, and has identified a
possible construction site. The Services Agreement 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
September 30, 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 ($13,770 at September 30, 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 February 1998, the Company believes it will be
able to relocate a substantial portion of the facilities during the first
quarter of 1999, but that plating operations as well as certain other areas will
remain at the British Airways location through at least the second 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 $4
million during 1998 at its Sun Valley operations for plating shop expansion,
rotable assets, large air transport 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
approximately $1 million in capital expenditures in 1998 for the purchase of
rotable assets and $2 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. Capital expenditures related to
new facility leasehold improvements will be financed by cash flow from
operations and borrowings under new credit facilities.
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 under its existing business plan for at least 12 months following
the Offering.
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 those countries, which could lead to a reduction in sales 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 inventory purchases are primarily United States dollar denominated
while sales and operating expenses are partially denominated in Dutch guilders.
The Company's sales 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 is
denominated in pounds. To hedge against the fluctuation of pounds to dollars,
the Company has entered into a transaction which
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<PAGE>
permits it to purchase approximately $17 million of pounds at a rate of 1.6373
dollars per pound. The balance of the purchase price has not been hedged and
thus the purchase price in United States dollars could increase or decrease
depending on the fluctuation of pounds to dollars and the currency conversion
factor in effect at the time the BA Acquisition is consummated. 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. See "Risk Factors--Risks
Associated with Expansion of International Operations," and "Acquisition of
Certain Assets of British Airways."
QUARTERLY SALES 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 sales 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 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 impact
the Company's quarterly operating results. See "Risk Factors--Fluctuations in
Results of Operations."
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.
YEAR 2000
The Company does not expect a significant disruption in operations or any
significant expenditures as a result of computer software issues related to the
year 2000.
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BUSINESS
GENERAL
Hawker Pacific 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 OEMs. In addition, the Company distributes and sells new
and overhauled spare parts and components for both fixed wing aircraft and
helicopters. During the nine months ended September 30, 1997, the Company had in
excess of 440 customers, several of which have entered into long-term service
contracts with the Company, including FedEx, American Airlines, the USCG, and US
Airways. On December 20, 1997, the Company entered into the Acquisition
Agreement to purchase, for approximately L13.0 million (approximately $21.1
million at September 30, 1997), substantially all of the assets of British
Airways' landing gear repair and overhaul operations. The Company expects to
close the transaction immediately following completion of this Offering using
approximately $11 million of the net proceeds. As part of the BA Acquisition,
the Company and British Airways have agreed to enter into a seven-year exclusive
service agreement for the Company to provide landing gear and related repair and
overhaul services to substantially all of the aircraft currently operated by
British Airways. The Company believes that 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 "Acquisition of Certain Assets of British Airways"
and "Use of Proceeds."
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.
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
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.
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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 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
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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 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
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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.
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. For the nine months ended September 30, 1997, approximately
$7.4 million, or 54% of the Company's landing gear repair and overhaul sales,
were received under long-term service agreements, which is expected to increase
in 1998 following the BA Acquisition. 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.
The following table sets forth: (i) the type of aircraft landing gear the
Company overhauls; (ii) management's estimate of the cost to purchase new
landing gear, which is not commonly purchased separately from an aircraft; (iii)
the typical charge by the Company to overhaul such landing gear; (iv)
management's estimate of the average time between overhauls; and (v) the
Company's primary customers for each type of aircraft:
<TABLE>
<CAPTION>
TYPICAL
ESTIMATED COST COST AVERAGE TIME
TYPE OF OF NEW OF COMPLETE BETWEEN
AIRCRAFT LANDING GEAR OVERHAUL OVERHAULS CUSTOMERS
- - --------- ---------------- ----------- ------------ -------------------
<C> <C> <C> <C> <S>
727 Not in $ 165,000 7 yrs. FedEx
Production
737 $1.1 mil $ 130,000 6-8 yrs. United Air Lines
British Airways
747 $7.2 mil $ 500,000 7-9 yrs. Air Canada
Tower Air
British Airways
757 $3.1 mil $ 250,000 7-9 yrs. U.S. Airways
American
British Airways
767 $4.6 mil $ 360,000 7-9 yrs. U.S. Airways
British Airways
MD80 $1.2 mil $ 180,000 7-8 yrs. Delta Air Lines
DC10 $5.1 mil $ 400,000 7-10 yrs. FedEx
British Airways
United Airlines
A300 $6.1 mil $ 400,000 8-10 yrs. FedEx
A310 $4.3 mil $ 400,000 8-10 yrs. FedEx
</TABLE>
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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 SAMM, Dunlop, 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 nine months ended September 30, 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, 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 18.2% for the nine months ended September 30, 1997. In 1994, the
Company entered into an agreement with FedEx to provide spare parts and repair
and overhaul services at a fixed price for most aircraft in FedEx's fleet, which
has been amended to extend the term to 2007 and to expand the Company's services
to include additional types of aircraft. The Company also has a seven-year
exclusive agreement with American Airlines to service landing gear on all Boeing
757 aircraft within its fleet on a flat-fee basis expiring in June 30, 2005. 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 $2,163,000 (7.2%
of revenues) in the year ended December 31, 1996 and the nine months ended
September 30, 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 year ended December 31,
1996, and the nine months ended September 30, 1997 sales to the USCG accounted
for approximately 11.2% and 7.0%, 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 nine months ended September
30, 1997. See "Risk Factors--Customer Concentration; Concentration of Credit
Risks."
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MANAGEMENT INFORMATION SYSTEMS AND QUALITY ASSURANCE
The Company believes that its management information systems are among the
most advanced in its industry. The Company utilizes its system 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
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
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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. Under two of the Company's three ten-year agreements with Dunlop,
however, the Company purchases 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 year ended December 31, 1996 and the nine
months ended September 30, 1997, Dunlop accounted for approximately 27% and
18.7%, 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 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 September 30, 1997 consisted of
approximately 11 employees and 11 sales representatives, respectively. Air
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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 Lokken oversees its sales
activities, while the Company's indirect and direct sales representatives report
directly to Brian Carr, Managing Director of Sun Valley Operations, for landing
gear sales and Michael 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 globally 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.
The Company does not consider backlog meaningful to its business.
GROWTH STRATEGY
The Company seeks to become the leading provider of landing gear repair and
overhaul services to the global aviation industry. The Company's strategies for
accomplishing this objective 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 will establish through the 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.
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 Hawker Pacific 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
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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.
COMPETITIVE STRENGTHS
The Company believes that it is well-positioned to achieve its strategic
objectives because of the following competitive strengths:
STRONG MARKET POSITION. The Company through its predecessors has been
providing aftermarket products and services to the aviation industry for over 30
years and believes it has gained an international reputation for high quality
and reliability. The Company believes that its customers select Hawker Pacific
based on its superior quality of service, competitive pricing, rapid turnaround
time and extensive industry experience. Using its engineering expertise, the
Company has developed proprietary or specialized repair and overhaul equipment
and techniques, including the ability to manufacture certain replacement parts
in-house, that enable it to reduce costs in providing its customers with repair
and overhaul services.
EXPERIENCED MANAGEMENT TEAM. The Company's senior executives have on
average over 20 years industry experience and have served the Company for an
average of seven years. In addition, the Company believes that its customers
highly value the extensive experience of its 15 managers, who have served the
Company on average for 12 years.
ADVANCED MANAGEMENT INFORMATION SYSTEMS. The Company has developed
proprietary systems to manage and schedule work flow and coordinate many aspects
of operations. The Company believes that its management information systems are
among the most advanced in its industry, permitting the Company to achieve
greater operating efficiencies, offer a higher level of customer service than
its competitors and provide complete traceability of aircraft parts.
BROAD ARRAY OF PRODUCTS AND SERVICES. The Company services and sells a
broad array of landing gear and hydromechanical components for fixed wing
aircraft and helicopters. The Company provides services and parts for several
large air transport aircraft, including the full line of Boeing, McDonnell
Douglas, Lockheed and Airbus jets, in addition to a variety of smaller fixed
wing aircraft and helicopters, including Embraer aircraft and Bell, and
Eurocopter helicopters. The Company believes that this breadth of products and
services gives it a competitive advantage in winning business from new customers
and affords an opportunity to expand its business with existing customers. It
also positions the Company to respond to aircraft operators' desire to focus on
a select group of suppliers to control costs, increase quality and enhance
timeliness of delivery.
KEY RELATIONSHIPS. The Company actively seeks to develop close
relationships with its customers and suppliers. The Company has been providing
repair and overhaul services and spare parts to the USCG for its Dauphin II
helicopters since 1987. The Company believes that the long-term relationships
that it has developed with many of its customers provide it with an ongoing base
of business and a source of new business opportunities. In addition, the
Company's relationships with certain key parts suppliers and OEMs enable it to
purchase parts at discounts from list price and, therefore, provide the Company
with a competitive advantage. Under two of the Company's three ten-year
agreements with Dunlop, each of which expires in October 2006, the Company
purchases Dunlop parts at a discount to list price for resale and for use in the
repair and overhaul of a variety of fixed wing aircraft and helicopters. 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.
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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 BFG, the Landing Gear Division of AAR, Revima, and Dowty.
The Company's major competitors in its hydromechanical components business
include AAR and OEMs such as Sunstrand, Vickers, Parker-Hannifin,
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
The Company is highly regulated worldwide by the FAA, the JAA, and various
other foreign regulatory authorities, including the Dutch Air Agency, which
regulates the Company's Netherlands' operations, and the CAA, which will
regulate the Company's United Kingdom operations upon consummation of the BA
Acquisition. These regulatory authorities require all 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 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 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
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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 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 for any future costs to the United States government
or the State of California 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 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."
EMPLOYEES AND EMPLOYEE TRAINING
As of September 30, 1997 the Company had 225 employees of whom approximately
16 are in management, 42 are engineering and technical personnel, 131 are direct
labor personnel, 11 are in sales and marketing and 25 are administrative
personnel. The Company is not currently a party to any collective bargaining
agreements; however, in connection with the BA Acquisition, the Company will be
required to enter into collective bargaining agreements in the United Kingdom.
The Company believes that its relationships with its employees are generally
good. Competition for employees in the Company's industry is intense, and the
Company cannot give any assurance that it will be able to attract or retain
highly qualified personnel in the future. See "Risk Factors--Dependence on Key
Employees."
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.
FACILITIES
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
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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 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. However,
as part of its internal growth strategy, the Company is in the process of
reorganizing and reconfiguring its Sun Valley, California location to meet its
growth needs and increase the efficiency of its operations, which it expects to
complete in early 1998. Beginning in 1998, the Company plans to expand its
plating operations at this facility. In addition, the Company is currently
looking for a facility in the United Kingdom to house its new United Kingdom
operations. See "Acquisition of Certain Assets of British Airways." Any failure
or delay in completing the reorganization or 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."
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MANAGEMENT
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)
David L. Lokken............................. 51 President, Chief Executive Officer and Director(2)
Brian S. Aune............................... 42 Vice President and Chief Financial Officer
Brian S. Carr............................... 40 Managing Director of Sun Valley 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 Nominee(1)(3)(4)
Daniel C. Toomey, Jr........................ 34 Director Nominee(1)(3)(4)
</TABLE>
- - ------------------------
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
(4) Position to be held with the Company following the Offering
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 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.
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.
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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 has been nominated to become a director of the Company
following the Offering. From 1963 through 1993, Mr. McIntrye 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 on
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 has been nominated to become a director of the Company
following the Offering. Mr. Toomey has 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. In
January 1998, Mr. Toomey joined a Los Angeles-based venture capital firm. Mr.
Toomey received a B.A. from the University of California, Los Angeles in 1986.
The Board of Directors has established an Audit Committee and a Compensation
Committee. 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 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 Board of Directors intends to appoint
independent directors to the Audit and Compensation Committees at such time as
such directors join the Board of Directors. The Board of Directors has also
established a nominating committee whose function 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 Company's executive officers are appointed by, and serve at the
discretion of, the Board of Directors of the Company. See
"Management--Employment Agreements." The Company's Directors serve until the
next annual meeting of shareholders or until successors are elected and
qualified.
FUTURE KEY EMPLOYEE
RICHARD ADEY is expected to become the Company's Managing Director of UK
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.
44
<PAGE>
DIRECTOR COMPENSATION
Following the Offering, each non-employee Director will receive 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
the grant. In January 1998, Daniel C. Toomey Jr. and Joel F. McIntyre, director
nominees, 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.
The Directors are also reimbursed for expenses incurred in connection with the
performance of services as Directors.
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 Lokken........................................................... 1997 $ 233,147 $ 44,358
Chief Executive Officer 1996 192,566 67,125 $ 173,220(2)
1995 184,256 --
Brian Aune............................................................. 1997 $ 117,302 $ 21,097
Chief Financial Officer 1996 98,440 28,763
1995 100,509 --
Brian Carr............................................................. 1997 $ 125,156 $ 21,097
Managing Director of Sun Valley Operations 1996 111,258 26,910
1995 104,785 --
Michael 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 to Unique of which 31% was paid in 1996 and 69% was paid
in 1997.
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.
45
<PAGE>
In November 1996, the Company also entered into employment agreements with
each of Brian Aune, the Company's Vice President and Chief Financial Officer,
Brian Carr, the Company's Managing Director of Sun Valley Operations, and
Michael 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 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. Upon consummation of the BA
Acquisition, the Company will seek to enter into an employment agreement with
Mr. Richard Adey to serve as the Company's Managing Director of its UK
Operations for an annual base salary of $120,000.
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
Lokken, Brian Aune, Brian Carr, and Michael 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 the initial public offering price 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 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). 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 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 10.0% 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
46
<PAGE>
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 259,572 shares of Common Stock under the 1997 Plan, of which
230,730 were granted to David Lokken, Brian Aune, Brian Carr, Michael 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 after
this Offering, 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.
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.
47
<PAGE>
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>
YEARS OF SERVICE
-----------------------------------------------------
REMUNERATION 15 20 25 30 35
- - ----------------------------------------------------------------- --------- --------- --------- --------- ---------
<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. 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 Internal Revenue Code of
1986, as amended.
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>
48
<PAGE>
LIMITATION ON DIRECTORS' LIABILITY
The Company's Amended and Restated Articles of Incorporation, as amended
("Amended Articles"), provide that, pursuant to the California Corporations
Code, the liability of the directors of the Company for monetary damages shall
be eliminated to the fullest extent permissible under California law. This is
intended to eliminate the personal liability of a director for monetary damages
in an action brought by, or in the right of, the Company for breach of a
director's duties to the Company or its shareholders. This provision in the
Amended Articles does not eliminate the directors' fiduciary duty and does not
apply for certain liabilities: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived an
improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision also does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws (the "Amended Bylaws") require the Company to indemnify its
officers and directors to the full extent permitted by law, including
circumstances in which indemnification would otherwise be discretionary. Among
other things, the Amended Bylaws require the Company to indemnify directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers and allows the Company to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such limitation
of liability also does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company has entered into indemnity agreements ("Indemnity Agreement(s)")
with each of its directors and executive officers. Each such Indemnity Agreement
provides that the Company shall indemnify the indemnitee against expenses,
including reasonable attorneys' fees, judgements, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with any civil
or criminal action or administrative proceeding arising out of the performance
of his duties as a director or officer. Such indemnification is available if the
indemnitee acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the Company, and, with respect to any
criminal action, had no reasonable cause to believe his conduct was unlawful.
The Indemnity Agreements also require that the Company indemnify the director or
executive officer in all cases to the fullest extent permitted by applicable
law. Each Indemnity Agreement permits the director or officer that is party
thereto to bring suit to seek recovery of amounts due under the Indemnity
Agreement and to recover the expenses of such a suit if he is successful.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. The Company believes that its
Amended Articles and Amended Bylaws provisions are necessary to attract and
retain qualified persons as directors and officers.
49
<PAGE>
CERTAIN TRANSACTIONS
ACQUISITION OF THE COMPANY FROM BTR
Effective November 1, 1996, Aqhawk, purchased all of the outstanding capital
stock of the company from BTR. 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 Dunlop 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.
Concurrently with the funding of the Amended Loan Agreement, the remaining
balance of the Subordinated Note will be replaced by a new $5 million promissory
note. The new note will bear interest at a fixed rate of 11.8% per annum, will
require the Company to make monthly payments of interest only, and will mature
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 has 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. In connection with the Amended Loan Agreement, Ms.
Bastian's guarantee and the pledges will be released upon the consummation of
this Offering.
CONVERSION OF PREFERRED STOCK INTO COMMON STOCK
As of September 30, 1997, all of the Company's issued and outstanding shares
of Preferred Stock were held by Ms. Bastian. Pursuant to the Company's Amended
Articles, all of the outstanding shares of Preferred Stock will upon the closing
of this Offering be converted into 250,000 shares of Common Stock.
50
<PAGE>
SALES OF COMMON STOCK TO PRINCIPAL SHAREHOLDER
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).
AGREEMENTS WITH UNIQUE INVESTMENT CORP.
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 $225,000
during the nine months ended September 30, 1997. In November 1997, the Company
and Unique entered into a new management services agreement (the "Management
Services Agreement") pursuant to which, upon the consummation of this 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 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 is entitled to receive
$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 will be credited against this $300,000.
FUTURE TRANSACTIONS
The Company intends that any future transactions with affiliates of the
Company will be on terms at least as favorable to the Company as those that can
be obtained from nonaffiliated third parties.
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Stock as
of January 29, 1998, and as adjusted to reflect the sale of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), by:
(i) each person known by the Company to beneficially own 5% or more of the
outstanding shares of Common Stock, (ii) each director and director nominee of
the Company, (iii) each Named Executive Officer of the Company, (iv) the Selling
Shareholder and (v) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER OFFERING(1)
OFFERING(1)
-------------------------- NUMBER OF -----------------------
NAME AND BENEFICIAL OWNERS NUMBER PERCENT SHARES NUMBER PERCENT
- - ------------------------------------------------------- ---------- -------------- OFFERED ---------- -----------
---------
<S> <C> <C> <C> <C> <C>
Melanie L. Bastian(2).................................. 1,542,919 47.9% 166,667 1,376,252 23.6%
Sidney G. Makoff....................................... 287,060 8.9 -- 287,060 4.9
John G. Makoff......................................... 444,943 13.8 -- 444,943 7.6
Daniel J. Lubeck....................................... 330,120 10.2 -- 330,120 5.7
Scott W. Hartman....................................... 330,120 10.2 -- 330,120 5.7
David L. Lokken(3)..................................... 221,403 6.4 -- 221,403 3.7
Brian S. Aune(4)....................................... 44,568 1.4 -- 44,568 *
Brian S. Carr(4)....................................... 44,568 1.4 -- 44,568 *
Michael A. Riley(4).................................... 44,568 1.4 -- 44,568 *
Daniel C. Toomey, Jr................................... 0 * -- 0 *
Joel F. McIntyre....................................... 0 * -- 0 *
All directors and executive officers as a group
(7 persons).......................................... 1,460,288 43.6 -- 1,460,288 24.5
</TABLE>
- - ------------------------
* Less than 1%.
(1) 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 securities. Shares of Common Stock subject
to options currently exercisable, or exercisable within 60 days of January
29, 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.
(2) Ms. Bastian has granted the Underwriters an option to purchase up to 415,000
shares of Common Stock solely to cover over-allotments, if any. In the event
that the over-allotment option is exercised in full, Ms. Bastian will sell
an additional 415,000 shares, reducing her ownership in the Company to
961,252 shares (16.5%) after this Offering.
(3) Includes 72,105 shares issuable upon exercise of vested options to purchase
Common Stock, and 5,768 shares issuable upon exercise of options which vest
within 60 days.
(4) Includes 14,420 shares issuable upon exercise of vested options to purchase
Common Stock, and 1,442 shares issuable upon exercise of options which vest
within 60 days.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 20,000,000 shares of Common Stock and 5,000,000 shares of
preferred stock.
COMMON STOCK
As of January 29, 1998, 3,222,222 shares of Common Stock were outstanding,
held of record by 11 shareholders. The holders of Common Stock are entitled to
one vote for each share held of record on all matters submitted to a vote of the
shareholders and may cumulate their votes in the election of directors upon
giving notice required by law. Subject to preferences that may be applicable to
any shares of Preferred Stock issued in the future, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." The
Company's shareholders currently may cumulate their votes for the election of
directors so long as at least one shareholder has given notice at the meeting of
shareholders prior to the voting of that shareholder's desire to cumulate his or
her votes. Cumulative voting means that in any election of directors, each
shareholder may give one candidate a number of votes equal to the number of
directors to be elected multiplied by the number of shares held by such
shareholder, or such shareholder may distribute such number of votes among as
many candidates as the shareholder sees fit. Cumulative voting will no longer be
required or permitted under the Amended Articles at such time as (i) the
Company's shares of Common Stock are listed on the Nasdaq National Market and
the Company has at least 800 holders of its equity securities as of the record
date of the Company's most recent annual meeting of shareholders or (ii) the
Company's shares of Common Stock are listed on the New York Stock Exchange or
the American Stock Exchange. At that time, the Company may divide its Board into
two classes of directors. In the event of a liquidation, dissolution or winding
up of the Company, holders of the Common Stock are entitled to share ratably
with the holders of any then outstanding Preferred Stock in all assets remaining
after payment of liabilities and the liquidation preference of any then
outstanding Preferred Stock. Holders of Common Stock have no preemptive rights
and no right to convert their Common Stock into any other securities. There are
no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock (including the shares to be sold by the
Selling Shareholder) are, and all shares of Common Stock to be issued by the
Company in this Offering will be, fully paid and nonassessable.
PREFERRED STOCK
As of January 29, 1998, 400 shares of Series A Preferred Stock were
outstanding held by one shareholder. Such shares will automatically be converted
into 250,000 shares of Common Stock upon the consummation of this Offering.
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. The rights of the holders of the
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the common stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company has no present plans to issue shares of preferred stock. No
shares of preferred stock are currently outstanding, other than the shares of
preferred stock which shall be automatically converted into Common Stock upon
this Offering.
STOCK TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation, Glendale, California.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 5,822,222 shares of
Common Stock outstanding. Of these shares, the 2,766,667 shares sold in this
Offering (3,181,667 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or registration
under the Securities Act, unless they are purchased by "affiliates" of the
Company as that term is defined under Rule 144 adopted under the Securities Act.
The remaining 3,055,555 shares will be "restricted securities" as defined in
Rule 144 ("Restricted Shares"). All such Restricted Shares are subject to
lock-up agreements with the Underwriters. See "Underwriting."
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices and adversely affect the
Company's ability to raise additional capital in the capital markets at a time
and price favorable to the Company. As a result of the lock-up agreements and
the provisions of Rules 144(k), 144 and 701, additional shares will be available
for sale in the public market as follows: (i) 2,766,667 shares will be eligible
for immediate sale on the date of this Prospectus, and (ii) 3,055,555 shares
(less any shares sold in the over-allotment option) will be eligible for sale
upon expiration of the lock-up agreements 180 days after the date of this
Prospectus, subject to the provisions of Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock (approximately 58,222 shares immediately after this
Offering) or the average weekly trading volume during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current public
information about the Company. A person who is not an affiliate, has not been an
affiliate within three months prior to the sale and has beneficially owned the
Restricted Shares for at least two years is entitled to sell such shares under
Rule 144(k) without regard to any of the limitations described above.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers between May 20, 1988, the effective
date of Rule 701, and the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Securities and
Exchange Commission has indicated that Rule 701 will apply to typical stock
options granted by an issuer before they become subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).
Securities issued in reliance on Rule 701 are restricted securities, and,
subject to the contractual restrictions described above, beginning 90 days after
the date of this Prospectus, such securities may be sold (i) by persons other
than Affiliates, subject only to the manner of sale provisions of Rule 144 and
(ii) by Affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register an aggregate of 749,879 shares of Common Stock
reserved for issuance under the 1997 Plan or under management stock options,
thus permitting the resale of shares issued under such plan by non-affiliates in
the public market without restriction under the Securities Act. The registration
statement is expected to be filed after the date of this Prospectus and will
automatically become effective upon filing. 180 days following the date of this
Prospectus, 115,365 shares issuable upon exercise of vested options that are
subject to the lock-up agreements will be eligible for sale pursuant to Rule
701.
Prior to this Offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts of Common Stock in the open
market may adversely affect the market price of Common Stock offered hereby.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom EVEREN Securities, Inc.
and The Seidler Companies Incorporated are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Shareholder, and the Company and the Selling Shareholder have agreed to
sell to the Underwriters, the respective number of shares of Common Stock set
forth opposite each Underwriter's name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- - --------------------------------------------------------------------------- -----------------
<S> <C>
EVEREN Securities, Inc..................................................... 1,405,000
The Seidler Companies Incorporated......................................... 691,667
BT Alex. Brown Incorporated................................................ 80,000
CIBC Oppenheimer Corp...................................................... 80,000
Goldman, Sachs & Co........................................................ 80,000
SBC Warburg Dillon Read Inc................................................ 80,000
William Blair & Company, L.L.C............................................. 50,000
Gabelli & Company, Inc..................................................... 50,000
Ladenburg Thalmann & Co., Inc.............................................. 50,000
Neuberger & Berman, LLC.................................................... 50,000
Ragen MacKenzie Incorporated............................................... 50,000
Trautman, Kramer & Company, Inc............................................ 50,000
Wedbush Morgan Securities Inc.............................................. 50,000
-----------------
Total.............................................................. 2,766,667
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of Common Stock if any are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain securities dealers at such price less a concession not
in excess of $0.34 per share. The Underwriters may allow, and such selected
dealers may reallow, a concession not in excess of $0.10 per share to certain
brokers and dealers. After this Offering, the price to the public, concession,
allowance and reallowance may be changed by the representatives of the
Underwriters.
The Selling Shareholder has granted the Underwriters an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
415,000 shares of Common Stock to cover over-allotments, if any, at the same
price per share as the initial 2,766,667 purchased by the Underwriters of the
Company. To the extent that the Underwriters exercise this option, each of the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares of Common Stock in approximately the same proportions as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this Offering.
At the closing of this Offering, the Company has agreed to pay the
Representatives a non-accountable expense allowance of one percent of the total
offering proceeds, which will include proceeds from the Underwriters' exercise
of the over-allotment option to the extent exercised. The Company has paid
$50,000 to be applied to the non-accountable expense allowance. The
Representatives' expenses in excess of the non-accountable expense allowance
will be borne by the Underwriters.
The Company has agreed to issue to the Representatives warrants (the
"Representatives' Warrants") to purchase up to 222,716 shares of Common Stock,
at an exercise price per share equal to the initial
55
<PAGE>
public offering price per share. The Representatives' Warrants are exercisable
for a period of four years, commencing one year from the effective date (the
"Effective Date") of the Registration Statement of which this Prospectus is a
part and expire five years from the Effective Date. The Representatives'
Warrants are not transferrable prior to the expiration of one year from the
Effective Date other than to officers or partners of the Underwriters and
members of the selling group and their officers and partners. The holders of the
Representatives' Warrants will have no voting, dividend or other shareholders'
rights until the Warrants are exercised. The Company has granted the
Representatives certain demand and piggy-back registration rights related to the
Representatives' Warrants, which are applicable during the period that the
Representatives' Warrants are exercisable and expire five years from the
Effective Date.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company has agreed not to issue, and all the Company's officers and
directors and all of the other shareholders, who in the aggregate hold 100% of
the shares of the Common Stock of the Company outstanding immediately prior to
the completion of this Offering, have agreed not to sell, or otherwise dispose
of, any shares of Common Stock or other equity securities of the Company for 180
days after the date of this Prospectus (other than shares sold pursuant to this
Prospectus) without the prior written consent of the Representatives.
The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no trading market for the Common
Stock. Consequently, the initial public offering price was negotiated among the
Company and the Representatives. Among the factors considered in such
negotiations were the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, the
past earnings of the Company and the trend and future prospects of such
earnings, the present state of the Company's development, the general conditions
of the securities markets at the time of this Offering and the market prices of
publicly-traded common stocks of comparable companies in recent periods. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to
this Offering at or above the initial public offering price.
The initial public offering price set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. No assurances can be given that Common Stock can be resold at
or above the initial public offering price.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California.
Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills,
California, has acted as counsel to the Underwriters in connection with certain
legal matters related to this Offering.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1996 and
September 30, 1997 and for the year ended December 31, 1995, the ten months
ended October 31, 1996, the two months ended December 31, 1996 and the nine
months ended September 30, 1997, included in this Prospectus and the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as stated in their report thereon appearing elsewhere herein and in
the Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the Common Stock being offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and such exhibits and schedules. A copy of the
Registration Statement and the exhibits and schedules thereto may be inspected
without charge at the public reference facilities maintained by the Commission
in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from such offices upon payment of the
fees prescribed by the Commission. In addition, the Registration Statement may
be accessed at the Commission's site on the World Wide Web located at
http://www.sec.gov. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
------------------------
The Company intends to furnish its shareholders with annual reports
containing consolidated audited financial statements and quarterly reports
containing unaudited consolidated financial data for the first three quarters of
each fiscal year.
57
<PAGE>
HAWKER PACIFIC AEROSPACE
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Audited Financial Statements
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Changes in Stockholders' Equity........................................ F-5
Statements of Cash Flows............................................................. F-6
Notes to Financial Statements........................................................ F-7
Unaudited Pro Forma Condensed Combining Statements of Operations
For the year ended December 31, 1996 (unaudited)................................... F-24
For the nine months ended September 30, 1996 (unaudited)........................... F-25
Notes to Unaudited Pro Forma Statements of Operations................................ F-26
</TABLE>
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 September 30, 1997 and the related
statements of operations, changes in stockholders' equity and cash flows for the
two months ended December 31, 1996 and the nine months ended September 30, 1997.
These financial statements are the responsibility of the Predecessor's and
Successor's management. Our responsibility is to express an opinion on these
financial statements 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 and 1996 and
September 30, 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 nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Woodland Hills, CA
November 7, 1997, except as to Note 14,
as to which the date is January 28, 1998
F-2
<PAGE>
HAWKER PACIFIC AEROSPACE
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -------------------------
DECEMBER DECEMBER SEPTEMBER
31, 1995 31, 1996 30, 1997
----------- ----------- ------------
Current assets:
<S> <C> <C> <C>
Cash........................................................ $ 399,000 $1,055,000 $ 36,000
Accounts receivable, less allowance for doubtful accounts of
$39,000, $67,000 and $100,000 at December 31, 1995,
December 31, 1996 and September 30, 1997, respectively.... 6,392,000 6,336,000 6,852,000
Accounts receivable from affiliates......................... 624,000 -- --
Other receivables........................................... 1,086,000 59,000 19,000
Inventories................................................. 13,446,000 12,950,000 16,000,000
Prepaid expenses and other current assets................... 404,000 344,000 337,000
----------- ----------- ------------
Total current assets.......................................... 22,351,000 20,744,000 23,244,000
Equipment and leasehold improvements, net..................... 4,871,000 4,719,000 4,780,000
Landing gear exchange, less accumulated amortization of
$422,000, $61,000 and $271,000 at December 31, 1995,
December 31, 1996 and September 30, 1997, respectively...... 7,479,000 8,654,000 10,226,000
Goodwill, less accumulated amortization of $17,000 and $24,000
at December 31, 1996 and September 30, 1997, respectively... -- 620,000 227,000
Deferred taxes................................................ 680,000 -- --
Deferred financing costs...................................... -- 325,000 275,000
Deferred offering costs....................................... -- -- 143,000
Other assets.................................................. 74,000 116,000 504,000
----------- ----------- ------------
3$5,455,000 3$5,178,000 $39,399,000
----------- ----------- ------------
----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $2,536,000 $3,806,000 $6,876,000
Accounts payable to affiliates.............................. 1,365,000 -- --
Line of credit.............................................. -- 5,329,000 7,479,000
Deferred revenue............................................ 1,299,000 1,593,000 827,000
Accrued payroll and employee benefits....................... 511,000 809,000 745,000
Environmental remediation................................... 234,000 657,000 --
Accrued expenses and other liabilities...................... 1,012,000 475,000 435,000
Current portion of notes payable............................ 2,105,000 850,000 1,300,000
----------- ----------- ------------
Total current liabilities..................................... 9,062,000 13,519,000 17,662,000
Due to parent and affiliates.................................. 27,310,000 -- --
Notes payable:
Bank note................................................... -- 12,650,000 11,563,000
Related party............................................... -- 6,500,000 6,500,000
----------- ----------- ------------
-- 19,150,000 18,063,000
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 shares and 2,920,551 issued and outstanding at
December 31, 1996 and September 30, 1997, respectively.... 500,000 40,000 540,000
Additional paid-in capital.................................. 4,126,000 -- --
Retained earnings (deficit)................................. (5,543,000) 469,000 1,134,000
----------- ----------- ------------
Total stockholders' equity (deficiency)....................... (917,000) 2,509,000 3,674,000
----------- ----------- ------------
Total liabilities and stockholders' equity (deficiency)....... 3$5,455,000 3$5,178,000 $39,399,000
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HAWKER PACIFIC AEROSPACE
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SUCCESSOR
PREDECESSOR -----------------------
---------------------- NINE
TEN MONTHS TWO MONTHS MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER OCTOBER DECEMBER SEPTEMBER
31, 1995 31, 1996 31, 1996 30, 1997
---------- ---------- ----------- ----------
Revenues................................... $35,012,000 $32,299,000 $6,705,000 $30,060,000
Cost of revenues........................... 28,993,000 27,027,000 4,599,000 23,083,000
---------- ---------- ----------- ----------
Gross profit............................... 6,019,000 5,272,000 2,106,000 6,977,000
---------- ---------- ----------- ----------
Operating expenses:
Selling expenses......................... 2,858,000 2,248,000 525,000 2,139,000
General and administrative expenses...... 1,979,000 2,796,000 534,000 1,979,000
Restructuring charges.................... -- 1,196,000 -- --
---------- ---------- ----------- ----------
Total operating expenses................... 4,837,000 6,240,000 1,059,000 4,118,000
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income (loss) from operations.............. 1,182,000 (968,000) 1,047,000 2,859,000
Other (expense) income:
Interest expense......................... (1,598,000) (1,609,000) (203,000) (1,804,000)
Interest income.......................... -- -- 7,000 2,000
---------- ---------- ----------- ----------
Total other (expense) income............... (1,598,000) (1,609,000) (196,000) (1,802,000)
---------- ---------- ----------- ----------
Income (loss) before income tax provision
(benefit)................................ (416,000) (2,577,000) 851,000 1,057,000
Income tax provision (benefit)............. (680,000) (971,000) 382,000 392,000
---------- ---------- ----------- ----------
Net income (loss).......................... $ 264,000 $(1,606,000) $ 469,000 $ 665,000
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Pro forma earnings per common share........ $ 0.15 $ 0.21
----------- ----------
----------- ----------
Weighted average shares outstanding........ 3,170,551 3,170,708
----------- ----------
----------- ----------
</TABLE>
See accompanying notes.
F-4
<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............. -- -- 49,948 500,000 -- 500,000
Net income for the period............ -- -- -- -- 665,000 665,000
--- ------------ ---------- ---------- ------------ ------------
Balance at September 30, 1997........ 400 $ 2,000,000 2,920,551 $ 540,000 $ 1,134,000 $ 3,674,000
--- ------------ ---------- ---------- ------------ ------------
--- ------------ ---------- ---------- ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
HAWKER PACIFIC AEROSPACE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------- ---------------------------
TEN MONTHS TWO MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................................... $ 264,000 ($1,606,000) $ 469,000 $ 665,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Deferred income taxes................................................. (680,000) (971,000) 382,000 391,000
Depreciation.......................................................... 680,000 525,000 183,000 537,000
Amortization.......................................................... 174,000 294,000 17,000 329,000
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) (476,000)
Inventory........................................................... (4,433,000) 1,156,000 (901,000) (1,371,000)
Prepaid expenses and other current assets........................... (101,000) (72,000) 21,000 7,000
Accounts payable.................................................... (397,000) (2,681,000) 2,195,000 552,000
Deferred revenue.................................................... 1,029,000 532,000 115,000 (766,000)
Accrued liabilities................................................. 682,000 261,000 (139,000) (766,000)
------------ ----------- ------------ -------------
Cash provided by (used in) operating activities......................... (4,223,000) (230,000) 2,279,000 (976,000)
INVESTING ACTIVITIES
Purchase of equipment, leasehold improvements and landing gear.......... (4,479,000) (1,173,000) (155,000) (1,438,000)
Proceeds from disposals of equipment, leasehold
improvements and landing gear......................................... 350,000 -- -- 250,000
Other assets............................................................ 15,000 (26,000) -- (388,000)
Acquisition of Predecessor.............................................. -- -- (28,398,000) --
------------ ----------- ------------ -------------
Cash used in investing activities....................................... (4,114,000) (1,199,000) (28,553,000) (1,576,000)
FINANCING ACTIVITIES
Borrowing under bank note............................................... -- -- 13,500,000 --
Principal payments on bank note......................................... -- -- -- (637,000)
Borrowing on note payable to related party.............................. -- -- 6,500,000 --
Borrowings/payments on line of credit, net.............................. -- -- (1,287,000) 2,150,000
Initial borrowing under line of credit.................................. -- -- 6,616,000 --
Borrowings/payments on due to Parent and Affiliates (net)............... 8,010,000 2,193,000 -- --
Deferred offering costs................................................. -- -- -- (143,000)
Deferred financing cost................................................. -- -- -- (337,000)
Issuance of preferred stock............................................. -- -- 2,000,000 --
Contributions to capital................................................ -- 242,000 -- 500,000
------------ ----------- ------------ -------------
Cash provided by financing activities................................... 8,010,000 2,435,000 27,329,000 1,533,000
Increase (decrease) in cash............................................. (327,000) 1,006,000 1,055,000 (1,019,000)
Cash, beginning of period............................................... 726,000 399,000 -- 1,055,000
------------ ----------- ------------ -------------
Cash, end of period..................................................... $ 399,000 $1,405,000 $1,055,000 $ 36,000
------------ ----------- ------------ -------------
------------ ----------- ------------ -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................ $1,574,000 $1,279,000 $ 193,000 $ 1,745,000
------------ ----------- ------------ -------------
------------ ----------- ------------ -------------
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-6
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 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 aircraft 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 has been
recorded as goodwill. Goodwill has been subsequently reduced for the reduction
of certain allowances on deferred taxes and amortization.
The financial statements as of December 31, 1995, and for the years ended
December 31, 1994 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 September
30, 1997, and for the two months ended December 31, 1996, and the nine months
ended September 30, 1997, are presented under the new basis of the successor
company (the "Successor") established in the Acquisition.
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,
F-7
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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>
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 parts
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.
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.
F-8
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
One customer accounted for 18.2% of the Company's total revenues for the
nine month period ended September 30, 1997 and represented 20.9% of the accounts
receivable balance at September 30, 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 $6,944,000 of the Company's total
purchases during the nine month period ended September 30, 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.
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 lease or asset Lesser of life of 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.
F-9
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
At December 31, 1996 and September 30, 1997, goodwill was reduced by
$382,000 and $391,000, 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 $7,099,000, of which
$3,368,000, $2,887,000, $1,191,000 and $5,557,000 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 nine months ended September 30, 1997, respectively.
Realized and unrealized foreign exchange gains (losses) amounted to
$161,000, $33,000, ($3,000) and $200,000 for the year ended December 31, 1995,
the ten months ended October 31, 1996, the two months ended December 31, 1996
and the nine months ended September 30, 1997.
ENVIRONMENTAL EXPENSE AND INSURANCE RECOVERY
Included in general and administrative expense for the years 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
nine months ended September 30, 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 14 as if they had occurred on November 1, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share," ("Statement 128") which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating earnings per share, the
dilutive effect of stock options will be excluded and the calculation will be
referred to as basic earnings per share. Basic earnings (loss) per share under
Statement 128 would have been the same as primary earnings (loss) per
F-10
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
share for all periods presented because there were no dilutive securities
included in the calculation. The impact of Statement 128 on the calculation of
fully diluted earnings (loss) per share for these periods is also not expected
to be material.
SUPPLEMENTAL EARNINGS PER SHARE
Supplemental earnings per share reflects what earnings would have been under
Accounting Principles Bulletin No. 15 if the debt retired with the proceeds from
the initial public offering (see footnote 14) had been retired at the beginning
of the period. The number of shares of common stock to be sold in this offering,
the proceeds from which will be used to retire debt are included in this
calculation with a corresponding reduction in interest expense.
Supplemental earnings per share for each of the periods presented are set
forth below:
<TABLE>
<CAPTION>
SUCCESSOR
--------------------------------
TWO MONTHS NINE MONTHS
ENDED DECEMBER ENDED SEPTEMBER
31, 1996 30, 1997
--------------- ---------------
<S> <C> <C>
Supplemental earnings per share................................. $ 0.13 $ 0.23
----- -----
----- -----
</TABLE>
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-11
<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, SEPTEMBER 30,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Purchased parts and assemblies...................................... $ 10,658,000 $ 9,722,000 $ 12,630,000
Work-in-process..................................................... 2,788,000 3,228,000 3,370,000
------------- ------------- -------------
$ 13,446,000 $ 12,950,000 $ 16,000,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements, at cost, consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ---------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Leasehold improvements............................................... $1,331,000 $1,009,000 $ 1,344,000
Machinery and equipment.............................................. 5,354,000 3,202,000 3,308,000
Tooling.............................................................. 641,000 308,000 339,000
Furniture and fixtures............................................... 342,000 72,000 91,000
Vehicles............................................................. 31,000 30,000 30,000
Computer equipment................................................... 1,301,000 209,000 319,000
------------ ------------ -------------
9,000,000 4,830,000 5,431,000
Less: Accumulated depreciation....................................... 4,129,000 111,000 651,000
------------ ------------ -------------
$4,871,000 $4,719,000 $ 4,780,000
------------ ------------ -------------
------------ ------------ -------------
</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 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 nine months ended
September 30, 1997, the taxable income will be included in a stand-alone federal
and state tax return of the Successor. 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.
F-12
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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, SEPTEMBER 30,
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................................... $ 3,026,000 $ 1,953,000 $ 2,972,000
Inventory valuation accruals....................................... 942,000 1,449,000 331,000
Accounts receivable valuation accruals............................. 17,000 131,000 22,000
Environmental remediation accruals................................. 102,000 285,000 --
Employee benefits and compensation................................. 135,000 195,000 164,000
Product and service warranties..................................... 109,000 82,000 70,000
State tax credits.................................................. -- -- 126,000
Other items, net................................................... 335,000 351,000 167,000
------------- ------------- -------------
Total deferred tax assets............................................ 4,666,000 4,446,000 3,852,000
Less valuation allowance............................................. (1,824,000) (1,427,000) (761,000)
------------- ------------- -------------
Net deferred tax asset............................................... 2,842,000 3,019,000 3,091,000
Deferred tax liabilities:............................................
Depreciation and amortization methods.............................. 1,977,000 2,474,000 2,583,000
Property, equipment and landing gear exchange asset basis
adjustments...................................................... -- 445,000 445,000
Other items, net................................................... 185,000 100,000 63,000
------------- ------------- -------------
Total deferred tax liabilities....................................... 2,162,000 3,019,000 3,091,000
------------- ------------- -------------
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
------------------------- ---------------------------
TEN MONTHS TWO MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ -- $ --
State................................................ -- -- -- 1,000
------------ ----------- ------------ -------------
-- -- -- 1,000
Deferred:
Federal.............................................. (504,000) (746,000) 277,000 391,000
State................................................ (176,000) (225,000) 105,000 --
------------ ----------- ------------ -------------
(680,000) (971,000) 382,000 391,000
------------ ----------- ------------ -------------
(Benefit) provision for taxes.......................... $ (680,000) $(971,000) $ 382,000 $ 392,000
------------ ----------- ------------ -------------
------------ ----------- ------------ -------------
</TABLE>
F-13
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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 nine months ended
September 30, 1997, reductions of the valuation reserve of approximately
$382,000 and $391,000, respectively, resulted in equivalent reductions of
goodwill. For the nine months ended September 30, 1997 deferred tax assets of
$275,000, were determined not to be realizable and were charged directly against
the valuation allowance.
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
-------------------------------- --------------------------------
TEN MONTHS TWO MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, SEPTEMBER 30,
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) -- -- --
--- --- --- ---
Other............................................... (164)% (38)% 45% 37%
--- --- --- ---
--- --- --- ---
</TABLE>
The Company has net operating loss carryforwards for federal tax purposes of
$7,768,000 which expire in the years 2007 to 2012. The Company also has state
net operating loss carryforwards of $3,486,000 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.
F-14
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SUCCESSOR LINE OF CREDIT AND SHIPSET PURCHASE LINE
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
eligible 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 7.51% at
September 20, 1997. The Company had available borrowings of $511,000 at
September 30, 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.
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 September 30,
1997, there were no amounts outstanding under the shipset purchase line of
credit.
6. NOTES PAYABLE
The Company's note payable balance consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
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 (Note 5), maturing December 31, 2003. The interest rate in
effect at September 30, 1997, was 7.6%........................................... $ 13,500,000 $ 12,863,000
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 (Note 5), 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 19,363,000
Less current portion............................................................... 850,000 1,300,000
------------- -------------
$ 19,150,000 $ 18,063,000
------------- -------------
------------- -------------
</TABLE>
F-15
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE (CONTINUED)
Maturity of notes payable as of September 30, 1997, is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1998........................................................................... $ 1,300,000
1999........................................................................... 1,637,000
2000........................................................................... 2,113,000
2001........................................................................... 2,250,000
2002........................................................................... 2,438,000
2003 and thereafter............................................................ 9,625,000
-------------
$ 19,363,000
-------------
-------------
</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% of the
notional amount. The notional amount at September 30, 1997 was $6,537,500. The
floating interest rate in effect under the Swap Agreement at September 30, 1997
was 5.66%. The Swap Agreement had a negative fair market value of $97,000 at
September 30, 1997.
7. 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 September 30, 1997, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1998........................................................................... $ 1,110,000
1999........................................................................... 1,116,000
2000........................................................................... 1,123,000
2001........................................................................... 1,101,000
2002........................................................................... 1,088,000
2003 and thereafter............................................................ 5,554,000
-------------
$ 11,092,000
-------------
-------------
</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 nine months ended September
30, 1997.
The Company incurred rent expense of approximately $980,000, $586,000,
$109,000 and $567,000 for the year ended December 31, 1995, the ten months ended
October 31, 1996, the two months ended December 31, 1996, and the nine months
ended September 30, 1997, respectively.
F-16
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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>
<CAPTION>
<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 hazardous substances. During 1996, the Company
recorded additional reserves related to this matter 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.
8. RELATED PARTY TRANSACTIONS
SALES AND PURCHASES
The Predecessor 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 September 30, 1997, the Successor paid $422,000 of
commissions and reimbursed expenses to this related party.
F-17
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
NOTES PAYABLE TO RELATED PARTY
As more fully described in Note 6, 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 nine
months ended September 30, 1997, amounted to $74,000 and $574,000, 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 years 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 $225,000 during the period from January 1, 1997 through September 30,
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. 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
F-18
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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 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.
During the year ended December 31, 1995, the assets and liabilities of the
defined benefit pension plan were transferred to the Parent. For the year ended
December 31, 1995 the Company recorded net periodic pension expense of $166,000.
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 plans for
the nine months ended September 30, 1997, included the following components:
<TABLE>
<CAPTION>
SUCCESSOR
-------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Service cost................................................................... $ 70,000
Interest cost.................................................................. 41,000
Actual gain on plan assets..................................................... --
Net amortization and deferral.................................................. 25,000
-------------
Net pension cost............................................................... $ 136,000
-------------
-------------
</TABLE>
F-19
<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
-------------
SEPTEMBER 30,
1997
-------------
<S> <C>
Actuarial present value of benefits:
Vested benefits.............................................................. $ (111,000)
Nonvested benefits........................................................... (99,000)
-------------
Accumulated benefit obligation................................................. (210,000)
Effect of projected future compensation increases.............................. (680,000)
-------------
Projected benefit obligation................................................... (890,000)
Fair value of plan assets...................................................... --
-------------
Projected benefit obligation in excess of plan assets.......................... (890,000)
Unrecognized net losses........................................................ --
Unrecognized transition obligation............................................. --
Unrecognized prior service cost................................................ 753,000
Minimum pension liability...................................................... (74,000)
-------------
Pension liability.............................................................. $ (211,000)
-------------
-------------
</TABLE>
The Company made no contributions to the Plans during the nine months ended
September 30, 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 held in a separate trust account.
During the nine months ended September 30, 1997, the Company's matching
contribution amounted to $105,000. 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
F-20
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRUCTURING CHARGES (CONTINUED)
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 the 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 September 1997 the Company received $500,000 for the issuance of 49,948
shares of 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. Subsequent to September 30,
1997 the majority shareholder provided an additional $500,000 in exchange for
51,671 shares of Common Stock of the Company.
12. NONMONETARY EXCHANGE TRANSACTION
During the nine months ended September 30, 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 nine months ended September
30, 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. ACQUISITION
On September 8, 1997, the Company signed a "letter of intent" related to a
significant purchase of assets for approximately $21.9 million, subject to due
diligence, from British Airways to expand international operations to include
the United Kingdom. The assets to be purchased consist primarily of machinery
and equipment, tooling, inventory and rotable assets. These assets will be
generally located in the United Kingdom and utilized in landing gear, flap track
and carriage overhaul and repair services, related to the British Airways fleet
as well as other customers.
F-21
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. PROPOSED INITIAL PUBLIC OFFERING AND OTHER SUBSEQUENT EVENTS
During 1997, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission, relating to
an initial public offering of 2,600,000 shares of the Company's unissued Common
Stock (222,716 additional shares if the underwriters' warrants are exercised)
and up to 415,000 shares of Common Stock held by a selling shareholder. If the
initial public offering is consummated under the terms presently anticipated,
all of the Preferred Stock outstanding will convert into 250,000 shares of
Common stock.
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. 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.
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, 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 10.0%
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 10.0% 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 adjustment 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.
In January 1998, the Company amended its mergers and acquisitions agreement
with UIC to provide that amounts paid under the Old Management Agreement during
1998 will be credited against the $300,000 payable thereunder.
F-22
<PAGE>
HAWKER PACIFIC AEROSPACE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Pursuant to an Agreement of Purchase and Sale of Stock, AqHawk, Inc. (the
"Purchase Agreement") 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. Effective December 6, 1996, the assets and liabilities of AqHawk, Inc.
were 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 initially $1,019,000 and has been recorded as
goodwill.
The following unaudited pro forma condensed combining statements of
operations of Hawker Pacific, Inc. (the "Company") for the year ended December
31, 1996 and the nine months ended September 30, 1996, have been prepared to
illustrate the effect of the Acquisition, as though the Acquisition had occurred
on January 1, 1996, for purposes of the pro forma statements of operations. The
pro forma adjustments and the assumptions on which they are based are described
in the accompanying Notes to the Unaudited Pro Forma Condensed Combining
Statements of Operations.
The pro forma condensed combining statements of operations are presented for
illustrative purposes only and are not necessarily indicative of the results of
operations of the Company that would have been reported had the Acquisition
occurred on January 1, 1996, nor do they represent a forecast of the results of
operations for any future period. The unaudited pro forma condensed combining
statements, including the Notes thereto should be read in conjunction with the
historical consolidated financial statements of the Company and the Predecessor
to the Company, which are, respectively, incorporated herein by reference and
included herein.
F-23
<PAGE>
HAWKER PACIFIC AEROSPACE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
PREDECESSOR SUCCESSOR PRO FORMA
----------- ------------ COMBINED
TEN MONTHS TWO MONTHS ------------
ENDED ENDED YEAR ENDED
OCTOBER 31, DECEMBER 31, PRO FORMA DECEMBER 31,
1996 1996 ADJUSTMENTS 1996
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues................................................. $ 32,299 $ 6,705 $ -- $ 39,004
Cost of revenues......................................... 27,027 4,599 173(1) 31,799
----------- ------------ ----- ------------
Gross profit............................................. 5,272 2,106 (173) 7,205
Operating expenses:
Selling expenses....................................... 2,248 525 -- 2,773
General and administrative expenses.................... 2,796 534 58 3,388
Restructuring charges.................................. 1,196 -- -- 1,196
----------- ------------ ----- ------------
6,240 1,059 58 7,357
----------- ------------ ----- ------------
Income (loss) from operations............................ (968) 1,047 (231) (152)
Other:
Interest and other income.............................. -- 7 -- 7
Interest expense....................................... (1,609) (203) (500) (2,312)
----------- ------------ ----- ------------
Income (loss) before taxes............................... (2,577) 851 (731) (2,457)
Provision (benefit) for income taxes..................... (971) 382 (345) (934)
----------- ------------ ----- ------------
Net income (loss)........................................ $ (1,606) $ 469 $ (386) $ (1,523)
----------- ------------ ----- ------------
----------- ------------ ----- ------------
Net earnings per share................................... $ 0.15 $ (0.48)
Average shares outstanding............................... 3,170,551 3,170,551
</TABLE>
See accompanying notes to pro forma financial statements.
F-24
<PAGE>
HAWKER PACIFIC AEROSPACE
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL COMBINED
------------- -------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1996 ADJUSTMENTS 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues........................................................ $ 29,567 $ -- $ 29,567
Cost of revenues................................................ 25,018 139(1) 25,157
------------- ----- -------------
Gross profit.................................................... 4,549 (139) 4,410
Operating expenses:
Selling expenses, general..................................... 4,346 60(2) 4,406
Restructuring charges......................................... 1,196 -- 1,196
------------- ----- -------------
5,542 60 (5,602)
------------- ----- -------------
Income (loss) from operations................................... (993) (199) (1,192)
Other:
Interest expense (1,449) (285)(3) (1,734)
------------- ----- -------------
Income (loss) before taxes...................................... (2,442) (484) (2,926)
Provision (benefit) for income taxes............................ (928) (184) (1,112)
------------- ----- -------------
Net income (loss)............................................... $ (1,514) $ (300) $ (1,814)
------------- ----- -------------
------------- ----- -------------
Net earnings (loss) per share................................... $ (0.57)
Average shares outstanding...................................... 3,170,551
</TABLE>
See accompanying notes to pro forma financial statements.
F-25
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENTS OF OPERATIONS
The unaudited pro forma combined statements of operations assume that the
Acquisition was completed on January 1, 1996. The unaudited pro forma combined
statement of operations are not necessarily indicative of operating results
which would have been achieved had the Acquisition been consummated as of
January 1, 1996 and should not be construed as representative of future
operations. The allocation of the purchase price amount identifiable tangible
and intangible assets was based on analysis of the estimated fair value of those
assets. The excess of the purchase price over the fair value of the net assets
acquired was allocated to goodwill.
1) Represents the pro forma adjustment for depreciable equipment and leasehold
improvements and amortization of landing gear based on the allocation of the
purchase price to the fair values of those assets and there remaining useful
lives.
2) Pro forma adjustment consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
A -- Depreciation and amortization of equipment,
leasehold improvements $ 9,000 $ 8,000
B -- Amortization of goodwill 51,000 50,000
------- -------
$ 60,000 $ 58,000
------- -------
------- -------
</TABLE>
A -- Represents depreciation and amortization of equipment and leasehold
improvement as described in note 1 above.
B -- Represents the amortization of goodwill calculated as follows.
<TABLE>
<S> <C>
Goodwill $1,019,000
Life 15 years
---------
Annual Amortization $ 68,000
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
Amortization for nine months = $ 51,000
---------
---------
Amortization for year $ 68,000
Amortization recorded in two months ended
December 31, 1996 (18,000)
---------
50,000 $ 50,000
---------
---------
</TABLE>
General and administrative expense includes $947,000 of expense related to
environmental remediation costs, settlement costs and legal fees related to the
predecessor Company's lawsuit with the United States Environmental Protection
Agency and the State of California in connection with certain alleged violations
of environmental regulations an groundwater contamination. The Company was fully
indemnified by BTR plc in the Purchase Agreement.
F-26
<PAGE>
HAWKER PACIFIC AEROSPACE
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING
STATEMENTS OF OPERATIONS (CONTINUED)
3) Adjusts interest expense assuming the revolving line of credit, bank and
related party notes which funded the Acquisition were outstanding on January
1, 1996 and that the applicable interest rates on the Acquisition date were
effective on January 1, 1996. Deferred financing costs are being amortized
as a component of interest expense over five years using on a straight-line
basis. Total interest expense include in the unaudited pro forma condensed
combining statement of operations was calculated as follows:
<TABLE>
<CAPTION>
ACQUISITION DATE PRO FORMA
---------------------------- INTEREST
DESCRIPTION BALANCE INTEREST RATE EXPENSE
------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
Revolving line of credit $ 6,615,841 7.13% $ 472,000
Note payable to bank 13,500,000 7.45% 1,006,000
Note payable to related party 6,500,000 11.8% 767,000
Deferred financing costs 337,000 N/A 67,000
---------------
Annual interest expense $ 2,312,000
Interest recorded 1,812,000
---------------
Pro forma adjustment $ 500,000
---------------
---------------
Pro forma interest expense for nine months $ 1,734,000
Interest recorded 1,449,000
---------------
---------------
Pro forma adjustment $ 285,000
---------------
---------------
</TABLE>
4) The income tax expense adjustment relates to the above described pro forma
adjustments and was calculated using the historical effective tax rate of
38% for the ten months ended October 31, 1996.
F-27
<PAGE>
HOLLAND FACILITY
The Company's Netherlands operation extends its services internationally,
providing an advanced hydraulic maintenance facility to service Europe and the
Middle East.
SPARES
Hawker Pacific stocks thousands of different parts to assist operators in
planning and controlling their maintenance budgets.
EXCHANGE POOL SHORTS 3-30 BRAKE ASSEMBLY
A DUNLOP CARBON BRAKE ASSEMBLY FOR THE BAE AND RJ SERIES AIRCRAFT
MANUFACTURING
Hawker Pacific designs and fabricates its own proprietary components, plus a
variety of build-to-print components and assemblies for aircraft manufacturers
and the military.
CUSTOMER SUPPORT
The Company constantly strives to build on its quality assurance standards,
and decrease overhaul and repair turn times.
AOG SUPPORT
The Company maintains Aircraft On the Ground service 24 hours a day, seven
days a week staffed by personnel who have the experience to solve problems fast.
ALL NON DESTRUCTIVE TESTING PROCESSES ARE PERFORMED ON-SITE BY THE COMPANY'S
TECHNICIANS
IN-HOUSE LAB FACILITIES PROVIDE ALL PLATING BATHS AND SOLUTIONS TO MEET
CUSTOMERS' SPECIFICATIONS
HYDRO-ELECTRIC TESTING OF BRAKE SERVO VALVE
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HERETO.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Acquisition of Certain Assets of British
Airways...................................... 16
Use of Proceeds................................ 18
Dividend Policy................................ 18
Capitalization................................. 19
Dilution....................................... 20
Selected Financial Data........................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 31
Management..................................... 43
Certain Transactions........................... 50
Principal and Selling Shareholders............. 52
Description of Capital Stock................... 53
Shares Eligible For Future Sale................ 54
Underwriting................................... 55
Legal Matters.................................. 56
Experts........................................ 56
Additional Information......................... 57
Financial Statements........................... F-1
</TABLE>
------------------------
UNTIL FEBRUARY 23, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS REQUIREMENT IS ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,766,667 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
EVEREN SECURITIES, INC.
THE SEIDLER COMPANIES
INCORPORATED
January 29, 1998
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities that
are the subject of this Registration Statement other than underwriting discounts
and commissions. The following expenses incurred with respect to the
distribution will be paid by the Company, and such amounts, other than the
Securities and Exchange Commission registration fee and the NASD filing fee, are
estimates only.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 10,316
NASD filing fee................................................. 3,904
Nasdaq National Market System listing fee....................... 32,055
Representative's nonaccountable expense allowance (1%).......... 221,333
Printing and engraving expenses................................. 125,000
Transfer agent and registrar fees............................... 3,000
Legal fees and expenses......................................... 160,000
Accounting fees and expenses.................................... 360,000
Miscellaneous expenses.......................................... 84,392
---------
Total..................................................... $1,000,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Articles of Incorporation, as amended
("Amended Articles") provide that, pursuant to the California Corporations Code,
the liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law. This is
intended to eliminate the personal liability of a director for monetary damages
in an action brought by, or in the right of, the Company for breach of a
director's duties to the Company or its shareholders. This provision in the
Amended Articles does not eliminate the directors' fiduciary duty and does not
apply for certain liabilities: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived an
improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision also does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws (the "Amended Bylaws") require the Company to indemnify its
officers and directors to the full extent permitted by law, including
circumstances in which indemnification would otherwise be discretionary. Among
other things, the Amended Bylaws require the Company to indemnify directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers and allows the Company to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
II-1
<PAGE>
Section 317 of the California Corporations Code ("Section 317") provides
that a California corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative (other
than action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee, or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation or enterprise, against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Section 317 also provides that a California corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect to any claim, issue or matter as to which
such persons shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 317 provides further that to the extent a director or officer of a
California corporation has been successful in the defense of any action, suit or
proceeding referred to in the previous paragraphs or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith; that
indemnification authorized by Section 317 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that the
corporation may purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him or
incurred by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 317.
In addition, the Company has entered into indemnity agreements ("Indemnity
Agreement(s)") with each of its directors and executive officers. Each such
Indemnity Agreement provides that the Company shall indemnify the indemnitee
against expenses, including reasonable attorneys' fees, judgements, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any civil or criminal action or administrative proceeding arising out of
the performance of his duties as a director or officer. Such indemnification is
available if the indemnitee acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action, had no reasonable cause to believe his conduct
was unlawful. The Indemnity Agreements also require that the Company indemnify
the director or executive officer in all cases to the fullest extent permitted
by applicable law. Each Indemnity Agreement permits the director or officer that
is party thereto to bring suit to seek recovery of amounts due under the
Indemnity Agreement and to recover the expenses of such a suit if he is
successful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. The
Company believes that its Amended Articles of Incorporation and Amended Bylaws
provisions are necessary to attract and retain qualified persons as directors
and officers. The Company also intends to obtain directors' and officers'
liability insurance.
The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
II-2
<PAGE>
The Company believes that it is the position of the Commission that insofar
as the foregoing provisions may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such limitation
of liability also does not affect the availability of equitable remedies such as
injunctive relief or rescission.
ITEM 15. 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 1996 Five shareholders of Unique 2,583,543 shares of Common (1)
Investment Corp. ("Unique") Stock
November 1996 Four executive officers 229,648 shares of Common (1)
Stock
November 1996 Two sales representatives 57,412 shares of Common (1)
Stock
November 1997 Four executive officers Options to Purchase 115,365 Services Rendered
shares at $8
IPO date A principal shareholder 250,000 shares of Common Conversion of 400 shares of
Stock Series A Preferred Stock
issued in connection with
the BTR Transaction, for
which Ms. Bastian paid
$2,000,000
November 1997 Employee Stock Options to Options to purchase 259,572 Services rendered
employees, including four shares at IPO price
executive officers
September 30, 1997 A principal shareholder 49,948 shares of Common $500,000
Stock
October 10, 1997 A principal shareholder 51,671 shares of Common $500,000
Stock
</TABLE>
- - ------------------------
(1) Effective November 1, 1996, Aqhawk, Inc., ("Aqhawk"), a corporation owned by
the Unique shareholders and management of the Company, purchased all of the
outstanding capital stock of the Company from BTR Dunlop, Inc. ("BTR") (the
"BTR Transaction"). The purchase price Aqhawk paid was approximately
$29,802,861 provided through a combination of bank debt and funds in the
aggregate amount of $8,500,000 provided by Melanie L. Bastian, a principal
shareholder and former director of the Company, consisting of subordinated
debt and $2,000,000 cash in return for the issuance of Preferred Stock. 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 Series A Preferred Stock of the Company, resulting in the
issuance of the shares shown on this chart.
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
II-3
<PAGE>
transactions not involving public offerings. No underwriters were engaged in
connection with any of the foregoing offers or sales of securites and no
commissions were paid in connection with such sales.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as a part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.(2)
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.+(2)
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.
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Representatives' Warrant Agreement.(2)
5.1 Opinion of Troy & Gould Professional Corporation.(3)
10.1 1997 Stock Option Plan and forms of Stock Option Agreements.(1)
10.1A Amendment No. 1 to 1997 Stock Option Plan.(3)
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.(3)
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.(3)
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.(3)
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.(3)
10.6 Form of Indemnity Agreement for directors and executive officers of the
Company.(3)
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.(3)
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)+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S>
10.10 Distribution Agreement dated November 1, 1996 between the Company and
Dunlop Limited, Precision Rubber.(1)
10.11 Repair, Overhaul, Exchange, Warranty and Distribution Agreement dated
November 1, 1996 between the Company and Dunlop Equipment Division.+(2)
10.12 Repair Services Agreement dated September 9, 1997 between the Company and
American Airlines, Inc.+(3)
10.12A Form of First Amendment to Repair Services Agreement between the Company
and American Airlines, Inc.(3)
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.+(2)
10.14A Form of Second Amendment to Maintenance Services Agreement between the
Company and Federal Express Corporation.(3)
10.15 Lease Agreement dated March 31, 1997 by and between the Company and
Industrial Centers Corp.(1)
10.15A Form of First Amendment to Lease Agreement dated March 31, 1997 by and
between the Company and Industrial Centers Corp.(3)
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.(3)
10.18 Subordinated Note for $6,500,000 in favor of Unique Investment Corp.(3)
10.19 Form of Amended and Restated Subordinated Promissory Note in favor of
Unique Investment Corp.(3)
10.20 Certified Translation of Rental Agreement between Mr. C. G. Kortenoever
and Flight Accessory Services.(3)
10.21 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.21A Form of First Amendment to Lease Agreement dated July 28, 1994 by and
between the Company and Industrial Bowling Corp.(3)
10.22 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.23 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.24 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.25 Lease Agreement dated June 24, 1997 by and between the Company and
Allstate Insurance Company.(3)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S>
10.25A Form of First Amendment to Lease Agreement between the Company and
Allstate Insurance Company.(3)
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.(3)
10.27 Form of Amended and Restated Business Loan Agreement between the Company
and Bank of America National Trust and Savings Association.(3)
10.28 Form of Security Agreement by the Company in favor of Bank of America
National Trust and Savings Association.(3)
10.29 Form of Pledge Agreement by the Company in favor of Bank of America
National Trust and Savings Association.(3)
10.30 Form of Subordination Agreement by and among the Company, Hawker Pacific
Aerospace Limited, Bank of America National Trust and Savings
Association, Melanie L. Bastian and Unique Investment Corporation.(3)
21.1 Subsidiaries of the Company.(3)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1).(3)
23.3 Consent of Daniel C. Toomey, Director Nominee.(2)
23.4 Consent of Joel F. McIntyre, Director Nominee.(2)
24.1 Power of Attorney (1)
27.1 Financial Data Schedule(1)
</TABLE>
- - ------------------------
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Previously filed on November 14, 1997.
(2) Previously filed on December 24, 1997.
(3) Previously filed on January 23, 1998.
(b) The following schedules supporting the financial statements are included
herein:
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted, since the required information is not
present in amounts sufficient to require submission of schedules or because the
information required is included in the Registrant's financial statements and
notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such
II-6
<PAGE>
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
this registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post Effective Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sun Valley, State of California, on January 29, 1998.
<TABLE>
<S> <C> <C>
HAWKER PACIFIC AEROSPACE
By: /s/ SCOTT W. HARTMAN
-----------------------------------------
Scott W. Hartman
CHAIRMAN OF THE BOARD
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - ------------------------------ -------------------------- -------------------
/s/ SCOTT W. HARTMAN
- - ------------------------------ Chairman of the Board January 29, 1998
Scott W. Hartman
Chief Executive Officer
* (Principal Executive
- - ------------------------------ Officer), President and January 29, 1998
David L. Lokken Director
Vice President and Chief
* Financial Officer
- - ------------------------------ (Principal Financial and January 29, 1998
Brian S. Aune Accounting Officer)
*
- - ------------------------------ Director January 29, 1998
Daniel J. Lubeck
*
- - ------------------------------ Director January 29, 1998
John G. Makoff
*By: /S/ SCOTT W. HARTMAN
- - ------------------------------
Scott W. Hartman
ATTORNEY-IN-FACT
II-8
<PAGE>
HAWKER PACIFIC AEROSPACE
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN E
---------- ------------------------ ----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D 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
Nine Months Ended September 30, 1997 67,000 117,000 -- (84,000 (a) 100,000
</TABLE>
- - ------------------------
(a) Represents amounts written-off against the allowance for doubtful accounts,
net of recoveries and reversals.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.(2)
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.+(2)
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.
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Representatives' Warrant Agreement.(2)
5.1 Opinion of Troy & Gould Professional Corporation.(3)
10.1 1997 Stock Option Plan and forms of Stock Option Agreements.(1)
10.1A Amendment No. 1 to 1997 Stock Option Plan.(3)
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.(3)
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.(3)
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.(3)
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.(3)
10.6 Form of Indemnity Agreement for directors and executive officers of the
Company.(3)
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.(3)
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)
10.11 Repair, Overhaul, Exchange, Warranty and Distribution Agreement dated
November 1, 1996 between the Company and Dunlop Equipment Division.+(2)
10.12 Repair Services Agreement dated September 9, 1997 between the Company and
American Airlines, Inc.+(3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S>
10.12A Form of First Amendment to Repair Services Agreement between the Company
and American Airlines, Inc.(3)
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.+(2)
10.14A Form of Second Amendment to Maintenance Services Agreement between the
Company and Federal Express Corporation.(3)
10.15 Lease Agreement dated March 31, 1997 by and between the Company and
Industrial Centers Corp.(1)
10.15A Form of First Amendment to Lease Agreement dated March 31, 1997 by and
between the Company and Industrial Centers Corp.(3)
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.(3)
10.18 Subordinated Note for $6,500,000 in favor of Unique Investment Corp.(3)
10.19 Form of Amended and Restated Subordinated Promissory Note in favor of
Unique Investment Corp.(3)
10.20 Certified Translation of Rental Agreement between Mr. C. G. Kortenoever
and Flight Accessory Services.(3)
10.21 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.21A Form of First Amendment to Lease Agreement dated July 28, 1994 by and
between the Company and Industrial Bowling Corp.(3)
10.22 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.23 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.24 Lease Agreement dated July 28, 1994 by and between the Company and
Industrial Bowling Corp.(2)
10.25 Lease Agreement dated June 24, 1997 by and between the Company and
Allstate Insurance Company.(3)
10.25A Form of First Amendment to Lease Agreement between the Company and
Allstate Insurance Company.(3)
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.(3)
10.27 Form of Amended and Restated Business Loan Agreement between the Company
and Bank of America National Trust and Savings Association.(3)
10.28 Form of Security Agreement by the Company in favor of Bank of America
National Trust and Savings Association.(3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ --------------------------------------------------------------------------
<C> <S>
10.29 Form of Pledge Agreement by the Company in favor of Bank of America
National Trust and Savings Association.(3)
10.30 Form of Subordination Agreement by and among the Company, Hawker Pacific
Aerospace Limited, Bank of America National Trust and Savings
Association, Melanie L. Bastian and Unique Investment Corporation.(3)
21.1 Subsidiaries of the Company.(3)
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1).(3)
23.3 Consent of Daniel C. Toomey, Director Nominee.(2)
23.4 Consent of Joel F. McIntyre, Director Nominee.(2)
24.1 Power of Attorney (1)
27.1 Financial Data Schedule(1)
</TABLE>
- - ------------------------
+ Portions of exhibits deleted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidentiality.
(1) Previously filed on November 14, 1997.
(2) Previously filed on December 24, 1997.
(3) Previously filed on January 23, 1998.
<PAGE>
CERTIFICATE OF AMENDMENT OF
TO THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
HAWKER PACIFIC AEROSPACE
Scott W. Hartman and Daniel Lubeck certify that:
I. They are the duly appointed and acting Chairman of the Board and
Secretary, respectively, of Hawker Pacific Aerospace, a California corporation
(the "Corporation").
II. Articles III., Paragraphs B and C of the Amended and Restated Articles
of Incorporation of the Corporation are hereby amended to read in their entirety
as follows:
"B. Each share of Common Stock outstanding as of the date of filing of
this Amendment to the Amended and Restated Articles of Incorporation shall
automatically and without further action be split into .9907406
outstanding shares of Common Stock.
C. The corporation currently has one series of Preferred Stock outstanding
entitled "Series A Preferred Stock," of which 400 shares are issued and
outstanding. The Series A Preferred Stock shall be nonvoting, shall have
no mandatory redemption provision, and have a liquidation preference in any
bankruptcy proceeding, as defined in California Corporation Code Section
172. All shares of Series A Preferred Stock issued and outstanding shall,
upon the closing of a bona fide underwritten public offering of Common
Stock of the corporation registered under the Securities Act of 1933, as
amended, automatically and without further action be converted into an
aggregate of 250,000 outstanding shares of Common Stock."
1.
<PAGE>
III. The amendments herein set forth have been duly approved by the Board
of Directors.
IV. The amendments herein set forth have been duly approved by the required
vote of the shareholders in accordance with Sections 902 and 903 of the
California Corporations Code. The Corporation has 3,000,000 shares of Common
Stock and 400 shares of Series A Preferred Stock outstanding. The number of
shares voting in favor of the amendments equaled or exceeded the vote required.
The percentage vote required was a majority of the voting power of the
outstanding shares of Common Stock and a majority of the voting power of the
outstanding shares of Preferred Stock.
(Remainder of page left blank intentionally)
2.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: January 28, 1998
/s/ SCOTT W. HARTMAN
------------------------
Scott W. Hartman,
Chairman of the Board
3.
<PAGE>
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: January 28, 1998
/s/ DANIEL LUBECK
------------------------
Daniel Lubeck
Secretary
4.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated November 7, 1997
(except Note 14, as to which the date is January 28, 1998), in the Registration
Statement Form S-1 and related Prospectus (the Registration Statement) of Hawker
Pacific Aerospace for the registration of 2,766,667 shares of its Common Stock.
Our audit also included the financial statement schedule of Hawker Pacific
Aerospace listed in Item 16(b). The schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Woodland Hills, CA
January 28, 1998
