<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number: 0-29490
HAWKER PACIFIC AEROSPACE
(Exact name of registrant as specified in its charter)
California 95-3528840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11240 Sherman Way, Sun Valley, California 91352
(Address of principal executive offices) (Zip Code)
(818) 765-6201
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----------- ----------
The number of shares of the registrant's common stock outstanding on August 13,
1999, was 5,822,222 shares.
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
----------- ------------
<S> <C> <C>
Current assets
Cash.......................................... $ 1,784,000 $ 560,000
Trade accounts receivable, net................ 9,824,000 12,303,000
Other receivables............................. 79,000 114,000
Inventories................................... 22,812,000 21,645,000
Prepaid expenses.............................. 550,000 617,000
----------- -----------
Total current assets........................ 35,049,000 35,239,000
Equipment and leasehold improvements, net...... 7,946,000 9,298,000
Exchange assets, net........................... 40,490,000 37,877,000
Deferred taxes................................. 3,511,000 1,916,000
Deferred financing costs....................... 839,000 798,000
Construction in progress....................... 5,429,000 982,000
Other assets................................... 720,000 1,127,000
----------- -----------
Total assets................................ $93,984,000 $87,237,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.............................. $12,271,000 $12,171,000
Accrued liabilities........................... 5,625,000 3,698,000
Line of credit................................ 51,816,000 37,185,000
Current portion of notes payable.............. 6,124,000 11,280,000
----------- -----------
Total current liabilities................... 75,836,000 64,334,000
Long-term debt................................. 2,500,000 2,500,000
Shareholders' equity........................... 15,648,000 20,403,000
----------- -----------
Total liabilities and shareholders' equity.. $93,984,000 $87,237,000
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-2-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue......................................... $17,395,000 $17,372,000
Cost of revenue................................. 18,099,000 13,632,000
----------- -----------
Gross margin.................................... (704,000) 3,740,000
Selling, general and administrative expense..... 2,524,000 2,228,000
----------- -----------
Income (loss) from operations................... (3,228,000) 1,512,000
Interest expense................................ (1,320,000) (801,000)
----------- -----------
Income (loss) before income taxes............... (4,548,000) 711,000
Income tax expense (benefit).................... (1,688,000) (254,000)
----------- -----------
Net income (loss)............................... $(2,860,000) $ 965,000
=========== ===========
Earnings (loss) per common share - basic $ (.49) $ .17
Earnings (loss) per common share - diluted $ (.49) $ .16
Number of shares - basic 5,822,222 5,822,222
Number of shares - diluted 5,822,222 6,023,152
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-3-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSQ
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue......................................... $33,590,000 $31,039,000
Cost of revenue................................. 30,896,000 24,102,000
----------- -----------
Gross margin.................................... 2,694,000 6,937,000
Selling, general and administrative expense..... 4,717,000 4,090,000
----------- -----------
Income (loss) from operations................... (2,023,000) 2,847,000
Interest expense................................ (2,461,000) (1,449,000)
----------- -----------
Income (loss) before income taxes............... (4,484,000) 1,398,000
Income tax expense (benefit).................... (1,664,000) 5,000
----------- -----------
Net income (loss)............................... $(2,820,000) $ 1,393,000
=========== ===========
Earnings (loss) per common share - basic $ (.48) $ .26
Earnings (loss) per common share - diluted $ (.48) $ .25
Number of shares - basic 5,822,222 5,420,012
Number of shares - diluted 5,822,222 5,573,074
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30
--------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Operating Activities
Net income..................................................... $(2,820,000) $ 1,393,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred income taxes........................................ (1,595,000) (12,000)
Depreciation................................................. 816,000 637,000
Amortization................................................. 1,272,000 657,000
Other non-cash items......................................... (85,000) --
Changes in operating assets and liabilities:
Accounts receivable and other receivables.................. 2,514,000 (6,900,000)
Inventory.................................................. (1,167,000) (3,669,000)
Other Assets............................................... 407,000 587,000
Prepaid expenses........................................... 67,000 (396,000)
Accounts payable........................................... 100,000 (1,979,000)
Deferred revenue........................................... 2,900,000 690,000
Accrued liabilities........................................ (973,000) 3,341,000
----------- ------------
Cash provided by (used in) operating activities.............. 1,436,000 (5,651,000)
Investing Activities
Purchase of equipment, leasehold improvements and landing gear. (5,200,000) (5,360,000)
Payments for construction in progress.......................... (4,447,000) --
Purchase of equipment and rotables from British Airways........ -- (18,887,000)
Purchase of inventory from British Airways..................... -- (1,962,000)
----------- ------------
Cash used in investing activities............................ (9,647,000) (26,209,000)
Financing Activities
Borrowings under bank note..................................... -- 13,285,000
Principal payments on bank notes............................... (5,156,000) (1,551,000)
Borrowings on line of credit................................... 15,694,000 11,905,000
Payments on line of credit..................................... (1,062,000) (9,964,000)
Proceeds from equity offering.................................. -- 20,800,000
Deferred offering costs........................................ (130,000) (1,966,000)
Deferred acquisition and loan fee expenses..................... 89,000 (235,000)
----------- ------------
Cash provided by financing activities........................ 9,435,000 32,274,000
----------- ------------
Increase in cash............................................... 1,224,000 414,000
Cash, beginning of period...................................... 560,000 160,000
----------- ------------
Cash, end of period............................................ $ 1,784,000 $ 574,000
=========== ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest.................................................... $ 991,000 $ 1,391,000
Income taxes................................................ 3,000 --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Other
Common Stock Accumulated Comprehensive
---------------------------
# of Shares Amount Deficit Income (Loss) Total
----------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1998................. 5,822,222 $21,108,000 ($941,000) $ 236,000 $20,403,000
Net loss............................ (2,820,000) (2,820,000)
Foreign currency
translation adjustment............. (1,935,000) (1,935,000)
------------
Comprehensive loss.................. (4,755,000)
--------- ----------- ----------- ----------- -----------
Balances at
June 30, 1999..................... 5,822,222 $21,108,000 ($3,761,000) ($1,699,000) $15,648,000
========= =========== =========== ============= ============
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
-6-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Interim Condensed Financial Statements
During interim periods, Hawker Pacific Aerospace (the "Company") follows the
accounting policies set forth in its Annual Report to Shareholders and applies
appropriate interim financial reporting standards, as indicated below. Users of
financial information produced for interim periods are encouraged to refer to
the notes contained in the Annual Report to Shareholders when reviewing interim
financial results.
Interim financial reporting standards require management to make estimates that
are based on assumptions regarding the outcome of future events and
circumstances not known at the present time, including the use of estimated
effective tax rates. Inevitably, some assumptions may not materialize and
unanticipated events and circumstances may occur which vary from those estimates
and such variations may significantly affect the Company's future results.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with the
Securities and Exchange Commission's requirements of Form 10-Q and contain all
adjustments of a normal and recurring nature which are necessary to present
fairly the financial position of the Company as of June 30, 1999, and December
31, 1998, and the results of its operations and cash flows for the three month
and/or six month periods ended June 30, 1999 and 1998.
Contingencies
The Company is party to various legal and environmental proceedings incidental
to its business. Certain claims, suits and complaints arising in the ordinary
course of business have been filed or are pending against the Company. Based on
facts now known to the Company, management believes all such matters are
adequately provided for, covered by insurance or, if not so covered or provided
for, are without merit, or involve such amounts that would not materially
adversely affect the consolidated results of operations and cash flows or
financial position of the Company.
Earnings (Loss) per Share
Basic earnings (loss) per share are based upon the weighted average number of
common shares outstanding. The weighted average common shares used in
calculating basic earnings per share were 5,822,222 and 5,822,222 for the three
months ended June 30, 1999 and 1998, respectively, and 5,822,222 and 5,420,012
for the six months ended June 30, 1999 and 1998, respectively. Diluted earnings
per share are based on the number of shares used in the basic earnings per share
calculation plus the dilutive effects of stock options under the treasury stock
method. The weighted average of common and common equivalent shares used in
calculating diluted earnings per share were 5,822,222 and 6,023,152, for the
three months ended June 30, 1999 and 1998, respectively, and 5,822,222 and
5,573,074, for the six months ended June 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
Inventories
<S> <C> <C>
Inventories are comprised of the following:
June 30, December 31,
1999 1998
----------- -----------
Purchased parts and assemblies............... $19,717,000 $19,251,000
Work in process.............................. 3,095,000 2,394,000
----------- -----------
$22,812,000 $21,645,000
=========== ===========
</TABLE>
Forward Looking Statements
Statements included in this filing which are not historical in nature are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward looking statements regarding the
Company's future performance and financial results are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those set forth for a variety of reasons. Factors that may impact such forward
looking statements include, among others, changes in the condition of the
industry, changes in general economic conditions and the success of the
Company's strategic operating plans.
-7-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2. INITIAL PUBLIC OFFERING
On February 3, 1998, the Company completed an initial public offering of
2,766,667 shares of the Company's common stock. The Company received net
proceeds of approximately $18.1 million, net of expenses of approximately $2.7
million. The Company used approximately $9.2 million of the net proceeds to fund
a portion of the purchase price for certain assets of British Airways as
discussed in Note 3, and approximately $7.6 million to repay a portion of the
revolving and term debt previously outstanding under the Company's credit
facility. The balance of the net proceeds has been used for working capital
purposes.
3. ACQUISITIONS
On February 4, 1998, the Company completed the acquisition of certain assets of
the British Airways landing gear repair and overhaul operation for a purchase
price of approximately $19.5 million. This acquisition resulted in the formation
of a wholly owned subsidiary in the United Kingdom, Hawker Pacific Aerospace
Ltd., which has been operational since that date.
4. LINE OF CREDIT AND NOTES PAYABLE
On December 22, 1998, the Company secured a $66.3 million senior credit facility
from Heller Financial, Inc., and NMB-Heller Limited (collectively, "Heller").
The Loan and Security Agreement (the "Heller Agreement") provides a $55.0
million revolving line of credit, a Term Loan A in the amount of $4.3 million,
and a Term Loan B in the amount of $7.0 million. The revolver and both term
loans expire in five years. At June 30, 1999, the weighted average interest rate
for all three loans was 7.75%.
Availability for the $55.0 million revolving line of credit may be limited by
borrowing base criteria related to levels of accounts receivable, inventory and
exchange assets. At July 31, 1999, the Company's borrowing base was $55.0
million, of which $52.9 million had been advanced, leaving remaining
availability of $2.1 million.
The Company has been in violation of certain financial covenants in the Heller
Agreement since December 31, 1998. Heller and the Company have been and remain
in continued and evolving discussions to restructure this agreement. For the
last few months there has been an informal understanding with Heller that the
line would be restructured if the following principal conditions were met: (i)
Term Loan B was paid down to $2.5 million, and the remaining principal balance
was secured by a letter of credit; and (ii) the Company agreed to take certain
steps to increase liquidity by $7.0 million. The increase in liquidity was to be
generated from $5.0 million of new junior capital and $2.0 million from asset
sales, or any combination thereof. This informal understanding was subject to
formal review and approval by both Heller and the Company's Board.
The first condition has been completed, and a $2.5 million guarantee and stand-
by letter of credit securing the Company's obligations to Heller related to Term
Loan B was provided by a shareholder of Unique Investment Corporation. Upon the
completion of this condition: (i) Heller released a $5.0 million reserve on the
revolving line of credit; and (ii) all remaining payments on Term Loan B were
deferred until the end of the five-year term.
The Company is currently in discussions with several financing sources to meet
Heller's second condition. Based on discussions to date, management believes
that additional financing, in an amount greater than that requested by Heller,
can be secured prior to September 30, 1999.
As a result of the Company's second quarter results of operations, Heller is
presently re-examining the situation. Heller may subsequently request that the
Company raise more than $7.0 million of liquidity, or Heller might propose
further conditions to restructure the facility. Heller may also avail itself of
other remedies available in the Heller Agreement, including the acceleration of
principal balances. Based on numerous recent conversations with financing
sources, management believes that senior financing to replace the Heller
facility would be readily available if necessary.
-8-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
As the Company has been in violation of certain provisions of its loan
agreement, Term Loans A and B (amounting to $6.1 million at June 30, 1999) have
been reclassified, in their entirety, as current obligations. However, with
regard to this $6.1 million current liability, only $0.6 million of principal
payments are currently required during the next twelve months.
In addition, as long as the Company's borrowing base exceeds the amount advanced
on its line of credit, no principal payments will be required. If no principal
payments become necessary on the line of credit, then only $0.6 million of the
$57.9 million in Heller current liabilities will be payable in the next twelve
months. This would correspond to an effective current ratio of 2.0 at June 30,
1999.
5. SEGMENT INFORMATION
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The new rules establish revised standards for public companies
relating to the reporting of financial and descriptive information about
business segments and enterprise-wide operations. The Company operates in one
segment. The following table sets forth certain geographic information related
to the Company's operations.
<TABLE>
<CAPTION>
United States United Kingdom Consolidated
As of June 30 1999 1998 1999 1998 1999 1998
- -------------- -------------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets......................... $50,241,000 $48,287,000 $43,743,000 $30,917,000 $93,984,000 $79,204,000
Total long-lived assets (net of
depreciation and amortization).... 21,594,000 19,972,000 26,842,000 22,248,000 48,436,000 42,220,000
For the quarter ended June 30
- -----------------------------
Revenue by location of operations.... 12,309,000 13,582,000 5,086,000 3,790,000 17,395,000 17,372,000
Income (loss) before income tax...... (346,000) 939,000 (4,202,000) (229,000) (4,548,000) 710,000
</TABLE>
The Company generated revenue from customers located outside of the United
States of $7,633,000 and $6,159,000 for the quarters ended June 30, 1999 and
1998, respectively.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report contains forward-looking statements within the meaning of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, such as statements of the Company's plans, objectives, expectations and
intentions, that involve risks and uncertainties that could cause actual results
to differ materially from those discussed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this Quarterly Report and in the Company's
various filings with the Securities and Exchange Commission, including without
limitation the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes thereto included herein, and
with the information set forth under Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
Relocation of United Kingdom Subsidiary
During the second quarter the Company relocated its UK subsidiary from its prior
location in a British Airways maintenance facility. This relocation materially
affected the Company's financial condition and results of operations for the
second quarter and six months ended June 30, 1999.
On April 15, 1999, the Company entered into a 25-year lease for a newly-
constructed 142,000 square foot facility near Heathrow Airport in London.
Additional construction and leasehold improvements were in progress throughout
the second quarter.
In late May the UK subsidiary began the relocation, which was substantially
completed by the end of July. The last functional area to be relocated is the
plating shop, which is scheduled to be transferred in December. Until that time,
there will be a slight increase in operating costs as overhaul items will
occasionally have to be transferred between the two facilities for plating
operations.
The new state-of-the-art facility was custom-designed for landing gear overhaul
and repair operations. The facility has increased capacity, provided improved
production and work-flow efficiencies, and significantly enhanced the ability of
the UK operation to serve its customers.
Material Changes in Financial Condition
The following analysis compares material changes in the Company's financial
position from December 31, 1998, to June 30, 1999.
Accounts receivable decreased from $12.3 million to $9.8 million primarily
because of the relocation of the UK subsidiary. As a result of the relocation,
revenue in June was $3.6 million lower than revenue in December.
Exchange assets increased from $37.9 million at the beginning of the year to
$40.5 million at June 30, 1999, as additional landing gear rotable assets were
purchased to meet increasing customer requirements.
Construction in progress increased from $1.0 million to $5.4 million,
representing principally additional construction and leasehold improvements in
the new UK facility. As the facility began full operations in the third quarter,
most of this amount was transferred to fixed assets.
The Company has drawn $14.6 million on its revolving line of credit during the
first two quarters of the year. Of this amount, $4.2 million was used to reduce
the principal balance on Term Loan B, and $4.6 million was used to fund the UK
relocation. The remaining $5.8 million was used principally to support purchases
for inventory, equipment, and a landing gear shipset. At July 31, 1999, the
Company had $2.1 million remaining available on its line of credit.
Despite the adverse impact of the UK relocation, the Company generated $1.4
million of operating cash flow during the first two quarters. While the Company
is currently meeting all of its cash obligations, supplemental funding will be
necessary during the next twelve months for planned capital expenditures and
rotable purchases to support higher levels of projected revenue.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company has been in violation of certain financial covenants in the Heller
Agreement since December 31, 1998. Heller and the Company have been and remain
in continued and evolving discussions to restructure this agreement. For the
last few months there has been an informal understanding with Heller that the
line would be restructured if the following principal conditions were met: (i)
Term Loan B was paid down to $2.5 million, and the remaining principal balance
was secured by a letter of credit; and (ii) the Company agreed to take certain
steps to increase liquidity by $7.0 million. The increase in liquidity was to be
generated from $5.0 million of new junior capital and $2.0 million from asset
sales, or any combination thereof. This informal understanding was subject to
formal review and approval by both Heller and the Company's Board.
The first condition has been completed, and a $2.5 million guarantee and stand-
by letter of credit securing the Company's obligations to Heller related to Term
Loan B was provided by a shareholder of Unique Investment Corporation. Upon the
completion of this condition: (i) Heller released a $5.0 million reserve on the
revolving line of credit; and (ii) all remaining payments on Term Loan B were
deferred until the end of the five-year term.
The Company is currently in discussions with several financing sources to meet
Heller's second condition. Based on discussions to date, management believes
that additional financing, in an amount greater than that requested by Heller,
can be secured prior to September 30, 1999.
As a result of the Company's second quarter results of operations, Heller is
presently re-examining the situation. Heller may subsequently request that the
Company raise more than $7.0 million of liquidity, or Heller might propose
further conditions to restructure the facility. Heller may also avail itself of
other remedies available in the Heller Agreement, including the acceleration of
principal balances. Based on numerous recent conversations with financing
sources, management believes that senior financing to replace the Heller
facility would be readily available if necessary.
As the Company has been in violation of certain provisions of its loan
agreement, Term Loans A and B (amounting to $6.1 million at June 30, 1999) have
been reclassified, in their entirety, as current obligations. However, with
regard to this $6.1 million current liability, only $0.6 million of principal
payments are currently required during the next twelve months.
In addition, as long as the Company's borrowing base exceeds the amount advanced
on its line of credit, no principal payments will be required. If no principal
payments become necessary on the line of credit, then only $0.6 million of the
$57.9 million in Heller current liabilities will be payable in the next twelve
months. This would correspond to an effective current ratio of 2.0 at June 30,
1999.
Material Changes in Results of Operations
The following analysis compares the Company's results of operations for the
quarter and six months ended June 30, 1999, with the quarter and six months
ended June 30, 1998. Year-to-date comparisons below should take into
consideration the fact that the Company's United Kingdom subsidiary began
operations on February 4, 1998.
Revenue in the second quarter increased slightly to $17.40 from $17.37 million
in 1998. Revenue for the six months increased by 8% to $33.6 million, as
compared with $31.0 million in the prior comparable period. For both periods,
most of the revenue gain was recorded in the Company's UK subsidiary.
Cost of revenue in the second quarter was materially affected by the UK
relocation. Substantial operating hours were lost in the UK during this period,
and to meet customer requirements the Company outsourced many jobs, to both
subcontractors and its own Sun Valley facility. The increased level of
outsourcing caused additional transportation costs to Sun Valley, and the loss
of gross margin on outside subcontracted work. Gross margin was further impacted
by a non-recurring inventory adjustment of $826,000 in the Sun Valley operation.
For the reasons above, consolidated cost of revenue for the second quarter was
unusually high, causing a negative gross margin of ($704,000), or (4%). This
negative gross margin combined with the 21% first quarter gross margin to reduce
the year-to-date gross margin to 8%. Sun Valley results of operations, however,
continue to exceed the Company's 1999 Business Plan in revenue, gross margin,
operating income and net income. Sun Valley has also recently recorded record
improvements in its overhead rate and labor efficiencies.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Second quarter and year-to-date selling, general and administrative expense
increased because of additional costs associated with the UK operation,
particularly with regard to the relocation, and the maintenance of dual
facilities during most of the second quarter. Interest expense increased by $0.5
million for both the second quarter and the six months as a result of increased
borrowings on the Company's line of credit.
As a result of the changes above, the Company recorded a net loss for the
quarter and six months of ($2,860,000) and ($2,820,000), as compared with net
income in the prior comparable periods of $965,000 and $1,393,000. Management
believes that the impact of the UK relocation on the Company's operating results
reported herein are transitional, non-recurring, and not indicative of the
results of operations which may be expected in future periods. The impact of UK
transition issues has been gradually decreasing during 1999, and the subsidiary
has been making considerable progress in improving performance metrics. The
brunt of the relocation impact was felt in the second quarter, although there
will be some lesser third quarter impact as the move continued through the end
of July. Management nevertheless believes that operating results for the
remainder of the year will show significant improvement.
Year 2000 Issue
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculation or system failures.
Based on a review of its product lines, the Company has determined that its
products and services do not require remediation to be Year 2000 compliant. The
Company has also completed an evaluation of the readiness status of its
significant suppliers and subcontractors, and has not discovered any problems
that would affect the Company's operations. All communication systems within the
Company are Year 2000 compliant, and the Company has developed a contingency
plan to handle any unanticipated year 2000 problems.
As of June 30, 1999, the total costs incurred to address the Company's year 2000
issues approximate $175,000. The Company estimates that another $25,000 of costs
may be required to complete final testing efforts on the year 2000 issue. Given
the nature of the Company's repair and overhaul operations, and the readiness
efforts already completed, management does not believe that the Year 2000 issue
presents a material exposure as it relates to the Company's products, services
or operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in certain
prices and rates on the Company's financial results and condition, primarily
foreign currency exchange rates and interest rates on borrowings. The Company
does not utilize derivative instruments in managing its exposure to such
changes.
Foreign Currency Risk. The Company has operations in the United Kingdom and the
Netherlands. The currencies of these two countries have been relatively stable
as compared with the U.S. dollar. The Company manages foreign currency risk, in
part, by generally requiring that customers pay for the services of the
Company's foreign operating units in the currency of the country where the
operating unit is located. The Company also does not routinely exchange material
sums of money between the operating units. The Company has not to date seen the
need for currency hedging transactions in the ordinary course of business.
Interest Rate Risk. The Company's senior credit facility is comprised of two
notes payable and a revolving line of credit, each of which currently carries an
interest rate which varies in accordance with a Base Rate equal to the higher of
the Federal Reserve prime rate, or the Federal Funds Effective Rate. The Company
is subject to potentially material fluctuations in its debt service if the Base
Rate should change significantly.
In February 1998, to reduce the impact of changes in interest rates on the
Company's debt facility, the Company entered into an interest rate swap
agreement. The swap agreement changed interest rate exposure to a fixed amount
on a portion of the debt.
-12-
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Form 8-K
No reports were filed on Form 8-K during the quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAWKER PACIFIC AEROSPACE
Date: August 13, 1999 By /s/ Daniel J.Lubeck
__________________________
Daniel J. Lubeck
Chairman of the Board
Date: August 13, 1999 By /s/ David L.Lokken
_________________________
David L. Lokken
President and Chief Executive Officer
Date: August 13, 1999 By /s/ Philip M.Panzera
___________________________
Philip M. Panzera
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF HAWKER PACIFIC AREOSPACE FOR THE QUARTER ENDED JUNE 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,784,000
<SECURITIES> 0
<RECEIVABLES> 9,924,000
<ALLOWANCES> 100,000
<INVENTORY> 22,812,000
<CURRENT-ASSETS> 35,049,000
<PP&E> 48,436,000
<DEPRECIATION> 2,088,000
<TOTAL-ASSETS> 93,984,000
<CURRENT-LIABILITIES> 75,836,000
<BONDS> 0
0
0
<COMMON> 21,108,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 93,984,000
<SALES> 0
<TOTAL-REVENUES> 17,395,000
<CGS> 0
<TOTAL-COSTS> 18,099,000
<OTHER-EXPENSES> 2,524,000
<LOSS-PROVISION> 6,000
<INTEREST-EXPENSE> 1,320,000
<INCOME-PRETAX> (4,548,000)
<INCOME-TAX> (1,688,000)
<INCOME-CONTINUING> (2,860,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,860,000)
<EPS-BASIC> (.49)
<EPS-DILUTED> (.49)
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