-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCwNOPGXaa70iJdHOl1vzFz23NIUGU7uIjPIu4ttZVkzkORCP4YNXmR0dptdaGjY BiONOnjJ1gTjbjH7etEWvQ== 0000928385-02-001315.txt : 20020415 0000928385-02-001315.hdr.sgml : 20020415 ACCESSION NUMBER: 0000928385-02-001315 CONFORMED SUBMISSION TYPE: SC 14D9/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20020402 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: HAWKER PACIFIC AEROSPACE CENTRAL INDEX KEY: 0001049625 STANDARD INDUSTRIAL CLASSIFICATION: AIRPORTS, FLYING FIELDS & AIRPORT TERMINAL SERVICES [4581] IRS NUMBER: 953528840 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-55289-02 FILM NUMBER: 02600434 BUSINESS ADDRESS: STREET 1: 11240 SHERMAN WAY CITY: SUN VALLEY STATE: CA ZIP: 91352-4942 BUSINESS PHONE: 8187656201 MAIL ADDRESS: STREET 1: 11240 SHERMAN WAY CITY: SUN VALLEY STATE: CA ZIP: 913524942 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HAWKER PACIFIC AEROSPACE CENTRAL INDEX KEY: 0001049625 STANDARD INDUSTRIAL CLASSIFICATION: AIRPORTS, FLYING FIELDS & AIRPORT TERMINAL SERVICES [4581] IRS NUMBER: 953528840 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D9/A BUSINESS ADDRESS: STREET 1: 11240 SHERMAN WAY CITY: SUN VALLEY STATE: CA ZIP: 91352-4942 BUSINESS PHONE: 8187656201 MAIL ADDRESS: STREET 1: 11240 SHERMAN WAY CITY: SUN VALLEY STATE: CA ZIP: 913524942 SC 14D9/A 1 dsc14d9a.txt SCHEDULE 14D-9A ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT UNDER SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 (Amendment No. 1) ----------------- HAWKER PACIFIC AEROSPACE (Name of Subject Company) HAWKER PACIFIC AEROSPACE (Name of Person Filing Statement) ----------------- COMMON STOCK, NO PAR VALUE (Title of Class of Securities) 420123 10 1 (Cusip Number of Class of Securities) ----------------- James R. Bennett Chief Financial Officer and Secretary Hawker Pacific Aerospace 11240 Sherman Way Sun Valley, CA 91352 (818) 765-6201 (Name, Address and Telephone Number of Person Authorized to Receive Notice and Communications On Behalf of the Person Filing Statement) ----------------- With a Copy to: K.C. Schaaf, Esq. Michael E. Flynn, Esq. Stradling Yocca Carlson & Rauth 660 Newport Center Drive, Suite 1600 Newport Beach, California 92660 (949) 725-4000 ----------------- [_] Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer. ================================================================================ This Amendment No. 1 (this "Amendment") amends and restates in its entirety the Solicitation/Recommendation Statement under cover of Schedule 14D-9 initially filed by Hawker Pacific Aerospace, a California corporation, with the Securities and Exchange Commission on March 11, 2002. Item 1. Subject Company Information. The name of the subject company is Hawker Pacific Aerospace, a California corporation (the "Company"). The address of the principal executive offices of the Company is 11240 Sherman Way, Sun Valley, California 91352. The telephone number of the Company at its principal executive offices is (818) 765-6201. The title of the class of equity securities to which this Solicitation/Recommendation Statement on Schedule 14D-9 (together with the Exhibits and Annexes hereto, this "Statement") relates is the common stock, no par value, of the Company (the "Common Stock"). As of March 5, 2002, there were 10,196,257 shares of Common Stock outstanding, and an additional 690,122 shares of Common Stock were then issuable upon exercise of other securities, including 342,406 shares of Common Stock issuable upon exercise of then outstanding options to purchase Common Stock and 347,716 shares of Common Stock issuable upon exercise of then outstanding warrants to purchase Common Stock. Lufthansa Technik AG, a corporation organized under the laws of the Federal Republic of Germany ("Lufthansa Technik"), has stated that it beneficially owns 7,451,357 shares, constituting a 72.7% beneficial ownership in the Company on a fully-diluted basis. As used herein, "fully-diluted basis" takes into account the conversion or exercise of all outstanding options and other rights and securities exercisable or convertible into Common Stock with exercise or conversion prices of less than $3.25 per share. The balance of those outstanding and issuable shares of Common Stock (i.e., the shares not beneficially owned by Lufthansa Technik), are referred to in this Statement as the "Shares." Item 2. Identity and Background of Filing Person. The Company is both the subject company and the filing person. The Company's name, business address and business telephone number are set forth in Item 1 above. This Statement relates to a tender offer by LHT Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Lufthansa Technik (the "Purchaser"), to purchase all of the Shares, at a purchase price of $3.25 per Share (the "Offer Price"), in cash, without interest, upon the terms and subject to the conditions set forth in the Purchaser's Offer to Purchase, dated March 11, 2002, as amended and restated by Amendment No. 1 to the Schedule TO-T/13E-3 filed on behalf of the Purchaser and Parent on April 2, 2002 (the "Offer to Purchase"), and in the related Letter of Transmittal, which is incorporated hereto by reference to the Schedule TO-T/13E-3 originally filed on behalf of the Purchaser and Parent on March 11, 2002 (which, as amended from time to time, together constitute the "Offer"). The amended and restated Offer to Purchase is incorporated herein by reference to Exhibit (a)(1) of Amendment No. 1 to the Schedule TO-T/13E-3 filed on behalf of the Purchaser and Parent on April 2, 2002. The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of March 7, 2002, among Lufthansa Technik, the Purchaser and the Company (the "Merger Agreement"). The Merger Agreement is filed as Exhibit (e)(1) to this Statement. Lufthansa Technik and the Purchaser have explained, in the Offer, and the Merger Agreement provides, that the Purchaser will not purchase any Shares in the Offer unless such number of tendered Shares, when added to the Common Stock then beneficially owned by Lufthansa Technik or the Purchaser, constitutes at least a 90% beneficial ownership in the Company on a fully-diluted basis. In order to satisfy the foregoing minimum tender condition, approximately 1,767,574 of the Shares must be tendered and not withdrawn prior to the expiration of the Offer. The Offer is also subject to other conditions, all of which, including the minimum tender condition described above, are waivable by the Purchaser. 1 Lufthansa Technik and the Purchaser have also explained, in the Offer, and the Merger Agreement provides, that if the Purchaser purchases Shares in the Offer such that the number of Shares purchased, when added to the Common Stock then beneficially owned by Lufthansa Technik or the Purchaser, constitutes at least a 90% beneficial ownership in the Company, then Lufthansa Technik intends to effect a short-form merger of the Purchaser with the Company (the "Merger") in accordance with the California General Corporation Law (the "CGCL"). In the Merger, each Share not then held by Lufthansa Technik or the Purchaser (other than Shares held by persons who properly perfect appraisal rights under California law) would be exchanged for the same consideration received for each Share in the Offer. If the Merger is completed, the Company will continue as the surviving corporation and will become a wholly-owned subsidiary of Lufthansa Technik. Upon completion of the Offer and the Merger, Lufthansa Technik and the Purchaser intend to cause the Company to file an application to withdraw the Common Stock from listing on the Nasdaq National Market, to terminate the registration of the Common Stock under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and to file a Form 15 with the Securities and Exchange Commission to suspend the Company's obligation to file reports under the Exchange Act. The Schedule TO-T/13E-3 states that the principal executive offices of the Purchaser are located at 6501 East Apache, Suite 206, Tulsa, Oklahoma 74115, that the principal executive offices of Lufthansa Technik are located at Weg beim Jager 193, D-22335 Hamburg, Germany, and that Lufthansa Technik is controlled by Deutsche Lufthansa AG, a corporation organized under the laws of the Federal Republic of Germany having its principal executive offices at Von-Galenz-Str. 2-6, 50679 Cologne, Germany. Item 3. Past Contacts, Transactions, Negotiations and Agreements. Except as described in this Statement (including in the Exhibits and Annexes to this Statement) or incorporated into this Statement by reference, to the Company's knowledge as of the date of this Statement, there were no material agreements, arrangements or understandings or any actual or potential conflicts of interest between the Company or its affiliates and (1) any of the Company's executive officers, directors or affiliates or (2) Lufthansa Technik or any of Lufthansa Technik's executive officers, directors or affiliates. The Merger Agreement The summary of the Merger Agreement and the description of the conditions of the Offer, contained in Section 18 and 19, respectively, of the Offer to Purchase, are incorporated herein by this reference. Such summary and description are qualified in their entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(1) to this Statement. The Confidentiality Agreement The Company and Lufthansa Technik entered into an Agreement for Non-Use and Non-Disclosure of Confidential Information dated as of March 4, 2002 (the "Confidentiality Agreement"), pursuant to which Lufthansa Technik agreed to maintain the confidentiality of information it received in connection with its due diligence review of the Company. The foregoing description is qualified in its entirety by reference to the Confidentiality Agreement, which is filed as Exhibit (e)(2) to this Statement. Certain Arrangements between the Company and its Executive Officers, Directors and Affiliates Certain agreements, arrangements and understandings between the Company and its executive officers, directors and affiliates are described in the Company's Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on September 4, 2001 under these captions: "Election of Directors," "Executive Officers," "Compensation of Directors and Executive Officers," "Report of the Compensation Committee of the Board of Directors on Executive Compensation," "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions." These portions of the proxy are filed as part of Exhibit (e)(4) to this Statement and are incorporated herein by this reference. See also the Company's Annual Report on Form 10-K/A for the year ended December 31, 2000 under Note 8 (Stock Option Plan) to the audited consolidated financial statements of the Company. This note is filed as part of Exhibit (e)(3) to this Statement and incorporated herein by this reference. 2 Certain Arrangements between the Company and Lufthansa Technik Lufthansa Technik has stated that it beneficially owns 7,451,357 shares of the outstanding and currently issuable shares of Common Stock of the Company, constituting a 72.7% beneficial ownership in the Company on a fully-diluted basis as of March 5, 2002. The transactions and arrangements pursuant to which Lufthansa Technik acquired such beneficial ownership are described in Section 1 of the Offer to Purchase, and such description is incorporated herein by this reference. Such description is also included by Lufthansa Technik in its statement on Schedule 13D, as amended, under the caption: "Item 5. Interest in Securities of the Issuer." In connection with Lufthansa Technik's initial purchase of outstanding shares of Common Stock in the Company on September 20, 2000, the Company and certain management shareholders entered into various agreements and arrangements with Lufthansa Technik, including a voting agreement granting Lufthansa Technik the right to appoint three of the seven members of the Board of Directors of the Company (the "Board"). Since September 2000, the Company has entered into several additional agreements and arrangements with Lufthansa Technik, including purchases of the preferred stock of the Company, no par value (the "Preferred Stock"), conversions of shares of Preferred Stock and debt into shares of Common Stock, debt financings and loans, loan guarantees and a revolving line of credit. Certain of these and other agreements and arrangements between the Company and Lufthansa Technik are described in Section 1 of the Offer to Purchase, which descriptions are incorporated herein by this reference. Also see the discussion in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2000 under these captions: "Item 1. Business," "Item 5. Market for Registrant's Common Equity and Related Shareholder Matters," and Note 7 (Related Party Transactions), Note 10 (Redeemable Preferred Stock) and Note 14 (Subsequent Events) to the audited consolidated financial statements of the Company. Portions of these items and notes are filed as part of Exhibit (e)(3) to this Statement and incorporated herein by this reference. Also see the discussion in (i) the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 under the caption "Part II-Item 2. Changes in Securities and Use of Proceeds," and Note 3 (Related Party Transactions) to the unaudited condensed consolidated financial statements; (ii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 under Note 3 (Related Party Transactions) and Note 6 (Subsequent Events) to the unaudited condensed consolidated financial statements; and (iii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 under the caption "Part II-Item 4. Submission of Matters to a Vote of Security Holders," and Note 3 (Note Payable to Related Party) and Note 7 (Subsequent Events) to the unaudited condensed consolidated financial statements. Portions of these items and notes from each of these three quarterly reports are filed as part of Exhibit (e)(5), Exhibit (e)(6) and Exhibit (e)(7), respectively, to this Statement and incorporated herein by this reference. Also see the discussion in the Company's Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on September 4, 2001 under these captions: "Election of Directors," "Approval of the Warrant to Lufthansa Technik AG," "Approval of Proposed Issuance to LHT of 35,582 Dividend Shares," "Executive Officers," "Compensation of Directors and Executive Officers," "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions." These portions of the proxy are filed as part of Exhibit (e)(4) to this Statement and are incorporated herein by this reference. The results of the shareholder vote with respect to the matters set forth in the proxy are described in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 under the caption "Part II-Item 4. Submission of Matters to a Vote of Security Holders." Portions of this item are filed as part of Exhibit (e)(7) to this Statement and incorporated herein by this reference. Lufthansa Technik's Relationships with the Company's Directors In reviewing the balance of this Statement, shareholders should know that certain members of the Company's management and the Board have relationships with Lufthansa Technik that may present actual or potential conflicts of interest in that such members may be deemed to have interests in the transactions contemplated by the Merger Agreement that are in addition to their interests as Company shareholders generally. 2 As of March 3, 2002, the Board had seven members: Richard Fortner, August Wilhelm Henningsen, Mellon C. Baird, Dr. Peter Jansen, Joel F. McIntyre, Laurans A. Mendelson and James C. Stoecker. Mr. Baird died on March 4, 2002. A successor has not been appointed as of March 11, 2002. Certain biographical information with respect to the members of the Board is contained in Schedule II to the Offer to Purchase, and incorporated herein by this reference. For additional biographical information, see also the Company's Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on September 4, 2001 under the caption "Election of Directors." This portion of the proxy is filed as part of Exhibit (e)(4) to this Statement and is incorporated herein by this reference; provided, however, that the information contained in Schedule II to the Offer to Purchase is more current and shall supersede the corresponding information in the proxy for purposes of incorporation by reference in this Statement. Messrs. Henningsen, Jansen and Stoecker were nominated by Lufthansa Technik pursuant to its right to nominate three members to the Board and, additionally, each of these three individuals has an existing employment relationship with Lufthansa Technik or one of its affiliates. Messrs. Henningsen and Jansen are members of Lufthansa Technik's executive board. See the Company's Definitive Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on September 4, 2001 under the caption "Election of Directors" for a more detailed description of these members' relationship with Lufthansa Technik. This portion of the proxy is filed as part of Exhibit (e)(4) to this Statement and is incorporated herein by this reference. Mr. Mendelson is President, Chief Executive Officer and Chairman of the Board of HEICO Corporation. Lufthansa Technik owns an approximate 20% interest in one of HEICO Corporation's two major subsidiaries, HEICO Aerospace, and has the right to elect two members out of seven to the subsidiary's board of directors. Lufthansa Technik is also a customer of the subsidiary. Mr. Fortner has no present relationship with Lufthansa Technik, but it is expected that he will be employed by the Company in its operations after the consummation of the Merger. The Company is not aware of any present agreements, arrangements or understandings between Mr. Fortner and Lufthansa Technik in connection with any such employment. The Board considered carefully the actual and potential conflicts of interest of certain of its members before establishing a special committee of independent directors (the "Special Committee"), initially comprised of Messrs. Baird, McIntyre and Mendelson, to consider any proposed offer which Lufthansa Technik might make for the Shares. (See Item 4 of this Statement for a description of the proposed offer). The Board concluded that Messrs. Henningsen, Jansen and Stoecker may have actual or potential conflicts in considering the transactions contemplated by the Merger Agreement as a result of their relationships with Lufthansa Technik. With respect to Mr. Fortner, the Board did not identify any actual or potential conflicts, but determined that Mr. Fortner should not serve on the Special Committee because of his role as an officer of the Company, since the Company is owned and controlled by Lufthansa Technik. On the other hand, the Board concluded that Messrs. Baird, McIntyre and Mendelson were independent and did not have any such actual or potential conflicts. In recognition of the fact that their service on the Special Committee would require a substantial commitment of time, the Board authorized compensation to members of the Special Committee. (See Item 5 of this Statement for a description of the compensation). The Board specifically considered the facts surrounding Mr. Mendelson's connection with Lufthansa Technik and determined that Mr. Mendelson is independent for the following reasons. First, no employment relationship exists between Mr. Mendelson and Lufthansa Technik or between Mr. Mendelson and the Company. Second, Lufthansa Technik's 20% ownership interest is in a subsidiary rather than the actual company of which Mr. Mendelson is President, Chief Executive Officer, Chairman and a 17% shareholder. Third, Lufthansa Technik does not control the subsidiary. Lufthansa Technik's 20% ownership interest is not controlling because the remaining 80% of the subsidiary is held by the subsidiary's parent, HEICO Corporation. Lufthansa Technik also does not have control arising from its right to elect only two of the seven members of the subsidiary's board. Finally, although Lufthansa Technik is a customer of the subsidiary, Lufthansa Technik does not account for 10% or more of the subsidiary's net sales during the last three fiscal years. Therefore, based on the above-described factors, the board determined that Lufthansa Technik did not control, was not controlled by and was not under common control with, directly or indirectly, the subsidiary, HEICO Aerospace Holdings Corp., the parent, HEICO Corporation, or Mr. Mendelson. 4 Effects of the Offer and the Merger under Company Stock Plans. The summary of the treatment of stock options under the Merger Agreement contained in Section 10 of the Offer to Purchase is incorporated herein by this reference. Such summary and the following summary in this paragraph are qualified in their entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(1) to this Statement. The Merger Agreement contemplates having the Company accelerate all unvested options immediately following execution of the Merger Agreement and permitting the holders of options with exercise prices per share less than the Offer Price to exercise their options on a conditional basis. The exercise is conditioned on the Purchaser actually purchasing the Shares pursuant to the Offer. The exercise of options with exercise prices per share less than the Offer Price will also be on a "cashless" basis. If the Shares are purchased, each holder of such an option will receive consideration for tendered option Shares equal to the difference between the Offer Price and the exercise price per share. If the Shares are not purchased, the option will be deemed to have not been exercised. Effect of Merger on Directors and Officers of the Company The summary of the effect of the Merger on directors and officers of the Company contained in Sections 4 and 18 of the Offer to Purchase is incorporated herein by this reference. Such summary and the following summary in this paragraph are qualified in their entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(1) to this Statement. If the Merger is effected, the directors and officers of the Company at the effective time of the Merger shall remain as directors and officers of the Company until their successors shall have been duly elected or qualified or until their earlier death, resignation or removal in accordance with the CGCL and the articles of incorporation and bylaws of the Company. Lufthansa Technik has indicated that it plans to conduct a detailed review of the Company after consummation of the Merger to determine what, if any, changes to the current officers and directors of the Company would be desirable. Presently, however, neither the Company nor its executive officers or directors have entered into any agreement, arrangement or understanding with Lufthansa Technik regarding the continuation or termination of their service as officers and directors following the consummation of the Merger. Indemnification and Related Arrangements The Merger Agreement provides that for six years after the effective time of the Merger, Lufthansa Technik and the Company (as constituted after the Merger) will not amend, repeal or otherwise modify the Company's articles of incorporation or bylaws so as to adversely affect the rights of the former officers and directors of the Company in respect of indemnification and exculpation from liability for acts or omissions occurring prior to the effective time of the Merger, provided that such indemnification will be subject to any limitation imposed from time to time under applicable law. For a period of four years after the effective time of the Merger, Lufthansa Technik will use its commercially reasonable best efforts to provide directors' and officers' liability insurance in respect of acts or omissions occurring prior to the effective time of the Merger on terms with respect to coverage and amount no less favorable than those of the policy then in effect, provided that Lufthansa Technik may instead purchase a three-year extended reporting period endorsement under Lufthansa Technik's directors' and liability insurance coverage, and in no event shall Lufthansa Technik be obligated to pay premiums in excess of 150% of the amount per annum that the Company paid in the fiscal year ended December 31, 2001. If Lufthansa Technik does not cause to be maintained such directors' and officers' insurance policies, then, for a period of four years after the effective time of the Merger, Lufthansa Technik unconditionally and irrevocably guarantees and promises to perform and to pay on demand, as and when the same shall become due, all of the statutory, articles of incorporation and bylaws indemnification obligations to the former officers and directors of the Company for acts or omissions occurring prior to the effective time of the Merger. The foregoing summary of indemnification and related arrangements between Lufthansa Technik and the Company is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit (e)(1) to this Statement. 5 Item 4. The Solicitation or Recommendation. (a) Recommendation of the Board. For the reasons set forth below, at a meeting held on March 7, 2002, at the recommendation of the Special Committee, the Board, (1) unanimously (with the two Lufthansa Technik-designated directors in attendance abstaining) determined that each of the Merger Agreement, the Offer and the Merger were advisable and fair from a financial point of view to, and in the best interests of, the Company and its unaffiliated minority shareholders, and (2) unanimously (with the two Lufthansa Technik-designated directors in attendance abstaining) voted to approve the Merger Agreement, the Offer and the Merger. Mr. Stoecker did not attend that portion of the meeting during which the Board considered and voted on the proposed Merger Agreement, Offer and Merger, and he did not approve or ratify or make any determination at the time of the meeting or at any other time regarding the proposed Merger Agreement, Offer or Merger in his capacity as a director of the Company. Mr. Mendelson participated by telephone. Accordingly, the Board recommends that holders of the Shares tender their Shares pursuant to the Offer. In evaluating the Merger Agreement, the Offer and the Merger, the Board and the Special Committee relied upon their knowledge of the business, financial condition and the prospects of the Company as well s the advice of financial and legal advisors. In view of the wide variety of factors considered in connection with the evaluation of the Merger Agreement, the Offer and the Merger, the Board and the Special Committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weight to the specific factors they considered in reaching their determinations. In addition, individual directors may have given different weights to different factors. The balance of this Item 4 summarizes events that led to the Offer, the information and factors considered and given weight by the Board and the Special Committee in making their recommendation to accept the Offer, and the Special Committee's discussions with its financial advisor, Houlihan Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey"), relating to Houlihan Lokey's written opinion regarding the fairness of the Offer Price. (b)(i) Background of the Offer; Contacts with Lufthansa Technik Set forth below is a summary of certain events that led to the Offer. Beginning on September 20, 2000, the Company entered into a series of transactions with Lufthansa Technik, as a result of which Lufthansa Technik has acquired its 72.7% controlling interest in the Company on a fully-diluted basis. A description of those transactions is referenced above under Item 3 "--Certain Arrangements between the Company and Lufthansa Technik." In December 2000, the Company received notification from Nasdaq that the Company's net tangible assets were below the $4,000,000 net tangible assets maintenance standard required to remain listed on the Nasdaq National Market. In early 2001, Lufthansa Technik voluntarily converted all of its shares of Preferred Stock in the Company into shares of Common Stock, which increased the Company's net tangible assets by over $3,000,000. In addition, Lufthansa Technik agreed to convert into Common Stock $9,800,000 of debt and accrued interest owed to it by the Company. The Board approved the conversion, which increased the Company's net tangible assets to an amount above the Nasdaq maintenance requirement. On August 28, 2001, the Company received notification from Nasdaq that the Company's net tangible assets and shareholders' equity were below the $4,000,000 and $10,000,000 respective maintenance standards required to remain listed on the Nasdaq National Market. On September 24, 2001, the Board created a special committee (the "Nasdaq Special Committee") composed of Messrs. Baird, McIntyre and Mendelson to study issues related to the impact of the Common Stock being delisted and the actions that the Company should take, if any, to preserve its listing. 6 On September 27, 2001 the Nasdaq issued a moratorium on its minimum bid price and minimum market price value of public float maintenance standards that expired on January 2, 2002. On January 29, 2002, the Nasdaq Special Committee reported to the full Board that no viable solution existed solely within the control of the Company for the Company to preserve its listing on the Nasdaq National Market. On January 31, 2001, representatives of Lufthansa Technik and a representative of the financial advisor to Lufthansa Technik met with attorneys from Wilmer, Cutler & Pickering, legal counsel to Lufthansa Technik and the Purchaser, to discuss a possible all-cash tender offer for the Shares. At that meeting, the participants decided to meet with the independent members of the Board to discuss Lufthansa Technik's proposed transaction. In addition, the participants at the meeting discussed the possibility of Lufthansa Technik's entering into privately negotiated transactions with certain holders of large blocks of Shares in advance of a possible future tender offer. The participants determined that representatives of Lufthansa Technik would have discussions with certain of these holders about purchasing their Shares. On February 6, 2002, representatives of Lufthansa Technik contacted Mr. Bennett, Chief Financial Officer of the Company, about setting up a date, time and place to meet with representatives of the Company to discuss the idea of a possible tender offer for the Shares. On February 13, 2002, representatives of Lufthansa Technik, a representative of the financial advisor to Lufthansa Technik and attorneys from Wilmer, Cutler & Pickering, met with Mr. McIntyre, a member of the Board, Mr. Fortner, Chief Executive Officer of the Company and Mr. Bennett. Messrs. Mendelson and Baird, both then members of the Board, also participated by telephone and videoconference, respectively. At the meeting, Lufthansa Technik indicated verbally its willingness to commence an all-cash tender offer for the Shares. On February 15, 2002, the Company received a letter from Nasdaq stating that for the previous thirty consecutive trading days the share price of the Common Stock was below the $3.00 minimum bid per share and the market value of publicly held shares was below the $15,000,000 minimum required for continued listing on the Nasdaq National Market. The letter also informed the Company that it had 90 calendar days to comply with the $3.00 minimum bid per share and the $15,000,000 minimum market value of publicly held shares requirements. On February 15, 2002, Dr. Gerald Gallus and Wolfgang Warburg, on behalf of Lufthansa Technik, sent a letter to the Board expressing its contemplation of commencing an all-cash tender offer for the Shares in early March 2002 at a premium to then current market price, possibly ranging from $2.90 to $3.25 per Share and its hope to have the Board support Lufthansa Technik in its offer. Lufthansa Technik also stated, in the letter, that its offer would be conditioned on the tender of a number of Shares sufficient to increase Lufthansa Technik's ownership in the Company to at least 90%. In such case, Lufthansa Technik indicated that it might proceed with a "short-form" merger of the Company with a subsidiary of Lufthansa Technik. (Short-form mergers do not require shareholder vote. Under California law, a short-form merger can be effected once the direct or indirect acquirer holds at least 90% of the outstanding stock of the company to be acquired). On February 15, 2002, the full Board held a special telephonic meeting during which the directors discussed Lufthansa Technik's written notification of its contemplation of a possible tender offer. The Board voted to appoint the Special Committee to consider and respond to the expected proposal. The Board appointed Messrs. McIntyre, Baird and Mendelson to serve as members of the Special Committee and Mr. McIntyre to chair the Special Committee. (Mr. Baird served as a member of the Special Committee until his death on March 4, 2002. Thereafter, the Special Committee consisted of Messrs. Mendelson and McIntyre). On February 15, 2002, the Special Committee held a telephonic meeting. The members decided to submit a memorandum to the full Board regarding the procedures to be followed in considering Lufthansa Technik's proposal. On February 15, 2002, the Special Committee held a telephonic meeting and appointed Stradling Yocca Carlson & Rauth, as independent legal counsel for the Special Committee. In a memorandum dated February 17, 2002 from Stradling Yocca Carlson & Rauth, legal counsel to the Special Committee reviewed at length the 7 directors' fiduciary duties regarding the evaluation of any proposal from Lufthansa Technik and the Purchaser and consideration of any alternatives to any proposed offer. On February 19, 2002, the Special Committee submitted the memorandum on procedures to be followed in connection with Lufthansa Technik's proposal to the Board. On February 20, 2002, the Board held a telephonic meeting. At the meeting, the Board discussed and voted to approve the procedures. The Board authorized the Special Committee to, among other things, appoint independent legal counsel and a financial advisor to the Special Committee. In addition, the Board authorized the Special Committee to evaluate, negotiate, finalize and approve, in its sole judgment, Lufthansa Technik and the Purchaser's offer (if and when made). On February 25, 2002, Lufthansa Technik filed a Schedule 13D/A with the Securities and Exchange Commission and issued a press release announcing that it had completed purchases of 715,530 shares of Common Stock in privately negotiated transactions from two institutional accounts and an individual investor at a price per share of $3.25, and that it was contemplating commencing in March 2002 a cash tender for the Shares, possibly at a price per Share in the range of $2.90 to $3.25. From February 15, 2002 until March 6, 2002, legal advisors for Lufthansa Technik and the Purchaser conducted due diligence on the Company. On February 26, 2002, attorneys from Wilmer, Cutler & Pickering, legal counsel to Lufthansa Technik and the Purchaser, delivered a draft Merger Agreement and Offer to Purchase to attorneys from Stradling Yocca Carlson & Rauth, legal counsel to the Special Committee. On February 28 and March 1, 2002, legal counsel for Lufthansa Technik and the Purchaser and legal counsel for the Special Committee met at the Newport Beach, California offices of Stradling Yocca Carlson & Rauth and engaged in extensive negotiations over the terms of the draft Merger Agreement and Offer to Purchase, including, among other things, conditions to Lufthansa Technik and the Purchaser's obligations to consummate the purchase of Shares in the Offer, the termination and termination fee provisions, restrictions on the ability of the Company to consider alternative transactions (i.e., "no-shop" and non-solicitation provisions), participation of Lufthansa Technik's designated members of the Board in any decision, the termination or waiver of the Company's Rights Agreement as to any third-party proposals for alternative transactions, the scope of the representations and warranties of the Company and the treatment of options. The meeting also included discussions on the Confidentiality Agreement. From February 18, 2002 until February 28, 2002, the Special Committee solicited and collected recommendations for a financial advisor for the Special Committee. On February 20, 2002, the chairman of the Special Committee, Mr. McIntyre, held a series of telephonic discussions with other members of the Special Committee and the Special Committee's legal counsel regarding the engagement of a financial advisor. The Special Committee determined to seek written proposals from each of four different investment banking firms to act as financial advisor to the Special Committee. After receipt of the written proposals from each of the investment banking firms, the Special Committee held a telephonic meeting to discuss each of the proposals. The Special Committee considered several candidates based on credentials, experience, independence and fees they proposed to charge the Company. During this meeting, the Special Committee determined to engage Houlihan Lokey as its independent financial advisor to consider Lufthansa Technik's expected proposal. On March 1, 2002, the Special Committee signed an engagement letter with Houlihan Lokey. On March 1, 2002, Lufthansa Technik formed the Purchaser as a corporation under the laws of Delaware. Lufthansa Technik is its sole shareholder. Knut Wisniewski is the sole director of the Purchaser and the President and Secretary of the Purchaser. On March 4, 2002, Lufthansa Technik executed and delivered to the Company the Confidentiality Agreement. 8 On March 4, 2002, Dr. Gallus and Mr. Warburg, on behalf of Lufthansa Technik, sent a letter to the Special Committee confirming Lufthansa Technik's intent to commence an all-cash tender offer for the Shares at a price of $3.25 per Share. Lufthansa Technik indicated that the Offered Price reflected a premium to the market price immediately prior to its public disclosure of its recent privately negotiated purchases of Common Stock at $3.25 per share. Lufthansa Technik also reaffirmed its prior statement (made in its February 15, 2002 letter) that its offer would be conditioned on the tender of a number of Shares sufficient to increase Lufthansa Technik's ownership in the Company to at least 90%. In such case, Lufthansa Technik indicated that it might proceed with a short-form merger of the Company with a subsidiary of Lufthansa Technik. On March 4, 2002, in response to Lufthansa Technik's letter of March 4, 2002, the Special Committee requested Houlihan Lokey to continue its financial analysis and to assist the Special Committee in analyzing the fairness from a financial point of view of the proposed $3.25 Offer Price to the unaffiliated minority shareholders of the Company. On March 6, 2002, Lufthansa Technik and the Purchaser retained D.F. King & Co., as Information Agent and the U.S. Stock Transfer Corporation, as Depositary. From March 1, 2002 until March 7, 2002, Houlihan Lokey conducted its financial analysis of the Company and the Offer Price. On March 7, 2002, the Special Committee held a meeting at the Company's offices in Sun Valley, California, to consider Lufthansa Technik's proposed offer with the advice of Stradling Yocca Carlson & Rauth and Houlihan Lokey, the Special Committee's legal counsel and financial advisor, respectively. Mr. Mendelson participated by telephone. Stradling Yocca Carlson & Rauth advised the members of their fiduciary duties and summarized the proposed terms of the Merger Agreement and related documents. Houlihan Lokey reviewed with the Special Committee its financial analysis of the $3.25 Offer Price and discussed its views with the Special Committee as to the fairness of the proposed $3.25 Offer Price. Houlihan Lokey furnished materials to the Board in connection with its presentation and analyses, copies of which materials are filed as Exhibit (a)(15) to this Statement and incorporated herein by this reference. Houlihan Lokey then delivered to the Special Committee its written fairness opinion (a copy of which is attached as Annex A to this Statement), concluding that, based upon and subject to the matters described in the written opinion and as of the date thereof, the Offer Price was fair, from a financial point of view, to the common shareholders of the Company, other than Lufthansa Technik. The Special Committee members reflected on and discussed the views and conclusion of Houlihan Lokey. The Special Committee also reviewed the reasons for recommending approval of the proposed Merger Agreement, Offer and Merger. After much discussion, the Special Committee unanimously voted in favor of the proposed Merger Agreement, Offer and Merger and decided to recommend that the full Board approve the Merger Agreement, the Offer and the Merger. On March 7, 2002, following the meeting of the Special Committee, the Board held a meeting at the Company's offices in Sun Valley, California to consider and vote on the proposed Merger Agreement, Offer and Merger. Mr. Mendelson participated by telephone. Mr. Stoecker did not attend that portion of the meeting during which the Board considered and voted on the proposed Merger Agreement, Offer and Merger, and he did not approve or ratify or make any determination at the time of the meeting or at any other time regarding the proposed Merger Agreement, Offer or Merger in his capacity as a director of the Company. Also present were representatives from Stradling Yocca Carlson & Rauth, legal counsel for the Special Committee, and Houlihan Lokey, financial advisor for the Special Committee. At this meeting, Stradling Yocca Carlson & Rauth reviewed the fiduciary duties applicable to the Board and summarized the proposed terms of the Merger Agreement and related documents. Also at this meeting, Houlihan Lokey reviewed with the Board its financial analysis of the $3.25 Offer Price and discussed its views with the Board as to the fairness of the $3.25 Offer Price. Also during this meeting, the directors comprising the Special Committee informed the Board that the Special Committee had thoroughly considered the proposed Offer and Offer Price and that it believed the proposed Offer to be fair, from a financial point of view, to and in the best interests of the Company and its unaffiliated minority shareholders 9 and that it, therefore, unanimously recommended that the Board approve the proposed Merger Agreement and Offer. The recommendation of the Special Committee was based in part on the written fairness opinion rendered by Houlihan Lokey as well as on the representations it had received from Lufthansa Technik that Lufthansa Technik will provide the Purchaser with sufficient and available funds to pay the consideration for all the Shares. Thereafter, the Board (1) unanimously (with the two Lufthansa Technik-designated directors in attendance abstaining) determined that each of the Merger Agreement, the Offer and the Merger were advisable and fair from a financial point of view to, and in the best interests of, the Company and its unaffiliated minority shareholders, and (2) unanimously (with the two Lufthansa Technik-designated directors in attendance abstaining) voted to approve the Merger Agreement, the Offer and the Merger. Lufthansa Technik, the Purchaser and the Company executed the Merger Agreement on March 7, 2002. The Company, Lufthansa Technik and the Purchaser issued a joint press release on March 8, 2002, publicly announcing the proposed tender offer. (ii) Reasons for the Recommendation of the Board and the Special Committee In reaching its determination to approve the Merger Agreement, the Offer and the Merger, and its recommendation described in paragraph (a) of this Item 4 that the unaffiliated minority shareholders accept the Offer, the Board and the Special Committee considered a number of factors, including the following: 1. Role and Recommendation of the Special Committee. The Board considered the role of the Special Committee, the independence of its members and the Special Committee's recommendation in favor of the Merger Agreement, the Offer and the Merger. The Board considered the fact that the Special Committee had authority to evaluate and review the Merger Agreement, the Offer and the Merger. 2. Houlihan Lokey's Analyses and Opinion. The Board and the Special Committee considered the analyses of Houlihan Lokey and Houlihan Lokey's written opinion delivered to the Special Committee that the Offer Price was fair, from a financial point of view, to the common shareholders of the Company, other than Lufthansa Technik. Houlihan Lokey performed a variety of financial and comparative analyses regarding the valuation of the Company and the Common Stock, including a discounted cash flow analysis of the projected cash flow of the Company; a comparison of financial performance and market valuation ratios of the Company with those of publicly traded companies Houlihan Lokey deemed relevant for purposes of its opinion; and an analysis of comparable transactions. For a more complete description of Houlihan Lokey's analyses and its written opinion, see Section 6 of the Offer to Purchase, incorporated herein by this reference. Copies of the materials furnished by Houlihan Lokey to the Board in connection with its presentation and analyses are filed as Exhibit (a)(15) to this Statement and incorporated herein by this reference. A copy of the written opinion rendered by Houlihan Lokey to the Special Committee, setting forth the procedures followed, the matters and the assumptions made by Houlihan Lokey in arriving at its opinion, is attached as Annex A to this Statement and incorporated here by reference. Shareholders are urged to read this opinion carefully and in its entirety. 3. Market Price and Premium. The Board and the Special Committee considered the historical market prices of the Common Stock compared to the Offer Price. In considering the historical market prices of the Common Stock as compared to the Offer Price, the Board and the Special Committee relied upon and adopted as their own the Historical Stock Price Analysis of Houlihan Lokey. The Offer Price represents a 53.3% premium over the $2.12 closing price per share of the Common Stock on February 25, 2002, the day Lufthansa Technik publicly announced that it had completed privately negotiated purchases of Common Stock at a price per share of $3.25, and that it was contemplating commencing a cash tender for the Shares at a price per Share of $2.90 to $3.25. The Offer Price also represents a 48.4% premium, a 34.8% premium, a 33.0% premium and a 37.6% premium for the five-day average share price, the 10-day average share price, the 20-day average share price and the 30-day average share price, respectively. The Board and the Special Committee also considered the uncertainty with respect to the price at which the Company's Common Stock might trade in the future and the possibility that, if the Offer is not consummated, there could be no assurance that any future transaction would yield $3.25 per Share. 10 4. Operating Performance. The Board and the Special Committee considered the fact that for the past four years, the Company has had significant net losses. Its net loss available to shareholders was $20.7 million for the fiscal year ended December 31, 2000 and $5.8 million for the nine months ended September 30, 2001. The Board and the Special Committee also considered that, to a large degree, Lufthansa Technik has provided necessary working capital for the Company since September 2000. In addition, the Company's operations are heavily dependent on the Company's aviation-related customers. The events of September 11, 2001 exacerbated the cash flow problems at the Company, as the entire aviation industry experienced and continues to experience severe difficulties. As a result, the Company is unable to determine with certainty the potential impact on its future revenues and operating performance. The Company is also unable to provide assurance that Lufthansa Technik will continue in the future to provide necessary financial support to the Company. Currently, Lufthansa Technik has no obligation to provide any such financial support. The Board and the Special Committee considered the likelihood that the price shareholders would realize from the Offer is likely to be higher than the price the shareholders would otherwise realize in the short or medium term. 5. Illiquidity of the Company's Common Stock. The Board and the Special Committee took into consideration the trading history of the Common Stock. Historically, the trading volume for the Common Stock has been low, resulting in an illiquid market for public shareholders, typical of smaller sized companies. The Board and the Special Committee believe that the liquidity that would result from the Offer would be beneficial to the Company's unaffiliated minority shareholders because Lufthansa Technik's significant ownership of Shares (1) results in a small public float that necessarily limits the amount of trading in the Shares and (2) decreases the likelihood that a proposal to acquire the Shares would be made by an independent entity without the consent of Lufthansa Technik. 6. Possible Nasdaq Delisting. The Board and the Special Committee considered the strong likelihood that the Company would be unable to demonstrate compliance with the net tangible assets and shareholders' equity maintenance requirements and other requisite continued listing standards of the Nasdaq National Market and, as a result, would have its Shares delisted. The Board and the Special Committee also considered the difficulty of relisting previously delisted shares. 7. Financial Ability to Consummate the Offer. The Board and the Special Committee considered the assurance provided by Lufthansa Technik representing that it will provide the Purchaser with sufficient and available funds to pay the consideration for all the Shares. In light of these representations and the lack of a financing condition, the Board and the Special Committee believed that it was very likely that the transaction would be completed on mutually agreeable terms. 8. Timing of Completion. The Board and the Special Committee considered that the shareholders must find it appealing to be able to receive the consideration through a tender of their Shares in the Offer or in the Merger within a relatively short period of time. 9. Limited Conditions. The Board and the Special Committee considered that the minimal conditions to the Offer and in particular the lack of a financing condition would increase the likelihood that the unaffiliated minority shareholders would receive the consideration. 10. No Firm Offers. There have been no other offers by third parties to acquire the Company within the last two years with which to compare the Offer. The Board and the Special Committee do not believe that a third party solicited or unsolicited bid would be likely because of Lufthansa Technik's substantial beneficial ownership of the Company and the Company's substantial long-term debt. The Offer Price exceeds the book value per share of $0.07 at September 30, 2001. 11. Other Valuation Measures. The Board and the Special Committee did not consider liquidation value to be a relevant or material measure for the Company but did consider going concern value to be a relevant and material measure for the Company, based on the Independent Valuation Analysis of Houlihan Lokey, which the Board and the Special Committee adopted as their own analysis. 11 12. Risk of Future Financial Performance. The Board and the Special Committee considered that the Offer would shift the risk of the future financial performance, which is uncertain in the current market environment, from the unaffiliated minority shareholders of the Company to Lufthansa Technik and the Purchaser. In addition, the Offer would eliminate the exposure of the unaffiliated minority shareholders to any future decline in the price of the Shares. 13. Negative Stock Market Conditions. The Offer Price is attractive based on negative stock market conditions for aviation-related and maintenance, repair and overhaul (MRO) stock prices. It cannot be predicted when the aviation and MRO markets will begin to improve. Given this unpredictability, the value of the Common Stock could continue to decline. 14. Alternative Transactions. The Company has no viable third party alternatives to consider. It has received no inquiries or offers from third parties to acquire the Company within the last two years. It is unlikely that the Company would receive a solicited or unsolicited third party offer given the substantial ownership interest in the Company by Lufthansa Technik and the Company's substantial long-term debt. Since September 2000, the Company has had to rely on the financial support of Lufthansa Technik to provide it with necessary working capital and to meet the minimum listing requirements of the Nasdaq National Market. Given the absence of alternatives and the Company's difficult financial situation, the Special Committee believes that no alternative transaction could result in as much consideration for the shareholders as this transaction. The Special Committee determined that the prospect of the Company's shareholders receiving cash at this time in an Offer that represents a substantial premium to the trading price of the Common Stock before the public disclosure of Lufthansa Technik's privately negotiated purchases of Shares, is better than not accepting this transaction at this time. The Company's only realistic alternative to this transaction at this time is to continue its operations as an independent company. However, several key factors weigh against continuing as an independent public company, including (1) the Special Committee's determination that there is no reasonable basis for asserting that the market for Shares will improve substantially at any time in the near future, (2) the poor financial results for the fourth quarter of 2001 and the fiscal year end for 2001 and the substantial long-term debt, (3) the lack of contractual obligation by Lufthansa Technik to provide financial support to the Company in the future, (4) the uncertainty in the aviation industry in which the Company operates and (5) the likelihood that the Company would be unable to meet the Nasdaq's maintenance standards for quotation of its Shares on the Nasdaq National Market. In that event, the Company would have its Shares delisted and would seek to terminate its reporting obligations under the Exchange Act. 15. Ability to Pursue Alternative Transactions. The Board and the Special Committee considered that the Merger Agreement, as negotiated, does not contain any non-solicitation prohibitions and provides that Lufthansa Technik would cause its designated board members to abstain or vote with the other members of the Board in deciding whether to waive the applicability of the Company's shareholder rights plan to a third party's proposed transaction. The Merger also does not contain a traditional break-up fee, but does contain an expense reimbursement not to exceed $250,000 in the event of a termination of the Merger Agreement as a result of a superior proposal. 16. Prior Purchases by Lufthansa Technik. The Board and the Special Committee considered that Lufthansa Technik purchased shares of Common Stock at purchase prices equal to or less than the Offer Price in three separate privately negotiated transactions, two with institutional funds and the third with a former executive officer and director of the Company. Lufthansa completed these purchases on February 25, 2002, and purchased a total of 715,530 shares of Common Stock at a price per share of $3.25. On March 16, 2001, Lufthansa Technik converted debt into Common Stock at a $3.13 per share price based on then current market price. On December 22, 2000, Lufthansa Technik converted its Preferred Stock at a $2.71 per share price based on then current market price. The Board and the Special Committee viewed these more recent purchases as more representative of current market prices for the Common Stock than purchases made by Lufthansa Technik in September 20, 2000 at purchase prices of $4.12 and $6.38 for 2,336,495 shares of Common Stock and 5,000 shares of Common Stock, respectively. 12 The Board and the Special Committee also believe that the Offer and Merger are procedurally fair to the unaffiliated minority shareholders of the Company in light of the following factors: 1. Special Committee. To avoid any potential conflict of interest of the Board because of Lufthansa Technik's substantial ownership interest in the Company and Lufthansa Technik's designated members on the Board, the Board established the Special Committee consisting of directors of the Company who are not officers or employees of the Company, the Purchaser or Lufthansa Technik and not directors of the Purchaser or Lufthansa Technik or otherwise affiliated with such officers, employees or directors. The Special Committee had sole and exclusive authority to negotiate the Merger Agreement, Offer and Merger. 2. Approvals of Directors. At the recommendation of the Special Committee, the Board (1) unanimously (with the two Lufthansa Technik-designated directors in attendance abstaining) determined that each of the Merger Agreement, the Offer and the Merger were advisable and fair from a financial point of view to, and in the best interests of, the Company and its unaffiliated minority shareholders, and (2) unanimously (with the two Lufthansa Technik-designated directors in attendance abstaining) voted to approve the Merger Agreement, the Offer and the Merger. Mr. Stoecker did not attend that portion of the meeting during which the Board considered and voted on the proposed Merger Agreement, Offer and Merger, and he did not approve or ratify or make any determination at the time of the meeting or at any other time regarding the Proposed Merger Agreement, Offer or Merger in his capacity as a director of the Company. 3. Individual Determination. Although the Offer and Merger are not structured to require formal approval of the majority of unaffiliated minority shareholders as a group, each shareholder of the Company can determine individually and without influence to tender Shares in the Offer. In addition, if the Purchaser's minimum tender condition (that the Shares tendered in the tender offer, when added to the Common Stock then beneficially owned by Lufthansa Technik or the Purchaser, constitutes at least a 90% beneficial ownership in the Company on a fully-diluted basis) is satisfied, a substantial majority of the unaffiliated minority shareholders of the Company will have accepted the Offer and tendered their Shares. 4. Potentially Reduced Costs. The Offer provides the opportunity for the unaffiliated minority shareholders of the Company to sell their Shares without incurring brokerage and other costs typically associated with market sales. 5. Dissenter and Appraisal Rights. The unaffiliated minority shareholders of the Company who believe that the terms of the Offer and the Merger are not fair can pursue dissenter and appraisal rights in respect of the Merger under the CGCL. 6. Independent Financial Advisor and Legal Counsel. The Special Committee had the benefit of advice from an independent financial advisor who reviewed and evaluated the Offer Price. In addition, the Special Committee retained independent legal counsel to assist it in performing its duties. In addition to the foregoing factors, which the Board of the Company and the Special Committee considered as supporting the Offer, they also considered the following countervailing factors: 1. No Future Participation in the Company. The Board and the Special Committee considered the fact that when the Offer and the Merger are completed, the unaffiliated minority shareholders will no longer be shareholders of the Company and accordingly will not participate in any future earnings or growth of the Company. 2. Possible Increase in Market Price of Shares. The Board and the Special Committee considered the possibility that, if the Offer is not completed, the Company's future share price could exceed the Offer Price or a future offer to acquire the Company for more than the Offer Price might materialize. 13 3. Taxable Transaction. The Board and the Special Committee considered that the Offer could result in a taxable gain to the shareholders, including those who may otherwise have preferred to retain their Shares to defer the occurrence of a taxable event. 4. Increased Illiquidity. There has been relatively low trading volume of the publicly traded shares of the Company. As a result of the tender by the shareholders of their Shares, the trading volume may decrease further. Those shareholders who do not tender their Shares may suffer increased illiquidity and decreased market value, particularly if the Shares will no longer be quoted on the Nasdaq National Market and the Company seeks to terminate the registration of the Shares under the Exchange Act. 5. Approval by the Unaffiliated Minority Shareholders Not Required. The Board and the Special Committee considered the fact that neither the Offer nor the Merger is structured to require the approval of the unaffiliated minority shareholders as a group. 6. No Unaffiliated Representative. The Board and the Special Committee considered the fact that the Board did not retain an unaffiliated representative to act solely on behalf of the unaffiliated minority shareholders for purposes of negotiating the Merger Agreement, the Offer and the Merger and preparing a fairness report. The foregoing includes the material factors considered by the Board and the Special Committee. In view of its many considerations, the Board and the Special Committee did not find it practical to, and did not, quantify or otherwise assign relative weights to the various individual factors considered. In addition, individual members of the Board and the Special Committee may have given different weights to the various factors considered. After weighing all of these considerations, the Board and the Special Committee collectively determined that the countervailing factors were not sufficient, either individually or collectively, to outweigh the benefits of the Offer and the Merger to the Company's unaffiliated minority shareholders, and therefore determined to approve the Merger Agreement and recommend that holders of Shares tender their Shares in the Offer. (c) Intent to Tender. Except as described in this paragraph, after reasonable inquiry and to the best of the Company's knowledge, each executive officer and director of the Company currently intends, subject to compliance with applicable law including Section 16(b) of the Securities and Exchange Act of 1934, to tender to the Purchaser all Shares and those directors who are not Lufthansa Technik-designated directors support the Offer and the Merger for the above-mentioned reasons. There is no agreement with any of the executive officers or directors of the Company that obligates any of them to tender their Shares in the Offer. Item 5. Persons/Assets Retained, Employed, Compensated or Used. The Company engaged Houlihan Lokey's services as financial advisor to the Special Committee. Under the engagement letter signed by Houlihan Lokey and on behalf of the Special Committee, the Company agreed to pay Houlihan Lokey: (a) a retainer of $100,000 payable upon signing of the engagement letter, (b) an additional $100,000 upon Houlihan Lokey's delivery of its written fairness opinion, and (c) reasonable out-of-pocket expenses associated with Houlihan Lokey's legal fees in connection with the transaction. All amounts payable to Houlihan Lokey are payable by the Company. The Company has also agreed to indemnify Houlihan Lokey against certain liabilities, including defense expenses, arising out of Houlihan Lokey's engagement. The Board authorized compensation to be paid to the members of the Special Committee. The Board authorized the Company to pay an initial special fee to Mr. McIntyre of $40,000 and to Messrs. Baird and Mendelson of $20,000 each, and to reimburse the members of the Special Committee for their reasonable out-of-pocket expenses incurred in serving on the Special Committee. Except as set forth above, neither the Company nor any person acting on its behalf has or currently intends to employ, retain or compensate any person to make solicitations or recommendations to the shareholders of the 14 Company on its behalf with respect to the Offer, except that such solicitations or recommendations may be made by directors, officers or employees of the Company, for which services no additional compensation will be paid. Item 6. Interest in Securities of the Subject Company. Except as described in this Statement (including in the Exhibits and Annexes to this Statement) or incorporated into this Statement by reference, no transactions in Shares have been effected during the past 60 days by the Company or any subsidiary of the Company or, to the knowledge of the Company, by any executive officer, director or affiliate of the Company. On February 25, 2002, Lufthansa Technik completed privately negotiated purchases of an aggregate of 715,530 shares of Common Stock of the Company. These purchases included a cash purchase of 426,600 shares of Common Stock from Royce & Associates, Inc., a cash purchase of 150,000 shares of Common Stock from Volksbanken-Kapitalanlageges m.b.H., and a cash purchase of 138,930 shares of Common Stock from David Lokken. Each purchase was for a price per share of $3.25. Lufthansa Technik is an affiliate of the Company. Mr. Lokken was an executive officer and director of the Company until January 16, 2002. Item 7. Purposes of the Transaction and Plans or Proposals. Except as set forth in this Statement, the Company is not currently undertaking or engaged in any negotiations in response to the Offer that relate to (1) a tender offer for or other acquisition of the Company's securities by the Company, any subsidiary of the Company or any other person; (2) an extraordinary transaction, such as a merger, reorganization or liquidation, involving the Company or any subsidiary of the Company; (3) a purchase, sale or transfer of a material amount of assets of the Company or any subsidiary of the Company; or (4) any material change in the present dividend rate or policy, or indebtedness or capitalization of the Company. Except as set forth in this Statement, there are no transactions, resolutions of the Board, agreements in principle, or signed contracts in response to the Offer that relate to one or more of the events referred to in the preceding paragraph. Item 8. Additional Information. (a) Fairness Opinion by Independent Appraiser Under Section 1203 of the CGCL, when a tender offer is made to some or all of a corporation's shareholders by an "interested party," a written affirmative opinion of an independent appraiser on the fairness of the consideration must be delivered to the shareholders when the tender offer is first made to them. Lufthansa Technik's and the Purchaser's controlling interest in the Company qualify them as interested parties for purposes of Section 1203. The written fairness opinion of Houlihan Lokey, concluding that the Offer Price is fair, from a financial point of view, to the unaffiliated minority shareholders of the Company, is being sent to shareholders with this Statement, as attached Annex A hereto, to satisfy the requirements of Section 1203. (b) "Short-form" Merger. Under Section 1110 of the CGCL, if the Purchaser acquires, pursuant to the Offer or otherwise, at least 90% of the outstanding Common Stock, after taking into account the shares of Common Stock previously held by Lufthansa Technik or the Purchaser, the Purchaser will be able to effect the Merger after consummation of the Offer without a vote of the Company's shareholders. However, if the Purchaser does not acquire at least 90% of the Shares pursuant to the Offer or otherwise, a vote of the Company's shareholders is required under California law for a merger, which would take a significantly longer period of time to accomplish. (c) Appraisal Rights. Holders of the Shares do not have statutory appraisal rights as a result of the Offer. However, they can exercise such rights in connection with the Merger if Lufthansa Technik proceeds with the Merger. Those rights, 15 including the procedures shareholders must follow in order to effectively demand and perfect such rights, are summarized in Section 5 of the Offer to Purchase. The relevant provisions of the CGCL governing appraisal is attached to the Offer to Purchase as Schedule A. (d) Regulatory Approvals. United States Antitrust Compliance. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and the rules that have been promulgated thereunder by the Federal Trade Commission (the "FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The purchase of Shares pursuant to the Offer is not subject to such requirements. Item 9. Exhibits. The following Exhibits are filed herewith:
Exhibit No. Description --- ----------- (a)(1) Letter to shareholders of the Company, dated March 11, 2002 (incorporated by reference to the Schedule 14D-9 filed by the Company on March 11, 2002). (a)(2) The amended and restated Offer to Purchase, dated April 2, 2002 (incorporated by reference to Exhibit (a)(1) to Amendment No. 1 to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on April 2--, 2002). (a)(3) Form of Letter of Transmittal (incorporated by reference to Exhibit (a)(2) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(4) Form of Notice of Guaranteed Delivery (incorporated by reference to Exhibit (a)(3) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(5) Form of Notice of Conditional Exercise (incorporated by reference to Exhibit (a)(4) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(6) Form of Instructions for Conditional Exercise (incorporated by reference to Exhibit (a)(5) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(7) Memorandum to Eligible Option Holders (incorporated by reference to Exhibit (a)(6) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(8) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (incorporated by reference to Exhibit (a)(7) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2000). (a)(9) Form of Letter to Clients for Use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees (incorporated by reference to Exhibit (a)(8) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(10) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (incorporated by reference to Exhibit (a)(9) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002).
16
Exhibit No. Description --- ----------- (a)(11) Form of Guidelines for Certification of Foreign Status of Beneficial Owner for United States Tax Withholding on Form W-8BEN (incorporated by reference to Exhibit (a)(10) to the Schedule TO- T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(12) Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc., dated as of March 7, 2002 (included as Annex A to this Amendment).* (a)(13) Joint Press Release issued by Lufthansa Technik, the Purchaser and the Company on March 8, 2002 (incorporated by reference to the Schedule 14D-9C filed by the Company on March 8, 2002). (a)(14) Summary Advertisement, published March 11, 2002 (incorporated by reference to Exhibit (a)(12) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (a)(15) Presentation Materials of Houlihan Lokey Howard & Zukin Financial Advisors, Inc., dated March 7, 2002.* (e)(1) Agreement and Plan of Merger, dated as of March 7, 2002, among Lufthansa Techink, the Purchaser and the Company (incorporated by reference to Exhibit (d)(1) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (e)(2) Agreement for Non-Use and Non-Disclosure of Confidential Information, dated as of March 4, 2002, between the Company and Lufthansa Technik (incorporated by reference to Exhibit (d)(2) to the Schedule TO-T/13E-3 of Lufthansa Technik and the Purchaser filed on March 11, 2002). (e)(3) Excerpted portions of the Company's Annual Report on Form 10-K/A for the year ended December 31, 2000 (incorporated by reference to the Schedule 14D-9 filed by the Company on March 11, 2002). (e)(4) Excerpted portions of the Company's Definitive Proxy Statement on Schedule 14A, filed on September 4, 2001 (incorporated by reference to the Schedule 14D-9 filed by the Company on March 11, 2002). (e)(5) Excerpted portions of the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 (incorporated by reference to the Schedule 14D-9 filed by the Company on March 11, 2002). (e)(6) Excerpted portions of the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 (incorporated by reference to the Schedule 14D-9 filed by the Company on March 11, 2002). (e)(7) Excerpted portions of the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 (incorporated by reference to the Schedule 14D-9 filed by the Company on March 11, 2002).
- -------- * Included with this Amendment. 17 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. HAWKER PACIFIC AEROSPACE By: /s/ JAMES R. BENNETT ----------------------------------- Name: James R. Bennett Title: Chief Financial Officer and Secretary Dated: April 2, 2002 18 ANNEX A [HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. LETTERHEAD] March 7, 2002 Special Committee of the Board of Directors Hawker Pacific Aerospace 11240 Sherman Way Sun Valley, California 91352 Members of the Special Committee of the Board of Directors: We understand that Hawker Pacific Aerospace (the "Company") and Lufthansa Technik AG ("Lufthansa") propose to enter into an Agreement and Plan of Merger (the "Agreement") by and among the Company, Lufthansa and LHT Acquisition Corporation, a wholly-owned subsidiary of Lufthansa (the "Purchaser"), pursuant to which Lufthansa and the Purchaser will commence a tender offer (the "Offer") to purchase all of the shares of the Company's common stock (the "Common Shares") that are issued and outstanding that Lufthansa does not already own at a price of $3.25 per Common Share (the "Offer Price"). We also understand that Lufthansa is the Company's largest shareholder and currently owns, as of the date hereof, approximately 73.1% of the issued and outstanding Common Shares. After completion of the Offer, the Purchaser will be merged with and into the Company and the separate corporate existence of the Purchaser will thereupon cease. The Company has formed a special committee of its Board of Directors (the "Committee") to evaluate the Offer and other related transactions contemplated by the Agreement (collectively, the "Transaction"). The terms and conditions of the Transaction are more fully set forth in the Agreement. You have requested our opinion (this "Opinion") as to whether the Offer Price is fair, from a financial point of view, to the holders of the Common Shares, other than Lufthansa. This Opinion does not address the Company's underlying business decision to effect the Transaction or whether the Offer Price represents the highest price obtainable. We have not been requested to, and did not, solicit third party indications of interest in acquiring all or any part of the Company. Furthermore, at your request, we have not negotiated the Transaction or advised you with respect to alternatives to it. In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Among other things, we have: 1. reviewed a draft copy of the Agreement; 2. reviewed the Company's annual reports to shareholders on Form 10-K for the fiscal years ended December 31, 1998, 1999, and 2000 and quarterly report on Form 10-Q for the three quarters ended September 30, 2001, and Company-prepared interim financial statements for the 12 month period ended December 31, 2001, which the Company's management has identified as being the most current financial statements available; 3. reviewed letters from Nasdaq to the Company, dated August 28, 2001 and February 14, 2002, with regard to the potential delisting of the Common Shares from The Nasdaq National Market; 4. reviewed forecasts and projections prepared by the Company's management on November 20, 2001 with respect to the Company for the years ending December 31, 2002 through 2004; 5. met with certain members of senior management of the Company to discuss the operations, financial condition, future prospects and projected operations and performance of the Company, and met with representatives of the Company's counsel to discuss certain matters; A-1 Special Committee of the Board of Directors Hawker Pacific Aerospace March 7, 2002 6. visited certain facilities and business offices of the Company; 7. reviewed the historical market prices and trading volume for the Company's publicly-traded securities; 8. reviewed certain publicly-available information relating to other historical transactions for the Company's securities; 9. reviewed certain additional publicly-available financial data for certain companies that we deem comparable to the Company, and publicly-available prices and premiums paid in other transactions that we considered similar to the Transaction; and 10. conducted such other studies, analyses and inquiries as we have deemed appropriate. We have relied upon and assumed, without independent verification, that the financial forecasts and projections provided to us have been reasonably prepared and reflect the best currently available estimates of the future financial results and condition of the Company, and that there has been no material change in the assets, financial condition, business or prospects of the Company since the date of the most recent financial statements made available to us. We have also assumed, with your consent, that the final, executed form of the Agreement will not differ in any respect from the draft that we have examined and that Lufthansa, the Purchaser and the Company will comply with all the terms of the Agreement. We have not independently verified the accuracy and completeness of the information that was publicly available or furnished to us with respect to the Company and do not assume any responsibility with respect to it. We have not assessed the tax consequences of the Transaction to either the Company or its shareholders. We have not made any physical inspection or independent appraisal of any of the properties or assets of the Company. This Opinion is necessarily based on business, economic, market and other conditions as they exist and can be evaluated by us at the date of this letter. Subsequent developments may affect this Opinion but we are under no obligation to update this Opinion. It is understood that our advisory services with respect to the Transaction do not constitute a review or audit of any procedures with respect to any financial information and our advisory services should not be relied upon by any person to disclose weaknesses in internal controls or financial statement errors or irregularities. Furthermore, it is understood that this Opinion is addressed to the Committee in its evaluation of the Transaction and is effective only as of the date hereof. This Opinion is delivered to the Committee subject to the conditions, scope of engagement, limitations and understandings set forth in this Opinion and the terms of our engagement. Our obligations with respect to our advisory services and the delivery of this Opinion are solely corporate obligations and none of our directors, officers, employees, agents, shareholders or controlling persons shall be subjected to any personal liability whatsoever to any person nor will any such claim be asserted by or on behalf of the Company or its affiliates. We will receive a fee from the Company for our advisory services in rendering this Opinion, plus reasonable out-of-pocket expenses associated only with legal fees that we may incur. The full fee is due and payable upon our delivery of this Opinion. No portion of the fee is contingent upon the consummation of the Transaction or the conclusions reached in this Opinion. A-2 Special Committee of the Board of Directors Hawker Pacific Aerospace March 7, 2002 We hereby consent to a description of and the inclusion of the text of this Opinion in the Schedule 14D-9 and Schedule TO-T/13E-3 required to be filed by the Company and Lufthansa with the Securities and Exchange Commission in connection with the Transaction. This Opinion does not constitute a recommendation to any shareholder as to how such shareholder should act on any matter relating to the Transaction, including, without limitation, whether such shareholder should tender any Common Shares pursuant to the Offer. Based upon and subject to the foregoing and in reliance thereon, as of the date hereof, it is our opinion that the Offer Price is fair, from a financial point of view, to the holders of the Common Shares, other than Lufthansa. HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. A-3 EX-15.A 3 dex15a.txt PRESENTATION MATERIALS Exhibit (a)(15) PRESENTATION MATERIALS OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. Project Sun - -------------------------------------------------------------------------------- PRESENTATION TO THE SPECIAL COMMITTEE TO THE BOARD OF DIRECTORS March 7, 2002 HOULIHAN LOKEY HOWARD & ZUKIN Financial Advisors 1930 Century Park West Los Angeles, California 90067 (310) 553-8871 http://www.hlhz.com Los Angeles New York Chicago San Francisco Washington, D.C. Minneapolis Dallas Atlanta Toronto - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Table of Contents - --------------------------------------------------------------------------------
Section ------- Executive Summary ..................................................... A Due Diligence Summary ................................................. B Overview of HPAC ...................................................... C Overview of Deutsche Lufthansa AG ..................................... D Valuation Summary ..................................................... E Delisting Issue ....................................................... F Potential Alternatives Summary ........................................ G Exhibits - -------- Synopses of Comparable Companies ................................. 1 Supplemental Valuation Schedules ................................. 2 - ---------------------------------------------- Houlihan Lokey Howard & Zukin i
- -------------------------------------------------------------------------------- Executive Summary - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Executive Summary Background We understand the following regarding Hawker Pacific Aerospace ("Company" or "HPAC" hereinafter) and its largest shareholder, Lufthansa Technik AG ("LHT"), a wholly-owned subsidiary of Deutsche Lufthansa AG ("Lufthansa"). The Company's common shares are traded on the NASDAQ. LHT currently owns 73.25 percent of the Company on a fully diluted basis, including a purchase of 715,530 shares on February 25, 2002. On the same day, LHT announced that was contemplating a launch of a tender offer for all of the HPAC shares it does not already own at a price between $2.90 and $3.25 per share. In response to this announcement, and in anticipation of a definitive offer from LHT, the Company has formed a special committee of its Board of Directors (the "Committee") to evaluate any such offer. On Monday March 4, 2002, LHT communicated to the Company the firm intention to pursue the tender offer at $3.25 per share. LHT's offer to purchase the shares of the Company it does not already hold and other related transactions disclosed to Houlihan Lokey Howard & Zukin are referred to collectively herein as the "Transaction." Role of Houlihan Lokey Howard & Zukin Houlihan Lokey Howard & Zukin ("Houlihan Lokey") has been retained on behalf of the Committee. The Committee has requested that Houlihan Lokey render an opinion as to the fairness, from a financial point of view, to the public stockholders of the Company of the consideration to be received by them in connection with the Transaction (the "Opinion"). The Opinion shall not address the Company's underlying business decision to effect the Transaction. - --------------------------------------------- Houlihan Lokey Howard & Zukin 1 - -------------------------------------------------------------------------------- Due Diligence Summary - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Due Diligence Summary - -------------------------------------------------------------------------------- Due Diligence Summary In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Among other things, we have: 1. met with certain members of the senior management of HPAC to discuss the operations, financial condition, future prospects and projected operations and performance of HPAC; 2. visited certain facilities and business offices of HPAC; 3. reviewed the HPAC's annual reports to shareholders and on Form 10-K for the fiscal years ended December 31, 2000 and quarterly reports on Form 10-Q for the three quarters ended September 30, 2001, and Company-prepared interim financial statements for the 12 month period ended December 31, 2001, which HPAC's management has identified as being the most current financial statements available; 4. reviewed the Management Projections Presented to LHT, dated November 20, 2001 and Modified Management Projections dated March 5, 2002 prepared by HPAC's management, with respect to the Company's future financial performance for the years ending December 31, 2002 through 2004; 5. reviewed the historical market prices and trading volume for HPAC's publicly traded securities; 6. reviewed certain other publicly available financial data for certain companies that we deem comparable to the Company; 7. reviewed the letter from NASDAQ dated, February 14, 2002 to HPAC regarding the May 15, 2002 deadline for the Company to regain compliance under NASDAQ's listing requirements in order for the Company's securities to remain listed on the NASDAQ; 8. reviewed certain financial data regarding historic acquisitions made by Lufthansa; and 9. conducted such other studies, analyses and inquiries as we have deemed appropriate. - --------------------------------------------- Houlihan Lokey Howard & Zukin 3 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Due Diligence Summary - -------------------------------------------------------------------------------- Due Diligence Summary (Continued) Limiting Factors We have relied upon and assumed, without independent verification, that the financial information, forecasts and projections provided to us have been reasonably prepared and reflect the best currently available estimates of the future financial results and condition of HPAC, and that there has been no material change in the assets, financial condition, business or prospects of HPAC since the date of the most recent financial statements made available to us. - --------------------------------------------- Houlihan Lokey Howard & Zukin 4 - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Company Overview HPAC repairs and overhauls fixed wing 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"). HPAC is a certified Federal Aviation Administration ("FAA") and Joint Airworthiness Authority ("JAA") approved repair station, and has also been granted Parts Manufacturer Approvals by the FAA. In addition, HPAC distributes, manufactures and sells new and overhauled spare parts and components for both fixed wing aircraft and helicopters. HPAC has long-term service contracts with many customers, including Federal Express Corporation ("Federal Express"), American Airlines, Inc. ("American Airlines"), the United States Coast Guard, British Airways, US Airways, Inc. ("US Airways"), EVA Airways, UPS, China Southern and Shanghai Airlines. HPAC is organized into two divisions and one wholly-owned subsidiary. HPAC's principal operating division and headquarters is located in Sun Valley (Los Angeles), California. HPAC's Hawker Pacific Aerospace, Ltd., subsidiary operates a major overhaul facility in Hayes (London) in the United Kingdom. HPAC also operates a small hydraulic repair facility in Amsterdam, The Netherlands. - --------------------------------------------- Houlihan Lokey Howard & Zukin 6 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Financial Profile ($ in millions, except per share amounts)
HPAC - MARKET OVERVIEW Pre-Announcement Stock Price on 02/25/02 $2.12 Post-Announcement Stock Price on 02/26/02 $3.24 Current Stock price on 3/5/02 $3.19 52-Week High on 4/25/01 $4.20 52-Week Low on 12/19/01 $1.50 - ---------------------------------------------------------------------- Pre-Announcement Price Discount to 52-Week High -49.5% Pre-Announcement Price Premium to 52-Week Low 41.3% Post-Announcement Price Discount to 52-Week High -22.9% Post-Announcement Price Premium to 52-Week Low 116.0% - ---------------------------------------------------------------------- Basic Shares Outstanding 10,160,675 Add: In the Money Options & Warrants 47,000 Fully Converted Shares Outstanding 10,207,675 Less: Shares Purchased 35,630 Fully Diluted Shares Outstanding 10,172,045 Current Price Per Share $3.19 Current Market Value of Equity $32.4 Debt at 12/31/01 $72.6 Cash at 12/31/01 1.6
HPAC - FINANCIAL SNAPSHOT Operating Revenue Income(1) Net Income(1) ------- --------- ------------- 1999 $82.3 $4.3 ($1.0) 2000 77.1 (2.3) (5.4) 2001 E 82.6 (3.5) (5.5) 2002 E 86.6 2.3 (1.0) 2003 E 95.2 5.3 0.9 Market Multiples ------------------------------------------- EV / EV / MVE / Revenues Oper. Income Net Income -------- ------------ ---------- 2001 E 1.25 x NMF NMF 2002 E 1.19 x NMF NMF 2003 E 1.09 x 19.5 x 35.4 x
Other Issues - ------------ - - HPAC is currently facing the possibility of being delisted from the Nasdaq. - - The company has approximately $4.0 million negative book value as of December 31, 2001. - - LHT has continued to provide funding to HPAC either directly or through the facilitation loan facilities with German financial institutions. Footnotes: NMF - Not Meaningful (1) FYE 1999 TO 2001E figures have been adjusted to account for non-recurring and one-time charges, see Representative Levels for additional detail. - --------------------------------------------- Houlihan Lokey Howard & Zukin 7 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Trading Analysis ($ in millions)
Daily Trading Volume/(1)/ ------------------------------------------------------------------------------------------------------------ 1 Month Public Company 1 Month % of Float Pre-Announce % of Float 3 Months % of Float 6 Months % of Float - -------------- -------------------------- ------------------------- ------------------------- -------------------------- Aar Corp 110.5 0.4% 102.2 0.4% 108.7 0.4% 98.0 0.4% Aviall Inc 79.8 0.4% 67.8 0.4% 111.6 0.6% 103.9 0.6% First Aviation Svcs Inc 0.7 0.0% 1.3 0.0% 1.5 0.0% 1.2 0.0% Mercury Air Group Inc 5.6 0.2% 5.5 0.2% 7.1 0.3% 8.4 0.4% Pemco Aviation Inc 2.2 0.1% 2.8 0.2% 4.5 0.2% 5.1 0.3% Sequa Corp -Cl A 4.9 0.1% 5.7 0.1% 5.9 0.1% 5.9 0.1% BBA Group plc 1,816.4 NA 1,780.6 NA 1,942.9 NA 2,520.2 NA Vector Aerospace 34.3 NA 32.4 NA 34.9 NA 31.8 NA Median 19.9 0.2% 19.0 0.2% 21.0 0.6% 20.1 0.5% - ------------------------------------------------------------------------------------------------------------------------------------ Hawker Pacific Aerospace 15.1 0.6% 3.3/(4)/ 0.1% 4.3/(4)/ 0.2% 4.8/(4)/ 0.2% - ------------------------------------------------------------------------------------------------------------------------------------ Public Company 1 Year % of Float Float/(2)(3)/ - -------------- ---------------------------- --------------- Aar Corp 92.4 0.4% 25,590.0 Aviall Inc 100.2 0.6% 18,210.0 First Aviation Svcs Inc 1.3 0.0% 3,160.0 Mercury Air Group Inc 8.9 0.4% 2,310.0 Pemco Aviation Inc 5.0 0.3% 1,860.0 Sequa Corp -Cl A 6.1 0.1% 4,200.0 BBA Group plc 2,696.5 NA NA Vector Aerospace 34.7 NA NA Median 21.808 0.6% 3,680.0 - ------------------------------------------------------------------------------ Hawker Pacific Aerospace 4.4/(4)/ 0.2% 2,540.0 - ------------------------------------------------------------------------------
Enterprise Market Value Volatility/(2)/ Value of Equity -------------------- ---------- ------------ Insider Institutional Public Company 30 Day 90 Day 3/1/02 3/1/02 Ownership/(6)/ Ownership/(6)/ - -------------- -------- ---------- ---------- ------------ -------------- --------------- Aar Corp 34.0% 46.0% $ 407.6 $ 199.8 52.0% 84.0% Aviall Inc 65.5% 58.9% 263.8 133.2 27.0% 50.0% First Aviation Svcs Inc 52.5% 58.1% 21.8 33.1 56.0% 30.0% Mercury Air Group Inc 44.5% 52.0% 95.3 30.4 32.0% 21.0% Pemco Aviation Inc 23.6% 62.8% 81.3 67.6 83.0% 17.0% Sequa Corp -Cl A 34.5% 29.9% 1,115.3 539.1 50.0% 31.0% BBA Group plc 22.8% 40.9% 2,622.3 1,662.0 NA NA Vector Aerospace 57.9% 69.5% 173.5 71.2 NA NA Median 39.5% 55.0% 218.7 $ 102.2 51.0% 30.5% - ------------------------------------------------------------------------------------------------------------ Hawker Pacific Aerospace 182.0% 128.2% $ 92.5/(5)/ $ 21.5/(5)/ 2.0% 82.9%/(2)/ - ------------------------------------------------------------------------------------------------------------ Stock Analyst Revenue Public Company Exchange Coverage(#)/(2)/ Multiples - -------------- ---------- ---------------- ----------- Aar Corp NYSE 4 0.53 x Aviall Inc NYSE 2 0.51 x First Aviation Svcs Inc NASDAQ 0 0.21 x Mercury Air Group Inc AMEX 0 0.22 x Pemco Aviation Inc NASDAQ 0 0.50 x Sequa Corp -Cl A NYSE 0 0.62 x BBA Group plc London 25 1.20 x Vector Aerospace Toronto 7 0.80 x Median 0.53 x - ------------------------------------------------------------------------- Hawker Pacific Aerospace NASDAQ 0/(2)/ 1.12 x - -------------------------------------------------------------------------
(1) Per Compustat, figures represented in thousands. (2) Per Bloomberg. (3) Float represented in thousands of shares. (4) Average trading volume for HPAC reflects prior to the announcement of LHT contemplated acquisition of the remaining shares outstanding. (5) Figures based upon stock price prior to LHT's announced contemplation of acquiring the remaining shares outstanding. (6) Per Yahoo Finance. - --------------------------------------------- Houlihan Lokey Howard & Zukin 8 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Financial Performance - Historical ($ in millions)
1999A FYE ------------------------------------------------------------------ 1Q99 2Q99 3Q99 4Q99 1999A ================================================================== Revenue $ 16.2 $ 17.4 $ 23.5 $ 25.3 $ 82.3 COGS 12.8 18.1 18.5 19.8 69.2 ------ ------ ------- ------ ------- Gross profit 3.4 (0.7) 5.0 5.5 13.1 SG&A 2.2 2.5 2.5 3.2 10.4 ------ ------ ------- ------ ------- Operating income 1.2 (3.2) 2.5 2.3 2.7 Interest (income)/expense 1.1 1.5 1.6 1.7 6.0 Other expenses - - - 0.1 0.1 ------ ------ ------- ------ ------- Pretax income 0.1 (4.7) 0.8 0.5 (3.3) Income (benefit)/taxes 0.0 (1.8) 0.3 0.4 (1.1) ------ ------ ------- ------ ------- Net income 0.0 (3.0) 0.5 0.2 (2.3) Other - - - 0.3 0.3 Preferred Stock Dividend - - - - - ------ ------ ------- ------ ------- Total - - - 0.3 0.3 Net income available to shareholders $ 0.0 $ (3.0) $ 0.5 $ (0.1) $ (2.5) Basic 5.822 5.822 5.858 5.822 5.822 Dilutive 0.008 - 0.005 - - ------ ------ ------- ------ ------- Total Shares Outstanding 5.830 5.822 5.862 5.822 5.822 EPS $ 0.01 $(0.51) $ 0.09 $(0.02) $ (0.44) Margins - ------- Gross Profit 21.0% -4.0% 21.1% 21.6% 15.9% COGS 79.0% 104.0% 78.9% 78.4% 84.1% SG&A 13.5% 14.5% 10.6% 12.5% 12.6% Operating income 7.4% -18.6% 10.5% 9.1% 3.3% Net income 0.2% -17.1% 2.2% 0.6% -2.7%
2000A FYE ------------------------------------------------------------------ 1Q00 2Q00 3Q00 4Q00 2000A ================================================================== Revenue $ 21.5 $ 20.3 $ 18.5 $ 16.7 $ 77.1 COGS 17.4 16.9 17.5 17.9 69.7 ------ ------ ------- ------ ------- Gross profit 4.1 3.4 1.0 (1.1) 7.4 SG&A 2.9 2.2 2.9 3.1 11.1 ------ ------ ------- ------ ------- Operating income 1.2 1.2 (1.9) (4.2) (3.7) Interest (income)/expense 1.7 2.3 2.6 2.2 8.8 Other expenses 0.1 0.0 1.8 (0.0) 1.9 ------ ------ ------- ------ ------- Pretax income (0.6) (1.1) (6.3) (6.4) (14.4) Income (benefit)/taxes (0.2) (0.5) 4.8 (0.0) 4.1 ------ ------ ------- ------ ------- Net income (0.4) (0.7) (11.1) (6.4) (18.5) Other 1.1 0.8 - 0.0 2.0 Preferred Stock Dividend 0.1 0.1 0.1 0.1 0.3 ------ ------ ------- ------ ------- Total 1.2 0.9 0.1 0.1 2.3 Net income available to shareholders $ (1.6) $ (1.6) $ (11.1) $ (6.5) $ (20.7) Basic 5.823 5.825 5.855 7.024 7.024 Dilutive - - - - - ------ ------ ------- ------ ------- Total Shares Outstanding 5.823 5.825 5.855 7.024 7.024 EPS $(0.27) $(0.27) $ (1.90) $(0.92) $ (2.95) Margins - ------- Gross Profit 18.9% 16.8% 5.4% -6.7% 9.5% COGS 81.1% 83.2% 94.6% 106.7% 90.5% SG&A 13.4% 11.0% 15.7% 18.3% 14.4% Operating income 5.5% 5.8% -10.3% -25.0% -4.8% Net income -1.6% -3.3% -59.8% -38.2% -24.0%
2001E FYE ------------------------------------------------------------------- 1Q01 2Q01 3Q01 4Q01E 2001E/(1)/ =================================================================== Revenue $ 18.9 $ 21.2 $ 22.5 $ 19.9 $ 82.6 COGS 14.9 20.4 19.5 19.7 74.5 ------ ------- ------- ------- ------- Gross profit 4.0 0.9 3.0 0.2 8.1 SG&A 3.1 3.3 2.8 3.8 12.9 ------ ------- ------- ------- ------- Operating income 0.9 (2.4) 0.3 (3.6) (4.8) Interest (income)/expense 2.0 1.3 1.2 1.1 5.7 Other expenses - (0.0) - 0.0 (0.0) ------ ------- ------- ------- ------- Pretax income (1.1) (3.7) (1.0) (4.7) (10.5) Income (benefit)/taxes - - - - - ------ ------- ------- ------- ------- Net income (1.1) (3.7) (1.0) (4.7) (10.5) Other - - - - - Preferred Stock Dividend - - - - - ------ ------- ------- ------- ------- Total - - - - - Net income available to shareholders $ (1.1) $ (3.7) $ (1.0) $ (4.7) $ (10.5) Basic 7.581 10.161 10.162 10.162 10.162 Dilutive - - - - - ------ ------- ------- ------- ------- Total Shares Outstanding 7.581 10.161 10.162 10.162 10.162 EPS $(0.14) $ (0.37) $ (0.10) $ (0.46) $ (1.03) Margins - ------- Gross Profit 21.2% 4.1% 13.5% 1.0% 9.8% COGS 78.8% 95.9% 86.5% 99.0% 90.2% SG&A 16.2% 15.5% 12.4% 19.1% 15.7% Operating income 4.9% -11.4% 1.1% -18.0% -5.8% Net income -5.7% -17.5% -4.3% -23.7% -12.7%
Footnotes: - --------- (1) FYE 2001 figures are based upon management's preliminary financial results. - --------------------------------------------- Houlihan Lokey Howard & Zukin 9 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Financial Performance - Projected ($ in millions)
------------------------------------ 2002P/(1)/ Fiscal Year Ending December 31,/(1)/ -------------------------------------- ------------------------------------ 1Q02 2Q02 3Q02 4Q02 2002P 2003P 2004P ====================================== ==================================== Revenue $ 20.6 $ 21.3 $ 23.6 $ 21.1 $ 86.6 $ 95.2 $ 105.0 COGS 17.7 17.6 20.1 17.4 72.7 77.3 84.0 ------- ------- ------- ------- ------- ------- ------- Gross profit 3.0 3.7 3.6 3.7 13.9 17.9 21.0 SG&A 2.9 2.9 2.9 2.9 11.6 12.6 14.0 ------- ------- ------- ------- ------- ------- ------- Operating income 0.1 0.8 0.6 0.7 2.3 5.3 7.0 Interest (income)/expense 1.0 1.0 1.0 1.0 4.0 3.8 3.3 Other expenses 0.0 0.0 0.0 0.0 0.0 -- -- ------- ------- ------- ------- ------- ------- ------- Pretax income (0.9) (0.2) (0.4) (0.3) (1.7) 1.5 3.7 Income (benefit)/taxes -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income (0.9) (0.2) (0.4) (0.3) (1.7) 1.5 3.7 Other -- -- -- -- -- -- -- Preferred Stock Dividend -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total -- -- -- -- -- -- -- Net income available to shareholders $ (0.9) $ (0.2) $ (0.4) $ (0.3) $ (1.7) $ 1.5 $ 3.7 Basic 10.162 10.162 10.162 10.162 10.162 10.162 10.162 Dilutive -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Total Shares Outstanding 10.162 10.162 10.162 10.162 10.162 10.162 10.162 EPS $ (0.09) $ (0.02) $ (0.04) $ (0.03) $ (0.17) $ 0.15 $ 0.36 Margins - ------- Gross Profit 14.3% 17.4% 15.0% 17.5% 16.1% 18.8% 20.0% COGS 85.7% 82.6% 85.0% 82.5% 83.9% 81.2% 80.0% SG&A 13.8% 13.6% 12.3% 14.0% 13.4% 13.2% 13.3% Operating income 0.5% 3.8% 2.7% 3.6% 2.7% 5.6% 6.7% Net income -4.4% -0.9% -1.6% -1.2% -2.0% 1.6% 3.5%
Footnotes: - --------- (1) Projections are based upon management's modified representations of future performance. - -------------------------------------------- Houlihan Lokey Howard & Zukin 10 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Historical Balance Sheet ($ in millions)
As of December 31, ------------------------------------------------- Assets 1998 1999 2000 2001E - ------ ------------------------------------------------- Current Assets: Cash & Equivalents $ 0.560 $ 2.227 $ 3.349 $ 1.604 Accounts Receivable 12.303 18.506 14.954 13.606 Inventories 21.645 24.680 27.398 31.320 Deferred Tax Assets 0.000 0.531 1.668 0.000 Other Current Assets 0.731 0.550 0.855 2.216 ------------------------------------------------- Total Current Assets 35.239 46.494 48.224 48.745 ------------------------------------------------- Net Fixed Assets 47.175 51.435 48.048 43.750 Other Assets 4.823 5.234 1.727 1.991 ------------------------------------------------- Total Assets $ 87.237 $103.163 $ 97.999 $ 94.486 ================================================= Liabilities & Stockholders' Equity - ---------------------------------- Current Liabilities: Accounts Payable $ 12.171 $ 13.402 $ 9.962 $ 9.975 Current Maturities 48.465 53.240 2.334 1.509 Accrued Expenses 1.242 4.186 6.082 9.669 Other Current Liabilities 2.456 4.892 7.025 5.173 ------------------------------------------------- Total Current Liabilities 64.334 75.720 25.403 26.326 ------------------------------------------------- Long-Term Debt $ 2.500 $ 8.117 $ 70.135 $ 71.062 Other Liabilities 0.000 0.000 0.000 1.179 Deferred Taxes 0.000 0.000 2.980 0.000 ------------------------------------------------- Total Liabilities 66.834 83.837 98.518 98.567 ------------------------------------------------- Stockholders' Equity: Preferred Stock $ 0.000 $ 1.792 $ 0.000 $ 0.000 Common Stock 21.108 22.384 28.682 36.030 Retained Earnings (0.705) (4.850) (29.201) (40.112) ------------------------------------------------- Net Stockholders' Equity 20.403 19.326 (0.519) (4.081) ------------------------------------------------- Total Liabilities & Stockholders' Equity $ 87.237 $103.163 $ 97.999 $ 94.486 =================================================
- -------------------------------------------- Houlihan Lokey Howard & Zukin 11 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Market Perspectives - 52 Week Returns Prior to Announcement ================================================================================ MARKET PERFORMANCE [PRICE PERFORMANCE GRAPH APPEARS HERE] ================================================================================ 52-Week Price Performance - HPAC: -32.2% - HLHZ MRO Index: -7.6% - S&P 500 Index: -12.5% - Nasdaq Composite Index: -23.3% - -------------------------------------------- Houlihan Lokey Howard & Zukin 12 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Market Perspectives - Returns Since September 20, 2000 ================================================================================ MARKET PERFORMANCE SINCE SEPTEMBER 20, 2000 [PRICE PERFORMANCE GRAPH APPEARS HERE] ================================================================================ Price Performance Since Sept. 20, 2000 - HPAC: -50.7% - HLHZ MRO Index: -10.5% - S&P 500 Index: -21.0% - Nasdaq Index: -52.1% - -------------------------------------------- Houlihan Lokey Howard & Zukin 13 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- Investor Profile
- -------------------------------------------------------------------------------------- Percent Holder Name Portfolio Name Share Held/(1)/ Outstanding - -------------------------------------------------------------------------------------- Lufthansa Technik NA 7.451/(2)/ 73.3% - -------------------------------------------------------------------------------------- Dimensional Fund Dimensional Fund 0.392 3.9% Royce & Associates Royce & Associates 0.005 0.0% Michael Riley NA 0.029 0.3% Keybank National Keybank National Company 0.017 0.2% Northern Trust Northern Trust Corp. 0.010 0.1% Barclays Global Barclays Bank plc 0.007 0.1% Mellon C. Baird NA 0.002 0.0% Joel F. McIntyre NA 0.002 0.0% Deutsche Bank Deutsche Bank AG 0.000 0.0% - -------------------------------------------------------------------------------------- Total 0.464 4.6% Total Basic Shares Outstanding 10.162
NA - Not Available Source: Bloomberg (1) Number of shares represented in millions. (2) LHT's holdings include 57,412 beneficiary shares held by certain members of management, committed to vote along with LHT as per the Shareholders Rights and Voting Agreement dated September 20, 2000. - -------------------------------------------- Houlihan Lokey Howard & Zukin 14 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- HPAC - Historical Events Study - -------------------------------------------------------------------------------- HPAC HISTORICAL CLOSING PRICE AND TRADING VOLUME - -------------------------------------------------------------------------------- [HISTORICAL HPAC CLOSING PRICE AND TRADING VOLUME GRAPH APPEARS HERE] Date Stock Price Volume(000's) ---- ----------- ------------- A - September 21, 2000 $6.00 227.0 B - November 15, 2000 $4.72 31.1 C - November 17, 2000 $4.50 12.6 D - November 22, 2000 $3.41 74.2 E - December 14, 2000 $4.50 30.6 F - March 19, 2001 $3.25 8.0 G - May 15, 2001 $3.10 4.1 H - June 27, 2001 $3.26 0.0 I - August 13, 2001 $3.01 5.6 J - November 14, 2001 $2.50 14.8 K - January 16, 2002 $2.35 0.3 L - February 25, 2002 $2.12 1.6 - --------------------------------------------- Houlihan Lokey Howard & Zukin 15 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- HPAC -- Significant Historical Events A September 21, 2000 HPAC announced with LHT, that LHT acquired a controlling interest in the Company. LHT acquired its controlling interest in a private transaction by purchasing 40 percent of the Company's common stock from the shareholders of Unique Investment Corporation. LHT also purchased all outstanding shares of the Company's Series C convertible preferred stock from the private investor group that provided such funding to the Company in December 1999. B November 15, 2000 HPAC announced the closing of a $65 million debt facility with two German banks: Landesbank Hessen-Thuringen Girozentrale ("Helaba") and KfW (Kreditanstalt fur Wiederaufbau). Proceeds from the facility, which was entirely drawn in one funding, had been used to retire the Company's obligations to Heller Financial Inc. C November 17, 2000 HPAC announced that it would delay the issuance of its Quarterly Report on Form 10-Q. The Company previously announced that it had terminated the services of its former independent auditors, and the Company is currently in the process of retaining a new accounting firm. D November 22, 2000 HPAC was notified by Nasdaq that its securities are subject to delisting from The Nasdaq National Market because the Company had not filed its quarterly report on Form 10-Q in a timely manner. The Company announced that it would delay the issuance of its 10-Q report as the Company had not yet received independent account review. E December 14, 2000 HPAC announced its financial results for the third quarter of fiscal year 2000. Revenue for the quarter decreased to $18.5 million from $23.5 million in the third quarter of 1999, while year-to-date revenue increased to $60.3 million from $57.1 million in the first nine months of 1999. Most of the revenue growth was derived from new landing gear contracts and increased component services in the Sun Valley division.
- --------------------------------------------- Houlihan Lokey Howard & Zukin 16 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- HPAC -- Significant Historical Events (Continued) F March 19, 2001 HPAC announced that on March 16, 2001, LHT converted into equity approximately $9.8 million of debt and accrued interest owed to it by Hawker Pacific. The conversion was executed pursuant to a February 6, 2001, debt exchange agreement between the parties. The conversion rate of $3.125 per common share was set equal to the then-current market price, and was determined by the average of the closing bid prices on the five trading days immediately preceding the date of the agreement. Based upon this conversion rate, LHT was issued 3,136,952 shares of the Company's common stock. As a result of these transactions, LHT now owns or controls approximately 67 percent of the outstanding common stock of the Company. G May 15, 2001 The Company announced financial results for the first quarter of fiscal year 2001. Revenue for the quarter decreased by 12 percent to $18.9 million from $21.5 million for the comparable period in 2000. The net loss available to common shareholders in the first quarter was $1.2 million, or $0.14 per basic and diluted share, a compared with $1.5 million, or $0.27 per basic and diluted share, in the prior year. H June 27, 2001 HPAC announced that its majority shareholder, LHT, has provided a revolving line of credit to the Company's wholly owned London subsidiary, Hawker Pacific Aerospace Ltd. The facility, which may be drawn up to an aggregate amount of 5.2 million British pounds sterling (approximately $7.4 million), must be repaid within 364 days.
- --------------------------------------------- Houlihan Lokey Howard & Zukin 17 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of HPAC - -------------------------------------------------------------------------------- HPAC -- Significant Historical Events (Continued) I August 13, 2001 HPAC announced financial results for the second quarter of fiscal year 2001. Second quarter revenue increased by 5 percent to $21.2 million from $20.3 million in 2000, while year-to-date revenue decreased by 4 percent to $40.1 million from $41.8 million in the prior comparable period. The company posted a net loss for the quarter of $3.7 million or $0.37 per common share, as compared with a net loss of $1.6 million or $0.27 per common share, in the second quarter of 2000. The Company also announced that it signed agreements with its majority shareholder, LHT, under which both parties have agreed to cooperate and support each other in providing aircraft component services to their combined customer base, and to provide each other access to their respective capabilities and capacities. The agreements also provided for the parties to continue developing a joint sales and marketing approach, and to further explore purchasing synergies. J November 14, 2001 HPAC announced financial results for the third quarter of fiscal year 2001. Third quarter revenue increased by 2 percent to $22.5 million from $18.5 million in 2000, while year-to-date revenue increased 4 percent to $62.7 million from $60.3 million in the comparable prior year period. The Company posted a net loss for the quarter of $1 million, or $0.10 per common share, as compared with a net loss of $11.1 million or $1.90 per common share, in the third quarter of 2000. K January 16, 2002 The Company announced that it had hired Richard Fortner as President and Chief Executive Officer. Mr. Fortner replaced Dave Lokken who had left the Company to pursue other business interests. Prior to joining HPAC, Mr. Fortner served as President of AAR Landing Gear Services at AAR Corp. L February 25, 2002 Deutsche Lufthansa AG's LHT unit announced that it was contemplating a cash tender offer for all of the shares of HPAC it doesn't already own. LHT would pay $2.90 to $3.25 a share in March for the Hawker shares the unit of Europe's second-biggest airline. LHT completed the purchases of 715,530 common shares of HPAC for $3.25 a share, raising its stake to 73 percent from 67 percent. In response, the Company has formed a committee to evaluate LHT's offer to buy its shares.
- --------------------------------------------- Houlihan Lokey Howard & Zukin 18 - -------------------------------------------------------------------------------- Overview of Deutsche Lufthansa AG - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of Deutsche Lufthansa AG - -------------------------------------------------------------------------------- Company Description - -------------------------------------------------------------------------------- LHT is a subsidiary of Deutsche Lufthansa AG, Europe's second largest passenger airline and cargo airline behind. With 375 jets, including code-sharing agreements, LHT serves about 340 destinations in 90 countries. With hubs in Frankfurt and Munich, the carrier is part of the Star Alliance that includes United Air Lines, Air Canada, and All Nippon Airways. LHT also has interests in travel-related businesses, including ground services, catering, and leisure travel services. LHT owns a stake in Amadeus, one of the world's biggest computer reservation systems, and it's expanding its shipping and logistics operations with partners Deutsche Post and DHL. - -------------------------------------------------------------------------------- Historical Financial Performance /(1)/ ($ in millions)
Fiscal Year Ending December 31, ---------------------------------------------------------------------------- 1996 1997 1998 1999 2000 ============================================================================ Revenue $ 13,547.2 $ 12,874.6 $ 13,573.2 $ 12,892.2 $ 14,327.5 % Growth NA -5.0% 5.4% -5.0% 11.1% COGS 10,651.9 9,694.9 10,310.3 9,971.7 11,739.2 Gross profit 2,895.3 3,179.7 3,262.9 2,920.5 2,588.3 % Margin 21.4% 24.7% 24.0% 22.7% 18.1% EBIT 540.9 987.6 1,849.1 1,304.1 1,464.1 % Margin 4.0% 7.7% 13.6% 10.1% 10.2% EBITDA 1,443.0 1,803.6 2,863.8 2,244.7 2,427.8 % Margin 10.7% 14.0% 21.1% 17.4% 16.9% Net Income $ 359.7 $ 461.7 $ 857.2 $ 635.2 $ 649.4 % Margin 2.7% 3.6% 6.3% 4.9% 4.5% Shares Outstanding 381.6 381.6 381.6 381.6 381.6 EPS - before extraordinary items $ 0.94 $ 1.21 $ 2.25 $ 1.66 $ 1.70 Cash 1,216.8 2,038.2 1,953.1 783.7 957.8 Long-term debt 2,303.9 2,337.6 2,816.9 1,357.7 1,608.0 Debt to EBITDA 1.6 x 1.3 x 1.0 x 0.6 x 0.7 x
NA - Not Available (1) Source: Compustat and Worldscope. - -------------------------------------------------------------------------------- Stock Price Performance Graph - -------------------------------------------------------------------------------- [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] - -------------------------------------------------------------------------------- Acquisition History - --------------------------------------------------------------------------------
Announce Close Pnt. Pnt. Purchase Date Date Target Acquired Owned Price - ------------------------------------------------------ ---------------------------------- 2/10/1999 3/30/1999 Hudson General Corp 100.0% 0.0% $ 133.3 3/11/1999 5/30/1999 SKY CHEFS 14.0% 33.0% 200.4 9/22/1999 9/22/1999 Air Dolomiti 26.0% 0.0% NA 11/9/1999 NA British Midland Airways Ltd. 20.0% 0.0% 151.1 5/3/2000 5/3/2000 Global Freight Exchange 10.0% 0.0% NA 9/21/2000 9/21/2000 Hawker Pacific Aerospace 40.0% 0.0% NA 9/21/2000 1/1/2001 Eurowings Luftverkehrs AG 24.9% 0.0% NA 1/23/2001 NA Composite International, Inc. 100.0% 0.0% NA 12/14/2001 Pending Swissair Flight Support AG 100.0% 0.0% NA
- --------------------------------------------- Houlihan Lokey Howard & Zukin 20 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of Deutsche Lufthansa AG - -------------------------------------------------------------------------------- LHT's Historical Ownership of HPAC
Common -------------------------- Prem./Disc. September 20, 2000 Shares to Market Preferred - ------------------ ----------- ------------- ----------- Upon the closing the purchases for $4.12 per share on September 20, 2000, LHT 2,341,495 -36.3% became the record owner of 2,341,495 shares of Common Stock and controlled the 196,342 voting rights of an additional 196,342 shares of Common Stock. This transaction also gave LHT control over the voting rights of 129,786 options. Upon the closing of the Stock Purchase Agreement with Deephaven Private 300 Placement Trading, Ltd., LHT became the record owner of 300 shares of the Preferred Stock, representing 100% of the then issued and outstanding shares of the Preferred Stock. December 22, 2000 - ----------------- LHT exercised its right to convert all 300 shares of the Preferred Stock and 1,106,982 -34.3% -300 accrued dividend into Common Stock at a conversion price equal to $2.71007 per share of Common Stock. As a result of this conversion, LHT acquired 1,106,982 shares of Common Stock. December 29, 2000 - ----------------- LHT received a portion of the accrued dividends on the Preferred Stock in the 57,404 NA form of an additional 57,404 shares of Common Stock. March 16, 2001 - -------------- On February 6, 2001, HPAC entered into an Exchange of Promissory Note with LHT 3,136,952 -2.0% ("Debt Conversion Agreement") whereby LHT agreed to cancel all of the principal and accrued interest under the Loan Agreement in exchange for shares of Common Stock. Under the Debt Conversion Agreement, the conversion price of $3.125 per share was set equal to the market price at the time the parties entered into the agreement, the market price was calculated based on the average of the closing bid prices for the prior five trading days preceding the date of the agreement. The Debt Conversion Agreement also contains certain covenants substantially similar to those in the Loan Agreement which continue beyond the debt conversion closing. On March 16, 2001, LHT retired the $9,300,000 plus $502,975 accrued interest under the Loan Agreement in exchange for the issuance by HPAC to LHT of 3,136,952 shares of Common Stock.
- -------------------------------------------- Houlihan Lokey Howard & Zukin 21 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Overview of Deutsche Lufthansa AG - -------------------------------------------------------------------------------- LHT's Historical Ownership of HPAC (Continued)
Common -------------------- Prem./Disc. Shares To Market Preferred --------- --------- --------- September 14, 2001 - ------------------ The shareholders of HPAC approved the issuance of the Warrants and the issuance 35,582 NA of 35,582 shares of Common Stock (issued November 21, 2001) in payment of the remaining portion of the accrued and unpaid dividends on the Preferred Stock. LHT did not exercise the Warrants before their expiration. February 25, 2002 - ----------------- LHT purchased for cash 426,600 shares of Common Stock from Royce & Associates, 426,600 53.3% Inc., 150,000 shares of Common Stock from Volksbanken-Kapitalanlageges 150,000 m.b.H., and 138,930 common shares from David Lokken, at a price per share of 138,930 $3.25 or a total purchase price of $2,325,472.50. - ----------------------------------------------------------------------------------------------------------------------- TOTAL SHARES HELD BY LHT/(1)/ 7,451,357 -- Percentage of total HPAC Common Shares Outstanding/(2)/ 73.3%
(1) LHT's holdings include 57,412 beneficiary shares held by certain members of management, committed to vote along with LHT as per the Shareholders Rights and Voting Agreement dated September 20, 2000. (2) 10,160,675 HPAC common shares outstanding as of October 15, 2001. - --------------------------------------------- Houlihan Lokey Howard & Zukin 22 - -------------------------------------------------------------------------------- Valuation Summary - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Valuation Summary - -------------------------------------------------------------------------------- Valuation Summary
Low High ----------- ------------ Market Approach - --------------- Market Multiple Methodology Speculative Speculative Comparable Transaction Methodology $1.05 $1.99 Income Approach - --------------- Discounted Cash Flow Methodology - Modified Management Case Speculative $0.04 Discounted Cash Flow Methodology - Management Case $0.33 $1.43 Pre-Announcement Share Price as of February 25, 2002 $2.12
- --------------------------------------------- Houlihan Lokey Howard & Zukin 24 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Valuation Summary - -------------------------------------------------------------------------------- Premium Study - ---------------------------------------------------------------- LHT's Contemplated Cash Tender Offer - ---------------------------------------------------------------- Low High ========== ========= Offer Range $2.90 -- $3.25 Price as of 2/25/02 $2.12 -- $2.12 Implied Premium 36.8% -- 53.3% 5-Day Average Share Price $2.19 $2.19 Implied Premium 32.4% -- 48.4% 10-Day Average Share Price $2.41 $2.41 Implied Premium 20.3% -- 34.8% 20-Day Average Share Price $2.44 $2.44 Implied Premium 18.6% -- 33.0% 30-Day Average Share Price $2.36 $2.36 Implied Premium/Discount 22.8% -- 37.6% - ---------------------------------------------------------------- Implied EV / Revenue 0.86 x -- 0.86 x - ---------------------------------------------------------------- - -------------------------------------------- Premiums Paid for Minority Interests/(1)/ - -------------------------------------------- Low High ========== ========== 1-Day - ----- Range -11.1% -- 279.3% Median/(3)/ 27.6% Mean/(3)/ 48.4% 7-Days - ------ Range -12.1% -- 281.5% Median/(3)/ 39.4% Mean/(3)/ 48.6% 30-Days - ------- Range -7.0% -- 279.3% Median/(3)/ 41.2% Mean/(3)/ 52.5% - -------------------------------------------- EV / Revenue NA -- NA - -------------------------------------------- - -------------------------------------------- Control Premium Study/(2)/ - -------------------------------------------- Low High ========== ========== Range -97.6% -- 610.0% Median/(3)/ 35.9% Mean/(3)/ 52.1% - -------------------------------------------- EV / Revenue NA -- NA - -------------------------------------------- - ------------------------------------------- Comparable Transaction Analysis/(4)/ - ------------------------------------------- Low High ========= ========= Range NA -- NA Median NA Mean NA - ------------------------------------------- EV / Revenue 1.09 x -- 1.52 x - ------------------------------------------- - ------------------------------------------- Premiums/Discounts Paid by LHT in Prior Transactions with HPAC - ------------------------------------------- Low High ========== ========= Range -36.3% -- 53.3% - ------------------------------------------- - -------------------------------------------------------------------------------- CONCLUSION: LHT's potential cash tender offer per share provides a premium to the pre-announce price per share of HPAC. Based on the above analysis, this premium is in the range of premiums paid for minority interests by a controlling shareholder and premiums paid for change of control transaction. Also, the implied EV / Revenue multiple based on LHT's potential cash tender offer is in the range of similar change of control transactions that have taken place in the MRO subsector of the Aerospace industry. - -------------------------------------------------------------------------------- (1) Premiums Paid for Minority Interest based upon 108 transactions across all industries from 1997 to March 4, 2002. (2) Control Premium Study based upon 908 transactions across all industries during 2001. (3) Calculation does not include negative premiums. (4) Transactions analysis data is comprised of acquisitions made in the MRO subsector of the aerospace industry, from January 2000 to March 4, 2002. - --------------------------------------------- Houlihan Lokey Howard & Zukin 25 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Valuation Summary - -------------------------------------------------------------------------------- Fairness Summary
Tender Offer Pre-Announce 5-Day 10-Day 20-Day 30-Day Price Price Avg. Price Avg. Price Avg. Price Avg. Price ------------- ------------- ------------ ------------ ------------ ------------ 3.25 2.12 2.19 2.41 2.44 2.36 Total Shares Outstanding 10.2 10.2 10.2 10.2 10.2 10.2 -------- -------- -------- -------- -------- -------- Implied Market Value of Equity $33.0 $21.5 $22.3 $24.5 $24.8 $24.0 Add: Net Debt 71.0 71.0 71.0 71.0 71.0 71.0 -------- -------- -------- -------- -------- -------- Enterprise Value $104.0 $92.5 $93.2 $95.5 $95.8 $94.9 Implied EV / Revenue 1.26 x 1.12 x 1.13 x 1.16 x 1.16 x 1.15 x Implied Premium Over --------------------------------------------------------------------- Pre-Announce 5-Day 10-Day 20-Day 30-Day Price Avg. Price Avg. Price Avg. Price Avg. Price ------------- ------------ ------------ ------------ ------------ 53.3% 48.4% 34.9% 33.2% 37.7%
Observations . The cash tender offer price of $3.25 implied a revenue multiple of 1.26x, which is in the range of what strategic buyers have paid for more profitable companies whose EBITDA margins ranged between 10 and 20 percent. . The 53.3 percent premium over the pre-announcement share price of $2.12 appears to be fair. Conclusion The cash tender offer of $3.25 per share is fair from a financial point of view. - -------------------------------------------- Houlihan Lokey Howard & Zukin 26 - -------------------------------------------------------------------------------- Market Multiple Methodology - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Market Multiple Methodology - -------------------------------------------------------------------------------- Market Multiple Methodology (figures in millions)
Representative Selected Indicated Level Multiple Range Enterprise Value Range -------------- ------------------ --------------------------- LTM Revenues (1) $82.581 0.20 x -- 0.50 x $16.520 -- $41.290 NFY Revenues (2) $86.600 0.20 x -- 0.50 x $17.320 -- $43.300 Mean $16.920 -- $42.295 Selected Enterprise Value Range, on a Minority Interest Basis $17.000 -- $43.000 Less: Total Interest-Bearing Debt, net of Cash 70.967 70.967 Add: Value of NOL 4.184 -- 4.184 Less: Option Value 0.000 -- 0.000 ----------- ----------- Aggregate Value of Minority Interest, as if Marketable Speculative -- Speculative - -------------------------------------------------------------------------------------------------------------- Price Per Share Speculative -- Speculative - --------------------------------------------------------------------------------------------------------------
Footnotes: - ---------- (1) Revenue figure based upon preliminary financial results. (2) Figure based upon management's modified forecasted performance. - -------------------------------------------- Houlihan Lokey Howard & Zukin 28 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Market Multiple Methodology - -------------------------------------------------------------------------------- Multiple Selection Analysis
Range --------------------- Low High Mean Median Selected Range Percent of Median ------- ------ ------ ------- ------------------ ----------------- LTM Revenues 0.21 x 1.20 x 0.57 x 0.52 x 0.20 x -- 0.50 x 38.4% -- 96.1% NFY Revenues 0.79 x 1.17 x 0.98 x 0.98 x 0.20 x -- 0.50 x 20.4% -- 51.1%
- --------------------------------------------- Houlihan Lokey Howard & Zukin 29 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Market Multiple Methodology - -------------------------------------------------------------------------------- Representative Levels (figures in millions)
Fiscal Year Ended December 31, - ----------------------------------------------------------------------------------------------------------- 1999 2000 2001E 2002P 2003P - ----------------------------------------------------------------------------------------------------------- Reported Revenue $ 82.318 $77.059 $82.581 $86.600 $ 95.200 Less: Cost of Goods Sold 69.197 69.704 74.458 72.700 77.300 ---------------------------------------------------------- Gross Profit $ 13.121 $7.355 $ 8.123 $13.900 $ 17.900 Less: Selling, General & Administrative 10.372 11.092 12.948 11.600 12.600 Add: Depreciation and Amortization 4.057 4.797 4.275 4.604 5.066 Add: Adjustments (1) 1.586 1.478 1.370 0.000 0.000 ---------------------------------------------------------- Adjusted EBITDA $ 8.392 $ 2.538 $ 0.820 $ 6.904 $ 10.366 Less: Depreciation and Amortization 4.057 4.797 4.275 4.604 5.066 ---------------------------------------------------------- Adjusted EBIT $ 4.335 $(2.259) $(3.455) $ 2.300 $ 5.300 Less: Interest Expense (2) 6.001 6.712 5.690 4.003 3.772 ---------------------------------------------------------- Adjusted Pre-tax Income $ (1.666) $(8.971) $(9.145) $(1.703) $ 1.528 Less: Taxes @ 40.0% (0.666) (3.588) (3.658) (0.681) 0.611 ---------------------------------------------------------- Adjusted Net Income $ (1.000) $(5.383) $(5.487) $(1.022) $ 0.917 Add: Depreciation and Amortization 4.057 4.797 4.275 4.604 5.066 ---------------------------------------------------------- Adjusted Cash Flow $ 3.057 $(0.586) $(1.212) $ 3.582 $5.983 Net Book Value (tangible) $ 17.534 NMF NMF NMF NMF Total Assets $103.163 $97.999 $94.486 $99.455 $108.069
Footnotes: - --------- (1) Adjustments: Asset Write-down $0.826 $0.830 $0.000 $0.000 $0.000 Severance (departing management) 0.760 0.648 0.850 0.000 0.000 Other Adjustments 0.000 0.000 0.520 0.000 0.000 -------------------------------------------------------- Total Adjustments $1.586 $1.478 $1.370 $0.000 $0.000
(2) Interest Expense has been adjusted to exclude borrowing costs in attributed to penalties and fees incurred by the Company. - --------------------------------------------- Houlihan Lokey Howard & Zukin 30 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Market Multiple Methodology - -------------------------------------------------------------------------------- Risk Analysis Rankings Size Size (Revenue, millions) (Enterprise Value, millions) - ------------------------------------------------------------------------------- Name Value Name Value - ------------------------------------------------------------------------------- BBA Group plc $2,178.9 BBA Group plc $2,622.3 Sequa Corp -Cl A $1,785.9 Sequa Corp -Cl A $1,115.3 Aar Corp $769.0 Aar Corp $407.6 Aviall Inc $516.9 Aviall Inc $263.8 Mercury Air Group Inc $428.8 Vector Aerospace $173.5 Vector Aerospace $217.6 Mercury Air Group Inc $95.3 Pemco Aviation Inc $161.4 Hawker Pacific Aerospace Inc $92.5 First Aviation Svcs Inc $105.0 Pemco Aviation Inc $81.3 Hawker Pacific Aerospace Inc $82.6 First Aviation Svcs Inc $21.8 Historical Growth Historical Growth (2-Year EBITDA) (1-Year EBITDA) - ------------------------------------------------------------------------------- Name Value Name Value - ------------------------------------------------------------------------------- BBA Group plc 11.5% Aviall Inc 36.3% Pemco Aviation Inc 8.7% Sequa Corp -Cl A 2.7% Mercury Air Group Inc 5.1% BBA Group plc 1.3% Vector Aerospace 3.4% Mercury Air Group Inc -1.8% Sequa Corp -Cl A -2.3% Vector Aerospace -5.8% Aviall Inc -3.0% Pemco Aviation Inc -24.5% First Aviation Svcs Inc -14.8% Aar Corp -30.8% Aar Corp -17.4% Hawker Pacific Aerospace Inc -67.7% Hawker Pacific Aerospace Inc -68.7% First Aviation Svcs Inc -81.9% Profitability Relative Depreciation (EBITDA to Revenue) (Depreciation to EBITDA) - ------------------------------------------------------------------------------- Name Value Name Value - ------------------------------------------------------------------------------- BBA Group plc 17.6% Hawker Pacific Aerospace Inc NMF Vector Aerospace 12.7% First Aviation Svcs Inc 98.0% Pemco Aviation Inc 11.1% Sequa Corp -Cl A 51.4% Sequa Corp -Cl A 10.1% Mercury Air Group Inc 43.4% Aviall Inc 8.0% Aar Corp 38.1% Aar Corp 6.2% BBA Group plc 33.3% Mercury Air Group Inc 5.4% Aviall Inc 26.1% First Aviation Svcs Inc 1.3% Pemco Aviation Inc 22.0% Hawker Pacific Aerospace Inc 1.0% Vector Aerospace 19.2% Historical Growth Historical Growth (2-Year Revenue) (1-Year Revenue) - ------------------------------------------------------------------------------- Name Value Name Value - ------------------------------------------------------------------------------- Mercury Air Group Inc 48.1% Mercury Air Group Inc 43.1% First Aviation Svcs Inc 26.4% Aviall Inc 30.7% Vector Aerospace 13.8% First Aviation Svcs Inc 17.5% BBA Group plc 13.7% Vector Aerospace 16.6% Aviall Inc 9.6% BBA Group plc 9.9% Pemco Aviation Inc 6.8% Hawker Pacific Aerospace Inc 7.2% Hawker Pacific Aerospace Inc 0.2% Sequa Corp -Cl A 3.6% Sequa Corp -Cl A -1.1% Pemco Aviation Inc -4.5% Aar Corp -8.8% Aar Corp -14.7% Projected Growth Projected Growth (1-Year EBITDA) (5-Year EPS) - ------------------------------------------------------------------------------- Name Value Name Value - ------------------------------------------------------------------------------- Aar Corp NA First Aviation Svcs Inc NA Aviall Inc NA Mercury Air Group Inc NA First Aviation Svcs Inc NA Pemco Aviation Inc NA Mercury Air Group Inc NA Sequa Corp -Cl A NA Pemco Aviation Inc NA Hawker Pacific Aerospace Inc NA Sequa Corp -Cl A NA BBA Group plc 20.4% Hawker Pacific Aerospace Inc NA Vector Aerospace 12.6% Vector Aerospace 5.1% Aar Corp 6.0% BBA Group plc -7.4% Aviall Inc -10.7% Internal Investment (Capital Expenditures to Liquidity Revenue) (Current Ratio) - ------------------------------------------------------------------------------- Name Value Name Value - ------------------------------------------------------------------------------- BBA Group plc 10.4% First Aviation Svcs Inc 4.7 Pemco Aviation Inc 5.4% Aviall Inc 2.7 Sequa Corp -Cl A 5.2% Aar Corp 2.6 Aviall Inc 3.6% Sequa Corp -Cl A 2.6 Vector Aerospace 3.4% BBA Group plc 1.9 Aar Corp 1.7% Hawker Pacific Aerospace Inc 1.9 Mercury Air Group Inc 1.3% Vector Aerospace 1.7 Hawker Pacific Aerospace Inc 1.0% Mercury Air Group Inc 1.5 First Aviation Svcs Inc -0.6% Pemco Aviation Inc 1.1 Projected Growth (1-Year Revenue) - --------------------------------------- Name Value - --------------------------------------- Aar Corp NA Aviall Inc NA First Aviation Svcs Inc NA Mercury Air Group Inc NA Pemco Aviation Inc NA Sequa Corp -Cl A NA Hawker Pacific Aerospace Inc 4.9% Vector Aerospace 1.2% BBA Group plc -4.4% Profitability (EBIT to Revenue) - --------------------------------------- Name Value - --------------------------------------- BBA Group plc 11.8% Vector Aerospace 10.3% Pemco Aviation Inc 8.7% Aviall Inc 5.9% Sequa Corp -Cl A 4.9% Aar Corp 3.9% Mercury Air Group Inc 3.1% First Aviation Svcs Inc 0.0% Hawker Pacific Aerospace Inc -4.1% Leverage (Debt to EV) - --------------------------------------- Name Value - --------------------------------------- Hawker Pacific Aerospace Inc 78.4% First Aviation Svcs Inc 74.5% Mercury Air Group Inc 71.4% Aar Corp 64.0% Sequa Corp -Cl A 63.8% Vector Aerospace 59.0% Aviall Inc 50.5% BBA Group plc 38.7% Pemco Aviation Inc 19.3% - --------------------------------------------- Houlihan Lokey Howard & Zukin 31 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Market Multiple Methodology - -------------------------------------------------------------------------------- Comparable Company Debt-Free Multiples (figures in millions)
EV / Revenue ------------------------------------------------------ EV 3-YR Avg. FYE LTM NFY NFY + 1 ----------- ----------- ------- -------- ------- --------- Aar Corp $ 407.598 0.41x 0.47x 0.53x NA NA Aviall Inc 263.824 0.63x 0.54x 0.51x NA NA First Aviation Svcs Inc 21.761 0.27x 0.22x 0.21x NA NA Mercury Air Group Inc 95.261 0.28x 0.20x 0.22x NA NA Pemco Aviation Inc 81.346 0.52x 0.50x 0.50x NA NA Sequa Corp -Cl A 1,115.253 0.63x 0.63x 0.62x NA NA BBA Group plc 2,622.306 1.25x 1.12x 1.20x 1.17x 1.09x Vector Aerospace 173.539 0.91x 0.80x 0.80x 0.79x 0.74x Hawker Pacific Aerospace Inc 92.508 1.15x 1.12x 1.12x NA NA - ------------------------------------------------------------------------------------------------------------- Low 0.27x 0.20x 0.21x 0.79x 0.74x High 1.25x 1.12x 1.20x 1.17x 1.09x Median 0.57x 0.52x 0.52x 0.98x 0.91x Mean 0.61x 0.56x 0.57x 0.98x 0.91x - ------------------------------------------------------------------------------------------------------------- EV / EBITDA ------------------------------------------------------ EV 3-YR Avg. FYE LTM NFY NFY + 1 ----------- ----------- ------- -------- ------- --------- Aar Corp $ 407.598 4.9x 6.3x 8.5x NA NA Aviall Inc 263.824 7.9x 7.4x 6.4x NA NA First Aviation Svcs Inc 21.761 NMF NMF 15.8x NA NA Mercury Air Group Inc 95.261 3.6x 3.5x 4.1x NA NA Pemco Aviation Inc 81.346 5.4x 5.7x 4.5x NA NA Sequa Corp -Cl A 1,115.253 5.6x 5.7x 6.2x NA NA BBA Group plc 2,622.306 6.7x 6.2x 6.8x 6.7x 6.0x Vector Aerospace 173.539 6.3x 6.3x 6.3x 6.0x 5.2x Hawker Pacific Aerospace Inc 92.508 24.0x NMF NMF NA NA - ------------------------------------------------------------------------------------------------------------- Low 3.6x 3.5x 4.1x 6.0x 5.2x High 7.9x 7.4x 15.8x 6.7x 6.0x Median 5.6x 6.2x 6.3x 6.3x 5.6x Mean 5.8x 5.9x 7.3x 6.3x 5.6x - -------------------------------------------------------------------------------------------------------------
Note: Hawker Pacific Aerospace Inc. is excluded from the Low, High, Median and Mean calculations. The Company's multiples are based upon the pre-announcement closing price of $2.12. - -------------------------------------------- Houlihan Lokey Howard & Zukin 32 - -------------------------------------------------------------------------------- Comparable Transaction Methodology - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Comparable Transaction Methodology - -------------------------------------------------------------------------------- Comparable Transaction Methodology (figures in millions)
Representative Selected Indicated Level Multiple Range Enterprise Value Range -------------- ------------------ --------------------------- LTM Revenues $82.581 0.95 x -- 1.10 x $78.450 -- $90.840 Selected Enterprise Value Range, on a Controlling Interest Basis $79.000 -- $91.000 Less: Total Interest-Bearing Debt, net Cash 70.967 70.967 --------- --------- Value of Total Equity, on a Controlling Interest Basis $ 8.033 -- $20.033 Less: Minority Interest Discount @ 23.1% (1) 1.506 -- 3.756 --------- --------- Aggregate Value of Minority Interest, as if Marketable $ 6.527 -- $16.277 Add: Value of NOL 4.184 4.184 Less: Option Value 0.069 -- 0.230 --------- --------- Marketable Minority Equity Value $10.642 -- $20.231 - ------------------------------------------------------------------------------------------------------------- Price Per Share $1.05 -- $1.99 - -------------------------------------------------------------------------------------------------------------
Footnotes: - ---------- (1) Based upon a control premium of 30.0 percent. - -------------------------------------------- Houlihan Lokey Howard & Zukin 34 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Comparable Transaction Methodology - -------------------------------------------------------------------------------- Comparable Transaction Analysis ($ in millions)
Target LTM Method Enter- EV EV EV Seller - Target Business ------------------- of prise to to to Announced Closed Unit Sold Buyer Description: Revenue EBIT EBITDA Payment Value EBITDA EBIT Revenue - --------- --------- -------------- --------------- ------------------ ------- ---- ------ ------- ------ ------ ---- ------- 7-Jan-02 Reliance Empresa Provides * * * Aerotech Brasileiras de maintenance and Inc - Celsius Aeronautica SA modification of Aerotech Inc aircraft 3-Oct-01 Spar L-3 Global provider 91.3 13.8 17.2 139.2 8.1x 10.1x 1.52x Aerospace Communications of turnkey Ltd Corp aviation life cycle management services 18-May-01 AeroGroup Inc American Supplies, * * * Communications aircraft, pilots, Enterprises Inc maintenance and other support services 19-Mar-01 19-Mar-01 Turbotech PWCA Pratt & Supplier of * * * Repairs Inc. Whitney Canada component repairs Corp for small gas turbine engines and auxiliary power 16-Jan-01 16-Jan-01 Gulfstream BBA Group Plc Aircraft Engines Cash 43.0 * * * Aerospace And Engine Parts Corporation - Engine Overhaul Business of Gulfstream 15-Nov-00 11-Jul-01 Ranger BBA Group PLC Provides ground 141.7 14.7 Cash 154.3 * 10.5x 1.09x Aerospace and cargo Corp handling and refueling services to the airline industry 4-Oct-00 4-Oct-00 Honeywell AAR Corp Provides repair 20.0 Cash * * * International and distribution Inc - Hermetic services to the Aircraft North American International aviation Corp aftermarket 24-Jul-00 24-Jul-00 Airborne Triumph Repairs and Cash * * * Nacelle Group Inc overhauls complex Services Inc parts for a broad spectrum of the aerospace industry 5-Jun-00 Lynton BBA Group PLC Performs aviation 56.0 2.5 5.4 Cash 81.6 15.0x 32.2x 1.46x Group Inc sales and services 24-Apr-00 24-Apr-00 Fort Wayne Air Mercury Air Provides aircraft 3.9 * * * Service Inc Group Inc maintenance, repair, and refueling services 24-Apr-00 24-Apr-00 Consolidated Mercury Air Provides aircraft * * * Airways Inc Group Inc maintenance, repair, and refueling services 10-Jan-00 10-Jan-00 Quantum Honeywell Provides aerospace * * * Laser Corp International repair services Inc ---------------------------------------------------------- Min 20.0 2.5 5.4 3.9 8.1x 10.1x 1.09x Max 141.7 13.8 17.2 154.3 15.0x 32.2x 1.52x Median 73.7 8.2 14.7 81.6 11.6x 10.5x 1.46x Mean 77.3 8.2 12.4 84.4 11.6x 17.6x 1.36x ----------------------------------------------------------
Source: Mergerstat * - Not available or excluded from range - -------------------------------------------- Houlihan Lokey Howard & Zukin 35 - -------------------------------------------------------------------------------- Discounted Cash Flow Methodology - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Disounted Cash Flow Methodology - -------------------------------------------------------------------------------- Discounted Cash Flow Methodology - Modified Management Case /(1)/ (figures in millions)
Projected Fiscal Year Ending December 31, ----------------------------------------------- 2002 2003 2004 ----------------------------------------------- EBIT $ 1.917 $ 5.300 $ 7.000 Less: Taxes 0.767 2.120 2.800 ----------------------------------------------- Debt-Free Earnings $ 1.150 $ 3.180 $ 4.200 Less: Capital Expenditures (3.100) (6.125) (7.910) Less: Working Capital Requirements (0.801) (1.108) (1.062) Add: Depreciation and Amortization 3.837 5.066 5.634 ----------------------------------------------- Total Net Investment $(0.064) $(2.166) $(3.338) ----------------------------------------------- Net Debt-Free Cash Flows: $ 1.086 $ 1.014 $ 0.862 Discount Period 0.42 1.33 2.33 Discount Factor @ 17.0% 0.94 0.81 0.69 ----------------------------------------------- Present Value of Net Debt-Free Cash Flows: $ 1.017 $ 0.822 $ 0.597
Sensitivity Analysis: Enterprise Value --------------------------------------
Terminal Multiple Discount ------------------------------------------------------- Rate 5.0 x 6.0 x 7.0 x 8.0 x 9.0 x -------- ------- ------- ------- ------- ------- 15.0% $45.003 $53.506 $62.008 $70.511 $79.014 16.0% $43.947 $52.243 $60.540 $68.837 $77.134 17.0% $42.925 $51.022 $59.120 $67.217 $75.315 18.0% $41.935 $49.840 $57.745 $65.649 $73.554 19.0% $40.978 $48.695 $56.413 $64.131 $71.849 Range of Selected Enterprise Values $51.022 -- $67.217 Less: Total Interest-Bearing Debt, net Cash 70.967 70.967 -------- ------- Total Value of Equity (19.945) -- (3.750) Less: Value of NOL 4.184 4.184 Less: Option Value - 0.000 -------- ------- Marketable Minority Equity Value Speculative -- 0.434 Price Per Share Speculative -- $ 0.04
- ------------------------------------------------------- DCF Assumptions - ------------------------------------------------------- Discount Rate 17.0% Tax Rate 40.0% - ------------------------------------------------------- - ------------------------------------------------------- Terminal Value Assumptions - ------------------------------------------------------- Terminal EBITDA (2004) $12.634 Terminal Multiple 7.0 x ------- Terminal Value $88.439 Discount Period 2.83 Discount Factor @ 17.0% 0.64 ------- PV of Terminal Value $56.683 - ------------------------------------------------------- - ------------------------------------------------------- Distribution of Value - ------------------------------------------------------- Period Cash Flow 4.1% Terminal Cash Flow 95.9% ------- Total 100.0% - ------------------------------------------------------- - ------------------------------------------------------- Implied Analyses - ------------------------------------------------------- LTM EBITDA Multiple NMF NFY EBITDA Multiple NMF Implied Gordon Growth Rate 15.9% - ------------------------------------------------------- (1) Modified Management Case represents management's base case expectations adjusted to reflect less aggressive growth and margin expansion. - --------------------------------------------- Houlihan Lokey Howard & Zukin 37 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Discounted Cash Flow Methodology - -------------------------------------------------------------------------------- Discounted Cash Flow Methodology - Management Case (figures in millions)
Projected Fiscal Year Ending December 31, ---------------------------------------------- 2002 2003 2004 EBIT $ 3.398 $10.415 $13.299 Less: Taxes 1.359 4.166 5.320 ---------------------------------------------- Debt-Free Earnings $ 2.039 $ 6.249 $ 7.979 Less: Capital Expenditures (3.100) (6.125) (7.910) Less: Working Capital Requirements (0.801) (1.108) (1.062) Add: Depreciation and Amortization 3.837 5.066 5.634 ---------------------------------------------- Total Net Investment $(0.064) $(2.166) $(3.338) ---------------------------------------------- Net Debt-Free Cash Flows: $ 1.975 $ 4.083 $ 4.641 Discount Period 0.42 1.33 2.33 Discount Factor @ 20.0% 0.93 0.78 0.65 ---------------------------------------------- Present Value of Net Debt-Free Cash Flows: $ 1.830 $ 3.202 $ 3.033
Sensitivity Analysis: Enterprise Value --------------------------------------
Terminal Multiple Discount ----------------------------------------------------- Rate 5.0 x 5.5 x 6.0 x 6.5 x 7.0 x ----------------------------------------------------------------- 18.0% $67.500 $73.422 $79.345 $85.268 $91.191 19.0% $65.996 $71.778 $77.561 $83.344 $89.127 20.0% $64.538 $70.186 $75.833 $81.480 $87.128 21.0% $63.126 $68.642 $74.159 $79.675 $85.191 22.0% $61.757 $67.146 $72.535 $77.924 $83.313 Range of Selected Enterprise Values $70.186 -- $81.480 Less: Total Interest-Bearing Debt, net Cash 70.967 70.967 ------- ------- Total Value of Equity (0.781) -- 10.513 Add: Value of NOL 4.184 4.184 Less: Option Value 0.008 0.124 ------- ------- Marketable Minority Equity Value 3.395 -- 14.573 Price Per Share $0.33 -- $1.43
- ------------------------------------------------------ DCF Assumptions - ------------------------------------------------------- Discount Rate 20.0% Tax Rate 40.0% - ------------------------------------------------------- - ------------------------------------------------------- Terminal Value Assumptions - ------------------------------------------------------- Terminal EBITDA (2004) $ 18.933 Terminal Multiple 6.0 x -------- Terminal Value $113.598 Discount Period 2.83 Discount Factor @ 20.0% 0.60 -------- PV of Terminal Value $ 67.768 - ------------------------------------------------------- - ------------------------------------------------------- Distribution of Value - ------------------------------------------------------- Period Cash Flow 10.6% Terminal Cash Flow 89.4% ------ Total 100.0% - ------------------------------------------------------- - ------------------------------------------------------- Implied Analyses - ------------------------------------------------------- LTM EBITDA Multiple NMF NFY EBITDA Multiple NMF Implied Gordon Growth Rate 15.3% - ------------------------------------------------------- - --------------------------------------------- Houlihan Lokey Howard & Zukin 38 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Discounted Cash Flow Methodology - -------------------------------------------------------------------------------- Weighted Average Cost of Capital (figures in millions)
Market Debt to Preferred to Equity to Preferred Value of Total Debt to Total Total Total Debt Stock Equity Capitalization Equity Capitalization Capitalization Capitalization -------- --------- -------- -------------- ------- -------------- -------------- -------------- Aar Corp $260.9 $0.0 $199.8 $460.7 130.6% 56.6% 0.0% 43.4% Aviall Inc $133.2 $0.0 $133.2 $266.4 100.0% 50.0% 0.0% 50.0% First Aviation Svcs Inc $16.2 $0.0 $33.1 $49.3 48.9% 32.8% 0.0% 67.2% Mercury Air Group Inc $68.1 $0.0 $30.4 $98.5 223.8% 69.1% 0.0% 30.9% Pemco Aviation Inc $15.7 $0.0 $67.6 $83.3 23.2% 18.8% 0.0% 81.2% Sequa Corp -Cl A $711.3 $4.0 $539.1 $1,254.4 131.9% 56.7% 0.3% 43.0% BBA Group plc $1,014.0 $84.5 $1,662.0 $2,760.5 61.0% 36.7% 3.1% 60.2% Vector Aerospace $102.3 $0.0 $71.2 $173.5 143.7% 59.0% 0.0% 41.0% Hawker Pacific Aerospace Inc $72.6 $0.0 $21.5 $94.1 336.9% 77.1% 0.0% 22.9% - --------------------------------------------------------------------------------------------------------------------------------- Median $102.3 $0.0 $71.2 $173.5 130.6% 56.6% 0.0% 43.4% Mean $266.0 $9.8 $306.5 $582.3 133.3% 50.8% 0.4% 48.9% - ---------------------------------------------------------------------------------------------------------------------------------
Decile Adjusted Equity Size Levered Unlevered Based Unlevered Risk Risk Cost of Beta Beta Beta Beta Premium (1) Premium (1) Equity ------- --------- ------ --------- ----------- ----------- ------- Aar Corp 0.60 0.34 1.28 0.37 7.8% 1.47% 11.8% Aviall Inc 1.04 0.65 1.34 0.69 7.8% 1.74% 15.5% First Aviation Svcs Inc 0.24 0.19 1.42 0.19 7.8% 4.63% 12.2% Mercury Air Group Inc 0.64 0.27 1.42 0.27 7.8% 4.63% 15.3% Pemco Aviation Inc 0.12* 0.11* 1.42 0.11* 7.8% 4.63% 11.3% Sequa Corp -Cl A 0.51 0.28 1.18 0.34 7.8% 1.08% 10.8% BBA Group plc 1.45 1.06 1.13 1.33 7.8% 0.62% 17.6% Vector Aerospace 0.11* 0.06* 1.42 0.06* 7.8% 4.63% 11.2% Hawker Pacific Aerospace Inc 0.44 0.15 1.42 0.15 7.8% 4.63% 13.8% - --------------------------------------------------------------------------------------------------------------------------------- Median 0.60 0.28 1.42 0.34 12.2% Mean 0.70 0.42 1.34 0.48 13.3% - ---------------------------------------------------------------------------------------------------------------------------------
Footnotes: - ---------- Source: Compustat Weighted Average Cost of Capital (WACC) = (Cost of Debt * (1-Tax Rate) * Debt to Enterprise Value) + (Cost of Equity * Equity to Enterprise Value) + (Cost of Preferred * Preferred to Enterprise Value) Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium) + Size Risk Premium Risk-free rate as of March 1, 2002. (1) Ibbotson Associates, Stocks Bonds Bills and Inflation 2001 Yearbook, pp. 134, 136, and 174. * Excluded from range. - --------------------------------------------- Houlihan Lokey Howard & Zukin 39 - -------------------------------------------------------------------------------- Delisting Risk - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Delisting Risk - -------------------------------------------------------------------------------- The Issue - Potential Delisting of HPAC HPAC received a letter dated February 14, 2001 from the NASDAQ warning of the potential delisting of HPAC's publicly traded common shares if HPAC does not meet the current listing requirements by May 15, 2002. NASDAQ requires all companies that wish to be listed on the exchange to meet the following criteria: i) minimum bid price of three dollars per share, ii) minimum float of three million shares, iii) minimum float dollars of $15 million, and iv) net tangible assets of at least four million dollars. Currently, the net tangible assets of HPAC do not meet the minimum requirements of NASDAQ. Also, without LHT's announced tender offer, it is reasonable to expect HPAC stock price to fall to its pre announcement price, below the three dollar per share threshold. As such, HPAC could potentially be delisted by May 2002. The delisting of HPAC would have a negative impact on the market value of the Company shares. Effects of Being Delisted "If your company's stock is being traded on OTC, it means you probably won't be able to attract institutional investors...Institutional investors also pull more than their investment dollars - they take their analysts with them, making it much harder for companies to generate any kind of buzz about their stock." - Mike Hutchings, Attorney, Gray Cary. "In general, if a stock does get delisted, it's not good news for anybody still holding the shares." -Jay Ritter, finance professor at the University of Florida. "Dropping off the NASDAQ means you essentially drop off everybody's radar screen," - Bill Whitlow, manager of more than $200 million in two mutual funds for Seattle-based Safeco Corp. "There are not the same market makers. There's not the same liquidity." - Richard Rosenblatt, Chief Executive of DrKoop.com - --------------------------------------------- Houlihan Lokey Howard & Zukin 41 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Delisting Risk - -------------------------------------------------------------------------------- Effects of Being Delisted (Continued) . Some institutions, such as mutual funds or large investments firms, don't invest in OTC companies. Without institutional investors companies have a much harder time selling their stocks. . Not being able to sell a stock can also make it harder to retain employees, since stock options make up a significant portion of many compensation packages. . Companies that are delisted by the NASDAQ national market have a number of options, few of them good: - Companies can join the OTC Bulletin Board, a lesser exchange set up by the National Association of Securities Dealers, where penny stocks abound. Failing that, they can fall to the Pink Sheets, a thinly traded exchange where share prices are quoted on printed, pink sheets distributed among certain Wall Street firms. - The reverse stock split is the most immediate method to fight delisting, although it reduces a company's public float. It is rare for delisted companies to reapply for NASDAQ listing. - Another strategy to avoid delisting is for a company to buy back its shares in the market, hoping to shore up the price. But that assumes the registrant has substantial cash levels to initiate the buyback. If that cash is spent buying back shares, it is not available to pay employees, develop new products, pay salespeople or keep the business running. . Avoiding delisting does not just mean temporarily meet the minimal NASDAQ requirements. In a hearing, the NASDAQ officials want to establish that the company has a viable business plan, with enough financial resources in place that it won't collapse, and that it trades actively enough so that the stock won't be vulnerable to manipulation. . A company's share value declines further when the stock is delisted, as liquidity is reduced and trading costs increase. Share values drop an average 55 percent when it begins trading after a delisting from the NASDAQ, according to Tyler Shumway, a finance professor at the University of Michigan who studied the delistings between 1978 and 1995, before NASDAQ tightened its listing standards. One reason the drop is so significant, he states, is that delistings often have coincided with bankruptcy filings by companies that never trade again. - --------------------------------------------- Houlihan Lokey Howard & Zukin 42 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Delisting Risk - -------------------------------------------------------------------------------- Effects of Being Delisted (Continued) . Companies that remain in business can experience sharp drops in their share value. Wavo Corp., a digital media company, dropped 43 percent to 12.5 cents on its first day on the OTC Bulletin Board. Shares of Source Media Inc., an interactive advertising company, sank 27 percent to 50 cents a share on the day the company was delisted from NASDAQ. . Companies facing delisting can request a hearing and then try to persuade NASDAQ that they have a viable business plan already in place and sufficient trading activity. . With thin trading volume, bid-ask spreads -- the difference between the price at which traders are offering to sell a stock and the price at which they are willing to buy it -- can double, says Paul Seguin, a finance professor at the University of Minnesota's Carlson School of Management. Another woe for investors: "A lot of databases don't cover Bulletin Board stocks," says Georgetown University finance professor James Angel. Nor do most analysts cover them. . Delisted stocks are also more vulnerable to market manipulation, both because regulators give them less scrutiny and because it takes less cash to move their prices. Manipulation is "absolutely" a worry, says Mr. Spohn of PopMail.com. "But it's sometimes very difficult to identify if somebody is manipulating your stock. You don't know who is buying and who is selling." . To regain a NASDAQ listing once lost, companies must have a bid price of at least $5 a share. - --------------------------------------------- Houlihan Lokey Howard & Zukin 43 - -------------------------------------------------------------------------------- Potential Alternatives Summary - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Potential Alternatives Summary - -------------------------------------------------------------------------------- Status Quo . Should the transaction not occur, and HPAC continues its normal course of business, or the "status quo" scenario, HPAC would not meet the net tangible asset requirement in order to remain listed on the NASDAQ, by end of May 2002. Further, assuming LHT is amenable converting debt to equity, the Company would meet NASDAQ minimum listing requirements only through November 2002, at which time the increased minimum net tangible asset requirement would force the Company to be in violation of the NASDAQ rules. Strategic Alliance . Sale of Minority Interest to a Strategic Investor - HPAC could pursue an alliance with a new strategic partner. However, on February 25, 2002, LHT announced it intention to repurchase shares of HPAC in a cash tender offer, and since that date, there has been no apparent interest by any other entity. Given LHT's significant ownership interest in HPAC, a strategic equity investor would not have the opportunity to gain control of the Company. Also, a strategic investor seeking to have access the LHT parent, Deutsche Lufthansa AG, for strategic alliance purposes would not use the purchase of minority interest in a non-material entity controlled by one of Deutsche Lufthansa AG's wholly owned subsidiaries such as LHT. Financial Investor . Sale of Minority Interest to Financial Investor - HPAC's Fiscal Year Ending December 31, 2002 budget demonstrates a "break-even" scenario, referred to as a "Black-Zero" by LHT, whereby the Company will attain a net income level slightly above zero. A financial investor would seek significantly higher operating profitability levels than what HPAC is budgeting for fiscal year 2000 through 2005. Further, a financial investor would be concerned with an exit event, which is undefined at the moment. As such, HPAC would have difficulty in attracting a financial investor. - --------------------------------------------- Houlihan Lokey Howard & Zukin 45 - -------------------------------------------------------------------------------- Exhibits - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- AAR Corp. AAR CORP. (AIR) supplies aftermarket products and services to the global aviation/aerospace industry. AIR reports its activities in one business segment: Aviation Services. Three classes of similar products and services are included within this segment: Aircraft and Engines, Airframe and Accessories and Manufacturing. ==================================================================== AAR CORP. DAILY PRICE/VOLUME GRAPH ==================================================================== [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ==================================================================== AIR's Aircraft and Engines activities include the purchase, sale and lease of used commercial jet aircraft; the purchase, sale and lease of a wide variety of new, overhauled and repaired engines and engine products for the aviation aftermarket, including a broad range of spare engines and engine parts and other engine components and accessories; and the overhaul, repair and exchange of a wide range of engine parts and components and other engine support services for its commercial and military customers. AIR also provides customized inventory supply and management programs for engine parts and components in support of customer maintenance activities. The company also provides turbine engine overhaul and parts supply services to industrial gas and steam turbine operators. AIR's Airframe and Accessories activities consist of the purchase, sale and lease of new, overhauled and repaired airframe parts and accessories for the aviation aftermarket; and the overhaul, repair and exchange of a wide variety of airframe and accessory parts and components for its commercial, military and general aviation customers. The company also provides customized inventory supply and management programs for certain airframe parts and components in support of customer maintenance activities. AIR is also an authorized distributor for more than 150 leading aviation/aerospace product manufacturers. - -------------------------------------------- Houlihan Lokey Howard & Zukin 48 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- Aviall, Inc. Aviall, Inc. (AVL), a subsidiary of Ryder System, Inc. prior to its spinoff in December 1993, is an independent global distributor of new aviation parts and supplies. It also provides on-line inventory information services to the aviation and marine industries through wholly owned Inventory Locator Service (ILS). ================================================================================ AVIALL, INC. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ The company believes it is the largest independent global distributor of aircraft parts and supplies, serving both the commercial and general aviation after-markets by providing a link between parts manufacturers, sellers and buyers throughout the world. AVL develops relationships with suppliers who seek advanced inventory management, order processing, forecasting and direct electronic communications with end users. Product lines distributed include piston engines and parts, a variety of airframe spares (oxygen systems, filters, control cables, batteries, actuators and motors), undercarriage items (wheels, brakes and tires) and supplies. Parts are distributed from customer service centers located throughout the world, including North America, Europe and the Asia-Pacific region. AVL has approximately 16,500 customers, to which it sells about 65,500 unique parts. The company is an authorized distributor for manufacturers such as BFGoodrich, Scott Aviation, Telair International, Lord Corp., Federal Mogul Aviation, Textron Lycoming and Honeywell, and in January 2000, under a ten-year agreement, became the exclusive distributor of the Rolls Royce model 250 turbine engine line. - -------------------------------------------- Houlihan Lokey Howard & Zukin 49 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- First Aviation Services Inc. First Aviation Services Inc. (FAVS) supplies aircraft parts and components to the aviation industry worldwide, and provides the aerospace industry with third party logistics and inventory management services. Customers include original equipment manufacturers, passenger and cargo airlines, fleet operators, corporate aircraft operators, fixed base operators, certified repair facilities, governments and military services. ================================================================================ FIRST AVIATION SERVICES INC. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ The company represents more than 150 manufacturers and distributes approximately 80,000 new and factory reconditioned parts and components, selling to professional aircraft maintenance organizations, aircraft operators, including fleet operators and airlines, and FBOs. The parts are approved by the Federal Aviation Administration (FAA) and are acquired from small, specialized manufacturers as well as major original equipment manufacturers such as Goodyear Tire and Rubber, Michelin Aircraft Tire, Federal Mogul, B.F. Goodrich Aerospace, General Electric Lighting, Teledyne Continental Motors, Parker Hannifin, Marathon Power Technologies, Barry Controls, The New Piper Aircraft, Inc. and Cessna Aircraft Co. Most of these suppliers are committed to servicing aftermarket customers solely through wholesale distributors such as API. Distributors add value to commonly available products by offering immediate availability, broad product lines, technical assistance and other value added services, such as logistics and inventory management services. API does not have any long-term agreements or commitments from the original equipment manufacturers from whom it purchases parts and is dependent upon these manufacturers for access to parts for resale. - -------------------------------------------- Houlihan Lokey Howard & Zukin 50 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- Mercury Air Group, Inc. Mercury Air Group, Inc. (MAX) provides services to the aviation industry through four principal operating units: fuel sales, cargo operations, fixed base operations and United States government contract services. ================================================================================ MERCURY AIR GROUP, INC. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ Fuel sales include the sale of fuel and delivery of fuel primarily to domestic and international commercial airlines, business aviation and air freight airlines. The fuel sales division facilitates the management and distribution of aviation fuel for Mercury's airline customers which the major suppliers typically do not service. In this way, MAX serves as a reseller from major oil companies to air carriers, affording oil companies access to these carriers without their assumption of the credit risk for these fuel purchases. The company competes based on quality of its service and by offering a combination of favorable pricing and credit terms, and a real time analysis of the availability, quantity and price of fuel in airports and terminals worldwide. Mercury's revenue from fuel sales and services as a percentage of revenue comprised 66.6 percent of total revenue in fiscal year 2001 (June). Cargo operations consist of cargo handling, space logistics operations and general cargo sales agent services. The company's cargo operations are conducted through its subsidiary, Mercury Air Cargo, Inc., which provides domestic and international air cargo handling, airmail handling and bonded warehousing. Cargo operations comprised 6.6 percent of total revenue for fiscal year 2001. - -------------------------------------------- Houlihan Lokey Howard & Zukin 51 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- Pemco Aviation Group Inc. A diversified aviation and aerospace company, Pemco Aviation Group Inc. (PAGI) is engaged mainly in providing aircraft maintenance and modification services, including complete airframe inspection, maintenance, repair and custom airframe design and modification. ================================================================================ PEMCO AVIATION GROUP INC. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ The company provides these services for government and military customers primarily through its Government Services Group (which accounted for 64 percent of revenues and 84 percent of profits in 2000), which specializes in providing Programmed Depot Maintenance (PDM) on large transport aircraft. In addition to PDM, various other repair, maintenance and modification services are performed for PAGI's customers. The Government Services Group's contracts are multi-aircraft programs generally lasting several years. The company believes its facilities, tooling, experienced labor force, quality and on time delivery record position it as one of the premier United States providers of PDM for large transport aircraft. PAGI's Commercial Services Group (25 percent of 2000 revenues, 8 percent of profit) provides commercial aircraft maintenance and modification services on a contract basis to the owners and operators of large commercial aircraft. The company provides commercial aircraft maintenance varying in scope from a single aircraft serviced over a few days to multi-aircraft programs lasting several years. PAGI can offer full range maintenance support services to airlines, coupled with related technical services required by these customers. The company also has broad experience in modifying commercial aircraft and providing value-added technical solutions and holds numerous proprietary Supplemental Type Certificates. The company has performed more than 250 cargo conversions of narrow and wide-body commercial aircraft. - -------------------------------------------- Houlihan Lokey Howard & Zukin 52 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- Sequa Corp. Sequa Corp. (SQA) is a diversified industrial company that produces a broad range of products through operating units in five segments: Aerospace, Propulsion, Metal Coating, Specialty Chemicals and Other Products. ================================================================================ SEQUA CORP. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ The Aerospace segment consists solely of the company's largest operating unit, Chromalloy Gas Turbine, which repairs and manufactures components for jet aircraft engines. A major independent supplier in the repair market, Gas Turbine provides domestic and international airlines with technologically advanced repairs and coatings for turbine airfoils and other critical engine components. In addition, the unit repairs components for land-based turbine engines. It also supplies components to the manufacturers of jet engines and serves both the general aviation and military markets. The Propulsion segment consists solely of Atlantic Research Corp. (ARC), a supplier of solid rocket fuel propulsion systems. ARC is a developer and manufacturer of advanced rocket propulsion systems, gas generators and auxiliary rocket motors, and engages in research and development relating to new rocket propellants and advanced engineered materials. For the military contract market, ARC produces propulsion systems primarily for tactical weapons. For space applications, ARC produces small liquid fuel rocket engines designed to provide attitude and orbit control for a number of satellite systems worldwide. The Metal Coating segment consists solely of Precoat Metals, which deals with the application of protective and decorative coatings to continuous steel and aluminum coils. Precoat's principal market is the building products industry, where coated steel is used for the construction of pre-engineered building systems, and as components in the industrial, commercial, agricultural and residential sectors. - -------------------------------------------- Houlihan Lokey Howard & Zukin 53 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- BBA Group PLC. BBA Group PLC. Aviation services and materials technology businesses. The aviation services operates in the United States and in Europe by providing fuelling, engine and landing gear overhaul, repair and maintenance, cargo handling, trip planning, and pilot training. Materials technology operates in such countries as Brazil, Canada, China, Hong Kong, Mexico, South Africa, United States, and in Europe by providing non-woven materials for the hygiene and industrial sector. Aviation accounted for 52 percent of 2000 revenues and material technology 48 percent. ================================================================================ BBA GROUP PLC. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ - -------------------------------------------- Houlihan Lokey Howard & Zukin 54 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Synopses of Comparable Companies - -------------------------------------------------------------------------------- Vector Aerospace Corp. Vector Aerospace Corporation. Provides aviation repair and overhaul services of gas turbine engines, components and helicopter airframes. Through facilities in Canada, the United States and the United Kingdom, it provides services to commercial and military customers internationally. Services include the repair and overhaul of turbine engines including turboprop and turbofan engines for airplanes and turboshaft engines for helicopters. Vector Aerospace also services dynamic components, accessories, blades, propellers and airframes for both helicopters and airplanes. It has also developed specialized avionics and information technology services. ================================================================================ VECTOR AEROSPACE CORP. DAILY PRICE/VOLUME GRAPH [STOCK PRICE AND TRADING VOLUME GRAPH APPEARS HERE] ================================================================================ - -------------------------------------------- Houlihan Lokey Howard & Zukin 55 - -------------------------------------------------------------------------------- Supplemental Valuation Schedules - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Supplemental Valuation Schedules - -------------------------------------------------------------------------------- Comparable Company Market Analysis (figures in millions, except per share values)
First Mercury Pemco Aviation Air Aviation Sequa Corp Aar Corp Aviall Inc Svcs Inc Group Inc Inc -Cl A -------- ---------- -------- --------- -------- ---------- General Market Information - -------------------------- Ticker Symbol AIR AVL FAVS MAX PAGI SQA A Exchange NYSE NYSE NASDAQ AMEX NASDAQ NYSE Fiscal Year End 05/2001 12/2000 01/2001 06/2001 12/2000 12/2000 Latest Financial Information 11/2001 09/2001 10/2001 12/2001 09/2001 09/2001 Closing Price as of Valuation Date $7.44 $7.10 $4.60 $4.50 $15.75 $49.31 20-Day Average Stock Price $7.79 $7.05 $4.71 $5.10 $15.54 $47.15 52 Week Price Range High $17.45 $11.25 $5.48 $7.50 $18.00 $54.22 Low $6.96 $4.52 $4.00 $3.10 $8.13 $37.64 52 Week Return -46.5% -3.0% 4.4% -21.1% 51.8% 12.2% Market Valuation Information - ---------------------------- Fully Diluted Shares 26.859 18.758 7.204 6.758 4.295 10.932 Closing Price as of Valuation Date $7.44 $7.10 $4.60 $4.50 $15.75 $49.31 Market Value of Equity (MVE) $199.832 $133.183 $33.138 $30.413 $67.645 $539.075 plus: Total Debt (book) 260.895 133.183 16.204 68.063 15.686 711.301 plus: Preferred Stock Redemption/Market/Liq. Value 0.000 0.000 0.000 0.000 0.000 3.985 less: Cash & Cash Equivalents (book) 53.129 2.542 28.622 3.215 1.985 139.108 plus: Minority Interest in Subsidiaries 0.000 0.000 1.041 0.000 0.000 0.000 ------------------------------------------------------------------------- Enterprise Value $407.598 $263.824 $21.761 $95.261 $81.346 $1,115.253 =========================================================================
BBA Vector Hawker Pacific Group plc Aerospace Aerospace Inc --------- --------- ------------- General Market Information -------------------------- Ticker Symbol BBA *RNO HPAC Exchange London Toronto NASDAQ Fiscal Year End 12/2000 12/2001 12/01/01 Latest Financial Information 06/01/01 12/2001 12/01/01 Closing Price as of Valuation Date $3.66 $2.51 $2.12 20-Day Average Stock Price $3.68 $2.61 $2.60 52 Week Price Range High $5.40 $4.45 $4.20 Low $2.48 $2.41 $1.50 52 Week Return 30.5% -7.0% -37.5% Market Valuation Information ---------------------------- Fully Diluted Shares 454.100 28.398 10.161 Closing Price as of Valuation Date $3.66 $2.51 $2.12 Market Value of Equity (MVE) $1,662.006 $71.223 $21.541 plus: Total Debt (book) 1,014.000 102.316 72.571 plus: Preferred Stock Redemption/Market/Liq. Value 84.450 0.000 0.000 less: Cash & Cash Equivalents (book) 140.250 0.000 1.604 plus: Minority Interest in Subsidiaries 2.100 0.000 0.000 ----------------------------------- Enterprise Value $2,622.306 $173.539 $92.508 ===================================
Note: HPAC stock price at closing on February 25, 2002. - --------------------------------------------- Houlihan Lokey Howard & Zukin 57 - -------------------------------------------------------------------------------- Project Sun - -------------------------------------------------------------------------------- Supplemental Valuation Schedules - -------------------------------------------------------------------------------- Balance Sheet Statistics (figures in millions)
Net Net Net Other Total Income Income Current Quick Inventory A/R A/P Working LT Assets ROA ROE Ratio Ratio Turnover Days Days Capital Liab/EV ---------- ------ ------ ------- ----- --------- ---- ---- -------- ------- Aar Corp $ 714.208 1.6% -13.7% 2.6 0.7 2.1 49.1 46.7 $306.151 13.8% Aviall Inc $ 440.206 3.1% 6.5% 2.7 0.9 2.8 57.1 48.3 $175.275 6.2% First Aviation Svcs Inc $ 80.877 0.2% -1.7% 4.7 2.9 3.8 56.6 50.5 $28.278 0.0% Mercury Air Group Inc $ 133.308 2.8% 5.6% 1.5 1.3 104.3 45.3 26.2 $22.502 0.4% Pemco Aviation Inc $ 66.461 15.7% 71.8% 1.1 0.5 6.8 38.4 48.5 $12.202 3.2% Sequa Corp -Cl A $1,864.956 2.5% 6.1% 2.6 1.1 3.9 46.1 37.3 $386.860 11.3% BBA Group plc $2,792.250 7.6% 24.9% 1.9 0.3 NMF NA NA $511.200 3.8% Vector Aerospace $ 240.263 1.4% -21.2% 1.7 0.5 1.7 67.3 81.7 $106.523 6.6% Hawker Pacific Aerospace Inc $ 94.486 -9.8% -182.6% 1.9 0.6 2.7 71.0 57.3 $22.325 1.3% - ------------------------------------------------------------------------------------------------------------------------ Low $ 66.461 -9.8% -182.6% 1.1 0.3 1.7 38.4 26.2 $12.202 0.0% High $2,792.250 15.7% 71.8% 4.7 2.9 104.3 71.0 81.7 $511.200 13.8% Median $ 240.263 2.5% 5.6% 1.9 0.7 3.3 52.9 48.4 $106.523 3.8% Mean $ 714.113 2.8% -11.6% 2.3 1.0 16.0 53.9 49.6 $174.591 5.2% - ------------------------------------------------------------------------------------------------------------------------
Leverage -------------------------------------- Debt/ Debt/ Debt/ Interest EBITDA MVE/(1)/ EV Coverage/(2)/ ------ -------- ----- ------------- Aar Corp 5.4 x 130.6% 0.6 x 2.3 x Aviall Inc 3.2 x 100.0% 0.5 x 4.3 x First Aviation Svcs Inc 11.8 x 48.9% 0.7 x 2.6 x Mercury Air Group Inc 2.9 x 223.8% 0.7 x 3.7 x Pemco Aviation Inc 0.9 x 23.2% 0.2 x 8.0 x Sequa Corp -Cl A 4.0 x 131.9% 0.6 x 3.2 x BBA Group plc 2.6 x 61.0% 0.4 x 8.8 x Vector Aerospace 3.7 x 143.7% 0.6 x 3.4 x Hawker Pacific Aerospace Inc 85.4 x 336.9% 0.8 x 0.1 x - -------------------------------------------------------------------------- Low 0.9 x 23.2% 0.2 x 0.1 x High 85.4 x 336.9% 0.8 x 8.8 x Median 3.7 x 130.6% 0.6 x 3.4 x Mean 13.3 x 133.3% 0.6 x 4.1 x - --------------------------------------------------------------------------
Footnotes: - --------- * Excluded from the Range Source: Compustat NA - Not Available NMF - Not Meaningful Figure EV - Enterprise Value MVE - Market Value of Equity EBIT - Earnings Before Interest and Taxes EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization ROA - Return on Assets ROE - Return on Equity A/R - Accounts Receivable A/P - Accounts Payable (1) Represents Total Interest-Bearing Debt to Market Value of Equity. (2) Represents EBITDA to Net Interest Expense. - --------------------------------------------- Houlihan Lokey Howard & Zukin 58 -----END PRIVACY-ENHANCED MESSAGE-----