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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-31443
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HAWAIIAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 71-0879698
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3375 KOAPAKA STREET, SUITE G-350 96819
HONOLULU, HAWAII (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (808) 835-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock ($.01 par value) American Stock Exchange and Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
The aggregate market value of the voting and non-voting common equity stock held
by non-affiliates of the Registrant was approximately $5 million, computed by
reference to the closing sale price of the Common Stock on the American Stock
Exchange on June 30, 2003, the last business day of the Registrant's most
recently completed second fiscal quarter.
As of March 31, 2004, 29,260,465 shares of Common Stock of the Registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
TABLE OF CONTENTS
Page
----
PART I .......................................................................2
ITEM 1. BUSINESS.........................................................2
ITEM 2. PROPERTIES......................................................17
ITEM 3. LEGAL PROCEEDINGS...............................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............18
PART II .....................................................................19
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..................................19
ITEM 6. SELECTED FINANCIAL DATA.........................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................28
ITEM 9A. CONTROLS AND PROCEDURES.........................................29
PART III ....................................................................30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS................................30
ITEM 11. EXECUTIVE COMPENSATION..........................................32
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................39
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................40
PART IV .....................................................................41
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.....................................................41
SIGNATURES ...............................................................44
EXPLANATORY NOTE
As explained herein, on March 21, 2003, Hawaiian Airlines, Inc. ("Hawaiian"),
the sole operating subsidiary of Hawaiian Holdings, Inc. ("Holdings"), filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court for the District of Hawaii. Holdings did not file for relief
under Chapter 11 of the Bankruptcy Code. Holdings has not been current in its
filings with the Securities and Exchange Commission since the first quarter of
2003 and is simultaneously filing its quarterly reports for the first, second
and third quarters of 2004 and its annual report for 2004 and its quarterly
reports for the second and third quarters of 2003 and its annual report for
2003. In the interest of accurate and complete disclosure, Holdings has included
current information in each of those reports for all material events and
developments that have taken place through the date of filing, including with
respect to its legal proceedings and the bankruptcy proceedings of Hawaiian.
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 that reflect our
current views with respect to certain current and future events and financial
performance. These forward-looking statements are and will be, as the case may
be, subject to many risks, uncertainties and factors relating to our operations
and business environments which may cause our actual results to be materially
different from any future results, expressed or implied, in these
forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the following: the
ability of Hawaiian Holdings, Inc. ("Holdings") to continue as a going concern;
the ability of its operating subsidiary, Hawaiian Airlines, Inc. ("Hawaiian") to
continue as a going concern; the ability of Hawaiian to consummate the joint
plan of reorganization with respect to the Chapter 11 case; aviation fuel costs;
the competitiveness of our labor costs; our relationship with our employees and
possible work stoppages; changes in capacity in the trans-Pacific and
interisland market; changes in the level of fares we can charge and remain
competitive; bankruptcy of our competitors and the impact such bankruptcies
might have on fares; the ability of Hawaiian to obtain and maintain normal terms
with vendors and service providers; the ability of Hawaiian to maintain
contracts that are critical to its operations; the ability of Hawaiian to fund
and execute its business plan; our ability to attract, motivate and/or retain
key executives and associates; the ability of Hawaiian to attract and retain
customers; demand for transportation in the markets in which Hawaiian operates;
economic conditions; the effects of any hostilities or act of war (in the Middle
East or elsewhere) or any terrorist attack; the effects of seasonality and
cyclicality; Hawaiian's dependence on tourism; Hawaiian's reliance on third
parties for facilities and services (including, without limitation, aircraft
maintenance, code sharing, reservations, computer services, frequent flyer
programs, passenger processing, ground facilities, baggage and cargo handling
and personnel training); maintenance costs and possible unavailable aircraft;
financing costs; the cost and availability of insurance, including aircraft
insurance; security-related costs; competitive pressures on pricing
(particularly from lower-cost competitors); weather conditions; government
legislation and regulation, including the Aviation and Transportation Security
Act and other September 11, 2001 related regulations; changes that may be
required by the Federal Aviation Administration or other regulators to our
aircraft or operations; aircraft unavailability due to mechanical or other
factors; consumer perceptions of the products of Hawaiian; and other risks and
uncertainties set forth from time to time in our reports to the Securities and
Exchange Commission (the "SEC"). We undertake no obligation to publicly update
or revise any forward-looking statements to reflect events or circumstances that
may arise after the date of this annual report.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Holdings, incorporated in April 2002 under the laws of the State of Delaware, is
a holding company. Its wholly-owned subsidiary, Hawaiian, was incorporated in
January 1929 under the laws of the Territory of Hawaii and, based on the number
of scheduled miles flown by revenue passengers (known as revenue passenger
miles) in 2004, is the largest airline headquartered in Hawaii. Holdings became
the parent of Hawaiian on August 29, 2002, pursuant to the corporate
restructuring described below under "Business - Corporate Restructuring." As a
result of the corporate restructuring, Holdings' primary asset was its sole
ownership, directly and indirectly, of all issued and outstanding shares of the
common stock of Hawaiian. As described in greater detail below under
"Business--Chapter 11 Reorganization of Hawaiian," on March 21, 2003, Hawaiian
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Chapter 11 Filing") in the United States Bankruptcy
Court for the District of Hawaii (the "Bankruptcy Court" or "Court") (In re
Hawaiian Airlines, Inc., Case No. 03-00817). Holdings did not file for relief
under Chapter 11 of the Bankruptcy Code. On May 30, 2003, a trustee was selected
to serve in connection with the Chapter 11 Filing and operate Hawaiian, which
has continued to operate its business under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and orders of the Bankruptcy Court. The initial trustee has since resigned and
been replaced by a duly appointed substitute trustee (the "Trustee"). The
appointment of the Trustee effectively served to divest operational and
financial control of Hawaiian from the officers and directors of Holdings, and
severed the availability of funds
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needed by Holdings to support its efforts to meet its ongoing obligations,
including its Exchange Act reporting requirements. Effective as of April 1,
2003, Holdings deconsolidated Hawaiian for financial reporting purposes and
accounted for its ownership of Hawaiian using the cost method of accounting. See
Note 3 of our Financial Statements. As a result, for financial reporting
purposes, Holdings currently is, and has been throughout 2004, a holding company
with no business operations or properties. Accordingly, as used in this Annual
Report on Form 10-K, the terms "Company", "we", "our", and "us" refer to: (i)
Hawaiian Airlines, Inc. only, with respect to periods prior to August 29, 2002
(the date of the aforementioned corporate restructuring); (ii) Hawaiian
Holdings, Inc. and its subsidiaries, with respect to the period from August 29,
2002 through and including March 31, 2003; and (iii) Hawaiian Holdings, Inc.
only, with respect to the periods from and after April 1, 2003.
As described in greater detail below under "Business--Chapter 11 Reorganization
of Hawaiian," Holdings, the Trustee, the Official Committee of Unsecured
Creditors of Hawaiian, a wholly-owned subsidiary of Holdings, and RC Aviation,
LLC have filed an amended Joint Plan of Reorganization to provide for Hawaiian
to emerge from bankruptcy. The joint plan provides for payment in full of all
allowed claims, including unsecured claims. We anticipate that Hawaiian will
emerge from bankruptcy in the latter half of April 2005. However, we cannot
provide any assurance that we will be able to consummate Hawaiian's joint plan
of reorganization successfully, and that we will regain full control of
Hawaiian. Accordingly, we urge that appropriate caution be exercised with
respect to existing and future investments in Holdings.
Since we have not controlled Hawaiian from the time a trustee was appointed in
May, 2003, the disclosure contained in this Annual Report on Form 10-K regarding
the operations of Hawaiian is limited and based only upon our best knowledge of
such operations. Accordingly, much of the disclosure contained in this Form 10-K
is with respect to Holdings as a holding company, exclusive of the business of
Hawaiian. The discussion and analysis of our financial condition and results of
operations, appearing in Item 7 hereof, is directed toward stand-alone
deconsolidated results for the periods for which Hawaiian's results were not
consolidated with our results, and consolidated results for the periods for
which Hawaiian's results were consolidated with our results. Following the
anticipated emergence of Hawaiian from bankruptcy, which we anticipate will
occur in the latter half of April 2005, although there can be no certainty as to
such date, we will file a Form 8-K containing pro forma financial statements to
report the consolidated financial condition and results of operations of
Holdings and Hawaiian.
Hawaiian is engaged primarily in the scheduled transportation of passengers,
cargo and mail. Hawaiian provides passenger and cargo service from Hawaii,
principally Honolulu, to eight Western U.S. cities. Hawaiian also provides daily
service directly to four of the six major islands and indirectly through an
arrangement with Island Air to two of the six major islands of the State of
Hawaii and weekly service to each of Pago Pago, American Samoa and Papeete,
Tahiti in the South Pacific and Sydney, Australia. Charter service is provided
from Honolulu to Anchorage, Alaska. Hawaiian currently operates a fleet of 14
Boeing 767-300ER aircraft and 11 Boeing 717-200 aircraft.
Our common stock, par value $0.01 per share (the "Common Stock"), is listed on
the American Stock Exchange ("AMEX") and the Pacific Exchange ("PCX") under the
symbol "HA". Our principal offices are located at 12730 High Bluff Drive, Suite
180, San Diego, CA 92130-2075. Our telephone and facsimile numbers are (858)
523-0219 and (858) 523-1899, respectively. General information about Hawaiian
can be found at www.hawaiianair.com.
CHAPTER 11 REORGANIZATION OF HAWAIIAN
On March 21, 2003 (the "Petition Date"), Hawaiian filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (In re
Hawaiian Airlines, Inc., Case No. 03-00817) in the Bankruptcy Court for the
District of Hawaii (the "Bankruptcy Court"). Holdings did not file for relief
under Chapter 11 of the Bankruptcy Code. Hawaiian has continued to operate its
business under the jurisdiction of the Bankruptcy Court and in accordance with
the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy
Court, and since May 30, 2003, under the supervision of a Chapter 11 trustee.
Hawaiian's Chapter 11 filing automatically enjoined, or stayed, the continuation
of any judicial or administrative proceedings or other actions against Hawaiian
or its property to recover on, collect or secure a claim arising prior to the
Petition Date. At a hearing held on March 21, 2003, the Bankruptcy Court granted
Hawaiian's first day motions for various relief designed to stabilize its
operations and business relationships with customers, vendors, employees and
others and entered orders granting authority to Hawaiian to, among other things:
pay certain pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations; pay vendors and other providers in the ordinary
course for goods and
3
services received from and after the Petition Date; honor customer service
programs, including the HawaiianMiles program and ticketing policies; honor
obligations arising prior to the Petition Date related to Hawaiian's interline,
clearinghouse, code sharing and other similar agreements; pay certain
pre-petition taxes and fees, including transportation excise taxes, payroll
taxes and passenger facility charges; and pay certain other obligations.
Under Section 365 of the Bankruptcy Code, Hawaiian may assume, assume and
assign, or reject executory contracts and unexpired leases, including leases of
real property, aircraft and aircraft engines, subject to the approval of the
Bankruptcy Court and certain other conditions. Rejection constitutes a
court-authorized breach of the lease or contract but creates a deemed
pre-petition claim for damages caused by this breach or rejection. Parties whose
contracts or leases are rejected may file claims against Hawaiian for damages.
Generally, the assumption of an executory contract or unexpired lease requires
Hawaiian to cure all prior defaults under the executory contract or unexpired
lease, including all pre-petition monetary defaults and all post-petition
arrearages and to provide adequate assurance of future performance. Hawaiian
does not, to our knowledge, presently intend to reject any material contracts.
Moreover, Section 554 of the Bankruptcy Code provides a mechanism by which
Hawaiian may abandon property that is no longer beneficial to the estate, the
retention of which serves no purpose in effecting the goals of the Bankruptcy
Code. Abandonment constitutes a court-authorized divestiture of all of
Hawaiian's interests in the property. Abandonment gives rise to potential claims
against Hawaiian. To date, to our knowledge, Hawaiian has not sought to abandon
and does not presently intend to seek to abandon any such property.
The Chapter 11 Filing, including the subsequent appointment of a trustee to
operate Hawaiian's business, as more fully discussed below, and the resulting
uncertainty regarding Hawaiian's future prospects raised substantial doubt about
the ability of both Holdings and Hawaiian to continue as a going concern. Our
ability to continue as a going concern is contingent upon our ability to
consummate the Joint Plan of reorganization of Hawaiian, as more fully discussed
below, or another plan of reorganization of Hawaiian. We have obtained the
necessary approvals and arranged the necessary financing in order to consummate
the Joint Plan, with the exception of the Air Line Pilots Association ("ALPA")
(as described below). The financing we have arranged is contingent upon
Hawaiian's ultimate emergence from bankruptcy protection and negotiation and
execution of final documentation. The occurrence of certain events prior to
Hawaiian's emergence from bankruptcy (including the inability to resolve the
outstanding ALPA issues) could result in the arranged financing not being
available to us and Hawaiian, which might prevent us from consummating the Joint
Plan and therefore delay or prevent Hawaiian's emergence from bankruptcy. The
accompanying financial statements have been prepared assuming that we will
continue as a going concern. The financial statements do not include any of the
adjustments that would result if Holdings or Hawaiian were unable to continue as
a going concern, nor do they give effect to any adjustments to the carrying
value of our assets or the amounts of our liabilities that will be necessary as
a consequence of the consummation of the Joint Plan or another plan of
reorganization.
TRUSTEE MOTION
On March 31, 2003, BCC Equipment Leasing Corporation ("BCC Leasing"), an
affiliate of The Boeing Company, filed a motion seeking the appointment of a
Chapter 11 trustee (the "Trustee Motion"). BCC Leasing asserted that John W.
Adams ("Mr. Adams"), the Chairman and Chief Executive Officer of Holdings and
Hawaiian at that time, could not be relied upon to act in the best interest of
creditors or a successful reorganization because he had allegedly engaged in
extensive self-dealing and allegedly had disabling conflicts of interest. BCC
Leasing specifically pointed to a "self-tender" of Hawaiian that occurred in the
spring of 2002 (the "2002 Tender Offer"), as described more fully in Note 11 to
Holdings' financial statements, which resulted in 5,880,000 shares of Hawaiian's
stock being repurchased by Hawaiian at a price in excess of the then-trading
price, of which a significant portion was repurchased from Mr. Adams and AIP,
LLC ("AIP"), an entity controlled by Mr. Adams. On May 16, 2003, the Bankruptcy
Court issued an order granting the Trustee Motion. As a result, until the Joint
Plan is consummated and Hawaiian emerges from bankruptcy (anticipated to be in
the latter half of April 2005), the Trustee is in charge of operating Hawaiian's
business, under the jurisdiction of the Bankruptcy Court, and has the power to
investigate and enforce claims relating to transfers of property that occurred
prior to the Petition Date.
Inasmuch as the Trustee has been in charge of operating Hawaiian's business
since May 2003, we do not have unfettered access to information and documents
regarding Hawaiian. The appointment of the Trustee also created
4
significant uncertainty regarding the ability of Hawaiian to facilitate a timely
reorganization allowing us to regain full control of Hawaiian in a relatively
short period of time. As a result, effective April 1, 2003, we deconsolidated
Hawaiian and prospectively accounted for our ownership of Hawaiian using the
cost method of accounting. Accordingly, our financial results include the
consolidated results of Holdings and Hawaiian for all of 2002 and the first
quarter of 2003, and the stand-alone deconsolidated results of Holdings for the
last three quarters of 2003 and all of 2004. This has resulted in historical
operating results that are not comparable on a year-to-year basis.
AIRCRAFT LEASES
Hawaiian has reached agreements with Ansett Worldwide Aviation Services, Inc.
("Ansett"), International Lease Finance Corporation ("ILFC"), and BCC Leasing,
who together lease Hawaiian its entire fleet of Boeing 767-300ER and 717-200
aircraft, on revised long-term leases, which have been approved by the
Bankruptcy Court. Hawaiian also cancelled the delivery of two Boeing 767-300ER
aircraft scheduled for delivery during 2003 and returned two Boeing 717-200
aircraft to BCC Leasing in late 2003 and early 2004. The revised leases and
cancellations provided Hawaiian with significant savings in monthly aircraft
rentals, but also resulted in lease related claims against Hawaiian for Ansett
(the "Ansett Claim") and BCC Leasing of approximately $107.5 million and $66.5
million, respectively. The amendments to the Ansett leases allow Ansett to
terminate those leases early, after not less than 180 days' prior notice to
Hawaiian, beginning on March 21, 2007. Ansett can terminate up to two Ansett
aircraft leases between March 21, 2007 and September 20, 2007, up to three
additional Ansett aircraft leases between September 21, 2007 and March 20, 2008;
and up to two additional Ansett aircraft leases between March 21, 2008 and
September 20, 2009. After September 20, 2009, Ansett can terminate up to all
seven Ansett aircraft leases on not less than 180 days' notice. If Ansett elects
to terminate any lease, Hawaiian shall be relieved of all obligations to pay
basic rent or other amounts upon any such termination. See "The Joint Plan" and
"Certain General Case Summary Matters".
THE JOINT PLAN
On September 9, 2004, Holdings, the Trustee, the Creditor's Committee, HHIC,
Inc., a wholly-owned subsidiary of Holdings ("HHIC"), and RC Aviation, LLC ("RC
Aviation"), filed an amended Joint Plan of Reorganization (as amended on October
4, 2004 and again on March 11, 2005, the "Joint Plan") to provide for Hawaiian
to emerge from bankruptcy. As described in greater detail below under
"Business--RC Aviation, LLC Transaction and Related Transactions," as of March
23, 2005, RC Aviation held approximately 32.5% of the outstanding shares of
Common Stock. The Joint Plan provides for payment in full, without interest
accruing after the Petition Date, of all allowed claims, including unsecured
claims. Additionally, the Joint Plan provides for the merger of Hawaiian into
HHIC, with HHIC to be the surviving entity but to change its name to Hawaiian
Airlines, Inc., a Delaware corporation. We will retain our equity interest in
Hawaiian; however, in connection with the Joint Plan, we will be required to
issue shares of Common Stock to creditors of Hawaiian to help fund the Joint
Plan, resulting in a dilution of the ownership interest of our existing common
shareholders.
On October 5, 2004, the Bankruptcy Court approved the disclosure statement for
the Joint Plan. The Joint Plan was submitted to creditors for vote on
approximately October 15, 2004 and the deadline for voting on the Joint Plan was
December 15, 2004. All Class 5 creditors who submitted ballots (the
"Lease-Related Claims" class consisting of the Ansett and Boeing claims owned by
RC Aviation) voted to accept the Joint Plan. More than 95% in both number and
amount of each other impaired class of creditors entitled to vote on the Joint
Plan accepted the Joint Plan. Holdings and HHIC, as the sole shareholders of
Hawaiian, also voted to accept the Joint Plan. The Joint Plan was, therefore,
accepted by more than the required two-thirds of the dollar amount of eligible
claims and more than the required one-half of the number of claims from each
class of creditors entitled to vote on the Joint Plan. At the conclusion of the
confirmation hearing for the Joint Plan on March 11, 2005, the Bankruptcy Court
concluded that all of the requirements for confirmation had been met and that
findings of fact and conclusions of law and an order would be entered following
ratification of the proposed agreements with The Association of Flight
Attendants ("AFA") and ALPA.
On February 19, 2005, a final proposed agreement was reached with the
negotiating committee of AFA, and on March 14, 2005, the agreement was ratified.
On March 14, 2005, a final proposed agreement (the "Proposed ALPA Agreement")
was reached with the negotiating committee of ALPA, but the members of ALPA did
not ratify the Proposed ALPA Agreement. Consequently, on March 29, 2005, the
Trustee's motion (the "Section 1113 Motion")
5
to impose an agreement on ALPA pursuant to Section 1113 of the Bankruptcy Code
commenced before the Bankruptcy Court, but was not completed. The hearing was
continued to April 13, 2005, and is anticipated to be completed no later than
April 15, 2005, though the Bankruptcy Court may not rule at the conclusion of
the hearing. Hawaiian and ALPA may engage in negotiations before the hearing
resumes. During the hearing on March 29, 2005, the Bankruptcy Court expressly
ruled that: (1) it can grant relief to Hawaiian to impose the contract proposed
by Hawaiian with the Section 1113 Motion, even if the Bankruptcy Court does not
conclude that the changes requested are absolutely essential to allow Hawaiian
to continue operating; and (2) the Bankruptcy Court can impose the contract
proposed with the Section 1113 Motion, rather than the Proposed ALPA Agreement
reached with the ALPA negotiating committee, because the members of ALPA did not
ratify the Proposed ALPA Agreement.
The Proposed ALPA Agreement would have provided certain rights to ALPA and its
members if there is a change of control or a sale, merger, or substantial
reduction of operations, all as defined in that agreement, in replacement for
change of control rights that existed under the prior agreement. The new
remedies available to ALPA would have included the right, to the extent the
collective bargaining agreement had an amendable date which is less than two
years from the date of the Change of Control or Adverse Transaction (as such
terms are defined in the agreement), to unilaterally extend the Proposed ALPA
Agreement for a period of two years from such date and to require a payment of
$1.5 million in either Common Stock or cash. Comparable provisions would likely
have been needed to have been added in each of the other collective bargaining
agreements negotiated with the other unions that represent Hawaiian's employees.
The aggregate Common Stock or cash payment upon a Change of Control or Adverse
Transaction would, therefore, likely have increased to approximately $5.6
million. These provisions would have replaced change of control provisions under
the existing collective bargaining agreements. Under those agreements, the
definition of change of control is unclear, and if a change of control occurred,
the potential remedies available to each union include the right to extend
unilaterally its collective bargaining agreement for three years, with a 4% pay
increase each year. We and Hawaiian believe that no change of control occurred
under the prior collective bargaining agreements and each of the unions elected
to re-open negotiations under the prior collective bargaining agreements as of
their amendable date, without exercising any right it might have had to extend
them.
If the Bankruptcy Court ultimately determines to impose the contract proposed by
Hawaiian with the Section 1113 Motion, the Joint Plan proponents will thereafter
present to the Bankruptcy Court, for execution by the Bankruptcy Court, the
"Findings of Fact And Conclusions Of Law Re Third Amended Joint Plan Of
Reorganization Filed By Chapter 11 Trustee, The Official Committee Of Unsecured
Creditors, Hawaiian Holdings, Inc., HHIC, Inc., And RC Aviation LLC, Dated As Of
March 11, 2005" and the "Order Confirming Third Amended Joint Plan Of
Reorganization Filed By Chapter 11 Trustee, The Official Committee Of Unsecured
Creditors, Hawaiian Holdings, Inc., HHIC, Inc., And RC Aviation LLC, Dated As Of
March 11, 2005" (the "Confirmation Order"). Among other things, the Confirmation
Order will authorize the reorganized Hawaiian, upon the Effective Date (as
defined below), to consummate the provisions of the Joint Plan. One of the
conditions to the occurrence of the Effective Date is that the Confirmation
Order is a final order (the "Final Order Requirement"). Unless the Final Order
Requirement is waived, the Effective Date should occur approximately 10 days
after entry of the Confirmation Order, unless an order is entered staying the
Confirmation Order. If the Final Order Requirement is waived, and no stay of the
Confirmation Order is entered, the Effective Date could occur earlier than 10
days after entry of the Confirmation Order. We cannot predict if the Final Order
Requirement will be waived, or if an opposing party will appeal the Confirmation
Order and seek to obtain a stay of the Confirmation Order, or if such a stay is
sought, whether it will be granted. Further, we cannot predict if the Final
Order will be appealed and, if appealed, the outcome and consequences of such
appeal.
The Effective Date is anticipated to be in the latter half of April 2005 (the
"Effective Date"). However, we can provide no assurance that we will be able to
consummate the Joint Plan successfully.
Holdings has agreed to set aside 1,500,000 shares of the Common Stock in a pool
for allocation to employees of Hawaiian. Under the agreement, shares in the pool
will be allocated between the time of Hawaiian's emergence from bankruptcy and
May 2007, among employees of Hawaiian (other than officers) or to their accounts
in Hawaiian's 401(k) or similar plan. The shares will be allocated pursuant to
formulas set forth in the agreement.
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The following table briefly summarizes the classification and treatment of
claims under the Joint Plan, the estimated allowed claims and the anticipated
treatment (in millions):
ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------------
Unclassified Unsecured Priority Tax In cash, paid in up to twenty-four
Claims (24) equal quarterly installments. $ 1.2 $30.1 $ --
Class 1 Secured Priority Tax Claims In cash, paid in accordance with
(Unimpaired) the legal, equitable and
contractual rights of the holder of
the claim. 1.0 -- --
Class 2 Other Secured Claims Generally, at the election of
(Unimpaired) Hawaiian, (i) cash, (ii) surrender
of the collateral securing the
claim, (iii) cure and
reinstatement, or (iv) retention by
the holder of the claim of its
legal, equitable and contractual
rights. -- 2.8 --
Class 3 Other Priority Claims Cash 0.1 -- --
(Unimpaired)
Class 4(1) Unsecured Claims not At the election of the holder,
(Impaired) included in a category either (a) cash in an amount equal
below. to fifty percent (50%) of the
allowed claim and Common Stock
equal to fifty percent (50%) of the
allowed claim, based on a stock
value of $6.16 per share; or (b)
cash equal to 100% of the allowed
claim. 36.3 -- --
Class 5(2) Lease Related Claims Cash in an amount equal to fifty
(Impaired) percent (50%) of the claim and
Common Stock equal to fifty percent
(50%) of the claim, based on a
stock value of $6.16 per share. 87.0 -- 87.0
Class 6 (Impaired) Convenience Claims Cash 0.8 -- --
Class 7 (Impaired/ Equity Interests Holders of equity interests in
Unimpaired) Hawaiian shall retain their
interests in the reorganized
Hawaiian, without modification or
alteration
-----------------------------
- ----------
(1) The amount and classification of the claim filed by American Airlines, Inc.
("AA") are in dispute. AA has filed a claim for approximately $11 million, which
it contends belongs to Class 4. Hawaiian disputes a substantial portion of AA's
claim, but the full $11 million is included above. Hawaiian also contends that a
significant portion of AA's claim should be categorized in Class 5.
(2) To the extent a portion of AA's claim is categorized in Class 5, AA will not
receive cash or stock. It will receive a 15-year fully amortizing promissory
note, which bears interest at the rate of 6.5% per annum. Because all of AA's
claim is included in Class 4 above, pending resolution of the classification
dispute, none of that claim is included in Class 5.
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ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------------
by the Joint Plan. However,
Holdings will be required to issue
new Common Stock to creditors of
Hawaiian, which will result in a
dilution of the ownership interest
of Holdings' existing common
shareholders.
------ ----- -----
Total $126.4 $32.9 $87.0
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The amounts and classifications of the claims above are based on the amounts
agreed in the settlement of the claims, with the exception of disputed claims,
where the gross claim amount has been included. It is expected that the ultimate
resolution of the disputed claims will be lower, but we can provide no assurance
that this will occur. See "Certain General Case Summary Matters" and "Additional
Disputed Claims" below. For these reasons, the ultimate amounts and
classifications of such claims cannot yet be determined.
RC Aviation has purchased the Class 5 claims of Boeing and Ansett. RC Aviation
elected to receive cash equal to fifty percent (50%) of the claims and Common
Stock equal to fifty percent (50%) of the claims. RC Aviation has informed us of
its present intention to distribute, prior to the Effective Date, the Boeing
Claim and the Ansett Claim to its members who funded the purchase price of those
claims. In addition, RC Aviation has advised us that it intends to distribute to
its members, prior to the Effective Date, the 10 million shares of our stock it
currently holds. RC Aviation has advised us that it does not currently expect
such members to constitute a group or otherwise act in concert.
The Internal Revenue Service (the "IRS") asserted an unsecured, non-priority
claim against Hawaiian for tax-related penalties in the amount of approximately
$40 million. It was a condition precedent to the consummation of the Joint Plan
that such claim shall not be allowed by the Bankruptcy Court. The Bankruptcy
Court has disallowed that claim. The IRS has not appealed that ruling, but the
IRS's period to appeal that ruling has not yet expired.
FINANCING ARRANGEMENTS
The Trustee, Holdings and RC Aviation entered into a Restructuring Support
Agreement, dated as of August 26, 2004 (the "Restructuring Support Agreement"),
pursuant to which we and RC Aviation agreed to raise the funding necessary to
meet the distribution and payment obligations under the Joint Plan and to ensure
that Hawaiian has at least the minimum amount of cash required by the Joint
Plan. The Joint Plan provides that the minimum unrestricted cash on hand at
Hawaiian on the Effective Date will be at least $70 million. In order to fund
these obligations under the Joint Plan, we and RC Aviation have the flexibility
to utilize one or more sources of financing, including the following: the
issuance of up to $150 million of new debt by Hawaiian, such as new notes and/or
a senior secured loan facility, the proceeds of a rights offering to our
existing shareholders, or the proceeds of the sale of a new series of Holdings
preferred stock to RC Aviation. We and RC Aviation have elected to finance the
Joint Plan with a $50 million senior secured credit facility together with
approximately $100 million of convertible senior notes as more fully described
below.
Subject to the final completion of the negotiations and satisfaction of the
conditions to closing, on the Effective Date, Holdings, as guarantor, expects to
enter into a three-year credit agreement (the "Credit Agreement") with Hawaiian,
as borrower, and Wells Fargo Foothill, Inc., D.B. Zwirn Special Opportunities
Fund, L.P., Bernard National Loan Investors Ltd. and certain other lenders
(collectively, the "Lenders"). The Credit Agreement will provide Hawaiian with a
$50 million facility comprised of (i) a $25 million revolving line of credit
(the "Revolving Facility"), subject to availability under a borrowing base
formula based on Hawaiian's eligible accounts receivable, eligible spare parts,
eligible ground equipment and collections, with a $15 million sublimit for
letters of credit and
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up to $5 million in swing loans and (ii) a $25 million term loan (the "Term
Loan"). At the option of Hawaiian, the Revolving Facility and the Term Loan each
may bear interest either at the Wells Fargo Bank prime rate ("Prime Rate") or
the rate at which U.S. Dollar deposits are offered to major banks in the London
interbank market, adjusted by a prescribed reserve percentage ("LIBOR"). If
Hawaiian chooses the Prime Rate, interest will accrue at a rate of 1.5% above
the Prime Rate. If Hawaiian chooses LIBOR, interest will accrue at a rate of 4%
above LIBOR. All obligations under the Credit Agreement bear interest at a
minimum per annum rate of 5%.
Borrowings under the Credit Agreement will be used initially to fund
distributions under the Joint Plan and to pay fees, costs and expenses in
connection therewith and with the Credit Agreement and transactions contemplated
thereby; thereafter, such borrowings are to be used for working capital and
other lawful purposes.
Commencing three months from the Effective Date, amortization payments in the
amount of $2,083,333 each will be payable by Hawaiian quarterly in arrears in
connection with the Term Loan, which matures three years from the Effective
Date. We will guarantee all obligations, liabilities and indebtedness under or
in connection with the Credit Agreement and the other loan documents
(collectively, the "Loan Documents"). Obligations of Holdings and Hawaiian under
the Loan Documents will be secured by a first priority lien on substantially all
of their respective assets, whether then owned or thereafter acquired, including
their engines, spare parts, accounts receivable, bank accounts, investment
property, inventory, intangibles, equipment, trademarks, copyrights and patents,
and a pledge of their equity interests in their respective subsidiaries.
The Credit Agreement will contain provisions requiring the Term Loan to be
prepaid from net cash proceeds from the sale of assets by Holdings, Hawaiian or
any of their subsidiaries, issuance of debt and receipt of extraordinary
receipts, subject to certain exceptions and limitations. The Credit Agreement
will contain numerous financial and other covenants, including limitations on
indebtedness, liens, fundamental changes, dividends, stock repurchases, disposal
of assets, prepayments, change of control, investments and transactions with
affiliates. In addition, Hawaiian will be required to maintain (i) specified
levels of minimum EBITDA, (ii) a certain leverage ratio, and (iii) specified
levels of excess borrowing availability under the Revolving Facility plus
certain cash.
Subject to final completion of the negotiations and satisfaction of the
conditions to closing, on the Effective Date, we intend to issue approximately
$100 million aggregate principal amount of Convertible Senior Notes due 2010
(the "Notes"). The Notes will be issued pursuant to an indenture (the
"Indenture"), dated the Effective Date, by and among Holdings, as issuer, and
The Bank of New York, as trustee (the "Trustee"), and sold pursuant to a
purchase agreement, dated the Effective Date, by and among Holdings, as issuer,
Hawaiian, as guarantor, and the purchasers named in Schedule A thereto. The
Notes will be subordinate to Holdings' secured indebtedness and will be
guaranteed by Hawaiian. The Notes will bear interest at a rate to be determined,
payable semiannually in cash in arrears. On each interest payment date, each
holder will also receive a cash payment equal to the per share cash dividends
paid on each share of the Common Stock during the prior three-month period
multiplied by the number of shares into which the Notes may be converted.
The Notes will be convertible at any time in whole or in part at the option of
the holders into Common Stock at an initial conversion rate which is to be
determined, but at a premium to market, subject to certain anti-dilution
protections. Upon conversion, we will also pay the holders accrued interest as
of the date of conversion and an amount equal to 50% of the remaining
prospective interest from the date of conversion through maturity (together, the
"Make Whole Payment"). In the event of a conversion caused by a certain
non-public change of control (as defined in the Indenture), the Enhanced Make
Whole Payment will be the greater of the Make Whole Payment that would have been
payable had such change of control not occurred or a percentage to be determined
of the principal amount of the Note; provided that, if the conversion occurs on
or after March 25, 2009, the Enhanced Make Whole Payment shall be a percentage
to be determined of the principal amount of the Note. The Make Whole Payment
will be payable in cash and/or Common Stock. The Notes will contain provisions
suspending the holder's right of conversion to the extent that such conversion
would result in such holder owning in the aggregate more than 9.9% of the Common
Stock.
We may redeem the Notes on or after the second anniversary of the date of
issuance, for cash, at par (plus accrued and unpaid interest) if the closing
price of the Common Stock has exceeded 150% of the conversion price for at least
20 out of 30 consecutive trading days prior to the date of the notice of
redemption. The Notes will be convertible at any time prior to the date such
redemption is effective. We will be required to repurchase all or part of the
Notes
9
upon a change in control (as defined in the Indenture) at a price equal to
101% of par plus accrued and unpaid interest.
The Indenture will contain various covenants, including limitations on senior
indebtedness, dividends, transactions with affiliates, use of proceeds,
restricted payments and issuances and sales of preferred stock by subsidiaries.
Events of default under the Indenture will include our failure to pay principal
or interest on the Notes when due, or our failure to comply with the Indenture,
and cross defaults with respect to certain other indebtedness (as applicable and
subject to certain grace periods). Upon an event of default on the Notes, the
outstanding principal balance of the Notes will bear interest at a rate equal to
1% greater than the rate otherwise applicable.
The Notes will be issued and sold in a private placement, and the Notes and
Common Stock into which they are convertible will be required to be registered
with the SEC not later than 180 days from the date of issuance, subject to
certain grace periods. Failure by Holdings to file a registration statement
within the applicable time limitations shall result in registration delay
payments accruing, (i) in respect of the Notes then outstanding, at a rate per
annum equal to 0.25% of the aggregate principal amount of the Notes then
outstanding during the 90-day period immediately following the occurrence of any
registration delay, which rate shall increase by 0.25% per annum of the
aggregate principal amount of the Notes outstanding at the end of each
subsequent 90-day period, but shall not exceed in the aggregate 1.00% per annum
of the aggregate principal amount of the Notes outstanding, and (ii) in respect
of each share of converted Common Stock then outstanding, at a rate per annum
equal to 0.25% of the conversion rate during the 90-day period immediately
following the occurrence of any registration delay, which rate shall increase by
0.25% per annum of the conversion rate at the end of each subsequent 90-day
period, but shall not exceed in the aggregate 1.00% per annum of the conversion
rate.
While Holdings has no formal financing commitments for the Credit Agreement or
the Notes and final terms of the financing agreements, including pricing terms,
are subject to final negotiation, the financing documentation is substantially
complete. We believe that we will be able to complete the required financing
transactions necessary to fund the Joint Plan, subject to resolution of the ALPA
issues and assuming no material deterioration in market conditions. There can be
no assurance, however, that we can successfully consummate such financings. In
the event that such financings are not available, Holdings will utilize the
funds available under the Restructuring Support Agreement. See "RC Aviation, LLC
Transactions".
CERTAIN GENERAL CASE SUMMARY MATTERS
AIRCRAFT LEASES
On September 15, 2004, the Trustee, BCC Leasing and Holdings, HHIC and RC
Aviation (collectively, the "HHI Parties") entered into a comprehensive
Memorandum of Understanding (the "MOU") that provides for the following: (a)
assumption, on modified terms, of the three 767 aircraft leases and eleven 717
aircraft leases between Hawaiian and BCC Leasing (together, the "Boeing Assumed
Leases"), (b) settlement of the claims of BCC Leasing against Hawaiian with
respect to certain rejected aircraft leases and certain aircraft leases to be
assumed, (c) a BCC Leasing claim for an agreed amount of $66.5 million; and (d)
the sale by BCC Leasing to RC Aviation of the $66.5 million claim. The MOU also
provides for mutual releases between the Trustee and BCC Leasing, as well as a
release of claims for avoidance actions against four affiliates of BCC Leasing.
Under the MOU, the Trustee and the HHI Parties agreed that the Joint Plan shall
provide for assumption of the Boeing Assumed Leases and would not provide for
their rejection under any circumstances. The Trustee and the HHI Parties also
agreed under the MOU that the Joint Plan would provide for the affirmation of
certain tax indemnity obligations related to certain rejected leases. The Joint
Plan contains such provisions. Under the affirmation, Hawaiian will continue to
indemnify BCC Leasing against certain tax matters. Hawaiian believes that any
such tax indemnity obligation will not have a material financial impact on
Hawaiian and its operations. BCC Leasing agreed, subject to certain limited
exceptions, not to object to the Joint Plan. BCC Leasing did not object to the
Joint Plan.
By order entered on September 27, 2004, the Bankruptcy Court approved assumption
of the Boeing Assumed Leases, and approved the terms of the MOU. The
transactions contemplated under the MOU, including the amendment of certain
leases and the sale of the BCC Leasing claim to RC Aviation, were consummated on
September 30, 2004.
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SEVERANCE PROGRAMS AND RELATED MATTERS
On November 28, 2003, the Trustee filed a motion seeking approval of (1) a
severance program for Hawaiian's management, including its president and chief
operating officer, Mark Dunkerley, (2) severance benefits to non-contract
employees, and (3) an agreement among the Trustee, the Official Committee of
Unsecured Creditors (the "Committee"), and certain officers of Hawaiian to
facilitate the ability of those officers to resign as officers of Holdings, and
certain other matters. Each of these, as more fully described below, was
approved at a hearing held on January 23, 2004.
SEVERANCE PROGRAM FOR MANAGEMENT
The severance program for Hawaiian's management provides eleven officers with
severance in the form of salary and certain benefits for one year after
termination. The program has subsequently been modified to include other
officers of Hawaiian. The severance benefits would only be available upon a
termination of employment without cause during the 180 day period, or
resignation during the 60-day period, following a "Change of Control." A Change
of Control was defined to be an event where the Trustee was no longer the
trustee, and the chief operating officer (Mark Dunkerley) was not elevated to
chief executive officer.
SEVERANCE BENEFITS TO NON-CONTRACT EMPLOYEES
The severance program for non-contract employees provided, to Hawaiian's current
and future regular non-contract full-time employees, severance on the same terms
and conditions as was available to those employees prior to the Petition Date.
That program provides those employees who are involuntarily terminated without
cause, with between two and thirteen weeks of severance benefits based on length
of service of the employee. The Trustee also retained discretion to pay
non-contract employees (including officers) accrued pre-petition vacation and
additional severance, provided that payments to any non-contract employee shall
not exceed 52 weeks of salary and benefits.
FIVE OFFICER AGREEMENT
Five officers of Hawaiian, Mark Dunkerley, Christine Deister, Ruth Ann Yamanaka,
Paul Kobayashi and John Wagner (the "Five Officers") were also officers of
Holdings on the Petition Date. While these individuals were willing to resign
their positions as officers of Holdings, they were concerned about the legal
implications of such resignation. Accordingly, the Trustee sought and obtained,
on an expedited basis, authority to engage separate counsel to represent the
officers. Following negotiations between the Trustee, the Committee and the Five
Officers, they agreed to resign their positions provided that they received
certain protections from the Trustee. The Trustee, the Committee and Five
Officers entered into an agreement (the "Five Officer Agreement") whereby the
Trustee and the Committee agreed (a) not to take any action that could result in
the subordination of any indemnity claim held by these officers, (b) to allow
the officers to make a claim against Hawaiian's existing Directors and Officers
Insurance Policies, and (c) to covenant not to sue the officers. The Five
Officers agreed to cooperate in the investigation related to the conduct of the
business of Holdings or Hawaiian prior to the Trustee's appointment. Mark
Dunkerley, Paul Kobayashi and John Wagner remain as officers of Hawaiian.
OTHER SIGNIFICANT BANKRUPTCY COURT ACTIONS
EXTENSION OF TIME TO ASSUME OR REJECT UNEXPIRED LEASES
The current deadline for rejection or assumption of unexpired leases is the
earlier of the effective date of a plan of reorganization or May 12, 2005.
MANAGEMENT INCENTIVE PROGRAM
The Trustee obtained an order, entered on July 16, 2004, authorizing the
implementation of a Management Incentive Plan, which authorizes the Trustee to
award performance bonuses to Hawaiian's senior and middle managers. Under the
Management Incentive Program, approved with the consent of the Committee but
over the objection of Hawaiian's three major unions, the Trustee has authority
to award up to $3 million in performance bonuses for work
11
attributable to 2003, and up to $3 million in performance bonuses in 2004 (or $4
million if operating profits exceed $60 million). Those bonuses are to be paid
as follows: up to fifty percent of the bonus attributable to 2003 can be paid at
any time, with the balance of the bonus payable for 2003 and the full amount of
any bonus for work performed in 2004 to be paid on the earlier of December 1,
2004 or the Effective Date. Any bonuses paid to senior management under the
Management Incentive Plan will reduce the amount of severance payable to those
officers under the severance programs previously approved by the Bankruptcy
Court.
ADDITIONAL DISPUTED CLAIMS
PENSION BENEFIT GUARANTY CORPORATION
The Pension Benefit Guaranty Corporation ("PBGC") filed at least nine claims in
the aggregate amount of more than $200 million relating to the three defined
benefit pension plans sponsored and maintained by Hawaiian for unfunded pension
liability. Three of those claims were contingent upon termination of the pension
plans; the remaining claims were for minimum funding obligations or unpaid
premiums.
On or about December 7, 2004, the Trustee and the PBGC executed a stipulation
providing, among other things, that so long as Hawaiian did not terminate its
pension plans prior to the Effective Date, upon the Effective Date the PBGC will
be deemed to have withdrawn its claims against Hawaiian, and that neither the
stipulation nor the Joint Plan will affect the liabilities of Hawaiian with
respect to its pension plans or the PBGC. All prepetition claims of the PBGC
will have been paid in full on the Effective Date. The IRS asserted a penalty
claim that it contended arose from the delay in payment of certain of those
claims, but the Bankruptcy Court has disallowed that claim. There are accrued
unpaid minimum contributions to Hawaiian's pension plan for the four quarters
during the calendar year 2004 that total approximately $9.6 million. These
amounts must be paid on or before September 15, 2005, together with interest, to
avoid any delinquency penalty and assuming the Effective Date occurs in the
latter half of April 2005, it is anticipated that Hawaiian will pay these
amounts by that date. The PBGC may be entitled to file a lien against the assets
of Hawaiian and Holdings to secure payment of these minimum funding obligations
for 2004 pending payment.
INTERNAL REVENUE SERVICE
In approximately July 2003, the IRS commenced a tax audit of Hawaiian, covering
taxes for income, fuel excise, and other matters. The IRS filed a proof of claim
which, as amended, was in the amount of approximately $126 million. Of that
amount, approximately $87.4 million was said to constitute a priority tax claim
under section 507(a)(8) of the Bankruptcy Code. The balance of the IRS claim, in
the amount of approximately $38.6 million, primarily reflects penalties proposed
by the IRS arising from its contention that Hawaiian filed excessive claims
related to the non-taxable use of aviation fuel. The Trustee and the IRS settled
most of the other components comprising the claim, resulting in a reduction of
the total priority claim to approximately $89.4 million (including interest). On
March 28, 2005, an order setting forth the allowed amount of the IRS' claim,
based upon the agreements reached and the rulings of the Bankruptcy Court was
entered by the Bankruptcy Court. The time period for the IRS to appeal the
Bankruptcy Court's ruling has not, therefore, expired.
The order entered by the Bankruptcy Court provides as follows: (1) the IRS is
allowed a prepetition priority excise tax claim in the amount of $22.0 million;
(2) the IRS's prepetition priority income tax claim for income tax adjustments
for 2001 and 2002 is estimated and capped at $8.1 million; (3) the IRS is
allowed an administrative priority excise tax claim in the amount of $1.0
million and because this is an administrative claim, interest runs on this claim
(through November 30, 2004, such interest was $0.2 million); and (4) Hawaiian
will be entitled to additional deductions and income reductions in 2003 and/or
subsequent years based on the adjustments made by the IRS to Hawaiian's 2001 and
2002 income tax returns. The income tax claim arose from the IRS's disallowance
of certain deductions for maintenance expenses in 2001 and 2002, based on its
conclusion that such deductions should have been taken in 2003 and/or subsequent
years. Pursuant to the agreement with the IRS, Hawaiian is entitled to
additional deductions in 2003 and 2004 of $44.2 million and $3.8 million,
respectively, for maintenance expenses previously included in Hawaiian's tax
returns for 2001 and 2002. In addition, a portion of the IRS's income tax claim
for 2001 and 2002 is based on its conclusion that Hawaiian was required to
recognize certain air traffic liability income in those years, which Hawaiian
had previously recognized in 2003. It is Hawaiian's position that it can reduce
its taxable income in 2003 by a like dollar amount, which will reduce Hawaiian's
tax liability for 2003.
12
The order provides that absent agreement by Hawaiian and the IRS with respect to
the reduction of taxable income in 2003, the Bankruptcy Court shall retain
jurisdiction to adjudicate the matter. The allowed administrative priority
excise tax claim will be paid in full in cash on the Effective Date. The
priority income tax and excise tax claims, totaling approximately $30.1 million,
will be paid over approximately 20 quarters following the Effective Date,
together with interest thereon from and after the Effective Date, at the rate of
5% per annum. The IRS has taken the position that it can retain and offset
income tax refunds against the priority claims to be paid over the 20 quarters
following the Effective Date. Hawaiian disputes this position and the issue
remains unresolved.
AMERICAN AIRLINES
American Airlines ("AA") has filed a proof of claim, as amended, in the amount
of approximately $11 million for unpaid rent accruals relating to DC-10 aircraft
which Hawaiian leased prior to the Petition Date, unpaid maintenance charges,
and airplanes leased from AA whose terms expired prior to the Petition Date. The
Trustee disputes a substantial portion and contends that the allowed amount of
the claim, other than for rent accruals, should not exceed approximately $2.3
million. By Order entered on or about January 20, 2005, the Bankruptcy Court
provided for the continued negotiations among the parties following confirmation
of the Joint Plan, or a hearing before the Bankruptcy Court to resolve the
issues, if agreement could not be reached, without prejudice to their respective
rights.
RC AVIATION, LLC TRANSACTIONS
On June 14, 2004, RC Aviation purchased ten million shares of Common Stock from
AIP, the entity which was formerly a control person of Holdings, reducing AIP's
ownership of Holdings to approximately 14 percent of the outstanding Common
Stock. Also as part of the purchase, Mr. Adams resigned as our Chairman and
Chief Executive Officer, and RC Aviation and AIP entered into a stockholders
agreement, under which, among other things, AIP agreed to cause (a) the
directors that AIP had previously designated to our Board of Directors to
resign, with the exception of Gregory Anderson, and (b) Lawrence S. Hershfield
and Randall L. Jenson (the "RC Designees") to be appointed to our Board of
Directors. AIP also agreed, among other things, to vote all of its common stock
and Series A Special Preferred Stock (a) in favor of the election, as members of
our Board of Directors, of persons identified by RC Aviation for nomination or
so nominated in accordance with our Amended and Restated Certificate of
Incorporation and our Amended Bylaws, (b) to otherwise effect the intent of the
stockholders agreement, which is to cause the RC Designees to become members of
our Board of Directors, and (c) to otherwise vote such equity securities at the
direction of RC Aviation.
On December 30, 2004, Holdings, AIP and related parties entered into an
agreement pursuant to which the four shares of the aforementioned Series A
Special Preferred Stock held by AIP were cancelled.
RC Aviation will receive shares of Common Stock valued at $6.16 per share on
account of 50% of the lease-related claims controlled by it under the Joint
Plan. If necessary to make distributions to holders of claims and to satisfy the
minimum cash requirement under the Joint Plan, in exchange for the 50% cash
portion that RC Aviation is to receive on account of its lease-related claims,
RC Aviation may defer the cash payment it is to receive and instead accept a
six-month note if the reorganized Hawaiian does not have sufficient cash to pay
all obligations due on the Effective Date and retain at least $70 million in
unrestricted cash. Based on current information, it does not appear that this
will be necessary and it appears likely that RC Aviation will receive 50% of
these claims in cash and 50% in Common Stock, assuming successful consummation
of the Credit Agreement and Note financing transactions.
On the Effective Date, we will issue a warrant (the "Warrant") to RC Aviation as
required pursuant to an agreement between RC Aviation and us dated August 24,
2004 in which RC Aviation and its members entered into a firm commitment to (a)
provide funds to purchase up to $175 million of lease claims at an agreed upon
discount, (b) provide up to $60 million if required to fund the Joint Plan and
(c) fund a tender offer for all Class 4 claims in the event the Joint Plan was
not consummated by March 31, 2005, which the Trustee and RC Aviation have
extended until April 29, 2005, estimated at the time to require approximately
$38 million. The up to $60 million required to be funded by RC Aviation will be
funded, based upon current circumstances, through the issuance of a new series
of Holdings non voting convertible preferred stock, providing for dividends at
the rate of 5% per annum, payable at the option of Holdings in cash or in kind.
If in kind, the holder may elect to receive preferred stock or Common Stock. The
preferred stock would be convertible into Common Stock on or after the twelve
month anniverary of the issuance date at a price per share based on then current
market conditions, but not in excess of $6 per share. The preferred stock would
be mandatorily redeemable in cash five years from the issue date. Holdings would
be required to use its best efforts to redeem the preferred stock, at 105% of its
face amount, prior to the twelve month anniverary of issuance out of the
proceeds of a rights offering of Common Stock. RC Aviation would receive a
commitment fee.
The Warrant will entitle its holder to purchase 100 shares of Series E Preferred
Stock. The Series E Preferred Stock will have an aggregate liquidation
preference equal to the Black Scholes valuation of the Common Stock Warrant (as
defined below). The Series E Preferred Stock will be nonvoting, but will
participate in dividends, distributions, mergers and similar events,
liquidation, dissolution or winding up of Holdings in an amount equal to the
greater of the liquidation
13
preference of the Series E Preferred Stock and the amount that would be received
based upon participation with the Common Stock on a pro rata basis. Upon the
receipt of shareholder approval of an increase in the number of authorized
shares of Common Stock, the Warrant shall be automatically exchanged for a
warrant (the "Common Stock Warrant") entitling the holder to purchase 5% of our
fully diluted Common Stock (upon giving effect to all securities issued upon the
Effective Date), at an exercise price of $7.20 per share, subject to adjustment
for certain anti-dilutive events.
In addition, if RC Aviation is required to fund up to $60 million referred to
above, it will be entitled to receive a commitment fee in the form of an
additional warrant on the terms described above exercisable for 1% of the
outstanding Common Stock on a fully diluted basis, for each $12 million of
preferred stock purchased by it.
CORPORATE RESTRUCTURING
On August 29, 2002, Hawaiian was restructured into a holding company structure,
whereby Hawaiian became a wholly owned subsidiary directly and indirectly of
Holdings, and the shareholders of Hawaiian, as described in more detail below,
exchanged their Hawaiian shares for Holdings shares on a one-for-one basis and
became shareholders of Holdings. The shareholders of Holdings have substantially
the same rights, privileges and interests with respect to Holdings as they had
with respect to Hawaiian immediately prior to the corporate restructuring,
except for any such differences that arise from differences between Delaware and
Hawaii law. The purpose of the corporate restructuring was to provide strategic,
operational and financing flexibility, and to take advantage of the flexibility,
predictability and responsiveness that Delaware law provides.
In connection with the corporate restructuring, Airline Investors Partnership,
L.P. ("Airline Investors Partnership"), the majority shareholder of Hawaiian
prior to the corporate restructuring, was restructured into AIP, a limited
liability company. As part of the restructuring, Holdings acquired and initially
owned, indirectly through HHIC, as well as directly, all of the shares of
Hawaiian's common stock that were previously held by Airline Investors
Partnership. In exchange, AIP received 14,159,403 shares of Holdings common
stock (the same number of shares that Airline Investors Partnership owned of
Hawaiian common stock immediately prior to the exchange). Immediately after the
restructuring, Holdings acquired the remaining outstanding shares of Hawaiian
common stock and all of the shares of Hawaiian special preferred stock, with
each of these shares being converted into one share of Holdings common stock.
After the completion of the corporate restructuring, the shareholders of
Holdings held the same relative percentage of Holdings common stock as they did
of Hawaiian common and special preferred stock immediately prior to the
corporate restructuring.
In addition, Holdings assumed sponsorship of the existing Hawaiian stock option
plans. As a result, the outstanding options became exercisable or issuable upon
the same terms and conditions as were in effect immediately prior to the
completion of the corporate restructuring, except that shares of Holdings common
stock will be issued upon the exercise or issuance of these options instead of
Hawaiian common stock. Furthermore, each pilot participant eligible to receive a
share of Hawaiian common stock under the Hawaiian pilots' 401(k) plan and the
2001 letter of agreement with the Hawaiian pilots became eligible to receive, on
the same terms and conditions as were in effect immediately prior to the
corporate restructuring, one share of Holdings common stock instead.
As part of the corporate restructuring, Holdings also issued to AIP and each of
the three labor unions having the right to nominate individuals to our Board of
Directors, a number of shares of a corresponding series of Holdings special
preferred stock equal to the number of shares of Hawaiian special preferred
stock that they held immediately prior to the corporate restructuring. In
addition, the existing stockholders agreement among Hawaiian, Airline Investors
Partnership and the three labor unions having board nomination rights was
amended and restated to make Holdings and AIP parties to the agreement and to
have them assume all the rights and obligations of Hawaiian and Airline
Investors Partnership under the existing stockholders agreement, respectively.
As a result, after the completion of the corporate restructuring, the relative
governance rights in Holdings of AIP and these three labor unions were
substantially the same as the rights in Hawaiian of Airline Investors
Partnership and these three labor unions immediately prior to the corporate
restructuring.
Pursuant to the Confirmation Order and the Joint Plan, on the Effective Date,
Hawaiian shall be merged into HHIC, with HHIC as the surviving entity which will
immediately thereafter be renamed Hawaiian Airlines, Inc. Simultaneously with
the merger, each issued and outstanding equity share in HHIC will be exchanged
for one share of common stock of the reorganized Hawaiian.
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FINANCIAL RESTRUCTURING
In light of the changed operating environment described in "Management's
Discussions and Analysis of Financial Condition and Results of Operations -
State of the Airline Industry" and recent financial losses, Hawaiian, during the
period it was controlled by Holdings, took several steps to mitigate the impact
on its results of operations and financial condition. These steps included a
significant reduction in scheduled capacity on an available seat mile basis as
well as in its workforce immediately after the events of September 11, 2001. In
addition, on October 31, 2002, Hawaiian announced that it would further reduce
its workforce by approximately 150 employees, or four percent of its total
workforce, in an effort to bring its cost structure in line with current and
expected revenues. Hawaiian secured voluntary leaves of absence from
approximately 60 flight attendants, reduced work schedules for part-time
reservations personnel and decided to leave certain open positions unfilled
until economic conditions improved. Hawaiian also began a comprehensive
financial restructuring effort to restore its long-term financial viability.
Hawaiian developed a financial restructuring plan that sought to reduce
operating costs to sustainable and competitive levels outside of Chapter 11 of
the Bankruptcy Code through the following measures:
o increasing operating efficiency through the conversion to a new fleet
of aircraft;
o obtaining economic concessions from key stakeholders, including
employees, aircraft lessors and other vendors;
o restructuring senior management; and
o reducing distribution costs while improving operating efficiency and
inventory management by converting to an electronic ticketing
environment through the elimination of paper tickets and interisland
coupons.
During the first quarter of 2003, Hawaiian was successful in its efforts in
implementing significant portions of the financial restructuring plan. As part
of its financial restructuring plan, Hawaiian began negotiations with its labor
unions seeking an aggregate of $15 million of annual concessions from the labor
unions, primarily through work rule changes. On February 20, 2003, Hawaiian's
employees represented by the International Association of Machinists and
Aerospace Workers (AFL-CIO) ("IAMAW") agreed to $3.8 million in annual
concessions. On March 6, 2003, Hawaiian's pilots represented by ALPA reached an
agreement with Hawaiian with respect to approximately $8 million in annual
concessions. Similarly, on March 11, 2003, Hawaiian's flight attendants
represented by AFA ratified an agreement to grant concessions that were expected
to save Hawaiian $3.5 million per year.
However, Hawaiian was not able to negotiate sufficient cost-savings from its
aircraft lessors to enable Hawaiian to restructure on a consensual basis outside
of Chapter 11 of the Bankruptcy Code. Under the terms of the Boeing 717-200
("B717") aircraft leases with BCC Leasing which required cash rental payments in
excess of the amounts recognized as rent expense in Hawaiian's financial
statements for approximately the first half of the lease terms, Hawaiian was
required to make cash payments in excess of $10 million in January 2004. Wells
Fargo acts as the trustee for the benefit of BCC Leasing. Wells Fargo extended
the due date for these payments and other subsequent payments that came due from
and after January 2003 under the B717 aircraft leases. From and after January
2003, Hawaiian made a number of payments to Wells Fargo on account of the B717
aircraft leases. As of March 21, 2003, however, Hawaiian owed Wells Fargo in
excess of $10 million, although Hawaiian was current on its payments under its
Boeing 767-300ER ("B767") aircraft lease agreements with each of Hawaiian's
lessors. Hawaiian was unsuccessful in negotiating satisfactory terms with Wells
Fargo to extend the waiver and deferral of certain rental payments associated
with Hawaiian's B717 fleet past March 21, 2003. Based on this reason, together
with the prospect of continued liquidity concerns, Hawaiian's then-current
management determined that it was necessary and appropriate to file for relief
under Chapter 11 as a means of completing the financial restructuring process
and putting Hawaiian in a position to return to profitability. At the time of
the Chapter 11 Filing, then-current management believed that Hawaiian's
operating leases could be quickly re-negotiated through the Chapter 11
bankruptcy process and that Hawaiian would emerge from bankruptcy in a short
period of time.
15
BUSINESS OF HAWAIIAN
As described above under "Business--Chapter 11 Reorganization of Hawaiian,"
inasmuch as the Trustee has been in charge of operating Hawaiian's business
since May 2003 and will retain such authority until such time as the Joint Plan
is confirmed and consummated, we do not have unfettered access to information
and documents regarding Hawaiian. Thus, while we believe that the following
information concerning the business of Hawaiian is accurate, it is not in a
position to verify such accuracy.
Segment Information
Principally all of Hawaiian's flight operations either originate or end in the
State of Hawaii. The management of such operations is based on a system-wide
approach due to the interdependence of Hawaiian's route structure in the various
markets that Hawaiian serves. Hawaiian operates as a matrix form of organization
as it has overlapping sets of components for which managers are held
responsible. Managers report to Hawaiian's chief operating decision-maker on
both Hawaiian's geographic components and Hawaiian's product and service
components, resulting in components based on products and services constituting
one operating segment. As Hawaiian offers only one service (i.e., air
transportation), management of Hawaiian has concluded that it has only one
segment of business for the periods in which Hawaiian is consolidated into our
operations.
Flight Operations
Hawaiian's flight operations are based in Honolulu, Oahu. As of December 31,
2003, Hawaiian operated approximately 135 scheduled flights per day with:
o daily service on transpacific routes between Hawaii and Los Angeles,
Sacramento, San Diego and San Francisco, California; Las Vegas,
Nevada; Phoenix, Arizona; Portland, Oregon and Seattle, Washington;
o daily service on interisland routes among the four major islands of
the State of Hawaii; and
o weekly service on south pacific routes as the sole direct provider of
air transportation from Hawaii to each of Pago Pago, American Samoa,
and Papeete, Tahiti in the South Pacific, and scheduled service to
Sydney, Australia.
o charter service two to three times weekly from Honolulu, Hawaii to
Anchorage, Alaska.
The following table delineates scheduled and chartered passenger revenue of
Hawaiian for the periods during which we consolidated Hawaiian.
2003(*) 2002
-------- --------
Transpacific $ 87,094 $341,662
Interisland 42,151 180,391
South Pacific 4,442 19,940
Overseas Charter 11,832 46,480
-------- --------
$145,519 $588,473
* Only represents the period during which we consolidated Hawaiian.
Aircraft
As of December 31, 2003, Hawaiian operated 12 B717 aircraft to service the
interisland routes and 14 B767 aircraft to service Hawaiian's transpacific,
south pacific and overseas charter routes.
16
Codesharing and Other Alliances
Hawaiian is able to provide connections across the United States, Canada and
Mexico through codesharing agreements (pursuant to which one carrier places its
name and flight numbers, or "code", on flights operated by the other carrier)
with Alaska Airlines, America West Airlines, American Airlines, American Eagle
Airlines, Continental Airlines and Northwest Airlines. Hawaiian also
participates in the frequent flyer programs of Alaska Airlines, America West
Airlines, American Airlines, Continental Airlines, Northwest Airlines and Virgin
Atlantic Airlines. These programs enhance Hawaiian's revenue opportunities by:
o providing Hawaiian's customers more value by offering more travel
destinations and better mileage accrual/redemption opportunities;
o gaining access to more connecting traffic from other airlines; and
o providing members of Hawaiian's alliance partners' frequent flyer
program an opportunity to travel on Hawaiian's system while earning
mileage credit in the alliance partners' program.
Although these programs and services increase Hawaiian's ability to be more
competitive, they also increase Hawaiian's reliance on third parties.
Competition
Hawaiian faces multiple competitors on its transpacific routes, including major
carriers such as American Airlines, Continental Airlines, Northwest Airlines,
Delta Airlines, United Airlines and various charter carriers. The Company
believes that transpacific competition is based on factors such as fare levels,
flight frequency, on-time performance and reliability, name recognition,
affiliations, frequent flyer programs, customer service, aircraft type and
in-flight service. Currently, Hawaiian is the only provider of direct service
between Honolulu and each of Pago Pago, American Samoa and Papeete, Tahiti.
While there are several small commuter and "air taxi" companies that provide air
transportation between Hawaii's interisland airports that cannot be served by
large aircraft, the interisland routes are serviced primarily by Hawaiian and
Aloha Airlines. Hawaiian believes that interisland competition is primarily
based on fare levels, flight frequency, on-time performance and reliability,
name recognition, affiliations, frequent flyer programs, customer service and
aircraft type.
Employees
As of December 31, 2003, Holdings had no employees and Hawaiian had
approximately 3,310 active employees of which approximately 2,625 were employed
on a full-time basis. Approximately 85% of Hawaiian's employees are covered by
labor agreements with the following unions: IAMAW, ALPA, AFA, the Transport
Workers Union ("TWU") and the Employees of the Communications Section
("Communications Section"). All contracts are subject to renegotiation in 2004
and 2005.
Recent events at Hawaiian, in particular, the 2002 Tender Offer and the
bankruptcy proceedings, have harmed the historically good labor relations
enjoyed by Hawaiian. While there can be no assurance that Hawaiian's generally
good labor relations will improve, we expect to develop and execute a business
strategy that recognizes the importance of good relations with Hawaiian's
employees.
ITEM 2. PROPERTIES.
As a holding company, Holdings does not own any physical properties. No
information regarding properties owned or leased by Hawaiian is contained herein
because the business of Hawaiian has been operated under the jurisdiction of the
Trustee since May 2003, as described in greater detail in "Business--Chapter 11
Reorganization of Hawaiian.
17
ITEM 3. LEGAL PROCEEDINGS.
CHAPTER 11 CASE
On March 21, 2003, Hawaiian filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court. The reorganization is being
administered under the caption "In re Hawaiian Airlines, Inc., Case No.
03-00817". The Chapter 11 case is discussed in greater detail under "Business --
Chapter 11 Reorganization of Hawaiian."
GOTBAUM V. HAPP - ADV. PROC. NO. 03-90060
On or about November 17, 2003, the Trustee brought a lawsuit against John Happ,
our former Vice President, Sales and Marketing, who resigned on February 15,
2003. In that lawsuit, the Trustee seeks injunctive and monetary relief against
Happ based upon his alleged violation of a covenant not to compete and other
contractual obligations which occurred when he accepted a similar position with
ATA Airlines, Inc. in July 2003. Pursuant to a settlement, the adversary
proceeding was dismissed with prejudice by order of the Bankruptcy Court dated
January 25, 2005.
GOTBAUM V. ADAMS, ET AL., ADV. NO. 03-90061 (BANKR. D. HAW.).
On November 28, 2003, the Trustee filed a complaint (the "Complaint") with the
Bankruptcy Court, naming Mr. Adams (our Chief Executive Officer prior to June
2004), AIP, Airline Investors Partnership and Smith Management LLC (together,
the "Adams Defendants") and Holdings, as defendants. The Complaint asserted
various counts based on corporate actions including claims alleging, inter alia,
fraudulent transfer claims under the Bankruptcy Code and Hawaii law; avoidance
and recovery of preference under the Bankruptcy Code; unlawful distribution
under Hawaii law; violations of the duties of care and loyalty under Hawaii law;
and unjust enrichment under Hawaii law. The factual allegations relate to a $25
million self-tender offer undertaken by Hawaiian announced on May 31, 2002 (the
"Self-Tender") that was subsequently consummated; payments made by Hawaiian
Airlines to Smith Management in the total amount of $2.75 million; $200,000 in
compensation paid by Hawaiian to defendant Mr. Adams; and $500,000 transferred
from Hawaiian to Holdings. Based on all of the claims in the Complaint, the
Trustee sought in excess of $28 million, as well as punitive damages,
prejudgment interest and the costs of the lawsuit.
The Adams Defendants and we served answers denying all material allegations of
the Complaint on January 5, 2004 and on February 18, 2004, respectively. On
January 4, 2005, Hawaiian announced that the Adams Defendants had agreed to pay
Hawaiian $3.6 million to settle the lawsuit brought by the Trustee. The
Bankruptcy Court approved the settlement on February 24, 2005. Such amount will
be paid to Hawaiian once it successfully emerges from bankruptcy.
SEC INVESTIGATION AND CIVIL ACTION
On September 22, 2003, we received notice that the SEC had opened a formal,
nonpublic investigation of Hawaiian and several of its then officers related to
the Self-Tender.
We announced on March 13, 2004 that the Staff of the San Francisco District
Office of the SEC was considering recommending that the SEC authorize a civil
action against Mr. Adams, our former Chairman, and AIP for possible violations
of securities laws related to the Self-Tender. On September 23, 2004, Hawaiian
announced a settlement agreement with the SEC that resolves the SEC's
investigation of the Self-Tender, pursuant to which investigation the SEC
concluded that the Self-Tender violated SEC rules relating to tender offers.
Under the terms of the settlement, the SEC will not file any claim or seek any
monetary penalties against Hawaiian, and Hawaiian pledges to comply with tender
offer disclosure rules if it should ever again make a public tender offer.
We are not a party to any other litigation that is expected to have a
significant effect on our operations or business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In the table below, we present the range of the reported high and low sales
prices on the AMEX of our Common Stock for the calendar quarters indicated. The
shares of our Common Stock are listed on the AMEX and the PCX under the symbol
"HA.
PRICE RANGE
-------------
HIGH LOW
----- -----
2003
First Quarter $2.10 $1.30
Second Quarter $1.50 $0.30
Third Quarter $1.82 $0.75
Fourth Quarter $3.08 $1.01
2002
First Quarter $4.60 $2.35
Second Quarter $4.00 $2.80
Third Quarter $3.66 $2.27
Fourth Quarter $2.54 $1.55
On March 31, 2004, the price per share of our Common Stock was $3.85. Past price
performance is not necessarily indicative of future price performance.
The rights and claims of Hawaiian's various creditors and Holdings will be
determined by the Joint Plan. We cannot provide any assurance that we will be
able to consummate the Joint Plan successfully. Accordingly, we urge that
appropriate caution be exercised with respect to existing and future investments
in Holdings.
There were approximately 1,015 holders of record of our Common Stock as of March
31, 2004, including record owners holding shares for an indeterminate number of
beneficial owners.
We paid no dividends in 2003 or 2002.
As part of the collective bargaining agreement negotiated with ALPA in December
2000, we agreed to distribute 1,685,380 shares of our Common Stock on a
quarterly basis to the individual 401(k) accounts of ALPA pilots in our
employment during 2001 and 2002. In 2001, 518,910 shares, representing the
number of shares required to be distributed in respect of the first, second and
third quarters of 2001, were distributed to Vanguard Group, Inc. as trustee for
the Hawaiian Holdings, Inc. Pilots' 401(k) Plan. In 2002, 1,051,214 shares,
required for the fourth quarter of 2001 and the first, second and third quarters
of 2002, were distributed to Vanguard Group, Inc, as trustee. The distribution
for the quarter ended December 31, 2002, consisting of 105,776 shares, was made
on March 14, 2003 to Vanguard Group, Inc. as trustee.
The Transportation Act prohibits non-U.S. citizens from owning more than 25% of
the voting interest of a U.S. air carrier or an entity controlling a U.S. air
carrier. Our articles of incorporation prohibit the ownership or control of more
than 25% (to be increased or decreased from time to time, as permitted under the
laws of the United States) of our issued and outstanding voting capital stock by
persons who are not "citizens of the United States". As of December 31, 2003, we
believe we are in compliance with the Transportation Act as it relates to voting
stock held by non-United States citizens.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides the specified information as of December 31, 2003
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance,
19
aggregated by all compensation plans previously approved by our security
holders, and by all compensation plans not previously approved by our security
holders:
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN FIRST
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN)
- ----------------------------------------- ----------------------- -------------------- ---------------------
Equity compensation plans approved by
security holders 3,088,000 $2.90 1,349,500
Equity compensation plans not approved by
security holders
--------- ----- ---------
Total 3,088,000 $2.90 1,349,500
See Note 10 to our financial statements for additional information regarding our
equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial and Statistical Data should be read in conjunction with
our accompanying audited consolidated financial statements and the notes related
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
HAWAIIAN HOLDINGS, INC.
SELECTED FINANCIAL AND STATISTICAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2003(A) 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Summary of Operations:
Operating revenue(b) $ 157,064 $ 632,038 $ 611,582 $ 607,220 $ 488,877
Operating expenses(b)(c) $ 172,157 $ 688,117 $ 594,921 $ 621,022 $ 529,414
Operating income (loss) $ (15,093) $ (56,079) $ 16,661 $ (13,802) $ (40,537)
Net income (loss) $ (16,998) $ (58,275) $ 5,069 $ (18,615) $ (29,267)
Net Income (Loss) per Common
Stock Share:
Basic $ (0.60) $ (1.88) $ 0.15 $ (0.48) $ (0.72)
Diluted $ (0.60) $ (1.88) $ 0.15 $ (0.48) $ (0.72)
Weighted Average Shares Outstanding:
Basic 28,435 31,024 33,811 38,537 40,997
Diluted 28,435 31,024 33,947 38,537 40,997
Shareholders' Equity Per Share $ (2.25) $ (5.03) $ (0.62) $ 0.54 $ 1.61
(Without Dilution)
Shares Outstanding at End of Period 28,459 28,350 34,151 33,708 40,997
Balance Sheet Items:
Total assets $ 862 $ 256,166 $ 305,294 $ 256,968 $ 241,937
Property and equipment, net -- $ 45,685 $ 45,256 $ 83,743 $ 65,272
Long-term debt, excluding current
portion -- $ 883 $ 1,673 $ 10,763 $ 23,858
Capital lease obligations,
excluding current portion -- $ 2,358 $ 3,308 $ 2,067 $ 2,790
Shareholders' equity
(deficiency)(d) $ (63,731) $ (142,610) $ (21,210) $ 18,259 $ 66,126
20
SCHEDULED OPERATIONS:
Revenue passengers 1,351 5,587 5,478 5,886 5,425
Revenue passenger miles 1,144,525 4,804,498 4,295,479 4,492,395 4,076,576
Available seat miles 1,622,707 6,246,127 5,587,566 5,967,810 5,468,589
Passenger load factor 70.5% 76.9% 76.9% 75.3% 74.5%
Passenger revenue per passenger
mile 11.7(CENTS) 11.0(CENTS) 11.4(CENTS) 10.6(CENTS) 9.8(CENTS)
OVERSEAS CHARTER OPERATIONS:
Revenue passengers 50 296 367 382 283
Revenue passenger miles 135,947 815,273 1,097,069 1,165,436 803,524
Available seat miles 163,542 862,096 1,218,734 1,279,749 852,155
TOTAL OPERATIONS:
Revenue passengers 1,401 5,883 5,845 6,268 5,708
Revenue passenger miles 1,280,472 5,619,771 5,392,548 5,657,831 4,880,100
Available seat miles 1,786,249 7,108,223 6,806,300 7,247,559 6,320,744
Passenger load factor 78.7% 79.1% 79.2% 78.1% 77.2%
Revenue Per ASM 8.79(CENTS) 8.89(CENTS) 8.99(CENTS) 8.38(CENTS) 7.73(CENTS)
Cost Per ASM 9.55(CENTS) 9.68(CENTS) 8.74(CENTS) 8.57(CENTS) 8.38(CENTS)
- ----------
(a) Includes the consolidated results of Holdings and Hawaiian from January 1,
2003 to March 31, 2003 and the stand-alone deconsolidated results of
Holdings from April 1, 2003 to December 31, 2003.
(b) For 2002 and 2001, overall revenue and expenses were significantly
unfavorably impacted by the events of September 11, 2001.
(c) For 2002, operating expenses included a net $8.7 million restructuring
charge related to the accelerated retirement of the DC-10 aircraft and the
sale of DC-9 aircraft and parts. For 2001, operating expenses included a
$30.8 million special credit for estimated proceeds from the federal
government under the Stabilization Act and a $3.6 million favorable
adjustment to the restructuring charge recorded in 2000. For 2000,
operating expenses included a $14.9 million restructuring charge related to
DC-9 aircraft and expendable inventory, and a $7.6 million loss on assets
held for sale related to sale-leaseback transactions on two DC-10 aircraft.
For 1999, operating expenses included a $47.0 million impairment loss
related to DC-9 aircraft.
(d) For 2002, 2001 and 2000 shareholders' equity (deficiency) included other
comprehensive losses related to minimum pension liability adjustments of
$96.0 million, $51.6 million and $10.1 million, respectively. The other
comprehensive losses related to minimum pension liability were eliminated
upon the deconsolidation of Hawaiian during 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As discussed in more detail under "Business - Chapter 11 Reorganization of
Hawaiian," on March 21, 2003, Hawaiian filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. Hawaiian Holdings did not file for
relief under Chapter 11 of the Bankruptcy Code. As discussed above, the Trustee
has been put in charge of operating Hawaiian's business. The filing of the
Trustee motion created significant uncertainty regarding the ability of Hawaiian
to facilitate a timely reorganization allowing us to regain full control of
Hawaiian in a relatively short period of time. As a result, effective April 1,
2003, we deconsolidated Hawaiian and prospectively accounted for our ownership
of Hawaiian using the cost method of accounting. Accordingly, our financial
results include the consolidated results of us and Hawaiian for all of 2002 and
the first quarter of 2003, and our stand-alone deconsolidated results for the
last three quarters of 2003. This has resulted in historical operating results
that are not comparable on a year-to-year basis.
We anticipate that Hawaiian will emerge from bankruptcy in the latter half of
April 2005. However, we cannot provide any assurance that we will be able to
consummate the Joint Plan successfully and that we will regain full control of
Hawaiian. Accordingly, the discussion and analysis of our financial condition
and results of operations is
21
directed toward stand-alone deconsolidated results for the periods for which
Hawaiian's results were not consolidated with ours, and our consolidated results
for the periods for which Hawaiian's results were consolidated with ours. In
addition, our liquidity discussion focuses only on our stand-alone
deconsolidated liquidity position. Following the anticipated emergence of
Hawaiian from bankruptcy in the latter half of April 2005, we will file a Form
8-K containing pro forma financial statements to report the consolidated
financial condition and results of operations of Holdings and Hawaiian.
There are a number of items that may be relevant for a discussion and analysis
of Hawaiian's results of operations, current business and industry developments,
and liquidity position that we will not discuss because we do not control
Hawaiian. Hawaiian's Chapter 11 reorganization is discussed under
"Business--Chapter 11 Reorganization of Hawaiian." In addition, summary
financial information for Hawaiian is included in Note 3 to the financial
statements included herein and Hawaiian's audited financial statements as of
December 31, 2003 and 2002, and for each of the three years ended December 31,
2003 are included in this Form 10-K beginning on page F-33.
RESULTS OF OPERATIONS
This discussion analyzes our operations for the fiscal years ended December 31,
2003, 2002 and 2001. The following information should be read together with our
audited consolidated financial statements and the accompanying notes included
elsewhere in this report.
Prior to the bankruptcy of Hawaiian we consolidated Hawaiian because we
controlled Hawaiian through our ownership of all of the voting stock of
Hawaiian. Following the Petition Date, we expected to regain full control of
Hawaiian in a relatively short period of time. We had re-negotiated Hawaiian's
collective bargaining agreements with its pilots, mechanics, and flight
attendants prior to filing bankruptcy, had minimal secured debt or other secured
non-aircraft claims, and then-current management believed that Hawaiian's
operating leases could be re-negotiated in a short period of time through the
Chapter 11 bankruptcy process. Furthermore, we and Hawaiian continued to have
both a common Board of Directors and common management. As a result, we
continued to consolidate Hawaiian through March 31, 2003. However, the filing of
the Trustee Motion created significant uncertainty regarding our ability to
facilitate a timely reorganization and regain full control of Hawaiian in a
relatively short period of time. This uncertainty was further confirmed on May
16, 2003, upon the Bankruptcy Court's issuance of the order granting the Trustee
Motion, which resulted in the appointment of the Trustee, instead of the common
Board of Directors and common management of us and Hawaiian. As a result,
effective April 1, 2003, we deconsolidated Hawaiian and prospectively accounted
for our ownership of Hawaiian using the cost method of accounting. Accordingly,
our results of operations include the operating results of Hawaiian through
March 31, 2003, but for no subsequent periods. Due to the deconsolidation of
Hawaiian, our financial statements and certain footnotes included therein do not
reflect comparable business activity on a year-to-year basis. The 2003 statement
of operations includes the consolidated operating results of Holdings and
Hawaiian through March 31, 2003, and the deconsolidated results of Holdings
only, which consists substantially of corporate expenses included in other
operating expenses, for the period from April 1, 2003 to December 31, 2003. The
2002 and 2001 statements of operations include the consolidated operating
results of Holdings and Hawaiian for the entire year.
For the periods indicated, the following table presents a breakdown of the
components of operating revenue and expenses as well as the percentage
relationship that these items bear to the total operating revenue and the
percentage increase (decrease) in the dollar amounts of such items.
PERCENTAGE
PERCENTAGE OF TOTAL OPERATING REVENUE CHANGE
------------------------------------- ----------
YEAR ENDED
DECEMBER 31, 2002
------------------------- VS.
2003(1) 2002(2) 2001 2001
------- ------- ----- -----
OPERATING REVENUE:
Passenger 85.1% 83.8% 79.8% 8.4%
Charter 7.5 7.4 12.4% (38.5)
Cargo 3.6 3.4 3.6 (4.0)
Other 3.8 5.5 4.2 37.1
----- ----- -----
TOTAL OPERATING REVENUE 100.0% 100.0% 100.0% 3.3%
===== ===== =====
22
OPERATING EXPENSES:
Wages and benefits 35.2% 32.5% 30.9% 8.8%
Aircraft fuel, including taxes and oil 16.4 15.1 18.3 (14.7)
Maintenance materials and repairs 9.9 14.3 16.2 (8.9)
Aircraft rent 18.8 13.2 6.5 108.8
Other rentals and landing fees 3.9 3.8 3.6 10.9
Sales commissions 0.7 2.3 3.4 (29.6)
Depreciation and amortization 1.2 1.4 2.3 (38.7)
Restructuring charges -- 1.4 (0.6) (341.7)
Loss on assets held for sale -- -- -- --
Special Credit (Stabilization Act) -- 0.1 (5.0) (102.2)
Other 23.6 24.8 21.7 17.9
----- ----- -----
TOTAL OPERATING EXPENSES 109.6 108.9% 97.3% 15.7%
===== ===== =====
(1) Includes the consolidated results of Holdings and Hawaiian from January 1,
2003 to March 31, 2003 and the stand-alone deconsolidated results of
Hawaiian from April 1, 2003 to December 31, 2003.
(2) Includes the consolidated results of Holdings and Hawaiian for the entire
period.
2003 COMPARED TO 2002
Our results in 2002 are not comparable to 2003 as the 2002 results included the
operating results of Hawaiian consolidated with ours for the entire year. As
indicated above, 2003 only includes those consolidated results for the first
quarter of the year. Please see "Restructuring Charges" below for a discussion
of the cost reduction measures taken during 2002 and the first quarter of 2003
and the effects of such actions on our results of operations and financial
condition.
2002 COMPARED TO 2001
For the year ended December 31, 2002, we reported an operating loss of $56.1
million and a net loss of $58.3 million. For the year ended December 31, 2001,
we reported operating income of $16.7 million and net income of $5.1 million,
during which year overall revenue and expenses for both years were unfavorably
impacted by the events of September 11, 2001. That impact was mitigated by
relief received under the Stabilization Act, totaling $30.1 million. Except for
this item, it is not practicable to determine the impact of those events on
individual elements of our operations, and the discussion that follows makes no
attempt to set forth what would have been our 2001 operating results had the
events of September 11, 2001 not occurred.
OPERATING REVENUE. Operating revenue totaled $632.0 million for the year ended
December 31, 2002, compared to $611.6 million for the year ended December 31,
2001, an increase of $20.4 million, or 3.3%. Significant year-to-year variances
were as follows:
o Scheduled passenger revenue totaled $542.0 million during the year
ended December 31, 2002, an increase of $45.2 million, or 9.1%, over
the year ended December 31, 2001. During 2002, we experienced higher
passenger volume in our transpacific market as a result of our
expanded transpacific routes. Year-to-year changes in revenue,
passengers and resulting yields on our transpacific, interisland and
south pacific flights were as follows:
PERCENTAGE
NET CHANGE IN PERCENTAGE CHANGE IN CHANGE IN
REVENUE REVENUE PASSENGERS PASSENGER YIELDS
------------- -------------------- ----------------
(IN MILLIONS)
Transpacific $41.4 13.2% (1.0)%
Interisland $ 4.3 (2.0)% 2.8%
South Pacific $(0.5) 1.5% (2.4)%
o Overseas charter revenue totaled $46.5 million for the year ended
December 31, 2002, a decrease of $29.2 million, or 38.5%, compared to
the year ended December 31, 2001. On September 25, 2001, a major
source
23
of our overseas charter revenue, Renaissance Cruises, Inc. filed for
bankruptcy under Chapter 11 and ceased operations, resulting in the
termination of our Los Angeles to Papeete, Tahiti charter service.
o Cargo revenue totaled $21.3 million for the year ended December 31,
2002, a decrease of $0.9 million, or 4.0%, compared to the year ended
December 31, 2001, due to a decrease in the cargo rate per pound.
o Other operating revenue totaled $22.2 million for the year ended
December 31, 2002, an increase of $5.3 million, or 31.1%, over the
year ended December 31, 2001, primarily due to an increase in the sale
of frequent flyer miles, sale of jet fuel and ground handling revenue.
OPERATING EXPENSES. Operating expenses, including restructuring charges and a
negative adjustment to the special credit resulting from federal financial
assistance received under the Stabilization Act, totaled $688.1 million for the
year ended December 31, 2002 compared to $594.9 million for the year ended
December 31, 2001, an increase of $93.2 million, or 15.7%. Significant year to
year variances were as follows:
o Wages and benefits totaled $205.4 million for the year ended December
31, 2002, an increase of $16.6 million, or 8.8%, over the year ended
December 31, 2001, primarily due to salary and wage increases related
to the new collective bargaining agreements with our pilots, flight
attendants and IAM employees that went into effect during 2001,
training costs associated with the introduction of the B767 aircraft
into the fleet, executive severance costs and an overall increase in
employee benefits.
o Aircraft fuel costs, including taxes and oil, totaled $95.5 million
for the year ended December 31, 2002, a decrease of $16.4 million, or
14.7%, compared to the year ended December 31, 2001. Due to the
introduction of the more fuel-efficient B717 aircraft on interisland
routes and B767 aircraft on transpacific routes, aircraft fuel
consumption decreased 8.9%, resulting in a decrease in fuel cost of
$9.8 million. The average cost of aircraft fuel per gallon decreased
5.5%, resulting in a $5.5 million decrease in fuel cost. We recognized
a loss from our fuel-hedging program of $0.6 million in 2002, compared
to $1.7 million in 2001.
o Maintenance materials and repairs totaled $90.2 million for the year
ended December 31, 2002, a decrease of $8.8 million, or 8.9%, compared
to the year ended December 31, 2001, primarily due to a decrease of
$5.7 million in DC-9 maintenance resulting from the replacement of the
DC-9 fleet, and a decrease of $22.1 million in DC-10 maintenance
resulting from the reduction of the DC-10 fleet. The cost savings were
offset by increases of $5.1 million in B717 maintenance expense
resulting from the introduction of B717 aircraft in 2001, and $14.1
million in B767 maintenance expense resulting from the operation of
B767 aircraft beginning in the fourth quarter of 2001.
o Aircraft rentals totaled $83.5 million for the year ended December 31,
2002, an increase of $43.5 million, or 108.8%, compared to the year
ended December 31, 2001, primarily due to the replacement of DC-9
aircraft with new B717 aircraft during 2001, and the current
transition from DC-10 aircraft to B767 aircraft.
o Other rentals and landing fees totaled $24.2 million for the year
ended December 31, 2002, an increase of $2.4 million, or 10.9%, over
the year ended December 31, 2001, mainly due to an increase in rent
due to the opening of two new stations in California in June 2002, the
opening of a new station in Arizona in October 2002, and an increase
in ground equipment rent to support the new B767 fleet.
o Sales commissions totaled $14.6 million for the year ended December
31, 2002, a decrease of $6.2 million, or 29.6%, over the year ended
December 31, 2001, primarily due to the elimination of travel agency
base commissions in June 2002.
o Depreciation and amortization expense totaled $8.6 million for the
year ended December 31, 2002, a decrease of $5.4 million, or 38.7%,
over the year ended December 31, 2001, primarily due to a decrease of
$4.1 million in DC-9 depreciation expense as a result of the
replacement of DC-9 aircraft in 2001. Additionally, effective January
1, 2002, we discontinued amortization of Reorganization Value in
Excess of Amounts Allocable to Identifiable Assets in accordance with
SFAS No. 142 "Goodwill and Other
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Intangible Assets" and as a result no amortization expense was
recorded in the year ended December 31, 2002 as compared to $2.3
million in the year ended December 31, 2001.
o Other expenses totaled $156.8 million for the year ended December 31,
2002, an increase of $23.8 million, or 17.9%, over the year ended
December 31, 2001. Increases in legal and consulting fees related to
our proposed merger with Aloha and TurnWorks, insurance premiums,
security costs, simulator costs, training and costs associated with
the sale of jet fuel were partially offset by decreases in interrupted
trips and personnel expenses.
o During the fourth quarter of 2002, based on a reduction in passenger
demand, we announced capacity reductions in specific transpacific
markets. We announced that we would reduce our workforce by
approximately 150 employees, or four percent of our total workforce,
in an effort to bring our cost structure in line with current and
expected revenues. In addition, we secured voluntary leaves of absence
from approximately 60 flight attendants, reduced work schedules for
part-time reservations personnel and decided to leave certain open
positions unfilled until economic conditions improve. As a result of
these actions, for the year ended December 31, 2002, we recorded $8.7
million in restructuring charges related primarily to the accelerated
retirement of our remaining eight leased DC-10 aircraft. We recorded a
charge of approximately $10.1 million related primarily to future
lease commitments on the DC-10 aircraft, lease return conditions and
maintenance commitments, DC-10 pilot severance costs and a write-down
of DC-10 improvements and parts. We also recorded a credit of $1.4
million related to the sale of eight non-operating DC-9 aircraft and
related assets that had been written in a prior year restructuring
charge. The year ended December 31, 2001 includes a $3.6 million
favorable adjustment to the restructuring charge recorded in 2000 due
to a change in the estimated cost to comply with the airframe return
provisions.
o In the year ended December 31, 2001, we recognized $30.8 million as a
special credit to operating expenses for the estimated allocation of
proceeds from the federal government under the Stabilization Act. For
the year ended December 31, 2002, we recorded a charge of $0.7 million
to adjust the special credit under the Stabilization Act based on the
DOT's final determination.
Restructuring Charges
During the fourth quarter of 2002, based on a reduction in passenger demand,
Hawaiian announced capacity reductions in specific transpacific markets.
Hawaiian announced that it would reduce its workforce by approximately 150
employees, or four percent of the total workforce, in an effort to bring its
cost structure in line with current and expected revenues. In addition, Hawaiian
secured voluntary leaves of absence from approximately 60 flight attendants,
reduced work schedules for part-time reservations personnel and decided to leave
certain open positions unfilled. As a result of these actions, for the year
ended December 31, 2002, we recorded a restructuring charge of $8.7 million
related primarily to the accelerated retirement of its remaining eight leased
DC-10 aircraft. This charge consisted of approximately $10.1 million related
primarily to future lease commitments on the DC-10 aircraft, lease return
conditions and maintenance commitments, severance costs for approximately 150
DC-10 pilots, and a write-down of DC-10 improvements and spare parts, partially
offset by a credit of $1.4 million related to the sale of eight non-operating
DC-9 aircraft and related assets that had been previously written down.
Activity related to the restructuring charges for the years ended December 31,
2003 and 2002, is set forth in greater detail in Note 5 to the financial
statements.
Deferred Tax Assets and Valuation Allowance
During the year ended December 31, 2002, we determined that it was no longer
more likely than not that any portion of our net deferred tax assets would be
realized and therefore recognized a full valuation allowance on our net deferred
tax assets as of the beginning of the year, net deferred tax assets generated
during the year (including net operating loss carryforwards), and items directly
impacting other comprehensive loss (primarily the minimum pension liability). As
a result, the valuation allowance for deferred tax assets increased by $44.7
million during the year ended December 31, 2002. Of this increase, $28.1 million
relates to increased valuation allowances for the deferred tax effect of current
year losses and the valuation allowance on the opening net deferred tax asset,
$17.7 million relates to increased valuation allowances for the deferred tax
asset attributable to the minimum pension
25
liability, and the remainder relates to an increase in deferred tax assets
attributable to other comprehensive loss items. The valuation allowance of
Hawaiian was eliminated upon the deconsolidation of Hawaiian on April 1, 2003.
Deferred tax assets at December 31, 2003 related to Holdings only. Due to
uncertainty surrounding the realizability of those assets, a valuation allowance
has been recorded for the full amount. As of December 31, 2003, we had total net
operating loss carryforwards of approximately $1.6 million to offset future
taxable income. If not utilized to offset future taxable income, the net
operating loss carryforwards will expire between the years 2022 and 2023.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had approximately $1,000 in cash and cash
equivalents, and $0.5 million of restricted cash. Our working capital deficit at
December 31, 2003 was $2.9 million, as compared with $137.0 million at December
31, 2002. Current liabilities at December 31, 2003 consisted of accounts
payable, accrued legal and professional fees and amounts due to related parties,
including $1.4 million due to Hawaiian that is primarily related to shared costs
paid by Hawaiian and allocated to us prior to Hawaiian's bankruptcy filing.
In 2003, we used $38.0 million of cash in operating activities, including $1.8
million of cash for professional fees related to Hawaiian's bankruptcy
proceedings. Cash flows from operating activities in 2003 primarily relate to
the operations of Hawaiian for the first quarter and our limited activity for
the last three quarters of the year. We used $2.6 million of cash in investing
activities in 2003 for purchases of property and equipment by Hawaiian in the
first quarter. We also used $0.7 million of cash in financing activities to pay
down long-term debt and capital lease obligations.
As a holding company, Holdings did not have any contractual obligations as of
December 31, 2003 other than liabilities payable to Hawaiian and Smith
Management LLC ("Smith Management"), each as described below.
Subsequent to our corporate restructuring in August 2002, Hawaiian paid certain
expenses on our behalf, generally relating to our obligations as a public
company. In addition, Hawaiian transferred $0.5 million, which is recorded as
restricted cash, to us immediately prior to Hawaiian's bankruptcy filing. We had
$1.4 million due to Hawaiian as of December 31, 2003.
Also, we had approximately $0.6 million due to Smith Management as of December
31, 2003 related to corporate amounts paid by Smith Management to third parties
on behalf of Holdings to fund costs associated with maintaining Holdings' status
as a public company, costs related to preparing a plan of reorganization for
Hawaiian, and other obligations of Holdings.
As described in greater detail in Item 1 under "Business--Chapter 11
Reorganization of Hawaiian," the consummation of the Joint Plan will involve
certain financial obligations on our part. We and RC Aviation have agreed,
pursuant to the Restructuring Support Agreement, to raise debt financing for
Hawaiian as described therein in order to meet the distribution and payment
obligations under the Joint Plan and to ensure that Hawaiian has at least the
minimum amount of cash required by the Joint Plan. To that end, we and RC
Aviation are in the process of negotiating a $50 million senior secured credit
facility as well as the issuance of up to $100 million of convertible senior
notes. The incurrence of any such indebtedness is contingent upon, among other
things, the confirmation of the Joint Plan. See "Chapter 11 Reorganization of
Hawaiian - Financing Arrangements."
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our
26
critical accounting policies for periods when Hawaiian was consolidated are
limited to those described below. For a detailed discussion of the application
of these and other accounting policies, see Note 3 in the notes to the
consolidated financial statements.
Revenue Recognition. Passenger revenue is recognized either when the
transportation is provi