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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
[_] 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
HAWAIIAN HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 71-0879698
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12730 HIGH BLUFF DRIVE, SUITE 180 92130-2075
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
(858) 523-0219
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [_] Yes [x] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [x] Yes [_] No
As of October 31, 2004, 30,101,227 shares of the Registrant's common stock were
outstanding.
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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.
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HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
On March 21, 2003, Hawaiian Airlines, Inc., the sole operating
subsidiary of Hawaiian Holdings, Inc., filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy
Court for the District of Hawaii (In re Hawaiian Airlines, Inc., Case
No. 03-00817). Hawaiian Holdings did not file for relief under
Chapter 11 of the Bankruptcy Code. Please see Note 2 to the financial
statements.
Statements of operations for the three months and nine months ended
September 30, 2004 and 2003
Condensed balance sheets as of September 30, 2004 and December 31,
2003
Statements of cash flows for the nine months ended September 30, 2004
and 2003
Notes to Condensed Financial Statements
Item 2. Management's discussion and analysis of financial condition and
results of operations
Item 3. Quantitative and qualitative disclosures about market risk
Item 4. Controls and procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
ii
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2004(*) 2003(*) 2004(*) 2003(**)
-------- -------- ------- --------
Operating Revenue:
Passenger $ -- $ -- $ -- $133,687
Charter -- -- -- 11,832
Cargo -- -- -- 5,619
Other -- -- -- 5,926
------- ------- ------- --------
Total -- -- -- 157,064
------- ------- ------- --------
Operating Expenses:
Wages and benefits -- -- -- 55,217
Aircraft fuel, including taxes and oil -- -- -- 25,716
Maintenance materials and repairs -- -- -- 15,573
Aircraft rent -- -- -- 29,502
Other rentals and landing fees -- -- -- 6,146
Sales commissions -- -- -- 1,096
Depreciation and amortization -- -- -- 1,813
Other 1,757 531 5,611 36,542
------- ------- ------- --------
Total 1,757 531 5,611 171,605
------- ------- ------- --------
Operating Loss (1,757) (531) (5,611) (14,541)
------- ------- ------- --------
Nonoperating Income (Expense):
Reorganization items, net -- -- -- (1,773)
Interest income, net 1 -- 4 54
Loss on disposition of equipment and
other, net -- -- -- (186)
------- ------- ------- --------
Total 1 -- 4 (1,905)
------- ------- ------- --------
Net Loss $(1,756) $ (531) $(5,607) $(16,446)
======= ======= ======= ========
Net Loss Per Common Stock Share:
Basic $ (0.06) $ (0.02) $ (0.19) $ (0.58)
======= ======= ======= ========
Diluted $ (0.06) $ (0.02) $ (0.19) $ (0.58)
======= ======= ======= ========
Weighted Average Number of Common Shares
Outstanding:
Basic 30,006 28,456 29,441 28,428
======= ======= ======= ========
Diluted 30,006 28,456 29,441 28,428
======= ======= ======= ========
* Includes the deconsolidated results of Hawaiian Holdings, Inc. for the
entire period.
** Includes the consolidated results of Hawaiian Holdings, Inc. and Hawaiian
Airlines, Inc. from January 1, 2003 through March 31, 2003 and the
deconsolidated results of Hawaiian Holdings, Inc. from April 1, 2003
through September 30, 2003.
See Accompanying Notes to Condensed Financial Statements.
1
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
CONDENSED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
September 30, December 31,
2004 2003
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,134 $ 1
Other receivables 1,060 286
Prepaid expenses and other 575 75
--------- ---------
Total current assets 2,769 362
--------- ---------
Noncurrent Assets:
Restricted cash 500 500
Total Assets 3,269 862
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable 1,638 771
Accrued liabilities 507 474
Due to related parties 3,041 2,046
--------- ---------
Total current liabilities 5,186 3,291
--------- ---------
Other Liabilities and Deferred Credits:
Losses in excess of investment in Hawaiian Airlines, Inc. 61,302 61,302
--------- ---------
Commitments and Contingent Liabilities
Shareholders' Deficiency:
Common Stock and Special Preferred Stock 301 285
Capital in excess of par value 66,180 60,077
Accumulated deficit (129,700) (124,093)
--------- ---------
Shareholders' deficiency (63,219) (63,731)
--------- ---------
Total Liabilities and Shareholders' Deficiency $ 3,269 $ 862
========= =========
See Accompanying Notes to Condensed Financial Statements.
2
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
Nine Months Ended
September 30,
------------------
2004(*) 2003(**)
------- --------
Cash Flows From Operating Activities:
Net loss $(5,607) $(16,446)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation -- 1,669
Amortization -- 144
Net periodic postretirement benefit cost -- 642
Increase in restricted cash -- (13,710)
Increase in accounts receivable -- (3,604)
Increase in spare parts and supplies -- (732)
Increase in prepaid expenses and other (500) (3,726)
Increase (decrease) in accounts payable 867 (7,316)
Increase in air traffic liability -- 3,136
Increase in other accrued liabilities 33 920
Change in due to/from related parties 995 182
Other, net (774) 2,626
------- --------
Net cash used in operating activities (4,986) (36,215)
------- --------
Reorganization items, net -- (1,773)
------- --------
Cash Flows From Investing Activities:
Additions to property and equipment -- (2,576)
------- --------
Net cash used in investing activities -- (2,576)
------- --------
Cash Flows From Financing Activities:
Repayment of long-term debt -- (481)
Repayment of capital lease obligations -- (262)
Proceeds from issuance of Common Stock 6,119 --
------- --------
Net cash provided by (used in) financing activities 6,119 (743)
------- --------
Net impact on cash of Hawaiian Airlines, Inc. deconsolidation -- (30,600)
Net increase (decrease) in cash and cash equivalents 1,133 (71,907)
Cash and cash equivalents - Beginning of Period 1 71,908
------- --------
Cash and cash equivalents - End of Period $ 1,134 $ 1
======= ========
* Includes the deconsolidated cash flows of Hawaiian Holdings, Inc. for the
entire period.
** Includes the consolidated cash flows of Hawaiian Holdings, Inc. and
Hawaiian Airlines, Inc. from January 1, 2003 through March 31, 2003 and the
deconsolidated cash flows of Hawaiian Holdings, Inc. from April 1, 2003
through September 30, 2003.
See Accompanying Notes to Condensed Financial Statements.
3
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
Notes to Condensed Financial Statements
(All dollar amounts in thousands, unless otherwise stated)
1. BUSINESS AND ORGANIZATION
Hawaiian Holdings is a holding company incorporated in the State of Delaware. On
August 29, 2002, Hawaiian became a wholly owned subsidiary of the Company
pursuant to a corporate restructuring under which the shareholders of Hawaiian,
as described in more detail below, exchanged their Hawaiian shares for Company
shares on a one-for-one basis and became shareholders of the Company (the
"Corporate Restructuring"). Hawaiian was incorporated in January 1929 under the
laws of the Territory of Hawaii and, based on operating revenue and revenue
passenger miles, is the largest airline headquartered in Hawaii. Hawaiian is
engaged primarily in the scheduled transportation of passengers, cargo and mail.
Following the Corporate Restructuring, the shareholders of the Company had
substantially the same rights, privileges and interests with respect to the
Company as they had with respect to Hawaiian immediately prior to the Corporate
Restructuring, except for any such differences that arose from differences
between Delaware and Hawaii law. As a result of the Corporate Restructuring, the
Company's primary asset is its sole ownership, directly and indirectly, of all
issued and outstanding shares of common stock of Hawaiian.
In connection with the Corporate Restructuring, Airline Investors Partnership,
L.P. ("AIP"), the majority shareholder of the Company prior to the Corporate
Restructuring, was restructured into a limited liability company called AIP,
LLC. As part of the AIP restructuring, the Company acquired and now owns,
indirectly through a subsidiary, all of the shares of Hawaiian common stock that
were previously held by AIP. In exchange, AIP, LLC received the same number of
shares of the Company's common stock, par value $0.01 per share (the "Common
Stock"), that AIP owned of Hawaiian common stock immediately prior to the
exchange. Immediately after the AIP restructuring, the Company 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 the Common Stock. After the completion of the Corporate
Restructuring, the shareholders of the Company held the same relative percentage
of the Common Stock as they did of Hawaiian common and special preferred stock
immediately prior to the Corporate Restructuring.
Also as part of the Corporate Restructuring, the Company issued to AIP, LLC and
each of the three labor unions having the right to nominate individuals to the
Company's board of directors, a number of shares of a corresponding series of
the Company's 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,
AIP and the three labor unions having board nomination rights was amended and
restated to make the Company and AIP, LLC parties to the agreement and to have
them assume all the rights and obligations of Hawaiian and AIP under the
existing stockholders agreement, respectively. As a result, after the completion
of the Corporate Restructuring, the relative governance rights in the Company of
AIP, LLC and these three labor unions were substantially the same as the rights
in Hawaiian of AIP and these three labor unions immediately prior to the
Corporate Restructuring.
On June 14, 2004, RC Aviation LLC ("RC Aviation") purchased ten million shares
of the Common Stock from AIP, LLC, reducing AIP, LLC's ownership of the Company
to approximately 14 percent of the Common Stock. Also as part of the purchase,
John W. Adams resigned as the Company's Chairman and
4
Chief Executive Officer and RC Aviation and AIP, LLC entered into a stockholders
agreement, under which, among other things, AIP, LLC agreed to cause the
directors that AIP, LLC had previously designated to the Board of Directors of
the Company to resign (other than Gregory S. Anderson), and Lawrence S.
Hershfield and Randall L. Jenson (the "RC Designees") to be appointed to the
Company's 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 the Board of Directors of the Company, of persons
identified by RC Aviation for nomination or so nominated in accordance with the
Company's Amended and Restated Certificate of Incorporation and the Company's
Amended Bylaws, (b) to otherwise effect the intent of the stockholders
agreement, which is to cause RC Designees to become members of the Board of
Directors of the Company, and (c) to otherwise vote such equity securities at
the direction of RC Aviation.
References herein to the "Company" refer to: (i) Hawaiian Airlines, Inc. only,
with respect to periods prior to the Corporate Restructuring; (ii) Hawaiian
Holdings, Inc. and its subsidiaries, with respect to the period from the
Corporate Restructuring through and including March 31, 2003; and (iii) Hawaiian
Holdings, Inc. only, with respect to the periods from and after April 1, 2003.
2. BANKRUPTCY FILING OF HAWAIIAN, LIQUIDITY AND GOING CONCERN
On March 21, 2003 (the "Petition Date"), Hawaiian filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the Bankruptcy Court for the District of Hawaii (the "Bankruptcy
Court"). The Company did not file a voluntary petition for relief under Chapter
11. 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. The Chapter 11 filing
triggered defaults, or termination events, on substantially all debt and lease
obligations, and certain contractual obligations, of Hawaiian. Subject to
certain exceptions under the Bankruptcy Code, 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 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.
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 the Company 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, as described more fully in Note 10, 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 an entity controlled by Mr. Adams. On May 16, 2003, the Bankruptcy
Court issued an order granting the Trustee Motion. As a result, a Chapter 11
trustee, Joshua Gotbaum, (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
5
transfers of property that occurred prior to the Petition Date. Additionally,
Hawaiian's exclusive periods to file and solicit acceptances of a plan of
reorganization terminated upon the appointment of the Trustee.
A pre-petition liability that requires different treatment under the Bankruptcy
Code relates to certain qualifying aircraft, aircraft engines and other
aircraft-related equipment that are leased or subject to a security interest or
conditional sale contract. Under Section 1110 of the Bankruptcy Code, actions to
collect most pre-petition liabilities of this nature are automatically stayed
for 60 days only, except under two conditions: (a) a debtor may extend the
60-day period by agreement with the relevant financier and with court approval;
or (b) a debtor may agree to perform all of the obligations under the applicable
financing and cure any defaults as required under the bankruptcy code. If
neither of these conditions is met, the financier may demand the return of the
aircraft or take possession of the property and enforce any of its contractual
rights or remedies to sell, lease or otherwise retain or dispose of such
equipment at the end of the 60-day period. With respect to Hawaiian, the 60-day
period under Section 1110 expired May 20, 2003. Hawaiian entered into various
stipulations with each of it aircraft lessors to extend the Section 1110
deadlines on several occasions. Hawaiian subsequently 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 and 717 aircraft, on revised long-term leases, which have
been approved by the Bankruptcy Court. Hawaiian also cancelled the delivery of
two Boeing 767 aircraft scheduled for delivery during 2003 and returned two
Boeing 717 aircraft to BCC Leasing in late 2003 and early 2004. The revised
leases and cancellations provide Hawaiian with significant savings in monthly
aircraft rentals, but also result in lease related claims against Hawaiian for
Ansett (the "Ansett Claim") and BCC Leasing of approximately $107.5 million and
$66.5 million, respectively.
On September 9, 2004, the Company, the Trustee, the Official Committee of
Unsecured Creditors, HHIC, Inc., a wholly-owned subsidiary of the Company
("HHIC"), and RC Aviation, LLC ("RC Aviation"), filed an amended Joint Plan of
Reorganization (as amended on October 4, 2004 and on March 11, 2005 and as may
be amended from time to time thereafter, the "Joint Plan") to provide for
Hawaiian to emerge from bankruptcy. 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
Company to retain its existing equity interest in Hawaiian, although the Company
will be required to issue shares of its common stock to creditors of Hawaiian to
help fund the Joint Plan, resulting in a dilution of the ownership interest of
existing common shareholders of the Company. The Joint Plan was submitted to
creditors for vote on approximately October 15, 2004. All Class 5 creditors who
voted accepted 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. The Company 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
the Air Line Pilots Association ("ALPA").
On or about 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") to impose an agreement on ALPA
pursuant to Section 1113 of the Bankruptcy 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
6
the Bankruptcy Court may not rule at the conclusion of the hearing. Hawaiian and
ALPA may engage in negotiations before the hearing resumes.
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 In cash, paid in up to twenty-four (24) equal
Tax Claims quarterly installments. $ 1.2 $ 30.1 $ --
Class 1 Secured Priority In cash, paid in accordance with the legal, equitable
(Unimpaired) Tax Claims and contractual rights of the holder of the claim. 1.0 -- --
Class 2 Other Secured Generally, at the election of Hawaiian, (i) cash, (ii)
(Unimpaired) Claims 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 Cash
(Unimpaired) Claims 0.1 -- --
Class 4(1) Unsecured Claims At the election of the holder, either (a) cash in an
(Impaired) not included in a amount equal to fifty percent (50%) of the allowed
category below. 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 Cash in an amount equal to fifty percent (50%) of the
(Impaired) Claims 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 Convenience Claims Cash
(Impaired) 0.8 -- --
Class 7 Equity Interests Holders of equity interests in Hawaiian shall retain
(Impaired/ their interests in the reorganized Hawaiian, without
Unimpaired) modification or alteration 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
======= ======= ======
- ----------
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.
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. For these reasons, the ultimate amounts and
classifications of such claims cannot yet be determined.
The Trustee, the Company and RC Aviation entered into a Restructuring Support
Agreement, dated as of August 26, 2004 (the "Restructuring Support Agreement"),
pursuant to which the Company 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 of the Joint Plan must be at least $70
million. In order to fund their obligations under the Joint Plan, the Company
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 existing shareholders of the Company, or the
proceeds of the sale of a new series of the Company's preferred stock in the
Company to RC Aviation. The Company 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. RC Aviation will receive
shares of common stock of the Company valued at $6.16 per share on account of
50% of the lease-related claims controlled by RC Aviation. If necessary to make
distributions to holders of claims and to satisfy the minimum cash requirement,
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 has agreed to accept a six-month note if Hawaiian does not have
sufficient cash to pay all obligations due on the effective date and retain at
least $70 million in unrestricted cash.
On the effective date of the Joint Plan, the Company will issue a warrant (the
"Warrant") to RC Aviation as required pursuant to an agreement between RC
Aviation and the Company 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 nonvoting convertible
preferred stock of the Company, providing for dividends at the rate of 5% per
annum, payable at the option of the Company 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 anniversary
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. The Company would
be required to use its best efforts to redeem the preferred stock, at 105% of
its face amount, prior to the twelve month anniversary of issuance out of the
proceeds of a rights offering of Common Stock.
The Warrant issued to RC Aviation will entitle its holder to purchase 100 shares
of Series E Preferred Stock. The Series E Preferred Stock 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 the Company in an amount equal
to the greater of the liquidation 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 the 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 the up to $60 million referred to above, RC
Aviation 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 RC Aviation.
The Chapter 11 Filing, including the subsequent appointment of the Trustee, and
the resulting uncertainty regarding Hawaiian's future prospects raised
substantial doubt about the ability of the Company and Hawaiian to continue as a
going concern. The ability of the Company to continue as a going concern is
contingent upon the Company's ability to consummate the Joint Plan, or another
plan of reorganization of Hawaiian. While management believes they have obtained
the necessary approvals and arranged the necessary financing in order to
consummate the Joint Plan, with the exception of the approval of ALPA, such
financing is contingent upon Hawaiian's ultimate emergence from bankruptcy
protection. 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, which might prevent
the Company from consummating the Joint Plan and therefore delay or prevent
Hawaiian's emergence from bankruptcy. The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The
financial statements do not include any of the adjustments that would result if
the Company were unable to continue as a going concern, nor do they give effect
to any adjustments to the carrying value of assets or the amounts of liabilities
of the Company that will be necessary as a consequence of the consummation of
the Joint Plan or another plan of reorganization of Hawaiian.
7
3. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S.
Securities and Exchange Commission. Accordingly, these interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments and reorganization items) considered necessary for a fair
presentation have been included. The accompanying financial statements should be
read in conjunction with the financial statements and the notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Prior to the bankruptcy of Hawaiian, the Company consolidated Hawaiian pursuant
to Statement of Financial Accounting Standards No. 94, "Consolidation of All
Majority-Owned Subsidiaries", because the Company controlled Hawaiian through
its ownership of all of the voting stock of Hawaiian. Following the Petition
Date, the Company expected to regain full control of Hawaiian in a relatively
short period of time. The Company had re-negotiated Hawaiian's collective
bargaining agreements with its pilots, mechanics, and flight attendants prior to
filing bankruptcy, Hawaiian 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, the Company and Hawaiian continued
to have both a common Board of Directors and common management. As a result, the
Company continued to consolidate Hawaiian through March 31, 2003. However, the
filing of the Trustee Motion created significant uncertainty regarding the
ability of the Company 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 to operate Hawaiian's business, instead of the common Board of Directors
and common management of the Company and Hawaiian. As a result, effective April
1, 2003, the Company deconsolidated Hawaiian and prospectively accounted for its
ownership of Hawaiian using the cost method of accounting.
The deconsolidation resulted in a deferred credit of $61.3 million, which
represents the losses of Hawaiian in excess of the Company's investment in
Hawaiian as of April 1, 2003. The deferred credit will remain on the Company's
balance sheet until such time as the Company either regains full control of
Hawaiian or disposes of its remaining interests in Hawaiian. It is presently
anticipated that the Company will regain such control in the latter half of
April 2005. The Company has not recorded any additional losses of Hawaiian
subsequent to March 31, 2003, as the Company has no obligation to fund such
losses.
The Company's results of operations include the operating results of Hawaiian
through March 31, 2003, but for no subsequent periods. Due to the
deconsolidation, the financial statements and certain footnotes included herein
do not reflect comparable business activity on a period-to-period basis. The
statement of operations for the nine months ended September 30, 2003 includes
the consolidated operating results of the Company and Hawaiian for three months.
The statement of operations for the three months ended September 30, 2004 and
2003, and the statement of operations for the nine months ended September 30,
2004 include the deconsolidated results of the Company only, which consists
substantially of corporate expenses included in other operating expenses. The
balance sheets at September 30, 2004 and December 31, 2003 include the
deconsolidated balances of the Company only. Summary financial information of
Hawaiian for the three and nine months ended September 30, 2004 is presented
below, in thousands.
Three Months Ended Nine Months Ended
Income Statement Data September 30, 2004 September 30, 2004
- --------------------- ------------------ ------------------
8
Operating revenue $210,819 $579,828
Operating expense 178,677 513,725
Operating income 32,142 66,103
Reorganization items, net 117,299 124,337
Nonoperating income (expense) 193 (4)
Loss before taxes 84,964 58,238
Provision for income taxes 10,095 20,408
Net loss 95,059 78,646
Hawaiian's financial statements, from which the above summarized financial
information was derived, are prepared in accordance with American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), and on a
going-concern basis, which assumes continuity of operations, realization of
assets and satisfaction of liabilities in the ordinary course of business. SOP
90-7 requires that the financial statements for periods subsequent to a Chapter
11 filing separate transactions and events that are directly associated with the
reorganization from the ongoing operations of the business. Accordingly, all
transactions (including, but not limited to, professional fees, realized gains
and losses, and provisions for losses) directly associated with Hawaiian's
reorganization and restructuring are reported separately as reorganization items
in the statements of operations. The statements of financial position
distinguish pre-petition liabilities subject to compromise both from those
pre-petition liabilities that are not subject to compromise and from
post-petition liabilities. Liabilities subject to compromise are reported at the
amounts expected to be allowed by the Bankruptcy Court, even if they may be
settled for lesser amounts. The financial statements of Hawaiian do not include
any of the adjustments that would result if Hawaiian was unable to continue as a
going concern, nor do they give effect to any adjustments to the carrying value
of the assets or the amounts of liabilities of Hawaiian that would be necessary
as a consequence of the confirmation of the Joint Plan or another plan of
reorganization.
4. STOCK OPTION PLANS
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations. Under APB 25, no compensation expense is recognized for
stock option grants if the exercise price of the stock option is at or above the
fair market value of the underlying stock on the date of grant.
The Company has adopted the pro forma disclosure features of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure". As required by SFAS 123, pro forma information regarding net loss
has been determined as if the Company had accounted for its employee stock
options and awards granted using the fair value method prescribed by SFAS 123.
The following table illustrates the pro forma effect on net loss if the Company
had accounted for its employee stock options and awards granted using the fair
value method prescribed by SFAS 123 for the periods ended September 30, 2004 and
2003. The fair value for the stock options was estimated at the date of grant
using the Black-Scholes option pricing model.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
(in thousands, except share data) 2004 2003 2004 2003
- --------------------------------- ------- ------ ------- --------
Net Loss:
As reported $(1,756) $(531) $(5,607) $(16,446)
9
Less: Total stock based employee
compensation expense determined under
the fair value method for all awards 66 93 252 322
------- ----- ------- --------
Pro forma $(1,822) $(624) $(5,859) $(16,768)
======= ===== ======= ========
Basic and diluted earnings per share
As reported $ (0.06) $(0.02) $ (0.19) $ (0.58)
======= ====== ======= ========
Pro forma $ (0.06) $(0.02) $ (0.20) $ (0.59)
======= ====== ======= ========
In December, 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Share Based Payment" ("SFAS 123R"), which replaces SFAS 123,
and supersedes APB 25. SFAS 123R requires that all stock-based payments to
employees, including grants of employee stock options, be recognized as
compensation expense in the financial statements based on their fair values.
SFAS 123R also requires that tax benefits associated with these stock-based
payments be classified as financing activities in the statement of cash flow
rather than operating activities as currently permitted. SFAS 123R will be
effective for periods beginning after June 15, 2005. SFAS 123R offers
alternative methods of adoption. At the present time, the Company has not yet
determined which alternative method it will use. Depending on the method the
Company adopts to calculate stock-based compensation expense upon the adoption
of SFAS 123R, the pro forma disclosure above may not be indicative of the
stock-based compensation expense to be recognized in periods beginning after
June 15, 2005.
5. REORGANIZATION ITEMS
Reorganization items, net represents amounts directly associated with Hawaiian's
reorganization and restructuring subsequent to the Petition Date and are
presented separately in the statement of operations for the period during which
Hawaiian was consolidated by the Company. Reorganization items, net for the nine
months ended September 30, 2003 consists primarily of professional fees incurred
in connection with Hawaiian's Chapter 11 filing.
6. INCOME TAXES
No income tax provision or benefit was recorded for the periods ended September
30, 2004 and 2003, as the tax benefit from operating losses was offset by an
increase in the valuation allowance for deferred tax assets. Utilization of the
Company's deferred tax assets is based on the Company generating taxable income
in the future years. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible, or
the future utilization of the resulting net operating loss carryforwards prior
to expiration. As of September 30, 2004, the Company has recognized a full
valuation allowance on its net deferred tax assets.
7. STOCK PURCHASES, RELATED PARTY TRANSACTIONS AND RELATED LITIGATION
In March 2000, Hawaiian's Board of Directors approved a stock repurchase program
authorizing the repurchase of up to five million shares of its common stock from
time to time in the open market or privately negotiated transactions. In August
2000, the Board of Directors increased the authorization to ten million shares.
Including the effect of the repurchase of certain warrants and stock repurchased
in 2000, the total number of shares of common stock repurchased under the stock
repurchase program amounted to 9,333,508 as of December 31, 2001. In March 2002,
Hawaiian's Board of Directors approved another stock repurchase program
authorizing the repurchase of up to five million shares of its common stock from
time to time in the open market or privately negotiated transactions. Hawaiian
10
purchased 990,700 shares of common stock for $3.1 million at an average cost of
$3.17 per share in open market transactions under this program through May 7,
2002, when the repurchase program was halted.
On May 31, 2002, Hawaiian commenced a tender offer to purchase for cash up to
5,880,000 shares of its common stock at a price of $4.25 per share, representing
a potential purchase of approximately 17.5% of Hawaiian's outstanding common
stock as of that date (the "Self-Tender"). The Self-Tender terminated without
extension on June 27, 2002 and was substantially oversubscribed. Hawaiian
accepted 5,880,000 properly tendered shares on a pro rata basis with a proration
factor of approximately 22.12%. Payment for accepted shares of $25.0 million was
made on July 8, 2002.
Included in other operating expenses for the nine months ended September 30,
2003 is $0.2 million related to a services agreement with Smith Management LLC
("Smith Management"), whereby Hawaiian paid $2.0 million to Smith Management for
specified corporate, financial and tax services purportedly provided to Hawaiian
through March 31, 2002, and $75,000 per month for such services thereafter. Mr.
Adams is also the president of Smith Management.
Subsequent to the Corporate Restructuring, Hawaiian paid certain expenses on
behalf of the Company, generally relating to the Company's obligations as a
public company. In addition, Hawaiian transferred $500,000, which is recorded as
restricted cash, to the Company immediately prior to Hawaiian's bankruptcy
filing. The Company had $1.4 million due to Hawaiian as of September 30, 2004
and December 31, 2003.
On November 28, 2003, the Trustee filed a complaint (the "Complaint") with the
Bankruptcy Court, naming Mr. Adams, AIP, LLC, AIP and Smith Management
(together, the "Adams Defendants") and the Company, 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 the Self-Tender; payments made by Hawaiian to Smith
Management; $200,000 in compensation paid by Hawaiian to Mr. Adams; and the
$500,000 transferred from Hawaiian to the Company immediately prior to
Hawaiian's bankruptcy filing. 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 the
Company served answers denying all material allegations of the Complaint on
January 5, 2004 and on February 18, 2004, respectively. On December 17, 2004
Hawaiian and the Adams Defendants entered into a settlement agreement under
which the Adams Defendants agreed to pay the sum of $3.6 million to Hawaiian in
exchange for a release of Hawaiian's claims. At a hearing held on February 24,
2005, the Bankruptcy Court approved the settlement agreement. The $3.6 million
is payable to Hawaiian no later than ten days after effective date of the Joint
Plan.
With respect to the $500,000 transferred from Hawaiian, the Company has filed a
response in which it acknowledges that it received $500,000 from Hawaiian
shortly before the commencement of Hawaiian's bankruptcy case and that it is
prepared to return that cash to Hawaiian. The Company has not, however, returned
the funds because the Pension Benefit Guarantee Corporation ("PBGC") has
asserted a contingent claim against the Company, which claim it has alleged is
secured by the $500,000 that the Company would otherwise return to Hawaiian. The
PBGC claim arises from the pension plan for the pilots employed by Hawaiian.
That pension plan has not been terminated and, therefore, the contingency to the
PBGC having a claim against the Company has not occurred. The PBGC has, however,
asserted a claim, pending confirmation of the Joint Plan that definitively
provides for the preservation of the pension plan.
11
During 2003, the SEC opened a formal, nonpublic investigation of Hawaiian and
several of its then officers, including Mr. Adams, related to the Self-Tender.
On March 13, 2004, Hawaiian announced that the Staff of the San Francisco
District Office of the Securities and Exchange Commission (the "SEC" or the
"Commission") was considering recommending that the SEC authorize a civil action
against Mr. Adams 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.
On October 14, 2003, the Company and Smith Management entered into an agreement
(the "Smith Management Agreement"), whereby the parties agreed that Smith
Management would continue to provide the Company with corporate, financial,
strategic, planning, management, consulting and tax-related services and forego
receiving compensation or reimbursement for any expenses for services provided
until the parties mutually agreed otherwise. The Smith Management Agreement
replaced the previous agreement between Smith Management and Hawaiian discussed
above. Under the Smith Management Agreement, the Company agreed that neither
Smith Management nor any of its members, affiliates, officers, directors,
employees, consultants or advisors (collectively the "Smith Representatives")
shall be liable or held accountable, in damages or otherwise, for any errors of
judgment or any mistakes of fact or law or for anything that the Smith
Management or the Smith Representatives do or refrain from doing in good faith
in providing or failing to provide services under the Smith Management
Agreement. Further, the Company agreed to indemnify the Smith Management and the
Smith Representatives (collectively the "Smith Indemnitees"), and each of their
successors and assigns, subject to certain conditions, from and against any and
all losses or cost suffered or sustained by any Smith Indemnitees (other than
any losses or cost arising out of the gross negligence or willful misconduct of
Smith Management or the Smith Representatives), arising in connection with their
obligations under the Smith Management Agreement. In connection with RC
Aviation's purchase of ten million shares of the Company's common stock from AIP
in June 2004, the Smith Management Agreement was terminated, but the
indemnification and exculpation provisions described above survive termination
of the Agreement. However, we have no obligation to indemnify the Smith
Representatives for amounts paid by them pursuant to the settlement with the
Trustee.
In addition, the Company incurred certain amounts of debt owed to AIP or its
affiliates. AIP informed the Company that AIP believed that the Company owed AIP
and its affiliates an aggregate amount of approximately $1.6 million for
expenditures paid on the Company's behalf by AIP and its affiliates to fund
costs associated with maintaining the Company's status as a public company,
costs related to preparing a plan of reorganization for Hawaiian, and other
obligations of the Company. All such indebtedness to AIP and its affiliates was
satisfied pursuant to a Mutual Release, dated as of December 30, 2004, by and
among the Company, RC Aviation, RC Aviation Management, LLC, John Adams, Smith
Management, AIP and Airline Investors Partnership.
8. COMPREHENSIVE LOSS
For the three months ended September 30, 2004 and 2003, total comprehensive loss
was $1.8 million and $0.5 million, respectively. For the nine months ended
September 30, 2004 and 2003, total comprehensive loss was $5.6 million and $18.1
million, respectively. The difference between the net loss and total
comprehensive loss for the nine months ended September 30, 2003 was due to
changes in the fair value of derivative financial instruments of Hawaiian during
the period Hawaiian was consolidated by the Company.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q 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.
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. 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 "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
13
"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 the Company, and severed the availability of funds
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
Quarterly Report on Form 10-Q, 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 "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 Quarterly Report on Form 10-Q
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-Q 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 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
14
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 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
15
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 10 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 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
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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."
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 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") 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
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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.
FINANCING ARRANGEMENTS
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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 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
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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 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
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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 for the Credit Agreement or the Notes 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 Note 2 to Consolidated Financial
Statements.
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
Holdings' operations.
RESULTS OF OPERATIONS
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, Hawaiian 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, the financial statements and certain footnotes
included therein do not reflect comparable business activity on a
period-to-period basis. The statement of operations for the nine months ended
September 30, 2003 includes the consolidated operating results of Holdings and
Hawaiian for three months. The statement of operations for the three months
ended September 30, 2004 and 2003, and the statement of operations for the nine
months ended September 30, 2004 include the deconsolidated results of Holdings
only, which consists substantially of corporate expenses included in other
operating
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expenses. The balance sheets at September 30, 2004 and December 31, 2003 include
the deconsolidated balances of Holdings only.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
Our results for the three months ended September 30, 2004 and 2003, are
deconsolidated from Hawaiian and primarily consist of corporate expenses
included within other operating expenses. These expenses include legal and
professional fees related to Hawaiian's Chapter 11 case, consulting fees for
other expenses, legal fees for general corporate matters and insurance expenses.
These expenses increased in 2004 compared to 2003 as a result of costs incurred
in connection with the Joint Plan. Our results in 2003 are not comparable to
2004 as the 2003 results include the operating results of Hawaiian for the
period from January 1, 2003 to March 31, 2003 consolidated with our results, and
our stand-alone deconsolidated results from April 1, 2003 to December 31, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
Our results for the nine months ended September 30, 2004 are not comparable our
results for the nine months ended September 30, 2003 as the 2003 results
included the operating results of Hawaiian consolidated with ours for the first
three months of the year. Our expenses for all periods subsequent to April 1,
2003 consist almost entirely of legal and professional fees related to
Hawaiian's Chapter 11 case, consulting fees for other expenses, legal fees for
general corporate matters and insurance expenses.
LIQUIDITY AND CAPITAL RESOURCES
Hawaiian's Chapter 11 filing has significantly affected, and is expected to
continue to significantly affect, our liquidity and capital resources. The
Chapter 11 proceedings involve, and may result in, various restrictions on our
activities, limitations on financing and the need to obtain approval of the
Bankruptcy Court for various matters. See "Chapter 11 Reorganization."
Our working capital deficit at September 30, 2004 was approximately $2.4 million
(with $2.8 million of current assets and $5.2 million of current liabilities),
as compared to a working capital deficit of $2.9 million (with $0.4 million of
current assets and $3.3 million of current liabilities) at December 31, 2003.
As of September 30, 2004, we had approximately $1.1 million in cash and cash
equivalents, and $0.5 million of restricted cash. As of December 31, 2003, we
had $1,000 in cash and cash equivalents, and $0.5 million of restricted cash.
The increase in our unrestricted cash of $1.1 million during the nine months
ended September 30, 2004 was the result of the use of $5.0 million of cash in
operating activities, offset by $6.1 million of net cash provided by financing
activities. Cash provided by financing activities consisted primarily of sales
of Common Stock in private placement transactions in the amount of $2.0 million
and proceeds of $4.1 million from the exercise of stock options.
As a holding company, Holdings did not have any contractual obligations as of
September 30, 2004 other than liabilities payable to Hawaiian, Ranch Capital,
LLC, AIP, LLC, a former control person of Holdings ("AIP"), as well as
obligations relating to the Joint Plan, 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 September 30, 2004.
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Also, we had $33,000 due to Ranch Capital, LLC as of September 30, 2004 related
to travel expenses for our officers, Lawrence S. Hershfield and Randall L.
Jenson, paid by Ranch Capital, LLC on our behalf. Mr. Hershfield and Mr. Jenson
are the Chief Executive Officer and Managing Director, respectively, of Ranch
Capital, LLC.
In addition, Holdings incurred certain amounts of debt owed to AIP or its
affiliates. AIP informed us that Holdings owed AIP and its affiliates an
aggregate amount of $1.6 million. This indebtedness arose due to expenditures
paid on Holdings' behalf by AIP and its affiliates 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. Amounts
owed by Holdings to AIP were settled in 2004.
As described in greater detail under "Chapter 11 Reorganization," the
confirmation and consummation of the Joint Plan will involve certain financial
obligations on the part of Holdings. We and RC Aviation have agreed, pursuant to
the Restructuring Support Agreement, to raise debt financing for Hawaiian
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. In order to fund their obligations under the
Joint Plan, we and RC Aviation have the flexibility to utilize one or more
sources of financing, including the issuance of up to $150 million of new debt
by Hawaiian, such as new notes and/or a senior secured loan facility. The
incurrence of any such indebtedness is contingent upon, among other things, the
confirmation of the Joint Plan.
The Chapter 11 Filing, including the subsequent appointment of a trustee to
operate Hawaiian's business, as more fully discussed above, 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
above, 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 approval of the Air Line Pilots
Association ("ALPA") (as described above). 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our
Annual Report on Form 10-K for the year ended December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
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. Consequently, information contained in this
Item 4 regarding controls and procedures is expressly limited to Holdings only
and thereby expressly excludes Hawaiian.
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DISCLOSURE CONTROLS AND PROCEDURES.
Holdings maintains controls and procedures designed to ensure that it is able to
collect the information it is required to disclose in the reports it files with
the SEC, and to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Based on an evaluation of Holdings'
disclosure controls and procedures as of the end of the period covered by this
report conducted by Holdings' management, with the participation of the Chief
Executive and Chief Financial Officers, the Chief Executive and Chief Financial
Officers believe that these controls and procedures are effective to ensure that
Holdings is able to collect, process and disclose the information it is required
to disclose in the reports it files with the SEC within the required time
periods.
INTERNAL CONTROL OVER FINANCIAL REPORTING.
From the time the Trustee assumed control of Hawaiian in May 2003 until RC
Aviation acquired a controlling interest in Holdings in June 2004, there was no
active management at Holdings. Accordingly, management does not believe that
there were any mechanisms in place at Holdings during that time for financial
reporting or internal controls. Shortly after the assumption of control by RC
Aviation and the institution of new management at Holdings, Holdings hired an
outside consultant to provide certain bookkeeping services to provide internal
monthly reporting to management.
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PART II. OTHER INFORMATION
ITEM 1. 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 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
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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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 26, 2004, we issued 351,062 shares of Common Stock to Donald J. Carty
for an aggregate consideration of $2,000,000. The issuance of such shares to Mr.
Carty was deemed exempt from the registration provisions of the Securities Act
of 1933, as amended (the "Securities Act"), by reason of the provision of
Section 4(2) of the Securities Act in reliance upon, among other things,
representations by Mr. Carty, including representations regarding his status as
an accredited investor (as such term is defined under Rule 501 promulgated under
the Securities Act), and his acquisition of such shares for investment and not
with a view to distribution thereof. The certificates representing the shares
issued to Mr. Carty contain a legend to the effect that such shares are not
registered under the Securities Act and may not be transferred except pursuant
to a registration which has become effective under the Securities Act or
pursuant to an exemption from such registration. The issuance of such shares was
not underwritten.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As a result of its filing a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code, Hawaiian is in default on substantially all of its debt and
lease obligations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
Exhibit No. Description
- ----------- -----------
10.1 Stock Purchase Agreement, dated July 26, 2004, by and between
Hawaiian Holdings, Inc. and Donald J. Carty.
10.2 Restructuring Support Agreement, dated as of August 26, 2004, by
and among Joshua Gotbaum as Trustee, Hawaiian Holdings, Inc. and
RC Aviation, LLC
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAWAIIAN HOLDINGS, INC.
March 31, 2005 By /s/ Randall L. Jenson
--------------------------------------
Randall L. Jenson
Chief Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
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