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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 1-31443
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HAWAIIAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 71-0879698
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
3375 KOAPAKA STREET, SUITE G-350 96819
HONOLULU, HAWAII (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (808) 835-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock ($.01 par value) American Stock Exchange and Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
The aggregate market value of the voting and non-voting common equity stock held
by non-affiliates of the Registrant was approximately $5 million, computed by
reference to the closing sale price of the Common Stock on the American Stock
Exchange on June 30, 2003, the last business day of the Registrant's most
recently completed second fiscal quarter.
As of March 31, 2004, 29,260,465 shares of Common Stock of the Registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
TABLE OF CONTENTS
Page
----
PART I .......................................................................2
ITEM 1. BUSINESS.........................................................2
ITEM 2. PROPERTIES......................................................17
ITEM 3. LEGAL PROCEEDINGS...............................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............18
PART II .....................................................................19
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS..................................19
ITEM 6. SELECTED FINANCIAL DATA.........................................20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................28
ITEM 9A. CONTROLS AND PROCEDURES.........................................29
PART III ....................................................................30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS................................30
ITEM 11. EXECUTIVE COMPENSATION..........................................32
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS...................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................39
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................40
PART IV .....................................................................41
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.....................................................41
SIGNATURES ...............................................................44
EXPLANATORY NOTE
As explained herein, on March 21, 2003, Hawaiian Airlines, Inc. ("Hawaiian"),
the sole operating subsidiary of Hawaiian Holdings, Inc. ("Holdings"), filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court for the District of Hawaii. Holdings did not file for relief
under Chapter 11 of the Bankruptcy Code. Holdings has not been current in its
filings with the Securities and Exchange Commission since the first quarter of
2003 and is simultaneously filing its quarterly reports for the first, second
and third quarters of 2004 and its annual report for 2004 and its quarterly
reports for the second and third quarters of 2003 and its annual report for
2003. In the interest of accurate and complete disclosure, Holdings has included
current information in each of those reports for all material events and
developments that have taken place through the date of filing, including with
respect to its legal proceedings and the bankruptcy proceedings of Hawaiian.
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 that reflect our
current views with respect to certain current and future events and financial
performance. These forward-looking statements are and will be, as the case may
be, subject to many risks, uncertainties and factors relating to our operations
and business environments which may cause our actual results to be materially
different from any future results, expressed or implied, in these
forward-looking statements.
Factors that could cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the following: the
ability of Hawaiian Holdings, Inc. ("Holdings") to continue as a going concern;
the ability of its operating subsidiary, Hawaiian Airlines, Inc. ("Hawaiian") to
continue as a going concern; the ability of Hawaiian to consummate the joint
plan of reorganization with respect to the Chapter 11 case; aviation fuel costs;
the competitiveness of our labor costs; our relationship with our employees and
possible work stoppages; changes in capacity in the trans-Pacific and
interisland market; changes in the level of fares we can charge and remain
competitive; bankruptcy of our competitors and the impact such bankruptcies
might have on fares; the ability of Hawaiian to obtain and maintain normal terms
with vendors and service providers; the ability of Hawaiian to maintain
contracts that are critical to its operations; the ability of Hawaiian to fund
and execute its business plan; our ability to attract, motivate and/or retain
key executives and associates; the ability of Hawaiian to attract and retain
customers; demand for transportation in the markets in which Hawaiian operates;
economic conditions; the effects of any hostilities or act of war (in the Middle
East or elsewhere) or any terrorist attack; the effects of seasonality and
cyclicality; Hawaiian's dependence on tourism; Hawaiian's reliance on third
parties for facilities and services (including, without limitation, aircraft
maintenance, code sharing, reservations, computer services, frequent flyer
programs, passenger processing, ground facilities, baggage and cargo handling
and personnel training); maintenance costs and possible unavailable aircraft;
financing costs; the cost and availability of insurance, including aircraft
insurance; security-related costs; competitive pressures on pricing
(particularly from lower-cost competitors); weather conditions; government
legislation and regulation, including the Aviation and Transportation Security
Act and other September 11, 2001 related regulations; changes that may be
required by the Federal Aviation Administration or other regulators to our
aircraft or operations; aircraft unavailability due to mechanical or other
factors; consumer perceptions of the products of Hawaiian; and other risks and
uncertainties set forth from time to time in our reports to the Securities and
Exchange Commission (the "SEC"). We undertake no obligation to publicly update
or revise any forward-looking statements to reflect events or circumstances that
may arise after the date of this annual report.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Holdings, incorporated in April 2002 under the laws of the State of Delaware, is
a holding company. Its wholly-owned subsidiary, Hawaiian, was incorporated in
January 1929 under the laws of the Territory of Hawaii and, based on the number
of scheduled miles flown by revenue passengers (known as revenue passenger
miles) in 2004, is the largest airline headquartered in Hawaii. Holdings became
the parent of Hawaiian on August 29, 2002, pursuant to the corporate
restructuring described below under "Business - Corporate Restructuring." As a
result of the corporate restructuring, Holdings' primary asset was its sole
ownership, directly and indirectly, of all issued and outstanding shares of the
common stock of Hawaiian. As described in greater detail below under
"Business--Chapter 11 Reorganization of Hawaiian," on March 21, 2003, Hawaiian
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Chapter 11 Filing") in the United States Bankruptcy
Court for the District of Hawaii (the "Bankruptcy Court" or "Court") (In re
Hawaiian Airlines, Inc., Case No. 03-00817). Holdings did not file for relief
under Chapter 11 of the Bankruptcy Code. On May 30, 2003, a trustee was selected
to serve in connection with the Chapter 11 Filing and operate Hawaiian, which
has continued to operate its business under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and orders of the Bankruptcy Court. The initial trustee has since resigned and
been replaced by a duly appointed substitute trustee (the "Trustee"). The
appointment of the Trustee effectively served to divest operational and
financial control of Hawaiian from the officers and directors of Holdings, and
severed the availability of funds
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needed by Holdings to support its efforts to meet its ongoing obligations,
including its Exchange Act reporting requirements. Effective as of April 1,
2003, Holdings deconsolidated Hawaiian for financial reporting purposes and
accounted for its ownership of Hawaiian using the cost method of accounting. See
Note 3 of our Financial Statements. As a result, for financial reporting
purposes, Holdings currently is, and has been throughout 2004, a holding company
with no business operations or properties. Accordingly, as used in this Annual
Report on Form 10-K, the terms "Company", "we", "our", and "us" refer to: (i)
Hawaiian Airlines, Inc. only, with respect to periods prior to August 29, 2002
(the date of the aforementioned corporate restructuring); (ii) Hawaiian
Holdings, Inc. and its subsidiaries, with respect to the period from August 29,
2002 through and including March 31, 2003; and (iii) Hawaiian Holdings, Inc.
only, with respect to the periods from and after April 1, 2003.
As described in greater detail below under "Business--Chapter 11 Reorganization
of Hawaiian," Holdings, the Trustee, the Official Committee of Unsecured
Creditors of Hawaiian, a wholly-owned subsidiary of Holdings, and RC Aviation,
LLC have filed an amended Joint Plan of Reorganization to provide for Hawaiian
to emerge from bankruptcy. The joint plan provides for payment in full of all
allowed claims, including unsecured claims. We anticipate that Hawaiian will
emerge from bankruptcy in the latter half of April 2005. However, we cannot
provide any assurance that we will be able to consummate Hawaiian's joint plan
of reorganization successfully, and that we will regain full control of
Hawaiian. Accordingly, we urge that appropriate caution be exercised with
respect to existing and future investments in Holdings.
Since we have not controlled Hawaiian from the time a trustee was appointed in
May, 2003, the disclosure contained in this Annual Report on Form 10-K regarding
the operations of Hawaiian is limited and based only upon our best knowledge of
such operations. Accordingly, much of the disclosure contained in this Form 10-K
is with respect to Holdings as a holding company, exclusive of the business of
Hawaiian. The discussion and analysis of our financial condition and results of
operations, appearing in Item 7 hereof, is directed toward stand-alone
deconsolidated results for the periods for which Hawaiian's results were not
consolidated with our results, and consolidated results for the periods for
which Hawaiian's results were consolidated with our results. Following the
anticipated emergence of Hawaiian from bankruptcy, which we anticipate will
occur in the latter half of April 2005, although there can be no certainty as to
such date, we will file a Form 8-K containing pro forma financial statements to
report the consolidated financial condition and results of operations of
Holdings and Hawaiian.
Hawaiian is engaged primarily in the scheduled transportation of passengers,
cargo and mail. Hawaiian provides passenger and cargo service from Hawaii,
principally Honolulu, to eight Western U.S. cities. Hawaiian also provides daily
service directly to four of the six major islands and indirectly through an
arrangement with Island Air to two of the six major islands of the State of
Hawaii and weekly service to each of Pago Pago, American Samoa and Papeete,
Tahiti in the South Pacific and Sydney, Australia. Charter service is provided
from Honolulu to Anchorage, Alaska. Hawaiian currently operates a fleet of 14
Boeing 767-300ER aircraft and 11 Boeing 717-200 aircraft.
Our common stock, par value $0.01 per share (the "Common Stock"), is listed on
the American Stock Exchange ("AMEX") and the Pacific Exchange ("PCX") under the
symbol "HA". Our principal offices are located at 12730 High Bluff Drive, Suite
180, San Diego, CA 92130-2075. Our telephone and facsimile numbers are (858)
523-0219 and (858) 523-1899, respectively. General information about Hawaiian
can be found at www.hawaiianair.com.
CHAPTER 11 REORGANIZATION OF HAWAIIAN
On March 21, 2003 (the "Petition Date"), Hawaiian filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (In re
Hawaiian Airlines, Inc., Case No. 03-00817) in the Bankruptcy Court for the
District of Hawaii (the "Bankruptcy Court"). Holdings did not file for relief
under Chapter 11 of the Bankruptcy Code. Hawaiian has continued to operate its
business under the jurisdiction of the Bankruptcy Court and in accordance with
the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy
Court, and since May 30, 2003, under the supervision of a Chapter 11 trustee.
Hawaiian's Chapter 11 filing automatically enjoined, or stayed, the continuation
of any judicial or administrative proceedings or other actions against Hawaiian
or its property to recover on, collect or secure a claim arising prior to the
Petition Date. At a hearing held on March 21, 2003, the Bankruptcy Court granted
Hawaiian's first day motions for various relief designed to stabilize its
operations and business relationships with customers, vendors, employees and
others and entered orders granting authority to Hawaiian to, among other things:
pay certain pre-petition and post-petition employee wages, salaries, benefits
and other employee obligations; pay vendors and other providers in the ordinary
course for goods and
3
services received from and after the Petition Date; honor customer service
programs, including the HawaiianMiles program and ticketing policies; honor
obligations arising prior to the Petition Date related to Hawaiian's interline,
clearinghouse, code sharing and other similar agreements; pay certain
pre-petition taxes and fees, including transportation excise taxes, payroll
taxes and passenger facility charges; and pay certain other obligations.
Under Section 365 of the Bankruptcy Code, Hawaiian may assume, assume and
assign, or reject executory contracts and unexpired leases, including leases of
real property, aircraft and aircraft engines, subject to the approval of the
Bankruptcy Court and certain other conditions. Rejection constitutes a
court-authorized breach of the lease or contract but creates a deemed
pre-petition claim for damages caused by this breach or rejection. Parties whose
contracts or leases are rejected may file claims against Hawaiian for damages.
Generally, the assumption of an executory contract or unexpired lease requires
Hawaiian to cure all prior defaults under the executory contract or unexpired
lease, including all pre-petition monetary defaults and all post-petition
arrearages and to provide adequate assurance of future performance. Hawaiian
does not, to our knowledge, presently intend to reject any material contracts.
Moreover, Section 554 of the Bankruptcy Code provides a mechanism by which
Hawaiian may abandon property that is no longer beneficial to the estate, the
retention of which serves no purpose in effecting the goals of the Bankruptcy
Code. Abandonment constitutes a court-authorized divestiture of all of
Hawaiian's interests in the property. Abandonment gives rise to potential claims
against Hawaiian. To date, to our knowledge, Hawaiian has not sought to abandon
and does not presently intend to seek to abandon any such property.
The Chapter 11 Filing, including the subsequent appointment of a trustee to
operate Hawaiian's business, as more fully discussed below, and the resulting
uncertainty regarding Hawaiian's future prospects raised substantial doubt about
the ability of both Holdings and Hawaiian to continue as a going concern. Our
ability to continue as a going concern is contingent upon our ability to
consummate the Joint Plan of reorganization of Hawaiian, as more fully discussed
below, or another plan of reorganization of Hawaiian. We have obtained the
necessary approvals and arranged the necessary financing in order to consummate
the Joint Plan, with the exception of the Air Line Pilots Association ("ALPA")
(as described below). The financing we have arranged is contingent upon
Hawaiian's ultimate emergence from bankruptcy protection and negotiation and
execution of final documentation. The occurrence of certain events prior to
Hawaiian's emergence from bankruptcy (including the inability to resolve the
outstanding ALPA issues) could result in the arranged financing not being
available to us and Hawaiian, which might prevent us from consummating the Joint
Plan and therefore delay or prevent Hawaiian's emergence from bankruptcy. The
accompanying financial statements have been prepared assuming that we will
continue as a going concern. The financial statements do not include any of the
adjustments that would result if Holdings or Hawaiian were unable to continue as
a going concern, nor do they give effect to any adjustments to the carrying
value of our assets or the amounts of our liabilities that will be necessary as
a consequence of the consummation of the Joint Plan or another plan of
reorganization.
TRUSTEE MOTION
On March 31, 2003, BCC Equipment Leasing Corporation ("BCC Leasing"), an
affiliate of The Boeing Company, filed a motion seeking the appointment of a
Chapter 11 trustee (the "Trustee Motion"). BCC Leasing asserted that John W.
Adams ("Mr. Adams"), the Chairman and Chief Executive Officer of Holdings and
Hawaiian at that time, could not be relied upon to act in the best interest of
creditors or a successful reorganization because he had allegedly engaged in
extensive self-dealing and allegedly had disabling conflicts of interest. BCC
Leasing specifically pointed to a "self-tender" of Hawaiian that occurred in the
spring of 2002 (the "2002 Tender Offer"), as described more fully in Note 11 to
Holdings' financial statements, which resulted in 5,880,000 shares of Hawaiian's
stock being repurchased by Hawaiian at a price in excess of the then-trading
price, of which a significant portion was repurchased from Mr. Adams and AIP,
LLC ("AIP"), an entity controlled by Mr. Adams. On May 16, 2003, the Bankruptcy
Court issued an order granting the Trustee Motion. As a result, until the Joint
Plan is consummated and Hawaiian emerges from bankruptcy (anticipated to be in
the latter half of April 2005), the Trustee is in charge of operating Hawaiian's
business, under the jurisdiction of the Bankruptcy Court, and has the power to
investigate and enforce claims relating to transfers of property that occurred
prior to the Petition Date.
Inasmuch as the Trustee has been in charge of operating Hawaiian's business
since May 2003, we do not have unfettered access to information and documents
regarding Hawaiian. The appointment of the Trustee also created
4
significant uncertainty regarding the ability of Hawaiian to facilitate a timely
reorganization allowing us to regain full control of Hawaiian in a relatively
short period of time. As a result, effective April 1, 2003, we deconsolidated
Hawaiian and prospectively accounted for our ownership of Hawaiian using the
cost method of accounting. Accordingly, our financial results include the
consolidated results of Holdings and Hawaiian for all of 2002 and the first
quarter of 2003, and the stand-alone deconsolidated results of Holdings for the
last three quarters of 2003 and all of 2004. This has resulted in historical
operating results that are not comparable on a year-to-year basis.
AIRCRAFT LEASES
Hawaiian has reached agreements with Ansett Worldwide Aviation Services, Inc.
("Ansett"), International Lease Finance Corporation ("ILFC"), and BCC Leasing,
who together lease Hawaiian its entire fleet of Boeing 767-300ER and 717-200
aircraft, on revised long-term leases, which have been approved by the
Bankruptcy Court. Hawaiian also cancelled the delivery of two Boeing 767-300ER
aircraft scheduled for delivery during 2003 and returned two Boeing 717-200
aircraft to BCC Leasing in late 2003 and early 2004. The revised leases and
cancellations provided Hawaiian with significant savings in monthly aircraft
rentals, but also resulted in lease related claims against Hawaiian for Ansett
(the "Ansett Claim") and BCC Leasing of approximately $107.5 million and $66.5
million, respectively. The amendments to the Ansett leases allow Ansett to
terminate those leases early, after not less than 180 days' prior notice to
Hawaiian, beginning on March 21, 2007. Ansett can terminate up to two Ansett
aircraft leases between March 21, 2007 and September 20, 2007, up to three
additional Ansett aircraft leases between September 21, 2007 and March 20, 2008;
and up to two additional Ansett aircraft leases between March 21, 2008 and
September 20, 2009. After September 20, 2009, Ansett can terminate up to all
seven Ansett aircraft leases on not less than 180 days' notice. If Ansett elects
to terminate any lease, Hawaiian shall be relieved of all obligations to pay
basic rent or other amounts upon any such termination. See "The Joint Plan" and
"Certain General Case Summary Matters".
THE JOINT PLAN
On September 9, 2004, Holdings, the Trustee, the Creditor's Committee, HHIC,
Inc., a wholly-owned subsidiary of Holdings ("HHIC"), and RC Aviation, LLC ("RC
Aviation"), filed an amended Joint Plan of Reorganization (as amended on October
4, 2004 and again on March 11, 2005, the "Joint Plan") to provide for Hawaiian
to emerge from bankruptcy. As described in greater detail below under
"Business--RC Aviation, LLC Transaction and Related Transactions," as of March
23, 2005, RC Aviation held approximately 32.5% of the outstanding shares of
Common Stock. The Joint Plan provides for payment in full, without interest
accruing after the Petition Date, of all allowed claims, including unsecured
claims. Additionally, the Joint Plan provides for the merger of Hawaiian into
HHIC, with HHIC to be the surviving entity but to change its name to Hawaiian
Airlines, Inc., a Delaware corporation. We will retain our equity interest in
Hawaiian; however, in connection with the Joint Plan, we will be required to
issue shares of Common Stock to creditors of Hawaiian to help fund the Joint
Plan, resulting in a dilution of the ownership interest of our existing common
shareholders.
On October 5, 2004, the Bankruptcy Court approved the disclosure statement for
the Joint Plan. The Joint Plan was submitted to creditors for vote on
approximately October 15, 2004 and the deadline for voting on the Joint Plan was
December 15, 2004. All Class 5 creditors who submitted ballots (the
"Lease-Related Claims" class consisting of the Ansett and Boeing claims owned by
RC Aviation) voted to accept the Joint Plan. More than 95% in both number and
amount of each other impaired class of creditors entitled to vote on the Joint
Plan accepted the Joint Plan. Holdings and HHIC, as the sole shareholders of
Hawaiian, also voted to accept the Joint Plan. The Joint Plan was, therefore,
accepted by more than the required two-thirds of the dollar amount of eligible
claims and more than the required one-half of the number of claims from each
class of creditors entitled to vote on the Joint Plan. At the conclusion of the
confirmation hearing for the Joint Plan on March 11, 2005, the Bankruptcy Court
concluded that all of the requirements for confirmation had been met and that
findings of fact and conclusions of law and an order would be entered following
ratification of the proposed agreements with The Association of Flight
Attendants ("AFA") and ALPA.
On February 19, 2005, a final proposed agreement was reached with the
negotiating committee of AFA, and on March 14, 2005, the agreement was ratified.
On March 14, 2005, a final proposed agreement (the "Proposed ALPA Agreement")
was reached with the negotiating committee of ALPA, but the members of ALPA did
not ratify the Proposed ALPA Agreement. Consequently, on March 29, 2005, the
Trustee's motion (the "Section 1113 Motion")
5
to impose an agreement on ALPA pursuant to Section 1113 of the Bankruptcy Code
commenced before the Bankruptcy Court, but was not completed. The hearing was
continued to April 13, 2005, and is anticipated to be completed no later than
April 15, 2005, though the Bankruptcy Court may not rule at the conclusion of
the hearing. Hawaiian and ALPA may engage in negotiations before the hearing
resumes. During the hearing on March 29, 2005, the Bankruptcy Court expressly
ruled that: (1) it can grant relief to Hawaiian to impose the contract proposed
by Hawaiian with the Section 1113 Motion, even if the Bankruptcy Court does not
conclude that the changes requested are absolutely essential to allow Hawaiian
to continue operating; and (2) the Bankruptcy Court can impose the contract
proposed with the Section 1113 Motion, rather than the Proposed ALPA Agreement
reached with the ALPA negotiating committee, because the members of ALPA did not
ratify the Proposed ALPA Agreement.
The Proposed ALPA Agreement would have provided certain rights to ALPA and its
members if there is a change of control or a sale, merger, or substantial
reduction of operations, all as defined in that agreement, in replacement for
change of control rights that existed under the prior agreement. The new
remedies available to ALPA would have included the right, to the extent the
collective bargaining agreement had an amendable date which is less than two
years from the date of the Change of Control or Adverse Transaction (as such
terms are defined in the agreement), to unilaterally extend the Proposed ALPA
Agreement for a period of two years from such date and to require a payment of
$1.5 million in either Common Stock or cash. Comparable provisions would likely
have been needed to have been added in each of the other collective bargaining
agreements negotiated with the other unions that represent Hawaiian's employees.
The aggregate Common Stock or cash payment upon a Change of Control or Adverse
Transaction would, therefore, likely have increased to approximately $5.6
million. These provisions would have replaced change of control provisions under
the existing collective bargaining agreements. Under those agreements, the
definition of change of control is unclear, and if a change of control occurred,
the potential remedies available to each union include the right to extend
unilaterally its collective bargaining agreement for three years, with a 4% pay
increase each year. We and Hawaiian believe that no change of control occurred
under the prior collective bargaining agreements and each of the unions elected
to re-open negotiations under the prior collective bargaining agreements as of
their amendable date, without exercising any right it might have had to extend
them.
If the Bankruptcy Court ultimately determines to impose the contract proposed by
Hawaiian with the Section 1113 Motion, the Joint Plan proponents will thereafter
present to the Bankruptcy Court, for execution by the Bankruptcy Court, the
"Findings of Fact And Conclusions Of Law Re Third Amended Joint Plan Of
Reorganization Filed By Chapter 11 Trustee, The Official Committee Of Unsecured
Creditors, Hawaiian Holdings, Inc., HHIC, Inc., And RC Aviation LLC, Dated As Of
March 11, 2005" and the "Order Confirming Third Amended Joint Plan Of
Reorganization Filed By Chapter 11 Trustee, The Official Committee Of Unsecured
Creditors, Hawaiian Holdings, Inc., HHIC, Inc., And RC Aviation LLC, Dated As Of
March 11, 2005" (the "Confirmation Order"). Among other things, the Confirmation
Order will authorize the reorganized Hawaiian, upon the Effective Date (as
defined below), to consummate the provisions of the Joint Plan. One of the
conditions to the occurrence of the Effective Date is that the Confirmation
Order is a final order (the "Final Order Requirement"). Unless the Final Order
Requirement is waived, the Effective Date should occur approximately 10 days
after entry of the Confirmation Order, unless an order is entered staying the
Confirmation Order. If the Final Order Requirement is waived, and no stay of the
Confirmation Order is entered, the Effective Date could occur earlier than 10
days after entry of the Confirmation Order. We cannot predict if the Final Order
Requirement will be waived, or if an opposing party will appeal the Confirmation
Order and seek to obtain a stay of the Confirmation Order, or if such a stay is
sought, whether it will be granted. Further, we cannot predict if the Final
Order will be appealed and, if appealed, the outcome and consequences of such
appeal.
The Effective Date is anticipated to be in the latter half of April 2005 (the
"Effective Date"). However, we can provide no assurance that we will be able to
consummate the Joint Plan successfully.
Holdings has agreed to set aside 1,500,000 shares of the Common Stock in a pool
for allocation to employees of Hawaiian. Under the agreement, shares in the pool
will be allocated between the time of Hawaiian's emergence from bankruptcy and
May 2007, among employees of Hawaiian (other than officers) or to their accounts
in Hawaiian's 401(k) or similar plan. The shares will be allocated pursuant to
formulas set forth in the agreement.
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The following table briefly summarizes the classification and treatment of
claims under the Joint Plan, the estimated allowed claims and the anticipated
treatment (in millions):
ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------------
Unclassified Unsecured Priority Tax In cash, paid in up to twenty-four
Claims (24) equal quarterly installments. $ 1.2 $30.1 $ --
Class 1 Secured Priority Tax Claims In cash, paid in accordance with
(Unimpaired) the legal, equitable and
contractual rights of the holder of
the claim. 1.0 -- --
Class 2 Other Secured Claims Generally, at the election of
(Unimpaired) Hawaiian, (i) cash, (ii) surrender
of the collateral securing the
claim, (iii) cure and
reinstatement, or (iv) retention by
the holder of the claim of its
legal, equitable and contractual
rights. -- 2.8 --
Class 3 Other Priority Claims Cash 0.1 -- --
(Unimpaired)
Class 4(1) Unsecured Claims not At the election of the holder,
(Impaired) included in a category either (a) cash in an amount equal
below. to fifty percent (50%) of the
allowed claim and Common Stock
equal to fifty percent (50%) of the
allowed claim, based on a stock
value of $6.16 per share; or (b)
cash equal to 100% of the allowed
claim. 36.3 -- --
Class 5(2) Lease Related Claims Cash in an amount equal to fifty
(Impaired) percent (50%) of the claim and
Common Stock equal to fifty percent
(50%) of the claim, based on a
stock value of $6.16 per share. 87.0 -- 87.0
Class 6 (Impaired) Convenience Claims Cash 0.8 -- --
Class 7 (Impaired/ Equity Interests Holders of equity interests in
Unimpaired) Hawaiian shall retain their
interests in the reorganized
Hawaiian, without modification or
alteration
-----------------------------
- ----------
(1) The amount and classification of the claim filed by American Airlines, Inc.
("AA") are in dispute. AA has filed a claim for approximately $11 million, which
it contends belongs to Class 4. Hawaiian disputes a substantial portion of AA's
claim, but the full $11 million is included above. Hawaiian also contends that a
significant portion of AA's claim should be categorized in Class 5.
(2) To the extent a portion of AA's claim is categorized in Class 5, AA will not
receive cash or stock. It will receive a 15-year fully amortizing promissory
note, which bears interest at the rate of 6.5% per annum. Because all of AA's
claim is included in Class 4 above, pending resolution of the classification
dispute, none of that claim is included in Class 5.
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ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------------
by the Joint Plan. However,
Holdings will be required to issue
new Common Stock to creditors of
Hawaiian, which will result in a
dilution of the ownership interest
of Holdings' existing common
shareholders.
------ ----- -----
Total $126.4 $32.9 $87.0
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The amounts and classifications of the claims above are based on the amounts
agreed in the settlement of the claims, with the exception of disputed claims,
where the gross claim amount has been included. It is expected that the ultimate
resolution of the disputed claims will be lower, but we can provide no assurance
that this will occur. See "Certain General Case Summary Matters" and "Additional
Disputed Claims" below. For these reasons, the ultimate amounts and
classifications of such claims cannot yet be determined.
RC Aviation has purchased the Class 5 claims of Boeing and Ansett. RC Aviation
elected to receive cash equal to fifty percent (50%) of the claims and Common
Stock equal to fifty percent (50%) of the claims. RC Aviation has informed us of
its present intention to distribute, prior to the Effective Date, the Boeing
Claim and the Ansett Claim to its members who funded the purchase price of those
claims. In addition, RC Aviation has advised us that it intends to distribute to
its members, prior to the Effective Date, the 10 million shares of our stock it
currently holds. RC Aviation has advised us that it does not currently expect
such members to constitute a group or otherwise act in concert.
The Internal Revenue Service (the "IRS") asserted an unsecured, non-priority
claim against Hawaiian for tax-related penalties in the amount of approximately
$40 million. It was a condition precedent to the consummation of the Joint Plan
that such claim shall not be allowed by the Bankruptcy Court. The Bankruptcy
Court has disallowed that claim. The IRS has not appealed that ruling, but the
IRS's period to appeal that ruling has not yet expired.
FINANCING ARRANGEMENTS
The Trustee, Holdings and RC Aviation entered into a Restructuring Support
Agreement, dated as of August 26, 2004 (the "Restructuring Support Agreement"),
pursuant to which we and RC Aviation agreed to raise the funding necessary to
meet the distribution and payment obligations under the Joint Plan and to ensure
that Hawaiian has at least the minimum amount of cash required by the Joint
Plan. The Joint Plan provides that the minimum unrestricted cash on hand at
Hawaiian on the Effective Date will be at least $70 million. In order to fund
these obligations under the Joint Plan, we and RC Aviation have the flexibility
to utilize one or more sources of financing, including the following: the
issuance of up to $150 million of new debt by Hawaiian, such as new notes and/or
a senior secured loan facility, the proceeds of a rights offering to our
existing shareholders, or the proceeds of the sale of a new series of Holdings
preferred stock to RC Aviation. We and RC Aviation have elected to finance the
Joint Plan with a $50 million senior secured credit facility together with
approximately $100 million of convertible senior notes as more fully described
below.
Subject to the final completion of the negotiations and satisfaction of the
conditions to closing, on the Effective Date, Holdings, as guarantor, expects to
enter into a three-year credit agreement (the "Credit Agreement") with Hawaiian,
as borrower, and Wells Fargo Foothill, Inc., D.B. Zwirn Special Opportunities
Fund, L.P., Bernard National Loan Investors Ltd. and certain other lenders
(collectively, the "Lenders"). The Credit Agreement will provide Hawaiian with a
$50 million facility comprised of (i) a $25 million revolving line of credit
(the "Revolving Facility"), subject to availability under a borrowing base
formula based on Hawaiian's eligible accounts receivable, eligible spare parts,
eligible ground equipment and collections, with a $15 million sublimit for
letters of credit and
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up to $5 million in swing loans and (ii) a $25 million term loan (the "Term
Loan"). At the option of Hawaiian, the Revolving Facility and the Term Loan each
may bear interest either at the Wells Fargo Bank prime rate ("Prime Rate") or
the rate at which U.S. Dollar deposits are offered to major banks in the London
interbank market, adjusted by a prescribed reserve percentage ("LIBOR"). If
Hawaiian chooses the Prime Rate, interest will accrue at a rate of 1.5% above
the Prime Rate. If Hawaiian chooses LIBOR, interest will accrue at a rate of 4%
above LIBOR. All obligations under the Credit Agreement bear interest at a
minimum per annum rate of 5%.
Borrowings under the Credit Agreement will be used initially to fund
distributions under the Joint Plan and to pay fees, costs and expenses in
connection therewith and with the Credit Agreement and transactions contemplated
thereby; thereafter, such borrowings are to be used for working capital and
other lawful purposes.
Commencing three months from the Effective Date, amortization payments in the
amount of $2,083,333 each will be payable by Hawaiian quarterly in arrears in
connection with the Term Loan, which matures three years from the Effective
Date. We will guarantee all obligations, liabilities and indebtedness under or
in connection with the Credit Agreement and the other loan documents
(collectively, the "Loan Documents"). Obligations of Holdings and Hawaiian under
the Loan Documents will be secured by a first priority lien on substantially all
of their respective assets, whether then owned or thereafter acquired, including
their engines, spare parts, accounts receivable, bank accounts, investment
property, inventory, intangibles, equipment, trademarks, copyrights and patents,
and a pledge of their equity interests in their respective subsidiaries.
The Credit Agreement will contain provisions requiring the Term Loan to be
prepaid from net cash proceeds from the sale of assets by Holdings, Hawaiian or
any of their subsidiaries, issuance of debt and receipt of extraordinary
receipts, subject to certain exceptions and limitations. The Credit Agreement
will contain numerous financial and other covenants, including limitations on
indebtedness, liens, fundamental changes, dividends, stock repurchases, disposal
of assets, prepayments, change of control, investments and transactions with
affiliates. In addition, Hawaiian will be required to maintain (i) specified
levels of minimum EBITDA, (ii) a certain leverage ratio, and (iii) specified
levels of excess borrowing availability under the Revolving Facility plus
certain cash.
Subject to final completion of the negotiations and satisfaction of the
conditions to closing, on the Effective Date, we intend to issue approximately
$100 million aggregate principal amount of Convertible Senior Notes due 2010
(the "Notes"). The Notes will be issued pursuant to an indenture (the
"Indenture"), dated the Effective Date, by and among Holdings, as issuer, and
The Bank of New York, as trustee (the "Trustee"), and sold pursuant to a
purchase agreement, dated the Effective Date, by and among Holdings, as issuer,
Hawaiian, as guarantor, and the purchasers named in Schedule A thereto. The
Notes will be subordinate to Holdings' secured indebtedness and will be
guaranteed by Hawaiian. The Notes will bear interest at a rate to be determined,
payable semiannually in cash in arrears. On each interest payment date, each
holder will also receive a cash payment equal to the per share cash dividends
paid on each share of the Common Stock during the prior three-month period
multiplied by the number of shares into which the Notes may be converted.
The Notes will be convertible at any time in whole or in part at the option of
the holders into Common Stock at an initial conversion rate which is to be
determined, but at a premium to market, subject to certain anti-dilution
protections. Upon conversion, we will also pay the holders accrued interest as
of the date of conversion and an amount equal to 50% of the remaining
prospective interest from the date of conversion through maturity (together, the
"Make Whole Payment"). In the event of a conversion caused by a certain
non-public change of control (as defined in the Indenture), the Enhanced Make
Whole Payment will be the greater of the Make Whole Payment that would have been
payable had such change of control not occurred or a percentage to be determined
of the principal amount of the Note; provided that, if the conversion occurs on
or after March 25, 2009, the Enhanced Make Whole Payment shall be a percentage
to be determined of the principal amount of the Note. The Make Whole Payment
will be payable in cash and/or Common Stock. The Notes will contain provisions
suspending the holder's right of conversion to the extent that such conversion
would result in such holder owning in the aggregate more than 9.9% of the Common
Stock.
We may redeem the Notes on or after the second anniversary of the date of
issuance, for cash, at par (plus accrued and unpaid interest) if the closing
price of the Common Stock has exceeded 150% of the conversion price for at least
20 out of 30 consecutive trading days prior to the date of the notice of
redemption. The Notes will be convertible at any time prior to the date such
redemption is effective. We will be required to repurchase all or part of the
Notes
9
upon a change in control (as defined in the Indenture) at a price equal to
101% of par plus accrued and unpaid interest.
The Indenture will contain various covenants, including limitations on senior
indebtedness, dividends, transactions with affiliates, use of proceeds,
restricted payments and issuances and sales of preferred stock by subsidiaries.
Events of default under the Indenture will include our failure to pay principal
or interest on the Notes when due, or our failure to comply with the Indenture,
and cross defaults with respect to certain other indebtedness (as applicable and
subject to certain grace periods). Upon an event of default on the Notes, the
outstanding principal balance of the Notes will bear interest at a rate equal to
1% greater than the rate otherwise applicable.
The Notes will be issued and sold in a private placement, and the Notes and
Common Stock into which they are convertible will be required to be registered
with the SEC not later than 180 days from the date of issuance, subject to
certain grace periods. Failure by Holdings to file a registration statement
within the applicable time limitations shall result in registration delay
payments accruing, (i) in respect of the Notes then outstanding, at a rate per
annum equal to 0.25% of the aggregate principal amount of the Notes then
outstanding during the 90-day period immediately following the occurrence of any
registration delay, which rate shall increase by 0.25% per annum of the
aggregate principal amount of the Notes outstanding at the end of each
subsequent 90-day period, but shall not exceed in the aggregate 1.00% per annum
of the aggregate principal amount of the Notes outstanding, and (ii) in respect
of each share of converted Common Stock then outstanding, at a rate per annum
equal to 0.25% of the conversion rate during the 90-day period immediately
following the occurrence of any registration delay, which rate shall increase by
0.25% per annum of the conversion rate at the end of each subsequent 90-day
period, but shall not exceed in the aggregate 1.00% per annum of the conversion
rate.
While Holdings has no formal financing commitments for the Credit Agreement or
the Notes and final terms of the financing agreements, including pricing terms,
are subject to final negotiation, the financing documentation is substantially
complete. We believe that we will be able to complete the required financing
transactions necessary to fund the Joint Plan, subject to resolution of the ALPA
issues and assuming no material deterioration in market conditions. There can be
no assurance, however, that we can successfully consummate such financings. In
the event that such financings are not available, Holdings will utilize the
funds available under the Restructuring Support Agreement. See "RC Aviation, LLC
Transactions".
CERTAIN GENERAL CASE SUMMARY MATTERS
AIRCRAFT LEASES
On September 15, 2004, the Trustee, BCC Leasing and Holdings, HHIC and RC
Aviation (collectively, the "HHI Parties") entered into a comprehensive
Memorandum of Understanding (the "MOU") that provides for the following: (a)
assumption, on modified terms, of the three 767 aircraft leases and eleven 717
aircraft leases between Hawaiian and BCC Leasing (together, the "Boeing Assumed
Leases"), (b) settlement of the claims of BCC Leasing against Hawaiian with
respect to certain rejected aircraft leases and certain aircraft leases to be
assumed, (c) a BCC Leasing claim for an agreed amount of $66.5 million; and (d)
the sale by BCC Leasing to RC Aviation of the $66.5 million claim. The MOU also
provides for mutual releases between the Trustee and BCC Leasing, as well as a
release of claims for avoidance actions against four affiliates of BCC Leasing.
Under the MOU, the Trustee and the HHI Parties agreed that the Joint Plan shall
provide for assumption of the Boeing Assumed Leases and would not provide for
their rejection under any circumstances. The Trustee and the HHI Parties also
agreed under the MOU that the Joint Plan would provide for the affirmation of
certain tax indemnity obligations related to certain rejected leases. The Joint
Plan contains such provisions. Under the affirmation, Hawaiian will continue to
indemnify BCC Leasing against certain tax matters. Hawaiian believes that any
such tax indemnity obligation will not have a material financial impact on
Hawaiian and its operations. BCC Leasing agreed, subject to certain limited
exceptions, not to object to the Joint Plan. BCC Leasing did not object to the
Joint Plan.
By order entered on September 27, 2004, the Bankruptcy Court approved assumption
of the Boeing Assumed Leases, and approved the terms of the MOU. The
transactions contemplated under the MOU, including the amendment of certain
leases and the sale of the BCC Leasing claim to RC Aviation, were consummated on
September 30, 2004.
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SEVERANCE PROGRAMS AND RELATED MATTERS
On November 28, 2003, the Trustee filed a motion seeking approval of (1) a
severance program for Hawaiian's management, including its president and chief
operating officer, Mark Dunkerley, (2) severance benefits to non-contract
employees, and (3) an agreement among the Trustee, the Official Committee of
Unsecured Creditors (the "Committee"), and certain officers of Hawaiian to
facilitate the ability of those officers to resign as officers of Holdings, and
certain other matters. Each of these, as more fully described below, was
approved at a hearing held on January 23, 2004.
SEVERANCE PROGRAM FOR MANAGEMENT
The severance program for Hawaiian's management provides eleven officers with
severance in the form of salary and certain benefits for one year after
termination. The program has subsequently been modified to include other
officers of Hawaiian. The severance benefits would only be available upon a
termination of employment without cause during the 180 day period, or
resignation during the 60-day period, following a "Change of Control." A Change
of Control was defined to be an event where the Trustee was no longer the
trustee, and the chief operating officer (Mark Dunkerley) was not elevated to
chief executive officer.
SEVERANCE BENEFITS TO NON-CONTRACT EMPLOYEES
The severance program for non-contract employees provided, to Hawaiian's current
and future regular non-contract full-time employees, severance on the same terms
and conditions as was available to those employees prior to the Petition Date.
That program provides those employees who are involuntarily terminated without
cause, with between two and thirteen weeks of severance benefits based on length
of service of the employee. The Trustee also retained discretion to pay
non-contract employees (including officers) accrued pre-petition vacation and
additional severance, provided that payments to any non-contract employee shall
not exceed 52 weeks of salary and benefits.
FIVE OFFICER AGREEMENT
Five officers of Hawaiian, Mark Dunkerley, Christine Deister, Ruth Ann Yamanaka,
Paul Kobayashi and John Wagner (the "Five Officers") were also officers of
Holdings on the Petition Date. While these individuals were willing to resign
their positions as officers of Holdings, they were concerned about the legal
implications of such resignation. Accordingly, the Trustee sought and obtained,
on an expedited basis, authority to engage separate counsel to represent the
officers. Following negotiations between the Trustee, the Committee and the Five
Officers, they agreed to resign their positions provided that they received
certain protections from the Trustee. The Trustee, the Committee and Five
Officers entered into an agreement (the "Five Officer Agreement") whereby the
Trustee and the Committee agreed (a) not to take any action that could result in
the subordination of any indemnity claim held by these officers, (b) to allow
the officers to make a claim against Hawaiian's existing Directors and Officers
Insurance Policies, and (c) to covenant not to sue the officers. The Five
Officers agreed to cooperate in the investigation related to the conduct of the
business of Holdings or Hawaiian prior to the Trustee's appointment. Mark
Dunkerley, Paul Kobayashi and John Wagner remain as officers of Hawaiian.
OTHER SIGNIFICANT BANKRUPTCY COURT ACTIONS
EXTENSION OF TIME TO ASSUME OR REJECT UNEXPIRED LEASES
The current deadline for rejection or assumption of unexpired leases is the
earlier of the effective date of a plan of reorganization or May 12, 2005.
MANAGEMENT INCENTIVE PROGRAM
The Trustee obtained an order, entered on July 16, 2004, authorizing the
implementation of a Management Incentive Plan, which authorizes the Trustee to
award performance bonuses to Hawaiian's senior and middle managers. Under the
Management Incentive Program, approved with the consent of the Committee but
over the objection of Hawaiian's three major unions, the Trustee has authority
to award up to $3 million in performance bonuses for work
11
attributable to 2003, and up to $3 million in performance bonuses in 2004 (or $4
million if operating profits exceed $60 million). Those bonuses are to be paid
as follows: up to fifty percent of the bonus attributable to 2003 can be paid at
any time, with the balance of the bonus payable for 2003 and the full amount of
any bonus for work performed in 2004 to be paid on the earlier of December 1,
2004 or the Effective Date. Any bonuses paid to senior management under the
Management Incentive Plan will reduce the amount of severance payable to those
officers under the severance programs previously approved by the Bankruptcy
Court.
ADDITIONAL DISPUTED CLAIMS
PENSION BENEFIT GUARANTY CORPORATION
The Pension Benefit Guaranty Corporation ("PBGC") filed at least nine claims in
the aggregate amount of more than $200 million relating to the three defined
benefit pension plans sponsored and maintained by Hawaiian for unfunded pension
liability. Three of those claims were contingent upon termination of the pension
plans; the remaining claims were for minimum funding obligations or unpaid
premiums.
On or about December 7, 2004, the Trustee and the PBGC executed a stipulation
providing, among other things, that so long as Hawaiian did not terminate its
pension plans prior to the Effective Date, upon the Effective Date the PBGC will
be deemed to have withdrawn its claims against Hawaiian, and that neither the
stipulation nor the Joint Plan will affect the liabilities of Hawaiian with
respect to its pension plans or the PBGC. All prepetition claims of the PBGC
will have been paid in full on the Effective Date. The IRS asserted a penalty
claim that it contended arose from the delay in payment of certain of those
claims, but the Bankruptcy Court has disallowed that claim. There are accrued
unpaid minimum contributions to Hawaiian's pension plan for the four quarters
during the calendar year 2004 that total approximately $9.6 million. These
amounts must be paid on or before September 15, 2005, together with interest, to
avoid any delinquency penalty and assuming the Effective Date occurs in the
latter half of April 2005, it is anticipated that Hawaiian will pay these
amounts by that date. The PBGC may be entitled to file a lien against the assets
of Hawaiian and Holdings to secure payment of these minimum funding obligations
for 2004 pending payment.
INTERNAL REVENUE SERVICE
In approximately July 2003, the IRS commenced a tax audit of Hawaiian, covering
taxes for income, fuel excise, and other matters. The IRS filed a proof of claim
which, as amended, was in the amount of approximately $126 million. Of that
amount, approximately $87.4 million was said to constitute a priority tax claim
under section 507(a)(8) of the Bankruptcy Code. The balance of the IRS claim, in
the amount of approximately $38.6 million, primarily reflects penalties proposed
by the IRS arising from its contention that Hawaiian filed excessive claims
related to the non-taxable use of aviation fuel. The Trustee and the IRS settled
most of the other components comprising the claim, resulting in a reduction of
the total priority claim to approximately $89.4 million (including interest). On
March 28, 2005, an order setting forth the allowed amount of the IRS' claim,
based upon the agreements reached and the rulings of the Bankruptcy Court was
entered by the Bankruptcy Court. The time period for the IRS to appeal the
Bankruptcy Court's ruling has not, therefore, expired.
The order entered by the Bankruptcy Court provides as follows: (1) the IRS is
allowed a prepetition priority excise tax claim in the amount of $22.0 million;
(2) the IRS's prepetition priority income tax claim for income tax adjustments
for 2001 and 2002 is estimated and capped at $8.1 million; (3) the IRS is
allowed an administrative priority excise tax claim in the amount of $1.0
million and because this is an administrative claim, interest runs on this claim
(through November 30, 2004, such interest was $0.2 million); and (4) Hawaiian
will be entitled to additional deductions and income reductions in 2003 and/or
subsequent years based on the adjustments made by the IRS to Hawaiian's 2001 and
2002 income tax returns. The income tax claim arose from the IRS's disallowance
of certain deductions for maintenance expenses in 2001 and 2002, based on its
conclusion that such deductions should have been taken in 2003 and/or subsequent
years. Pursuant to the agreement with the IRS, Hawaiian is entitled to
additional deductions in 2003 and 2004 of $44.2 million and $3.8 million,
respectively, for maintenance expenses previously included in Hawaiian's tax
returns for 2001 and 2002. In addition, a portion of the IRS's income tax claim
for 2001 and 2002 is based on its conclusion that Hawaiian was required to
recognize certain air traffic liability income in those years, which Hawaiian
had previously recognized in 2003. It is Hawaiian's position that it can reduce
its taxable income in 2003 by a like dollar amount, which will reduce Hawaiian's
tax liability for 2003.
12
The order provides that absent agreement by Hawaiian and the IRS with respect to
the reduction of taxable income in 2003, the Bankruptcy Court shall retain
jurisdiction to adjudicate the matter. The allowed administrative priority
excise tax claim will be paid in full in cash on the Effective Date. The
priority income tax and excise tax claims, totaling approximately $30.1 million,
will be paid over approximately 20 quarters following the Effective Date,
together with interest thereon from and after the Effective Date, at the rate of
5% per annum. The IRS has taken the position that it can retain and offset
income tax refunds against the priority claims to be paid over the 20 quarters
following the Effective Date. Hawaiian disputes this position and the issue
remains unresolved.
AMERICAN AIRLINES
American Airlines ("AA") has filed a proof of claim, as amended, in the amount
of approximately $11 million for unpaid rent accruals relating to DC-10 aircraft
which Hawaiian leased prior to the Petition Date, unpaid maintenance charges,
and airplanes leased from AA whose terms expired prior to the Petition Date. The
Trustee disputes a substantial portion and contends that the allowed amount of
the claim, other than for rent accruals, should not exceed approximately $2.3
million. By Order entered on or about January 20, 2005, the Bankruptcy Court
provided for the continued negotiations among the parties following confirmation
of the Joint Plan, or a hearing before the Bankruptcy Court to resolve the
issues, if agreement could not be reached, without prejudice to their respective
rights.
RC AVIATION, LLC TRANSACTIONS
On June 14, 2004, RC Aviation purchased ten million shares of Common Stock from
AIP, the entity which was formerly a control person of Holdings, reducing AIP's
ownership of Holdings to approximately 14 percent of the outstanding Common
Stock. Also as part of the purchase, Mr. Adams resigned as our Chairman and
Chief Executive Officer, and RC Aviation and AIP entered into a stockholders
agreement, under which, among other things, AIP agreed to cause (a) the
directors that AIP had previously designated to our Board of Directors to
resign, with the exception of Gregory Anderson, and (b) Lawrence S. Hershfield
and Randall L. Jenson (the "RC Designees") to be appointed to our Board of
Directors. AIP also agreed, among other things, to vote all of its common stock
and Series A Special Preferred Stock (a) in favor of the election, as members of
our Board of Directors, of persons identified by RC Aviation for nomination or
so nominated in accordance with our Amended and Restated Certificate of
Incorporation and our Amended Bylaws, (b) to otherwise effect the intent of the
stockholders agreement, which is to cause the RC Designees to become members of
our Board of Directors, and (c) to otherwise vote such equity securities at the
direction of RC Aviation.
On December 30, 2004, Holdings, AIP and related parties entered into an
agreement pursuant to which the four shares of the aforementioned Series A
Special Preferred Stock held by AIP were cancelled.
RC Aviation will receive shares of Common Stock valued at $6.16 per share on
account of 50% of the lease-related claims controlled by it under the Joint
Plan. If necessary to make distributions to holders of claims and to satisfy the
minimum cash requirement under the Joint Plan, in exchange for the 50% cash
portion that RC Aviation is to receive on account of its lease-related claims,
RC Aviation may defer the cash payment it is to receive and instead accept a
six-month note if the reorganized Hawaiian does not have sufficient cash to pay
all obligations due on the Effective Date and retain at least $70 million in
unrestricted cash. Based on current information, it does not appear that this
will be necessary and it appears likely that RC Aviation will receive 50% of
these claims in cash and 50% in Common Stock, assuming successful consummation
of the Credit Agreement and Note financing transactions.
On the Effective Date, we will issue a warrant (the "Warrant") to RC Aviation as
required pursuant to an agreement between RC Aviation and us dated August 24,
2004 in which RC Aviation and its members entered into a firm commitment to (a)
provide funds to purchase up to $175 million of lease claims at an agreed upon
discount, (b) provide up to $60 million if required to fund the Joint Plan and
(c) fund a tender offer for all Class 4 claims in the event the Joint Plan was
not consummated by March 31, 2005, which the Trustee and RC Aviation have
extended until April 29, 2005, estimated at the time to require approximately
$38 million. The up to $60 million required to be funded by RC Aviation will be
funded, based upon current circumstances, through the issuance of a new series
of Holdings non voting convertible preferred stock, providing for dividends at
the rate of 5% per annum, payable at the option of Holdings in cash or in kind.
If in kind, the holder may elect to receive preferred stock or Common Stock. The
preferred stock would be convertible into Common Stock on or after the twelve
month anniverary of the issuance date at a price per share based on then current
market conditions, but not in excess of $6 per share. The preferred stock would
be mandatorily redeemable in cash five years from the issue date. Holdings would
be required to use its best efforts to redeem the preferred stock, at 105% of its
face amount, prior to the twelve month anniverary of issuance out of the
proceeds of a rights offering of Common Stock. RC Aviation would receive a
commitment fee.
The Warrant will entitle its holder to purchase 100 shares of Series E Preferred
Stock. The Series E Preferred Stock will have an aggregate liquidation
preference equal to the Black Scholes valuation of the Common Stock Warrant (as
defined below). The Series E Preferred Stock will be nonvoting, but will
participate in dividends, distributions, mergers and similar events,
liquidation, dissolution or winding up of Holdings in an amount equal to the
greater of the liquidation
13
preference of the Series E Preferred Stock and the amount that would be received
based upon participation with the Common Stock on a pro rata basis. Upon the
receipt of shareholder approval of an increase in the number of authorized
shares of Common Stock, the Warrant shall be automatically exchanged for a
warrant (the "Common Stock Warrant") entitling the holder to purchase 5% of our
fully diluted Common Stock (upon giving effect to all securities issued upon the
Effective Date), at an exercise price of $7.20 per share, subject to adjustment
for certain anti-dilutive events.
In addition, if RC Aviation is required to fund up to $60 million referred to
above, it will be entitled to receive a commitment fee in the form of an
additional warrant on the terms described above exercisable for 1% of the
outstanding Common Stock on a fully diluted basis, for each $12 million of
preferred stock purchased by it.
CORPORATE RESTRUCTURING
On August 29, 2002, Hawaiian was restructured into a holding company structure,
whereby Hawaiian became a wholly owned subsidiary directly and indirectly of
Holdings, and the shareholders of Hawaiian, as described in more detail below,
exchanged their Hawaiian shares for Holdings shares on a one-for-one basis and
became shareholders of Holdings. The shareholders of Holdings have substantially
the same rights, privileges and interests with respect to Holdings as they had
with respect to Hawaiian immediately prior to the corporate restructuring,
except for any such differences that arise from differences between Delaware and
Hawaii law. The purpose of the corporate restructuring was to provide strategic,
operational and financing flexibility, and to take advantage of the flexibility,
predictability and responsiveness that Delaware law provides.
In connection with the corporate restructuring, Airline Investors Partnership,
L.P. ("Airline Investors Partnership"), the majority shareholder of Hawaiian
prior to the corporate restructuring, was restructured into AIP, a limited
liability company. As part of the restructuring, Holdings acquired and initially
owned, indirectly through HHIC, as well as directly, all of the shares of
Hawaiian's common stock that were previously held by Airline Investors
Partnership. In exchange, AIP received 14,159,403 shares of Holdings common
stock (the same number of shares that Airline Investors Partnership owned of
Hawaiian common stock immediately prior to the exchange). Immediately after the
restructuring, Holdings acquired the remaining outstanding shares of Hawaiian
common stock and all of the shares of Hawaiian special preferred stock, with
each of these shares being converted into one share of Holdings common stock.
After the completion of the corporate restructuring, the shareholders of
Holdings held the same relative percentage of Holdings common stock as they did
of Hawaiian common and special preferred stock immediately prior to the
corporate restructuring.
In addition, Holdings assumed sponsorship of the existing Hawaiian stock option
plans. As a result, the outstanding options became exercisable or issuable upon
the same terms and conditions as were in effect immediately prior to the
completion of the corporate restructuring, except that shares of Holdings common
stock will be issued upon the exercise or issuance of these options instead of
Hawaiian common stock. Furthermore, each pilot participant eligible to receive a
share of Hawaiian common stock under the Hawaiian pilots' 401(k) plan and the
2001 letter of agreement with the Hawaiian pilots became eligible to receive, on
the same terms and conditions as were in effect immediately prior to the
corporate restructuring, one share of Holdings common stock instead.
As part of the corporate restructuring, Holdings also issued to AIP and each of
the three labor unions having the right to nominate individuals to our Board of
Directors, a number of shares of a corresponding series of Holdings special
preferred stock equal to the number of shares of Hawaiian special preferred
stock that they held immediately prior to the corporate restructuring. In
addition, the existing stockholders agreement among Hawaiian, Airline Investors
Partnership and the three labor unions having board nomination rights was
amended and restated to make Holdings and AIP parties to the agreement and to
have them assume all the rights and obligations of Hawaiian and Airline
Investors Partnership under the existing stockholders agreement, respectively.
As a result, after the completion of the corporate restructuring, the relative
governance rights in Holdings of AIP and these three labor unions were
substantially the same as the rights in Hawaiian of Airline Investors
Partnership and these three labor unions immediately prior to the corporate
restructuring.
Pursuant to the Confirmation Order and the Joint Plan, on the Effective Date,
Hawaiian shall be merged into HHIC, with HHIC as the surviving entity which will
immediately thereafter be renamed Hawaiian Airlines, Inc. Simultaneously with
the merger, each issued and outstanding equity share in HHIC will be exchanged
for one share of common stock of the reorganized Hawaiian.
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FINANCIAL RESTRUCTURING
In light of the changed operating environment described in "Management's
Discussions and Analysis of Financial Condition and Results of Operations -
State of the Airline Industry" and recent financial losses, Hawaiian, during the
period it was controlled by Holdings, took several steps to mitigate the impact
on its results of operations and financial condition. These steps included a
significant reduction in scheduled capacity on an available seat mile basis as
well as in its workforce immediately after the events of September 11, 2001. In
addition, on October 31, 2002, Hawaiian announced that it would further reduce
its workforce by approximately 150 employees, or four percent of its total
workforce, in an effort to bring its cost structure in line with current and
expected revenues. Hawaiian secured voluntary leaves of absence from
approximately 60 flight attendants, reduced work schedules for part-time
reservations personnel and decided to leave certain open positions unfilled
until economic conditions improved. Hawaiian also began a comprehensive
financial restructuring effort to restore its long-term financial viability.
Hawaiian developed a financial restructuring plan that sought to reduce
operating costs to sustainable and competitive levels outside of Chapter 11 of
the Bankruptcy Code through the following measures:
o increasing operating efficiency through the conversion to a new fleet
of aircraft;
o obtaining economic concessions from key stakeholders, including
employees, aircraft lessors and other vendors;
o restructuring senior management; and
o reducing distribution costs while improving operating efficiency and
inventory management by converting to an electronic ticketing
environment through the elimination of paper tickets and interisland
coupons.
During the first quarter of 2003, Hawaiian was successful in its efforts in
implementing significant portions of the financial restructuring plan. As part
of its financial restructuring plan, Hawaiian began negotiations with its labor
unions seeking an aggregate of $15 million of annual concessions from the labor
unions, primarily through work rule changes. On February 20, 2003, Hawaiian's
employees represented by the International Association of Machinists and
Aerospace Workers (AFL-CIO) ("IAMAW") agreed to $3.8 million in annual
concessions. On March 6, 2003, Hawaiian's pilots represented by ALPA reached an
agreement with Hawaiian with respect to approximately $8 million in annual
concessions. Similarly, on March 11, 2003, Hawaiian's flight attendants
represented by AFA ratified an agreement to grant concessions that were expected
to save Hawaiian $3.5 million per year.
However, Hawaiian was not able to negotiate sufficient cost-savings from its
aircraft lessors to enable Hawaiian to restructure on a consensual basis outside
of Chapter 11 of the Bankruptcy Code. Under the terms of the Boeing 717-200
("B717") aircraft leases with BCC Leasing which required cash rental payments in
excess of the amounts recognized as rent expense in Hawaiian's financial
statements for approximately the first half of the lease terms, Hawaiian was
required to make cash payments in excess of $10 million in January 2004. Wells
Fargo acts as the trustee for the benefit of BCC Leasing. Wells Fargo extended
the due date for these payments and other subsequent payments that came due from
and after January 2003 under the B717 aircraft leases. From and after January
2003, Hawaiian made a number of payments to Wells Fargo on account of the B717
aircraft leases. As of March 21, 2003, however, Hawaiian owed Wells Fargo in
excess of $10 million, although Hawaiian was current on its payments under its
Boeing 767-300ER ("B767") aircraft lease agreements with each of Hawaiian's
lessors. Hawaiian was unsuccessful in negotiating satisfactory terms with Wells
Fargo to extend the waiver and deferral of certain rental payments associated
with Hawaiian's B717 fleet past March 21, 2003. Based on this reason, together
with the prospect of continued liquidity concerns, Hawaiian's then-current
management determined that it was necessary and appropriate to file for relief
under Chapter 11 as a means of completing the financial restructuring process
and putting Hawaiian in a position to return to profitability. At the time of
the Chapter 11 Filing, then-current management believed that Hawaiian's
operating leases could be quickly re-negotiated through the Chapter 11
bankruptcy process and that Hawaiian would emerge from bankruptcy in a short
period of time.
15
BUSINESS OF HAWAIIAN
As described above under "Business--Chapter 11 Reorganization of Hawaiian,"
inasmuch as the Trustee has been in charge of operating Hawaiian's business
since May 2003 and will retain such authority until such time as the Joint Plan
is confirmed and consummated, we do not have unfettered access to information
and documents regarding Hawaiian. Thus, while we believe that the following
information concerning the business of Hawaiian is accurate, it is not in a
position to verify such accuracy.
Segment Information
Principally all of Hawaiian's flight operations either originate or end in the
State of Hawaii. The management of such operations is based on a system-wide
approach due to the interdependence of Hawaiian's route structure in the various
markets that Hawaiian serves. Hawaiian operates as a matrix form of organization
as it has overlapping sets of components for which managers are held
responsible. Managers report to Hawaiian's chief operating decision-maker on
both Hawaiian's geographic components and Hawaiian's product and service
components, resulting in components based on products and services constituting
one operating segment. As Hawaiian offers only one service (i.e., air
transportation), management of Hawaiian has concluded that it has only one
segment of business for the periods in which Hawaiian is consolidated into our
operations.
Flight Operations
Hawaiian's flight operations are based in Honolulu, Oahu. As of December 31,
2003, Hawaiian operated approximately 135 scheduled flights per day with:
o daily service on transpacific routes between Hawaii and Los Angeles,
Sacramento, San Diego and San Francisco, California; Las Vegas,
Nevada; Phoenix, Arizona; Portland, Oregon and Seattle, Washington;
o daily service on interisland routes among the four major islands of
the State of Hawaii; and
o weekly service on south pacific routes as the sole direct provider of
air transportation from Hawaii to each of Pago Pago, American Samoa,
and Papeete, Tahiti in the South Pacific, and scheduled service to
Sydney, Australia.
o charter service two to three times weekly from Honolulu, Hawaii to
Anchorage, Alaska.
The following table delineates scheduled and chartered passenger revenue of
Hawaiian for the periods during which we consolidated Hawaiian.
2003(*) 2002
-------- --------
Transpacific $ 87,094 $341,662
Interisland 42,151 180,391
South Pacific 4,442 19,940
Overseas Charter 11,832 46,480
-------- --------
$145,519 $588,473
* Only represents the period during which we consolidated Hawaiian.
Aircraft
As of December 31, 2003, Hawaiian operated 12 B717 aircraft to service the
interisland routes and 14 B767 aircraft to service Hawaiian's transpacific,
south pacific and overseas charter routes.
16
Codesharing and Other Alliances
Hawaiian is able to provide connections across the United States, Canada and
Mexico through codesharing agreements (pursuant to which one carrier places its
name and flight numbers, or "code", on flights operated by the other carrier)
with Alaska Airlines, America West Airlines, American Airlines, American Eagle
Airlines, Continental Airlines and Northwest Airlines. Hawaiian also
participates in the frequent flyer programs of Alaska Airlines, America West
Airlines, American Airlines, Continental Airlines, Northwest Airlines and Virgin
Atlantic Airlines. These programs enhance Hawaiian's revenue opportunities by:
o providing Hawaiian's customers more value by offering more travel
destinations and better mileage accrual/redemption opportunities;
o gaining access to more connecting traffic from other airlines; and
o providing members of Hawaiian's alliance partners' frequent flyer
program an opportunity to travel on Hawaiian's system while earning
mileage credit in the alliance partners' program.
Although these programs and services increase Hawaiian's ability to be more
competitive, they also increase Hawaiian's reliance on third parties.
Competition
Hawaiian faces multiple competitors on its transpacific routes, including major
carriers such as American Airlines, Continental Airlines, Northwest Airlines,
Delta Airlines, United Airlines and various charter carriers. The Company
believes that transpacific competition is based on factors such as fare levels,
flight frequency, on-time performance and reliability, name recognition,
affiliations, frequent flyer programs, customer service, aircraft type and
in-flight service. Currently, Hawaiian is the only provider of direct service
between Honolulu and each of Pago Pago, American Samoa and Papeete, Tahiti.
While there are several small commuter and "air taxi" companies that provide air
transportation between Hawaii's interisland airports that cannot be served by
large aircraft, the interisland routes are serviced primarily by Hawaiian and
Aloha Airlines. Hawaiian believes that interisland competition is primarily
based on fare levels, flight frequency, on-time performance and reliability,
name recognition, affiliations, frequent flyer programs, customer service and
aircraft type.
Employees
As of December 31, 2003, Holdings had no employees and Hawaiian had
approximately 3,310 active employees of which approximately 2,625 were employed
on a full-time basis. Approximately 85% of Hawaiian's employees are covered by
labor agreements with the following unions: IAMAW, ALPA, AFA, the Transport
Workers Union ("TWU") and the Employees of the Communications Section
("Communications Section"). All contracts are subject to renegotiation in 2004
and 2005.
Recent events at Hawaiian, in particular, the 2002 Tender Offer and the
bankruptcy proceedings, have harmed the historically good labor relations
enjoyed by Hawaiian. While there can be no assurance that Hawaiian's generally
good labor relations will improve, we expect to develop and execute a business
strategy that recognizes the importance of good relations with Hawaiian's
employees.
ITEM 2. PROPERTIES.
As a holding company, Holdings does not own any physical properties. No
information regarding properties owned or leased by Hawaiian is contained herein
because the business of Hawaiian has been operated under the jurisdiction of the
Trustee since May 2003, as described in greater detail in "Business--Chapter 11
Reorganization of Hawaiian.
17
ITEM 3. LEGAL PROCEEDINGS.
CHAPTER 11 CASE
On March 21, 2003, Hawaiian filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court. The reorganization is being
administered under the caption "In re Hawaiian Airlines, Inc., Case No.
03-00817". The Chapter 11 case is discussed in greater detail under "Business --
Chapter 11 Reorganization of Hawaiian."
GOTBAUM V. HAPP - ADV. PROC. NO. 03-90060
On or about November 17, 2003, the Trustee brought a lawsuit against John Happ,
our former Vice President, Sales and Marketing, who resigned on February 15,
2003. In that lawsuit, the Trustee seeks injunctive and monetary relief against
Happ based upon his alleged violation of a covenant not to compete and other
contractual obligations which occurred when he accepted a similar position with
ATA Airlines, Inc. in July 2003. Pursuant to a settlement, the adversary
proceeding was dismissed with prejudice by order of the Bankruptcy Court dated
January 25, 2005.
GOTBAUM V. ADAMS, ET AL., ADV. NO. 03-90061 (BANKR. D. HAW.).
On November 28, 2003, the Trustee filed a complaint (the "Complaint") with the
Bankruptcy Court, naming Mr. Adams (our Chief Executive Officer prior to June
2004), AIP, Airline Investors Partnership and Smith Management LLC (together,
the "Adams Defendants") and Holdings, as defendants. The Complaint asserted
various counts based on corporate actions including claims alleging, inter alia,
fraudulent transfer claims under the Bankruptcy Code and Hawaii law; avoidance
and recovery of preference under the Bankruptcy Code; unlawful distribution
under Hawaii law; violations of the duties of care and loyalty under Hawaii law;
and unjust enrichment under Hawaii law. The factual allegations relate to a $25
million self-tender offer undertaken by Hawaiian announced on May 31, 2002 (the
"Self-Tender") that was subsequently consummated; payments made by Hawaiian
Airlines to Smith Management in the total amount of $2.75 million; $200,000 in
compensation paid by Hawaiian to defendant Mr. Adams; and $500,000 transferred
from Hawaiian to Holdings. Based on all of the claims in the Complaint, the
Trustee sought in excess of $28 million, as well as punitive damages,
prejudgment interest and the costs of the lawsuit.
The Adams Defendants and we served answers denying all material allegations of
the Complaint on January 5, 2004 and on February 18, 2004, respectively. On
January 4, 2005, Hawaiian announced that the Adams Defendants had agreed to pay
Hawaiian $3.6 million to settle the lawsuit brought by the Trustee. The
Bankruptcy Court approved the settlement on February 24, 2005. Such amount will
be paid to Hawaiian once it successfully emerges from bankruptcy.
SEC INVESTIGATION AND CIVIL ACTION
On September 22, 2003, we received notice that the SEC had opened a formal,
nonpublic investigation of Hawaiian and several of its then officers related to
the Self-Tender.
We announced on March 13, 2004 that the Staff of the San Francisco District
Office of the SEC was considering recommending that the SEC authorize a civil
action against Mr. Adams, our former Chairman, and AIP for possible violations
of securities laws related to the Self-Tender. On September 23, 2004, Hawaiian
announced a settlement agreement with the SEC that resolves the SEC's
investigation of the Self-Tender, pursuant to which investigation the SEC
concluded that the Self-Tender violated SEC rules relating to tender offers.
Under the terms of the settlement, the SEC will not file any claim or seek any
monetary penalties against Hawaiian, and Hawaiian pledges to comply with tender
offer disclosure rules if it should ever again make a public tender offer.
We are not a party to any other litigation that is expected to have a
significant effect on our operations or business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
In the table below, we present the range of the reported high and low sales
prices on the AMEX of our Common Stock for the calendar quarters indicated. The
shares of our Common Stock are listed on the AMEX and the PCX under the symbol
"HA.
PRICE RANGE
-------------
HIGH LOW
----- -----
2003
First Quarter $2.10 $1.30
Second Quarter $1.50 $0.30
Third Quarter $1.82 $0.75
Fourth Quarter $3.08 $1.01
2002
First Quarter $4.60 $2.35
Second Quarter $4.00 $2.80
Third Quarter $3.66 $2.27
Fourth Quarter $2.54 $1.55
On March 31, 2004, the price per share of our Common Stock was $3.85. Past price
performance is not necessarily indicative of future price performance.
The rights and claims of Hawaiian's various creditors and Holdings will be
determined by the Joint Plan. We cannot provide any assurance that we will be
able to consummate the Joint Plan successfully. Accordingly, we urge that
appropriate caution be exercised with respect to existing and future investments
in Holdings.
There were approximately 1,015 holders of record of our Common Stock as of March
31, 2004, including record owners holding shares for an indeterminate number of
beneficial owners.
We paid no dividends in 2003 or 2002.
As part of the collective bargaining agreement negotiated with ALPA in December
2000, we agreed to distribute 1,685,380 shares of our Common Stock on a
quarterly basis to the individual 401(k) accounts of ALPA pilots in our
employment during 2001 and 2002. In 2001, 518,910 shares, representing the
number of shares required to be distributed in respect of the first, second and
third quarters of 2001, were distributed to Vanguard Group, Inc. as trustee for
the Hawaiian Holdings, Inc. Pilots' 401(k) Plan. In 2002, 1,051,214 shares,
required for the fourth quarter of 2001 and the first, second and third quarters
of 2002, were distributed to Vanguard Group, Inc, as trustee. The distribution
for the quarter ended December 31, 2002, consisting of 105,776 shares, was made
on March 14, 2003 to Vanguard Group, Inc. as trustee.
The Transportation Act prohibits non-U.S. citizens from owning more than 25% of
the voting interest of a U.S. air carrier or an entity controlling a U.S. air
carrier. Our articles of incorporation prohibit the ownership or control of more
than 25% (to be increased or decreased from time to time, as permitted under the
laws of the United States) of our issued and outstanding voting capital stock by
persons who are not "citizens of the United States". As of December 31, 2003, we
believe we are in compliance with the Transportation Act as it relates to voting
stock held by non-United States citizens.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides the specified information as of December 31, 2003
with respect to compensation plans (including individual compensation
arrangements) under which our equity securities are authorized for issuance,
19
aggregated by all compensation plans previously approved by our security
holders, and by all compensation plans not previously approved by our security
holders:
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN FIRST
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN)
- ----------------------------------------- ----------------------- -------------------- ---------------------
Equity compensation plans approved by
security holders 3,088,000 $2.90 1,349,500
Equity compensation plans not approved by
security holders
--------- ----- ---------
Total 3,088,000 $2.90 1,349,500
See Note 10 to our financial statements for additional information regarding our
equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial and Statistical Data should be read in conjunction with
our accompanying audited consolidated financial statements and the notes related
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
HAWAIIAN HOLDINGS, INC.
SELECTED FINANCIAL AND STATISTICAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2003(A) 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
Summary of Operations:
Operating revenue(b) $ 157,064 $ 632,038 $ 611,582 $ 607,220 $ 488,877
Operating expenses(b)(c) $ 172,157 $ 688,117 $ 594,921 $ 621,022 $ 529,414
Operating income (loss) $ (15,093) $ (56,079) $ 16,661 $ (13,802) $ (40,537)
Net income (loss) $ (16,998) $ (58,275) $ 5,069 $ (18,615) $ (29,267)
Net Income (Loss) per Common
Stock Share:
Basic $ (0.60) $ (1.88) $ 0.15 $ (0.48) $ (0.72)
Diluted $ (0.60) $ (1.88) $ 0.15 $ (0.48) $ (0.72)
Weighted Average Shares Outstanding:
Basic 28,435 31,024 33,811 38,537 40,997
Diluted 28,435 31,024 33,947 38,537 40,997
Shareholders' Equity Per Share $ (2.25) $ (5.03) $ (0.62) $ 0.54 $ 1.61
(Without Dilution)
Shares Outstanding at End of Period 28,459 28,350 34,151 33,708 40,997
Balance Sheet Items:
Total assets $ 862 $ 256,166 $ 305,294 $ 256,968 $ 241,937
Property and equipment, net -- $ 45,685 $ 45,256 $ 83,743 $ 65,272
Long-term debt, excluding current
portion -- $ 883 $ 1,673 $ 10,763 $ 23,858
Capital lease obligations,
excluding current portion -- $ 2,358 $ 3,308 $ 2,067 $ 2,790
Shareholders' equity
(deficiency)(d) $ (63,731) $ (142,610) $ (21,210) $ 18,259 $ 66,126
20
SCHEDULED OPERATIONS:
Revenue passengers 1,351 5,587 5,478 5,886 5,425
Revenue passenger miles 1,144,525 4,804,498 4,295,479 4,492,395 4,076,576
Available seat miles 1,622,707 6,246,127 5,587,566 5,967,810 5,468,589
Passenger load factor 70.5% 76.9% 76.9% 75.3% 74.5%
Passenger revenue per passenger
mile 11.7(CENTS) 11.0(CENTS) 11.4(CENTS) 10.6(CENTS) 9.8(CENTS)
OVERSEAS CHARTER OPERATIONS:
Revenue passengers 50 296 367 382 283
Revenue passenger miles 135,947 815,273 1,097,069 1,165,436 803,524
Available seat miles 163,542 862,096 1,218,734 1,279,749 852,155
TOTAL OPERATIONS:
Revenue passengers 1,401 5,883 5,845 6,268 5,708
Revenue passenger miles 1,280,472 5,619,771 5,392,548 5,657,831 4,880,100
Available seat miles 1,786,249 7,108,223 6,806,300 7,247,559 6,320,744
Passenger load factor 78.7% 79.1% 79.2% 78.1% 77.2%
Revenue Per ASM 8.79(CENTS) 8.89(CENTS) 8.99(CENTS) 8.38(CENTS) 7.73(CENTS)
Cost Per ASM 9.55(CENTS) 9.68(CENTS) 8.74(CENTS) 8.57(CENTS) 8.38(CENTS)
- ----------
(a) Includes the consolidated results of Holdings and Hawaiian from January 1,
2003 to March 31, 2003 and the stand-alone deconsolidated results of
Holdings from April 1, 2003 to December 31, 2003.
(b) For 2002 and 2001, overall revenue and expenses were significantly
unfavorably impacted by the events of September 11, 2001.
(c) For 2002, operating expenses included a net $8.7 million restructuring
charge related to the accelerated retirement of the DC-10 aircraft and the
sale of DC-9 aircraft and parts. For 2001, operating expenses included a
$30.8 million special credit for estimated proceeds from the federal
government under the Stabilization Act and a $3.6 million favorable
adjustment to the restructuring charge recorded in 2000. For 2000,
operating expenses included a $14.9 million restructuring charge related to
DC-9 aircraft and expendable inventory, and a $7.6 million loss on assets
held for sale related to sale-leaseback transactions on two DC-10 aircraft.
For 1999, operating expenses included a $47.0 million impairment loss
related to DC-9 aircraft.
(d) For 2002, 2001 and 2000 shareholders' equity (deficiency) included other
comprehensive losses related to minimum pension liability adjustments of
$96.0 million, $51.6 million and $10.1 million, respectively. The other
comprehensive losses related to minimum pension liability were eliminated
upon the deconsolidation of Hawaiian during 2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
As discussed in more detail under "Business - Chapter 11 Reorganization of
Hawaiian," on March 21, 2003, Hawaiian filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code. Hawaiian Holdings did not file for
relief under Chapter 11 of the Bankruptcy Code. As discussed above, the Trustee
has been put in charge of operating Hawaiian's business. The filing of the
Trustee motion created significant uncertainty regarding the ability of Hawaiian
to facilitate a timely reorganization allowing us to regain full control of
Hawaiian in a relatively short period of time. As a result, effective April 1,
2003, we deconsolidated Hawaiian and prospectively accounted for our ownership
of Hawaiian using the cost method of accounting. Accordingly, our financial
results include the consolidated results of us and Hawaiian for all of 2002 and
the first quarter of 2003, and our stand-alone deconsolidated results for the
last three quarters of 2003. This has resulted in historical operating results
that are not comparable on a year-to-year basis.
We anticipate that Hawaiian will emerge from bankruptcy in the latter half of
April 2005. However, we cannot provide any assurance that we will be able to
consummate the Joint Plan successfully and that we will regain full control of
Hawaiian. Accordingly, the discussion and analysis of our financial condition
and results of operations is
21
directed toward stand-alone deconsolidated results for the periods for which
Hawaiian's results were not consolidated with ours, and our consolidated results
for the periods for which Hawaiian's results were consolidated with ours. In
addition, our liquidity discussion focuses only on our stand-alone
deconsolidated liquidity position. Following the anticipated emergence of
Hawaiian from bankruptcy in the latter half of April 2005, we will file a Form
8-K containing pro forma financial statements to report the consolidated
financial condition and results of operations of Holdings and Hawaiian.
There are a number of items that may be relevant for a discussion and analysis
of Hawaiian's results of operations, current business and industry developments,
and liquidity position that we will not discuss because we do not control
Hawaiian. Hawaiian's Chapter 11 reorganization is discussed under
"Business--Chapter 11 Reorganization of Hawaiian." In addition, summary
financial information for Hawaiian is included in Note 3 to the financial
statements included herein and Hawaiian's audited financial statements as of
December 31, 2003 and 2002, and for each of the three years ended December 31,
2003 are included in this Form 10-K beginning on page F-33.
RESULTS OF OPERATIONS
This discussion analyzes our operations for the fiscal years ended December 31,
2003, 2002 and 2001. The following information should be read together with our
audited consolidated financial statements and the accompanying notes included
elsewhere in this report.
Prior to the bankruptcy of Hawaiian we consolidated Hawaiian because we
controlled Hawaiian through our ownership of all of the voting stock of
Hawaiian. Following the Petition Date, we expected to regain full control of
Hawaiian in a relatively short period of time. We had re-negotiated Hawaiian's
collective bargaining agreements with its pilots, mechanics, and flight
attendants prior to filing bankruptcy, had minimal secured debt or other secured
non-aircraft claims, and then-current management believed that Hawaiian's
operating leases could be re-negotiated in a short period of time through the
Chapter 11 bankruptcy process. Furthermore, we and Hawaiian continued to have
both a common Board of Directors and common management. As a result, we
continued to consolidate Hawaiian through March 31, 2003. However, the filing of
the Trustee Motion created significant uncertainty regarding our ability to
facilitate a timely reorganization and regain full control of Hawaiian in a
relatively short period of time. This uncertainty was further confirmed on May
16, 2003, upon the Bankruptcy Court's issuance of the order granting the Trustee
Motion, which resulted in the appointment of the Trustee, instead of the common
Board of Directors and common management of us and Hawaiian. As a result,
effective April 1, 2003, we deconsolidated Hawaiian and prospectively accounted
for our ownership of Hawaiian using the cost method of accounting. Accordingly,
our results of operations include the operating results of Hawaiian through
March 31, 2003, but for no subsequent periods. Due to the deconsolidation of
Hawaiian, our financial statements and certain footnotes included therein do not
reflect comparable business activity on a year-to-year basis. The 2003 statement
of operations includes the consolidated operating results of Holdings and
Hawaiian through March 31, 2003, and the deconsolidated results of Holdings
only, which consists substantially of corporate expenses included in other
operating expenses, for the period from April 1, 2003 to December 31, 2003. The
2002 and 2001 statements of operations include the consolidated operating
results of Holdings and Hawaiian for the entire year.
For the periods indicated, the following table presents a breakdown of the
components of operating revenue and expenses as well as the percentage
relationship that these items bear to the total operating revenue and the
percentage increase (decrease) in the dollar amounts of such items.
PERCENTAGE
PERCENTAGE OF TOTAL OPERATING REVENUE CHANGE
------------------------------------- ----------
YEAR ENDED
DECEMBER 31, 2002
------------------------- VS.
2003(1) 2002(2) 2001 2001
------- ------- ----- -----
OPERATING REVENUE:
Passenger 85.1% 83.8% 79.8% 8.4%
Charter 7.5 7.4 12.4% (38.5)
Cargo 3.6 3.4 3.6 (4.0)
Other 3.8 5.5 4.2 37.1
----- ----- -----
TOTAL OPERATING REVENUE 100.0% 100.0% 100.0% 3.3%
===== ===== =====
22
OPERATING EXPENSES:
Wages and benefits 35.2% 32.5% 30.9% 8.8%
Aircraft fuel, including taxes and oil 16.4 15.1 18.3 (14.7)
Maintenance materials and repairs 9.9 14.3 16.2 (8.9)
Aircraft rent 18.8 13.2 6.5 108.8
Other rentals and landing fees 3.9 3.8 3.6 10.9
Sales commissions 0.7 2.3 3.4 (29.6)
Depreciation and amortization 1.2 1.4 2.3 (38.7)
Restructuring charges -- 1.4 (0.6) (341.7)
Loss on assets held for sale -- -- -- --
Special Credit (Stabilization Act) -- 0.1 (5.0) (102.2)
Other 23.6 24.8 21.7 17.9
----- ----- -----
TOTAL OPERATING EXPENSES 109.6 108.9% 97.3% 15.7%
===== ===== =====
(1) Includes the consolidated results of Holdings and Hawaiian from January 1,
2003 to March 31, 2003 and the stand-alone deconsolidated results of
Hawaiian from April 1, 2003 to December 31, 2003.
(2) Includes the consolidated results of Holdings and Hawaiian for the entire
period.
2003 COMPARED TO 2002
Our results in 2002 are not comparable to 2003 as the 2002 results included the
operating results of Hawaiian consolidated with ours for the entire year. As
indicated above, 2003 only includes those consolidated results for the first
quarter of the year. Please see "Restructuring Charges" below for a discussion
of the cost reduction measures taken during 2002 and the first quarter of 2003
and the effects of such actions on our results of operations and financial
condition.
2002 COMPARED TO 2001
For the year ended December 31, 2002, we reported an operating loss of $56.1
million and a net loss of $58.3 million. For the year ended December 31, 2001,
we reported operating income of $16.7 million and net income of $5.1 million,
during which year overall revenue and expenses for both years were unfavorably
impacted by the events of September 11, 2001. That impact was mitigated by
relief received under the Stabilization Act, totaling $30.1 million. Except for
this item, it is not practicable to determine the impact of those events on
individual elements of our operations, and the discussion that follows makes no
attempt to set forth what would have been our 2001 operating results had the
events of September 11, 2001 not occurred.
OPERATING REVENUE. Operating revenue totaled $632.0 million for the year ended
December 31, 2002, compared to $611.6 million for the year ended December 31,
2001, an increase of $20.4 million, or 3.3%. Significant year-to-year variances
were as follows:
o Scheduled passenger revenue totaled $542.0 million during the year
ended December 31, 2002, an increase of $45.2 million, or 9.1%, over
the year ended December 31, 2001. During 2002, we experienced higher
passenger volume in our transpacific market as a result of our
expanded transpacific routes. Year-to-year changes in revenue,
passengers and resulting yields on our transpacific, interisland and
south pacific flights were as follows:
PERCENTAGE
NET CHANGE IN PERCENTAGE CHANGE IN CHANGE IN
REVENUE REVENUE PASSENGERS PASSENGER YIELDS
------------- -------------------- ----------------
(IN MILLIONS)
Transpacific $41.4 13.2% (1.0)%
Interisland $ 4.3 (2.0)% 2.8%
South Pacific $(0.5) 1.5% (2.4)%
o Overseas charter revenue totaled $46.5 million for the year ended
December 31, 2002, a decrease of $29.2 million, or 38.5%, compared to
the year ended December 31, 2001. On September 25, 2001, a major
source
23
of our overseas charter revenue, Renaissance Cruises, Inc. filed for
bankruptcy under Chapter 11 and ceased operations, resulting in the
termination of our Los Angeles to Papeete, Tahiti charter service.
o Cargo revenue totaled $21.3 million for the year ended December 31,
2002, a decrease of $0.9 million, or 4.0%, compared to the year ended
December 31, 2001, due to a decrease in the cargo rate per pound.
o Other operating revenue totaled $22.2 million for the year ended
December 31, 2002, an increase of $5.3 million, or 31.1%, over the
year ended December 31, 2001, primarily due to an increase in the sale
of frequent flyer miles, sale of jet fuel and ground handling revenue.
OPERATING EXPENSES. Operating expenses, including restructuring charges and a
negative adjustment to the special credit resulting from federal financial
assistance received under the Stabilization Act, totaled $688.1 million for the
year ended December 31, 2002 compared to $594.9 million for the year ended
December 31, 2001, an increase of $93.2 million, or 15.7%. Significant year to
year variances were as follows:
o Wages and benefits totaled $205.4 million for the year ended December
31, 2002, an increase of $16.6 million, or 8.8%, over the year ended
December 31, 2001, primarily due to salary and wage increases related
to the new collective bargaining agreements with our pilots, flight
attendants and IAM employees that went into effect during 2001,
training costs associated with the introduction of the B767 aircraft
into the fleet, executive severance costs and an overall increase in
employee benefits.
o Aircraft fuel costs, including taxes and oil, totaled $95.5 million
for the year ended December 31, 2002, a decrease of $16.4 million, or
14.7%, compared to the year ended December 31, 2001. Due to the
introduction of the more fuel-efficient B717 aircraft on interisland
routes and B767 aircraft on transpacific routes, aircraft fuel
consumption decreased 8.9%, resulting in a decrease in fuel cost of
$9.8 million. The average cost of aircraft fuel per gallon decreased
5.5%, resulting in a $5.5 million decrease in fuel cost. We recognized
a loss from our fuel-hedging program of $0.6 million in 2002, compared
to $1.7 million in 2001.
o Maintenance materials and repairs totaled $90.2 million for the year
ended December 31, 2002, a decrease of $8.8 million, or 8.9%, compared
to the year ended December 31, 2001, primarily due to a decrease of
$5.7 million in DC-9 maintenance resulting from the replacement of the
DC-9 fleet, and a decrease of $22.1 million in DC-10 maintenance
resulting from the reduction of the DC-10 fleet. The cost savings were
offset by increases of $5.1 million in B717 maintenance expense
resulting from the introduction of B717 aircraft in 2001, and $14.1
million in B767 maintenance expense resulting from the operation of
B767 aircraft beginning in the fourth quarter of 2001.
o Aircraft rentals totaled $83.5 million for the year ended December 31,
2002, an increase of $43.5 million, or 108.8%, compared to the year
ended December 31, 2001, primarily due to the replacement of DC-9
aircraft with new B717 aircraft during 2001, and the current
transition from DC-10 aircraft to B767 aircraft.
o Other rentals and landing fees totaled $24.2 million for the year
ended December 31, 2002, an increase of $2.4 million, or 10.9%, over
the year ended December 31, 2001, mainly due to an increase in rent
due to the opening of two new stations in California in June 2002, the
opening of a new station in Arizona in October 2002, and an increase
in ground equipment rent to support the new B767 fleet.
o Sales commissions totaled $14.6 million for the year ended December
31, 2002, a decrease of $6.2 million, or 29.6%, over the year ended
December 31, 2001, primarily due to the elimination of travel agency
base commissions in June 2002.
o Depreciation and amortization expense totaled $8.6 million for the
year ended December 31, 2002, a decrease of $5.4 million, or 38.7%,
over the year ended December 31, 2001, primarily due to a decrease of
$4.1 million in DC-9 depreciation expense as a result of the
replacement of DC-9 aircraft in 2001. Additionally, effective January
1, 2002, we discontinued amortization of Reorganization Value in
Excess of Amounts Allocable to Identifiable Assets in accordance with
SFAS No. 142 "Goodwill and Other
24
Intangible Assets" and as a result no amortization expense was
recorded in the year ended December 31, 2002 as compared to $2.3
million in the year ended December 31, 2001.
o Other expenses totaled $156.8 million for the year ended December 31,
2002, an increase of $23.8 million, or 17.9%, over the year ended
December 31, 2001. Increases in legal and consulting fees related to
our proposed merger with Aloha and TurnWorks, insurance premiums,
security costs, simulator costs, training and costs associated with
the sale of jet fuel were partially offset by decreases in interrupted
trips and personnel expenses.
o During the fourth quarter of 2002, based on a reduction in passenger
demand, we announced capacity reductions in specific transpacific
markets. We announced that we would reduce our workforce by
approximately 150 employees, or four percent of our total workforce,
in an effort to bring our cost structure in line with current and
expected revenues. In addition, we secured voluntary leaves of absence
from approximately 60 flight attendants, reduced work schedules for
part-time reservations personnel and decided to leave certain open
positions unfilled until economic conditions improve. As a result of
these actions, for the year ended December 31, 2002, we recorded $8.7
million in restructuring charges related primarily to the accelerated
retirement of our remaining eight leased DC-10 aircraft. We recorded a
charge of approximately $10.1 million related primarily to future
lease commitments on the DC-10 aircraft, lease return conditions and
maintenance commitments, DC-10 pilot severance costs and a write-down
of DC-10 improvements and parts. We also recorded a credit of $1.4
million related to the sale of eight non-operating DC-9 aircraft and
related assets that had been written in a prior year restructuring
charge. The year ended December 31, 2001 includes a $3.6 million
favorable adjustment to the restructuring charge recorded in 2000 due
to a change in the estimated cost to comply with the airframe return
provisions.
o In the year ended December 31, 2001, we recognized $30.8 million as a
special credit to operating expenses for the estimated allocation of
proceeds from the federal government under the Stabilization Act. For
the year ended December 31, 2002, we recorded a charge of $0.7 million
to adjust the special credit under the Stabilization Act based on the
DOT's final determination.
Restructuring Charges
During the fourth quarter of 2002, based on a reduction in passenger demand,
Hawaiian announced capacity reductions in specific transpacific markets.
Hawaiian announced that it would reduce its workforce by approximately 150
employees, or four percent of the total workforce, in an effort to bring its
cost structure in line with current and expected revenues. In addition, Hawaiian
secured voluntary leaves of absence from approximately 60 flight attendants,
reduced work schedules for part-time reservations personnel and decided to leave
certain open positions unfilled. As a result of these actions, for the year
ended December 31, 2002, we recorded a restructuring charge of $8.7 million
related primarily to the accelerated retirement of its remaining eight leased
DC-10 aircraft. This charge consisted of approximately $10.1 million related
primarily to future lease commitments on the DC-10 aircraft, lease return
conditions and maintenance commitments, severance costs for approximately 150
DC-10 pilots, and a write-down of DC-10 improvements and spare parts, partially
offset by a credit of $1.4 million related to the sale of eight non-operating
DC-9 aircraft and related assets that had been previously written down.
Activity related to the restructuring charges for the years ended December 31,
2003 and 2002, is set forth in greater detail in Note 5 to the financial
statements.
Deferred Tax Assets and Valuation Allowance
During the year ended December 31, 2002, we determined that it was no longer
more likely than not that any portion of our net deferred tax assets would be
realized and therefore recognized a full valuation allowance on our net deferred
tax assets as of the beginning of the year, net deferred tax assets generated
during the year (including net operating loss carryforwards), and items directly
impacting other comprehensive loss (primarily the minimum pension liability). As
a result, the valuation allowance for deferred tax assets increased by $44.7
million during the year ended December 31, 2002. Of this increase, $28.1 million
relates to increased valuation allowances for the deferred tax effect of current
year losses and the valuation allowance on the opening net deferred tax asset,
$17.7 million relates to increased valuation allowances for the deferred tax
asset attributable to the minimum pension
25
liability, and the remainder relates to an increase in deferred tax assets
attributable to other comprehensive loss items. The valuation allowance of
Hawaiian was eliminated upon the deconsolidation of Hawaiian on April 1, 2003.
Deferred tax assets at December 31, 2003 related to Holdings only. Due to
uncertainty surrounding the realizability of those assets, a valuation allowance
has been recorded for the full amount. As of December 31, 2003, we had total net
operating loss carryforwards of approximately $1.6 million to offset future
taxable income. If not utilized to offset future taxable income, the net
operating loss carryforwards will expire between the years 2022 and 2023.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had approximately $1,000 in cash and cash
equivalents, and $0.5 million of restricted cash. Our working capital deficit at
December 31, 2003 was $2.9 million, as compared with $137.0 million at December
31, 2002. Current liabilities at December 31, 2003 consisted of accounts
payable, accrued legal and professional fees and amounts due to related parties,
including $1.4 million due to Hawaiian that is primarily related to shared costs
paid by Hawaiian and allocated to us prior to Hawaiian's bankruptcy filing.
In 2003, we used $38.0 million of cash in operating activities, including $1.8
million of cash for professional fees related to Hawaiian's bankruptcy
proceedings. Cash flows from operating activities in 2003 primarily relate to
the operations of Hawaiian for the first quarter and our limited activity for
the last three quarters of the year. We used $2.6 million of cash in investing
activities in 2003 for purchases of property and equipment by Hawaiian in the
first quarter. We also used $0.7 million of cash in financing activities to pay
down long-term debt and capital lease obligations.
As a holding company, Holdings did not have any contractual obligations as of
December 31, 2003 other than liabilities payable to Hawaiian and Smith
Management LLC ("Smith Management"), each as described below.
Subsequent to our corporate restructuring in August 2002, Hawaiian paid certain
expenses on our behalf, generally relating to our obligations as a public
company. In addition, Hawaiian transferred $0.5 million, which is recorded as
restricted cash, to us immediately prior to Hawaiian's bankruptcy filing. We had
$1.4 million due to Hawaiian as of December 31, 2003.
Also, we had approximately $0.6 million due to Smith Management as of December
31, 2003 related to corporate amounts paid by Smith Management to third parties
on behalf of Holdings to fund costs associated with maintaining Holdings' status
as a public company, costs related to preparing a plan of reorganization for
Hawaiian, and other obligations of Holdings.
As described in greater detail in Item 1 under "Business--Chapter 11
Reorganization of Hawaiian," the consummation of the Joint Plan will involve
certain financial obligations on our part. We and RC Aviation have agreed,
pursuant to the Restructuring Support Agreement, to raise debt financing for
Hawaiian as described therein in order to meet the distribution and payment
obligations under the Joint Plan and to ensure that Hawaiian has at least the
minimum amount of cash required by the Joint Plan. To that end, we and RC
Aviation are in the process of negotiating a $50 million senior secured credit
facility as well as the issuance of up to $100 million of convertible senior
notes. The incurrence of any such indebtedness is contingent upon, among other
things, the confirmation of the Joint Plan. See "Chapter 11 Reorganization of
Hawaiian - Financing Arrangements."
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our
26
critical accounting policies for periods when Hawaiian was consolidated are
limited to those described below. For a detailed discussion of the application
of these and other accounting policies, see Note 3 in the notes to the
consolidated financial statements.
Revenue Recognition. Passenger revenue is recognized either when the
transportation is provided or when the related ticket expires unused. The value
of unused passenger tickets is included as air traffic liability. Hawaiian
performs periodic evaluations of this estimated liability, and any adjustments
resulting therefrom, which can be significant, are included in results of
operations for the periods in which the evaluations are completed. Charter and
cargo revenue is recognized when the transportation is provided.
Mileage credits are sold in the HawaiianMiles frequent flyer program to
participating partners such as hotels, car rental agencies and credit card
companies. Revenue from the sale of mileage credits was deferred and, beginning
in 2003, recognized as passenger revenue when transportation was likely to be
provided, based on the fair value of the transportation to be provided. Prior to
2003, these amounts were recognized on a comparable basis but were classified as
other revenue. The related amounts in the statements of operations for the year
ended December 31, 2002 have been reclassified to conform to the 2003
presentation. Amounts in excess of the fair value of the transportation to be
provided are recognized currently as a reduction in marketing expenses.
Pension and Other Postretirement Benefits. We accounted for Hawaiian's defined
benefit pension plans using Statement of Financial Accounting Standards 87,
"Employer's Accounting for Pensions" ("SFAS No. 87") and its other
postretirement benefit plans using Statement of Financial Accounting Standards
No. 106, "Employer's Accounting for Postretirement Benefits Other than Pensions"
("SFAS No. 106"). Under both SFAS No. 87 and SFAS No. 106, pension expense is
recognized on an accrual basis over employees' approximate service periods.
Expense calculated under SFAS No. 87 and SFAS No. 106 is generally independent
of funding decisions or requirements. We recognized expense for the defined
benefit pension plans of $3.3 million and $9.3 million for the years ended
December 31, 2003 and 2002, respectively, and other postretirement benefit
expense of $0.6 million and $2.6 million the years ended December 31, 2003 and
2002, respectively. The amounts for the year ended December 31, 2003 represent
only the period during which we consolidated Hawaiian. The calculation of
pension expense and our pension liability requires the use of a number of
assumptions. Changes in these assumptions can result in different expense and
liability amounts, and future actual experience can differ from the assumptions.
We believe that the two most critical assumptions are the expected long-term
rate of return on plan assets and the assumed discount rate.
We assumed that our plans' assets would generate a long-term rate of return of
9.0% at December 31, 2002, which is unchanged from the rate used at December 31,
2001. We developed our expected long-term rate of return assumption by
evaluating input from the trustee managing the plans' assets, including the
trustee's review of asset class return expectations by several consultants and
economists as well as long-term inflation assumptions. Pension expense increases
as the expected rate of return on plan assets decreases. Lowering the expected
long-term rate of return on our plan assets by 50 basis points (from 9.0% to
8.5%) would have increased our estimated full-year 2003 pension by approximately
$0.9 million. We discounted both our future pension obligations and other
postretirement benefit obligations using a rate of 6.75% at December 31, 2002,
compared to 7.25% at December 31, 2001. We determined the appropriate discount
based on the current rates earned on long-term bonds that receive one of the two
highest ratings given by a recognized rating agency. The pension liability and
future pension expense both increase as the discount rate is reduced. Lowering
the discount rate by 50 basis points (from 6.75% to 6.25%) would have increased
our pension and other postretirement liabilities at December 31, 2002 by
approximately $16.9 million and $1.8 million, respectively, and increased our
estimated full-year 2003 pension and other postretirement benefits expenses by
approximately $1.9 million and $0.2 million, respectively.
Impairments of Long-Lived Assets. We recorded impairment losses on long-lived
assets used in operations, primarily property and equipment and airport
operating rights, when events and circumstances indicated that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets were less than the carrying amount of those items. Cash flow estimates
were based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable were reduced to fair value. Estimates of fair value represented our
best estimate based on industry trends and reference to market rates and
transactions.
27
We provided an allowance for spare parts inventory obsolescence over the
remaining useful life of the related aircraft, plus allowances for spare parts
currently identified as excess. These allowances were based on our estimates and
industry trends, which are subject to change, and, where available, reference to
market rates and transactions. The estimates are more sensitive when we near the
end of a fleet life or when we remove entire fleets from service sooner than
originally planned.
Frequent Flyer Accounting. We utilized a number of estimates in accounting for
our HawaiianMiles frequent flyer program that are consistent with industry
practices. We recorded a liability for the estimated incremental cost of
providing travel awards that includes the cost of incremental fuel and meals and
does not include any costs for aircraft ownership, maintenance, labor or
overhead allocation.
Stock Compensation. We account 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.
We disclose pro forma information regarding what our net loss would have been if
we had accounted for option grants using the fair value method prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). We estimated the fair value of our stock options
using a Black-Scholes option pricing model. 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, we
have not yet determined which alternative method it will use. Depending on the
method we adopt to calculate stock-based compensation expense upon the adoption
of SFAS 123R, the pro forma disclosure included in our financial statements may
not be indicative of the stock-based compensation expense to be recognized in
periods beginning after June 15, 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a holding company with no operations, Hawaiian is not subject to any material
market risk. Market risk information is not provided for Hawaiian, the business
of which has been operated under the jurisdiction of the Trustee since May 2003,
as described in greater detail in "Business -- Chapter 11 Reorganization."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements, accompanying notes, Report of Independent
Registered Public Accounting Firm and Selected Financial and Statistical Data
are contained in this Annual Report on Form 10-K beginning on page F-1 and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously disclosed on a Form 8-K filed on June 20, 2003, on June 18, 2003,
we received a letter from Ernst & Young LLP ("Ernst & Young") notifying us that
Ernst & Young had resigned as our auditors, effective immediately. Ernst & Young
continued to serve as the auditors of Hawaiian.
Ernst & Young's report dated March 31, 2003 on our consolidated financial
statements as of and for the year ended December 31, 2002 was modified as to the
existence of substantial doubt about our ability to continue as a going concern.
Except as described in the previous sentence, the reports of Ernst & Young on
our consolidated financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles.
During Ernst & Young's audit of our financial statements for the year ended
December 31, 2001, there was a disagreement between us and Ernst & Young
regarding the accounting for certain non-passenger related excise taxes. We
ultimately agreed to record an accrual for such excise taxes, which resulted in
the matter being resolved to
28
the satisfaction of Ernst & Young. If this matter had not been resolved to the
satisfaction of Ernst & Young, it would have been referred to in Ernst & Young's
auditors' report on our financial statements for the year ended December 31,
2001. The Audit Committee of our Board of Directors at the time discussed the
disagreement with representatives of Ernst & Young, and Ernst & Young was
authorized to respond fully to the inquiries of any successor independent
accounting firm regarding this disagreement.
Except as described in the preceding paragraph, in connection with Ernst &
Young's audits for the two most recent fiscal years, there were no disagreements
with Ernst & Young on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst & Young, would have
caused Ernst & Young to make reference thereto in their report on the financial
statements for such years.
ITEM 9A. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As disclosed in greater detail elsewhere in this filing, on March 21, 2003,
Hawaiian, Holdings' wholly-owned operating subsidiary and source of cash flow,
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
Since May 30, 2003, Hawaiian has operated under the supervision of a Chapter 11
trustee. Holdings filed its Form 10-Q Quarterly Report for the first quarter of
2003 and has been unable to file any quarterly or annual periodic reports since
such date. The current members of management of Holdings did not join Holdings
until June 2004. As a result, the evaluation of the disclosure controls and
procedures referred to in this Item 9A below took place in March 2005, in
preparation for this filing. In addition, the statement below that there was no
change in our internal controls over financial reporting is based solely upon
the knowledge of current management. Lastly, with the Trustee in charge of
operating Hawaiian's business since May 2003 and retaining such authority until
such time as the Joint Plan is consummated, we do not have unfettered access to
information and documents regarding Hawaiian. Consequently, information
contained in this Item 9A regarding controls and procedures is expressly limited
to Holdings only and thereby expressly excludes Hawaiian.
Disclosure Controls and Procedures. We maintain controls and procedures designed
to ensure that we are able to collect the information we are required to
disclose in the reports we file 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 our disclosure controls and procedures as of the
end of the period covered by this report conducted by our management in March
2005, 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 we are able to collect,
process and disclose the information we are required to disclose in the reports
we file with the SEC within the required time periods.
Internal Control over Financial Reporting. During the period covered by this
report, there have been no changes in our internal control over financial
reporting that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
All of our directors were nominated in accordance with our bylaws. Pursuant to
our bylaws, based on the share ownership of AIP, our controlling shareholder at
December 31, 2003, AIP had the right to identify for nomination six of the
eleven directors. In addition, based on collective bargaining agreements with
us, each of ALPA, IAMAW and AFA has the right to identify for nomination one
director. Under the stockholders agreement to which we, AIP and each of these
three labor unions were parties, AIP had agreed to vote its shares in favor of
the nominees identified by these three labor unions. In addition, under our
bylaws, our board is required to nominate one outside director (an individual
not employed by us or affiliated with AIP or any of these three labor unions),
and one director who is a senior management official.
All officers are appointed annually by our board of directors at their first
meeting after the annual meeting of shareholders at which our board is elected
and at subsequent meetings of our board or as directed by our by-laws or as
delegated by our board.
Information regarding directors as of December 31, 2003:
John W. Adams. Mr. Adams was the chairman of our Board of Directors and of our
executive committee from February 1996 through June 2004. Mr. Adams assumed the
additional positions of chief executive officer and president in May 2002 and
relinquished the position of president in December 2002. He has been president
of Smith Management, a private investment firm, since 1984. In February 2002, he
became a member of the board of directors of Sun Healthcare Group, Inc., a
health care company, and he serves as chairman of its executive committee. He
was a member of the board of directors of Harvard Industries, Inc. from October
1994 until November 1998, and was chairman of the board and chief executive
officer of Harvard Industries from February 1997 until November 1998. Harvard
Industries filed for protection under Chapter 11 under the Bankruptcy Code in
May 1997 and emerged from Chapter 11 protection in November 1998. He served on
the board of directors of Servico, Inc., a lodging ownership and management
company, from April 1994 until August 1997, being chairman of the board from
December 1995 until he resigned from the board. Mr. Adams was chairman of the
board of directors of Regency Health Services, Inc., a health care services
company, from July 1994 until October 1997.
Gregory S. Anderson. Mr. Anderson has been a member of our Board of Directors
since 2002. Since 2004, Mr. Anderson has been chairman, president and chief
executive officer of Valley Commerce Bank Corporation and Valley Commerce Bank,
a commercial bank located in Phoenix, Arizona. From 2002 to 2004, he was
president, chief executive officer and managing general partner of Glendora
Hospital Partners and Glendora Holdings. From 1998 to 2002, he was president and
chief executive officer of Quality Care Solutions Inc., an Arizona corporation
that is a leading provider of healthcare payer software solutions. From 1985 to
1998, Mr. Anderson was general manager of El Dorado Investment Company,
Arizona's then largest venture capital company. Mr. Anderson has served on
numerous boards of both public and private companies. Currently, Mr. Anderson is
a director of Sun Healthcare, Inc., Valley Commerce Bank and several civic
boards. He is also the general partner of Glendora Holdings, a senior housing
management and development company. Mr. Anderson has a B.S. in Finance from
Arizona State University (1979) and has been certified by the Center for
Executive Development at Stanford University School of Business.
Robert G. Coo. Mr. Coo was a member of our Board of Directors from 1996 through
January 31, 2004. He has been an independent consultant since 1995. From 1998 to
1999, he was chief financial officer and secretary of Camstar Systems, a
developer of manufacturing execution system (MES) software. He was vice
president and chief financial officer of Pengo Industries, Inc., from 1990 until
1995, a director of Regency Health Services, Inc., from 1991 to 1997 and of
First National Bank, San Diego from 1995 to 1997. Mr. Coo is married to the
sister of Mr. Adams.
Joseph P. Hoar. Mr. Hoar was a member of our Board of Directors from 1999
through January 31, 2004. He served in the Marine Corps for 37 years, retiring
as a four-star general in 1994. His last active-duty assignment was
Commander-in-Chief, U.S. Central Command. In 1994, he established a consulting
firm, J.P. Hoar & Associates, that engages in international strategic planning
and business development in the Middle East and Africa. He is a director of
several nonprofit and privately owned corporations.
30
Reno F. Morella. Mr. Morella was a member of our Board of Directors from 1996
through January 31, 2004. He has been a pilot for Hawaiian since 1978. He is
currently a captain flying Boeing 767 aircraft. He was chairman of the Hawaiian
Master Executive Council of ALPA from 1994 until 1998. Mr. Morella was the First
Officer Category Representative for Council 102 of ALPA from 1993 until 1994.
Samson Poomaihealani. Mr. Poomaihealani was a member of our Board of Directors
from 1990 through January 31, 2004. He has served as Grand Lodge Representative
of IAMAW since September 2001. He was the assistant general chairman of the
Airline Machinists District 141 of the IAMAW from 1987 to 2001. Prior to
retiring, Mr. Poomaihealani was a lead ramp serviceman for United Airlines, Inc.
Edward Z. Safady. Mr. Safady was a member of our Board of Directors from 1996
through June 2004. He was president and chief executive officer of Liberty
National Bank in Austin, Texas from March 1988 to October 1995. He then joined
Smith Management as vice president in 1995, where he served until 1997. He is
currently chairman of the board, president and chief executive officer of
Liberty Bank, SSB ("Liberty Bank").
Sharon L. Soper. Ms. Soper was a member of our Board of Directors from 1998
through January 31, 2004. She has been a flight attendant for Hawaiian since
1965. She has worked in our interisland, transpacific and southpacific
operations. Ms. Soper has been president of the Hawaiian Master Executive
Council of the AFA since 1987.
Thomas J. Trzanowski. Mr. Trzanowski was a member of our Board of Directors from
1998 through July 2004. He served as president and director of Spire Realty
Group, Inc., Houston, Texas, a private property management company, since July
1989. He has also served as president and director of Pengo Realty Group, Inc.,
New York, New York, a private real estate holding company engaged in real estate
investments, since June 1994. Mr. Trzanowski also served as treasurer of Smith
Management from November 1983 through December 1994 and, from September of 1996
until September of 1999 as a director of Inland Resources, Inc., in Denver,
Colorado, a publicly traded oil and gas company. He currently serves as a
director of Liberty Bank.
William M. Weisfield. Mr. Weisfield was a member of our Board of Directors from
2001 through January 31, 2004. He has served as chief operating officer of
LifeSpan BioSciences, Inc., a privately held company specializing in molecular
pathology since March 2003 and has been a member of their board of directors
since 1995. He was a director of UTILX Corporation since January 1995, chairman
of the board since January 1996 and president and chief executive officer from
November 1998 until February 2003. He was senior vice president of Benaroya
Capital Company, a privately held investment company specializing in development
of Pacific Northwest real estate and other investments, from January 1994 to
December 1998. Mr. Weisfield is also a director of Lindal Cedar Homes, Inc., Gem
East Inc. and the Downtown Seattle Association.
On February 3, 2004, we announced the resignation of six of our directors from
the Board because of the expiration, on January 31, 2004, of our director and
officer liability insurance policies. Specifically, each of Robert G. Coo,
Joseph P. Hoar, Reno F. Morella, Samson Poomaihealani, Sharon L. Soper, and
William M. Weisfield resigned from the Board, effective as of January 31, 2004.
Messrs. Coo, Hoar and Weisfield had been nominated to the Board by AIP, pursuant
to rights held by AIP under the Bylaws and the Certificate of Incorporation.
Mr. Morella, Mr. Poomaihealani, and Ms. Soper had been nominated to the Board by
the ALPA, the IAMAW and the AFA, respectively, pursuant to rights held by each
of ALPA, IAMAW, and AFA under its collective bargaining agreement with us and
under the Bylaws and the Certificate of Incorporation. None of the resigning
directors resigned from the Board because of a disagreement with us on any
matter relating to our operations, policies or practices.
On January 31, 2004, prior to the director resignations described above, the
Board approved several revisions to the Bylaws at a special meeting of the
Board. The Bylaws were amended to remove the requirement therein that any
amendment to the Bylaws relating to the size of the Board and the qualification
of directors be approved by the affirmative vote of at least two of the three
directors nominated to the Board by ALPA, IAMAW, and AFA (so long as ALPA,
IAMAW, and AFA remain stockholders of Holdings). The Bylaws were also amended to
remove the requirement that the Board nominate one outside director (an
individual not employed by Holdings or affiliated with AIP, ALPA, IAMAW, or
AFA), and one director who is a senior management official. Finally, the Bylaws
were amended to remove the requirement that the size of the Board be set at 11
directors, and to provide that the number
31
of directors on the Board shall be determined from time to time by resolution
adopted by the Board. The Board also approved a resolution decreasing the number
of authorized directors on the Board from 11 to nine. Neither the resignations
nor the Bylaw amendments described above alter the rights of AIP, ALPA, IAMAW,
or AFA under the Bylaws or the Certificate of Incorporation or, with regard to
ALPA, IAMAW or AFA, under its respective collective bargaining agreement with
us, to have candidates nominated and elected to the Board.
Following the Chapter 11 Filing and the appointment of the Trustee, all the
executive officers of Holdings who previously held similar positions at both
Holdings and Hawaiian, with the exception of Mr. Adams, resigned their positions
at Holdings. Moreover, the Trustee has not provided to us any financial or other
information with respect to the executive officers of Hawaiian, including
information related to the compensation of executives.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Please see "Legal Proceedings--Gotbaum v. Adams" for a discussion of certain
legal proceedings involving John W. Adams, our Chief Executive Officer as of
December 31, 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of a registered class of
our equity securities, to file with the Securities and Exchange Commission
("SEC") and with us initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. Based solely upon the
information supplied to us by these persons, we are required to report any known
failure to file these reports within the specified period. To our knowledge,
based solely upon a review of the Section 16(a) reports furnished to us and the
written representations of these persons, all these filing requirements were
satisfied by these persons for fiscal year 2003, except that Mr. Reno F. Morella
filed a late Form 5 reporting three transactions.
AUDIT COMMITTEE
We established a standing Audit Committee in accordance with section 3(a)(58)(A)
of the Exchange Act. During 2003, the Audit Committee had 3 members, Gregory S.
Anderson, Joseph P. Hoar and William M. Weisfeld. During 2003, the Audit
Committee acted under a written charter that was adopted by our Board effective
April 25, 2003.
Pursuant to the Audit Committee charter, the Audit Committee is responsible for
the appointment, compensation, retention, and oversight of the work of our
independent auditors. Its principal functions are to give additional assurance
that financial information is accurate and timely and that it includes all
appropriate disclosures; to ascertain the existence of an effective accounting
and internal control system; to pre-approve all services provided by the
independent auditors; and to oversee the entire audit function, both independent
and internal.
On June 18, 2003, Ernst & Young resigned as our auditors, although Ernst & Young
remained as the auditors for Hawaiian. In light of the Chapter 11 Filing, the
appointment of the Trustee, and our prior dependence on Hawaiian's resources for
carrying out our operations, we lacked the funds necessary to retain a
substitute audit firm. Even if such replacement auditor could be retained, it
could not have completed the work required to enable us to meet our obligations
because any such auditor, like us, would not have had access to the information,
documents, and personnel of Hawaiian needed to prepare financial statements and
our periodic reports. Given the foregoing, since the Chapter 11 filing, the
Audit Committee has had few functions to perform. As previously disclosed, we
have also received notification from the AMEX that we are not in compliance with
certain continued listing standards including with respect to maintenance of an
independent Audit Committee. We have continued to work with the AMEX to address
matters related to our continued listing pending Hawaiian's emergence from
Chapter 11.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding compensation paid for the three fiscal years ending December 31, 2003,
to our "named executive officers," who were our chief executive officer during
fiscal year 2003 and two additional persons who would have been among our most
highly
32
compensated executive officers but for the fact that they were not our executive
officers at the end of fiscal year 2003 (collectively, our "named executive
officers").
Following the Chapter 11 Filing and the appointment of the Trustee, all the
"named executive officers" who previously held similar positions at both
Holdings and Hawaiian, with the exception of Mr. Adams (who was our Chief
Executive Officer from May 2002 to June 2004), resigned from their positions at
Holdings. Moreover, the Trustee has not provided to us any financial or other
information with respect to Hawaiian, including information related to the
compensation of executives. As a result, we are unable to provide compensation
information for the fiscal year ended December 31, 2003, with respect to named
executive officers who are employees of Hawaiian, and are not in a position to
otherwise verify the other information in the table. We have not paid our
directors or employees any compensation since the Chapter 11 Filing in March
2003.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION SHARES OF
------------------------------------------- COMMON
OTHER ANNUAL STOCK
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($) ($) OPTIONS(#) COMPENSATION
- ------------------------------- ---- --------- --------- ------------ ------------ ------------
John W. Adams(1) 2003 600,000 -- -- -- --
Chairman of the Board, 2002 525,000 -- -- -- --
Chief Executive Officer and
President 2001 366,667 -- -- 200,000 --
Christine R. Deister(2) 2003 * * * * *
Executive Vice President, 2002 250,000 -- 41,100(4) -- --
Chief Officer and Treasurer and
Treasurer 2001 197,917(3) 75,000 92,593(4) 200,000 --
John B. Happ(5) 2003 * * * * *
Senior Vice President-Marketing 2002 225,000 -- -- -- 5,000(6)
and Sales 2001 225,000 -- -- -- --
- ----------
* As described below, each of these persons has resigned from their positions
with Holdings. We do not know of the current terms of such person's
employment with Hawaiian, if any.
(1) Mr. Adams' 2003 annual salary was $600,000. Since the Chapter 11 Filing,
however, Mr. Adams has not collected any salary from Holdings.
(2) Ms. Deister resigned from her position with Holdings following the Chapter
11 Filing and the appointment of the Trustee.
(3) Ms. Deister's reported compensation for fiscal year 2001 is for the period
beginning March 1, 2001 through December 31, 2001.
(4) We provide various perquisites to our executives. Except as noted, the
value of such perquisites was in each case less than 10% of the named
executive officer's total salary and bonus. In fiscal year 2001, Ms.
Deister received relocation expenses of $60,560, a car allowance of $7,200,
housing allowance of $3,000, and a dependent education.
(5) Mr. Happ was no longer employed with us as of February 15, 2003.
(6) Prorated portion of a $20,000 payment paid in 24 bi-monthly equal
installments.
33
OPTION GRANTS IN LAST FISCAL YEAR
During fiscal year 2003, no options were granted to any of the named executive
officers pursuant to the 1994 Stock Option Plan or 1996 Stock Incentive Plan or
otherwise.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth for each of our named executive officers (i) the
aggregated options exercised in the last fiscal year, (ii) the number of shares
underlying unexercised options at December 31, 2003 and (iii) the option values
of unexercised in-the-money options at December 31, 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ON VALUE ------------------------------ ---------------------------
NAMES EXECUTIVE OFFICER EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ ----------- ----------- ------------- ----------- -------------
John W. Adams -- -- 250,000(2) -- 0 --
Christine R. Deister -- -- 50,000 150,000 0 0
John B. Happ -- -- 250,000 -- 0 --
- ----------
(1) The market price per share at December 31, 2003 was $2.29 per share.
(2) According to a Schedule 13D filed by AIP, Mr. Adams and Jeffrey A. Smith on
June 23, 2004, Mr. Adams entered into a privately negotiated transaction on
June 21, 2004 pursuant to which he agreed to sell the 24,005 shares of
Common Stock held in his individual capacity and, as soon as legally
permitted, the remaining 250,000 shares of Common Stock represented by
stock options held by him.
LONG-TERM INCENTIVE PLANS
We did not grant awards to the named executive officers under any long-term
incentive plan in the last fiscal year.
COMPENSATION OF DIRECTORS
During fiscal year 2003, we did not pay our directors any fees for services on
the Board or any committees of the Board. Prior to the Chapter 11 Filing, we
paid our nonemployee directors a $12,000 annual retainer fee. In addition to the
$12,000 annual retainer fee, we paid our nonemployee directors a fee of $1,250
for each meeting of the Board attended (decreased to $625 for telephonic
attendance) and a fee of $500 for each Board committee meeting attended (though
no fees were paid for committee meetings that occurred on the same day as a
Board meeting). No fees were paid to the nonemployee directors for their service
on the Board or any committee thereof. Hawaiian provided travel to and from
Board meetings, as well as hotel accommodations, meals and ground
transportation, as needed, for all directors. Mr. Adams, Mr. Morella and Ms.
Soper, as employee directors, received only reimbursement for expenses incurred
in attending meetings.
Nonemployee directors are eligible to receive stock options under the terms of
the 1996 Nonemployee Director Stock Option Plan. At its discretion, the
Compensation Committee of the Board, acting pursuant to that plan, may grant
stock options to nonemployee directors under the terms of the plan. During
fiscal year 2003, no such options were granted.
34
EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We are not party to any employment or change-in control agreement with any of
our current executive officers.
Due to the lack of information available to us following the appointment of the
Trustee, we do not know the terms of the employment agreements with Hawaiian, if
any, of the named executive officers, including terms with respect to the
effective date, term, base salary and any bonus.
Hawaiian had entered into a separation agreement with John B. Happ which became
effective on April 3, 2003. Under this agreement, Hawaiian was obligated to pay
Mr. Happ a lump sum of $15,000 plus an additional $422,278 to be paid in
semi-monthly installments until August 2004. In consideration, Mr. Happ agreed
to release Hawaiian from any claims that he might have had arising out of his
employment with or separation from Hawaiian. However, since this agreement was
executed by Mr. Happ after the Chapter 11 Filing, Hawaiian suspended payments
under this agreement.
COMPENSATION COMMITTEE REPORT
The Company did not have a fully functioning Compensation Committee during
fiscal year 2003. Since the Chapter 11 Filing, the appointment of the Trustee
and the resignations of the named executive officers, each of which is described
above, the Compensation Committee has not performed any substantial functions.
Moreover, none of the Company's officers or directors have received any
compensation since the Chapter 11 Filing. Notwithstanding the foregoing, the
Compensation Committee was charged with making compensation recommendations to
the full Board for the executive officers of Hawaiian Holdings whose title
includes chairman, vice chairman, president, chief operating officer, all
executive and senior vice presidents and our corporate secretary, along with
recommendations for bonuses, deferred compensation and stock option plans.
In determining executive compensation, the Compensation Committee would
generally review such general factors as profitability, operational integrity
and customer satisfaction, and take into consideration the executives'
accomplishment of specific projects. The Compensation Committee, in considering
appropriate compensation levels, considers marketplace compensation data of
other comparable U.S. airlines in order to provide compensation packages that
are capable of attracting and retaining exceptional executives. None of the
current members of the Company's Board of Directors were members of the
Compensation Committee during fiscal year 2003 and therefore, cannot verify the
accuracy of this Report.
BOARD OF DIRECTORS
Lawrence Hershfield
Randall L. Jenson
Gregory S. Anderson
Donald J. Carty
Bert T. Kobayashi, Jr.
Thomas B. Fargo
PRINCIPAL COMPONENTS OF EXECUTIVE COMPENSATION
Components of executive compensation would include annual base salary, specific
contractual provisions that vary per officer (including term, benefits and
fringes), incentive bonuses, and grants of options under our option plans. The
annual base salary for an executive officer is generally negotiated at the
beginning of employment and reviewed on a regular basis in comparison to
industry compensation levels, the need to attract talented executives to Hawaii
and the performance objectives listed in the previous section. The award of
bonuses, if awarded, is generally related to achievement of performance
objectives. The grant of options is generally incentive based related to
individual performance and to our profitability.
The named executive officers, except for Mr. Adams, had employment agreements
with Holdings, which set forth their base salaries and other compensation
arrangements and provided that their compensation levels were subject to annual
review and possible increases in the sole discretion of the Board. As noted,
such officers have resigned from their positions and are not receiving any
compensation from Holdings.
35
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Adams' compensation determination for fiscal year 2003 was based primarily
on the responsibilities and role that he assumed in the day-to-day management of
Holdings. Mr. Adams received an increase to his base salary from $400,000 to
$600,000 effective May 1, 2002. As noted above, Mr. Adams was not paid any
salary from Hawaiian Holdings after the Chapter 11 Filing.
CERTAIN 2003 ACTIONS OF THE COMPENSATION COMMITTEE
There were no significant actions taken by the Compensation Committee in 2003.
COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The above report of the Compensation Committee will not be deemed to be
incorporated by reference into any of our filings under the Securities Act of
1933, as amended (the "Securities Act"), or the Exchange Act, except to the
extent that we specifically incorporate the same by reference, nor shall it be
deemed to be "soliciting material" or to be "filed" with the SEC or subject to
Regulations 14A or 14C or to the liabilities of Section 18 of the Exchange Act.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Edward Z. Safady, Reno F. Morella and Thomas J. Trzanowski served on the
Compensation Committee of our Board during fiscal year 2003. No other member of
our Board or other person served on the Compensation Committee during fiscal
year 2003. Reno F. Morella was an employee of Hawaiian during fiscal year 2003.
Edward Z. Safady and Thomas J. Trzanowski are employees and/or directors of
Liberty Bank. Mr. Adams, who was our Chairman and Chief Executive Officer and
the sole managing member of AIP, which is our controlling shareholder, is
president and serves as a director of a holding company that has a majority
ownership interest in Liberty Bank.
STOCKHOLDER RETURN PERFORMANCE GRAPH
The following graph compares cumulative total shareholder return on our Common
Stock, the S&P 500 Index and our selected peer issuer index from December 31,
1998 to December 31, 2003. The peer issuers we have selected are AirTran
Holdings Inc. (formerly Valujet Inc.), Alaska Air Group Inc., America West
Holding Corporation, Atlantic Coast Airlines Holdings, Inc. and Southwest
Airlines Co. The comparison assumes $100 was invested on December 31, 1998 in
our Common Stock and each of the foregoing indices and assumes reinvestment of
dividends before consideration of income taxes. We have paid no dividends on our
Common Stock.
[GRAPHIC]
HAWAIIAN HOLPEERSGROUP.IS&PX500 INDEX
12/31/03 $2.99 $15.51 $1,111.92
12/31/02 $2.04 $10.65 $879.82
12/31/01 $4.00 $16.18 $1,148.08
12/31/00 $1.81 $18.50 $1,320.28
12/31/99 $2.12 $16.59 $1,469.25
12/31/98 $3.25 $17.28 $1,229.23
HAWAIIAN HOLPEERSGROUP.INDEX S&P 500 INDEX
12/31/03 92 90 90
12/31/02 63 62 72
12/31/01 123 94 93
12/31/00 56 107 107
12/31/99 65 96 120
12/31/98 100 100 100
The stock performance depicted in the graph above is not to be relied upon as
indicative of future performance. The Stock Performance Graph shall not be
deemed to be incorporated by reference into any of our filings under the
Securities Act or the Exchange Act, except to the extent that we specifically
incorporate the same by reference, nor
36
shall it be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulations 14A or 14C or to the liabilities of Section 18 of the
Exchange Act.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides the beneficial ownership, both direct and indirect,
reported to us as of March 31, 2004 of our Common and special preferred stock,
including shares as to which a right to acquire ownership within 60 days exists
(for example, through the ability to exercise stock options) within 60 days of
such date. The information is presented for beneficial owners of more than 5% of
our Common and special preferred stock, for each of our directors and director
nominees, our named executive officers and for the group comprised of all of our
directors and executive officers. We know of no persons other than those
identified below who owned beneficially more than 5% of the outstanding shares
of our Common or special preferred stock as of March 31, 2004. The table is
based on 29,260,465 shares of Common Stock outstanding as of March 31, 2004.
NUMBER OF SHARES OF PERCENT AND CLASS OF
NAME AND ADDRESS OF COMMON AND SPECIAL PREFERRED STOCK COMMON AND SPECIAL PREFERRED
BENEFICIAL OWNER(1) BENEFICIALLY OWNED (2) STOCK BENEFICIALLY OWNED
- -------------------------------------------- ---------------------------------- ----------------------------------
AIP, LLC 14,159,403(3) 44.5% of Common Stock
885 Third Avenue, 34th Floor 4(3) 100% of Series A special preferred
stock (constituting 57.1% of all
preferred stock)
John W. Adams 14,433,412(3) 45.4% of Common Stock
4(3) 100% of Series A special preferred
stock (constituting 57.1% of all
preferred stock)
Dimensional Fund Advisors, Inc. 2,752,213(4) 8.7% of Common Stock
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Vanguard Fiduciary Trust Company 2,081,675(5) 6.5% of Common Stock
14321 North Northsight Boulevard
Scottsdale, AZ 85260
Association of Flight Attendants 1 100% of Series B special preferred
1625 Massachusetts Avenue, N.W. stock (constituting 14.3% of all
Washington, DC 20036-2212 preferred stock)
Attn: David Borer, Esq.
International Association of Machinists and 1 100% of Series C special preferred
Aerospace Workers stock (constituting 14.3% of all
P.O. Box 3141 preferred stock)
South San Francisco, CA 94083
Attn: Kenneth Thiede
Hawaiian Master Executive Council 1 100% of Series D special preferred
c/o Air Line Pilots Association stock (constituting 14.3% of all
3375 Koapaka Street, preferred stock)
Suite F-238-8
Honolulu, HI 96819
Attn: Master Chairman, Hawaiian MEC
Gregory S. Anderson 8,000(6) Common stock*
Edward Z. Safady 46,018(7) Common stock*
37
Thomas J. Trzanowski 33,000(7)(8) Common stock*
All current directors and executive officers 14,520,430 45.7% of Common Stock*
as a group (4 persons)
- ----------
* Less than 1%
(1) The address of each of the directors and executive officers listed above is
c/o Hawaiian Holdings, Inc., 3375 Koapaka Street, Suite G350, Honolulu,
Hawaii 96819.
(2) Each executive officer and director has sole voting and investment power
with respect to the shares listed after his or her name except for shares
issued to the Hawaiian Holdings, Inc. 401(k) Savings Plan, the Hawaiian
Holdings, Inc. 401(k) Plan for Flight Attendants and the Hawaiian Holdings,
Inc. Pilots' 401(k) Plan or as otherwise indicated in the footnotes that
follow. Shares of our Common Stock allocated to participants' accounts in
the 401(k) Savings Plan, the Flight Attendants' 401(k) Plan and the Pilots'
401(k) Plan are voted on matters presented at shareholders meetings by the
Vanguard Group, Inc. as trustee for each of the respective Plans, pursuant
to the terms of each Plan. Except for the shares in the 401(k) Savings Plan
allocated to participants represented by IAMAW, the 401(k) Savings Plan and
the 401(k) Plan for Flight Attendants provide for Vanguard to vote the
shares pursuant to the written directions of the participants. Shares held
by the 401(k) Savings Plan (other than the shares allocated to participants
represented by IAMAW) and the 401(k) Plan for Flight Attendants with
respect to which no participant directions are received are voted in
proportion to the direction of the shares held by each of the plans for
which the trustee receives written directions. Shares held by the Pilots'
401(k) Plan and those shares held by the 401(k) Savings Plan allocated to
participants represented by IAMAW are voted by Vanguard according to the
directions of the majority of such shares for which it receives written
directions.
(3) According to an amendment to their Schedule 13D filing with the SEC on
September 9, 2002, AIP and Mr. Adams exercise sole voting and dispositive
power over 14,159,403 shares of Common Stock and all four shares of our
Series A special preferred stock. Mr. Adams exercises sole voting and
dispositive power over an additional 274,009 shares of Common Stock, which
includes options to purchase 250,000 shares of Common Stock, all of which
have vested. Mr. Adams is the managing member of AIP.
(4) On February 6, 2004 Dimensional Fund Advisors, Inc. filed a Schedule 13G
with the SEC with respect to 2,081,675 shares of Common Stock held as of
December 31, 2002. Dimensional, an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940, furnishes investment
advice to four investment companies registered under the Investment Company
Act of 1940, and serves as investment manager to certain other commingled
group trusts and separate accounts (collectively, the "Funds"). In its role
as investment advisor or manager, Dimensional possessed voting and/or
investment power over the reported shares that are owned by the Funds, and
may be deemed to be the beneficial owner of the reported shares held by the
Funds. All of the reported shares are owned by the Funds and Dimensional
disclaims beneficial ownership of the reported shares.
(5) On February 3, 2004, Vanguard Fiduciary Trust Company, as trustee of
Hawaiian Holdings, Inc. 401(k) Savings Plan, Hawaiian Holdings, Inc.
Pilots' 401(k) Plan and Hawaiian Holdings, Inc. 401(k) Plan for Flight
Attendants, filed a Schedule 13G with the SEC with respect to 2,523,403
shares of Common Stock held as of December 31, 2003. Shares of Common Stock
are held in trust for the benefit of employees participating in the plans.
Vanguard Fiduciary Trust Company disclaims beneficial ownership of all
shares that have been allocated to the individual accounts of plan
participants for which voting directions have been received.
(6) Consists of options to purchase 8,000 shares of Common Stock, all of which
have vested.
(7) Includes options to purchase 32,000 shares of Common Stock, all of which
have vested.
(8) Includes 1,000 shares of Common Stock beneficially owned by Mr.
Trzanowski's wife. Mr. Trzanowski disclaims beneficial ownership of the
shares owned by his wife.
38
SPECIAL PREFERRED STOCK
AIP holds four shares of Series A Special Preferred Stock which entitle it to
nominate a number of directors determined based on the percentage of outstanding
common equity interest (on a fully diluted basis) that it owns. Based on the
share ownership of AIP, it had the right to nominate six directors. IAMAW, AFA
and ALPA (collectively, the "Unions") each hold one share of Series B Special
Preferred Stock, Series C Special Preferred Stock and Series D Special Preferred
Stock, respectively, (together with the Series A Special Preferred Stock, the
"Special Preferred Stock") that entitle each Union to nominate one director. The
Unions previously had nominated representatives to the Board, which nominees had
been elected to the Board. Under the stockholders agreement to which we, AIP and
the Unions were parties, AIP had agreed to vote its shares in favor of the
nominees identified by the Unions. On January 31, 2004, the persons nominated by
the Unions to serve on the Board resigned from the Board.
In addition to the rights described above, each series of the Special Preferred
Stock, unless otherwise specified: (1) ranks senior to the Common Stock and
ranks pari passu with each other such series of Special Preferred Stock with
respect to liquidation, dissolution and winding up of Holdings and will be
entitled to receive $0.01 per share before any payments are made, or assets
distributed to holders of any stock ranking junior to the Special Preferred
Stock; (2) has no dividend rights unless a dividend is declared and paid on the
Common Stock, in which case the Special Preferred Stock would be entitled to
receive a dividend in an amount per share equal to two times the dividend per
share paid on the Common Stock; (3) is entitled to one vote per share of such
series and votes with the Common Stock as a single class on all matters
submitted to holders of the Common Stock; (4) automatically converts into the
Common Stock on a 1:1 basis (i) in the case of the Series A Special Preferred
Stock, upon the transfer of any such shares to any person that is not an
affiliate of AIP or if the holder of such stock ceases to own 5% or more of the
outstanding common equity interest of Holdings for a period of 365 consecutive
days or (ii) in the case of the Series B, C and D Special Preferred Stock, at
such time as such shares are transferred or such holders are no longer entitled
to nominate a representative to our Board of Directors pursuant to their
respective collective bargaining agreements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since May 19, 2000 and prior to the Chapter 11 Filing, Hawaiian had invested
$3.0 million in certificates of deposit with Liberty Bank. Mr. Adams, who was
our Chairman and Chief Executive Officer and the sole managing member of AIP,
which was, prior to June 14, 2004, our controlling shareholder, is president and
serves as a director of a holding company that has a majority ownership interest
in Liberty Bank. One of our directors, Thomas J. Trzanowski, is also a director
of Liberty Bank. Following the Chapter 11 Filing, Hawaiian Airlines liquidated
its certificates of deposit held at Liberty Bank.
On October 14, 2003, Holdings and Smith Management entered into an agreement
(the "Smith Management Agreement"), whereby the parties agreed that Smith
Management would continue to provide corporate, financial, strategic, planning,
management, consulting and tax-related services to us and forego receiving
compensation or reimbursement for any expenses for services provided to us until
the parties mutually agree otherwise. The Smith Management Agreement replaced an
earlier and previously disclosed May 2002 agreement that Smith Management
entered into with Hawaiian. Under the Smith Management Agreement, Holdings
agreed, inter alia, 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, Holdings agreed to indemnify
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 the consummation of the transactions
contemplated by the Purchase Agreement, 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.
39
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. All such
indebtedness to AIP and its affiliates was satisfied pursuant to a Mutual
Release, dated as of December 30, 2004, by and among Holdings, RC Aviation, RC
Aviation Management, LLC, John Adams, Smith Management, AIP and Airline
Investors Partnership. In addition, Holdings borrowed $39,887.67 from Smith
Management pursuant to a promissory note dated September 1, 2003, which funds
were used by Holdings to pay the annual listing fee of the AMEX and overdue fees
to Mellon Investor Services, its transfer agent.
Indebtedness of Management
Since January 1, 2003, no officer or director, or affiliate thereof (including
family members) has been indebted to us or any subsidiary.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
We paid no fees to Ernst & Young for services provided to Holdings by Ernst &
Young in 2003 prior to Ernst & Young's resignation as our independent
accountants on June 18, 2003. Fees for professional services provided by Ernst &
Young during the year ended December 31, 2002 were:
Audit fees $ 856,000
Audit-related fees 61,000
Tax fees 265,000
----------
$1,182,000
==========
Audit fees consisted of fees for professional services rendered for the annual
audit of our consolidated financial statements, reviews of our quarterly
financial statements, procedures related to registration statements filed with
the SEC, and various audits and agreed-upon procedures required by federal
regulations and statutes. Audit-related fees consisted of fees for professional
services rendered for the annual audits of our employee benefit plans. Tax fees
consisted of fees for professional services for federal and state tax
compliance, tax advice and tax planning.
40
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements.
(1) Hawaiian Holdings, Inc.
(i) Report of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
(ii) Statements of Operations for the Years ended December 31, 2003,
2002 and 2001.
(iii) Balance Sheets, December 31, 2003 and 2002.
(iv) Statements of Shareholders' Deficiency and Comprehensive Loss for
the Years ended December 31, 2003, 2002, and 2001.
(v) Statements of Cash Flows for the Years ended December 31, 2003,
2002, and 2001.
(vi) Notes to Financial Statements.
(2) Hawaiian Airlines, Inc.
(i) Report of Ernst & Young LLP, Independent Auditors.
(ii) Statements of Operations for the Years ended December 31, 2003,
2002 and 2001.
(iii) Balance Sheets, December 31, 2004 and 2003.
(iv) Statements of Shareholders' Deficiency and Comprehensive Loss for
the years ended December 31, 2003, 2002 and 2001.
(v) Statements of Cash Flows for the Years ended December 31, 2003,
2002 and 2001.
(vi) Notes to Financial Statements
(3) Schedule of Valuation and Qualifying Accounts of Hawaiian Holdings,
Inc.
Schedules not listed above are omitted because of the absence of
the conditions under which they are required or because the
required information is included in the financial statements or
notes thereto.
(b) Reports on Form 8-K.
1. On October 2, 2003, Holdings filed a Current Report on Form 8-K to
attach the unaudited Monthly Operating Report for the month of August
2003 filed by Hawaiian with the Bankruptcy Court on September 20,
2003.
2. On October 29, 2003, Holdings filed a Current Report on Form 8-K to
attach the unaudited Monthly Operating Report for the month of
September 2003 filed by Hawaiian with the Bankruptcy court on October
20, 2003 and to attach a press release reporting that the AMEX has
continued to list the securities of Holdings, subject to conditions,
and has granted Hawaiian Holdings an 18 month extension within which
to comply with the AMEX continued listing standards.
3. On December 3, 2003, Holdings filed a Current Report on Form 8-K to
attach the unaudited Monthly Operating Report for the month of October
2003 filed by Hawaiian with the Bankruptcy Court and to
41
attach a complaint filed by the Trustee in the Bankruptcy Court on
November 28, 2003 naming Mr. Adams, Holdings and certain affiliates of
Mr. Adams as defendants and alleging, among other items, conflicts of
interest, fraudulent transfer, unlawful distribution and breaches of
fiduciary duties in connection with the self-tender offer announced on
May 31, 2002 and subsequently completed by Holdings.
(c) Exhibits.
In as much as the Trustee has been in charge of operating Hawaiian's business
since May 2003, the Company and its personnel do not have unfettered access to
information and documents regarding Hawaiian, and Hawaiian has been
deconsolidated from the Company during that time. Consequently, the exhibits
referenced below generally relate only to Hawaiian Holdings.
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of May 2, 2002, by and among
Hawaiian Holdings, Inc., HA Sub Inc. and Hawaiian Airlines, Inc.
(filed as Exhibit 2.1 to the Registration Statement on Form S-4
originally filed by Hawaiian Holdings, Inc. on May 3, 2002).*
2.2 Agreement and Plan of Merger, dated as of May 2, 2002, by and among
Hawaiian Holdings, Inc. AIP General Partner, Inc., AIP, Inc. and AIP
Merger Sub, Inc. (filed as Exhibit 2.2 to the Registration Statement
on Form S-4 originally filed by Hawaiian Holdings, Inc. on May 3,
2002).*
3.1 Amended and Restated Certificate of Incorporation of Hawaiian
Holdings, Inc. (filed as Exhibit 3.1 to the Form 8-K filed by Hawaiian
Holdings, Inc. on August 30, 2002).*
3.2 Amended and Restated Bylaws of Hawaiian Holdings, Inc. (filed as
Exhibit 3.2 to the Form 8-K filed by Hawaiian Holdings, Inc. on August
30, 2002).*
3.3 Articles of Incorporation of Hawaiian Airlines, Inc. (filed as Exhibit
3.4 to the Form 10-Q filed by Hawaiian Holdings, Inc. on November 15,
2002.)*
3.4 Amended Bylaws of Hawaiian Airlines, Inc. (filed as Exhibit 3.3 to the
Form 10-Q filed by Hawaiian Holdings, Inc. on November 15, 2002).*
10.1 Amended and Restated Stockholders Agreement, dated as of August 29,
2002, by and among Hawaiian Holdings, Inc., AIP, LLC, Air Line Pilots
Association, Hawaiian Master Executive Council, Association of Flight
Attendants and the International Association of Machinists and
Aerospace Workers (filed as Exhibit 10.3 to the Form 10-Q filed by
Hawaiian Holdings, Inc. on November 15, 2002).*
10.2 Registration Rights Agreement, dated as of August 29, 2002, between
Hawaiian Holdings, Inc. and AIP, LLC (filed as Exhibit 10.1 to the
Form 8-K filed by Hawaiian Holdings, Inc. on August 30, 2002).*
10.31 Hawaiian Holdings, Inc. 1994 Stock Option Plan, as amended (filed as
Exhibit 4.1 to the Registration Statement on Form S-8 filed by
Hawaiian Airlines, Inc. on November 15, 1995).* +
10.32 Hawaiian Holdings, Inc. 1996 Stock Incentive Plan, as amended (filed
as Exhibit 4.12 to Amendment No. 1 to the Registration Statement on
Form S-2 filed by Hawaiian Airlines, Inc. on July 12, 1996).* +
10.33 Hawaiian Holdings, Inc. 1996 Non-employee Director Stock Option Plan,
as amended (filed as Exhibit 10-N to the Form 10-K filed by Hawaiian
Airlines, Inc. on March 31, 1997).* +
21.1 List of Subsidiaries of Hawaiian Holdings, Inc.
42
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------
23.1 Consent of Ernst & Young LLP.
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.
- ----------
* Hereby incorporated by reference.
+ Management contract or compensatory plan or arrangement.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HAWAIIAN HOLDINGS, INC.
By /s/ Randall L. Jenson
-------------------------------------
March 31, 2005 Randall L. Jenson
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 2005.
SIGNATURE TITLE
- ------------------------------------- ----------------------------------------
/s/ Lawrence S. Hershfield President and Chief Executive Officer
- ------------------------------------- (Principal Executive Officer)
Lawrence S. Hershfield
/s/ Randall L. Jenson Chief Financial Officer, Treasurer and
- ------------------------------------- Secretary
Randall L. Jenson (Principal Financial and Accounting
Officer)
/s/ Gregory S. Anderson Director
- -------------------------------------
Gregory S. Anderson
/s/ Donald J. Carty Director
- -------------------------------------
Donald J. Carty
/s/ Bert T. Kobayashi, Jr. Director
- -------------------------------------
Bert T. Kobayashi, Jr.
/s/ Thomas B. Fargo Director
- -------------------------------------
Thomas B. Fargo
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Hawaiian Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Hawaiian
Holdings, Inc. (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' deficiency and
comprehensive loss, and cash flows for each of the three years in the period
ended December 31, 2003. Our audits also include the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 2 to the consolidated financial statements, the Company's wholly-owned
subsidiary, Hawaiian Airlines, filed a voluntary petition for relief under
Chapter 11 of the federal bankruptcy laws on March 21, 2003, which raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 2. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets".
/s/ Ernst & Young LLP
March 30, 2005
Honolulu, Hawaii
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003(*) 2002(**) 2001(**)
--------- -------- --------
Operating Revenue:
Passenger $133,687 $541,992 $496,772
Charter 11,832 46,480 75,632
Cargo 5,619 21,319 22,214
Other 5,926 22,247 16,964
-------- -------- --------
Total 157,064 632,038 611,582
-------- -------- --------
Operating Expenses:
Wages and benefits 55,217 205,422 188,813
Aircraft fuel, including taxes and oil 25,716 95,457 111,876
Maintenance materials and repairs 15,573 90,194 99,043
Aircraft rent 29,502 83,462 39,966
Other rentals and landing fees 6,146 24,179 21,801
Sales commissions 1,096 14,645 20,812
Depreciation and amortization 1,813 8,577 13,983
Restructuring charges -- 8,701 (3,600)
Special credit (Stabilization Act grant) -- 680 (30,780)
Other 37,094 156,800 133,007
-------- -------- --------
Total 172,157 688,117 594,921
-------- -------- --------
Operating Income (Loss) (15,093) (56,079) 16,661
-------- -------- --------
Nonoperating Income (Expense):
Reorganization items, net (1,773) -- --
Interest and amortization of debt expense (180) (1,264) (2,212)
Interest income 234 1,889 3,865
Loss on disposition of equipment and
other, net (186) (22) 525
-------- -------- --------
Total (1,905) 603 2,178
-------- -------- --------
Income (Loss) Before Income Tax Provision (16,998) (55,476) 18,839
Income Tax Provision -- (2,799) (13,770)
-------- -------- --------
Net Income (Loss) $(16,998) $(58,275) $ 5,069
======== ======== ========
Net Income (Loss) Per Common Stock Share:
Basic $ (0.60) $ (1.88) $ 0.15
======== ======== ========
Diluted $ (0.60) $ (1.88) $ 0.15
======== ======== ========
Weighted Average Number of Common Shares
Outstanding:
Basic 28,435 31,024 33,811
======== ======== ========
Diluted 28,435 31,024 33,947
======== ======== ========
* Includes the consolidated results of Hawaiian Holdings, Inc. and Hawaiian
Airlines, Inc. from January 1, 2003 to March 31, 2003 and the
deconsolidated results of Hawaiian Holdings, Inc. from April 1, 2003 to
December 31, 2003.
** Includes the consolidated results of Hawaiian Holdings, Inc. and Hawaiian
Airlines, Inc. for the entire period.
F-2
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 2003 AND 2002
2003(*) 2002(**)
------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 1 $ 71,908
Restricted cash -- 23,202
Accounts receivable, net of allowance for doubtful
accounts of $1,305 as of December 31, 2002 -- 28,093
Other receivables 286 --
Spare parts and supplies -- 4,408
Prepaid expenses and other 75 13,273
---- --------
Total current assets 362 140,884
---- --------
Noncurrent Assets:
Restricted Cash 500 --
Property and Equipment:
Flight equipment -- 17,720
Progress payments on flight equipment -- 1,089
Ground equipment, buildings and leasehold improvements -- 54,944
---- --------
Total -- 73,753
Accumulated depreciation and amortization -- (28,068)
---- --------
Property and equipment, net -- 45,685
---- --------
Other Assets:
Long-term prepayments and other -- 41,277
Reorganization value, net -- 28,320
---- --------
Total other assets -- 69,597
---- --------
Total Assets $862 $256,166
==== ========
* Includes the deconsolidated balance sheet of Hawaiian Holdings, Inc.
** Includes the consolidated balance sheet of Hawaiian Holdings, Inc. and
Hawaiian Airlines, Inc.
See Accompanying Notes to Financial Statements.
F-3
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 2003 AND 2002
2003(*) 2002(**)
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 771 $ 79,682
Air traffic liability -- 109,974
Accrued liabilities 474 61,780
Current portion of long-term debt -- 2,153
Current portion of capital lease obligations -- 1,096
Due to related parties 2,046 --
--------- ---------
Total current liabilities 3,291 254,685
--------- ---------
Long-Term Debt -- 883
--------- ---------
Capital Lease Obligations -- 2,358
--------- ---------
Other Liabilities and Deferred Credits:
Accumulated pension and other postretirement benefit
obligations -- 112,208
Other liabilities and long-term deposits -- 28,642
Losses in excess of investment in Hawaiian Airlines, Inc. 61,302 --
--------- ---------
Total other liabilities and deferred credits 61,302 140,850
--------- ---------
Commitments and Contingent Liabilities
Shareholders' Deficiency:
Common Stock - $0.01 par value, 60,000,000 shares
authorized, 28,456,165 and 28,350,389 shares
issued and outstanding in 2003 and 2002, respectively 285 284
Preferred Stock - $0.01 par value, 2,000,000 shares
authorized, seven shares issued and outstanding
designated as Special Preferred Stock -- --
Capital in excess of par value 60,077 59,935
Notes receivable from Common Stock sales -- (1,560)
Accumulated deficit (124,093) (107,095)
Accumulated other comprehensive income (loss):
Minimum pension liability adjustment -- (96,063)
Unrealized gain on hedge instruments -- 1,889
--------- ---------
Shareholders' deficiency (63,731) (142,610)
--------- ---------
Total Liabilities and Shareholders' Deficiency $ 862 $ 256,166
========= =========
* Includes the deconsolidated balance sheet of Hawaiian Holdings, Inc.
** Includes the consolidated balance sheet of Hawaiian Holdings, Inc. and
Hawaiian Airlines, Inc.
See Accompanying Notes to Financial Statements.
F-4
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
STATEMENTS OF SHAREHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS (IN THOUSANDS,
EXCEPT SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
NOTES
RECEIVABLE
SPECIAL CAPITAL IN FROM ACCUMULATED
COMMON PREFERRED EXCESS OF COMMON STOCK ACCUMULATED COMPREHENSIVE
STOCK STOCK PAR VALUE SALES DEFICIT INCOME (LOSS) TOTAL
------ --------- ---------- ------------ ----------- ------------- ---------
Balance at December 31, 2000 $337 $-- $ 83,491 $(1,581) $ (53,889) $(10,099) $ 18,259
Net income -- -- -- -- 5,069 -- 5,069
Minimum pension liability adjustment -- -- -- -- -- (41,501) (41,501)
Unrealized loss on hedge instruments -- -- -- -- -- (4,237) (4,237)
---------
Comprehensive loss (40,669)
---------
Exercise of options to acquire
15,000 shares of Common Stock -- -- 24 21 -- -- 45
Distribution to Pilots' 401(k) Plan
of 518,910 shares of Common Stock 5 -- 1,335 -- -- -- 1,340
Repurchase of 90,700 shares of
Common Stock -- -- (185) -- -- -- (185)
---- --- -------- ------- --------- -------- ---------
Balance at December 31, 2001 342 -- 84,665 (1,560) (48,820) (55,837) (21,210)
Net loss -- -- -- -- (58,275) -- (58,275)
Minimum pension liability adjustment -- -- -- -- -- (44,463) (44,463)
Unrealized gain on hedge instruments -- -- -- -- -- 6,126 6,126
---------
Comprehensive loss (96,612)
---------
Exercise of options to acquire
20,000 shares of Common Stock -- -- 41 -- -- -- 41
Distribution to Pilots' 401(k)
Plan of 1,051,214 shares of
Common Stock 11 -- 3,280 -- -- -- 3,291
Repurchase of 990,700 shares of
Common Stock (10) -- (3,117) -- -- -- (3,127)
Repurchase of 5,880,000 shares of
Common Stock tendered (59) -- (24,931) -- -- -- (24,990)
Return of 934 shares of Common
Stock -- -- (3) -- -- -- (3)
---- --- -------- ------- --------- -------- ---------
Balance at December 31, 2002 284 -- 59,935 (1,560) (107,095) (94,174) (142,610)
Net loss -- -- -- -- (16,998) -- (16,998)
Reclassification adjustment for
gains included in net loss on
hedge instruments -- -- -- -- -- (1,718) (1,718)
---------
Comprehensive loss (18,716)
---------
Distribution to Pilots' 401(k)
Plan of 105,776 shares of Common
Stock 1 -- 142 -- -- -- 143
Deconsolidation of Hawaiian
Airlines, Inc. -- -- -- 1,560 -- 95,892 97,452
---- --- -------- ------- --------- -------- ---------
Balance at December 31, 2003 $285 $-- $ 60,077 $ -- $(124,093) $ -- $ (63,731)
==== === ======== ======= ========= ======== =========
See Accompanying Notes to Financial Statements.
F-5
HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003(*) 2002(**) 2001(**)
-------- -------- ---------
Cash Flows From Operating Activities:
Net income (loss) $(16,998) $(58,275) $ 5,069
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
before reorganization activities:
Depreciation 1,669 8,010 10,813
Amortization 144 567 3,170
Net periodic postretirement benefit cost 642 2,598 1,555
Restructuring charges (credit) -- 8,701 (3,600)
Loss on disposition of equipment 1 118 32
Advance on sale of frequent flyer miles -- 24,000 --
Decrease (increase) in restricted cash (13,710) 3,708 (26,910)
Decrease (increase) in accounts receivable (3,604) 6,917 (9,815)
Increase in prepaid expenses and other (3,776) (270) (982)
Decrease in deferred taxes, net -- 5,904 9,806
Decrease in accounts payable (7,080) (677) 16,843
Increase (decrease) in air traffic liability 3,136 (667) 35,652
Increase (decrease) in other accrued liabilities 518 (5,284) 28,234
Other, net 2,843 15,028 (13,063)
-------- -------- --------
Net cash provided by (used in) operating
activities before reorganization activities (36,215) 10,378 56,804
-------- -------- --------
Cash Flows From Reorganization Activities:
Professional fees paid for services rendered in
connection with bankruptcy proceedings (1,773) -- --
-------- -------- --------
Net cash used by reorganization activities (1,773) -- --
-------- -------- --------
Net cash provided by (used in) operating
activities (37,988) 10,378 56,804
-------- -------- --------
Cash Flows From Investing Activities:
Additions to property and equipment (2,577) (9,693) (16,147)
Progress payments on flight equipment -- (21) (5,256)
Net proceeds from disposition of equipment 1 2,123 12,888
-------- -------- --------
Net cash used in investing activities (2,576) (7,591) (8,515)
-------- -------- --------
Cash Flows From Financing Activities:
Long-term borrowings -- 344 1,426
Repayment of long-term debt (481) (4,450) (13,000)
Repayment of capital lease obligations (262) (1,554) (1,547)
Proceeds from issuance of Common Stock -- 41 24
Repurchase of Common Stock -- (28,120) (185)
Proceeds on notes receivable from Common Stock
sales -- -- 21
-------- -------- --------
Net cash used in financing activities (743) (33,739) (13,261)
-------- -------- --------
Net impact on cash of Hawaiian Airlines, Inc.
deconsolidation (30,600) -- --
Net increase (decrease) in cash and cash
equivalents (71,907) (30,952) 35,028
Cash and cash equivalents - Beginning of Year 71,908 102,860 67,832
-------- -------- --------
Cash and cash equivalents - End of Year $ 1 $ 71,908 $102,860
======== ======== ========
* Includes the consolidated cash flows of Hawaiian Holdings, Inc. and
Hawaiian Airlines, Inc. from January 1, 2003 to March 31, 2003 and the
deconsolidated cash flows of Hawaiian Holdings, Inc. from April 1, 2003 to
December 31, 2003.
See Accompanying Notes to Financial Statements.
F-6
** Includes the consolidated cash flows of Hawaiian Holdings, Inc. and
Hawaiian Airlines, Inc. for the entire period.
See Accompanying Notes to Financial Statements.
F-7
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
1. BUSINESS AND ORGANIZATION
Hawaiian Holdings, Inc. (the "Company") is a holding company incorporated in the
State of Delaware. On August 29, 2002, Hawaiian Airlines, Inc. ("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. ("Airline Investors Partnership"), the majority shareholder of the Company
prior to the Corporate Restructuring, was restructured into a limited liability
company called AIP, LLC ("AIP"). 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 Airline Investors
Partnership. In exchange, AIP received the same number of shares of the
Company's common stock that Airline Investors Partnership owned of Hawaiian
common stock immediately prior to the exchange. Immediately after the Airline
Investors Partnership 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 Company's common stock. After the
completion of the Corporate Restructuring, the shareholders of the Company held
the same relative percentage of the Company's 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 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,
Airline Investors Partnership and the three labor unions having board nomination
rights was amended and restated to make the Company and AIP parties to the
agreement and to have them assume all the rights and obligations of Hawaiian and
Airline Investors Partnership under the existing stockholders agreement,
respectively. As a result, after the completion of the Corporate Restructuring,
the relative governance rights in the Company of AIP and these three labor
unions were substantially the same as the rights in Hawaiian of Airline
Investors Partnership and these three labor unions immediately prior to the
Corporate Restructuring.
On June 14, 2004, RC Aviation LLC ("RC Aviation") purchased ten million shares
of the Company's common stock from AIP, reducing AIP's ownership of the Company
to approximately 14 percent of the Company's outstanding common stock. Also as
part of the purchase, John W. Adams resigned as the Company's Chairman and Chief
Executive Officer and RC Aviation and AIP entered into a stockholders agreement,
under which, among other things, AIP agreed to cause the directors that AIP 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 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
F-8
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
the Board of Directors of the Company, and (c) to otherwise vote such equity
securities at the direction of RC Aviation. On December 30, 2004, the Company
and AIP entered into an agreement whereby the four shares of Special Preferred
Stock of the Company held by AIP were cancelled and AIP no longer has any
beneficial ownership or any other form of right, title or interest in, the
shares of Special Preferred Stock.
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, 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 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
F-9
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
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 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):
F-10
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------
Unclassified Unsecured Priority Tax In cash, paid in up to twenty-four
Claims (24) equal quarterly installments. $ 1.2 $30.1 $ --
Class 1 Secured Priority Tax Claims In cash, paid in accordance with
(Unimpaired) the legal, equitable and
contractual rights of the holder of
the claim. 1.0 -- --
Class 2 Other Secured Claims Generally, at the election of
(Unimpaired) Hawaiian, (i) cash, (ii) surrender
of the collateral securing the
claim, (iii) cure and
reinstatement, or (iv) retention by
the holder of the claim of its
legal, equitable and contractual
rights. -- 2.8 --
Class 3 Other Priority Cash 0.1 -- --
(Unimpaired) Claims
Class 4(1) Unsecured Claims not At the election of the holder,
(Impaired) included in a category either (a) cash in an amount equal
below. to fifty percent (50%) of the
allowed claim and common stock of
the Company equal to fifty percent
(50%) of the allowed claim, based
on a stock value of $6.16 per
share; or (b) cash equal to 100% of
the allowed claim. 36.3 -- --
Class 5(2) Lease Related Claims Cash in an amount equal to fifty
(Impaired) percent (50%) of the claim and
common stock of the Company 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 0.8 -- --
(Impaired)
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.
F-11
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------
Class 7 Equity Interests Holders of equity interests in
(Impaired/ Hawaiian shall retain their
Unimpaired) interests in the reorganized
Hawaiian, without modification or
alteration by the Joint Plan.
However, the Company 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
=============================
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
F-12
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 the removal of the following assets, liabilities and comprehensive
loss item from the Company's consolidated financial statements:
ASSETS
Cash and cash equivalents $ 30,600
Restricted Cash 36,412
Accounts receivable, net 31,697
Prepaid expenses and other 15,256
Spare parts and supplies 5,140
Property and equipment, net 46,447
Long-term prepayments and other 44,840
Reorganization value, net 28,320
LIABILITIES
Accounts payable 24,322
Air traffic liability 113,110
Other accrued liabilities 42,415
Accumulated pensions and other postretirement benefit obligations 113,816
Other liabilities and deferred credits 26,198
Liabilities subject to compromise 76,045
F-13
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
COMPREHENSIVE LOSS (GAIN)
Minimum pension liability 96,063
Unrealized gain on hedge instruments (171)
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. 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 year-to-year basis. The 2002
and 2001 statements of operations include the consolidated operating results of
the Company and Hawaiian. The 2003 statement of operations includes the
consolidated operating results of the Company and Hawaiian through March 31,
2003, and the statement of operations for the period from April 1, 2003 to
December 31, 2003 includes the deconsolidated results of the Company only, which
consists substantially of corporate expenses included in other operating
expenses. Similarly, the balance sheet at December 31, 2003 includes the
deconsolidated balances of the Company only and the balance sheet at December
31, 2002 includes the consolidated balances of the Company and Hawaiian. Summary
financial information of Hawaiian as of and for the year ended December 31,
2003, is presented below.
BALANCE SHEET DATA 2003
- --------------------------------- --------
Cash and cash equivalents $ 87,728
Current assets 207,622
Total assets 328,371
Current liabilities 211,913
Liabilities subject to compromise 134,532
Total liabilities 537,602
Shareholders' deficiency 209,231
INCOME STATEMENT DATA 2003
- --------------------------------- --------
Operating revenue $706,145
Operating expense 628,667
Operating income 77,478
Reorganization items, net 115,063
Loss before taxes 36,569
Provision for income taxes 12,944
Net loss 49,513
Hawaiian's complete financial statements are included in this Form 10-K
beginning on page F-33. 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
F-14
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
provisions for losses) directly associated with Hawaiian's reorganization and
restructuring are reported separately as reorganization items in the statements
of operations. The balance sheets 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.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents.
RESTRICTED CASH
As of December 31, 2003, restricted cash, included in noncurrent assets,
consists of the amount transferred to the Company by Hawaiian immediately prior
to Hawaiian's Chapter 11 filing. See Note 11.
As of December 31, 2002, approximately $23.2 million of cash was restricted as
to withdrawal and is classified as current restricted cash in the accompanying
balance sheets. Restricted cash of $18.6 million serves as collateral to support
a credit card holdback for advance ticket sales, which funds are made available
as air travel is provided. The remaining $4.6 million serves as collateral for
outstanding letters of credit in the same amount.
SPARE PARTS AND SUPPLIES
Spare parts and supplies consist primarily of expendable parts for flight
equipment and supplies that are stated at average cost and are expensed when
consumed in operations. An allowance for obsolescence is provided over the
estimated useful life of the related aircraft.
PROPERTY AND EQUIPMENT
Owned property and equipment of Hawaiian is stated at cost and depreciated on a
straight-line basis over the following estimated useful lives:
Flight equipment 2-15 years, 15% residual value
Ground equipment 5-15 years, no residual value
Airport terminal facility 30 years
Buildings 15-20 years
Leasehold improvements Shorter of lease term or useful life
Hawaiian financed $3.2 million of property and equipment through capital lease
agreements during the year ended December 31, 2001. The net book value of
property held under capital leases by Hawaiian as of December 31, 2002 was $3.9
million. Amortization of property held under capital leases is included in
depreciation and amortization expense in the accompanying statements of
operations.
Maintenance and repairs are charged to operations as incurred, except that
maintenance and repairs under "power by the hour" maintenance contract
agreements are accrued on the basis of hours flown, and scheduled airframe
inspection and repairs, which are generally performed every seven years, are
capitalized and amortized over the
F-15
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
estimated period benefited, presently the least of seven years, the time until
the scheduled event, or the remaining life of the aircraft. Modifications that
significantly enhance the operating performance or extend the useful lives of
aircraft or engines are capitalized and amortized over the remaining life of the
asset.
REORGANIZATION VALUE, NET
Hawaiian emerged from a previous Chapter 11 bankruptcy on September 12, 1994,
with Hawaiian being the sole surviving corporation. Under fresh start reporting,
the reorganization value of the entity was allocated to Hawaiian's assets and
liabilities on a basis substantially consistent with the purchase method of
accounting. The portion of reorganization value not attributable to specific
tangible or identifiable intangible assets of Hawaiian is reflected as
reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Value, net") in the accompanying balance sheets.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under
SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are
not amortized but are instead subject to annual impairment tests in accordance
with SFAS No. 142. As of January 1, 2002, the Company had no recorded intangible
assets apart from Reorganization Value, net, of $28.3 million, net of
accumulated amortization of $22.4 million. Pro forma results for the year ended
December 31, 2001, assuming the discontinuation of amortization of
Reorganization Value, net had occurred at the beginning of 2001, are presented
below (per share data in whole dollars):
Reported net income $5,069
Amortization, net of taxes 2,306
------
Adjusted net income $7,375
======
Basic and diluted earnings per share:
As reported $ 0.15
Amortization, net of taxes 0.07
------
Pro forma, as adjusted $ 0.22
======
REVENUE RECOGNITION
Passenger revenue is recognized either when the transportation is provided by
Hawaiian or when the related ticket expires unused. The value of unused
passenger tickets is included as air traffic liability. Hawaiian performs
periodic evaluations of this estimated liability, and any resulting adjustments,
which can be significant, are included in results of operations for the periods
in which the evaluations are completed. No such liabilities are recorded on the
Company's deconsolidated balance sheets at December 31, 2003. These liabilities
are recorded in current liabilities as of December 31, 2002. Charter and cargo
revenue is recognized when the transportation is provided.
Hawaiian sells mileage credits in its HawaiianMiles frequent flyer program to
participating partners such as hotels, car rental agencies and credit card
companies. Revenue from the sale of mileage credits is deferred and, beginning
in 2003, recognized as passenger revenue when transportation is likely to be
provided, based on the fair value of the transportation to be provided. Prior to
2003, these amounts were recognized on a comparable basis but were classified as
other revenue. The related amounts in the statements of operations for the years
ended December 31, 2002 and 2001, have been reclassified to conform to the 2003
presentation. Amounts in excess of the fair value of the transportation to be
provided are recognized currently as a reduction in marketing expenses.
F-16
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
Components of other revenue include ticket change fees, ground handling fees,
sales of jet fuel, and other incidental services that are recognized as revenue
when the related service is provided.
FREQUENT FLYER PROGRAM
Hawaiian recognizes a liability under its HawaiianMiles frequent flyer program
as members accumulate mileage points. The incremental cost method is used,
computed primarily on the basis of fuel, insurance and catering costs, exclusive
of any overhead or profit margin.
FAIR VALUES OF FINANCIAL INSTRUMENTS
At December 31, 2003, the Company believes the carrying amounts of cash and cash
equivalents, restricted cash, other receivables and accounts payable is a
reasonable estimate of the fair value of these instruments due to their
short-term nature.
At December 31, 2002, the carrying amounts of cash and cash equivalents,
restricted cash, and accounts receivable approximate fair value due to the short
maturity of those instruments. The fair value of accounts payable, accrued
liabilities, and long-term debt could not reasonably be estimated due to the
subsequent Chapter 11 filing by Hawaiian. See Note 2 for proposed classification
and treatment of claims under the Joint Plan.
FUEL RISK MANAGEMENT
Hawaiian utilizes heating oil forward contracts in an effort to manage market
risks and hedge its financial exposure to fluctuations in its aircraft fuel
costs. Hawaiian employed a strategy whereby heating oil contracts were used to
hedge up to 50% of Hawaiian's anticipated aircraft fuel needs. At December 31,
2002, the Company held forward contracts to purchase barrels of heating oil in
the aggregate amount of $7.4 million through April 2003. The Company accounts
for Hawaiian's derivative instruments and hedging activities in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The Company measures fair value of its
derivatives based on quoted market prices. Derivatives that are not designated
as hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivatives are either offset against the change in the fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value is immediately
recognized in earnings as a component of non-operating income (loss). Such
amounts were not material in any year presented.
During the year ended December 31, 2003, the Company ceased hedge accounting on
Hawaiian's derivative instruments, and recognized realized and unrealized net
gains of $1.0 million during the period Hawaiian was consolidated by the Company
as a component of non-operating income (expense) related to the derivative
instruments not designated as hedges. For the years ended December 31, 2003,
2002 and 2001, realized net gains (losses) of $1.7 million, $(0.6) million, and
(1.7) million were recognized as a component of aircraft fuel expense on
liquidated contracts designated as hedges during the period Hawaiian was
consolidated by the Company. Based upon Hawaiian's derivative positions as of
December 31, 2002, realized gains of $0.8 million and unrealized gains of $1.1
million were recognized as other comprehensive income in the balance sheet as of
December 31, 2002. The Company reclassified $1.7 million of gains from
accumulated other comprehensive income to operations during the year ended
December 31, 2003 (during the period Hawaiian was consolidated by the Company)
when the hedged fuel expenses were recognized.
F-17
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
SALES COMMISSIONS
Commissions from the sale of passenger traffic are recognized as expense when
the transportation is provided and the related revenue is recognized. The amount
of sales commissions not yet recognized as expense is included in prepaid
expenses and other current assets in the accompanying balance sheets.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the years
ended December 31, 2003, 2002 and 2001 was $2.1 million, $8.0 million and $6.3
million, respectively, during the period Hawaiian was consolidated by the
Company.
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 years ended December 31, 2003, 2002
and 2001. The fair value for the stock options was estimated at the date of
grant using a Black-Scholes option pricing model. See Note 10 for the
assumptions used to compute the pro forma amounts. Amounts in thousands except
per share data:
2003 2002 2001
-------- -------- ------
Net loss:
As reported $(16,998) $(58,275) $5,069
Less: Total stock based employee
compensation expense determined under
the fair value method for all awards 376 849 1,067
-------- -------- ------
Pro forma $(17,374) $(59,124) $4,002
======== ======== ======
F-18
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
Basic earnings per share
As reported, basic and diluted $ (0.60) $ (1.88) $ 0.15
Pro forma $ (0.61) $ (1.91) $ 0.12
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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share represents income (loss) available to common
shareholders divided by the weighted average number of Common Stock shares
outstanding for the period. Diluted earnings (loss) per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares of Common Stock were exercised or converted into shares of Common Stock
or resulted in the issuance of shares of Common Stock that then shared in the
earnings of the Company. Outstanding rights, warrants and options to purchase
shares of the Company's Common Stock are not included in the computation of
diluted earnings per share if inclusion of these rights, warrants and options is
antidilutive. Options and warrants to purchase approximately 3.1 million, 3.4
million, and 1.3 million shares of Common Stock in 2003, 2002, and 2001,
respectively, were outstanding, but not included in the computation of diluted
earnings (loss) per share as inclusion of these options and warrants would be
antidilutive due to the Company's net loss position.
The following table shows a reconciliation of the weighted average shares
outstanding used in computing basic and diluted net income (loss) per Common
Stock share (in thousands):
2003 2002 2001
------ ------ ------
Weighted average Common Stock Shares outstanding 28,435 31,024 33,811
Incremental Common Stock shares issuable upon
exercise of outstanding warrants and stock
options (treasury stock method) -- -- 136
------ ------ ------
Weighted average Common Stock Shares and Common
Stock Share equivalents 28,435 31,024 33,947
====== ====== ======
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those
estimates.
F-19
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
Material estimates that are particularly susceptible to significant change
relate to the determination of asset impairment, air traffic liability, frequent
flyer liability and the amounts reported for accumulated pension and other
postretirement benefit obligations. Management believes that such estimate have
been appropriately established in accordance with U.S. generally accepted
accounting principles.
RECLASSIFICATIONS
Certain prior year amounts were reclassified to conform to the 2003
presentation. Such reclassifications had no effect on previously reported
financial condition and/or results of operations.
4. STABILIZATION ACT
On September 22, 2001, President Bush signed into law the Air Transportation
Safety and System Stabilization Act (the "Stabilization Act"), which for all
U.S. airlines and air cargo carriers (collectively, air carriers) provided for,
among other things, $5 billion in compensation for direct losses (including lost
revenue) incurred as a result of the federal ground stop order and for
incremental losses incurred through December 31, 2001 as a direct result of the
September 11, 2001 terrorist attacks. Under the Stabilization Act, Hawaiian
received $24.9 million and $5.2 million during the years ended December 31, 2001
and 2002, respectively, totaling $30.1 million. The Company recognized $30.8
million during the year ended December 31, 2001 as a special credit to operating
expenses for its estimated allocation of proceeds under the Stabilization Act.
During the year ended December 31, 2002, the Company recorded a charge of $0.7
million based on the Department of Transportation's final determination of
Hawaiian's compensation under the Stabilization Act.
5. RESTRUCTURING CHARGES
During the fourth quarter of 2002, based on a reduction in passenger demand,
Hawaiian announced capacity reductions in specific transpacific markets.
Hawaiian announced that it would reduce its workforce by approximately 150
employees, or four percent of the total workforce, in an effort to bring its
cost structure in line with current and expected revenues. In addition, Hawaiian
secured voluntary leaves of absence from approximately 60 flight attendants,
reduced work schedules for part-time reservations personnel and decided to leave
certain open positions unfilled. As a result of these actions, for the year
ended December 31, 2002, the Company recorded a restructuring charge of $8.7
million related primarily to the accelerated retirement of its remaining eight
leased DC-10 aircraft. This charge consisted of approximately $10.1 million
related primarily to future lease commitments on the DC-10 aircraft, lease
return conditions and maintenance commitments, severance costs for approximately
150 DC-10 pilots, and a write-down of DC-10 improvements and spare parts,
partially offset by a credit of $1.4 million related to the sale of eight
non-operating DC-9 aircraft and related assets that had been previously written
down.
During the year ended December 31, 2001, the Company recorded a $3.6 million
credit to restructuring charges related to a change in estimate on the return
condition provisions and early termination provisions of the five DC-9 aircraft
under operating leases. The change in estimate was based on renegotiation of the
return provisions with the respective lessors, which concluded in 2001.
Activity related to the restructuring charges for the years ended December 31,
2003, 2002, and 2001, is as follows (the non-cash utilization of the
restructuring change during the year ended December 31, 2003 represents the
elimination of the remaining restructuring reserves upon the deconsolidation of
Hawaiian):
F-20
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
UTILIZATION OF CHARGE
BEGINNING RESTRUCTURING --------------------- REMAINING
RESERVE CHARGES CASH NON-CASH RESERVE
--------- ------------- ------- -------- ---------
Year ended December 31, 2001:
Allowance for future lease payments, return
conditions, and early termination costs $ 6,800 $(3,600) $(3,200) $ -- $ --
------- ------- ------- ------- ------
$ 6,800 $(3,600) $(3,200) $ -- $ --
======= ======= ======= ======= ======
Year ended December 31, 2002:
Write-down of spare parts and improvements $ -- $ 1,243 $ -- $(1,243) $ --
Allowance for future lease payments, return
conditions, and early termination costs -- 7,344 -- -- 7,344
Pilot severance costs -- 1,600 -- -- 1,600
------- ------- ------- ------- ------
$ -- 10,187 $ -- $(1,243) $8,944
======= ======= ======= ======
Sale of non-operating DC-9 assets (1,486)
-------
$ 8,701
=======
Year ended December 31, 2003:
Allowance for future lease payments, return
conditions, and early termination costs $ 7,344 $ -- $ (120) $(7,224) $ --
Pilot severance costs 1,600 -- (1,389) (211) --
------- ------- ------- ------- ------
$ 8,944 $ -- $(1,509) $(7,435) $ --
======= ======= ======= ======= ======
6. REORGANIZATION ITEMS, NET
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 consists
primarily of professional fees incurred in connection with Hawaiian's Chapter 11
filing.
7. DEBT
At December 31, 2002, Hawaiian's long-term debt consisted of secured obligations
due in 2003 through 2007. Hawaiian's Chapter 11 filing triggered defaults on
Hawaiian's debt obligations. It also 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, including its obligations under long-term
agreements that existed at the Petition Date.
Cash paid for interest during the years ended December 31, 2003, 2002, and 2001,
was $0.2 million, $1.2 million, and $3.2 million, respectively (during the
period Hawaiian was consolidated by the Company).
F-21
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
8. INCOME TAXES
The components of the income tax provision for the years ended December 31,
2003, 2002 and 2001 (in thousands) were:
2003 2002 2001
----- ------- -------
Current
Federal $-- $ 5,129 $ 1,683
State -- 775 851
--- ------- -------
-- 5,904 2,534
Deferred --
Federal -- (2,172) 9,762
State -- (933) 1,474
--- ------- -------
-- (3,105) 11,236
--- ------- -------
Provision for income taxes $-- $ 2,799 $13,770
=== ======= =======
Income tax provision is based on an estimated annual effective tax rate, which
differs from the federal statutory rate in 2003, 2002 and 2001, primarily due to
state income taxes, certain nondeductible expenses, increases in the deferred
tax valuation allowance, and amortization of reorganization value as follows:
2003 2002 2001
------- -------- -------
Computed "expected" tax expense (benefit) $(5,949) $(19,417) $ 6,594
State income tax provision (benefit),
net of federal income tax benefit (494) (2,883) 1,067
Change in deferred tax valuation allowance 5,206 28,071 5,331
Amortization of reorganization value -- -- 807
Other 1,237 (2,972) (29)
------- -------- -------
$ -- $ 2,799 $13,770
======= ======== =======
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002 are presented below:
2003 2002
----- --------
Deferred tax assets:
Net operating loss carryforwards $ 588 $ 15,528
Accrued liabilities -- 19,499
Accumulated pension and other postretirement
benefits -- 46,998
Reorganization items -- --
Advance on sale of frequent flyer miles -- 9,600
Other -- 7,314
----- --------
Total gross deferred tax assets 588 98,939
Less valuation allowance on deferred tax assets (588) (93,655)
----- --------
Net deferred tax assets -- 5,284
----- --------
F-22
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
Deferred tax liabilities:
Plant and equipment, principally due to
difference in depreciation $ -- $ (5,284)
----- --------
Total deferred tax liabilities -- (5,284)
----- --------
Net deferred taxes $ -- $ --
===== ========
Deferred tax assets at December 31, 2003 relates to the Company only. Due to
uncertainty surrounding the realizability of those assets, a valuation allowance
has been recorded for the full amount.
During the year ended December 31, 2002, the Company determined that it was no
longer more likely than not that any portion of its deferred tax assets would be
realized and recognized a full valuation allowance on its net deferred tax
assets as of the beginning of the year, all 2002 net operating losses, and all
items directly impacting other comprehensive loss (primarily the minimum pension
liability). As a result, the valuation allowance for deferred tax assets
increased by $44.7 million during 2002. Of this increase, $28.1 million relates
to increased valuation allowances for the deferred tax effect of current year
losses and the valuation allowance on the opening net deferred tax asset, $17.7
million relates to increased valuation allowances for the deferred tax asset
attributable to the minimum pension liability, and the remainder relates to an
increase in deferred tax assets attributable to other comprehensive loss items.
The valuation allowance of Hawaiian was eliminated upon the deconsolidation of
Hawaiian as of April 1, 2003.
As of December 31, 2003, the Company has total net operating loss carryforwards
of approximately $1.6 million to offset future taxable income. If not utilized
to offset future taxable income, the net operating loss carryforwards will
expire between the years 2022 and 2023.
9. BENEFIT PLANS
Hawaiian sponsors three defined benefit pension plans covering the Air Line
Pilots Association, International Association of Machinists and Aerospace
Workers (AFL-CIO) ("IAM") and other personnel (salaried, Transport Workers
Union, Employees of the Communications Section). The plans for the IAM and other
employees were frozen effective October 1, 1993. As a result of the freeze,
there will be no further benefit accruals. The pilot's plan is funded based on
minimum Employee Retirement Income Security Act of 1974 (ERISA) requirements,
but not less than the normal cost plus the 20-year funding of the past service
liability. Funding for the ground personnel plans is based on minimum ERISA
requirements. Plan assets consist primarily of common stocks, government and
convertible securities, insurance contract deposits and cash management and
mutual funds.
In addition to providing pension benefits, Hawaiian sponsors two unfunded
defined benefit postretirement medical and life insurance plans. Employees in
Hawaiian's pilot group are eligible for certain medical, dental and life
insurance benefits under one plan if they become disabled or reach normal
retirement age while working for Hawaiian. Employees in Hawaiian's non-pilot
group are eligible for certain medical benefits under another plan if they meet
specified age and service requirements at the time of retirement.
The following tables summarize changes to projected benefit obligations, plan
assets, funded status and amounts included in the accompanying balance sheets as
of December 31, 2002 (in thousands):
F-23
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
CHANGE IN PROJECTED BENEFIT OBLIGATIONS
Projected benefit obligation at beginning of year $ 227,157 $ 21,654
Service cost 7,466 1,324
Interest cost 16,342 1,525
Plan amendments 881 --
Assumption changes 14,611 2,863
Curtailment -- --
Actuarial (gain) loss 2,880 (204)
Benefits paid (10,639) (819)
--------- --------
Projected benefit obligation at end of year 258,698 26,343
--------- --------
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year 163,917 --
Actual gain (loss) on plan assets (15,890) --
Employer contribution 5,481 819
Benefits paid (10,639) (819)
--------- --------
Fair value of assets at end of year 142,869 --
--------- --------
FUNDED STATUS
Funded status - underfunded $(115,829) $(26,343)
Unrecognized actuarial net (gain) loss 123,959 (4,941)
Unrecognized prior service cost -- 1,722
--------- --------
Prepaid (accrued) benefit cost at end of year $ 8,130 $(29,562)
--------- --------
AMOUNTS RECOGNIZED IN THE ACCOMPANYING
BALANCE SHEETS
Accrued benefit liability $ (87,933) $ (29,562)
Accumulated other comprehensive loss 96,063 --
--------- --------
Prepaid (accrued) benefit cost at end of year $ 8,130 $ (29,562)
========= ===========
WEIGHTED AVERAGE ASSUMPTIONS AT END OF YEAR
Discount rate 6.75% 6.75%
Expected return on plan assets 9.0% Not applicable
Rate of compensation increase Various* Not applicable
*Compensation for pilots was assumed to increase at a rate of 9.8% in 2002, 3.5%
in 2003, 4.5% in 2004 and after. The rate of compensation increase is not
applicable to the frozen plans.
At December 31, 2002, the health care cost trend rate was assumed to increase at
a rate of 9.5% in 2003 and decrease gradually to 4.75% over seven years and
remain level thereafter. Assumption changes, for both pension and other
benefits, relate primarily to reductions in the discount rate used to value the
pension obligations as of December 31, 2002.
F-24
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
The accumulated benefit obligation for Hawaiian's defined benefit pension plans
was $230.8 million as of December 31, 2002. To the extent that the accumulated
benefit obligation exceeds the fair value of plan assets, a minimum pension
liability must be recognized on the balance sheet. Accordingly, the Company
recognized an additional amount (the minimum pension liability adjustment)
necessary to record the full amount of the minimum pension liability. Pursuant
to SFAS No. 87, "Employers' Accounting for Pensions", minimum pension liability
adjustments are recognized through accumulated other comprehensive loss, rather
than through the statement of operations. The minimum pension liability
increased shareholders' deficiency by $96.1 million as of December 31, 2002. The
accumulated benefit obligations and accumulated other comprehensive loss were
eliminated upon the deconsolidation of Hawaiian on April 1, 2003.
The following table sets forth the net periodic benefit cost for the years ended
December 31, 2003, 2002, and 2001 (in thousands):
PENSION BENEFITS OTHER BENEFITS
COMPONENTS OF NET PERIODIC -----------------------------------------------------------
BENEFIT COST 2003 (*) 2002 2001 2003 (*) 2002 2001
- --------------------------------------------------------------------------------------------------
Service cost $ 2,045 $ 7,466 $ 6,166 $ 440 $1,324 $ 973
Interest costs 4,276 16,342 15,296 496 1,525 1,213
Expected return on plan assets (4,198) (17,271) (16,802) -- -- --
Amortization of prior service cost -- -- -- 64 239 134
Recognized net actuarial (gain) loss 1,191 1,865 758 (14) (490) (765)
Curtailment and termination benefits -- 881 -- (344) -- --
-----------------------------------------------------------
Net periodic benefit cost $ 3,314 $ 9,283 $ 5,418 $ 642 $2,598 $1,555
===========================================================
(*) Only represents the period during which Hawaiian was consolidated by the
Company.
Plan assets consist primarily of equity and fixed income securities. As of
December 31, 2002, the asset allocation percentages by category were as follows
(in thousands):
U.S. equities 42%
Fixed income 24%
International equities 10%
Other 24%
---
100%
===
Hawaiian develops the expected long-term rate of return assumption based on
historical experience and by evaluating input from the trustee managing the
plan's assets, including the trustee's review of asset class return expectations
by several consultants and economists as well as long-term inflation
assumptions. Hawaiian's expected long-term rate of return on plan assets is
based on a target allocation of assets, which is based on the goal of earning
the highest rate of return while maintaining risk at acceptable levels. The plan
strives to have assets sufficiently diversified so that adverse or unexpected
results from security class will not have an unduly detrimental impact on the
entire portfolio.
Hawaiian also sponsors separate deferred compensation plans (401(k)) for its
pilots, flight attendants and ground and salaried personnel. Participating
employer cash contributions are not required under the terms of the pilots'
plan. Hawaiian is required to contribute up to 7.0% of defined compensation
pursuant to the terms of the flight attendants' plan. Contributions to the
flight attendants' plan are funded currently and totaled approximately $0.6
million, $2.2 million, and $2.1 million in 2003, 2002, and 2001, respectively
during the period Hawaiian was consolidated by the
F-25
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
Company. Hawaiian is also required to contribute a minimum of 4.04%, up to a
maximum of 8%, of eligible earnings to the ground and salaried plan for eligible
employees as defined by the plan. Contributions to the ground and salaried
401(k) plan totaled $0.9 million, $3.5 million, and $2.5 million in 2003, 2002,
and 2001, respectively during the period Hawaiian was consolidated by the
Company.
10. CAPITAL STOCK AND OPTIONS
As of December 31, 2003 and 2002, the authorized capital stock of the Company
consists of 60,000,000 shares of Common Stock, par value $0.01 per share, and
2,000,000 shares of Preferred Stock, of which seven shares have been designated
as Special Preferred Stock, par value $0.01 per share.
No dividends were paid by the Company during years ended December 31, 2003,
2002, or 2001.
SPECIAL PREFERRED STOCK
In connection with the Corporate Restructuring, four shares of the Company's
Series A Special Preferred Stock were issued to AIP with such shares entitling
AIP to nominate a number of directors determined based on the percentage of
outstanding common equity interest (on a fully diluted basis) that it owns. The
IAM, Association of Flight Attendants ("AFA"), and ALPA each hold one share of
Series B Special Preferred Stock, Series C Special Preferred Stock and Series D
Special Preferred Stock, respectively, (with the Series A Special Preferred
Stock, collectively the "Special Preferred Stock") which entitle each union to
nominate one director. The holder of the Series A Special Preferred Stock is
entitled to identify a number of director nominees based on the percentage of
outstanding common equity interest (on a fully diluted basis) that it owns: six
directors if the holder, together with specified affiliates, own at least 35% of
the outstanding common equity interest (on a fully diluted basis); five
directors if the holder, together with specified affiliates, own at least 25% of
the outstanding common equity interest (on a fully diluted basis); four
directors if the holder, together with specified affiliates, own at least 10% of
the outstanding common equity interest (on a fully diluted basis); three
directors if the holder, together with specified affiliates, own at least 5% of
the outstanding common equity interest (on a fully diluted basis); or will not
be entitled to identify any directors if the holder, together with specified
affiliates, own less than 5% of the outstanding common equity interest (on a
fully diluted basis). If the holder of the Series A Special Preferred Stock is
entitled to identify less than six directors, the remaining directors of such
six will be comprised of outside directors that are not affiliated with either
(i) the holder of the Series A Special Preferred Stock, (ii) any of the unions
holding Series B, C, or D Special Preferred Stock, or (iii) the Company other
than as a director. In addition to the rights described above, each series of
the Special Preferred Stock, unless otherwise specified: (1) ranks senior to the
Company's Common Stock and ranks pari passu with each other such series of
Special Preferred Stock with respect to liquidation, dissolution and winding up
of the Company and will be entitled to receive $0.01 per share before any
payments are made, or assets distributed to holders of any stock ranking junior
to the Special Preferred Stock; (2) has no dividend rights unless a dividend is
declared and paid on the Company's Common Stock, in which case the Special
Preferred Stock would be entitled to receive a dividend in an amount per share
equal to two times the dividend per share paid on the Common Stock; (3) is
entitled to one vote per share of such series and votes with the Common Stock as
a single class on all matters submitted to holders of the Company's Common
Stock; (4) automatically converts into the Company's Common Stock on a 1:1
basis, (i) in the case of the Series A Special Preferred Stock, upon the
transfer of any shares of Series A Special Preferred Stock to any person or
entity that is not an affiliate of AIP; or if the holder of Series A Special
Preferred Stock ceases to own 5% or more of the outstanding common equity
interest of the Company (on a fully diluted basis) for a period of 365
consecutive days or (ii) in the cases of the Series B, C and D Special Preferred
Stock, at such time as such shares are transferred or such holders are no longer
entitled to nominate a representative to the Company's Board of Directors
pursuant to their respective collective bargaining agreements. As further
discussed in Note 1, the four shares of Series A Special Preferred Stock held by
AIP were cancelled.
F-26
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
STOCK COMPENSATION
As part of the collective bargaining agreement negotiated with the ALPA in
December 2000, Hawaiian agreed to distribute 1,685,380 shares of Hawaiian's
common stock on a quarterly basis to the individual 401(k) accounts of ALPA
pilots in Hawaiian's employment during 2001 and 2002. Subsequent to the
Corporate Restructuring, each pilot participant eligible to receive a share of
Hawaiian common stock became eligible to receive, on the same terms and
conditions as were in effect immediately prior to the Corporate Restructuring,
one share of the Company's common stock instead. In 2001, 518,910 shares,
representing the number of shares required to be distributed in respect of the
first, second and third quarters of 2001, were distributed to Vanguard Group,
Inc. as trustee for the Hawaiian Airlines, Inc. Pilots' 401(k) Plan. In 2002,
1,051,214 shares, required for the fourth quarter of 2001 and the first, second
and third quarters of 2002, were distributed to Vanguard Group, Inc. as trustee.
The distribution for the quarter ended December 31, 2002, consisting of 105,776
shares, was made on March 14, 2003. Hawaiian recognized compensation expense
related to the stock distribution of $2.2 million and $2.6 million for the years
ended December 31, 2002 and 2001, respectively.
STOCK OPTION PLANS
Under the 1994 Stock Option Plan, 600,000 shares of Common Stock were reserved
for grants of options to officers and key employees of Hawaiian. Under the 1996
Stock Incentive Plan, as amended, 4,500,000 shares of Common Stock were reserved
for issuance of discretionary grants of options to Hawaiian's employees.
Hawaiian also had a 1996 Nonemployee Director Stock Option Plan under which
500,000 shares of Common Stock were reserved for issuance and grants of options
to nonemployee members of the Board of Directors. Following the Corporate
Restructuring, The Company assumed sponsorship of the then-existing Hawaiian
stock option plans. As a result, the outstanding options became exercisable or
issuable upon the same terms and conditions as were in effect immediately prior
to the completion of the Corporate Restructuring, except that shares of the
Company's common stock would be issued upon the exercise or issuance of these
options instead of Hawaiian common stock.
Stock options were granted with an exercise price equal to the common stock's
fair market value at the date of grant, generally vested over a period of four
years and expired, if not previously exercised, ten years from the date of
grant.
Stock option activity for Hawaiian during the periods indicated is as follows:
SHARES OF COMMON STOCK WEIGHTED
----------------------- AVERAGE OF
AVAILABLE OUTSTANDING EXERCISE PRICE
--------- ----------- --------------
Balance at December 31, 2000 1,843,500 2,629,000 $3.05
=====
Granted
1996 Stock Incentive Plan (600,000) 600,000 2.56
Exercised
1994 Stock Option Plan -- (15,000) 1.62
Forfeited
1996 Stock Incentive Plan 180,000 (180,000) 2.81
1996 Nonemployee Director Stock Option Plan 16,000 (16,000) 3.60
--------- --------- -----
F-27
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
Balance at December 31, 2001 1,439,500 3,018,000 $2.97
=====
Granted
1996 Stock Incentive Plan (350,000) 350,000 2.46
1996 Nonemployee Director Stock Option Plan (164,000) 164,000 3.26
Exercised
1996 Stock Incentive Plan -- (20,000) 2.06
Forfeited
1996 Stock Incentive Plan 110,000 (110,000) 2.91
--------- ---------
Balance at December 31, 2002 1,035,500 3,402,000 $2.92
=====
Granted
1996 Stock Incentive Plan 290,000 (290,000) 3.42
1996 Nonemployee Director Stock Option Plan 24,000 (24,000) 2.81
--------- --------- -----
Balance at December 31, 2003 1,349,500 3,088,000 $2.90
=====
As of December 31, 2003, vesting requirements and exercise periods under each
respective plan are as follows:
VESTING EXERCISE PERIOD
----------------- -----------------
1994 Stock Option Plan Fully vested Through 2005
1996 Stock Incentive Plan Various from Various from
2004 through 2006 2004 through 2012
1996 Nonemployee Director Fully Vested Various from
Stock Option Plan 2004 through 2012
As of December 31, 2003, the range of exercise prices and weighted-average
remaining contractual lives of outstanding options was $1.62 to $4.06 and 5.07
years, respectively. At December 31, 2003, 2002, and 2001, the number of options
exercisable was 2,628,000, 2,643,000, and 1,738,000, respectively, with
weighted-average exercise prices of $2.96, $3.02, and $3.16, respectively.
There were no stock options granted during 2003. The per share weighted-average
fair value of stock options granted during 2002 and 2001, was $1.62 and $1.57,
respectively, on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions:
2002 2001
-------------- --------------
Expected dividend yield 0.00% 0.00%
Expected volatility 55.00% 55.00%
Risk-free interest rate 3.54% to 5.29% 4.95% to 5.41%
Expected life Up to 7 years Up to 7 years
11. STOCK REPURCHASES, 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
F-28
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
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
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 years ended December 31, 2003 and
2002 is $0.2 million and $2.6 million, respectively, 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 December 31, 2004 and
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.
F-29
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
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.
Included in other operating expenses for the year ended December 31, 2002 is
$0.3 million related to a consulting agreement with Todd G. Cole, a director of
Hawaiian through May 15, 2003, pursuant to which Mr. Cole provided executive
consulting services regarding fleet utilization, scheduling and other
operational matters for a fee of $20,833 per month from May 1, 2002 through
October 31, 2002 and a single payment of $125,800 due January 6, 2003. The
consulting agreement was extended through December 31, 2002, during which Mr.
Cole received a fee of $41,666 per month and accrued payments during the initial
term totaling $125,000 on October 31, 2002. The consulting agreement was
terminated on December 31, 2002.
From May 19, 2000 through April 25, 2003, Hawaiian invested $3.0 million in
certificates of deposit with Liberty Bank, SSB, of Austin, Texas. Liberty Bank
is indirectly majority owned by Mr. Adams and another individual. Edward Z.
Safady and Thomas J. Trzanowski, both former members of Hawaiian's Board of
Directors, are employees and/or directors of Liberty Bank, SSB.
12. CONCENTRATION OF BUSINESS RISK
Hawaiian's scheduled service operations are primarily focused on providing air
transportation service to, from, or throughout the Hawaiian Islands. Therefore,
Hawaiian's operations, including its ability to collect its outstanding
F-30
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
receivables, are significantly affected by economic conditions in the State of
Hawaii and by other factors affecting the level of tourism in Hawaii. For the
period in which Hawaiian was consolidated by the Company in 2003, and for the
year ended December 31, 2002, one particular Hawaii-based wholesaler constituted
approximately 6% and 15% of the Hawaiian's total operating revenue,
respectively.
Financial instruments that potentially subject the Company to risk due to
concentrations consist principally of accounts with financial institutions in
excess of federally insured limits. As of December 31, 2003 the Company had
deposits in a financial institution that were in excess of federally insured
amounts totaling $0.4 million.
13. SEGMENT INFORMATION
Principally all operations of Hawaiian 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 its various markets.
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 the
components based on products and services constituting one operating segment. As
Hawaiian offers only one service (i.e., air transportation), management has
concluded that it has only one segment. Hawaiian's principal line of business,
the scheduled and chartered transportation of passengers, constitutes more than
90% of its operating revenue. The following table delineates scheduled and
chartered passenger revenue of Hawaiian for the period during which Hawaiian was
consolidated by the Company:
2003(*) 2002 2001
-------- -------- --------
Transpacific $ 87,094 $341,662 $300,304
Interisland 42,151 180,391 176,058
South Pacific 4,442 19,940 20,410
Overseas Charter 11,832 46,480 75,632
-------- -------- --------
$145,519 $588,473 $572,404
======== ======== ========
(*) Only represents the period (January 1, 2003 to March 31, 2003) during which
Hawaiian was consolidated by the Company.
F-31
Hawaiian Holdings, Inc.
(Parent Company of Debtor)
(Notes to Financial Statements)
(in thousands, unless otherwise indicated)
14. SUPPLEMENTAL FINANCIAL INFORMATION (UNAUDITED)
UNAUDITED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE
DATA)
FIRST SECOND THIRD FOURTH
QUARTER* QUARTER QUARTER QUARTER
-------- ------- ------- -------
2003:
Operating revenue $157,064 $ -- $ -- $ --
Operating loss (13,559) (451) (531) (552)
Nonoperating expense (1,905) -- -- --
Net loss (15,464) (451) (531) (552)
Net loss per Common Stock share:
Basic and diluted (0.55) (0.02) (0.02) (0.02)
FIRST SECOND THIRD FOURTH
QUARTER* QUARTER* QUARTER* QUARTER*
-------- -------- -------- --------
2002:
Operating revenue $138,139 $148,000 $179,247 $166,652
Operating income (loss) (18,628) (25,091) 6,366 (18,726)
Nonoperating income (expense) 48 (90) 79 566
Net income (loss) (18,580) (31,085) 6,445 (15,055)
Net income (loss) per Common Stock share:
Basic and diluted (0.54) (0.92) 0.23 (0.53)
* Includes the consolidated results of the Company and Hawaiian. All other
periods include the deconsolidated results of the Company only.
F-32
REPORT OF INDEPENDENT AUDITORS
Hawaiian Airlines, Inc.
We have audited the accompanying balance sheets of Hawaiian Airlines, Inc.
("Hawaiian") as of December 31, 2003 and 2002, and the related statements of
operations, shareholders' deficiency and comprehensive loss, and cash flows for
each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of Hawaiian's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of Hawaiian's
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hawaiian as of December 31,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that Hawaiian
will continue as a going concern. As more fully described in Note 2 to the
financial statements, Hawaiian filed a voluntary petition for relief under
Chapter 11 of the federal bankruptcy laws on March 21, 2003, which raises
substantial doubt about Hawaiian's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
As discussed in Note 3 to the financial statements, effective January 1, 2002,
Hawaiian adopted Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets".
/s/ Ernst & Young LLP
March 30, 2004, except for
Note 19, as to which the date
is March 30, 2005
Honolulu, Hawaii
F-33
Hawaiian Airlines, Inc. (Debtor)
Statements of Operations
YEAR ENDED DECEMBER 31,
2003 2002 2001
--------- -------- --------
(In Thousands)
Operating Revenue:
Passenger $ 626,807 $541,992 $496,772
Charter 23,070 46,480 75,632
Cargo 28,504 21,319 22,214
Other 27,764 22,247 16,964
--------- -------- --------
Total 706,145 632,038 611,582
--------- -------- --------
Operating Expenses:
Wages and benefits 215,421 205,422 188,813
Aircraft fuel, including taxes and oil 97,055 95,457 111,876
Maintenance materials and repairs 49,515 90,194 99,043
Aircraft rent 111,454 83,462 39,966
Other rentals and landing fees 24,967 24,179 21,801
Sales commissions 4,302 14,645 20,812
Depreciation and amortization 7,098 8,577 13,983
Restructuring charges -- 8,701 (3,600)
Special credits (Stabilization and Supplemental
Appropriations Acts) (17,497) 680 (30,780)
Other 136,352 155,970 133,007
--------- -------- --------
Total 628,667 687,287 594,921
--------- -------- --------
Operating income (loss) 77,478 (55,249) 16,661
--------- -------- --------
Non-operating income (expense):
Reorganization items, net (115,063) -- --
Interest and amortization of debt expense (417) (1,264) (2,212)
Interest income 234 1,889 3,865
Loss on disposition of equipment and other, net 1,199 (22) 525
--------- -------- --------
Total (114,047) 603 2,178
--------- -------- --------
Income (loss) before income taxes (36,569) (54,646) 18,839
Income tax provision (12,944) (2,799) (13,770)
--------- -------- --------
Net income (loss) $ (49,513) $(57,445) $ 5,069
========= ======== ========
See accompanying notes.
F-34
Hawaiian Airlines, Inc. (Debtor)
Balance Sheets
DECEMBER 31,
---------------------
2003 2002
--------- --------
(In Thousands, Except
for Share Data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 87,728 $ 71,907
Restricted cash 52,766 23,202
Accounts receivable, net of allowance for doubtful
accounts of $1,940 and $1,305 in 2003 and 2002 36,902 28,093
Spare parts and supplies 9,552 4,408
Prepaid expenses and other 20,674 13,273
-------- --------
Total current assets 207,622 140,883
-------- --------
PROPERTY AND EQUIPMENT
Flight equipment 17,766 18,809
Ground equipment, buildings and leasehold improvements 60,656 54,944
-------- --------
Total 78,422 73,753
Accumulated depreciation and amortization (32,431) (28,068)
-------- --------
Property and equipment, net 45,991 45,685
-------- --------
OTHER ASSETS
Long-term prepayments and other 46,438 42,108
Reorganization value in excess of amounts allocable to
identifiable assets, net 28,320 28,320
-------- --------
Total other assets 74,758 70,428
-------- --------
Total Assets $328,371 $256,996
======== ========
F-35
Hawaiian Airlines, Inc. (Debtor)
Balance Sheets
DECEMBER 31,
---------------------
2003 2002
--------- ---------
(In Thousands, Except
for Share Data)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 54,153 $ 79,682
Air traffic liability 100,173 109,974
Other accrued liabilities 57,587 61,780
Current portion of long-term debt -- 2,153
Current portion of capital lease obligations -- 1,096
--------- ---------
Total current liabilities 211,913 254,685
--------- ---------
Long-Term Debt -- 883
--------- ---------
Capital Lease Obligations -- 2,358
--------- ---------
OTHER LIABILITIES AND DEFERRED CREDITS
Accumulated pension and other postretirement
benefit obligations 139,633 112,208
Other liabilities and long-term deposits 51,524 28,642
--------- ---------
Total other liabilities and deferred credits 191,157 140,850
--------- ---------
Liabilities Subject to Compromise 134,532 --
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' DEFICIENCY:
Common Stock - $.01 par value, 60,000,000 shares authorized,
27,814,143 shares issued and outstanding in
December 31, 2003 and 2002 278 278
Preferred stock - $0.01 par value, 2,000,000 shares authorized,
no shares issued or outstanding as of December 31, 2003 and 2002 -- --
Capital in excess of par value 60,084 59,941
Notes receivable from common stock sales (1,560) (1,560)
Accumulated deficit (155,778) (106,265)
Accumulated other comprehensive loss -
Minimum pension liability (112,255) (96,063)
Derivative financial instruments -- 1,889
--------- ---------
Shareholders' deficiency (209,231) (141,780)
--------- ---------
Total Liabilities and Shareholders' Deficiency $ 328,371 $ 256,996
========= =========
See accompanying notes.
F-36
Hawaiian Airlines, Inc. (Debtor)
Statements of Shareholders' Deficiency and Comprehensive Loss
ACCUMU- ACCUMU-
NOTES LATED LATED
RECEIV- COMPRE- COMPRE-
ABLE FROM HENSIVE HENSIVE
CAPITAL IN COMMON ACCUMU- INCOME INCOME
COMMON EXCESS OF STOCK LATED (LOSS) (LOSS)
STOCK PAR VALUE SALES DEFICIT PENSION DERIVATIVE TOTAL
------ ---------- ---------- --------- --------- ---------- ---------
(In Thousands, Except for Share Data)
Balance at December 31, 2000 $337 $ 83,491 $(1,581) $ (53,889) $ (10,099) $ -- $ 18,259
Net income -- -- -- 5,069 -- -- 5,069
Minimum pension liability -- -- -- -- (41,501) -- (41,501)
Derivative financial instruments -- -- -- -- (4,237) (4,237)
---------
Comprehensive loss (40,669)
---------
Exercise of options to acquire 15,000
shares of common stock -- 24 21 -- -- -- 45
Distribution to Pilots' 401(k) Plan of
518,910 shares of common stock 5 1,335 -- -- -- -- 1,340
Repurchase of 90,700 shares of common
stock -- (185) -- -- -- -- (185)
---- -------- ------- --------- --------- ------- ---------
Balance at December 31, 2001 342 84,665 (1,560) (48,820) (51,600) (4,237) (21,210)
Net loss -- -- -- (57,445) -- -- (57,445)
Minimum pension liability -- -- -- -- (44,463) -- (44,463)
Derivative financial instruments -- -- -- -- -- 6,126 6,126
---------
Comprehensive loss (95,782)
Exercise of options to acquire 20,000
shares of common stock -- 41 -- -- -- -- 41
Distribution to Pilots' 401(k) Plan of
514,034 shares of common stock 5 1,920 -- -- -- -- 1,925
Repurchase of 990,700 shares of common
stock (10) (3,117) -- -- -- -- (3,127)
Repurchase of 5,880,000 shares of
common stock tendered (59) (24,931) -- -- -- -- (24,990)
Other -- 1,363 -- -- -- -- 1,363
---- -------- ------- --------- --------- ------- ---------
Balance at December 31, 2002 278 59,941 (1,560) (106,265) (96,063) 1,889 (141,780)
Net loss -- -- -- (49,513) -- -- (49,513)
Minimum pension liability -- -- -- -- (16,192) -- (16,192)
Derivative financial instruments -- -- -- -- -- (1,889) (1,889)
---------
Comprehensive loss (67,594)
Other -- 143 -- -- -- -- 143
---- -------- ------- --------- --------- ------- ---------
Balance at December 31, 2003 $278 $ 60,084 $(1,560) $(155,778) $(112,255) $ -- $(209,231)
==== ======== ======= ========= ========= ======= =========
See accompanying notes
F-37
Hawaiian Airlines, Inc. (Debtor)
Statements of Cash Flows
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(In Thousands)
OPERATING ACTIVITIES
Net income (loss) $(49,513) $(57,445) $ 5,069
Adjustments to reconcile net income (loss) to
net cash provided by operating activities
before reorganization activities:
Reorganization items, net 115,063 -- --
Depreciation 6,534 8,010 10,813
Amortization 564 567 3,170
Net periodic postretirement benefit cost 2,298 2,598 1,555
Restructuring charges (credit) -- 8,701 (3,600)
Loss on assets held for sale 29 118 32
Advance on sale of frequent flyer miles -- 24,000 --
Change in restricted cash (29,564) 3,708 (26,910)
Decrease (increase) in accounts receivable (8,809) 6,917 (9,815)
Decrease (increase) in inventories (5,144) (839) 166
Increase in prepaid expenses and other (9,290) (270) (982)
Decrease in deferred taxes, net -- 5,904 9,806
Increase (decrease) in accounts payable 14,389 (677) 16,843
Increase (decrease) in air traffic liability (9,801) (667) 35,652
Increase (decrease) in other accrued liabilities 15,690 (2,659) 28,234
Other, net (3,402) 12,411 (13,229)
-------- -------- --------
Net cash provided by operating activities before
reorganization activities 39,044 10,377 56,804
Cash flows from reorganization activities:
Professional fees paid for services rendered in
connection with bankruptcy proceedings (14,026) -- --
Interest on accumulated cash balances 728 -- --
-------- -------- --------
Net cash used by reorganization activities (13,298) -- --
-------- -------- --------
Net cash provided by operating activities 25,746 10,377 56,804
-------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment (7,445) (9,693) (16,147)
Progress payments on flight equipment -- (21) (5,256)
Proceeds from disposition of equipment 12 2,123 12,888
-------- -------- --------
Net cash used in investing activities (7,433) (7,591) (8,515)
-------- -------- --------
FINANCING ACTIVITIES:
Long-term borrowings -- 344 1,426
Repayment of long-term debt (1,508) (4,450) (13,000)
Repayment of capital lease obligations (984) (1,554) (1,547)
Issuance of common stock -- 41 24
Repurchase of common stock -- (28,120) (185)
Proceeds on notes receivable from common stock sales -- -- 21
-------- -------- --------
F-38
Net cash used in financing activities (2,492) (33,739) (13,261)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 15,821 (30,953) 35,028
Cash and cash equivalents at beginning of year 71,907 102,860 67,832
-------- -------- --------
Cash and cash equivalents at end of year $ 87,728 $ 71,907 $102,860
======== ======== ========
See accompanying notes.
F-39
1. BUSINESS AND ORGANIZATION
Hawaiian Airlines, Inc. ("Hawaiian") was incorporated in January 1929 under the
laws of the Territory of Hawaii and, based on operating revenue, is the largest
airline headquartered in Hawaii. Hawaiian became a wholly-owned subsidiary of
Hawaiian Holdings, Inc. ("Holdings") on August 29, 2002, pursuant to the
corporate restructuring described in Note 4. 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
United States cities ("Transpacific"). Hawaiian also provides daily service
among the six major islands of the State of Hawaii ("Interisland") and weekly
service to each of Pago Pago, American Samoa and Papeete, Tahiti in the South
Pacific ("South Pacific"). Charter service is provided from Honolulu to
Anchorage, Alaska ("Overseas Charter"). Hawaiian currently operates a fleet of
11 Boeing 717-200 aircraft for its Interisland routes, and a fleet of 14 Boeing
767-300ER aircraft for its Transpacific, South Pacific and Overseas Charter
routes.
2. BANKRUPTCY FILING, 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"). Holdings did not file a voluntary petition for relief under Chapter 11.
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"). 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 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) the debtor may extend the
60-day period by agreement with the relevant financier and with court approval;
or (b) the debtor may agree to perform all of the obligations under the
applicable financing and cure any defaults as required under the bankruptcy
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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 has reached
agreements with Ansett Worldwide Aviation Services, Inc. ("Ansett") and
International Lease Finance Corporation ("ILFC"), who together lease Hawaiian 11
Boeing 767 aircraft, on revised long-term leases, which have been approved by
the Bankruptcy Court. The revised leases provide Hawaiian with significant
savings in monthly aircraft rentals, but also result in a deficiency claim for
the lessors in Hawaiian's bankruptcy case. Hawaiian has agreed to the value of
such claim with Ansett, but not ILFC. See Notes 6 and 7. Hawaiian has also
entered into stipulations with BCC Leasing, which leases Hawaiian 11 Boeing 717
aircraft and three Boeing 767 aircraft, to extend the Section 1110 deadline on
those aircraft on several occasions. The most recent stipulation approved by the
Bankruptcy Court extends the Section 1110 deadline through April 15, 2004.
Absent further agreement, BCC Leasing would be entitled to make a demand for the
return of such aircraft after April 15, 2004. Repossession of any or all of the
aircraft could result in substantial disruptions to Hawaiian's operations and
have a material adverse effect on Hawaiian's business. Should BCC Leasing
attempt to repossess any or all of the aircraft, Hawaiian's only alternative
would be to cure the defaults under those leases on or before April 15, 2004,
which would be extremely costly.
On November 28, 2003, the Trustee commenced a lawsuit in the Bankruptcy Court
against Hawaiian's former Chairman of its Board of Directors and Chief Executive
Officer, John W. Adams, Holdings, and three of Mr. Adams' affiliates, AIP LLC,
Smith Management LLC ("Smith Management"), and Airline Investors Partnership, LP
("AIP"). The Trustee seeks recovery of damages arising from a $25 million tender
offer that occurred in June 2002 (see Note 15), as well as other transactions
that involved payments by Hawaiian in excess of $3 million (see Note 16). The
Trustee has asserted that the transactions in question constitute fraudulent
conveyances and/or preferences, and that Mr. Adams breached his fiduciary duty
and violated Hawaii law in causing and authorizing Hawaiian to consummate the
transactions. The defendants (other than Hawaiian Holdings) filed an answer on
January 5, 2004, and trial is scheduled to commence in June 2005. It is not
possible to predict either the timing or the amount, if any, of any recovery
that may result from this litigation or any settlement of the litigation. No
potential recoveries have been recorded in Hawaiian's financial statements
related to this litigation.
On February 11, 2004, a group consisting of BCC Leasing, Boeing Capital
Corporation and Corporate Recovery Group, LLC filed a proposed plan of
reorganization with the Bankruptcy Court. On February 26, 2004, Robert Konop, a
Hawaiian pilot, filed a second proposed plan of reorganization with the
Bankruptcy Court. On March 1, 2004, Mr. Adams and his investment group announced
the intention to file a third proposed plan of reorganization. Following the
filing or announcement of these plans of reorganization, in order to determine
the most advantageous plan for Hawaiian and its constituencies, and in an effort
to provide a consistent basis under which potential investors might develop
proposals, the Trustee, working with the Official Committee of Unsecured
Creditors (the "Creditors Committee"), developed a process for selecting and
evaluating investment proposals and provided a confidential offering memorandum
to potential investors. Qualified potential investors will have, in addition to
the offering memorandum, access to management and other information necessary to
develop a formal proposal. Under their process, the Trustee and the Creditors
Committee will jointly select the proposal they believe to be in the best
interest of the estate and such proposal will be incorporated into a plan of
reorganization to be filed on or before June 14, 2004. However, the Trustee and
Committee have retained their rights to propose a stand-alone plan of
reorganization if no investor proposal is considered preferable to that
alternative. Although there can be no assurance, based on timeline set forth by
the Trustee and the Creditors Committee, Hawaiian expects to emerge from Chapter
11 protection by the end of September 2004.
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Hawaiian maintains several defined benefit pension plans, all of which were
frozen in 1993 except the pilots' plan. The combination of low interest rates,
poor stock market performance, lack of funding, and pilot pay increases the past
three years has caused Hawaiian's pension plans to be significantly underfunded.
The largest of these pension plans, the pilots' pension plan, had an accumulated
benefit obligation (the "ABO") in excess of plan assets of $94.5 million as of
December 31, 2003; the aggregate ABO in excess of plan assets for all Hawaiian's
defined benefit pension plans totaled $114.1 million as of that date. Hawaiian
has begun negotiations with the Air Line Pilots Association (the "ALPA") in an
effort to develop a resolution to the pilots' plan underfunding. In September
2003, the Bankruptcy Court authorized Hawaiian to temporarily defer making a
$4.25 million contribution to the pilot pension plan. A hearing on whether to
make the deferral permanent has been deferred several times and is now scheduled
for the end of July 9, 2004. If the pilots' retirement plan is not amended to
reduce benefits, the contributions required by ERISA and Hawaiian's agreements
with ALPA currently are expected to be significant - $31.1 million, $21.2
million, $18.4 million, $13.3 million and $8.1 million during 2004 through 2008,
respectively.
Hawaiian has no outside credit lines and limited assets against which to
finance, and therefore funds all of its liquidity requirements using existing
cash and cash generated from operations. As of February 29, 2004, Hawaiian had
approximately $159.9 million in cash, of which approximately $65.3 million was
restricted pursuant to agreements with third parties, primarily as a result of
holdbacks by credit card companies. Hawaiian has not attempted to secure
debtor-in-possession financing during its bankruptcy proceeding. Because all of
Hawaiian's aircraft are leased, Hawaiian has limited unencumbered assets that
could be used as collateral for debtor-in-possession financing.
The matters described above raise substantial doubt about Hawaiian's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include adjustments that might result should Hawaiian be unable to
continue as a going concern. As a result of the Chapter 11 filing, Hawaiian's
ability to realize assets and liquidate liabilities is subject to uncertainty.
While operating as a debtor under the protection of Chapter 11 of the Bankruptcy
Code and subject to Bankruptcy Court approval or otherwise as permitted in the
normal course of business, Hawaiian may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. Furthermore, a plan of reorganization could
materially change the amounts and classifications of assets and liabilities
reported in the historical financial statements, which do not give effect to any
adjustments to the carrying value of the assets or the amounts of liabilities
that might be necessary as a consequence of the confirmation of a plan of
reorganization.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements 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
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compromise are reported at the amounts expected to be allowed by the Bankruptcy
Court, even if they may be settled for lesser amounts.
CASH AND CASH EQUIVALENTS
Hawaiian considers all investments purchased with an original maturity of three
months or less to be cash equivalents.
RESTRICTED CASH
Restricted cash consists primarily of collateral to support credit card
holdbacks for advance ticket sales, which funds are made available as air travel
is provided.
SPARE PARTS AND SUPPLIES
Spare parts and supplies consist primarily of expendable parts for flight
equipment and supplies that are stated at average cost and are expensed when
consumed in operations. An allowance for obsolescence is provided over the
estimated useful life of the related aircraft.
PROPERTY AND EQUIPMENT
Owned property and equipment are stated at cost and depreciated on a
straight-line basis over the following estimated useful lives:
Flight equipment 2-15 years, 15% residual value
Ground equipment 5-15 years, no residual value
Airport terminal facility 30 years
Buildings 15-20 years
Leasehold improvements Shorter of lease term or useful life
Maintenance and repairs are charged to operations as incurred, except that
maintenance and repairs under "power by the hour" maintenance contract
agreements are accrued on the basis of hours flown, and scheduled airframe
inspection and repairs, which are generally performed every seven years, are
capitalized and amortized over the estimated period benefited, presently the
least of seven years, the time until the scheduled event, or the remaining life
of the aircraft. Modifications that significantly enhance the operating
performance or extend the useful lives of aircraft or engines are capitalized
and amortized over the remaining life of the asset.
In 2003, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued a Draft Statement of Position entitled
"Accounting for Certain Costs and Activities Related to Property, Plant and
Equipment" Among other items, the draft statement, as written, would require
that all maintenance events, including those currently capitalized by Hawaiian,
be expensed as incurred beginning in 2005. As of December 31, 2003, Hawaiian had
$1.6 million of costs capitalized on its balance sheet that would be required to
be expensed under the draft statement.
F-43
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Hawaiian emerged from a previous Chapter 11 bankruptcy on September 12, 1994,
with Hawaiian Airlines being the sole surviving corporation. Under fresh start
reporting, the reorganization value of the entity was allocated to Hawaiian's
assets and liabilities on a basis substantially consistent with the purchase
method of accounting. The portion of reorganization value not attributable to
specific tangible or identifiable intangible assets of Hawaiian is reflected as
reorganization value in excess of amounts allocable to identifiable assets
("Excess Reorganization Value") in the accompanying balance sheets.
Effective January 1, 2002, Hawaiian adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". Under SFAS
No. 142, goodwill and intangible assets deemed to have indefinite lives are not
amortized but are instead subject to annual impairment tests in accordance with
SFAS No. 142. As of January 1, 2002, Hawaiian had no recorded intangible assets
apart from reorganization value in excess of amounts allocable to identifiable
assets of $28.3 million, net of accumulated amortization of $22.4 million. Pro
forma results for the year ended December 31, 2001, assuming the discontinuation
of amortization of reorganization value in excess of amounts allocable to
identifiable assets had occurred at the beginning of 2001, are presented below
(per share data in whole dollars):
2001
------
Reported net income $5,069
Amortization, net of taxes 2,306
------
Adjusted net income $7,375
======
Basic and diluted earnings per share:
As reported $ 0.15
Amortization, net of taxes 0.07
------
As adjusted $ 0.22
======
REVENUE RECOGNITION
Passenger revenue is recognized either when the transportation is provided or
when the related ticket expires unused. The value of unused passenger tickets is
included as air traffic liability. Hawaiian performs periodic evaluations of
this estimated liability, and any resulting adjustments, which can be
significant, are included in results of operations for the periods in which the
evaluations are completed. Charter and cargo revenue is recognized when the
transportation is provided.
Hawaiian sells mileage credits in its HawaiianMiles frequent flyer program to
participating partners such as hotels, car rental agencies and credit card
companies. Revenue from the sale of mileage credits is deferred and, beginning
in 2003, recognized as passenger revenue when transportation is likely to be
provided, based on the fair value of the transportation to be provided. Prior to
2003, these amounts were recognized on a comparable basis but were classified as
other revenue. The related amounts in the statements of operations for the years
ended December 31, 2002 and 2001 have been reclassified to conform to the 2003
presentation. Amounts in excess of the fair value of the transportation to be
provided are recognized currently as a reduction in marketing expenses.
F-44
Components of other revenue include ticket change fees, ground handling fees,
sales of jet fuel, and other incidental services that are recognized as revenue
when the related service is provided.
FREQUENT FLYER PROGRAM
Hawaiian recognizes a liability under its HawaiianMiles frequent flyer program
as members accumulate mileage points. The incremental cost method is used,
computed primarily on the basis of fuel, insurance and catering costs, exclusive
of any overhead or profit margin.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted cash, and accounts
receivable approximate fair value due to the short maturity of those
instruments. The fair value of accounts payable, accrued liabilities, long-term
debt and liabilities subject to compromise could not be estimated due to the
uncertainties resulting from the bankruptcy filing.
DERIVATIVE FINANCIAL INSTRUMENTS
Hawaiian utilizes heating oil forward contracts in an effort to manage market
risks and hedge its financial exposure to fluctuations in its aircraft fuel
costs. Hawaiian employs a strategy whereby heating oil contracts may be used to
hedge up to 50% of Hawaiian's anticipated aircraft fuel needs. At December 31,
2003, Hawaiian held forward contracts to purchase barrels of heating oil in the
aggregate notional amount of $1.6 million through March 2004.
As of January 1, 2001, Hawaiian adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which established accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Hawaiian measures fair value of its derivatives based on quoted
market prices. Derivatives that are not designated as hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivatives are either offset
against the change in the fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is immediately recognized in earnings as a
component of non-operating income (loss). Such amounts were not material in any
year presented.
During the year ended December 31, 2003, Hawaiian ceased hedge accounting on its
derivative instruments, and recognized realized and unrealized net gains of $1.0
million as a component of non-operating income (expense) related to the
derivative instruments not designated as hedges. For the years ended December
31, 2003, 2002 and 2001, Hawaiian realized net gains (losses) of $1.9 million,
$(0.6) million, and $(1.7) million as a component of aircraft fuel expense on
liquidated contracts designated as hedges. Based upon Hawaiian's derivative
positions as of December 31, 2002, realized gains of $0.8 million and unrealized
gains of $1.1 million were recognized as other comprehensive income in the
balance sheet as of December 31, 2002. Such gains were reclassified from
accumulated other comprehensive income to operations during the year ended
December 31, 2003 when the hedged fuel expenses were recognized.
F-45
SALES COMMISSIONS
Commissions from the sale of passenger traffic are recognized as expense when
the transportation is provided and the related revenue is recognized. The amount
of sales commissions not yet recognized as expense is included in prepaid
expenses and other current assets in the accompanying balance sheets.
ADVERTISING COSTS
Hawaiian expenses the costs of advertising as incurred. Advertising expense was
$4.6 million, $8.0 million and $6.3 million for the years ended December 31,
2003, 2002 and 2001, respectively.
STOCK OPTION PLANS
Hawaiian accounts for stock options issued by Hawaiian prior to the corporate
restructuring discussed in Note 4, and for stock options issued subsequent to
the corporate restructuring by Holdings related to Hawaiian's participation in
the stock-based compensation plans of Holdings, 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.
Hawaiian 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 Hawaiian 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 income (loss) if Hawaiian had
accounted for its employee stock options and awards granted using the fair value
method prescribed by SFAS 123 for the years ended December 31, 2003, 2002 and
2001. The fair value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model. See Note 13 for the assumptions used
to compute the pro forma amounts.
2003 2002 2001
-------- -------- ------
Net income (loss):
As reported $(49,513) $(57,445) $5,069
Less: Total stock based employee compensation
expense determined under the fair value
method for all awards 376 849 1,067
-------- -------- ------
Pro forma $(49,889) $(58,294) $4,002
======== ======== ======
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those
estimates.
F-46
Material estimates that are particularly susceptible to significant change
relate to the determination of asset impairment, air traffic liability, frequent
flyer liability and the amounts reported for accumulated pension and other
postretirement benefit obligations. Management believes that such estimates have
been appropriately established in accordance with accounting principles
generally accepted in the United States.
RECLASSIFICATIONS
Certain prior year amounts were reclassified to conform to the 2003
presentation. Such reclassifications had no effect on previously reported
financial condition and/or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, Hawaiian adopted SFAS No. 146, "Accounting for Costs
Associated with Disposal or Exit Activities" ("SFAS No. 146"). This Statement
supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires
that liabilities for the costs associated with exit or disposal activities be
recognized when the liabilities are incurred, rather than when an entity commits
to an exit plan, for plans initiated after December 31, 2002. This Statement
changes the timing of the liability and expense recognition related to exit or
disposal activities, but not the ultimate amount of such expenses. The adoption
of SFAS No. 146 had no effect on Hawaiian's results of operations or balance
sheet during the year ended December 31, 2003.
Effective January 1, 2003, Hawaiian also adopted the recognition and measurement
provisions of Financial Accounting Standards Board ("FASB") Interpretation 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified. The adoption of FIN 45 had no effect on
Hawaiian's results of operations or balance sheet during the year ended December
31, 2003. FIN 45 also expands the disclosures required to be made by a guarantor
about its obligations under certain guarantees that it has issued. The
disclosures required by FIN 45 are provided in Note 14.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which was amended by FIN 46R issued in
December 2003. This interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) for which
the equity investors lack an essential characteristic of a controlling financial
interest. Hawaiian has not identified any entities that would require
consolidation under FIN 46.
4. CORPORATE RESTRUCTURING
On August 29, 2002, Hawaiian was restructured into a holding company structure,
whereby Hawaiian became a wholly owned subsidiary of Holdings, a Delaware
corporation, and the shareholders of Hawaiian, as described in more detail
below, exchanged their Hawaiian shares for Holdings shares on a one-for-one
basis and became shareholders of Holdings (the "Corporate Restructuring"). The
shareholders of Holdings then had substantially the same rights, privileges and
interests with respect to Holdings as they had with respect to Hawaiian
immediately prior
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to the Corporate Restructuring, except for any such differences that arose from
differences between Delaware and Hawaii law.
In connection with the Corporate Restructuring, Airline Investors Partnership,
L.P., or AIP, the majority shareholder of Hawaiian prior to the Corporate
Restructuring, was restructured into a limited liability company called AIP LLC.
As part of the AIP restructuring, Holdings 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 Holdings common stock that AIP owned of Hawaiian common stock immediately
prior to the exchange. Immediately after the AIP restructuring, Holdings
acquired the remaining outstanding shares of Hawaiian common stock and all of
the shares of Hawaiian special preferred stock, with each of these shares being
converted into one share of Holding's common stock. After the completion of the
Corporate Restructuring, the shareholders of Holdings held the same relative
percentage of Holdings common stock as they did of Hawaiian common and special
preferred stock immediately prior to the Corporate Restructuring.
In addition, Holdings assumed sponsorship of the then-existing Hawaiian stock
option plans. As a result, the outstanding options became exercisable or
issuable upon the same terms and conditions as were in effect immediately prior
to the completion of the Corporate Restructuring, except that shares of Holdings
common stock would be issued upon the exercise or issuance of these options
instead of Hawaiian common stock. Furthermore, each pilot participant eligible
to receive a share of Hawaiian common stock under the Hawaiian pilots' 401(k)
plan and the 2001 letter of agreement with the Hawaiian pilots became eligible
to receive, on the same terms and conditions as were in effect immediately prior
to the Corporate Restructuring, one share of Holdings common stock instead.
As part of the Corporate Restructuring, Holdings also issued to AIP LLC and each
of Hawaiian's three labor unions having the right to nominate individuals to the
Holdings board of directors, a number of shares of a corresponding series of
Holdings special preferred stock equal to the number of shares of Hawaiian
special preferred stock that they held immediately prior to the corporate
restructuring. In addition, the existing stockholders agreement among Hawaiian,
AIP and the three labor unions having board nomination rights was amended and
restated to make Holdings 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 Holdings 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.
Finally, immediately after the Corporate Restructuring was completed, an
amendment to the rights agreement between Hawaiian and the rights agent, which
was previously approved by the Hawaiian board of directors, also became
effective. This amendment essentially rendered non-exercisable the rights
attached to each share of Hawaiian common stock that were issued pursuant to the
rights agreement.
The Corporate Restructuring had no impact on Hawaiian's financial statements. As
more fully discussed in Note 2, on May 16, 2003, the Bankruptcy Court issued an
order granting the Trustee Motion, which provided the Trustee with the authority
to operate Hawaiian's business. Holdings continues to own 100% of the
outstanding common stock of Hawaiian; however has no authority over the Trustee
or Hawaiian.
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5. STABILIZATION AND SUPPLEMENTAL APPROPRIATIONS ACTS
On September 22, 2001, President Bush signed into law the Air Transportation
Safety and System Stabilization Act (the "Stabilization Act"), which for all
U.S. airlines and air cargo carriers (collectively, air carriers) provided for,
among other things, $5 billion in compensation for direct losses (including lost
revenue) incurred as a result of the federal ground stop order and for
incremental losses incurred through December 31, 2001 as a direct result of the
September 11, 2001 terrorist attacks. Under the Stabilization Act, Hawaiian
received $24.9 million and $5.2 million during the years ended December 31, 2001
and 2002, respectively, totaling $30.1 million. Hawaiian recognized $30.8
million during the year ended December 31, 2001 as a special credit to operating
expenses for its estimated allocation of proceeds under the Stabilization Act.
In the year ended December 31, 2002, Hawaiian recorded a charge of $0.7 million
based on the Department of Transportation's final determination of Hawaiian's
compensation under the Stabilization Act.
On April 16, 2003, President Bush signed into law the Emergency Wartime
Supplemental Appropriations Act (the "Supplemental Appropriations Act"), a
supplemental appropriations bill that included reimbursement to U.S. air
carriers for their proportional share of passenger security and air carrier
security fees paid or collected by U.S. air carriers as of the date of enactment
of the legislation, together with other items. Among other provisions, the
Supplemental Appropriations Act provided (a) $2.3 billion for reimbursement of
airline security fees, both the passenger and the air carrier security fees,
which had been paid or collected by the carriers as of the date of enactment;
(b) that passenger security fees would not be imposed during the period
beginning June 1, 2003 and ending September 30, 2003; (c) $100 million to
compensate carriers for the direct costs associated with installing strengthened
flight deck doors and locks; and (d) the aviation war risk insurance provided by
the government was extended for one year to August 2004. On May 15, 2003,
Hawaiian received and recognized as a special credit to operating expenses $17.5
million for reimbursement of airline security fees under the Supplemental
Appropriations Act.
6. REORGANIZATION ITEMS
Reorganization items, net represents amounts incurred as a direct result of
Hawaiian's Chapter 11 filing and are presented separately in the statement of
operations. Reorganization items, net for the year ended December 31, 2003
consists of the following:
Deficiency claims and other lease rejection charges $ 96,915
Professional fees 14,026
Interest on accumulated cash balances (728)
Other 4,850
--------
Total reorganization items, net $115,063
========
As further discussed in Note 2, Hawaiian has reached agreements with Ansett and
ILFC, which together lease Hawaiian 11 Boeing 767 aircraft, on revised long-term
leases, which have been approved by the Bankruptcy Court. The revised leases
provide Hawaiian with significant savings in monthly aircraft rentals, but also
result in deficiency claims for the lessors in Hawaiian's bankruptcy case.
Additionally, Hawaiian cancelled the delivery of two Boeing 767 aircraft
scheduled for delivery in 2003 and returned two Boeing 717 aircraft to BCC
Leasing in late 2003 and early 2004. These cancellations and lease returns will
also result in deficiency claims in Hawaiian's bankruptcy case.
F-49
Under the terms of the revised lease agreements with Ansett on seven Boeing 767
aircraft, Hawaiian surrendered lease deposits totaling $5.8 million and agreed
that Ansett's deficiency claims related to the renegotiation of the leases under
the Section 1110 process would be $91.1 million. The agreed deficiency claims
have been classified as Liabilities Subject to Compromise in the accompanying
balance sheet, and it is anticipated that they will be settled under a plan of
reorganization to be approved by the Bankruptcy Court. Hawaiian has not agreed
on the value of the deficiency claims related to the renegotiated leases with
ILFC for four Boeing 767 aircraft, the two cancelled deliveries of Boeing 767
aircraft, or the two returned Boeing 717 aircraft. Accordingly, no amounts have
been recorded for such deficiency claims, the impact of which cannot be
estimated by Hawaiian. However, such claims are material.
7. LIABILITIES SUBJECT TO COMPROMISE
Under the Bankruptcy Code, pre-petition obligations of Hawaiian generally may
not be enforced, and any actions to collect pre-petition indebtedness are
automatically stayed, unless the stay is lifted by the Bankruptcy Court.
Hawaiian has received approval from the Court to (a) pay certain pre-petition
and post-petition employee wages, salaries, benefits and other employee
obligations; (b) pay vendors and other providers in the ordinary course for
goods and services received from and after the Petition Date; (c) honor customer
service programs, including the HawaiianMiles program and ticketing policies;
(d) honor obligations arising prior to the Petition Date related to Hawaiian's
interline, clearinghouse, code sharing and other similar agreements; and (e) pay
certain pre-petition taxes and fees, including transportation excise taxes,
payroll taxes and passenger facility charges. Substantially all other
pre-petition liabilities not mentioned above have been classified as Liabilities
Subject to Compromise in the accompanying balance sheet. It is anticipated that
most of the Liabilities Subject to Compromise will be settled under a plan of
reorganization to be approved by the Bankruptcy Court. The following table
summarizes the components of Liabilities Subject to Compromise as of December
31, 2003. Adjustments to these liabilities may result from negotiations,
payments authorized by Bankruptcy Court order, additional rejection of executory
contracts, including leases, or other events.
Debt $ 1,527
Capital leases 2,370
Accounts payable 36,554
Accrued liabilities 2,956
Deficiency claims 91,125
--------
Total liabilities subject to compromise $134,532
========
Hawaiian filed schedules with the Bankruptcy Court setting forth the assets and
liabilities of Hawaiian as of the Petition Date. The deadline for filing proofs
of claim with the Bankruptcy Court was January 26, 2004, with a limited
exception for federal government entities, including the Internal Revenue
Service, which have until June 30, 2004 to file proofs of claim. As is typical
in reorganization cases, differences between amounts scheduled by the debtor and
claims by creditors are being investigated and resolved in connection with the
claims resolution process. The aggregate amount of claims filed with the
Bankruptcy Court totals approximately $573 million. Of this amount,
approximately $184 million relates to claims associated with renegotiated or
rejected aircraft leases and related maintenance agreements. Ansett has filed a
proof of claim in the amount of approximately $110 million, of which
approximately $97 million is undisputed and has been accrued as discussed in
Note 6. BCC Leasing, or its agents, has filed two proofs of claim totaling
approximately $40 million related to the rejection of lease agreements. Wells
Fargo Bank, as owner trustee, acting on behalf of a leasing company, has filed a
proof of claim in the amount of approximately $23 million arising from the
rejection of lease agreements for two DC-10 aircraft. Finally, American
F-50
Airlines has filed a proof of claim in the amount of approximately $11 million
arising from rejection of lease and maintenance agreements for five DC-10
aircraft. However, the above amount does not include claims expected to be made
by ILFC, which has filed two proofs of claim in an undetermined amount, or by
affiliates of Boeing related to the anticipated renegotiation of the lease terms
of the three Boeing 767 and 11 Boeing 717 aircraft still in Hawaiian's fleet.
With respect to the non-lease related claims, Hawaiian believes that many of
these claims are invalid because they are duplicative, are based upon
contingencies that have not occurred, or are otherwise overstated. Differences
in amount between claims filed by creditors and liabilities shown in Hawaiian's
records are being investigated and resolved in connection with the claims
resolution process. That process has commenced and, in light of the number of
claims asserted, will take significant time to complete. For these reasons, the
ultimate number and allowed amounts of such claims cannot yet be determined.
8. LEASES
AIRCRAFT LEASES
At December 31, 2003 and 2002, Hawaiian leased all 26 and 32, respectively, of
its aircraft under long-term operating leases. The aircraft fleet in service was
as follows:
AIRCRAFT TYPE 2003 2002
- ------------- ---- ----
B-767 14 11
B-717 12 13
DC-10 -- 8
--- ---
Total 26 32
=== ===
In January 2004, Hawaiian returned one Boeing 717 aircraft to the lessor.
OTHER LEASES
Hawaiian leases office space for its headquarters, airport facilities, ticket
offices and certain ground equipment under various leases with terms through
2013.
GENERAL
Rent expense for aircraft, office space, real property and other equipment and
aircraft parts during 2003, 2002, and 2001 was $126.7 million, $104.8 million,
and $53.6 million, respectively, net of sublease rental income.
The following table sets forth the scheduled future minimum lease commitments
under operating and capital leases for Hawaiian as of December 31, 2003. This
table reflects the revised terms of Hawaiian's leases with Ansett and ILFC,
which were renegotiated during 2003, and the original terms of Hawaiian's leases
with BCC Leasing, which have not been renegotiated. The tables does not include
any amounts for the DC-10 leases that were rejected as of March 21, 2003, the
two Boeing 717 aircraft that were rejected during 2003 and returned to the
lessor in December 2003 and January 2004, or the deficiency claims associated
with leases renegotiated or rejected by Hawaiian subsequent to the bankruptcy
filing.
F-51
OPERATING CAPITAL
LEASES LEASES
---------- -------
2004 $ 108,283 $1,227
2005 104,334 504
2006 104,951 242
2007 105,153 137
2008 108,903 102
Thereafter 1,079,810 836
---------- ------
Total minimum lease payments $1,611,434 3,048
==========
Less amount representing interest (rates
ranging from 8.00% to 12.72%) 678
------
Present value of capital lease obligations $2,370
======
Hawaiian's capital lease obligations are included in liabilities subject to
compromise as of December 31, 2003.
Hawaiian financed $3.2 million of property and equipment through capital lease
agreements during the year ended December 31, 2001. The net book value of
property held under capital leases as of December 31, 2003 and 2002 totaled $3.4
million and $3.9 million, respectively. Amortization of property held under
capital leases is included in depreciation and amortization expense in the
accompanying statements of operations.
9. DEBT
At December 31, 2003 and 2002, Hawaiian's long-term debt consisted of the
following:
2003 2002
------ -------
Secured obligations due 2003-2007 $1,527 $ 3,036
Current portion -- (2,153)
------ -------
Long-term debt obligations, excluding current portion $1,527 $ 883
====== =======
Hawaiian's long-term debt is included in liabilities subject to compromise as of
December 31, 2003.
Hawaiian's Chapter 11 filing triggered defaults on Hawaiian's debt obligations.
It also 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,
including its obligations under long-term agreements that existed at the
Petition Date.
Cash paid for interest during the years ended December 31, 2003, 2002, and 2001,
was $0.4 million, $1.2 million, and $3.2 million, respectively.
F-52
10. RESTRUCTURING CHARGES
During the fourth quarter of 2002, based on a reduction in passenger demand,
Hawaiian announced capacity reductions in specific transpacific markets.
Hawaiian announced that it would reduce its workforce by approximately 150
employees, or four percent of the total workforce, in an effort to bring its
cost structure in line with current and expected revenues. In addition, Hawaiian
secured voluntary leaves of absence from approximately 60 flight attendants,
reduced work schedules for part-time reservations personnel and decided to leave
certain open positions unfilled. As a result of these actions, for the year
ended December 31, 2002, Hawaiian recorded a restructuring charge of $8.7
million related primarily to the accelerated retirement of its remaining eight
leased DC-10 aircraft. This charge consisted of approximately $10.1 million
related primarily to future lease commitments on the DC-10 aircraft, lease
return conditions and maintenance commitments, severance costs for approximately
150 DC-10 pilots, and a write-down of DC-10 improvements and spare parts,
partially offset by a credit of $1.4 million related to the sale of eight
non-operating DC-9 aircraft and related assets that had been previously written
down.
During the year ended December 31, 2001, Hawaiian recorded a $3.6 million credit
to restructuring charges related to a change in estimate on the return condition
provisions and early termination provisions of the five DC-9 aircraft under
operating leases. The change in estimate was based on renegotiation of the
return provisions with the respective lessors, which concluded in 2001.
Activity related to the restructuring charges for the years ended December 31,
2003, 2002, and 2001, is as follows:
UTILIZATION OF CHARGE
BEGINNING RESTRUCTURING --------------------- REMAINING
RESERVE CHARGES CASH NON-CASH RESERVE
--------- ------------- ------- -------- ---------
Year ended December 31, 2001:
Allowance for future lease
payments, return conditions, and
early termination costs $6,800 $(3,600) $(3,200) $ -- $ --
------ ------- ------- -------- ------
$6,800 $(3,600) $(3,200) $ -- $ --
====== ======= ======= ======== ======
Year ended December 31, 2002:
Write-down of spare parts and
improvements $ -- $ 1,243 $ -- $(1,243) $ --
Allowance for future lease
payments, return conditions, and
early termination costs -- 7,344 -- -- 7,344
Pilot severance costs -- 1,600 -- -- 1,600
------ ------- ------- -------- ------
$ -- 10,187 $ -- $(1,243) $8,944
====== ======= ======== ======
Sale of non-operating DC-9 assets (1,486)
-------
$ 8,701
=======
Year ended December 31, 2003:
Allowance for future lease
payments, return conditions, and
early termination costs $7,344 $ -- $ (120) $ (283) $6,941
Pilot severance costs 1,600 -- (1,389) -- 211
------ ------- ------- -------- ------
$8,944 $ -- $(1,509) $ (283) $7,152
====== ======= ======= ======== ======
On March 21, 2003, the Bankruptcy Court granted an order authorizing Hawaiian to
reject the remaining DC-10 aircraft leases and related maintenance agreements.
As a result, a significant portion of the accrual for future lease
F-53
payments, return conditions, and early termination costs will most likely not be
paid, and the accrual was reclassified to liabilities subject to compromise.
11. INCOME TAXES
The significant components of the income tax provision were:
2003 2002 2001
------- ------- -------
Current
Federal $10,100 $ 5,129 $ 1,683
State 2,844 775 851
------- ------- -------
12,944 5,904 2,534
Deferred
Federal $ -- $(2,172) $ 9,762
State -- (933) 1,474
------- ------- -------
-- (3,105) 11,236
------- ------- -------
Provision for income taxes $12,944 $ 2,799 $13,770
======= ======= =======
Income tax expense in 2003, 2002 and 2001 differs from the "expected" tax
expense (benefit) for that year computed by applying the respective year's U.S.
federal corporate income tax rate to income (loss) before income taxes as
follows:
2003 2002 2001
-------- -------- -------
Computed "expected" tax expense (benefit) $(12,799) $(19,417) $ 6,594
State income taxes, net of federal income tax benefit (1,828) (2,883) 1,067
Change in deferred tax valuation allowance 26,101 28,071 5,331
Amortization of excess reorganization value -- - 807
Other 1,470 (2,972) (29)
-------- -------- -------
$ 12,944 $ 2,799 $13,770
======== ======== =======
F-54
The tax effects of temporary differences that give rise to significant portions
of Hawaiian's deferred tax assets and deferred tax liabilities at December 31,
2003 and 2002 are presented below:
2003 2002
--------- --------
Deferred tax assets:
Accumulated pension and other postretirement
benefits $ 47,768 $ 46,998
Reorganization items 39,923 --
Accrued liabilities 26,085 19,499
Advance on sale of frequent flyer miles 7,720 9,600
Net operating loss carryforwards 3,531 15,528
Other 8,950 7,314
--------- --------
Total gross deferred tax assets 133,977 98,939
Less valuation allowance on deferred tax assets (127,995) (93,655)
--------- --------
Net deferred tax assets 5,982 5,284
--------- --------
Deferred tax liabilities:
Plant and equipment, principally due to
difference in depreciation $ (5,982) $ (5,284)
--------- --------
Total deferred tax liabilities (5,982) (5,284)
--------- --------
Net deferred taxes $ -- $ --
========= ========
Utilization of Hawaiian's deferred tax assets is predicated on Hawaiian being
profitable in 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 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. During the year ended December 31, 2002,
Hawaiian determined that it was no longer more likely than not that any portion
of its deferred tax assets would be realized and recognized a full valuation
allowance on its net deferred tax assets as of the beginning of the year, all
2002 net operating losses, and all items directly impacting other comprehensive
loss (primarily the minimum pension liability). Hawaiian also recognized a full
valuation allowance on all net deferred tax assets recorded during 2003. As a
result, the valuation allowance for deferred tax assets increased by $34.3
million, $39.6 million and $25.5 million during the years ended December 31,
2003, 2002 and 2001, respectively. These increases include amounts in all
periods presented that both impact the provision (benefit) for income taxes and
directly impact other comprehensive loss.
Hawaiian underwent an ownership change in January 1996, as defined under Section
382 of the Internal Revenue Code ("IRC Section 382"). IRC Section 382 places an
annual limitation on the amount of income that can be offset by net operating
loss carryforwards generated in pre-ownership change years. The ownership change
resulted in an annual IRC Section 382 limitation of approximately $1.7 million
plus certain "built-in" income items. This new limitation applies to all net
operating losses incurred prior to the ownership change. As of December 31,
2003, Hawaiian has total net operating loss carryforwards of approximately $10.1
million to offset future taxable income, all of which were generated prior to
Hawaiian's previous bankruptcy. If not utilized to offset future taxable income,
the net operating loss carryforwards will expire between the years 2004 and
2009. Utilization of the net operating loss carryforwards will result in a
reduction in Excess Reorganization Value.
F-55
12. BENEFIT PLANS
Hawaiian sponsors three defined benefit pension plans covering the ALPA,
International Association of Machinists and Aerospace Workers (AFL-CIO) ("IAM")
and other personnel (salaried, Transport Workers Union, Employees of the
Communications Section). The plans for the IAM and other employees were frozen
effective October 1, 1993. As a result of the freeze, there will be no further
benefit accruals. The pilots plan is funded based on minimum Employee Retirement
Income Security Act of 1974 (ERISA) requirements, but not less than the normal
cost plus the 20-year funding of the past service liability. Funding for the
ground personnel plans is based on minimum ERISA requirements. Plan assets
consist primarily of common stocks, government and convertible securities,
insurance contract deposits and cash management and mutual funds.
In addition to providing pension benefits, Hawaiian sponsors two unfunded
defined benefit postretirement medical and life insurance plans. Employees in
Hawaiian's pilot group are eligible for certain medical, dental and life
insurance benefits under one plan if they become disabled or reach normal
retirement age while working for Hawaiian. Employees in Hawaiian's non-pilot
group are eligible for certain medical benefits under another plan if they meet
specified age and service requirements at the time of retirement. On December 8,
2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare Act") was enacted to provide a prescription drug benefit as well
as a federal subsidy to sponsors of certain retiree health care benefit plans.
As allowed by FASB Staff Position No. 106-1, Hawaiian has elected to defer
recognition of the Medicare Act in any measures of accumulated postretirement
benefit obligations and net periodic postretirement benefit costs. Specific
authoritative guidance on the accounting for the federal subsidy is pending and
that guidance, when issued, could require Hawaiian to change previously reported
information. Hawaiian estimates that the Medicare Act will not have a material
impact on postretirement liabilities and benefit costs.
The following tables summarize changes to projected benefit obligations, plan
assets, funded status and amounts included in the accompanying balance sheets as
of December 31, 2003 and 2002:
PENSION BENEFITS OTHER BENEFITS
------------------- -----------------
2003 2002 2003 2002
-------- -------- ------- -------
CHANGE IN PROJECTED BENEFIT OBLIGATIONS
Projected benefit obligation at beginning of year $258,698 $227,157 $26,343 $21,654
Service cost 8,181 7,466 1,576 1,324
Interest cost 17,105 16,342 1,776 1,525
Plan amendments -- 881 -- --
Assumption changes 35,034 14,611 5,960 2,863
Curtailment (2,081) -- (1,367) --
Actuarial (gain) loss (676) 2,880 1,442 (204)
Benefits paid (11,766) (10,639) (1,047) (819)
-------- -------- ------- -------
Projected benefit obligation at end of year 304,495 258,698 34,683 26,343
-------- -------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year 142,869 163,917 -- --
Actual gain (loss) on plan assets 28,070 (15,890) -- --
Employer contribution 3,279 5,481 1,047 819
Benefits paid (11,766) (10,639) (1,047) (819)
-------- -------- ------- -------
Fair value of assets at end of year 162,452 142,869 -- --
-------- -------- ------- -------
F-56
FUNDED STATUS
Funded status - underfunded $(142,043) $(115,829) $(34,683) $(26,343)
Unrecognized actuarial net (gain) loss 140,193 123,959 2,510 (4,941)
Unrecognized prior service cost -- -- 1,360 1,722
--------- --------- -------- --------
Prepaid (accrued) benefit cost at end of year $ (1,850) $ 8,130 $(30,813) $(29,562)
========= ========= ======== ========
PENSION BENEFITS OTHER BENEFITS
--------------------- -------------------------------
2003 2002 2003 2002
--------- --------- -------------- --------------
AMOUNTS RECOGNIZED IN THE ACCOMPANYING
BALANCE SHEETS FUNDED STATUS
Accrued benefit liability $(114,105) $(87,933) $(30,813) $(29,562)
Accumulated other comprehensive loss 112,255 96,063 -- --
--------- -------- -------- --------
Prepaid (accrued) benefit cost at end of year $ (1,850) $ 8,130 $(30,813) $(29,562)
========= ======== ======== ========
WEIGHTED AVERAGE ASSUMPTIONS AT END OF YEAR
Discount rate 6.00% 6.75% 6.00% 6.75%
Expected return on plan assets 9.0% 9.0% Not applicable Not applicable
Rate of compensation increase Various * Various * Not applicable Not applicable
* Compensation for pilots was assumed to increase 9.8% in 2002, 3.5% in 2003,
4.5% in 2004 and after. The rate of compensation increase is not applicable
to the frozen plans.
At December 31, 2003, the health care cost trend rate was assumed to increase by
9.50% for 2004 and decrease gradually to 4.75% over 7 years and remain level
thereafter. At December 31, 2002, the health care cost trend rate was assumed to
increase by 9.5% for 2003 and decrease gradually to 4.75% over 7 years and
remain level thereafter.
Assumption changes, for both pension and other benefits, relate primarily to
reductions in the discount rate used to value the pension obligations as of
December 31, 2003 and 2002, which resulted in a significant increase in the
projected benefit obligation in both years. The curtailment recognized in the
year ended December 31, 2003 resulted from pilot furloughs that occurred during
2003.
The accumulated benefit obligation for Hawaiian's defined benefit pension plans
was $276.4 million and $230.8 million as of December 31, 2003 and 2002,
respectively. To the extent that the accumulated benefit obligation exceeds the
fair value of plan assets, a minimum pension liability must be recognized on the
balance sheet. Accordingly, Hawaiian recognized an additional amount (the
minimum pension liability adjustment) necessary to record the full amount of the
minimum pension liability. Pursuant to SFAS No. 87, "Employers' Accounting for
Pensions", minimum pension liability adjustments are recognized through
accumulated other comprehensive income (loss), rather than through the statement
of operations. The minimum pension liability increased shareholders' deficiency
by $112.3 million and $96.1 million as of December 31, 2003 and 2002,
respectively.
F-57
The following table sets forth the net periodic benefit cost for the years ended
December 31, 2003, 2002, and 2001:
PENSION BENEFITS OTHER BENEFITS
------------------------------ -------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST 2003 2002 2001 2003 2002 2001
- -------------------------- -------- -------- -------- ------- ------ ------
Service cost $ 8,181 $ 7,466 $ 6,166 $ 1,576 $1,324 $ 973
Interest costs 17,105 16,342 15,296 1,776 1,525 1,213
Expected return on plan assets (16,790) (17,271) (16,802) -- -- --
Amortization of prior service cost -- -- -- 227 239 134
Recognized net actuarial (gain) loss 4,763 1,865 758 (50) (490) (765)
Curtailment and termination benefits -- 881 -- (1,232) -- --
-------- -------- -------- ------- ------ ------
Net periodic benefit cost $ 13,259 $ 9,283 $ 5,418 $ 2,297 $2,598 $1,555
======== ======== ======== ======= ====== ======
Assumed health care cost trend rates have a significant impact on the amounts
reported for other benefits. A one-percentage point change in the assumed health
care cost trend rates would have the following effects:
1-PERCENTAGE-POINT 1-PERCENTAGE POINT
INCREASE DECREASE
------------------ ------------------
Effect on total of service and interest cost components $ 429 $ (352)
Effect on postretirement benefit obligation $3,585 $(2,981)
Plan assets consist primarily of equity and fixed income securities. As of
December 31, the asset allocation percentages by category were as follows (in
thousands):
2003 2002
---- ----
U.S. equities 46% 42%
Fixed income 21% 24%
International equities 11% 10%
Other 22% 24%
--- ---
100% 100%
=== ===
Hawaiian develops the expected long-term rate of return assumption based on
historical experience and by evaluating input from the trustee managing the
plan's assets, including the trustee's review of asset class return expectations
by several consultants and economists as well as long-term inflation
assumptions. Hawaiian's expected long-term rate of return on plan assets is
based on a target allocation of assets, which is based on the goal of earning
the highest rate of return while maintaining risk at acceptable levels. The plan
strives to have assets sufficiently diversified so that adverse or unexpected
results from security class will not have an unduly detrimental impact on the
entire portfolio. The target allocation of assets are as follows:
F-58
EXPECTED LONG-TERM RATE
PERCENT TO TOTAL OF RETURN
---------------- -----------------------
U.S. equities 50% 10.0%
Fixed income 20% 5.5%
International equities 15% 10.0%
Other 15% 9.1%
---
100%
===
Hawaiian also sponsors separate deferred compensation plans (401(k)) for its
pilots, flight attendants and ground and salaried personnel. Participating
employer cash contributions are not required under the terms of the pilots'
plan. Hawaiian is required to contribute up to 7.0% of defined compensation
pursuant to the terms of the flight attendants' plan. Contributions to the
flight attendants' plan are funded currently and totaled approximately $2.3
million, $2.2 million and $2.1 million in 2003, 2002, and 2001, respectively.
Hawaiian is also required to contribute a minimum of 4.04%, up to a maximum of
8%, of eligible earnings to the ground and salaried plan for eligible employees
as defined by the plan. Contributions to the ground and salaried 401(k) plan
totaled $3.3 million, $3.5 million and $2.5 million in 2003, 2002, and 2001,
respectively.
13. CAPITAL STOCK AND OPTIONS
AUTHORIZED CAPITAL STOCK
As of December 31, 2003 and 2002, the authorized capital stock of Hawaiian
consists of 60,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock, par value $0.01 per share.
No dividends were paid by Hawaiian during years ended December 31, 2003, 2002,
or 2001.
STOCK COMPENSATION
As part of the collective bargaining agreement negotiated with the ALPA in
December 2000, Hawaiian agreed to distribute 1,685,380 shares of Hawaiian's
common stock on a quarterly basis to the individual 401(k) accounts of ALPA
pilots in Hawaiian's employment during 2001 and 2002. Subsequent to the
Corporate Restructuring, each pilot participant eligible to receive a share of
Hawaiian common stock became eligible to receive, on the same terms and
conditions as were in effect immediately prior to the Corporate Restructuring,
one share of Holdings common stock instead. In 2001, 518,910 shares,
representing the number of shares required to be distributed in respect of the
first, second and third quarters of 2001, were distributed to Vanguard Group,
Inc. as trustee for the Hawaiian Airlines, Inc. Pilots' 401(k) Plan. In 2002,
1,051,214 shares, required for the fourth quarter of 2001 and the first, second
and third quarters of 2002, were distributed to Vanguard Group, Inc. as trustee.
The distribution for the quarter ended December 31, 2002, consisting of 105,776
shares, was made on March 14, 2003. Hawaiian recognized compensation expense
related to the stock distribution of $2.2 million and $2.6 million for the years
ended December 31, 2002 and 2001, respectively.
F-59
STOCK OPTION PLANS
Under the 1994 Stock Option Plan, 600,000 shares of Common Stock were reserved
for grants of options to officers and key employees of Hawaiian. Under the 1996
Stock Incentive Plan, as amended, 4,500,000 shares of Common Stock were reserved
for issuance of discretionary grants of options to Hawaiian's employees.
Hawaiian also had a 1996 Nonemployee Director Stock Option Plan under which
500,000 shares of Common Stock were reserved for issuance and grants of options
to nonemployee members of the Board of Directors. Following the Corporate
Restructuring, Holdings assumed sponsorship of the then-existing Hawaiian stock
option plans. As a result, the outstanding options became exercisable or
issuable upon the same terms and conditions as were in effect immediately prior
to the completion of the Corporate Restructuring, except that shares of Holdings
common stock would be issued upon the exercise or issuance of these options
instead of Hawaiian common stock. As a result, Hawaiian currently has no stock
options outstanding.
Stock options were granted with an exercise price equal to the common stock's
fair market value at the date of grant, generally vested over a period of four
years and expired, if not previously exercised, ten years from the date of
grant. Stock option activity for Hawaiian during the periods indicated is as
follows:
WEIGHTED
SHARES OF COMMON STOCK AVERAGE OF
------------------------- EXERCISE PRICE
AVAILABLE FOR UNDER OF SHARES
OPTIONS PLAN UNDER PLAN
------------- --------- --------------
Balance at December 31, 2000 1,843,500 2,629,000 $3.05
Granted
1996 Stock Incentive Plan (600,000) 600,000 2.56
Exercised
1994 Stock Option Plan -- (15,000) 1.62
Forfeited
1996 Stock Incentive Plan 180,000 (180,000) 2.81
1996 Nonemployee Director Stock
Option Plan 16,000 (16,000) 3.60
--------- --------- -----
Balance at December 31, 2001 1,439,500 3,018,000 $2.97
=====
Granted
1996 Stock Incentive Plan (150,000) 150,000 2.95
1996 Nonemployee Director Stock
Option Plan (164,000) 164,000 3.26
Exercised
1996 Stock Incentive Plan -- (20,000) 2.06
Forfeited
1996 Stock Incentive Plan 50,000 (50,000) 3.25
--------- ---------
F-60
WEIGHTED
SHARES OF COMMON STOCK AVERAGE OF
-------------------------- EXERCISE PRICE
AVAILABLE FOR UNDER OF SHARES
OPTIONS PLAN UNDER PLAN
------------- ---------- --------------
Balance at August 29, 2002 1,175,500 3,262,000 $2.96
=====
Corporate Restructuring, options assumed by Holdings (1,175,500) (3,262,000)
---------- ----------
Balance at December 31, 2002 -- --
========== ==========
As of December 31, 2002, vesting requirements and exercise periods under each
respective plan are as follows:
VESTING EXERCISE PERIOD
----------------- -----------------
1994 Stock Option Plan Fully vested Through 2006
1996 Stock Incentive Plan Various from 2003 Various from 2003
through 2006 through 2012
1996 Nonemployee Director Stock Option Plan Through 2003 Various from 2003
through 2012
At December 31, 2001, 1,738,000 options were exercisable, with a
weighted-average exercise price of $3.16 per share.
The per share weighted-average fair value of stock options granted during 2002
and 2001 was $1.62 and $1.57, respectively, on the date of grant using a Black
Scholes option-pricing model with the following weighted-average assumptions:
2002 2001
-------------- --------------
Expected dividend yield 0.00% 0.00%
Expected volatility 55.00% 55.00%
Risk-free interest rate 3.54% to 5.29% 4.95% to 5.41%
Expected life Up to 6 years Up to 7 years
14. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION AND CONTINGENCIES
From time to time, Hawaiian is subject to legal proceedings arising in the
normal course of its operations. Management does not anticipate that the
disposition of such proceedings will have a material effect upon Hawaiian's
financial statements. Furthermore, Hawaiian's Chapter 11 filing automatically
enjoined, or stayed, the
F-61
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.
Included in other liabilities and long-term deposits as of December 31, 2003 and
accrued liabilities as of December 31, 2002, is $21.5 million and $18.7 million,
respectively, for certain non-passenger related excise taxes, and related
interest, resulting from tax positions taken through June 30, 2003. No amounts
for potential penalties have been accrued, as management believes they are
neither probable of being asserted and assessed nor estimable. The related tax
returns and tax filings are currently under audit by the Internal Revenue
Service. Results of audit assessments by the taxing authorities could result in
penalties, which could have a material effect on Hawaiian's financial position,
results of operations and liquidity.
The Internal Revenue Service is currently also in the process of examining
Hawaiian's income tax returns for years through 2002. Hawaiian cannot currently
determine the impact of any potential assessments by the Internal Revenue
Service on Hawaiian's financial position, results of operations and liquidity.
Hawaiian and Rolls Royce GmbH ("Rolls Royce") dispute whether Hawaiian is
required to pay for certain maintenance services that were provided under two
interrelated maintenance support agreements. Rolls Royce contends it is entitled
to payment in the amount of approximately $1.2 million. Hawaiian contends that
no additional payment is required under the agreements for those services. In
December 2003, the parties agreed to binding arbitration of the dispute. The
parties have selected an arbitrator and tentatively scheduled an arbitration
date in July 2004. No amounts have been accrued for this dispute.
LOS ANGELES AIRPORT OPERATING TERMINAL
On December 1, 1985, Hawaiian entered into an interline agreement with other
airlines, which was amended and restated as of September 1, 1989 for, among
other things, the sharing of costs, expenses and certain liabilities related to
the acquisition, construction and renovation of certain passenger terminal
facilities at the Los Angeles International Airport ("Facilities"). Current
tenants and participating members of LAX Two Corporation (the "Corporation"), a
mutual benefit corporation, are jointly and severally obligated to pay their
share of debt service payments related to Facilities Sublease Revenue Bonds
issued to finance the acquisition, construction and renovation of the Facilities
which totaled $111.9 million at completion. The Corporation leases the
Facilities from the Regional Airports Improvement Corporation under a lease
agreement. In addition, the Corporation is also obligated to make annual
payments to the city of Los Angeles for charges related to its terminal ground
rental. All leases of the Corporation are accounted for as operating leases with
related future commitments as of December 31, 2003 amounting to approximately
$200.3 million.
GENERAL GUARANTEES AND INDEMNIFICATIONS
Hawaiian is the lessee under many real estate leases. It is common in such
commercial lease transactions for Hawaiian as the lessee to agree to indemnify
the lessor and other related third parties for tort liabilities that arise out
of or relate to Hawaiian's use or occupancy of the leased premises. In some
cases, this indemnity extends to related liabilities arising from the negligence
of the indemnified parties, but usually excludes any liabilities caused by their
gross negligence or willful misconduct. Additionally, Hawaiian typically
indemnifies such parties for any environmental liability that arises out of or
relates to its use of the leased premises. Hawaiian expects that it would be
covered by insurance (subject to deductibles) for most tort liabilities and
related indemnities described above
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with respect to real estate that is leases. Hawaiian cannot estimate the
potential amount of future payments, if any, under the foregoing indemnities and
agreements.
15. STOCK REPURCHASES
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
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 offer 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.
In addition to the litigation commenced by the Trustee as described in Note 2,
the Securities and Exchange Commission has also opened a formal investigation of
the tender offer.
16. RELATED PARTY TRANSACTIONS
Subsequent to the Corporate Restructuring, Hawaiian paid certain expenses on
behalf of Holdings, generally relating to Holdings' obligations as a public
company. In addition, Hawaiian transferred $500,000 to Holdings immediately
prior to Hawaiian's bankruptcy filing. These transactions resulted in an
aggregate receivable from Holdings of $0.9 million and $1.6 million as of
December 31, 2003 and 2002, respectively, which was fully reserved by Hawaiian
as of December 31, 2003.
Included in other operating expenses for the years ended December 31, 2003 and
2002 is $0.2 million and $2.6 million, respectively, related to a services
agreement with 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. John W. Adams, Hawaiian's former Chairman of its Board of
Directors and Chief Executive Officer, and the current Chairman of the Board of
Directors and Chief Executive Officer of Holdings, is also the president of
Smith Management. Subsequent to Hawaiian's Chapter 11 filing, payments to Smith
Management under this agreement were suspended.
Included in other operating expenses for the year ended December 31, 2003 is
$0.3 million related to a consulting agreement with Todd G. Cole, a director of
Hawaiian through May 15, 2003, pursuant to which Mr. Cole provided executive
consulting services regarding fleet utilization, scheduling and other
operational matters for a fee of $20,833 per month from May 1, 2002 through
October 31, 2002 and a single payment of $125,800 due January 6, 2003. The
consulting agreement was extended through December 31, 2002, during which Mr.
Cole received a fee of $41,666 per month and accrued payments during the initial
term totaling $125,000 on October 31, 2002. The consulting agreement was
terminated on December 31, 2002.
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From May 19, 2000 through April 25, 2003, Hawaiian invested $3.0 million in
certificates of deposit with Liberty Bank, SSB, of Austin, Texas. Liberty Bank
is indirectly majority owned by John W. Adams and another individual. Edward Z.
Safady and Thomas J. Trzanowski, both former members of Hawaiian's Board of
Directors, are employees and/or directors of Liberty Bank, SSB.
17. CONCENTRATION OF BUSINESS RISK
Hawaiian's scheduled service operations are primarily focused on providing air
transportation service to, from, or throughout the Hawaiian Islands. Therefore,
Hawaiian's operations, including its ability to collect its outstanding
receivables, are significantly affected by economic conditions in the State of
Hawaii and by other factors affecting the level of tourism in Hawaii. In 2003
and 2002, one particular Hawaii-based wholesaler constituted approximately 6%
and 15% of the Hawaiian's total operating revenue, respectively.
18. SEGMENT INFORMATION
Principally all operations of Hawaiian 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 its various markets.
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 the
components based on products and services constituting one operating segment. As
Hawaiian offers only one service (i.e., air transportation), management has
concluded that it has only one segment. Hawaiian's principal line of business,
the scheduled and chartered transportation of passengers, constitutes more than
90% of its operating revenue. The following table delineates scheduled and
chartered passenger revenue of Hawaiian:
2003 2002 2001
-------- -------- --------
Transpacific $408,349 $341,662 $300,304
Interisland 197,629 180,391 176,058
South Pacific 20,829 19,940 20,410
Overseas Charter 23,070 46,480 75,632
-------- -------- --------
$649,877 $588,473 $572,404
======== ======== ========
19. SUBSEQUENT EVENTS
Subsequent to the issuance of the 2003 financial statements of Hawaiian, the
following events have occurred:
JOINT PLAN OF REORGANIZATION
On September 9, 2004, Holdings, the Trustee, the Official Committee of Unsecured
Creditors, 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 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 Holdings to retain its
existing equity interest in Hawaiian, although Holdings will be required to
issue shares of its common stock to creditors of Hawaiian to
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help fund the Joint Plan, resulting in a dilution of the ownership interest of
existing common shareholders of Holdings. 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. 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
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 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):
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ANTICIPATED TREATMENT
----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ---------------------------------------------------------------------------------------------------------------------
Unclassified Unsecured Priority Tax In cash, paid in up to twenty-four
Claims (24) equal quarterly installments. $ 1.2 $30.1 $ --
Class 1 Secured Priority Tax Claims In cash, paid in accordance with
(Unimpaired) the legal, equitable and
contractual rights of the holder of
the claim. 1.0 -- --
Class 2 Other Secured Claims Generally, at the election of
(Unimpaired) Hawaiian, (i) cash, (ii) surrender
of the collateral securing the
claim, (iii) cure and
reinstatement, or (iv) retention by
the holder of the claim of its
legal, equitable and contractual
rights. -- 2.8 --
Class 3 Other Priority Claims Cash 0.1 -- --
(Unimpaired)
Class 4(1) Unsecured Claims not At the election of the holder,
(Impaired) included in a category either (a) cash in an amount equal
below. to fifty percent (50%) of the
allowed claim and common stock of
Holdings equal to fifty percent
(50%) of the allowed claim, based
on a stock value of $6.16 per
share; or (b) cash equal to 100% of
the allowed claim. 36.3 -- --
Class 5(2) Lease Related Claims Cash in an amount equal to fifty
(Impaired) percent (50%) of the claim and
common stock of Holdings 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 0.8 -- --
(Impaired)
- ----------
(1) The amount and classification of the claim filed by American Airlines, Inc.
("AA") are in dispute. AA has filed a claim for approximately $11 million, which
it contends belongs to Class 4. Hawaiian disputes a substantial portion of AA's
claim, but the full $11 million is included above. Hawaiian also contends that a
significant portion of AA's claim should be categorized in Class 5.
(2) To the extent a portion of AA's claim is categorized in Class 5, AA will not
receive cash or stock. It will receive a 15-year fully amortizing promissory
note, which bears interest at the rate of 6.5% per annum. Because all of AA's
claim is included in Class 4 above, pending resolution of the classification
dispute, none of that claim is included in Class 5.
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ANTICIPATED TREATMENT
-----------------------------
TREATMENT UNDER INSTALLMENT COMMON
CLASS CLASSIFICATION THE JOINT PLAN CASH PAYMENTS STOCK
- ----------------------------------------------------------------------------------------------------------------------
Class 7 (Impaired/ Equity Interests Holders of equity interests in
Unimpaired) Hawaiian shall retain their
interests in the reorganized
Hawaiian, without 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
=============================
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, Holdings and RC Aviation entered into a Restructuring Support
Agreement, dated as of August 26, 2004 (the "Restructuring Support Agreement"),
pursuant to which Holdings 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, Holdings 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 Holdings, or the proceeds of
the sale of a new series of Holdings' preferred stock in Holdings to RC
Aviation. Holdings 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 Holdings 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.
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AIRCRAFT LEASES
In 2004, Ansett filed an amended proof of claim for $89.0 million for the leases
renegotiated during 2003. Additionally, Hawaiian agreed to Ansett's $18.5
million deficiency claim, net of a surrendered lease security deposit of $0.3
million, for the cancelled delivery of one Boeing 767 aircraft in 2003. As a
result of these agreements, Hawaiian recognized reorganization expense of $16.4
million during the years ended December 31, 2004.
In 2004, Hawaiian, BCC Leasing, and Holdings entered into a comprehensive
agreement that provided for the assumption and modification of aircraft lease
terms for three Boeing 767 and eleven Boeing 717 aircraft. Under the terms of
the agreement, and in settlement of all claims with respect to the lease
revisions, cancelled delivery of one Boeing 767 aircraft in 2003, and rejection
of two Boeing 717 aircraft in late 2003 and early 2004, Hawaiian agreed that the
BCC Leasing deficiency claim would be $66.5 million and Hawaiian's monthly
rentals on the eleven Boeing 717 aircraft leased from BCC Leasing were
increased. As a result of this agreement, Hawaiian recognized reorganization
expense of $96.6 million during the year ended December 31, 2004, consisting of
the agreed-upon claim, the present value of the additional monthly rental
payments, and the write-off of deferred aircraft rent and financing costs
related to the previous lease agreements.
INCOME TAXES
On June 30, 2004, the Internal Revenue Service (the "IRS") filed a proof of
claim in the amount of $128.9 million, resulting from its audit of Hawaiian that
commenced during 2003, covering taxes for income, fuel excise, and other
matters. Of that amount, $88.4 million was asserted by the IRS to constitute a
priority tax claim under section 507(a)(8) of the Bankruptcy Code. The priority
claim consisted of two components: (1) excise taxes on aviation fuel consumed on
flights over international waters, which Hawaiian claimed were not subject to
the United States fuel excise tax; and (2) income adjustments for the years 2001
and 2002 related primarily to the deductibility of payments for
power-by-the-hour maintenance agreements, tax revenue recognition relative to
certain components of the air traffic liability, deductions taken by Hawaiian in
2001 for certain DC-9 aircraft, and tax change in ownership limitations under
IRC Section 382 on certain net operating loss carryforwards utilized in 2001.
The balance of the claim represented penalties proposed by the IRS arising from
the fuel excise tax matter referred to above. The IRS subsequently amended its
claim on several occasions.
Hawaiian and the IRS settled the disputes regarding the deductibility of
payments for power-by-the-hour maintenance agreements, tax revenue recognition
relative to certain components of the air traffic liability, and the deductions
taken by Hawaiian in 2001 for the DC-9 aircraft. On February 1, 2005, the
Bankruptcy Court ruled that the IRS's claim for unpaid fuel excise tax and
interest of $21.8 million was a valid claim, but that the IRS's penalty claim
for nonpayment of the fuel excise tax was not a valid claim. Additionally, on
February 24, 2005, the Bankruptcy Court ruled in favor of Hawaiian with respect
to the net operating loss issue.
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Hawaiian had fully reserved for the unpaid fuel excise tax and interest during
each period the related tax position had been taken. Additionally, under the
applicable provisions of the Bankruptcy Code, amounts due to the IRS by a debtor
in a bankruptcy proceeding are generally payable in up to twenty-four equal
quarterly installments. As a result, after considering the additional deductions
available to Hawaiian in its 2003 and 2004 tax returns arising from the income
adjustments agreed to with the IRS for the two years under audit, the results of
the IRS audit of Hawaiian's 2001 and 2002 tax returns did not have a material
impact on Hawaiian's financial position, results of operations and liquidity.
The IRS has begun an examination of Hawaiian's income tax returns for 2003.
Hawaiian cannot currently determine the impact of any potential assessments by
the IRS on Hawaiian's financial position, results of operations and liquidity.
Hawaiian believes that the IRS will assert similar claims with regard to
deductibility of payments for power-by-the-hour maintenance agreements and tax
revenue recognition relative to certain components of the air traffic liability
as were asserted during the audits of Hawaiian's 2001 and 2002 tax returns. No
amounts have been accrued for these items, as management believes the ultimate
liability, if any, is neither probable nor estimable.
ADAMS LITIGATION
On December 17, 2004, Hawaiian and John W. Adams, AIP, Airline Investors
Partnership, L.P. and Smith Management (together, 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.
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HAWAIIAN HOLDINGS, INC.
(PARENT COMPANY OF DEBTOR)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS)
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- --------------------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2003 $1,305 -- -- $1,305 (b) --
====== ====== === ====== ======
2002 $1,305 401 -- 401 (a) $1,305
====== ====== === ====== ======
2001 $ 500 1,320 -- 515 (a) $1,305
====== ====== === ====== ======
ALLOWANCE FOR OBSOLESCENCE OF FLIGHT
EQUIPMENT EXPENDABLE PARTS AND
SUPPLIES
2003 $1,037 $ -- -- $1,037 (e) --
====== ====== === ====== ======
2002 $7,501 692 (c) -- 7,156 (d) $1,037
====== ====== === ====== ======
2001 $8,004 -- -- 503 $7,501
====== ====== === ====== ======
- ----------
(a) Doubtful accounts written off, net of recoveries.
(b) Includes the doubtful accounts written off, net of recoveries for $65 from
January 1, 2003 to March 31, 2003 and elimination of $1,240 upon
consolidation of Hawaiian on April 1, 2003.
(c) Restructuring charge related to the write-down of DC-10 expendable parts.
(d) Includes write-off of DC-9 expendable parts sold.
(e) Includes the write off of expendable parts and supplies for $218 from
January 1, 2003 to March 31, 2003 and elimination of $819 upon
deconsolidation of Hawaiian on April 1, 2003.
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