<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
( ) 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 1-8836
HAWAIIAN AIRLINES, INC.
(Exact Name of Registrant as Specified in Its Charter)
HAWAII 99-0042880
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
531 Ohohia Street
Honolulu, Hawaii 96819
(Address of Principal Executive Offices) (Zip Code)
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 American Stock Exchange
($0.01 par value) Pacific Stock 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. (X) Yes ( ) 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 other information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X) Yes ( ) No
As of April 30, 1995, no shares of common stock of the Registrant were
outstanding (see Note 1 of Notes to Financial Statements). Accordingly, the
aggregate market value of voting stock held by non-affiliates of the
Registrant is $0.00.
<PAGE>
EXPLANATORY NOTE
----------------
On April 17, 1995, Hawaiian Airlines, Inc. (the "Company") filed its
1994 Form 10-K (the "1994 Form 10-K") with the Securities and Exchange
Commission (the "Commission") pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In connection with
review of the Company's proxy statement for a Special Meeting of Shareholders
to be held on January 30, 1996, the Staff of the Commission requested that
the Company clarify the nature of fourth quarter adjustments which cause
restatement of previously reported quarterly amounts reported in its
Supplemental Financial Information -- Unaudited Quarterly Financial Information
on page F-39 of the 1994 Form 10-K. This Amendment No. 3 on Form 10-K/A is
being filed solely to clarify the nature of such adjustments on page F-39 of
the 1994 Form 10-K. Although the Securities and Exchange Commission rules
require the Company to refile the Company's financial statements with this
Form 10-K/A, only page F-39 has been changed to provide the disclosure
requested by the Staff of the Commission.
-2-
<PAGE>
SIGNATURES
Pursuant to the requirements of Rule 12b-15 under the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HAWAIIAN AIRLINES, INC.
January 15, 1996 By /s/ C.J. DAVID DAVIES
-------------------------------------
C.J. David Davies
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-3-
<PAGE>
[KPMG Peat Marwick LLP Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hawaiian Airlines, Inc.:
We have audited the accompanying balance sheets of Hawaiian Airlines, Inc. as
of December 31, 1994 and 1993, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the period September 12,
1994 through December 31, 1994, the period January 1, 1994 through September 11,
1994, and for each of the years in the two-year period ended December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as 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 Airlines, Inc. as
of December 31, 1994 and 1993, and the results of its operations and its cash
flows for the period September 12, 1994 through December 31, 1994, the period
January 1, 1994 through September 11, 1994, and for each of the years in the
two-year period ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 2 to the financial statements, on September 12,
1994, Hawaiian Airlines, Inc. emerged from bankruptcy. The financial
statements of the Reorganized Company reflect the impact of adjustments to
reflect the fair value of assets and liabilities under fresh start reporting.
As a result, the financial statements of the Reorganized Company are
presented on a different basis than those of the Predecessor Company and,
therefore, are not comparable in all respects. Furthermore, as discussed in
note 4 to the financial statements, the Company changed its method of
accounting for income taxes in 1992.
The accompanying financial statements have been prepared assuming that
Hawaiian Airlines, Inc. will continue as a going concern. As discussed in
note 14 to the financial statements, the Company's recurring losses from
operations, deficit working capital and its limited sources of additional
liquidity raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 14. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
April 14, 1995
<PAGE>
HAWAIIAN AIRLINES, INC.
BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1994 (REORGANIZED COMPANY) AND 1993 (PREDECESSOR)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR
-------------------- -----------
1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 3,501 $ 4,273
Accounts receivable, net of allowance for doubtful accounts of $500 in 1994
and $800 in 1993............................................................ 16,275 14,301
Inventories, net of allowance for obsolescence of $315 in 1994 and $1,212 in
1993........................................................................ 6,234 11,526
Assets held for sale......................................................... 1,594 --
Prepaid expenses............................................................. 6,079 3,915
---------- -----------
Total current assets................................................... 33,683 34,015
---------- -----------
PROPERTY AND EQUIPMENT:
Flight equipment............................................................. 34,702 52,003
Ground equipment, buildings, and leasehold improvements...................... 3,976 11,037
---------- -----------
Total.................................................................. 38,678 63,040
Accumulated depreciation and amortization.................................... (922) (26,482)
---------- -----------
Property and equipment, net............................................ 37,756 36,558
---------- -----------
OTHER ASSETS:
Nonoperating assets, net of accumulated depreciation of $6,828 in 1993....... -- 22,838
Assets held for sale......................................................... 11,789 --
Lease security and other deposits............................................ 603 5,464
Long-term prepayments and other.............................................. 8,536 6,665
Reorganization value in excess of amounts allocable to identifiable assets,
net......................................................................... 70,934 --
---------- -----------
Total other assets..................................................... 91,862 34,967
---------- -----------
TOTAL ASSETS........................................................... $ 163,301 $ 105,540
---------- -----------
---------- -----------
</TABLE>
F-2
<PAGE>
HAWAIIAN AIRLINES, INC.
BALANCE SHEETS, CONTINUED (IN THOUSANDS)
DECEMBER 31, 1994 (REORGANIZED COMPANY)
AND 1993 (PREDECESSOR)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR
-------------------- -----------
1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt............................................ $ 6,394 $ 2,175
Current portion of capital lease obligations................................. 2,907 --
Accounts payable............................................................. 17,529 31,595
Air traffic liability........................................................ 40,382 30,037
Other accrued liabilities.................................................... 4,916 4,832
Current portion of accrued vacation liability................................ 5,040 4,397
Accrued salaries and wages................................................... 2,342 2,203
---------- -----------
Total current liabilities.............................................. 79,510 75,239
---------- -----------
LONG-TERM DEBT................................................................. 14,152 2,615
---------- -----------
CAPITAL LEASE OBLIGATIONS...................................................... 12,764 --
---------- -----------
OTHER LIABILITIES AND DEFERRED CREDITS:
Noncurrent portion of accrued vacation liability............................. 485 1,460
Accumulated pension and other postretirement benefit obligations............. 22,013 23,834
Other........................................................................ 528 1,072
---------- -----------
Total other liabilities and deferred credits........................... 23,026 26,366
---------- -----------
Total liabilities not subject to compromise............................ 129,452 104,220
---------- -----------
LIABILITIES SUBJECT TO COMPROMISE.............................................. -- 205,229
---------- -----------
REDEEMABLE PREFERRED AND PREFERENCE STOCK SUBJECT TO COMPROMISE................ -- 5,973
---------- -----------
SHAREHOLDERS' EQUITY (DEFICIT):
Commo stock - $0.01 par value and no par or stated value in 1994 and 1993,
respectively; 20,000,000 shares and 16,000,000 shares authorized in 1994 and
1993, respectively; no shares and 7,136,577 shares issued and outstanding in
1994 and 1993, respectively................................................. -- 40,504
Capital in excess of par value............................................... -- 12,479
Common stock, warrants and options issuable.................................. 40,000 --
Accumulated deficit.......................................................... (6,151) (262,865)
---------- -----------
Shareholders' equity (deficit)......................................... 33,849 (209,882)
---------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 6, 7, 10, 12 AND 13)
SUBSEQUENT EVENTS (NOTES 7, 12, 13 AND 14)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)................... $ 163,301 $ 105,540
---------- -----------
---------- -----------
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED
COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO SEPTEMBER 11, 1994 (PREDECESSOR),
YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR
--------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 12, JANUARY 1,
1994 TO 1994 TO
DECEMBER 31, SEPTEMBER 11,
1994 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger.................................................. $ 80,675 $ 199,502 $ 273,386 $ 342,096
Charter.................................................... 536 135 7,169 27,430
Cargo...................................................... 5,300 11,039 15,000 16,866
Other...................................................... 2,646 6,147 8,554 8,684
------------- ------------- --------- ---------
Total................................................ 89,157 216,823 304,109 395,076
------------- ------------- --------- ---------
OPERATING EXPENSES:
Flying operations.......................................... 28,650 71,768 107,959 187,260
Maintenance................................................ 21,547 47,281 65,963 85,187
Passenger service.......................................... 10,647 25,224 33,748 38,941
Aircraft and traffic servicing............................. 16,720 34,324 44,135 50,102
Promotion and sales........................................ 10,892 28,499 35,563 81,584
General and administrative................................. 4,696 12,063 21,610 19,377
Depreciation and amortization.............................. 2,273 4,085 5,969 6,965
Restructuring charges...................................... -- -- 14,000 36,701
------------- ------------- --------- ---------
Total................................................ 95,425 223,244 328,947 506,117
------------- ------------- --------- ---------
OPERATING LOSS............................................... (6,268) (6,421) (24,838) (111,041)
------------- ------------- --------- ---------
NONOPERATING INCOME (EXPENSE):
Interest and amortization of debt expense.................. (1,286) (1,150) (5,066) (11,885)
Interest income............................................ 318 300 360 668
Gain on sale of routes..................................... -- -- -- 41,702
Gain (loss) on disposition of equipment.................... 558 45 (659) (1,075)
Other, net................................................. 527 502 1,312 (321)
Reorganization expenses.................................... -- (13,950) (52,637) --
------------- ------------- --------- ---------
Total................................................ 117 (14,253) (56,690) 29,089
------------- ------------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............................. (6,151) (20,674) (81,528) (81,952)
Extraordinary gain, net...................................... -- 190,063 12,104 108,722
------------- ------------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................................ (6,151) 169,389 (69,424) 26,770
Cumulative Effect on Prior Year of Change in Accounting for
Income Taxes................................................ -- -- -- 2,192
------------- ------------- --------- ---------
NET INCOME (LOSS)............................................ $ (6,151) $ 169,389 $ (69,424) $ 28,962
------------- ------------- --------- ---------
------------- ------------- --------- ---------
PROFORMA LOSS PER COMMON SHARE (UNAUDITED):
Before extraordinary items and cumulative effect of change in
accounting principle........................................ $ **(0.65) $ *N/M $ *N/M $ *N/M
Extraordinary gain, net...................................... ** *N/M *N/M *N/M
Cumulative effect of change in accounting principle.......... ** *N/M *N/M *N/M
------------- ------------- --------- ---------
NET INCOME (LOSS)............................................ $ **(0.65) $ *N/M $ *N/M $ *N/M
------------- ------------- --------- ---------
------------- ------------- --------- ---------
Weighted Average Number of Common Shares Outstanding......... $ **9,400 $ 7,137 $ 6,170 $ 5,123
------------- ------------- --------- ---------
------------- ------------- --------- ---------
</TABLE>
* Not Meaningful - Per share data is not meaningful as the Predecessor has been
recapitalized and has adopted fresh start reporting as of September 12, 1994
** Proforma per share data has been calculated assuming that the Reorganized
Company will issue approximately 9.4 million shares of common stock
See accompanying Notes to Financial Statements.
F-4
<PAGE>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED
COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO SEPTEMBER 11, 1994 (PREDECESSOR),
YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
<TABLE>
<CAPTION>
Class D Capital in Common
Junior excess of stock,
Convertible par value, warrants and
Preference Common including options Accumulated
Stock Stock warrants issuable deficit
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991. . . . . . . . . . . . $ 2,172 $12,395 $ - $ - $(221,034)
Net income . . . . . . . . . . . . . . . . . . . - - - - 28,962
Return and cancellation of 600,000 shares of
Class D Junior Convertible Preference Stock
and 504,742 shares of common stock from
NWA, Inc. . . . . . . . . . . . . . . . . . . (2,172) (1,827) 423 - -
Conversion of 487,992 shares of Class A
Convertible Preferred Stock to 487,992 shares
of common stock by Pan-Pacific Hoteliers, Inc. - 19,519 - - -
Return and cancellation of 479,758 shares of
common stock as part of the financial
restructuring. . . . . . . . . . . . . . . . . - (4,650) 4,650 - -
Issuance of warrants to purchase common stock. . - - 8,000 - -
Issuance of 2,816,659 shares of common stock
as part of the private placement . . . . . . . - 10,478 (594) - -
Issuance of 283,370 shares of common stock to
the Employee Stock Option Plans. . . . . . . . - 1,707 - - -
Accretion in value of Class B Preference Stock . - - - - (750)
------- ------- -------- ------- ---------
BALANCE, DECEMBER 31, 1992 . . . . . . . . . . . . - 37,622 12,479 - (192,822)
Net loss . . . . . . . . . . . . . . . . . . . . - - - - 69,424
Exercise of warrants for 1,075,268 shares of
of common stock. . . . . . . . . . . . . . . . - 11 - - -
Issuance of 348,038 shares of common stock to
the Employee Stock Option Plans. . . . . . . . - 2,871 - - -
Accretion in value of Class B Preference Stock . - - - - (619)
------- ------- -------- ------- ---------
BALANCE, DECEMBER 31, 1993 . . . . . . . . . . . . - 40,504 12,479 - (262,865)
Net income . . . . . . . . . . . . . . . . . . . - - - - 169,389
Fresh start adjustments, net . . . . . . . . . . - (40,504) (12,479) 40,000 93,476
------- ------- -------- ------- ---------
BALANCE SEPTEMBER 12, 1994 . . . . . . . . . . . . - - - 40,000 -
Net Loss . . . . . . . . . . . . . . . . . . . . - - - - (6,151)
------- ------- -------- ------- ---------
BALANCE, DECEMBER 31, 1994 . . . . . . . . . . . . $ - $ - $ - $40,000 $ (6,151)
------- ------- -------- ------- ---------
------- ------- -------- ------- ---------
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO
SEPTEMBER 11, 1994 (PREDECESSOR), YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
REORGANIZED
COMPANY PREDECESSOR
----------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 12, JANUARY 1,
1994 TO 1994 TO
DECEMBER 31, SEPTEMBER 11,
1994 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . $(6,151) $ 169,389 $(69,424) $ 28,962
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . 1,219 4,488 7,001 13,318
Amortization of reorganization
value in excess of identifiable
assets . . . . . . . . . . . . . . 1,090 - - -
Amortization of debt discount. . . . 136 - - 433
Cumulative effect of change in
accounting principle . . . . . . . - - - (2,192)
Allowance for doubtful accounts. . . - 422 4,811 1,615
Amortization and write-off of
favorable operating leases . . . . - - - 10,006
Net periodic postretirement benefit
cost . . . . . . . . . . . . . . . 903 1,988 2,916 2,327
Contribution to Employee Stock
Ownership Plans. . . . . . . . . . - - - 4,973
Gain on sale of routes . . . . . . . - - - (41,702)
(Gain) loss from disposition of
equipment. . . . . . . . . . . . . (558) (45) 659 1,075
Extraordinary items. . . . . . . . . - (190,063) (12,104) (108,722)
(Increase) decrease in accounts
receivable . . . . . . . . . . . . 3,401 (6,223) 44 (1,579)
(Increase) decrease in inventories . 220 497 (419) (2,946)
(Increase) decrease in prepaid
expenses . . . . . . . . . . . . . (2,233) (1,133) (406) 2,096
(Decrease) increase in accounts
payable. . . . . . . . . . . . . . (1,966) 5,774 (22,923) 44,667
(Decrease) increase in air traffic
liability. . . . . . . . . . . . . (319) 10,602 (14,319) (2,348)
(Decrease) increase in accrued
liabilities. . . . . . . . . . . . (1,323) (734) 66,408 40,216
Other, net . . . . . . . . . . . . . 316 335 (972) 2,620
------- --------- -------- ---------
Net cash used by operations before
reorganization expenses. . . . . (5,265) (4,703) (38,728) (7,181)
Reorganization expenses. . . . . . . - 10,799 52,637 -
------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . (5,265) 6,096 13,909 (7,181)
CASH FLOWS FROM INVESTING ACTIVITIES:
Return (issuance) of security
deposits . . . . . . . . . . . . . . 6,979 (3,007) (3,800) -
Deposit received on nonoperating
assets . . . . . . . . . . . . . . . - - - 25,000
Additions to property and equipment. . (3,603) (3,682) (7,037) (15,373)
Net proceeds from disposition of
equipment. . . . . . . . . . . . . . 673 817 992 840
------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES . . . . . . 4,049 (5,872) (9,845) 10,467
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt . . . . . . 5,393 - - -
Repayment of long-term debt. . . . . . (2,095) (689) (1,730) (20,258)
Repayment of capital lease
obligations. . . . . . . . . . . . . (1,044) (1,345) - -
Issuance of common stock . . . . . . . - - 11 10,478
------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES . . . . . . 2,254 (2,034) (1,719) (9,780)
------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS . . . . . . 1,038 (1,810) 2,345 (6,494)
Cash and Cash Equivalents - Beginning of
Year or Period . . . . . . . . . . . . 2,463 4,273 1,928 8,422
------- --------- -------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR
OR PERIOD. . . . . . . . . . . . . . . $ 3,501 $ 2,463 $ 4,273 $ 1,928
------- --------- -------- ---------
------- --------- -------- ---------
(continued)
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO
SEPTEMBER 11, 1994 (PREDECESSOR), YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
REORGANIZED
COMPANY PREDECESSOR
----------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 12, JANUARY 1,
1994 TO 1994 TO
DECEMBER 31, SEPTEMBER 11,
1994 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . $ 988 $ 1,009 $ 1,584 $ 1,319
Income taxes paid. . . . . . . . . . . - - - -
Reorganization expenses paid . . . . . - 3,151 535 -
SUPPLEMENTAL SCHEDULE OF NONCASH
ACTIVITIES:
LIABILITIES SUBJECT TO COMPROMISE:
Reclassification of long-term debt. . . - - 5,537 -
Reclassification of accounts payable. . - - 30,074 -
Reclassification of air traffic
liability . . . . . . . . . . . . . . - - 3,280 -
Reclassification of other accrued
liabilities . . . . . . . . . . . . . - - 95,719 -
Reclassification of sales deposit . . . - - 25,000 -
Reclassification of other liabilities
and deferred credits. . . . . . . . . - - 1,429 -
RECLASSIFICATION OF REDEEMABLE PREFERRED
AND PREFERENCE STOCK SUBJECT TO
COMPROMISE. . . . . . . . . . . . . . . - - 5,973 -
BANK OF AMERICA, NATIONAL TRUST AND
SAVINGS DEBT RESTRUCTURING TRANSACTIONS:
Exercise of warrants for common stock . - - 8,000 -
Cancellation of debt, net of replacement
debt. . . . . . . . . . . . . . . . . - - - 47,000
Cancellation of accrued interest
payable . . . . . . . . . . . . . . . - - - 10,342
Issuance of new warrant to purchase
common stock. . . . . . . . . . . . . - - - 8,000
Cancellation of common stock warrants . - - - 2,900
Cancellation of Class C Senior Preferred
Stock . . . . . . . . . . . . . . . . - - - 54,470
NORTHWEST AIRLINES, INC. TRANSACTIONS:
Surrender of common and Class D Junior
Convertible Stock . . . . . . . . . . - - - 4,000
Bilateral prorate agreement recorded as
air traffic liability . . . . . . . . - - - 3,510
Honolulu-Fukuoka route transfer to
Northwest Airlines, Inc:
Cancellation of note payable. . . . . - - - 7,482
Cancellation of wet lease obligation. - - - 34,229
Conversion of Northwest Airlines, Inc.
accrued interest into debt. . . . . . - - - 236
CANADIAN GOVERNMENT DEBT RESTRUCTURING:
Transfer of ownership of nonoperating
assets, net . . . . . . . . . . . . . - - - 9,284
Cancellation of accrued interest
payable . . . . . . . . . . . . . . . - - - 2,574
Cancellation of debt, net of
replacement debt. . . . . . . . . . . - - - 8,879
OTHER CAPITAL TRANSACTIONS:
Issuance of 348,038 shares of common
stock to the Employee Stock Option
Plans . . . . . . . . . . . . . . . . - - 2,871 -
Return of common stock by shareholders. - - - 4,650
Class A Convertible Preferred Stock
converted to common stock . . . . . . - - - 19,520
Class B Preference Stock accretion. . . - - 619 750
(continued)
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF CASH FLOWS, CONTINUED (IN THOUSANDS)
FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO
SEPTEMBER 11, 1994 (PREDECESSOR), YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
REORGANIZED
COMPANY PREDECESSOR
----------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
SEPTEMBER 12, JANUARY 1,
1994 TO 1994 TO
DECEMBER 31, SEPTEMBER 11,
1994 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER:
Reclassification of property and
equipment to nonoperating assets
at net book value . . . . . . . . . . $ - $ - $ 679 $ 24,824
Issuance of notes payable to purchase
property and equipment, net . . . . . - - 3,232 350
Property and equipment acquired through
capital lease obligations . . . . . . 2,003 16,057 - -
Issuance of air tickets to purchase
property. . . . . . . . . . . . . . . - - - 325
Conversion of accounts payable to note
payable . . . . . . . . . . . . . . . - - - 2,700
</TABLE>
See accompanying Notes to Financial Statements
F-8
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
1. CHAPTER 11 REORGANIZATION
On September 21, 1993 (the "Petition Date"), Hawaiian Airlines together with
HAL, INC., Hawaiian Airlines' parent company, and West Maui Airport, Inc.,
another wholly owned subsidiary of HAL, INC., (collectively the "Debtors" or
"Predecessor") commenced reorganization cases by filing voluntary petitions for
relief under Chapter 11, Title 11 ("Chapter 11") of the United States (the
"U.S.") Code in the U.S. Bankruptcy Court for the District of Hawaii (the
"Bankruptcy Court"). Concurrently therewith, the Debtors filed a Consolidated
Plan of Reorganization dated September 21, 1993 (as amended on March 5, 1994,
May 6, 1994, August 29, 1994, November 2, 1994 and February 16, 1995, the
"Plan"). By order dated May 10, 1994, the Debtors received Bankruptcy Court
approval of their disclosure statement for soliciting acceptances of the Plan,
and commenced solicitation on May 13, 1994. In the balloting completed on June
13, 1994 the class of creditors holding general unsecured claims and the class
comprised of holders of Class B Preference Stock interests both failed to
approve the Plan. On August 30, 1994, the Bankruptcy Court entered an order
confirming the Plan and with the satisfaction of certain conditions, the Plan
became effective on September 12, 1994 (the "Effective Date"). Due to the
aforementioned voting results on the Plan, on the Effective Date, all of the
outstanding equity securities of the Debtors were cancelled, including without
limitation, all outstanding common, preferred and preference stock of HAL, INC.
Pursuant to the Plan, on the Effective Date, first West Maui Airport, Inc. and
then HAL, INC. were merged with and into Hawaiian Airlines with Hawaiian
Airlines (the "Reorganized Company" or the "Company") being the sole surviving
corporation. All unsecured creditors with allowed claims (except with respect
to certain immaterial claims and claims relating to assumed executory
contracts) will receive Reorganized Company common stock in consideration for
their allowed claims. Generally, secured creditors amended the terms of their
existing indebtedness, but retained a security interest in the collateral that,
at the Effective Date, secured their claims.
The Plan contemplated that the Reorganized Company would issue approximately
9,400,000 shares of common stock, $0.01 par value per share, and warrants and
options to purchase an additional 1,589,011 shares of such common stock. A
portion of the shares to be distributed to general unsecured creditors
(currently estimated at 3,212,927 shares) will be held pending resolution of
disputed claims. As disputed claims are finally resolved, the creditor holding
such claim will receive a distribution of stock. Any shares reserved in excess
of the amount distributed to such creditor will be held until all disputed
claims have been resolved. Upon resolution of all disputed claims, there will
be a final distribution of shares to all general unsecured creditors on a pro
rata basis.
Under the Plan, the shares of new common stock were to be distributed by
December 12, 1994. By order entered December 15, 1994, the Reorganized Company
received approval from the Bankruptcy Court to postpone distribution of the
Reorganized Company's new common stock as originally contemplated under the
Plan. By order entered March 14, 1995, the Reorganized Company received a
second extension from the Bankruptcy Court to postpone the distribution of the
Reorganized Company's new common stock. The Reorganized Company now
anticipates that its shares of new common stock will be distributed during the
second quarter of 1995.
F-9
<PAGE>
The Reorganized Company postponed the distribution for two reasons. First, the
Company had received very few completed Letters of Distribution Request (which
all claimants are required to return to the Distribution Agent under the Plan
in order to receive their distributions of new common stock) from holders of
allowed claims so that very few distributions could be made. Second, the
Reorganized Company was concerned that it could have been required to make
distributions to claimants who are not citizens of the U.S. that could have
resulted in Hawaiian Airlines failing to be a citizen of the U.S. as defined in
Section 40102 of the Transportation Act (49 U.S.C. Section 40102).
In order to hold a Section 401 Certificate which is necessary for Hawaiian
Airlines to carry on its business as a provider of interstate and foreign
scheduled air transportation, Hawaiian Airlines must be a citizen of the U.S.
In order for Hawaiian Airlines to be deemed a citizen of the U.S. for these
purposes, the president and at least two-thirds of the board of directors and
other managing officers must be citizens of the U.S., and at least 75.0% of the
voting interest must be owned and controlled by persons that are citizens of
the U.S.
Accordingly, the Reorganized Company has filed with the Bankruptcy Court a
motion seeking approval of an amendment to the Plan which the Reorganized
Company believes will enable it to satisfy the citizenship test of the
Transportation Act and still make all contemplated distributions under the
Plan. The amendment would accomplish this by bifurcating the new common stock
into two classes, one with limited voting rights ("Class B Common Stock") and
the other with full voting rights ("Class A Common Stock"). The Company has
asked the holders of the two largest general unsecured claims entitled to
receive stock to accept Class B Common Stock for the distribution due them
under the Plan. If they agree, then all other claimants entitled to receive
distributions in stock under the Plan would receive shares of Class A Common
Stock. If they do not agree, then non-U.S. citizens holding general unsecured
claims would receive a portion of their distribution in shares of Class A
Common Stock and a portion in shares of Class B Common Stock. The number of
shares of Class A Common Stock to be distributed to them would be determined to
assure that after giving effect to the distributions, non-U.S. citizens would
not hold more than 24.0% of the outstanding shares of Class A Common Stock.
The balance of their distribution would be made in shares of Class B Common
Stock. All distributions to other claimants entitled to receive distributions
in stock under the Plan would be made in shares of Class A Common Stock. The
Company believes that the issuance of shares of Class B Common Stock in either
of the foregoing manners will enable the Reorganized Company to meet the
citizenship test described above.
Because implementation of the proposed amendment requires several Bankruptcy
Court hearings and determinations, as well as either an agreement with the
holders of the two claims who would agree to receive shares of Class B Common
Stock, or, failing such agreement, a solicitation of approval of the claimants
classified as non-U.S. citizens, it is impossible to determine when or whether
the Reorganized Company will succeed in such implementation. If the
Reorganized Company is unsuccessful in implementing the amendment, it may seek
Bankruptcy Court approval to make distributions to U.S. citizens and withhold
distributions to non-U.S. citizens or it may seek to implement alternative
strategies to enable distributions under the Plan. However, if the Reorganized
Company is unsuccessful in implementing any of the alternatives, distributions
of stock to all claimants may be delayed indefinitely.
The Reorganized Company's new common stock has been approved for listing on the
American Stock Exchange and Pacific Stock Exchange. The actual commencement of
trading, however, may be delayed depending on the timing of the distribution of
stock to general
F-10
<PAGE>
unsecured creditors. Because a significant amount (up to 42.5% of the stock
to be distributed to general unsecured creditors) may not be distributed
until most disputed claims have been resolved, and because significant
amounts of stock may be held in employee stock ownership plans, the trading
volume may be limited. By first distribution, the Reorganized Company
anticipates that approximately 28.9% of the disputed claims should be
resolved.
In connection with the satisfaction of legal requirements for confirmation of
the Plan, certain financial projections were furnished to the Bankruptcy Court.
The Reorganized Company will not update or comment further on such projections,
which were not intended to be, and should not be, relied upon by post-
reorganization investors in the Reorganized Company's common stock. As a
matter of policy, the Reorganized Company does not intend to publish
projections of future financial performance.
F-11
<PAGE>
2. FRESH START REPORTING
The fresh start reporting common equity value of approximately $40.0
million was determined by the Reorganized Company's management and was
calculated by employing a methodology based on a multiple of earnings before
interest and taxes. Analyses of publicly available information of other
companies believed to be comparable to the Reorganized Company were used in
determining a multiple which was then applied to financial projections of the
Reorganized Company. Management's estimate of common equity value considered
a number of factors including relevant industry and economic conditions,
expected future performance, and the amount of available cash and current
market conditions, and may not necessarily be indicative of the value at
which the Reorganized Company's common shares may trade. Under fresh start
reporting, the reorganization value of the entity has been allocated to the
Reorganized Company'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 the Reorganized Company has been reflected as
"Reorganization value in excess of amounts allocable to identifiable assets"
in the accompanying balance sheets.
The effects of the Plan and fresh start reporting in accordance with the
provisions of the American Institute of Certified Public Accountants Statement
of Position (the "SOP") 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" on the Reorganized Company's balance
sheet as of the Effective Date are as follows, in thousands:
<TABLE>
<CAPTION>
REORGANIZED
PREDECESSOR COMPANY'S
BALANCE SHEET FRESH START BALANCE SHEET
SEPTEMBER 11, DEBT DISCHARGE ADJUSTMENTS SEPTEMBER 11,
1994 (a) (b) 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . $ 2,463 $ - $ - $ 2,463
Accounts receivable, net . . . . . 20,052 - (376) 19,676
Inventories, net . . . . . . . . . 10,714 - (4,260) 6,454
Assets held for sale . . . . . . . - - 1,594 1,594
Prepaid expenses and other . . . . 5,048 (549) (653) 3,846
----------- --------- --------- ---------
Total current assets . . . . . . 38,277 (549) (3,695) 34,033
Property and equipment, net . . . . . 48,516 - (15,204) 33,312
Nonoperating assets . . . . . . . . . 25,818 (20,968) (4,850) -
Assets held for sale . . . . . . . . - - 11,925 11,925
Reorganization value in excess of
amounts allocable to identifiable
assets . . . . . . . . . . . . . . . - - 72,024 72,024
Other assets . . . . . . . . . . . . 15,172 (882) 1,627 15,917
----------- --------- --------- ---------
TOTAL ASSETS . . . . . . . . . $ 127,783 $(22,399) $ 61,827 $ 167,211
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
F-12
<PAGE>
FRESH START REPORTING (CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED
PREDECESSOR COMPANY'S
BALANCE SHEET FRESH START BALANCE SHEET
SEPTEMBER 11, DEBT DISCHARGE ADJUSTMENTS SEPTEMBER 11,
1994 (a) (b) 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt . . $ 1,416 $ 4,418 $ (145) $ 5,689
Current portion of capital lease
obligations . . . . . . . . . . . . 2,121 - - 2,121
Accounts payable . . . . . . . . . . 34,787 (14,789) (504) 19,494
Accrued liabilities . . . . . . . . . 12,774 (129) 439 13,084
Air traffic liability . . . . . . . . 40,639 - 61 40,700
------------ ------------- ---------- ---------
Total current liabilities . . . . . 91,737 (10,500) (149) 81,088
Long-term debt . . . . . . . . . . . . 2,684 8,737 - 11,421
Capital lease obligations . . . . . . . 12,591 - - 12,591
Other liabilities and deferred
credits . . . . . . . . . . . . . . . 31,789 - (9,678) 22,111
------------ ------------- ---------- ---------
Total liabilities not subject to
compromise . . . . . . . . . . . 138,801 (1,763) (9,827) 127,211
------------ ------------- ---------- ---------
Total liabilities subject to
compromise . . . . . . . . . . . . . 204,726 (204,726) - -
------------ ------------- ---------- ---------
TOTAL LIABILITIES . . . . . . . . 343,527 (206,489) (9,827) 127,211
------------ ------------- ---------- ---------
REDEEMABLE PREFERRED AND PREFERENCE
STOCK SUBJECT TO COMPROMISE . . . . . 5,973 (5,973) - -
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock . . . . . . . . . . . . 40,504 - (40,504) -
Capital in excess of par value . . . 12,479 - (12,479) -
Common stock, warrants and options
issuable . . . . . . . . . . . . . - - 40,000 40,000
Accumulated deficit . . . . . . . . . (274,700) 190,063 84,637 -
------------ ------------- ---------- ---------
SHAREHOLDERS' EQUITY (DEFICIT). . . (221,717) 190,063 71,654 40,000
------------ ------------- ---------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY (DEFICIT) . $ 127,783 $ (22,399) $ 61,827 $ 167,211
------------ ------------- ---------- ---------
------------ ------------- ---------- ---------
</TABLE>
(a) To record the discharge or reclassification of obligations
pursuant to the Plan. Substantially all of these obligations are
only entitled to receive such distributions of cash and common
stock as provided under the Plan. Portions of these obligations
were restructured and will continue, as restructured, to be
liabilities of the Reorganized Company.
(b) To record adjustments to reflect assets and liabilities at
estimated fair value (including the establishment of
Reorganization value in excess of amounts allocable to
identifiable assets), the establishment of the Reorganized
Company's equity value of $40.0 million and the cancellation of
the Predecessor's equity.
F-13
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements included herein have been prepared in accordance with
SOP 90-7 which was adopted by the Company effective September 22, 1993.
For periods during the Chapter 11 proceeding, prepetition liabilities which
were unsecured or estimated to be unsecured are classified as "Liabilities
Subject to Compromise." The accrual of interest on such liabilities was
discontinued for the period from September 22, 1993 to the Effective Date of
the Plan.
For accounting purposes, the Effective Date of the Plan and inception date for
the Reorganized Company is deemed to be September 12, 1994. Under fresh start
reporting, the reorganization value of the entity has been allocated to the
Reorganized Company'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 the Company has been reflected as "Reorganization value in
excess of amounts allocable to identifiable assets" in the accompanying balance
sheets.
Because of the application of fresh start reporting, the financial statements
for periods after reorganization are not comparable to the financial statements
for periods prior to the reorganization.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents. Short-term cash investments at
December 31, 1994 and 1993 were valued at cost and amounted to $2.6 and $3.0
million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of short-
and long-term debt is based on rates negotiated with prepetition creditors and
approximates carrying value. Letters of credit had a fair value of
approximately $2.1 million. The fair values of the letters of credit were
based on the face value of the underlying instruments. See Note 7.
INVENTORIES
Inventories consisting of flight equipment expendable parts and supplies are
stated at average cost, less an allowance for obsolescence.
ASSETS HELD FOR SALE
Assets held for sale consisting of expendable inventory parts and rotable
flight equipment are stated at the lower of average cost or net realizable
value. As of December 31, 1994 and 1993, the Company had approximately $13.4
million and $1.6 million, respectively, of expendable inventory parts and
rotable flight equipment held for sale internally or on a consignment basis
with a third party. In 1993, Assets held for sale were presented as a part of
Inventories and Nonoperating assets.
F-14
<PAGE>
PROPERTY AND EQUIPMENT
Owned property and equipment are stated at cost. Costs of major improvements
are capitalized. Depreciation and amortization are provided on a straight-line
basis over the following estimated useful lives:
<TABLE>
<S> <C>
Flight equipment . . . . . . . . . . 12-15 years, 15% residual value
Ground equipment . . . . . . . . . . 5-15 years
Airport terminal facility . . . . . . 30 years
Buildings . . . . . . . . . . . . . . 15-20 years
Leasehold improvements . . . . . . . Shorter of lease term or useful life
</TABLE>
Maintenance and repairs are charged to operations as incurred, except that 1)
costs of overhauling engines are charged to operations in the year the engines
are removed for overhaul and 2) scheduled heavy airframe overhauls on DC-9-50
aircraft are recorded under the deferral method whereby the cost of overhaul is
capitalized and amortized over the shorter of the period benefitted or the
lease term. Additionally, provision is made for the estimated cost of
scheduled heavy airframe overhauls required to be performed on leased DC-9-50
aircraft prior to their return to lessors.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets is
amortized on a straight-line basis over 20.0 years. Accumulated amortization
at December 31, 1994 totalled approximately $1.1 million. The Company will
continue to assess and evaluate whether the remaining useful life of the asset
requires revision or, through the use of estimated future undiscounted cash
flows over the remaining life of the asset, whether the remaining balance of
the asset may not be recoverable.
OTHER ASSETS
Material preoperating costs associated with the introduction of new flight
equipment are amortized on a straight-line basis over the shorter of the lease
period or five years.
ACCRUED VACATION LIABILITY
Accrued vacation in excess of the amount expected to be taken by employees
during the following year are classified as a noncurrent liability.
FREQUENT FLYER AWARDS
A liability for frequent flyer awards is recognized on the incremental cost
basis in the period during which passengers have accumulated sufficient mileage
for award redemption. Incremental costs primarily include fuel and catering.
PASSENGER REVENUES
Passenger fares are recorded as operating revenues when the transportation is
provided. The value of unused passenger tickets is included as air traffic
liability.
F-15
<PAGE>
INCOME (LOSS) PER SHARE
Income (loss) per share is based on the weighted average number of common stock
shares and common stock equivalents outstanding during each year.
NEW ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to Be Disposed Of." This Statement is
effective for years beginning after December 15, 1995 and applies to long-lived
assets and certain identifiable intangible assets whether held and used or to
be disposed of, and goodwill.
The Statement requires that a review be made of long-lived assets and certain
identifiable intangible assets to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the future cash flows expected to result from
use of the asset (undiscounted and without interest charges) are less than the
carrying amount of the asset, an impairment loss is recognized. Such
impairment loss is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. In instances where goodwill is
identified with assets that are subject to an impairment loss, such goodwill
should be allocated to the assets tested for recoverability on a pro rata basis
using the relative fair values of the assets acquired in the transaction
generating the goodwill.
The Statement also requires that long-lived assets and certain identifiable
intangible assets to be disposed of be reported at the lower of the asset
carrying amount or fair value, less cost to sell.
The Company plans to adopt the Statement in 1996. Restatement of previously
issued financial statements is not permitted. The Company has not estimated
the impact that adoption of the Statement is expected to have on its financial
statements.
4. CHANGE IN ACCOUNTING METHODS
Effective January 1, 1992, the Predecessor elected early adoption of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." The deferred tax liability recognized at January 1, 1992, as
calculated under SFAS No. 96, reflected the alternative minimum tax created by
the limitation on the Predecessor's net operating loss carryforwards. The
provisions of SFAS No. 109 minimized the effect of alternative minimum tax on
the measurement of the gross deferred tax liability. Accordingly, the
implementation of SFAS No. 109 eliminated the Predecessor's deferred tax
liability existing as of January 1, 1992.
The effect of the change in method of accounting for income taxes on net income
before cumulative effect of change in accounting principle for the year ended
December 31, 1992 was insignificant. The cumulative effect of the change in
method of accounting for income taxes on prior years was approximately $2.2
million.
F-16
<PAGE>
5. FLIGHT EQUIPMENT
All of the Company's aircraft are leased except for one DC-9-50. The
composition of the Company's aircraft fleet is as follows:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor
-------------------------------------------
December 31, 1994 December 31, 1993
-------------------------------------------
Aircraft Type Leased Owned Leased Owned
--------------------------------------------------------------
<S> <C> <C> <C> <C>
DC-10-10 7 - -
L-1011-1 - - 1 -
L-1011-50 - - 6 -
DC-9-50 12 1 8 1
DHC-7 - - 4 -
------ ----- ------ -----
Total 19 1 19 1
------ ----- ------ -----
------ ----- ------ -----
</TABLE>
During 1994, the Reorganized Company completed its transition from L-1011
aircraft to DC-10-10 aircraft and ceased its DHC-7 operations in April 1994.
6. LEASES
AIRCRAFT LEASES
Six DC-10-10 aircraft are leased under operating leases which expire in year
2001. A seventh DC-10-10 is leased under a short term operating lease which
expires in 1995. Seven and five DC-9-50 aircraft and related flight equipment
are leased under operating and capital leases, respectively, for various
periods ranging through the year 2004.
Most of the aircraft under operating leases include renewal options and fair
market value purchase options at the end of the lease period.
OTHER LEASES
The Company leases office space for its headquarters, airport facilities,
ticket offices and certain ground equipment in varying terms to 2008.
GENERAL
Rent expense for aircraft, office space, real property and other equipment
during 1994, 1993 and 1992 was $33.6, $36.6 million and $105.3 million
(including $47.6 million in 1992 related to the Northwest wet lease agreement,
see Note 17), respectively, net of sublease rental income from operating leases
of $368,000, $48,000 and $276,000, respectively.
F-17
<PAGE>
Scheduled future minimum lease commitments under operating and capital leases
for the Reorganized Company as of December 31, 1994, in thousands, are as
follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------------------------------------------------------------
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . . $ 17,296 $ 4,210
1996 . . . . . . . . . . . . . . . . . . 17,165 3,715
1997 . . . . . . . . . . . . . . . . . . 16,164 3,643
1998 . . . . . . . . . . . . . . . . . . 15,551 3,281
1999 . . . . . . . . . . . . . . . . . . 15,030 3,281
Thereafter . . . . . . . . . . . . . . . 30,928 1,501
------- ------
Total minimum lease payments . . . . . $ 112,134 19,631
-------
-------
Less amount representing interest. . . 3,960
------
Present value of obligations under
capital leases . . . . . . . . . . . . 15,671
Less current portion of capital
lease obligations. . . . . . . . . . . 2,907
------
Capital lease obligations, excluding
current portion . . . . . . . . . . . $ 12,764
------
------
</TABLE>
In addition to scheduled future minimum lease payments, the Company is required
to prepay for monthly DC-10-10 maintenance services in accordance with the
American Airlines, Inc.-Registered- ("American") Long-Term Agreements, as
hereafter defined. The payments are based on estimated flight hours for the
month. For the period from September 12, 1994 to December 31, 1994, the
Company incurred $8.9 million in maintenance expenses under the Long-Term
Agreements.
As discussed in Notes 12, 13 and 14, prior to April 1995, the Company failed to
make certain payments due American under its lease arrangements. An amendment
to the long-term Aircraft Lease Agreement providing for the deferral of payment
of any remaining delinquent amounts owed by the Company over scheduled dates
throughout 1995 became effective April 13, 1995.
The net book value of property held under capital leases as of December 31,
1994 totalled $17.3 million.
F-18
<PAGE>
7. DEBT
At December 31, 1994, the Company's long-term debt, including obligations under
capital leases, consists of the following, in thousands:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor
-----------------------------
1994 1993
----------------------------------------------------------------------------
<S> <C> <C>
Secured obligations due 1996-1999 . . . . $ 13,537 $ 4,790
Tax obligations due 1995-2000 . . . . . . 668 -
Unsecured obligations due 1996-1997 . . . 6,341 -
Obligations under capital leases due
1995-2000 . . . . . . . . . . . . . . . . 15,671 -
------------- ----------
36,217 4,790
Current portion . . . . . . . . . . . . . (9,301) (2,175)
------------- ----------
Long-term debt and obligations under
capital leases, excluding current
portion . . . . . . . . . . . . . . $ 26,916 $ 2,615
------------- ----------
------------- ----------
</TABLE>
Secured obligations due 1996-1999 are as follows:
* A note payable executed in 1994 in settlement of $6.0 million of
administrative claims related to unpaid prepetition L-1011 and DC-9-50
aircraft rents. The note is due in 1999, bears interest at 8.0% per annum
and is payable in monthly installments of principal and interest of
$121,658. At December 31, 1994, $5.8 million is outstanding;
* A secured note payable executed in 1992 pursuant to a settlement agreement
with the Government of Canada related to two DHC-7 aircraft and related
flight equipment. The note is due in 1996 and is payable in installments
of $50,000 per month. As the note bears no interest, interest has been
imputed as of the Effective Date at 10.0% per annum. As of December 31,
1994 and 1993, $1.0 million and $1.8 million were outstanding,
respectively;
* A secured note executed in 1993 for the purchase of a DC-9-50 aircraft
from a lessor. The mortgage note is due in 1999 and is payable in monthly
installments of principal and interest of $59,876. Interest accrues at
10.315% per annum. At December 31, 1994 and 1993, $2.6 million and $3.0
million were outstanding, respectively;
* On the Effective Date, credit facility borrowings were made by the
Reorganized Company under a financing arrangement with CIT Group/Credit
Finance, Inc. ("CIT"). The financing arrangement was approved by the
Bankruptcy Court on July 27, 1994 and consists of a credit facility of up
to $8.15 million consisting of a secured revolving credit facility
including up to $3.0 million of letters of credit (the "Financing"). On
the
F-19
<PAGE>
Effective Date of the Plan, $2.0 million of the revolving credit
facility and $3.0 million of letters of credit were funded to the
Reorganized Company. Borrowings under the revolving credit facility have
been recorded net of discount representing the estimated fair value of
issued warrants as discussed in Note 11. The Financing has a term of two
years and bears interest at the rate of prime plus 2.5% (11.0% at December
31, 1994). Available credit is subject to reduction determined by
recalculation of the borrowing base and repayments arising from
disposition of collateral. At December 31, 1994, $4.1 million and $2.1
million of borrowings and letters of credit, respectively, were
outstanding. The Financing contains certain restrictive covenants one of
which requires a minimum net worth. Effective April 13, 1995, the minimum
required net worth covenant was reduced from $28.0 million to $20.0
million. See Note 14.
Estimated tax obligations due 1995-2000 represent allowed priority tax claims
for various taxing jurisdictions, which in accordance with the provisions of
the Plan, bear interest at 7.0% per annum and are payable in twenty-four
quarterly installments commencing on the first through sixth anniversaries of
the Effective Date.
Unsecured notes payable due 1996-1997 are as follows:
* A note executed in 1994 in settlement of $4.7 million of administrative
claims related to unpaid postpetition L-1011 aircraft rents. The note is
due in 1996, bears interest at prime plus 3.0% (11.5% at December 31,
1994) and is payable in monthly installments of principal and interest of
$194,010. At December 31, 1994, $3.9 million was outstanding;
* A note executed in 1994 in settlement of $2.8 million of administrative
claims related to unpaid prepetition airport use and occupancy fees to the
State of Hawaii. The note is due in 1997 and is payable in monthly
installments of $100,000. The note bears no interest; however, interest
has been imputed at 10.0% per annum. As of December 31, 1994, $2.2
million was outstanding;
* A note executed in 1994 in settlement of $276,000 of administrative claims
related to unpaid L-1011 aircraft rents. The note is due in 1996 and is
payable in monthly principal installments of $11,518. At December 31,
1994, $254,000 remained outstanding. Interest accrues at prime plus 3.0%
per annum (11.5% at December 31, 1994).
Obligations under capital leases represent the present value of aggregate
future minimum lease payments discounted using interest rates ranging from 8.5%
to 9.0%.
F-20
<PAGE>
The following table represents a summary of the Reorganized Company's assets as
of December 31, 1994 which are pledged as security for the indicated
obligations as of December 31, 1994:
<TABLE>
<CAPTION>
Net Book Value of Balance of Obligation
Asset/Nature of Security as of as of
Security December 31, 1994 Creditor December 31, 1994
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Security interst in $6.0 million GPA Group PLC $5.8 million note due
certain DC-9 rotable and 1999
parts AEROUSA, INC.
Security interest in $2.0 million Canadian $1.0 million note due
certain ground and Government 1996
flight equipment,
$15.0 million
stipulated judgment to
be filed upon default
of payments due
Mortgage interest in $3.7 million GATX Capital $2.6 million mortgage
DC-9-50 aircraft Corporation note due 1999
First priority security Unspecified CIT Group/Credit $4.1 million revolving
interest in Finance, Inc. credit facility obligation
substantially all due 1996, $2.1 million
assets, with certain letters of credit
limited exceptions
including prior liens
contemplated by the
Plan, $2.0 million
letters of credit (See
Note 11)
</TABLE>
8. REORGANIZATION AND NONRECURRING OPERATING ITEMS
The following reorganization and other items associated with the bankruptcy
proceeding were incurred by the Predecessor during the period from January 1,
1994 to September 11, 1994, in thousands:
<TABLE>
<S> <C>
Reorganization Items:
Professional fees . . . . . . . . . . . . . . . $ 5,744
Employee share of common stock distribution . . 7,568
Other . . . . . . . . . . . . . . . . . . . . . 268
Revaluation of assets and liabilities . . . . . . 370
---------
$ 13,950
---------
---------
</TABLE>
F-21
<PAGE>
During 1993, the Predecessor returned or terminated the respective leases under
five of its DC-9-50 aircraft. As a result, the Company provided for $14.0
million in anticipated aircraft rental and return costs. In accordance with
SOP 90-7, following the Petition Date, the Predecessor classified
reorganization and other costs associated with the bankruptcy proceeding as
nonoperating reorganization expenses. The balance for the period from
September 22, 1993 through December 31, 1993 includes the following, in
thousands:
<TABLE>
<S> <C>
Provisions for claims related to rejection of L-1011
and DHC-7 aircraft leases . . . . . . . . . . . . . $ 51,456
Provisions for claims related to various contract
disputes, litigation and other matters . . . . . . . 346
Professional fees and expenses related to
reorganization proceedings . . . . . . . . . . . . . 835
----------
$ 52,627
----------
----------
</TABLE>
Charter revenues in 1993 include $3.9 million received from the Military
Airlift Command in May 1993 following a settlement with the Debtors on its
claim for additional compensation for charter operations during Operations
Desert Shield and Desert Storm in 1991 and 1990.
As part of the Predecessor's restructuring of its operations in the last
quarter of 1992, the Predecessor provided for approximately $23.0 million in
anticipated aircraft rental and return costs for its six DC-8 aircraft, $5.6
million for the write-down to net realizable value of DC-8 aircraft
improvements and deferred charges and approximately $650,000 in severance cost
related to scheduled personnel reductions. In addition, approximately $7.5
million of favorable operating leases were completely written down to reflect
the changes in the economic value of the restructured lease terms.
9. INCOME TAXES
In 1992, the Financial Accounting Standards Board issued SFAS No. 109. Under
the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Predecessor adopted SFAS No. 109 as of January 1, 1992. The cumulative
effect of this change in accounting for income taxes of $2.2 million was
determined as of January 1, 1992 and is reported separately in the statement of
operations for the year ended December 31, 1992.
As a result of net operating losses in the current year and net operating
losses carried forward from prior years, the Company and the Predecessor were
not required to provide for federal and state income taxes for 1994 and 1993.
F-22
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994
and 1993 are presented below, in thousands:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor
------------------------------
1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts . . . . . $ 198 $ 319
Accured pension and post-retirement
benefits . . . . . . . . . . . . . . . . 10,448 10,796
Accrued vacation . . . . . . . . . . . . . . 1,644 1,861
Net operating loss carryforwards . . . . . . 34,181 24,585
Investment tax credit carryforwards. . . . . 2,569 2,569
Airframe return provision . . . . . . . . . 76 37,184
Other . . . . . . . . . . . . . . . . . . . 3,813 1,403
--------- ---------
Total gross deferred tax assets . . . . 52,929 78,717
Less valuation allowance . . . . . . . . (47,086) (66,407)
--------- ---------
Net deferred tax assets . . . . . . . . 5,843 12,310
--------- ---------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation . . . . . . . (5,843) (12,220)
Other . . . . . . . . . . . . . . . . . . . - (90)
--------- ---------
Total gross deferred tax liability . . . (5,843) (12,310)
--------- ---------
Net deferred tax liability . . . . . . . $ - $ -
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1993 was
$66.4 million. The net change in the total valuation allowance for the year
ended December 31, 1994 was a decrease of $19.3 million.
As a result of the November 1992 debt restructuring and recapitalization
transaction, an ownership change of the Company occurred which resulted in a
limitation on the use of its net operating loss (and tax credit) carryforwards
pursuant to Sections 382 and 383 of the Internal Revenue Code. Consequently,
the Company's ability to utilize net operating loss and tax credit
carryforwards that arose prior to that ownership change is limited to $2.8
million annually ("Section 382 limitation"). Any part of the Section 382
limitation that is not utilized in a given year may be carried forward to the
next year and combined with that year's originating Section 382 limitation of
$2.8 million. Net operating loss carryforwards generated after the ownership
change resulting from the November 1992 restructuring, are not subject to the
Section 382 limitation, but were affected by the Company's Chapter 11
reorganization, as discussed below. After taking into account the reductions
in net operating loss carryforwards resulting from the November 1992 debt
F-23
<PAGE>
restructuring and recapitalization transaction, as of December 31, 1994 the
Company has approximately $44.8 million of net operating loss (and equivalent
tax credit) carryforwards attributable to the period prior to the November 1992
restructuring ("pre-November 1992 NOLs") that are subject to the Section 382
limitation.
The financial reorganization of the Company in 1994 resulted in the
cancellation of substantial debts of the Company. Such cancellation of
indebtedness can result in taxable income under the Internal Revenue Code equal
to the excess of the amount of debt canceled over the cash and fair market
value of property (including new stock of the Company) paid to the creditors.
However, the Internal Revenue Code provides that the cancellation of
indebtedness does not give rise to taxable income if the cancellation was
pursuant to a plan approved by the court in a bankruptcy case. Moreover, under
the judicial "stock-for-debt exception," as modified by Section 108 of the
Internal Revenue Code, the Company will not be required to reduce its net
operating loss and tax credit carryforwards as a result of the issuance of the
Company's new stock to creditors in connection with the Company's
reorganization, except as discussed below.
The Chapter 11 reorganization of the Company resulted in another "ownership
change" of the Company under Section 382 of the Internal Revenue Code.
Ordinarily, an ownership change would result in a significant limitation on the
Company's ability to utilize its net operating loss carryforwards following the
ownership change. However, pursuant to the so-called "Section 382(l)(5)
bankruptcy exception," provided the Company's reorganization resulted in the
ownership of 50.0% or more of the Company's stock by "qualifying creditors" and
pre-change stockholders, the general limitations imposed by Section 382 will
not apply, but the Company's net operating loss carryforwards will be reduced
by (i) certain interest paid or accrued on indebtedness converted into stock
pursuant to the Plan and (ii) 50.0% of the excess of the amount of debt
canceled (other than debt incurred for interest described in (i)) over the
value of the Company's stock issued in exchange for the canceled debt.
If the Section 382(l)(5) bankruptcy exception applies and the Company undergoes
another ownership change within two years after the ownership change resulting
from its Chapter 11 reorganization, the Company would not be entitled to use
any net operating loss and tax credit carryforwards that accrued prior to such
subsequent ownership change to offset taxable income earned following such
ownership change. In addition, the Section 382(l)(5) bankruptcy exception will
not affect the limitations imposed on the Company's pre-November 1992 NOLs,
and therefore such pre-November 1992 NOLs will remain subject to the $2.8
million Section 382 limitation.
If the Company determines that the net operating loss reduction rules mandated
by the Section 382(l)(5) bankruptcy exception would seriously reduce the amount
of the Company's net operating loss carryforwards, or if there is a
significant possibility that the Company will undergo another ownership change
within the two-year period following the ownership change resulting from its
Chapter 11 reorganization, the Company may elect to be subject to the annual
limitation rules under Section 382(l)(6) of the Internal Revenue Code (the
"Section 382(l)(6) election"). Under this provision, the Company's ability to
utilize net operating loss and equivalent tax credit carryforwards in the
future will generally will be subject to an annual limitation (the "Section
382(l)(6) limitation") determined by multiplying the applicable long term tax-
exempt rate of 6.05% as of September 1994, by the lower of (1) the value of the
Company's assets immediately before the ownership change, determined without
regard to liabilities; or (2) the aggregate new stock value immediately after
the ownership change. If the Section 382(l)(6) election
F-24
<PAGE>
is made, the Company's net operating loss and credit carryforwards will not
be subject to the reductions mandated by the Section 382(l)(5) bankruptcy
exception, nor will there be a complete prohibition on the use of net
operating loss and credit carryforwards if the Company undergoes another
ownership change within the two-year period described above. Moreover, if
the Section 382(l)(6) election is made and the Section 382(l)(6) limitation
is greater than the $2.8 million Section 382 limitation discussed above, the
$2.8 million Section 382 limitation will continue to apply to the
pre-November 1992 NOLs.
After giving consideration to the provisions of Section 382(l)(5), the Company
has post-November 1992 net operating loss and equivalent investment tax credit
carryforwards of $49.1 million. Such amounts are in addition to the pre-
November 1992 NOLs, and if the Company decides not to make the Section
382(l)(6) election, such amounts would not be subject to limitation under
Section 382 until the occurrence of another ownership change. The Company's
net operating loss and credit carryforwards will expire in 2006 at the
earliest.
While it is anticipated that the Section 382(l)(5) bankruptcy exception would
be most advantageous, the Company has until September 15, 1995 to decide on
whether or not to make the Section 382(l)(6) election.
If the Company, in future tax periods, were to recognize tax benefits
attributable to tax attributes of the Predecessor (such as net operating loss
and other carryforwards), any such benefit would first be applied to reduce the
balance of Reorganization value in excess of amounts allocable to identifiable
assets.
10. BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
The Company has several pension plans covering substantially all of its
employees hired prior to September 1, 1992. Pilots and ground personnel are
covered under three defined benefit plans which provide benefits based
primarily on years of service and employee compensation near retirement. The
International Association of Machinists ("IAM") defined benefit pension plan
was frozen effective October 1, 1993 upon ratification of the new IAM
collective bargaining unit agreement. The salaried employee defined benefit
pension plan was also frozen effective October 1, 1993. Funding for the ground
personnel plans is based on minimum Employee Retirement Income Security Act
requirements. Pension cost for the Air Line Pilots Association ("ALPA") plan
is funded on a current basis based on the amortization of prior service cost
over 20 years. Plan assets consist primarily of common stocks, government
securities, insurance contract deposits and cash management funds.
F-25
<PAGE>
The following table summarizes the funded status of the defined benefit plans
as of December 31, 1994 and 1993, in thousands:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor
-------------------------------
1994 1993
-------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets . . . . . . . . . $ 122,625 $ 130,257
----------- ----------
Accumulated benefit obligation:
Vested . . . . . . . . . . . . . . . . . (108,119) (114,290)
Nonvested . . . . . . . . . . . . . . . (7,991) (10,588)
----------- ----------
(116,110) (124,878)
Additional benefits based on future
salary levels . . . . . . . . . . . . . (10,244) (6,956)
----------- ----------
Projected benefit obligation . . . . . . . (126,354) (131,834)
----------- ----------
Projected benefit obligation in excess of
plan assets . . . . . . . . . . . . . . (3,729) (1,577)
Unrecognized prior service cost . . . . . . - 3,275
Unrecognized actuarial net (gain) loss . . 5,956 (6,114)
Unrecognized net transition obligation . . - 144
----------- ----------
Prepaid (accrued) pension cost . . . . . . $ 2,227 $ (4,272)
----------- ----------
----------- ----------
</TABLE>
The projected benefit obligation was determined using an assumed weighted-
average discount rate of 8.25% and 7.25% for 1994 and 1993, respectively. At
December 31, 1994, the assumed weighted-average rate of compensation increase
was 4.50% for pilots and 0.00% for ground personnel. The assumed weighted-
average rate of compensation increase was 4.25% in 1993. The assumed weighted-
average expected long-term rate of return on plan assets was 9.0% for 1994 and
1993.
In the third quarter of 1994, ALPA further ratified certain funding assumption
changes to their defined benefit pension plan which resulted in decreased
required cash contributions to the plan. The changes were ratified by ALPA in
exchange for 1) an additional allowed general unsecured claim under the
Predecessor's Chapter 11 process; 2) payment by the Reorganized Company of the
pilots' pension plan investment and advisory fees and administrative expenses
in 1994 and 1995, with payments being limited to $100,000 in 1994; 3) if
applicable, future payment directly by the Reorganized Company for retirement
benefits accrued in excess of statutory compensation limits; and 4)
forgiveness of certain immaterial fees due from ALPA.
Subsequent to December 31, 1994, in the first quarter of 1995, an early out
retirement program has been offered by the Company to qualified participants of
the IAM and salaried defined benefit plans. As of the date of this report, the
Company is not able to determine the dollar adjustment required to its defined
benefit and postretirement obligations as a result of this program.
F-26
<PAGE>
The net periodic pension cost for defined benefit plans in 1994 included the
following components, in thousands:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company
----------------------------------------
Period from
September 12, Period from January
1994 to 1, 1994 to
December 31, September 11,
1994 1994
-----------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits earned
during the period . . . . . . . . $ 818 $ 2,326
Interest cost on projected
benefit obligation . . . . . . . . 2,831 6,828
Actual return on plan assets . . . . 3,109 (2,244)
Net amortization and deferral. . . . (6,366) (5,515)
Fresh start adjustment . . . . . . . - (8,284)
--------- ----------
Net periodic pension (gain) cost . . $ 392 $ (6,889)
--------- ----------
--------- ----------
</TABLE>
The net periodic pension cost in 1994 was determined using an assumed weighted-
average discount rate of 8.25% and 7.25% for the period from September 12, 1994
to December 31, 1994 and the period from January 1, 1994 to September 11, 1994,
respectively.
Fresh start adjustment of $8.3 million represents the net effect of fresh start
accounting, as applied by the Company in accordance with SOP 90-7, on the
pension benefit obligation as of September 12, 1994.
Net pension cost for defined benefit plans in 1993 and 1992 included the
following components, in thousands:
<TABLE>
<CAPTION>
Predecessor
---------------------------------
1993 1992
-----------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits earned
during the year . . . . . . . . $ 5,740 $ 6,043
Interest cost on projected
benefit obligation . . . . . . 9,919 9,592
Actual return on plan assets . . (11,455) (7,983)
Net amortization and deferral . . 645 (2,126)
Curtailment gain . . . . . . . . (12,104) -
---------- ----------
Net periodic pension (gain) cost. $ (7,255) $ 5,526
---------- ----------
---------- ----------
</TABLE>
The net periodic pension cost in 1993 and 1992 was determined using an assumed
weighted-average discount rate of 7.25% and 8.0%, respectively.
F-27
<PAGE>
Curtailment gain of $12.1 million representing the actuarial equivalent of the
reduction in the net accrued pension benefit obligation as of September 30,
1993 is reflected in the accompanying financial statements as an extraordinary
item. The gain results from the cessation of future pay and credited service
increases due to the aforementioned freezing of the IAM and salaried employee
defined benefit pension plans as of October 1, 1993.
POSTRETIREMENT PLANS
In addition to providing pension benefits, the Company sponsors two defined
benefit postretirement plans. Employees in the Company's non-pilot group are
eligible for certain medical benefits under one plan if they meet certain age
and service requirements at the time of retirement. Employees in the Company's
pilot group are eligible for certain medical and life insurance benefits under
another plan if they become disabled or reach normal retirement age while
working for the Company. The Company continues to fund the cost of medical and
life insurance benefits in the year incurred.
The postretirement benefit plans' combined benefit obligations as of December
31, 1994 and 1993 are as follows, in thousands:
<TABLE>
<CAPTION>
Reorganized
Company Predecessor
-----------------------------
1994 1993
--------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents . . . . . . . . . . . $ (5,278) $ (4,504)
Fully eligible active plan participants . . . (346) (267)
Other active plan participants . . . . . . . (16,391) (14,273)
--------- ---------
Unfunded accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . (22,015) (19,044)
Unrecognized net (gain) loss . . . . . . . . . 2 (2,744)
Unrecognized prior service cost . . . . . . . . - (711)
--------- ---------
Accrued postretirement benefit cost . . . . . . $ (22,013) $ (22,499)
--------- ---------
--------- ---------
</TABLE>
The accumulated postretirement benefit obligation was determined using an
assumed weighted-average discount rate of 8.25% and 7.25% for 1994 and 1993,
respectively.
Net periodic postretirement benefit cost in 1994 included the following
components, in thousands:
<TABLE>
<CAPTION>
Reorganized Predecessor
Company
----------------------------------------
Period from Period from January
September 12, 1, 1994 to
1994 to December September 11,
31, 1994 1994
-----------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits attributed to
service during the period . . . . . $ 444 $ 1,074
Interest cost on accumulated
postretirement benefit
obligation . . . . . . . . . . . . 459 986
Net amortization and deferral . . . . - (72)
-------- ----------
Net periodic postretirement
benefit cost . . . . . . . . . . . $ 903 $ 1,988
-------- ----------
-------- ----------
</TABLE>
F-28
<PAGE>
A weighted average discount rate of 8.25% and 7.25% was used for the period
from September 12, 1994 to December 31, 1994 and the period from January 1,
1994 to September 11, 1994, respectively.
For measurement purposes, a graded rate ranging from an initial rate of 15.0%
to a termination rate of 6.0% was used in the per capita cost of covered
medical benefits for the period from September 12, 1994 to December 31, 1994.
A graded rate ranging from an initial rate of 14.0% to a termination rate of
5.0% was used in the per capita cost of covered medical benefits for the period
from January 1, 1994 to September 11, 1994. The medical cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed medical cost trend rates by 1.0% in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1994, 1993 and 1992 by $3.7 million, $3.5 million and $2.9 million,
respectively, and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the years then ended by $584,000,
$593,000 and $495,000, respectively.
Net periodic postretirement benefit cost in 1993 and 1992 included the
following components, in thousands:
<TABLE>
<CAPTION>
Predecessor
---------------------------------
1993 1992
-----------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits attributed
to service . . . . . . . . . . . $ 1,480 $ 1,281
Interest cost on accumulated
postretirement benefit
obligation . . . . . . . . . . . 1,479 1,157
Net amortization and deferral . . (43) (111)
---------- ----------
Net periodic postretirement
benefit cost . . . . . . . . . . $ 2,916 $ 2,327
---------- ----------
---------- ----------
</TABLE>
A weighted average discount rate of 7.25% and 8.0% was used as of December 31,
1993 and 1992, respectively.
A graded rate ranging from an initial rate of 14.0% to a termination rate of
5.0% was used in the per capita cost of covered medical benefits as of December
31, 1993. A graded rate ranging from an initial rate of 15.0% to a termination
rate of 6.0% was used in the per capita cost of covered medical benefits as of
December 31, 1992.
OTHER
During September 1990, the Predecessor agreed to establish Employee Stock
Option Plans (the "ESOPs") as a part of the renegotiation of labor contracts
covering the pilots, flight attendants and other union represented employees.
In exchange for work rule changes and 10.0% wage rate reductions for the two-
year period commencing September 1, 1990, the Predecessor contributed 20.0% of
its common stock on a fully diluted basis to the tax-
F-29
<PAGE>
qualified ESOPs. The final increment of 220,931 shares was contributed on
January 2, 1992 and recorded as a $1.3 million charge to compensation expense
in 1992.
In 1992, the Predecessor agreed to contribute 425,000 shares of common stock to
the pilots 401(k) plan in exchange for revisions to work rules, shared health
care costs and a change in the interest rate assumption used for funding the
pilot's retirement plan. The Predecessor accrued an obligation of
approximately $3.5 million in 1992 based on the market price of the
Predecessor's common stock at the date of commitment. On August 12, 1993,
348,038 of such shares were issued.
In 1993 the Company entered into new collective bargaining agreements with the
IAM, ALPA, Association of Flight Attendants ("AFA") and Transport Workers Union
("TWU") and made certain changes to the compensation and benefits of salaried
employees. The new agreements and the changes for the salaried employees are
for a duration of three-and-a-half years. These new agreements contemplated
that the employees would have claims relating to these concessions which would
be satisfied through the issuance of the new common stock of the Reorganized
Company. See Note 1.
The Company also has 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. However, the Company made contributions of 5.0% in 1994, 7.0% in 1993 and
6.25% in 1992, of defined compensation pursuant to the terms of the flight
attendants' plan. Effective January 1, 1994, the Company is required to
contribute an additional 2.0% to participants in the flight attendants' plan.
Contributions to the flight attendants' plan are funded currently and totalled
approximately $889,000, $868,000 and $832,000 in 1994, 1993 and 1992,
respectively. Effective September 1, 1993, in conjunction with the
modifications to IAM and salaried employees benefits, the Company was required
to contribute 2.0% of eligible earnings to the 401(k) plan for IAM and salaried
personnel. Effective September 1, 1994, the Company is required to contribute
4.0% of eligible earnings to the IAM and salaried personnel plan.
Contributions from the Company are required only for those employees who were
participants in the plan as of September 1, 1993. Contributions to the IAM and
salaried 401(k) plan totalled $1.1 million and $288,000 in 1994 and 1993,
respectively.
11. COMMON STOCK WARRANTS, RIGHTS AND OPTIONS
In conjunction with obtaining the Financing, $2.0 million of letters of credit
were provided by certain third parties as additional security for performance
of the Reorganized Company's obligations under the Financing. One such letter
of credit in the amount of $1.0 million is guaranteed by a Director of the
Reorganized Company. The persons providing the letters of credit received a
subordinated security interest in the assets securing the Financing and
received warrants to purchase 989,011 shares of the Reorganized Company's
common stock. The warrants have a five-year term, expiring September 12, 1999,
and are exercisable at a price equal to $2.73 per common share, subject to
adjustment pursuant to anti-dilution provisions.
On December 1, 1994 the Board of Directors of the Company authorized adoption
of a shareholder rights plan pursuant to which there will be attached to each
share of common stock of the Reorganized Company one preferred stock purchase
right (a "Right"). The rights plan provides that in the event any person
becomes the beneficial owner of 10.0% or more of the outstanding common shares,
each Right (other than a Right held by the 10.0% shareholder) will be
exercisable, on and after the close of business on the tenth business day
F-30
<PAGE>
following such event, to purchase Hawaiian Airlines preferred stock having a
market value equal to two times the then current exercise price (initially
$8.00). The rights plan further provides that if, on or after the occurrence
of such event, the Company is merged into any other corporation or 50.0% or
more of the Company's assets or earning power are sold, each right (other than
a Right held by the 10.0% shareholder) will be exercisable to purchase common
shares of the acquiring corporation having a market value equal to $16.00. The
Rights expire on December 1, 2004 (unless previously triggered) and are subject
to redemption by the Company at $0.01 per Right at any time prior to the first
date upon which they become exercisable.
Pursuant to the terms of the Plan, 600,000 shares of the Reorganized Company's
new common stock have been reserved for issuance under a 1994 Stock Option
Plan. The 1994 Stock Option Plan provides for issuance of options to officers
and key employees of the Reorganized Company, with the terms of such options
and the recipients of such options to be determined by a committee. In
February 1995, the Compensation Committee of the Board of Directors approved a
form of nonqualified stock option agreement and granted options under such
agreements covering substantially all of the 600,000 reserved shares. The
grant of such options is subject to approval of the 1994 Stock Option Plan by
shareholders of the Reorganized Company.
12. TRANSACTIONS WITH AMERICAN AND CERTAIN OF ITS AFFILIATES
On November 8, 1993, the Predecessor entered into a letter of intent as amended
from time to time with AMR Training & Consulting Group, Inc. ("AMRCG"), an
affiliate of American. As contemplated by the Letter, Hawaiian Airlines, Inc.
entered into a variety of agreements with AMRCG's affiliates (collectively, the
"Interim Agreements") for certain services, including data processing,
licensing of reservations system, leasing of DC-10-10 aircraft, maintenance
services on such DC-10-10 aircraft and participation in the AAdvantage-
Registered Trademark- frequent flyer program. Pursuant to its participation in
the program, members who are redeeming mileage to fly to Hawaii or among the
islands may fly on Hawaiian Airlines (subject to space limitations) with
American paying Hawaiian Airlines an agreed fee for transporting such
passengers. In addition, passengers flying on Hawaiian Airlines can earn
AAdvantage-Registered Trademark- miles.
On September 12, 1994, long-term agreements with American and certain of its
affiliates (the "Long-Term Agreements") were entered into pursuant to the
confirmation of the Plan, and superseded the Interim Agreements. Services
provided under the Long-Term Agreements are substantially identical to those
services specified in the Interim Agreements and include the lease of six DC-10-
10 aircraft from American. In November 1994, an additional DC-10-10 aircraft
was leased by American to the Company on a a short-term basis, which lease has
been extended until April 30, 1995. At December 31, 1994, the obligations of
the Company under the Long-Term Agreements were secured by a $2.0 million
letter of credit issued under the Company's working capital line of credit.
See Note 7.
On October 31, 1994, the Company failed to timely make certain payments due to
American pursuant to the long-term Aircraft Lease Agreement entered into on the
Effective Date. American sent the Company notice of the failure to make rent
and prepaid maintenance payments, but did not declare the Aircraft Lease
Agreement in default or exercise any of the remedies, which include, but are
not limited to, termination of the lease, repossession of aircraft and engines,
recovery of damages and drawings under the letters of credit, available to it.
The Company subsequently made the rent and prepaid maintenance payments due
American on November 4 and November 15, 1994, respectively. In December 1994
and
F-31
<PAGE>
January, February and March 1995 the Company again failed to timely make
certain full payments due pursuant to the long-term Aircraft Lease Agreement.
Again, while American sent the Company notice of the failure to make such full
rent and prepaid maintenance payments, American did not declare the Aircraft
Lease Agreement in default or exercise any of the remedies available to it.
Certain additional payments were subsequently made by the Company to American
and effective April 13, 1995, the Company and American executed an amendment to
the long-term Aircraft Lease Agreement providing for the deferral of payment of
approximately $11.1 million of delinquent lease rents and maintenance payments.
The amendment provides that the Company is to remit periodic payments
(generally on a weekly basis) to American commencing March 31, 1995 and ending
December 22, 1995, in amounts ranging from approximately $25,000 to $950,000,
including interest at 10.0% per annum, plus payments for the basic rent of
aircraft. Maintenance payments will also be payable weekly, but in the same
aggregate amounts as set forth in the original terms of the long-term Aircraft
Lease Agreement. Thereafter, commencing January 5, 1996, the Company is
required to pay, weekly in advance, the basic rent payments owed for the
aircraft and maintenance payments in respect of the aircraft.
13. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
The Reorganized Company is a party to a number of legal proceedings,
substantially all of which were filed prior to the Petition Date. The Chapter
11 filing resulted in the imposition of an automatic stay against the
commencement or continuation of any judicial, administrative or other action or
proceeding against the Reorganized Company that was or could have been
commenced before the Petition Date. The outcomes of these proceedings cannot be
predicted with certainty. However, adverse outcomes in any of the legal
proceedings filed prior to the Chapter 11 filing and any resultant allowed
claim will share pro rata with other unsecured creditors in common stock of the
Reorganized Company.
Claims have been, or may be, asserted against the Reorganized Company for
alleged administrative claims on or before the Effective Date of the Plan.
Management believes that the Reorganized Company has established adequate
reserves for these claims.
The Reorganized Company is a party to various other claims and legal actions
which are incidental to the conduct of its business. In the opinion of
management, after consultation with legal counsel, the Reorganized Company
believes that the ultimate disposition of these matters will not have a
material adverse effect on the Reorganized Company's operations or financial
condition.
OTHER CARRIER SETTLEMENT
In the first quarter of 1995, the Company reached agreement with one of its
creditors for settlement of approximately $2.0 million in liabilities owed.
The creditor will receive 1) $300,000 of the Reorganized Company's new common
stock shares and 2) $1.7 million to be paid in specified installments over 20.0
months. The $2.0 million in liabilities are included in air traffic liability
as of December 31, 1994.
AIRCRAFT MAINTENANCE
F-32
<PAGE>
Maintenance on the Company's DC-10-10 aircraft fleet is being performed by
American in accordance with FAA regulations and Hawaiian Airlines' approved
maintenance program. The Company is required to prepay for such maintenance
services on a monthly basis in accordance with the Long-Term Agreements. Prior
to April 1995, the Company was delinquent in making certain payments due
American under its lease arrangements. See Notes 6, 12 and 14.
Hawaiian Airlines anticipates that in the period 1995 through 1999, eight of
its thirteen DC-9-50 aircraft will require a heavy airframe overhaul check (the
"D Check"). The D Check for a DC-9-50 requires more than 10,000 man-hours of
maintenance work and includes stripping the airframe, extensively testing the
airframe structure and a large number of parts and components, and reassembling
the overhauled airframe with new or rebuilt components. The Company
anticipates each D Check to cost approximately $900,000.
As a result of certain incidents in 1989 and 1988 involving structural damage
to aircraft in flight operated by carriers other than the Company, the Federal
Aviation Administration (the "FAA") is requiring or is expected to require
structural modifications and the replacement of certain parts, as well as the
implementation of additional maintenance programs or changes to current
programs, with respect to various types of aircraft over a certain age. These
requirements vary, depending on the type of aircraft covered. Based on
information currently available, the Company estimates that the total cost of
complying with the aging aircraft requirements over the 1995 through 1999
period will approximate $300,000 per DC-9-50 aircraft.
In addition, the Company expects to incur approximately $100,000 per DC-9-50
aircraft per year, for maintenance required under a corrosion prevention and
control program. This program is anticipated to continue indefinitely in the
future.
During the period from 1995 through 1999, the Company anticipates implementing
its supplemental inspection document program for certain of its DC-9-50
aircraft which is estimated to range up to $50,000 per aircraft.
The estimated future cost of complying with FAA regulations as discussed in the
preceding paragraphs will be in addition to the costs of the Company's current
DC-9-50 fleet maintenance programs.
LOS ANGELES AIRPORT OPERATING TERMINAL
On December 1, 1985, the Company entered into an Interline Agreement with other
airlines 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 totalled $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, 1994 amounting to approximately $208.1 million. Rent expense
relating to these operating leases totalled $4.4 million, $3.6 million and $4.2
million in 1994, 1993 and 1992, respectively.
F-33
<PAGE>
Member airlines pay the expenses associated with the Facilities on a prorata
share basis calculated primarily upon their respective numbers of passengers
utilizing the Facilities. The Company accounts for its obligation under this
agreement as an operating lease and incurred $737,000, $672,000 and $557,000 of
rent in 1994, 1993 and 1992, respectively.
FREQUENT FLYER PROGRAM
The Company's Gold Plus frequent flyer program offers a variety of awards based
on accumulated mileage. The Company recognizes a liability in the period in
which members have accumulated sufficient mileage points to allow for award
redemption. The incremental cost method is used, computed primarily on the
basis of fuel and catering costs, exclusive of any overhead or profit margin.
Non-travel awards are valued at the incremental cost of tickets exchanged for
such awards.
As of December 31, 1994 and 1993, Gold Plus members had accumulated
approximately 3.0 and 3.1 billion miles, respectively, representing liabilities
totalling approximately $489,000 and $450,000 at the end of each year,
respectively. The Company's accruals assume full redemption of mileage points.
During the years ended December 31, 1994, 1993 and 1992, 636.0 million, 493.0
million and 264.0 million award miles were redeemed, respectively.
The Company believes that the usage of free travel awards will not result in
the displacement of revenue customers and, therefore, such usage will not
materially affect the Company's liquidity or operating results. The use of
free travel awards is subject to effective capacity control/yield management
programs maintained by the Company to limit the possibility of displacing
revenue passengers. Usage of Gold Plus travel redemption accounted for
approximately 2.7%, 2.1% and 1.2% of Interisland traffic and an insignificant
percentage of Transpacific and South Pacific traffic in 1994, 1993 and 1992,
respectively.
14. FINANCIAL CONDITION AND LIQUIDITY
On the Effective Date, the Company recognized an extraordinary gain of $190.1
million representing the relief of approximately $204.7 million in prepetition
liabilities net of offsets and certain prepetition liabilities which survived.
However, as of December 31, 1994, the Reorganized Company had a net working
capital deficit of $45.8 million. The net working capital deficit as of
December 31, 1994 represents a $4.6 million increase from the net working
capital deficit of $41.2 million at December 31, 1993. The deterioration in
the Company's working capital position at December 31, 1994 from that at
December 31, 1993 is due to a combination of the following:
* In relation to current assets, increases in accounts receivable, assets
held for sale, and prepaid expenses of $2.0 million, $1.6 million and $2.2
million, respectively, being offset by decreases in cash and cash
equivalents of $800,000 and inventories of$5.3 million;
* In relation to current liabilities, increases in current portion of long-
term debt, current portion of capital lease obligations, air traffic
liability and accrued liabilities of $4.2 million, $2.9 million, $10.3
million and $1.0 million, respectively, reduced by decreases in accounts
payable of $14.1 million.
As discussed in Note 7, on the Effective Date, credit facility borrowings were
made by the Reorganized Company under the Financing. As of the date of this
report, the amount of the facility had been effectively reduced to
approximately $5.5 million, which amount was
F-34
<PAGE>
approximately fully drawn in the form of $3.4 million in borrowings and $2.1
million in letters of credit.
In order to increase liquidity, the Company has also engaged in a series of
promotional ticket sales activities. As of the date of this report, another
such promotional activity is in progress. Such promotional activities increase
liquidity, but also increase air traffic liability which could affect revenues
and liquidity in future periods. Liquidity was further enhanced when 1) in
December 1994, $3.0 million of letters of credit issued under the CIT Financing
and held by the Airline Reporting Corporation were supplanted with a letter of
credit of $100,000, effectively increasing the availability of the revolving
credit facility under the Financing and 2) in March 1995, $3.6 million in fuel
facility notes receivable held by the Company were collected with $1.5 million
of the proceeds reducing borrowings under the Financing and $2.1 million
reverting back to the Company.
Notwithstanding the above, since the Effective Date, the Company has continued
to experience liquidity shortfalls. As discussed in Notes 6, 12 and 13, prior
to April 1995, the Company failed to timely make certain payments due American
under the long-term Aircraft Lease Agreement with the Company and American
executing an amendment to the long-term Aircraft Lease Agreement, effective
April 13, 1995, providing for the deferral of payment of the delinquent lease
rents and maintenance payments.
The Company currently does not have access to other unutilized credit
facilities and, since there are no remaining unencumbered assets, its access to
additional sources of liquidity remains limited. The Company is seeking other
possible sources of external financing, but unless it is successful there may
continue to be liquidity shortfalls in the future.
The financial statements at December 31, 1994, have been prepared on a going
concern basis which assumes continuity of operations and realization of assets
and liquidation of liabilities in the ordinary course of business. As
discussed herein, the Company has continued to experience net and operating
losses post Effective Date. Furthermore, there can be no assurance that the
Company will succeed in solving its liquidity problems or that the Company will
have sufficient cash resources to support its continued operations. Because of
the Company's liquidity shortfall, an adverse change in events and
circumstances outside the control of management could result in the Company
being unable to meet its financial obligations. The financial statements do
not include any adjustments relating to the recoverability and classification
of recorded asset amounts, or the amounts and classification of liabilities
that might be necessary as a result of the outcome of the uncertainties
discussed herein. Management recognizes that the continuation of the Company
as a going concern is dependent upon a return to profitable, positive cash flow
operations and the generation of adequate funds to meet its ongoing
obligations.
15. CONCENTRATION OF BUSINESS RISK
The Company's scheduled service operations are primarily focused on providing
air transportation service to, from, or throughout the Hawaiian Islands.
Therefore, the Company'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.
The Company's Interisland, Transpacific and South Pacific scheduled service is
marketed through a number of wholesalers and tour operators. No wholesaler or
tour operator accounted for more than 10.0% of total passenger revenues in 1994
or 1992. In 1993, one
F-35
<PAGE>
wholesaler accounted for approximately 11.0% of total passenger revenues.
The wholesaler primarily purchased tickets in the Interisland and
Transpacific markets with total purchases in 1993 aggregating approximately
$31.0 million.
16. RELATED PARTY TRANSACTIONS
NWA, INC. ("NWA") AND NORTHWEST AIRLINES, INC. ("NORTHWEST")
The Predecessor incurred certain operating revenues and expenses in 1992 in
relation to certain operating and marketing agreements with NWA and Northwest.
Both NWA and Northwest ceased being related parties in 1992. Refer to Note 17.
JAPAN AIRLINES CO., LTD. ("JAL")
Pursuant to a Space Block Agreement, the Predecessor provided JAL with blocks
of seats on certain of its flights from Honolulu to Kahului, Maui and certain
ground handling services. The Predecessor earned $970,000 and $4.5 million in
revenue under this arrangement during 1993 and 1992, respectively. Ground
handling charges related to those segments under the Space Block Agreement
totalled an additional $267,000 during 1992. The Space Block Agreement was
terminated in 1993.
OTHER
The Company incurred $276,000, $583,000 and $1.5 million in legal fees from one
of its outside legal counsel in 1994, 1993 and 1992, respectively. One of the
directors of the Company, Mr. Martin Anderson, is a partner in this law firm.
As of December 31, 1994, $7,500 of fees were outstanding.
17. 1992 FINANCIAL RESTRUCTURING AND RECAPITALIZATION PLAN
The Predecessor implemented a complex and comprehensive financial and operating
restructuring in November 1992 (the "1992 Restructuring"). Most of the
components of the restructuring were consummated at the same time, and
contingent upon each other. The principal components of this restructuring
were as follows:
TRANSACTIONS WITH THE BANK OF AMERICA, NATIONAL TRUST AND SAVINGS (THE "BANK")
An extraordinary gain of $106.6 million was recognized in 1992 when pursuant to
an agreement with the Debtors in November 1992, the Bank cancelled indebtedness
of approximately $80.0 million and surrendered for cancellation its warrant to
purchase approximately 8.0% of the Predecessor's common stock on a fully
diluted basis and all of the outstanding shares of the Predecessor's Class C
Senior Preferred Stock ("Class C Stock"), which had a liquidation preference of
approximately $55.0 million and certain rights to mandatory redemption.
The Debtors transferred to the Bank 1) approximately $18.6 million of cash
proceeds received from the condemnation of the West Maui Airport; 2)
approximately $200,000 in payment for the Bank's attorneys' fees and for
accrued and future letter of credit fees related to $3.0 million in letters of
credit issued for the Debtors' benefit; 3) a warrant to purchase 1,075,268
shares of the common stock of the Predecessor representing approximately 13.1%
of the common stock of the Predecessor following closing, exercisable at a
price of $0.01 per share at any time through November 9, 2002; and 4) an
unsecured subordinated promissory note
F-36
<PAGE>
payable in the principal amount of approximately $3.4 million. The $3.0
million in letters of credit were secured by most of the mortgages and
security interests that had previously secured the Debtors' indebtedness to
the Bank. The outstanding letters of credit and mortgages and security
interests securing such were cancelled on the Effective Date.
NWA AND NORTHWEST TRANSACTIONS
In 1992, the Predecessor completed a series of transactions with Northwest and
its parent NWA involving the sale of its Honolulu, Hawaii-Fukuoka Route (the
"Fukuoka Route") in exchange for 1) the forgiveness of $7.5 million in loans
plus related accrued interest and $34.2 million in outstanding net wet lease
obligations resulting in a nonoperating gain of approximately $41.7 million, 2)
the return and cancellation of its shares of common and Class D Junior
Convertible Preference Stock ("Class D Stock"), and NWA's option to purchase up
to 49.0% of the Predecessor's common stock on a fully diluted basis; 3) the
extension through 1995 of certain marketing and operational agreements relating
to fuel purchase, engine overhaul and repair and flight simulator training and
ground handling and 4) new ten-year agreements for code sharing and proration
of fares designed to save Northwest up to $500,000 per year off of the Debtors'
standard prorated fares on Interisland flights, assuming Northwest provided
certain volumes of feeder traffic. The Debtors' performance obligations under
these ten-year agreements were secured by 100,000 Interisland ticket coupons
and were to be used by Northwest had the Debtors materially defaulted under the
agreements. The ten-year agreements were rejected on the Effective Date and
the 100,000 Interisland ticket coupons subsequently returned to the Reorganized
Company.
The Predecessor incurred approximately $63.3 million and $135.7 million in
operating revenues and expenses, respectively, in 1992 related to the operation
of the Fukuoka Route and the marketing and operational agreements with
Northwest and NWA.
CANCELLATION OF CERTAIN SHARES OF STOCK
In addition to the shares of common, Class C and Class D Stock surrendered for
cancellation by NWA and the Bank, J. Thomas Talbot and Peter V. Ueberroth, two
former directors of the Predecessor, surrendered a total of 479,758 common
stock shares for cancellation. Messrs. Talbot's and Ueberroth's voting rights
with respect to an additional 1,006,994 shares of the Predecessor's common
stock were also terminated. Prior to the restructuring, Messrs. Talbot and
Ueberroth held voting control of approximately 36.2% of the outstanding voting
securities of the Predecessor.
Pan Pacific Hoteliers, Inc. ("PPH"), a subsidiary of JAL, converted its 487,992
shares of Class A Convertible Preferred Stock ("Class A stock") into 487,992
shares of common stock, thereby relieving the Predecessor from a mandatory
redemption obligation commencing in December 1998 that would have aggregated
approximately $19.5 million. PPH was also granted the right to "put" its
487,992 shares of common stock to the Company for $10.0 million if a "Control
Change" (sale of the Predecessor to certain U.S. air carriers) occurred on or
prior to the first anniversary of the restructuring or for $5.0 million if the
Control Change occurred after the first anniversary and on or before the fifth
anniversary of the 1992 Restructuring. PPH's Common Stock interests in the
Predecessor along with any remaining Class A Stock were cancelled on the
Effective Date.
F-37
<PAGE>
PRIVATE PLACEMENT
As part of the 1992 Restructuring, the Debtors also closed a private placement
of 2,816,659 shares of HAL, Inc. common stock at a purchase price of $3.72 per
share for total proceeds of approximately $10.5 million.
AMENDMENTS TO UNION AGREEMENTS
In 1992, the Predecessor received ratification agreements with three of its
unions to assist in lowering expenses and increasing productivity. Included
in these agreements were (1) revised work rules; (2) sharing of health care
costs; and (3) a change in the interest rate assumption used for funding the
pilots' retirement plan in exchange for 425,000 shares of the Predecessor's
common stock.
SALE OF WEST MAUI AIRPORT
In October 1992, the State of Hawaii filed an action to condemn the West Maui
Airport (the "Airport") pursuant to a prior agreement with the Debtors. The
Airport was owned by the Debtors and located on land leased from a third party.
By an agreement between the State of Hawaii, the Debtors and the third party,
the State agreed to pay $18.6 million to the Debtors and $6.4 million to the
third party. The net proceeds were utilized to repurchase the Debtors's
indebtedness to the Bank as part of the 1992 Restructuring. The Debtors
discontinued operations to the Airport on April 18, 1994 with title of the
Airport transferring to the State of Hawaii on the Effective Date.
F-38
<PAGE>
HAWAIIAN AIRLINES, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
UNAUDITED QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
Predecessor Reorganized Company
-------------------------------------- -------------------------
First Second Fourth
Quarter Quarter (a) (b) Quarter
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994:
Operating revenues:
As previously reported . . . . . . . . . . . $ 70,395 $ 71,933 $ 72,877 $ 13,171
Adjustment to passenger revenues . . . . . . 582 582 454 -
-------- --------- -------- ---------
As adjusted . . . . . . . . . . . . . . . . 70,977 72,515 73,331 13,171 $ 75,986
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
Operating income (loss):
As previously reported . . . . . . . . . . . (7,643) (7,645) 5,973 (2,714)
Adjustment to passenger revenues . . . . . . 582 582 454 -
Adjustment to wages and benefits . . . . . . 605 380 291 (400)
-------- --------- -------- ---------
As adjusted . . . . . . . . . . . . . . . (6,456) (6,683) 6,718 (3,114) $ (3,154)
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
Loss before extraordinary items and
cumulative effect of change in accounting
principle:
As previously reported . . . . . . . . . . . (8,538) (9,727) (17,816) (2,779)
Adjustment to operating income (loss) . . . 1,187 962 745 (400)
Adjustment to interest expense . . . . . . - - (3) -
Adjustment to reorganization expenses . . . - - 12,516 -
-------- --------- -------- ---------
As adjusted . . . . . . . . . . . . . . . . (7,351) (8,765) (4,558) (3,179) $ (2,972)
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
Net income (loss):
As previously reported . . . . . . . . . . . (8,538) (9,727) 170,448 (2,779)
Adjustment to operating income (loss) . . . 1,187 962 745 (400)
Adjustment to nonoperating expenses . . . . - - 12,513 -
Adjustment to extraordinary item . . . . . - - 1,799 -
-------- --------- -------- ---------
As adjusted . . . . . . . . . . . . . . . (7,351) (8,765) 185,505 (3,179) $ (2,972)
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
Proforma loss per share:**
As previously reported . . . . . . . . . . . *N/M *N/M *N/M **(0.30)
Adjustments . . . . . . . . . . . . . . . . *N/M *N/M *N/M **(0.04)
-------- --------- -------- ---------
As adjusted . . . . . . . . . . . . . . . $ *N/M $ *N/M $ *N/M $ **(0.34) $**(0.31)
-------- --------- -------- --------- ---------
-------- --------- -------- --------- ---------
1993:
Operating revenues . . . . . . . . . . . . . . $ 73,918 $ 67,512 $ 86,412 $ 76,267
Operating loss . . . . . . . . . . . . . . . . (4,074) (22,904) 3,052 (912)
Loss before income taxes . . . . . . . . . . . (5,246) (24,386) 1,262 (53,159)
Net loss . . . . . . . . . . . . . . . . . . . (5,246) (24,386) 13,367 (53,159)
Loss per share . . . . . . . . . . . . . . . . *N/M * N/M *N/M * N/M
</TABLE>
The results for the fourth quarter of 1993 include $52.6 million of
expenses related to the reorganization processes of the Company, including
$51.8 million for the early termination of the Company's L-1011 aircraft
leases.
The results of operations for the first three quarters of 1994 and 1993 were
adjusted for the impact of certain significant fourth quarter adjustments
which related to the prior quarters. These adjustments were corrections of
errors which resulted from mathematical mistakes, mistakes in the application
of accounting principles, or oversight or misuse of facts that existed at the
time the financial statements were prepared.
(a) Period from July 1, 1994 to September 11, 1994
(b) Period from September 12, 1994 to September 30, 1994
* Not Meaningful - Per share data is not meaningful as the Predecessor
has been recapitalized and has adopted fresh start reporting as of
September 11, 1994
** Proforma loss per share data has been calculated assuming that the
Reorganized Company will issue approximately 9.4 million shares of
common stock
F-39
<PAGE>
HAWAIIAN AIRLINES, INC.
SELECTED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Reorganized Company Predecessor
----------------------------------------------
Period from Period from
September 12, 1994 January 1, 1994
to December 31, to September 11,
1994 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Summary of Operations:
Operating revenues . . . . . . . . $ 89,157 $ 216,823
Operating expenses . . . . . . . . 95,425 223,244
----------- ------------
Operating loss . . . . . . . . . . (6,268) (6,421)
Interest expense, net . . . . . . . (968) (850)
Gain on disposition of equipment . . 558 45
Reorganization expenses . . . . . . - (13,950)
Other, net . . . . . . . . . . . . 527 502
----------- ------------
Loss before extraordinary item . . (6,151) (20,674)
Extraordinary gain, net . . . . . - 190,063
----------- ------------
Net income (loss) . . . . . . . . $ (6,151) $ 169,389
----------- ------------
----------- ------------
Proforma Loss Per Common Share:
Before extraordinary item . . . . . $ **(0.65) $ *N/M
Extraordinary gain, net . . . . . . **- *N/M
----------- ------------
Net loss . . . . . . . . . . . . . $ *(0.65) $ *N/M
----------- ------------
----------- ------------
Weighted Average Shares Outstanding . **9,400 7,137
Shareholders' Equity (Deficit)
Per Share . . . . . . . . . . . . . $ **3.60 $ *N/M
Shares Outstanding at Year End . . . **- 7,137
<CAPTION>
December 31, 1994 September 11, 1994
----------------- ------------------
Balance Sheet Items:
Total assets . . . . . . . . . . . $ 163,301 $ 167,211
Property and equipment, net . . . . 37,756 33,312
Long-term debt . . . . . . . . . . 14,152 11,421
Capital lease obligations,
excluding current portion . . . . . 12,764 12,591
Shareholders' equity . . . . . . . 33,849 40,000
</TABLE>
* Not Meaningful - Per share data is not meaningful as the Predecessor
has been recapitalized and has adopted fresh start reporting as of
September 11, 1994
** Proforma per share data has been calculated assuming that the
Reorganized Company will issue approximately 9.4 million shares of
common stock
See Notes to Financial Statements (continued)
F-40
<PAGE>
HAWAIIAN AIRLINES, INC.
SELECTED FINANCIAL AND STATISTICAL DATA, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Predecessor
----------------------------------------------------------
1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations:
Operating revenues . . . . . . . . . . . . . . . . . $ 304,109 $ 395,076 $ 365,042 $ 340,730
Operating expenses . . . . . . . . . . . . . . . . . 328,947 506,117 460,036 442,475
---------- ---------- ---------- ----------
Operating loss . . . . . . . . . . . . . . . . . . . (24,838) (111,041) (94,994) (101,745)
Interest expense, net . . . . . . . . . . . . . . . . (4,706) (11,217) (12,493) (11,827)
Loss on disposition of equipment . . . . . . . . . . (659) (1,075) (3,888) (1,996)
Gain on sale of routes . . . . . . . . . . . . . . . - 41,702 9,000 -
Reorganization expenses . . . . . . . . . . . . . . . (52,637) - - -
Other, net . . . . . . . . . . . . . . . . . . . . . 1,312 (321) 1,217 (3,780)
---------- ---------- ---------- ----------
Loss before income taxes, extraordinary item
and cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . (81,528) (81,952) (101,158) (119,348)
Income taxes . . . . . . . . . . . . . . . . . . . . - - 2,610 1,022
---------- ---------- ---------- ----------
Loss before extraordinary items and cumulative
effect of change in accounting principle . . . . . . (81,528) (81,952) (98,548) (118,326)
Extraordinary items, net . . . . . . . . . . . . . . 12,104 108,722 - -
---------- ---------- ---------- ----------
Income (loss) before cumulative effect
of change in accounting principle . . . . . . . . . (69,424) 26,770 (98,548) (118,326)
Cumulative effect of change in accounting principle . - 2,192 - (2,961)
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . $ (69,424) $ 28,962 $ (98,548) $ (121,287)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income (Loss) Per Share:
Before extraordinary items and cumulative effect
of change in accounting principle . . . . . . . . . $ *N/M $ *N/M $ *N/M $ *N/M
Extraordinary items, net . . . . . . . . . . . . . . *N/M *N/M *N/M *N/M
Cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . *N/M *N/M *N/M *N/M
---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . $ *N/M $ *N/M $ *N/M $ *N/M
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted Average Shares Outstanding . . . . . . . . . . 6,170 5,123 2,777 2,181
Shareholders' Deficit Per Share . . . . . . . . . . . . $ *N/M $ *N/M $ *N/M $ *N/M
Shares Outstanding at Year End . . . . . . . . . . . . 7,136 5,713 3,110 2,274
Balance Sheet Items:
Total assets . . . . . . . . . . . . . . . . . . . . $ 105,540 $ 105,743 $ 133,758 $ 192,817
Property and equipment, net . . . . . . . . . . . . . 36,558 38,956 65,317 78,928
Long-term debt . . . . . . . . . . . . . . . . . . . 2,615 1,800 75,958 -
Redeemable preferred stock and preference stock . . . - 5,354 79,276 23,479
Redeemable warrants to purchase common stock . . . . - - 2,900 14,175
Shareholders' deficit . . . . . . . . . . . . . . . . (209,882) (142,720) (206,467) (114,049)
</TABLE>
See Notes to Financial Statements
F-41
<PAGE>
HAWAIIAN AIRLINES, INC.
SELECTED FINANCIAL AND STATISTICAL DATA, CONTINUED
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Statistics:
Revenue passengers* . . . . . . . . . . . . . . . . 4,583 4,337 4,647 3,765 4,736
Revenue passenger miles* . . . . . . . . . . . . . 2,880,338 2,870,713 3,322,045 2,021,698 2,571,956
Available seat miles* . . . . . . . . . . . . . . . 3,995,649 3,850,133 4,710,795 3,203,842 3,899,447
Passenger load factor . . . . . . . . . . . . . . . 72.1% 74.6% 70.5% 63.1% 66.0%
Cargo tons . . . . . . . . . . . . . . . . . . . . 22,740 19,669 15,694 12,003 14,354
Revenue ton miles* . . . . . . . . . . . . . . . . 324,096 314,725 353,067 211,070 275,705
Revenue plane miles* . . . . . . . . . . . . . . . 16,243 15,256 20,909 14,702 17,979
Passenger revenue per passenger mile . . . . . . . 9.7CENTS 9.4CENTS 10.3CENTS 12.7CENTS 9.7CENTS
</TABLE>
*In thousands
Effective July 1, 1993, the Predecessor began to treat passengers flying on
promotional or frequent flyer awards as revenue passengers. This change
decreased passenger revenue per passenger mile by 0.1 CENTS in 1993 and
increased the number of revenue passengers, revenue passenger miles and
passenger load factor by 4.0%, 2.0%, and 1.5%, respectively, in 1993 over the
amounts that would have been reported without the change.
F-42
<PAGE>
HAWAIIAN AIRLINES, INC.
STOCK TRADING RANGE (PER SHARE)
Stock trading range (per share) is not meaningful as the Predecessor has been
recapitalized and has adopted fresh start reporting as of September 11, 1994.
Further, the new Common Stock shares of the Reorganized Company have not
been distributed as of the date of this report.
F-43