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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 2
FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 identification no.)
incorporation or organization)
3375 Koapaka Street, Suite G-350
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
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Class A Common Stock ($.01 par value) American Stock Exchange
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 files such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (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 the court. Yes (X) No ( )
As of March 15, 1996, 27,067,424 shares of Class A Common Stock of the
Registrant were outstanding. The aggregate market value of voting stock held by
non-affiliates (8,281,624 shares of Class A Common Stock) of the Registrant is
$23,809,669.
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EXPLANATORY NOTE
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On April 1, 1996, Hawaiian Airlines, Inc. (the "Company"), filed its Form 10-K
for the Year Ended December 31, 1995, as amended. The Company is filing this
Amendment No. 2 on Form 10-K/A in order to (i) correct a numerical error in the
number of shares purchased by Airlines Investors Partnership, L.P. as described
in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources-AIP Investment, (ii)
reallocate certain Bonus amounts as Other Annual Compensation amounts in Item
11. Executive Compensation-Summary Compensation Table and (iii) clarify the
exercise price of certain existing warrants in Item 11. Executive
Compensation-Compensation Committee Interlocks and Insider Participation and
Note 16 of Notes to Financial Statements, Financial Condition and Liquidity and
Subsequent Investment and Financial Transactions-Existing Warrants. Except as
specifically amended by this Form 10-K/A, the Company's Form 10-K shall remain
unchanged.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
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The airline industry is a highly cyclical business with substantial volatility,
and airlines frequently experience short-term cash requirements caused by both
seasonal fluctuations in traffic that often put a drain on cash during off-peak
periods and other factors that are not necessarily seasonal, including the
extent and nature of price and other competition from other airlines, changing
levels of operations, national and international events, fuel prices and general
economic conditions, including inflation. Accordingly, airlines require
substantial liquidity to sustain continued operations under most conditions.
The Company has operated with limited cash and cash equivalents and a working
capital deficit for a number of years. Working capital deficits are not
uncommon in the airline industry since airlines typically have no product
inventories and sales not yet flown are reflected as current liabilities.
Since the commencement of deregulation in 1978, the U.S. airline industry has
become extremely competitive and volatile. Increased competition, rising
operational costs and pricing pressures have created financial difficulties for
most airlines and many airlines have been acquired, forced to restructure or
ceased operations. After five years of losses totaling $13.0 billion, the U.S.
airline industry is expecting to make more than $2.0 billion in 1995, its first
annual profit since 1989. Improvements in total passenger traffic, cargo
traffic, fares and operations were experienced in 1995 compared to 1994.
Further recovery will depend on the continuing strength of the overall economy,
cooperation for more efficient work rules by employees and governmental
decisions on taxes applicable to the airline industry.
As with other airlines, Hawaiian Airlines was adversely affected by the
unpredictable and often unfavorable, industry and economic conditions of the
past five years. As discussed in Business contained in Part I, Item 1 of this
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Form 10-K, the Interisland and Transpac routes served by the Company are highly
competitive with such competition primarily based on fare levels, performance,
aircraft equipment and service. The markets are subject to seasonal and
cyclical volatility primarily due to seasonal leisure and holiday travel. The
Company typically experiences strong travel periods during June, July, August
and December. The Company, along with other airlines, uses discount fares and
other promotions to stimulate traffic during normally slack travel periods, to
generate cash flow and to sustain relative market share in its Interisland and
Transpac markets.
Recent announcements of capacity increases to Hawaii by both international and
domestic carriers will bring pressure to bear on forecasted pricing levels. The
charter carriers have increased capacity from secondary markets in the Western
region and United has scheduled an additional 9,000 seats per week from Japan
and the U.S. mainland, with the bulk of that capacity dedicated to San Francisco
and Los Angeles routes. Subsequent announcements by United of service from Los
Angeles to Kona and Maui are believed to be in addition to the 9,000 seats
mentioned above. The ever increasing presence of charter carriers and United's
increased frequencies are examples of the competitive pricing and capacity
issues facing the Company in the future.
As discussed in Business, contained in Item 1, Part I of this Form 10-K, on
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September 21, 1993, Hawaiian Airlines voluntarily commenced a Chapter 11
reorganization process and emerged from bankruptcy less than a year later on
September 12, 1994, the Effective Date of the Reorganization Plan. The Chapter
11 process resulted in the Company recognizing an extraordinary gain of $190.1
million, representing the relief of $204.7 million of liabilities net of offsets
and certain liabilities that survived the reorganization.
Consistent with the industry, excluding nonrecurring noncash transactions, the
Company improved its operating and net performance in 1995. Nevertheless, the
Company's working capital deficit during 1995 reached an extreme level, even by
industry standards. To address this problem, in January 1996 the Company
consummated a series of transactions, including the completion of the $20.0
million AIP Investment and certain arrangements and agreements with American and
the Company's labor unions. These transactions have improved the Company's
liquidity substantially and will result in reduced cash operating expenses over
the next few years.
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LIQUIDITY AND CAPITAL RESOURCES
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OVERVIEW
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As of December 31, 1995, the Company had a net working capital deficit of $51.7
million, representing a $5.9 million increase from the net working capital
deficit of $45.8 million at December 31, 1994. Principally, the increase in the
working capital deficit resulted from the net of (1) an increase in accounts
payable of $17.7 million primarily due to deferred aircraft lease rents and
maintenance payments due American as further described below; (2) a decrease in
air traffic liability of $9.9 million due to the burnoff throughout 1995 of
promotional fare ticket sales held in the second and last quarters of 1994; and
(3) miscellaneous changes in other working capital accounts resulting in a $1.9
million decrease in the working capital deficit from that of 1994.
For several years, the Company has been operating with a cash balance equivalent
to less than one week's worth of operating expenses. Continuing to operate at
that level of liquidity would place the Company's existence at risk; there would
be no cushion to respond to unexpected operational upheavals that have
periodically affected the airline industry or to cover the seasonal downturn
typically experienced by the Company in the first quarter of the year.
Due to its working capital shortage, the Company has deferred certain
discretionary capital expenditures that management believes may improve
profitability. One example is a series of investments in improved software that
are expected to increase operating efficiency. Another is the outlay needed to
consolidate operations into one terminal at Honolulu International Airport. The
working capital shortage also has had an unfavorable effect on yield, which,
although difficult to quantify, is believed to be significant. Prior to the AIP
Investment, the Company found it necessary to offer its products to wholesalers
and to the public at reduced rates in order to enhance cash flow. The uncertain
financial situation has also limited the availability of trade credit and at
times has necessitated the use of cash or equivalent security to obtain
services. Finally, potential partners in the airline industry have been
reluctant to enter into business arrangements with the Company until its
financial difficulties have been overcome.
Since the Effective Date, the Company has financed its operations from:
. Operating cash flow;
. Borrowings under an $8.15 million credit facility provided by CIT Group/Credit
Finance, Inc. (the "Credit Facility"). The Credit Facility consists of an
$8.15 million secured revolving line of credit including up to $3.0 million of
letters of credit. Available credit is subject to reduction determined by
recalculation of the borrowing base and repayments arising from disposition of
collateral. As of December 31, 1995, the total availability under the Credit
Facility had been effectively reduced due to recalculation of the borrowing
base to approximately $3.4 million, which amount was fully drawn in the form
of $1.3 million in borrowings and $2.1 million in letters of credit. As of
March 15, 1996, $2.0 million of additional borrowing capacity was available
due to American's release of $2.0 million in letters of credit as described
under Arrangements with American below;
. A series of promotional fare ticket sale activities. Such promotional sales
increase liquidity, but also increase air traffic liability, which could
adversely affect yields and revenues, as well as liquidity, in future periods;
and
. Payment deferrals from existing creditors, including American.
AMERICAN DEFERRAL
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On October 31, 1994, the Company failed to make certain payments due to American
pursuant to the Aircraft Lease Agreement pursuant to which American leases six
DC-10s to the Company. American sent the Company notice of the failure to make
rent and prepaid maintenance payments and noted that such failure constituted an
event of default under the Aircraft Lease Agreement, but did not declare the
Aircraft Lease Agreement in default or exercise any of the remedies available to
it, which include, but are not limited to, termination of the Aircraft Lease
Agreement, repossession of certain aircraft and engines, recovery of damages and
drawings under letters of
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credit then in place in the amount of $2.0 million posted by the Company as
required by the Aircraft Lease Agreement. The Company subsequently made the rent
and prepaid maintenance payments due American in November 1994.
On several occasions during 1995, the Company again failed to timely make
certain rent and prepaid maintenance payments in full due pursuant to the
Aircraft Lease Agreement. Again, while American sent the Company notice of the
failure to make such payments in full, American did not declare the Aircraft
Lease Agreement in default or exercise any of the remedies available to it. On
several occasions during the year, American deferred the payment of the
delinquent amounts. As of December 9, 1995, the Company owed American $7.1
million in deferred payments and accrued interest. American agreed to permit
the deferral of the payment of this $7.1 million (plus interest thereon) and the
periodic payments of lease rents and maintenance payments that would become due
on or after December 8, 1995, up to a maximum of an additional $2.9 million
(including interest), until the earlier of the consummation of the AIP
Investment or February 7, 1996. As of January 4, 1996, the Company had deferred
the maximum deferrable amount of lease rents and maintenance payments under the
Aircraft Lease Agreement. These deferred amounts were paid by the Company on
January 31, 1996 through the delivery by the Company of a secured promissory
note in connection with the AIP Investment as described below under Arrangements
with American.
AIP INVESTMENT
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For a variety of reasons, including the Company's financial results, its
inability to meet its current financial responsibilities, including its
obligations to American under the Aircraft Lease Agreement, thereby creating an
urgent need to obtain an infusion of capital, and the uncertain economic
outlook, the Board of Directors determined in 1995 to explore options to
supplement the Company's capital base, reduce its reliance on short-term bank
debt and promotional coupon sales and increase the Company's financial
flexibility. The Company, with the assistance of its financial advisor,
identified and met with potential investors, including AIP, regarding a possible
equity investment in the Company. As a result of such efforts, AIP agreed to
make the AIP Investment, in which AIP purchased 18,181,818 shares of the Class A
Common Stock and four shares of the Series B Special Preferred Stock for $20.0
million in cash. The AIP Investment was unanimously approved by the Company's
Board of Directors in December 1995, approved by the Company's shareholders on
January 30, 1996 and consummated on January 31, 1996.
Of the $20.0 million gross proceeds from the AIP Investment, a portion has been
used to pay (1) approximately $2.8 million of fees and expenses associated with
the AIP Investment and its related transactions; (2) approximately $3.2 million
of accrued landing fees for the Company's Hawaii operations and accrued rent on
the Company's facilities in Hawaii; and (3) approximately $310,000 of deferred
Board of Director compensation. Although the Company has not designated
specific uses for the $13.7 million balance of the proceeds from the AIP
Investment, it is anticipated that such proceeds will be used to meet working
capital needs.
ARRANGEMENTS WITH AMERICAN
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Upon consummation of the AIP Investment and satisfaction of certain other
conditions, the Company entered into certain arrangements with American pursuant
to which American and the Company agreed to, among other things, the following:
. The payment of $10.0 million of deferred lease rents and maintenance payments
under the Aircraft Lease Agreement (and accrued interest thereon) and the
reimbursement of American's fees and expenses in connection with the
transaction through the issuance by the Company to American of a $10.25
million promissory note secured by certain assets of the Company (the
"American Note"). The American Note bears interest at 10.0% per annum,
payable quarterly in arrears, and has a final maturity date of September 11,
2001. The American Note requires repayment of principal equal to one-sixth of
the original principal amount on each anniversary of its date of issuance
(January 31). The Company has the option to prepay the American Note for $9.15
million at any time before January 31, 1997, or at any time thereafter, in
whole or in part, at its remaining principal balance, without premium. The
American Note is prepayable in full, at the option of the holder, in the event
and at the time that any person or group (other than AIP) acquires more than
30.0% of the voting interest in the Company;
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The American Note is secured by a lien on substantially all of the personal
property of the Company through December 31, 1997. This lien is a first
priority lien except that it is junior to (1) liens of security deposits held
by credit card processors and (2) liens securing up to $15.0 million in
obligations of the Company consisting of (x) secured obligations of the
Company (other than credit card processor security deposit liens) existing on
the date of issuance of the American Note, and (y) additional secured
obligations of the Company incurred after such issuance. As of January 31,
1996, in addition to its credit card deposits, the Company had $7.6 million in
secured obligations (including all amounts under the Credit Facility), the
liens of which are prior to the lien of the American Note. On and after
January 1, 1998, the Company is obligated to secure the American Note and the
other obligations of the Company to American with a first priority lien on
identified assets with a fair market value (supported by an appraisal) of at
least 125.0% of the remaining outstanding principal balance of the American
Note from time to time;
. Basic rents under the Aircraft Lease Agreement have been reduced by
approximately 28.0% for a period of three years, at which time basic rents
would revert back to 1995 levels. The Company has agreed to pay a minimum
monthly charge for maintenance services and basic rents and maintenance
charges are payable monthly in arrears rather than weekly in advance. American
has the right to terminate its obligation to provide aircraft maintenance
services on and after January 1, 1999 upon 180 days prior notice; and
. American's relinquishment of $2.0 million of letters of credit which secured
the Company's obligations to American under the Aircraft Lease Agreement. The
termination of these letters of credit increased the Company's borrowing
capacity under the Credit Facility.
The arrangements with American have provided the Company with substantial
benefits. The payment through the American Note of $10.0 million of deferred
rents and maintenance payments otherwise due on February 7, 1996 will
effectively permit the Company to make such payments in installments over the
period from January 1997 to September 2001, thereby freeing up working capital
for other purposes. In addition, basic rents under the Aircraft Lease Agreement
have been reduced by approximately 28.0% for three years, resulting in lower
operating costs. Furthermore, the release by American of the security deposit
letters of credit resulted in $2.0 million of borrowing capacity becoming
available to the Company under the Credit Facility. In total, these
arrangements with American have further improved the Company's liquidity by
approximately $15.0 million and will result in the reduction of cash operating
expenses by approximately $3.0 million per year for three years.
UNIONS AND LABOR AGREEMENTS
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Upon consummation of the AIP Investment and satisfaction of certain other
conditions, amendments to the labor agreements for each of the Company's labor
unions became effective. The modifications to the labor agreements extend the
amendable date of all five contracts from February 28, 1997 to February 28,
2000. Each of the five unions agreed to certain economic concessions, which
include cancellation of certain scheduled pay increases, with new pay increases
to be effective December 1, 1998 and January 1, 2000. Management expects that
these concessions will reduce cash operating expenses which would have been
incurred by an aggregate amount of approximately $10.0 million during the two-
year period ending December 1997. In exchange for the wage concessions, the
Company has agreed to negotiate gain-sharing programs to provide employees the
opportunity to receive wage rate increases resulting from work rule and
productivity modifications, which produce cost savings to the Company. In
addition, the Company has agreed to establish a profit bonus plan, which would
provide all employees (other than senior management) with cash bonuses if the
Company achieves certain pre-tax profit targets. The contracts as modified
provide additional furlough protection to employees under certain specified
circumstances. The Company and unions also have agreed to include certain
additional low-cost or no-cost provisions that are specific to each of the
respective union contracts. The estimated cash operating expense savings noted
above do not include estimated costs associated with these gain sharing and
profit bonus plan initiatives because management cannot presently determine the
amount of such costs.
RIGHTS OFFERING
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The AIP Investment agreement requires AIP to use its best efforts to cause the
Company, as soon as practicable after the consummation of the AIP Investment, to
make a rights offering (the "Rights Offering") pursuant to which the Company
would offer to such persons as the Board of Directors shall determine at the
time of the Rights Offering (which would not initially include AIP (except
possibly with respect to Rights not exercised
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during the allotted time) but would include, among others, shareholders who hold
shares at the record date for the Rights Offering and holders of options granted
under the 1994 Stock Option Plan) rights to purchase shares of Class A Common
Stock (the "Rights"), during a 20-day period after the issuance of the Rights,
at a discount equal to at least 30.0% of the trading price of the Class A Common
Stock measured over a period of time to be designated by the Board of Directors
after the consummation of the AIP Investment and prior to the Rights Offering,
subject to a minimum exercise price of $1.10 per Right. Unexercised Rights would
be offered to certain employees, as provided in the modifications to the
collective bargaining agreements described below, and possibly to AIP. The other
terms and conditions of the Rights Offering, including the number of Rights to
be offered, the record date for the Rights Offering and whether the Rights would
be transferable, would be established by the Board of Directors at the time of
the Rights Offering. It is currently expected that Rights with respect to
approximately 10,000,000 shares of Class A Common Stock would be distributed,
subject to the Board's determination at the time. If Rights with respect to
10,000,000 shares were distributed and exercised in full, the Rights Offering
would produce gross proceeds to the Company of at least $11.0 million. The
timing of the Rights Offering cannot be estimated at this time. The Rights
Offering would be made only by means of a separate prospectus constituting a
part of a registration statement to be filed by the Company with the Securities
and Exchange Commission.
The Company has agreed with GPA Group plc and its affiliate AEROUSA, Inc. (the
"GPA Companies") that, if the closing of the Rights Offering shall have
occurred by September 30, 1996, the Company shall repurchase all of the shares
of Class A Common Stock owned by the GPA Companies and repay certain secured and
unsecured promissory notes held by the GPA Companies. The stock repurchase
price would be $1.10 per share and the promissory notes would be repaid at
approximately 85.0% of the then carrying value of the notes, including any
deferred costs and other expenses owed. Based on the number of shares owned by
the GPA Companies as of January 31, 1996 and the carrying value of the notes as
of such date, the Company would pay approximately $4.91 million to the GPA
Companies. The Company has the option at any time prior to the Rights Offering
to repurchase the GPA Companies' shares and repay their notes on the above
terms.
AUTHORIZED CAPITAL STOCK; WARRANTS AND OPTIONS
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In connection with the AIP Investment, the Amended Articles of Incorporation of
the Company, as amended, were further amended to increase the authorized number
of shares of Class A Common Stock from 40,000,000 shares to 60,000,000 shares.
The increase in the number of authorized shares allows the Company to have a
sufficient number of authorized and unissued shares of Class A Common Stock to
permit the exercise of Rights under the Rights Offering and ensures that the
Company will have, from time to time, an adequate number of authorized and
unissued shares available for corporate purposes, such as future public and
private equity offerings, to raise working capital.
Pursuant to the anti-dilution provisions of the Existing Warrants, upon the
consummation of the AIP Investment, the exercise price of the Existing Warrants
was adjusted to $1.71 per share and the holders of the Existing Warrants
received warrants to purchase an additional 587,356 shares of Class A Common
Stock exercisable at $1.71 per share as well. The holders of the Existing
Warrants have agreed that the anti-dilution provisions will not apply in
connection with the AMR Warrants and the Rights.
Options to acquire 592,500 shares of Class A Common Stock were granted in 1995
pursuant to the terms of the 1994 Stock Option Plan. As a result of an
amendment to the 1994 Stock Option Plan in connection with the AIP Investment,
the option exercise period was extended to February 2, 2005. The option
exercise price is $1.62 per share. The aforementioned amendment to the 1994
Stock Option Plan resulted in a new measurement date for the awarded options and
approximately $782,000 of noncash compensation expense was recorded in January
1996. To date, no options have been exercised.
In connection with the arrangements with American described above, the Company
issued to AMR the AMR Warrants, which entitle AMR to acquire up to 1,897,946
shares of the Class A Common Stock at $1.10 per share. One-half of the AMR
Warrants are immediately exercisable but the balance will only be exercisable if
American and the Company enter into a code sharing agreement by January 1, 1997
regarding the placement of the two letter flight designator code for American's
flights on the Company's Interisland flights. The AMR Warrants expire on
September 11, 2001.
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Except for shares of Class A Common Stock that have been reserved in connection
with the Existing Warrants, the 1994 Stock Option Plan, the Reorganization Plan,
the AMR Warrants and the Rights Offering, the Company has no present agreements
or commitments to issue any additional shares of Class A Common Stock.
TAX AND NET OPERATING LOSS ("NOL") CONSIDERATIONS
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The Company believes that the transactions with respect to its equity following
its bankruptcy reorganization, including those pertaining to the AIP Investment,
issuance of the AMR Warrants, consummation of the Rights Offering, and possible
purchases or sales of its stock by significant shareholders or exercises of
options to acquire equity in the Company, has resulted in or has significantly
increased the likelihood of an "ownership change" of the Company for purposes of
Section 382 of the Internal Revenue Code. An ownership change under Section 382
results in an annual limitation (the "Section 382 Limitation") on the amount of
pre-ownership change NOLs of the Company that can be used to offset the
Company's taxable income for periods following the ownership change.
Based on values used by the Company in preparing its 1994 federal income tax
return, the Company's Section 382 Limitation that generally applied to all NOLs
attributable to the period prior to the ownership change that resulted from the
Company's bankruptcy reorganization was approximately $2.4 million, plus certain
"built-in" income items that increase the Section 382 Limitation. While the
Company anticipates that any ownership change resulting from the AIP Investment
and its related transactions would result in a new Section 382 Limitation which
is lower than the Section 382 Limitation in effect previously, the amount of
such reduction and its effect on the Company (as well as the effect on the
Company of subjecting NOLs incurred following the Company's bankruptcy
reorganization to the Section 382 Limitation) depend on numerous issues,
including but not limited to the value of the Company's equity at certain dates,
the amount and timing of future taxable income and loss, and the amount of
"built-in" income items of the Company. Therefore, while the effect of an
ownership change resulting from the AIP Investment and its related transactions
could be to increase the future tax liabilities of the Company, the precise
effect of such an ownership change of the Company resulting from the AIP
Investment and its related transactions is unclear.
CURRENT STATUS
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The Company's capital resources have been increased substantially due to the AIP
Investment and the arrangements with American. It is anticipated that the
combination of the Company's improved liquidity and reduced operating costs will
enable the Company to make necessary capital expenditures, take advantage of
prompt payment discounts, avoid the need to provide early payment incentives to
wholesalers and become less dependent on promotional fare ticket sales to the
traveling public, thereby further improving liquidity.
In addition, the Company is anticipating the consummation of the Rights Offering
and is currently negotiating to increase the capacity of the Credit Facility to
$15.0 million. No assurance can be given that the Company will be successful in
either of these efforts. If the Company is unsuccessful, it will seek other
sources of financing. However, because the Company has no remaining
unencumbered assets, its access to additional sources of liquidity remains
limited. If the Company is unsuccessful in obtaining additional sources of
liquidity, an adverse change in events and circumstances could result in the
Company being unable to meet its financial obligations after it exhausts its
current and foreseeable capital resources.
The financial statements at December 31, 1995, 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. 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 future uncertainties. 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.
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RESULTS OF OPERATIONS
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1995 COMPARED TO 1994
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INTRODUCTION
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The Company understands that financial results of the Reorganized Company have
been affected due to the recapitalization and adoption of fresh start reporting
as of September 12, 1994 and such results are not comparable to the Predecessor.
Nevertheless, the operating revenues and expenses of the Reorganized Company in
1995 have been compared to the combined operating revenues and expenses of the
Reorganized Company and Predecessor in 1994. Significant differences between
1995 and 1994 as a result of the recapitalization and fresh start adjustments
have been disclosed.
For the year ended December 31, 1995, the Company incurred operating and net
losses of $1.9 million and $5.5 million, respectively. The 1995 operating loss
represents a decrease of $10.8 million or 85.0% from the operating loss of $12.7
million in 1994.
OPERATING REVENUES
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The following table compares 1995 operating revenues to those in 1994, in
thousands, by service type:
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
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<S> <C> <C> <C>
Interisland:
Passenger............. $122,079 $119,750 $ 2,329
Charter............... 33 25 8
Cargo................. 6,702 6,513 189
Other................. 5,665 5,645 20
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134,479 131,933 2,546
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Transpac:
Passenger............. 156,155 142,116 14,039
Cargo................. 9,555 7,688 1,867
Other................. 3,114 2,896 218
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168,824 152,700 16,124
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Southpac:
Passenger............. 19,293 18,311 982
Cargo................. 1,912 2,138 (226)
Other................. 229 252 (23)
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21,434 20,701 733
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Overseas Charter:
Passenger............. 22,167 646 21,521
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Total............... $346,904 $305,980 $40,924
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</TABLE>
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The following table compares applicable 1995 operating and financial passenger
revenue statistics to those in 1994:
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE) %
---------------------------------------------
<S> <C> <C> <C> <C>
Interisland:
Revenue passengers*....... 3,721 3,639 82 2.3
Revenue passenger miles*.. 490,044 476,051 13,993 2.9
Available seat miles*..... 937,736 854,073 83,663 9.8
Passenger load factor..... 52.3% 55.7% (3.4) (6.1)
Yield..................... 24.9 cents 25.2 cents (0.3) cents (1.2)
Transpac:
Revenue passengers*....... 994 880 114 13.0
Revenue passenger miles*.. 2,506,774 2,231,106 275,668 12.4
Available seat miles*..... 3,034,177 2,857,081 177,096 6.2
Passenger load factor..... 82.6% 78.1% 4.5 5.8
Yield..................... 6.2 cents 6.4 cents (0.2) cents (3.1)
Southpac:
Revenue passengers*....... 66 65 1 1.5
Revenue passenger miles*.. 174,548 173,182 1,366 0.8
Available seat miles*..... 266,406 284,495 (18,089) (6.4)
Passenger load factor..... 65.5% 60.9% 4.6 7.6
Yield..................... 11.1 cents 10.6 cents 0.5 cents 4.7
Overseas Charter:
Revenue passengers*....... 155 1 154 N/M**
Revenue passenger miles*.. 425,797 2,202 423,595 N/M**
Available seat miles*..... 439,142 4,141 435,001 N/M**
</TABLE>
* In thousands
** Not Meaningful
Operating revenues totaled $346.9 million in 1995 compared to $306.0 million in
1994, an increase of $40.9 million or 13.4%.
Revenues from Interisland passenger service totaled $122.1 million during 1995,
an increase of $2.3 million or 1.9% from 1994 Interisland passenger revenues of
$119.8 million. Increases of 2.3% and 2.9% in Interisland passengers carried and
revenue passenger miles, respectively, were offset by a decrease in Interisland
yield of 0.3 cents or 1.2%. Increases in Interisland revenue passengers carried,
revenue passenger miles and available seat miles were a direct result of
increased schedule frequencies due to operational concepts such as the Island
Shuttle operating for a full year in 1995 versus a partial year in 1994 and the
use of promotional fare ticket programs to stimulate traffic and increase
liquidity. The promotional fare ticket programs, however, were also the primary
cause of dilution in the 1995 Interisland yield.
Revenues from Transpac passenger operations amounted to $156.2 million during
1995 compared to $142.1 million in 1994, an increase of $14.0 million or 9.9%.
The increase in Transpac passenger revenues resulted primarily from an increase
in Transpac load factor of 5.8%. The increase in load factor was offset by a 0.2
cents or 3.1% decrease in Transpac yield year over year. Transpac yields were
affected by heavy pricing competition in the Transpac market and similar to
above, the effects of promotional fare ticket programs.
-9-
<PAGE>
Southpac passenger revenues in 1995 totaled $19.3 million, representing an
increase of $982,000 or 5.4% from 1994. Both Southpac load factor and yield
increased year over year by 7.6% and 4.7%, respectively. The increase in yield
is primarily attributable to increases to all Southpac fares in late 1994.
Transpac cargo revenues increased by $1.9 million or 24.3% from 1994. Increased
frequency in its Transpac routes allowed the Company to transport 5.1 or 48.4%
more tons of freight in 1995. The increase in tonnage was offset by a decrease
in yield year over year of 5.9 cents or 16.3%. The decrease in Transpac cargo
yield was primarily caused by a change in mix as the Company carried more
agricultural and bulk freight in 1995 versus 1994.
Overseas charter revenues of $22.2 million were earned in 1995 due to the
commencement of charter operations between Honolulu, Hawaii and Las Vegas,
Nevada in 1995.
OPERATING EXPENSES
------------------
The following table compares operating expenses for 1995 with 1994 by major
category, in thousands:
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
-------------------------------------
<S> <C> <C> <C>
Wages and benefits.......... $108,274 $102,670 $ 5,604
Aircraft fuel, including
taxes and oil.............. 56,724 47,682 9,042
Maintenance materials and
repairs.................... 60,581 46,541 14,040
Aircraft rentals............ 16,477 23,966 (7,489)
Purchased services.......... 20,192 19,866 326
Sales commissions........... 13,875 12,841 1,034
Rentals other than aircraft
and engines................ 9,021 9,633 (612)
Passenger food.............. 8,185 8,972 (787)
Depreciation and
amortization............... 7,859 6,797 1,062
Landing fees................ 8,202 6,793 1,409
Reservation fees and
services................... 6,808 6,635 173
Advertising and promotion... 8,301 4,909 3,392
Personnel expenses.......... 3,868 4,056 (188)
Insurance-hull and liability 3,920 3,388 532
Interrupted trips........... 1,823 2,038 (215)
Early retirement provision.. 2,000 -- 2,000
Nonreorganization
professional and legal
fees....................... 2,032 1,656 376
Other....................... 10,663 10,226 437
-------- -------- -------
Total.................... $348,805 $318,669 $30,136
======== ======== =======
</TABLE>
Operating expenses totaled $348.8 million in 1995, an increase of $30.1 million
or 9.4% from total operating expenses of $318.7 million in 1994.
Wages and benefits increased $5.6 million or 5.5% in 1995. The increase is
primarily attributed to (1) $3.6 million of additional wages and benefits due
to 5.0% to 6.7% wage increases effective September 1, 1994 and (2) $2.0 million
of noncash compensation expense recognized under the provisions of a 1994 Stock
Option Plan for officers and key employees of the Company.
Aircraft fuel, including taxes and oil, increased by $9.0 million or 19.0% from
$47.7 in 1994 to $56.7 million in 1995. While average cost per gallon remained
relatively stable year over year at $0.61, the Company consumed
-10-
<PAGE>
14.0 million or 17.9% more gallons in 1995 than 1994, primarily due to increased
frequencies on the Company's Interisland and Transpac routes.
Maintenance materials and repairs totaled $60.5 million in 1995 an increase of
$14.0 million or 30.1% over 1994. The Company incurred approximately $9.8
million less in L-1011 and DHC-7 maintenance costs in 1995 as these aircraft
were phased out during 1994. However, $23.8 million of additional maintenance
was incurred in 1995 for the Company's DC-10-10 and DC-9-50 fleets.
Aircraft rentals decreased by $7.5 million or 31.2% year over year. The
decrease was a net result of (1) $7.7 million less in DHC-7 and L-1011 aircraft
rents, again as these aircraft were phased out during 1994; (2) $4.2 million
less in DC-9-50 aircraft and engine rents due to such rents being restructured
on the Effective Date; and (3) $4.4 million more in rents for DC-10-10 aircraft.
Sales commissions totaled $13.9 million in 1995, an increase of $1.1 million or
8.6% over total sales commissions of $12.8 million in 1994. The increase is
primarily attributable to $1.0 million in additional commissions related to
incentive programs offered to wholesalers designed to stimulate traffic.
Depreciation and amortization increased by $1.1 million or 15.6%. An additional
$2.5 million of amortization of reorganization value in excess of identifiable
assets in 1995 was offset by $1.7 million less in depreciation from the
reclassification of approximately $13.5 million of Property and equipment to
Assets held for sale on the Effective Date.
Landing fees increased by $1.4 million or 20.7% to $8.2 million in 1995. The
increase was principally caused by increased frequencies in the Interisland and
Transpac markets, specifically Los Angeles, Las Vegas and Portland.
Advertising and promotion totaled $8.3 million in 1995, an increase of $3.4
million or 69.1% over 1994, a direct result of efforts to increase the Company's
exposure in the Interisland and West Coast markets through advertising and
telecommunications media.
Other operating expenses in 1995 were reduced by the reversal of $1.8 million in
preconfirmation contingency accruals initially provided for on the Effective
Date.
Early retirement provision of $2.0 million represents the estimated effects on
the Company's pension and postretirement benefit obligations from the early
retirement program offered in the first quarter of 1995.
NONOPERATING INCOME (EXPENSE)
-----------------------------
Reorganization expenses in 1994 totaled $14.0 million and principally represents
$5.7 million and $7.6 million in legal and professional fees and employee
concession claims, respectively, associated with the Predecessor's Chapter 11
process and $638,000 in fresh start adjustments recorded on the Effective Date
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."
EXTRAORDINARY ITEMS
-------------------
An extraordinary gain of approximately $190.1 million was recorded in the third
quarter of 1994 primarily due to the extinguishment of prepetition obligations.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (the "SFAS") 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.
-11-
<PAGE>
SFAS No. 121 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.
SFAS No. 121 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 SFAS No. 121 in 1996. Restatement of previously
issued financial statements is not permitted. The Company does not believe that
adoption of SFAS No. 121 will have a material impact on its financial condition
or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a new, fair value based method of
accounting for stock-based compensation, but does not require an entity to adopt
the new method for purposes of preparing its basic financial statements. For
entities not adopting the new method, SFAS No. 123 requires footnote disclosure
of pro forma net income and earnings per share information as if the fair value
based method had been adopted. The disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The Company will comply with the disclosure requirements of SFAS No. 123
in its 1996 financial statements.
1994 COMPARED TO 1993
---------------------
INTRODUCTION
------------
The Company believes that its operating revenues and expenses after the
Effective Date have been presented on a basis which is in all material respects
consistent with the presentation of operating revenues and expenses before the
Effective Date. Therefore, operating revenues and expenses of the Reorganized
Company and the Predecessor in 1994 have been combined for purposes of
comparison to 1993.
Excluding nonrecurring items, the Company's operating and net losses for 1994
decreased over 1993 by $12.1 million and $16.0 million, respectively, to $12.7
million and $12.9 million, respectively.
-12-
<PAGE>
OPERATING REVENUES
------------------
The following table compares 1994 operating revenues to those in 1993, in
thousands, by service type:
<TABLE>
<CAPTION>
INCREASE
1994 1993 (DECREASE)
-------------------------------------------
<S> <C> <C> <C>
Interisland:
Passenger............. $119,750 $118,530 $ 1,220
Charter............... 25 1,016 (991)
Cargo................. 6,513 6,954 (441)
Other................. 5,645 5,569 76
-------- -------- -------
131,933 132,069 (136)
-------- -------- -------
Transpac:
Passenger............. 142,116 136,543 5,573
Cargo................. 7,688 6,121 1,567
Other................. 2,896 2,669 227
-------- -------- -------
152,700 145,333 7,367
-------- -------- -------
Southpac:
Passenger............. 18,311 18,313 (2)
Cargo................. 2,138 1,925 213
Other................. 252 178 74
-------- -------- -------
20,701 20,416 285
-------- -------- -------
Overseas Charter:
Passenger............. 646 6,153 (5,507)
Other................. -- 138 (138)
-------- -------- -------
646 6,291 (5,645)
-------- -------- -------
Total............... $305,980 $304,109 $ 1,871
======== ======== =======
</TABLE>
-13-
<PAGE>
The following table compares applicable 1994 operating and financial passenger
revenue statistics to those in 1993:
<TABLE>
<CAPTION>
INCREASE
1994 1993 (DECREASE) %
----------------------------------------------
<S> <C> <C> <C> <C>
Interisland:
Revenue passengers*....... 3,639 3,386 253 7.5
Revenue passenger miles*.. 476,051 438,979 37,072 8.4
Available seat miles*..... 854,073 770,171 83,902 10.9
Passenger load factor..... 55.7% 57.0% (1.3) (2.3)
Yield..................... 25.2 cents 27.0 cents (1.8) cents (6.7)
Transpac:
Revenue passengers*....... 880 885 (5) (0.6)
Revenue passenger miles*.. 2,231,106 2,257,472 (26,366) (1.2)
Available seat miles*..... 2,857,081 2,784,980 72,101 2.6
Passenger load factor..... 78.1% 81.1% (3.0) (3.7)
Yield..................... 6.4 cents 6.0 cents 0.4 cents 6.7
Southpac:
Revenue passengers*....... 65 66 (1) (1.5)
Revenue passenger miles*.. 173,182 174,262 (1,080) (0.6)
Available seat miles*..... 284,495 294,983 (10,488) (3.6)
Passenger load factor..... 60.9% 59.1% 1.8 3.0
Yield..................... 10.6 cents 10.5 cents 0.1 cents 1.0
</TABLE>
* In thousands
Operating revenues totaled $306.0 million in 1994 compared to $304.1 million in
1993, an increase of $1.9 million or 0.6%.
Revenues from Interisland passenger service totaled $119.8 million during 1994,
an increase of $1.2 million or 1.0% from 1993 Interisland passenger revenues of
$118.5 million. Increases of 7.5% and 8.4% in Interisland passengers carried and
revenue passenger miles, respectively, were offset by a decrease in Interisland
yield of 1.8 cents or 6.7%. Increases in revenue passengers carried, revenue
passenger miles and available seat miles were a direct result of (1) the
utilization of 13 DC-9-50 aircraft during a majority of 1994 versus four DHC-7
and, on average nine DC-9-50 aircraft in 1993; and (2) increased passenger
counts due to the overall increase in Hawaii tourism year over year and, newly
implemented operational concepts such as the Island Shuttle to Maui and Kauai
and promotional fare ticket programs. However, the promotional fare ticket
programs, such as those held in the second and fourth quarters of 1994, were
also the primary cause of dilution in the 1994 Interisland yield.
Revenues from Transpac passenger operations amounted to $142.1 million during
1994 compared to $136.5 million in 1993, an increase of $5.6 million or 4.1%.
The increase in Transpac passenger revenues resulted primarily from a 0.4 cents
or 6.7% increase in Transpac yield year over year. The increase in yield was
offset by decreases in revenue passengers carried and revenue passenger miles of
0.6% and 1.2%, respectively. As noted above, promotional fare ticket programs
were held in 1994, with a portion of such promotional fare ticket programs
associated with Transpac routes. Such allocations assisted in increasing
Transpac yields in 1994 as no such allocations were made in 1993. Decreases in
Transpac revenue passengers carried, revenue passenger miles flown and available
seat miles were a direct result of the Company completing in 1994 its transition
to an all DC-10-10 aircraft fleet from an all L-1011 fleet. In their current
configuration, at full load, the DC-10-10 on average accommodates 35 less
passengers than the L-1011.
-14-
<PAGE>
Southpac passenger revenues in 1994 remained comparable to 1993 at $18.3
million. While period over period revenue passengers carried and revenue
passenger miles decreased by 1.5% and 0.6%, respectively, Southpac yield
increased by 0.1 cents or 1.0%. Again, decreases in Southpac revenue passengers
carried, revenue passenger miles flown and available seat miles may be
attributed to the transition to an all DC-10-10 aircraft fleet in 1994.
Southpac yields increased due to the downsized operations of a competitor in the
Southpac market in 1994.
Transpac cargo revenues increased by $1.6 million or 26.2% from 1993. Increased
frequency in its Transpac routes allowed the Company to transport 5.4 million or
34.3% more pounds of freight in 1994. The increase in tonnage was offset by a
decrease in yield year over year of 2.5 cents or 6.4%.
Overseas charter revenues decreased by $5.5 million or 88.7% upon comparison of
1994 to 1993. A majority of the decrease is associated with the Predecessor
obtaining in 1993 a $3.9 million settlement from the Military Airlift Command
for charter operations during Operations Desert Shield and Desert Storm in 1991
and 1990.
OPERATING EXPENSES
------------------
The following table compares operating expenses for 1994 with 1993 by major
category, in thousands:
<TABLE>
<CAPTION>
INCREASE
1994 1993 (DECREASE)
-------------------------------------
<S> <C> <C> <C>
Wages and benefits.......... $102,670 $101,292 $ 1,378
Aircraft fuel, including
taxes and oil.............. 47,682 49,777 (2,095)
Maintenance materials and
repairs.................... 46,541 40,986 5,555
Aircraft rentals............ 23,966 29,342 (5,376)
Purchased services.......... 19,866 17,789 2,077
Sales commissions........... 12,841 11,153 1,688
Rentals other than aircraft
and engines................ 9,633 7,292 2,341
Passenger food.............. 8,972 8,150 822
Depreciation and
amortization............... 6,797 7,442 (645)
Landing fees................ 6,793 4,803 1,990
Reservation fees and
services................... 6,635 5,762 873
Advertising and promotion... 4,909 3,154 1,755
Personnel expenses.......... 4,056 4,199 (143)
Insurance-hull and liability 3,388 2,126 1,262
Interrupted trips........... 2,038 4,074 (2,036)
Nonreorganization
professional and legal
fees....................... 1,656 3,872 (2,216)
Restructuring charges....... -- 14,000 (14,000)
Other....................... 10,226 13,734 (3,508)
-------- -------- --------
Total.................... $318,669 $328,947 $(10,278)
======== ======== ========
</TABLE>
Operating expenses totaled $318.7 million in 1994, a decrease of $10.2 million
or 3.1% from total operating expenses of $328.9 million in 1993.
Wages and benefits increased $1.4 million or 1.4% in 1994. The increase is
primarily attributed to 5.0% to 6.7% wage increases effective September 1,
1994.
Aircraft fuel, including taxes and oil decreased by $2.1 million or 4.2% from
$49.8 in 1993 to $47.7 million in 1994. In addition to a $0.05 or 8.2% decrease
in average cost per gallon year over year, the Company incurred approximately
$2.3 million less in aircraft fuel expense in 1994 due to the phase out of its
DC-8 aircraft in 1993.
-15-
<PAGE>
Maintenance materials and repairs totaled $46.5 million in 1994 an increase of
$5.6 million or 13.7% over 1993. On a net basis, the Company incurred
approximately $5.1 million in additional maintenance expense from the DC-10-10
aircraft transitioned in 1994.
Aircraft rentals decreased by $5.4 million or 18.3%, of which $4.1 million
represents decreased rents due to DC-9-50 aircraft operating under capital
versus operating leases in 1994 and other DC-9-50 aircraft operating lease rents
being restructured on the Effective Date. Approximately $1.3 million of the
decrease is attributable to decreased rents associated with phased out L-1011,
DHC-7 and DC-8 aircraft in 1994 and 1993.
Purchased services increased $2.1 million or 11.8%, to $19.9 million in 1994
from $17.8 million in 1993. The Company incurred an additional $1.6 million in
costs in 1994 associated with simulator training, operation of its flight
operating system, credit card fees and outsourced computer mainframe services.
Sales commissions totaled $12.8 million in 1994, an increase of $1.6 million or
14.3% over total sales commissions of $11.2 million in 1993. The increase is
primarily attributable to an 18.0% increase in commissionable sales processed
through area settlement plans.
Rentals other than aircraft and engines totaled $9.6 million in 1994 versus $7.3
million in 1993. The $2.3 million or 31.5% increase is due to increased space
rental rates and additional joint use and system support expenses charged
primarily by the State of Hawaii airport authorities.
Landing fees increased by $2.0 million or 41.6% to $6.8 million in 1994.
Increases associated with DC-9-50 aircraft landings and wide-body aircraft
landings of $1.4 million and $900,000, respectively, were experienced in 1994.
Such increases were due to (1) increased landing fee rates in Hawaii and Los
Angeles, California and (2) increased frequency due to implementation of the
Island Shuttle, schedule changes to Los Angeles, California and Las Vegas,
Nevada and commencement of scheduled service to Portland, Oregon.
Advertising and promotion totaled $4.9 million in 1994, an increase of $1.8
million or 58.1% over 1993. Approximately $900,000 is due to a conscious effort
by management to increase the Company's exposure through advertising and
promotional media, especially on the U.S. West Coast. Another $200,000 of
additional expenses were incurred in connection with the Company's participation
in American's frequent flyer program.
Insurance-hull and liability increased from $2.1 million in 1993 to $3.4 million
in 1994. The $1.3 million or 61.9% increase was mainly due to an 84.2% increase
in the applicable premium rate for liability applied to the Company's revenue
passenger miles in 1994.
Interrupted trip expense decreased by $2.0 million or 49.9% year over year. The
Company experienced $1.8 million less in flight interruption manifest and denied
boarding expenses due to its continual efforts to improve customer service and
on-time performance.
Nonreorganization professional and legal fees decreased $2.2 million period over
period due to a majority of professional and legal fees being classified, in
accordance with the provisions of SOP 90-7 as reorganization expenses during the
year 1994.
Restructuring charges in 1993 represent the Predecessor's provision for the
anticipated return and termination of five of its DC-9-50 aircraft in the second
quarter of 1993.
-16-
<PAGE>
NONOPERATING INCOME (EXPENSE)
-----------------------------
Reorganization expenses in 1993 of $52.6 million primarily consists of $47.1
million in anticipated L-1011 and DHC-7 aircraft rental and return costs, $4.7
million for the write-off of related flight equipment leasehold improvements and
$800,000 in legal and professional fees.
EXTRAORDINARY ITEMS
-------------------
The $12.1 million extraordinary item in 1993 represents a one-time non-monetary
gain due to the reduction in the net accrued pension benefit obligation of the
Predecessor. Effective October 1, 1993, the IAM and salaried employee defined
benefit pension plans were frozen with no future pay or credited service
increases.
-17-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The following Summary Compensation Table sets forth certain information
regarding compensation paid for the last three fiscal years to the Company's
Chief Executive Officer and its four other most highly compensated executive
officers of the Company ("Named Executive Officers") whose salary and bonus
exceeded $100,000 in the 1995 fiscal year.
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------- ------------
Securities
Name and Principal Salary Bonus Other Annual Underlying
Position Year ($) ($) Compensation Options*
------------------ ---- ------- ------- ------------ ----------
<S> <C> <C> <C> <C>
Bruce R. Nobles 1995 295,000 - 41,200/(1)/ 300,000
President and Chief 1994 199,166 50,000 43,749/(1)/ -
Executive Officer 1993 100,454/(2)/ 50,000/(4)/ 39,590/(1)/ -
Frank L. Forster 1995 187,083 - /(2)/ 60,000
Senior Vice President and 1994 100,250/(3)/ 17,500 /(2)/ -
Chief Operating Officer 1993 - - - -
C.J. David Davies 1995 182,292 - /(2)/ 65,000
Senior Vice President- 1994 120,000 25,000 /(2)/ -
Finance and Chief 1993 50,000 - /(2)/ -
Financial Officer
Peter W. Jenkins 1995 177,500 - /(2)/ 40,000
Senior Vice President- 1994 72,170/(3)/ 5,000 /(2)/ -
Marketing and Sales 1993 - - - -
Clarence K. Lyman 1995 105,625 - - 50,000
Vice President-Finance, 1994 95,000 17,500 - -
Treasurer and Assistant 1993 79,479 - /(2)/ -
Corporate Secretary
</TABLE>
______________
* The options are fully vested and exerciseable. They were granted to
certain key executive officers of the Company on February 2, 1995 pursuant
to the 1994 Stock Option Plan, as amended. See "Option Grants in the Last
Fiscal Year" and "Aggregated Option Exercises in the Last Fiscal Year ("F-
Y"), and F-Y End Option Value."
1 Includes a housing allowance of $36,000 in both 1995 and 1994, $20,000 in
1993 and certain Company or HAL, INC. related club and business expenses.
2 The Company provides various perquisites to its executives which are not
disclosed pursuant to SEC regulations. The value of such perquisites is
less than 10% of the Named Executive Officer's combined salary and bonus.
3 These salaries represent the actual amounts paid to the Named Executive
Officer as the Named Executive Officer was not employed by the Company for
the entire calendar year. Mr. Nobles' reflected compensation is for the
period beginning June 10, 1993 through December 31, 1993. Mr. Davies'
reflected compensation is for the period beginning July 16, 1993 through
December 31, 1993. Mr. Forster's compensation reflects a consulting fee for
the months January and February 1994, as well as Chief Operating Officer
compensation for the period March 1, 1994 through December 31, 1994.
4 This amount represents a signing bonus intended to cover moving expenses.
18
<PAGE>
The following table sets forth the aggregated option exercises in the last
fiscal year and fiscal year end option value for each of the Named Executive
Officers in 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR ("F-Y"), AND FY-END OPTION VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised In-
Unexercised Option at the-Money Options at
Shares Acquired FY-End (#) FY-End ($)
Name on Exercise (#) Value Realized ($) Exercisable Exercisable/1/
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bruce R. Nobles 0 0 300,000 207,750
Frank L. Forster 0 0 60,000 41,550
C.J. David Davies 0 0 65,000 45,013
Peter W. Jenkins 0 0 40,000 27,700
Clarence K. Lyman 0 0 50,000 34,625
</TABLE>
- ----------------
/1/ Based on the market value of the Class A Common Stock of $2.3125 on the
close of business on December 29, 1995, less the exercise price of $1.62.
The following table sets forth the option grants to the Named Executive
Officers under the Hawaiian Airlines, Inc. 1994 Stock Option Plan, as amended
in fiscal year 1995.
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------
% of Total Potential Realizable Value at
Number of Options Assumed Annual Rates of
Securities Granted to Exercise Stock Price Appreciation for
Underlying Employees or Base Option Term/3/
Options in Fiscal Price Expiration
Name Granted (#)/1/ Year ($/Sh)/2/ Date 5% ($) 10% ($)
- ---- -------------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bruce R. Nobles 300,000 50.6% 1.62 2/2/05 1,292,753 2,356,367
Frank Forster 60,000 10.1% 1.62 2/2/05 258,551 469,273
C.J. David Davies 65,000 11.0% 1.62 2/2/05 280,096 508,379
Peter W. Jenkins 40,000 6.8% 1.62 2/2/05 172,367 312,849
Clarence Lyman 50,000 8.4% 1.62 2/2/05 215,459 391,061
</TABLE>
- ------------------
1 The options are fully vested and currently exerciseable pursuant to the
terms of the 1994 Stock Option Plan, as amended. The Company may withhold
shares to pay the withholding tax or exercise price.
2 The exercise price is $1.62 per share. The Committee administering the
Plan (the "Committee"), with the consent of the optionee, may amend the
terms of any Option to provide that the exercise price of the shares
remaining subject to the option shall be reestablished at an exercise price
determined by the Committee at the date the terms of such options are
amended.
3 Because no shares of Class A Common Stock had been issued upon the date of
grant, the price used for calculating the potential realizable value at
assumed annual rates of stock price appreciation is $3.64, the price at
which each share was valued on the Effective Date prior to the distribution
of the Class A Common Stock following the Reorganization. There can be no
assurance provided to any executive officer or other holder of
19
<PAGE>
the Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any
other defined level.
HAWAIIAN AIRLINES, INC. PENSION PLAN FOR SALARIED EMPLOYEES
-----------------------------------------------------------
The Company has several retirement plans covering a substantial number of
its employees. The Hawaiian Airlines, Inc. Pension Plan for Salaried Employees
(the "Salaried Plan") covers those directors and officers who are employees of
the Company hired prior to September 1, 1992. Effective October 1, 1993, the
Salaried Plan was frozen. The Salaried Plan continued after the Effective Date
of the Plan of Reorganization, but credited service is not recognized after
September 1993 and the 1994 calendar year compensation is not taken into
account.
Benefits paid under the Salaried Plan are primarily determined by the number
of years the employee participated in the Salaried Plan through October 1, 1993
and the employee's average compensation for the five consecutive calendar years
through 1993 that results in the highest average. For purposes of the Salaried
Plan, compensation includes only base compensation; overtime, bonuses and other
forms of compensation are not included.
The following table shows the annual amounts payable in the form of a single
life annuity commencing at age 65 under the current provisions of the Salaried
Plan, without regard to any survivor options, based on assumed earnings for
various years of participation, as indicated. The benefits shown in the table
are not subject to a deduction for Social Security payments.
<TABLE>
<CAPTION>
Assumed Average
Annual Earnings for
Highest Five Years of Participation
Consecutive Calendar
Years
- -------------------- ---------------------------------------------------
15 20 25 30 35
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 25,000 $ 6,000 $ 8,000 $10,000 $12,000 $14,000
50,000 $12,000 $16,000 $20,000 $24,000 $28,000
75,000 $18,000 $24,000 $30,000 $36,000 $42,000
100,000 $24,000 $32,000 $40,000 $48,000 $56,000
125,000 $30,000 $40,000 $50,000 $60,000 $70,000
150,000/(1)/ $36,000 $48,000 $60,000 $72,000 $84,000
</TABLE>
- ------------------
1 Pursuant to Section 401 of the Internal Revenue Code, effective January 1,
1994, no more than $150,000 (as adjusted from time to time by the Internal
Revenue Service) of compensation may be taken into consideration in
calculating benefits payable under the Salaried Plan.
The years of credited service as of October 1, 1993 and the 1995 calendar
year compensation covered by the Salaried Plan for Messrs. Forster and Lyman
are 2.58 years and $0 and 7.17 years and $0, respectively. Compensation earned
in the 1995 calendar year is not taken into account when calculating final
average earnings under the Salaried Plan because the Salaried Plan was frozen
as of October 1, 1993. Messrs. Nobles, Davies and Jenkins are not eligible to
participate under the Salaried Plan.
20
<PAGE>
COMPENSATION OF DIRECTORS
-------------------------
For the portion of 1994 prior to the Effective Date of the Reorganization
Plan, the directors of the Company received no compensation for their service
as directors. From and after the Effective Date, all outside directors of the
Company are entitled to receive a retainer fee of $12,000 per year, an
attendance fee of $1,250 for each meeting of the Board of Directors and an
attendance fee of $500 for each committee meeting (collectively, "Directors'
Fees"). The Company provides travel from the mainland to Hawaii for Board of
Directors meetings, as well as one night hotel and ground transportation as
needed. For their service as directors of the Company from the Effective Date
through December 31, 1994, the outside Directors earned a $4,000 retainer fee,
except for former director Mr. David Urrea who, pursuant to his wishes, only
accepted reimbursement for expenses incurred in attending meetings. For their
service as directors of the Company for fiscal year 1995, the outside directors
earned a $12,000 retainer fee, except for Mr. Urrea who, pursuant to his
wishes, is only accepting reimbursement for expenses incurred in attending
meetings. Mr. Nobles does not receive Directors' Fees. In February 1995, the
Board of Directors resolved to defer payment of their Directors' Fees until
January 1996. In December 1995, the Board of Directors decided to further
defer the directors' fees earned in 1994 and 1995 until consummation of the
Investment. Thus, Directors' Fees earned by the directors in 1994 and 1995
were paid by March 1996.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND
---------------------------------------------------
CHANGE-IN-CONTROL ARRANGEMENTS
------------------------------
There are currently no employment contracts between the Company and any of
its executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
During 1995, the Compensation Committee consisted of former directors Messrs.
Martin Anderson and Clifton Kagawa and current director Mr. Todd Cole.
During 1995, the law firm Goodsill Anderson Quinn & Stifel, of which Mr.
Anderson, a member and chairman of the Compensation Committee, is a partner,
billed legal fees to the Company in the amount of $117,479. As of December 31,
1995, $9,836 of fees were outstanding. Goodsill Anderson Quinn & Stifel
received 28,606 shares of Class A Common Stock upon the June 19, 1995 initial
distribution by the Company of shares of Class A Common Stock. Goodsill
Anderson Quinn & Stifel sold all 28,606 shares of Class A Common Stock after
the initial distribution.
In conjunction with obtaining financing under the Plan of Reorganization,
$2.0 million of letters of credit were provided by certain third parties as
additional security for performance of the Company's obligations under the
financing. One such letter of credit in the amount of $1.0 million is
guaranteed by Mr. Anderson. In consideration for the guarantee, Mr. Anderson
received a subordinate security interest in the assets securing the financing
and received warrants to purchase 494,505 shares of the Company's Class A
Common Stock. The warrants have a five-year term, expiring September 12, 1999,
and are exerciseable at a price equal to $2.73 per share, subject to adjustment
pursuant to anti-dilution provisions. As a result of the AIP Investment,
pursuant to the anti-dilution provisions of the warrants, the exercise price of
the warrants was adjusted to $1.71 per share and Mr. Anderson received warrants
to purchase an additional 293,678 shares of the Company's Class A Common Stock.
These additional warrants expire September 12, 1999 and are also exerciseable at
a price equal to $1.71 per share.
Mr. Anderson served as Vice President of the Company from 1976 to 1980, and
Vice President-Legal and Assistant Secretary to the Company from 1980 to 1981.
Mr. Kagawa, a former member of the Compensation Committee, is the President
and Chief Executive Officer of Hill and Knowlton Asia Pacific, and senior
representative in Hawaii for WPP Group plc, the parent company of Hill and
Knowlton, Inc., and advertising agency Ogilvy and Mather Worldwide. Hill and
Knowlton, Inc. is a public relations company which provides services to the
Company. During 1995, this public relations company billed the Company for
services totaling $170,601 and collected net revenue of $170,601. Hill and
Knowlton, Inc. received 1,431 shares of Class A Common Stock upon the June 19,
1995 initial distribution by the Company of shares of Class A Common Stock.
Hill and Knowlton, Inc. sold all 1,431 shares of Class A Common Stock
21
<PAGE>
after the initial distribution. The Company also employs the services of
Ogilvy & Mather Hawaii, which received 20,410 shares of Class A Common Stock
upon the June 19, 1995 initial distribution by the Company of shares of Class
A Common Stock. Ogilvy & Mather Hawaii sold all 20,410 shares of Class A
Common Stock after the initial distribution. During 1995, this advertising
agency billed the Company for services totaling $2,942,574 and collected net
revenue of $2,942,574.
22
<PAGE>
Hawaiian Airlines, Inc.
Notes to Financial Statements
16. FINANCIAL CONDITION AND LIQUIDITY AND
SUBSEQUENT INVESTMENT AND FINANCIAL TRANSACTIONS
As discussed in Note 1, the Company's Plan became effective in September 1994,
representing the completion of its Chapter 11 reorganization process within one
year and the avoidance of additional costs primarily related to the transition
of its aircraft fleet. Thereafter, the Company financed its operations through
operating cash flow, borrowings under the Credit Facility, a series of
promotional fare ticket sale activities and payment deferrals from existing
creditors, one of which was American. During this period, the Company also
operated with a cash balance equivalent to less than one week's worth of
operating expenses. Operating at that level of liquidity placed the Company's
existence at risk; there was no cushion to respond to unexpected operational
upheavals that have periodically affected the airline industry or to cover the
seasonal downturns typically experienced by the Company.
Due to its working capital shortage, the Company deferred certain discretionary
capital expenditures that management believes may improve profitability. One
example is a series of investments in improved software that are expected to
improve operating efficiency. Another is the outlay required to consolidate
operations into one terminal at Honolulu International Airport. The working
capital shortage also had an unfavorable effect on yield, which, although
difficult to quantify, is believed to be significant. The Company found it
necessary to offer its products to wholesalers and to the public at reduced
rates in order to enhance cash flow. The uncertain financial situation also
limited the availability of trade credit and at times necessitated the use of
cash or equivalent security to obtain services. Finally, potential partners in
the airline industry have been reluctant to enter into business arrangements
with the Company until its financial difficulties have been overcome.
This situation led the Company during 1995 to seek a possible equity investor.
As a result of its efforts, on November 6, 1995, the Company executed a letter
of intent with AIP, which was followed by the execution on December 8, 1995 of
the definitive Stock Purchase Agreement (the "Investment Agreement") setting
forth the terms of the AIP Investment. As of December 31, 1995, the Company had
aggregated a net working capital deficit of $51.7 million, representing a $5.9
million increase from the net working capital deficit of $45.8 million at
December 31, 1994. Principally, the increase in the working capital deficit
resulted from the net of (1) an increase in accounts payable of $17.7 million
primarily due to deferred aircraft lease rents and maintenance payments due
American; (2) a decrease in air traffic liability of $9.9 million due to the
burnoff throughout 1995 of promotional fare ticket sales held in the second and
last quarters of 1994; and (3) miscellaneous changes in other working capital
accounts resulting in a $1.9 million decrease in the working capital deficit
from that of 1994.
The Board of Directors unanimously approved the AIP Investment and believes that
the AIP Investment is in the best interests of the Company and its shareholders.
A special shareholders meeting was held on January 30, 1996 at which the
shareholders approved the series of transactions described below. On January
31, 1996, the AIP Investment and certain other transactions described below were
consummated, which when considered in combination, are anticipated to (1)
improve the Company's liquidity; (2) reduce operating costs; (3) enable the
Company to make necessary capital expenditures; (4) allow the Company to take
advantage of prompt payment discounts; (5) avoid the need to provide early
payment incentives to wholesalers and become less dependent on promotional fare
ticket sales to the traveling public; and (6) provide coverage for seasonal
working capital needs.
AIP
- ---
The AIP Investment consisted of the issuance and sale to AIP of 18,181,818
shares of the Company's Class A Common Stock (the "Shares"), par value $.01 per
share, and four shares of the Company's Class B Special Preferred Stock, par
value $.01 per share, for an aggregate cash purchase price of $20.0 million
under the Investment Agreement. Upon consummation of the AIP Investment, AIP
owns approximately 67.0% of the Company's common equity. As a result, AIP
currently controls substantially all actions to be taken by the shareholders of
the Company. After giving effect to the issuance of shares of Class A Common
Stock upon the exercise of rights proposed to be offered after the consummation
of the AIP Investment as described below (the agreement with AIP requires AIP to
use its best efforts to cause the Company to make such offering), the issuance
of shares of Class A Common Stock upon the exercise of the AMR warrants and
certain other issuances of Class A Common Stock, AIP would own approximately
44.0% of the outstanding common equity of the Company
23
<PAGE>
(assuming that the rights referred to above are exercised by persons other than
AIP). Until such time as AIP ceases to own at least 35.0% of the common equity,
it would have the right to nominate six of the 11 nominees to stand from time to
time for election as directors of the Company. Thereafter, AIP would have the
right to nominate five, four or three directors so long as it owned at least
25.0%, 10.0% or 5.0%, respectively, of the common equity. On January 30, 1996,
six of AIP's director nominees were elected to the Board of Directors.
AIP and the Company have entered into a registration rights agreement pursuant
to which AIP would have the right to require the Company, on two occasions, to
use its best efforts to register, at the Company's expense, some or all of the
Shares under the Securities Act of 1933, as amended (the "Securities Act"). In
addition, AIP would have the right to have the Shares included in any other
registered offering of shares of Class A Common Stock made within ten years
after consummation of the AIP Investment.
Rights Offering
- ---------------
The Investment Agreement requires AIP to use its best efforts to cause the
Company, as soon as practicable after the consummation of the AIP Investment, to
make a rights offering (the "Rights Offering") pursuant to which the Company
would offer to such persons as the Board of Directors shall determine at the
time of the Rights Offering (which would not initially include AIP (except
possibly with respect to Rights not exercised during the allotted time) but
would include, among others, shareholders who hold shares at the record date for
the Rights Offering and holders of options granted under the 1994 Stock Option
Plan) rights to purchase shares of Class A Common Stock (the "Rights"), during a
20-day period after the issuance of the Rights, at a discount equal to at least
30.0% of the trading price of the Class A Common Stock measured over a period of
time to be designated by the Board of Directors after the consummation of the
AIP Investment and prior to the Rights Offering, subject to a minimum exercise
price of $1.10 per Right. Unexercised Rights would be offered to certain
employees, as provided in the modifications to the collective bargaining
agreements described below, and possibly to AIP. The other terms and conditions
of the Rights Offering, including the number of Rights to be offered, the record
date for the Rights Offering and whether the Rights would be transferable, would
be established by the Board of Directors at the time of the Rights Offering. It
is currently expected that Rights with respect to approximately 10,000,000
shares of Class A Common Stock would be offered, subject to the Board's
determination at the time of the Rights Offering. The Rights Offering would be
made only by means of a separate prospectus constituting a part of a
registration statement to be filed by the Company with the Securities and
Exchange Commission.
The Company has agreed with GPA Group plc and its affiliate AEROUSA, Inc. (the
"GPA Companies") that, if the closing of the Rights Offering shall have occurred
by September 30, 1996, the Company shall repurchase all of the shares of Class A
Common Stock owned by the GPA Companies and repay certain secured and unsecured
promissory notes held by the GPA Companies. The stock repurchase price would be
$1.10 per share and the promissory notes would be repaid at approximately 85.0%
of the then carrying value of the notes, including any deferred costs and other
expenses owed. Based on the number of shares owned by the GPA Companies as of
January 31, 1996 and the carrying value of the notes as of such date, the
Company would pay approximately $4.91 million to the GPA Companies. The Company
has the option at any time prior to the Rights Offering to repurchase the GPA
Companies' shares and repay their notes on the above terms.
AMR and American
- -----------------
Upon consummation of the AIP Investment and satisfaction of certain other
conditions, the Company entered into certain arrangements with AMR and American
pursuant to which, AMR and American accepted the following:
. The payment of up to $10.0 million of deferred lease rents and maintenance
payments (and accrued interest thereon) under the Aircraft Lease Agreement and
the reimbursement of American's fees and expenses in connection with the
transaction through the issuance by the Company to American of a $10.25
million promissory note secured by certain assets of the Company (the
"American Note"). The American Note bears interest at 10.0% per annum, payable
quarterly in arrears, and has a final maturity date of September 11, 2001. The
American Note requires repayment of principal equal to one-sixth of the
original principal amount on each anniversary of its date of issuance (January
31). The Company has the option to prepay the American Note for $9.15 million
at any time before January 31, 1997, or at any time thereafter, in whole or in
part, at its remaining principal
24
<PAGE>
balance, without premium. The American Note is prepayable in full, at the
option of the holder, in the event and at the time that any person or group
(other than AIP) acquires more than 30.0% of the voting interest in the
Company;
The American Note is secured by a lien on substantially all of the personal
property of the Company through December 31, 1997. This lien is a first
priority lien except that it is junior to (1) liens of security deposits held
by credit card processors and (2) liens securing up to $15.0 million in
obligations of the Company consisting of (x) secured obligations of the
Company (other than credit card processor security deposit liens) existing on
the date of issuance of the American Note, and (y) additional secured
obligations of the Company incurred after such issuance. As of January 31,
1996, in addition to its credit card deposits, the Company had $7.6 million in
secured obligations (including all amounts under the Credit Facility), the
liens of which are prior to the lien of the American Note. On and after
January 1, 1998, the Company is obligated to secure the American Note and the
other obligations of the Company to American with a first priority lien on
identified assets with a fair market value (supported by an appraisal) of at
least 125.0% of the remaining outstanding principal balance of the American
Note from time to time;
. Basic rents under the Aircraft Lease Agreement have been reduced by
approximately 28.0% for a period of three years, at which time basic rents
would revert back to 1995 levels. The Company has agreed to pay a minimum
monthly charge for maintenance services and basic rents and maintenance
charges are payable monthly in arrears rather than weekly in advance. American
has the right to terminate its obligation to provide aircraft maintenance
services on and after January 1, 1999 upon 180 days prior notice;
. American's relinquishment of $2.0 million of letters of credit which secured
the Company's obligations to American under the Aircraft Lease Agreement. The
termination of these letters of credit increased the Company's borrowing
capacity under the Credit Facility;
. Issuance of the AMR Warrants to AMR, which entitle the holder to acquire up to
1,897,946 shares of the Class A Common Stock (the "AMR Warrant Shares")
exercisable at $1.10 per share. One half of the AMR Warrants are immediately
exercisable but the balance of the AMR Warrants are only exercisable if
American and the Company enter into a code sharing arrangement by January 1,
1997 regarding the placement of the two letter flight designator code for
American's flights on the Company's Interisland flights. If not exercised,
the AMR Warrants expire on September 11, 2001; and
. American's right to require the Company, on two occasions, to use its best
efforts to register, at the Company's expense, some or all of the AMR Warrant
Shares under the Securities Act. In addition, AMR has the right to have the
AMR Warrant Shares included in any other registered offering of shares of
Class A Common Stock made before September 11, 2001. If any person or entity
acquires a majority of the outstanding Common Stock before September 11, 2001,
the Company is required to use its best efforts to cause the seller or sellers
of such Common Stock to permit AMR to include AMR Warrant Shares in such sale
on the same terms as those available to such seller. AIP has agreed that, if
it were one of the sellers in such a sale, it would permit AMR to participate
in such sale.
The arrangements with American have provided the Company with substantial
benefits. The payment through the American Note of $10.0 million of deferred
rents and maintenance payments otherwise due on February 7, 1996 will
effectively permit the Company to make such payments in installments over the
period from January 1997 to September 2001, thereby freeing up working capital
for other purposes. In addition, basic rents under the Aircraft Lease Agreement
have been reduced by approximately 28.0% for three years, resulting in lower
operating costs. Furthermore, the release by American of the security deposit
letters of credit resulted in $2.0 million of borrowing capacity becoming
available to the Company under the Credit Facility. In total, these
arrangements with American would further improve the Company's liquidity and
will result in the reduction of cash operating expenses by approximately $3.0
million per year for three years.
25
<PAGE>
Unions and Labor Agreements
- ---------------------------
Upon consummation of the AIP Investment and satisfaction of certain other
conditions, amendments to the labor agreements for each of the Company's labor
unions became effective.
The amendments to the agreements extend the amendable date of all five
contracts from February 28, 1997 to February 28, 2000. Each of the five unions
agreed to certain economic concessions, which include cancellation of certain
scheduled pay increases, with new pay increases to be effective December 1, 1998
and January 1, 2000. Management expects that these concessions will reduce cash
operating expenses which would have been incurred during the two-year period
ending December 1997. In exchange for the wage concessions, the Company has
agreed to negotiate a gain-sharing program to provide employees the opportunity
to receive wage rate increases resulting from work rule and productivity
modifications, which would produce cost savings to the Company. In addition,
the Company has agreed to establish a profit bonus plan, which would provide all
employees (other than senior management) with cash bonuses if the Company
achieves certain pre-tax profit targets. The contracts as modified provide
additional furlough protection to employees under certain specified
circumstances. The Company and unions also have agreed to include certain
additional low-cost or no-cost provisions that are specific to each of the
respective union contracts. Management cannot presently determine the estimated
costs associated with these gain sharing and profit bonus plan initiatives.
Pursuant to their collective bargaining agreements, AFA, IAM and ALPA each have
the right to nominate one of the nominees to stand from time to time for
election as directors of the Company. On January 30, 1996, each of the IAM,
ALPA and AFA director nominees were elected to the Board of Directors.
Special Preferred Stock
- -----------------------
As part of the AIP Investment, AIP received four shares of Series B Special
Preferred Stock, which entitle AIP to nominate directors as described above.
AFA, IAM and ALPA each received one share of Series C Special Preferred Stock,
Series D Special Preferred Stock and Series E Special Preferred Stock,
respectively, (collectively the "Special Preferred Stock") which entitle each
union to nominate one director. The holders of each series of the Special
Preferred Stock are entitled to fill a vacancy on the Board of Directors caused
by the removal, resignation or death of a director nominated by that series if
the Board fails to fill such vacancy within 30 days. AIP has agreed with each
of IAM, ALPA and AFA that so long as the right to have a representative on the
Board is in its respective collective bargaining agreement, AIP will vote its
shares in favor of such union's nominee for the Board of Directors. In addition
to the rights of the Special Preferred Stock described above, the Special
Preferred Stock is 1) senior to Common Stock and each series is pari passu with
each other with respect to rights on liquidation, dissolution and winding up and
will be entitled to receive $.01 per share, and no more, before any payments are
made to holders of any stock ranking junior to the Special Preferred Stock; 2)
has no dividend rights other than at any time that a dividend is declared and
paid on the Common Stock dividends in an amount per share equal to twice the
dividend per share paid on the Common Stock will be paid on the Special
Preferred Stock; 3) is entitled to one vote per share and votes with the Class A
Common Stock as a single class on all matters submitted to the shareholders of
the Company; 4) automatically converts into one share of Class A Common Stock
upon the transfer of such share from the person to whom originally issued to any
person that is not an affiliate of such person; and 5) does not have preemptive
rights in connection with future issuances of the Company's capital stock.
Authorized Capital Stock
- ------------------------
The Amended Articles of Incorporation of the Company, as amended were further
amended to increase the authorized number of shares of Class A Common Stock from
40,000,000 shares to 60,000,000 shares. The increase in the number of authorized
shares allows the Company to have a sufficient number of authorized and unissued
shares of Class A Common Stock to permit the exercise of Rights under the Rights
Offering and ensures that the Company will have, from time to time, an adequate
number of authorized and unissued shares available for corporate purposes, such
as future public and private equity offerings, to raise working capital. As a
result of the amendment, the authorized capital stock of the Company consists of
60,000,000 shares of Class A Common Stock, par value $.01 per share, 3,050,000
shares of Class B Common Stock, par value $.01 per share, and 2,000,000 shares
of Preferred Stock, $.01 par value per share.
26
<PAGE>
Except for shares of Class A Common Stock that have been reserved in connection
with the Existing Warrants, the 1994 Stock Option Plan, the Plan, the AMR
Warrants and the Rights Offering, the Company has no present agreements or
commitments to issue any additional shares of Class A Common Stock.
Existing Warrants
- -----------------
Pursuant to the anti-dilution provisions of the Existing Warrants, upon the
consummation of the AIP Investment, the exercise price of the Existing Warrants
was adjusted to $1.71 per share and the holders of the Existing Warrants
received warrants to purchase an additional 587,356 shares of Class A Common
Stock exercisable at $1.71 per share as well. The holders of the Existing
Warrants have agreed that the anti-dilution provisions will not apply in
connection with the AMR Warrants and the Rights.
1994 Stock Option Plan
- ----------------------
As discussed in Note 11, options to acquire 592,500 shares of Class A Common
Stock were granted in 1995 pursuant to the terms of the 1994 Stock Option Plan.
The AIP Investment constituted a change of control for purposes of the 1994
Stock Option Plan, thereby accelerating both the vesting and expiration of the
options. In connection with the AIP Investment, the 1994 Stock Option Plan was
amended to extend the option exercise period to February 2, 2005. This
amendment resulted in a new measurement date for the awarded options and
approximately $782,000 of related noncash compensation expense was recorded in
January 1996.
Rights Plan
- -----------
AIP's acquisition of the Shares would have rendered AIP a "10% Shareholder," as
that term is defined in the Rights Plan (see Note 11), thereby triggering the
distribution of preferred stock purchase rights to the Company's shareholders.
Pursuant to the Rights Plan, the Board has the power to determine whether any
person, including AIP, is or is not a "10% Shareholder," whether or not such a
determination is adverse to any holder of PSP rights. The Board determined that
AIP's acquisition of the Shares shall not render AIP a "10% Shareholder" and in
anticipation of the AIP Investment, amended the Rights Plan to exclude AIP's
acquisition of the Shares from triggering the distribution of the PSP rights.
Tax and Net Operating Loss Considerations
- -----------------------------------------
The Company believes that the transactions with respect to its equity following
its bankruptcy reorganization, including those pertaining to the AIP Investment,
issuance of the AMR Warrants, consummation of the Rights Offering, and possible
purchases or sales of its stock by significant shareholders or exercises of
options to acquire equity in the Company, has resulted in or has significantly
increased the likelihood of an "ownership change" of the Company for purposes of
Section 382 of the Internal Revenue Code. An ownership change under Section 382
results in an annual limitation on the amount of pre-ownership change NOLs of
the Company that can be used to offset the Company's taxable income for periods
following the ownership change.
Based on values used by the Company in preparing its 1994 federal income tax
return, the Company's Section 382 Limitation that generally applied to all NOLs
attributable to the period prior to the ownership change that resulted from the
Company's bankruptcy reorganization was approximately $2.4 million, plus certain
"built-in" income items that increase the Section 382 Limitation. While the
Company anticipates that any ownership change resulting from the AIP Investment
and its related transactions would result in a new Section 382 Limitation which
is lower than the Section 382 Limitation in effect previously, the amount of
such reduction and its effect on the Company (as well as the effect on the
Company of subjecting NOLs incurred following the Company's bankruptcy
reorganization to the Section 382 Limitation) depend on numerous issues,
including but not limited to the value of the Company's equity at certain dates,
the amount and timing of future taxable income and loss, and the amount of
"built-in" income items of the Company. Therefore, while the effect of an
ownership change resulting from the AIP Investment and its related transactions
could be to increase the future tax liabilities of the Company, the precise
effect of such an ownership change of the Company resulting from the Investment
and its related transactions is unclear.
27
<PAGE>
Current Status
- --------------
The Company's capital resources have been increased substantially due to the AIP
Investment and the arrangements with American. It is anticipated that the
combination of the Company's improved liquidity and reduced operating costs will
enable the Company to make necessary capital expenditures, take advantage of
prompt payment discounts, avoid the need to provide early payment incentives to
wholesalers and become less dependent on promotional fare ticket sales to the
traveling public, thereby further improving liquidity.
In addition, the Company is anticipating the consummation of the Rights Offering
and is currently negotiating to increase the capacity of the Credit Facility to
$15.0 million. No assurance can be given that the Company will be successful in
either of these efforts. If the Company is unsuccessful, it will seek other
sources of financing. However, because the Company has no remaining
unencumbered assets, its access to additional sources of liquidity remains
limited. If the Company is unsuccessful in obtaining additional sources of
liquidity, an adverse change in events and circumstances could result in the
Company being unable to meet its financial obligations after it exhausts its
current and foreseeable capital resources.
The financial statements at December 31, 1995, 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. 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 future uncertainties. 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.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Rule 12b-15 under the Securities Exchange Act of
1934, the Registrant has duly caused this Amendment to be signed on its behalf
by the undersigned, thereunto duly authorized.
HAWAIIAN AIRLINES, INC.
April 30, 1996 By: /s/ C.J. David Davies
---------------------------
C.J. David Davies
Senior Vice President-Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
29
