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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 1-8836
HAWAIIAN AIRLINES, INC.
(Exact Name of Registrant as Specified in Its Charter)
HAWAII 99-0042880
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. (X) Yes ( ) No
As of May 15, 1996, 26,240,203 shares of Class A Common Stock and no shares of
Class B Common Stock were outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HAWAIIAN AIRLINES, INC.
CONDENSED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 13,452 $ 5,389
Accounts receivable, net.......................................... 23,715 18,178
Inventories, net.................................................. 7,554 7,648
Assets held for sale.............................................. 1,344 1,344
Prepaid expenses.................................................. 5,243 5,804
-------- --------
TOTAL CURRENT ASSETS............................................ 51,308 38,363
-------- --------
Property and equipment, less accumulated depreciation and
amortization of $6,166 and $5,043 in 1996 and 1995, respectively.. 41,756 41,391
Assets held for sale................................................ 7,274 8,336
Other assets........................................................ 4,805 6,217
Reorganization value in excess of amounts
allocable to identifiable assets, net............................. 66,433 67,333
-------- --------
TOTAL ASSETS.................................................... $171,576 $161,640
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................. $6,210 $6,027
Current portion of capital lease obligations...................... 2,724 2,662
Accounts payable.................................................. 24,254 35,182
Air traffic liability............................................. 28,771 30,461
Accrued liabilities............................................... 11,072 15,730
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TOTAL CURRENT LIABILITIES....................................... 73,031 90,062
-------- --------
Long-Term Debt...................................................... 11,618 5,523
Capital Lease Obligations........................................... 9,396 10,102
Other Liabilities and Deferred Credits.............................. 28,406 26,775
SHAREHOLDERS' EQUITY:
Common and Special Preferred Stock................................ 276 94
Capital in excess of par value.................................... 59,613 41,193
Warrants.......................................................... 2,646 900
Unearned compensation............................................. - (182)
Minimum pension liability......................................... (1,171) (1,170)
Accumulated deficit............................................... (12,239) (11,657)
-------- --------
SHAREHOLDERS' EQUITY............................................ 49,125 29,178
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $171,576 $161,640
-------- --------
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</TABLE>
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HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
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OPERATING REVENUES:
Passenger........................................... $79,811 $65,601
Charter............................................. 6,971 3,557
Cargo............................................... 4,813 3,961
Other............................................... 2,467 2,389
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TOTAL............................................. 94,062 75,508
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OPERATING EXPENSES:
Flying operations................................... 29,315 24,289
Maintenance......................................... 20,055 17,781
Passenger service................................... 10,538 9,268
Aircraft and traffic servicing...................... 14,515 13,542
Promotion and sales................................. 11,620 10,198
General and administrative.......................... 5,763 4,031
Depreciation and amortization....................... 1,860 1,826
Early retirement provision.......................... - 2,000
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TOTAL............................................. 93,666 82,935
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OPERATING INCOME (LOSS)........................... 396 (7,427)
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NONOPERATING INCOME (EXPENSE):
Interest expense, net............................... (956) (1,027)
Gain on disposition of equipment.................... 8 48
Other, net.......................................... (30) 112
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TOTAL............................................. (978) (867)
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NET LOSS.............................................. ($582) ($8,294)
------- -------
------- -------
PRO FORMA LOSS PER COMMON SHARE....................... $ (0.03)* $ (0.88)*
------- -------
------- -------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.. 21,521 * 9,400 *
------- -------
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</TABLE>
* Proforma per share data has been calculated utilizing issued and outstanding
and issuable common shares as of March 31, 1996 and 1995
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HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (582) $(8,294)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization.......................... 1,860 1,826
Net periodic postretirement benefit cost............... 567 876
Stock option compensation.............................. 964 -
Early retirement provision............................. - 2,000
Gain from disposition of equipment..................... (8) (48)
Increase in accounts receivable........................ (3,847) (1,562)
Decrease (increase) in inventories..................... 94 (470)
Decrease in prepaid expenses........................... 561 823
Increase (decrease) in accounts payable................ (1,407) 7,347
Decrease air traffic liability......................... (1,690) (529)
Increase (decrease) in accrued liabilities............. (5,758) 901
Other, net............................................. 1,301 4,704
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.. (7,945) 7,574
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....................... (1,680) (2,483)
Net proceeds from disposition of equipment............... 519 393
------- -------
NET CASH USED IN INVESTING ACTIVITIES................ (1,161) (2,090)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock................... 20,000 -
Issuance of long-term debt............................... 124 179
Repayment of long-term debt.............................. (2,311) (3,049)
Repayment of capital lease obligations................... (644) (728)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.. 17,169 (3,598)
------- -------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................................ 8,063 1,886
------- -------
Cash and cash equivalents - Beginning of Period............ 5,389 3,501
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD.................. $13,452 $ 5,387
------- -------
------- -------
</TABLE>
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HAWAIIAN AIRLINES, INC.
STATISTICAL DATA (IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
- -----------------------------------------------------------------
SCHEDULED OPERATIONS:
Revenue passengers.................... 1,269 1,152
Revenue passenger miles............... 809,797 680,342
Available seat miles.................. 1,112,525 939,543
Passenger load factor................. 72.8% 72.4%
Revenue ton miles..................... 94,600 77,004
Revenue plane miles................... 4,681 3,956
Passenger revenue per passenger mile.. 9.9 c 9.6 c
OVERSEAS CHARTER OPERATIONS:
Revenue passengers.................... 46 25
Revenue passenger miles............... 125,660 69,268
Available seat miles.................. 131,767 70,530
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ITEM 1. (CONTINUED)
In the opinion of management, the condensed unaudited financial statements
included in this report contain all adjustments necessary for a fair
presentation of the results of operations and cash flows for the interim
periods covered and the financial condition of Hawaiian Airlines, Inc.
("Hawaiian Airlines" or the "Company") as of March 31, 1996 and December 31,
1995. The operating results for the interim period are not necessarily
indicative of the results to be expected for the full fiscal year.
Certain reclassifications have been made to conform prior year's data to
current year's presentation.
The accompanying financial statements should be read in conjunction with the
financial statements and the notes thereto contained in Hawaiian Airlines'
Annual Report on Form 10-K for the year ended December 31, 1995, as amended,
which are incorporated herein by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
On January 31, 1996, the Company consummated a series of related transactions
which, among other things, included:
- - A $20.0 million cash investment in the Company by Airline Investors
Partnership, L.P. ("AIP") through the purchase of 18,181,818 shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"),
and four shares of the Company's Series B Special Preferred Stock, par
value $.01 per share (the "AIP Investment").
- - Certain agreements and arrangements with American Airlines, Inc.
("American"), including amendment to the long-term aircraft lease agreement
pursuant to which American leases DC-10-10s to the Company (the "Aircraft
Lease Agreement"), which provide for, among other things: (1) the making of
$10.0 million of previously deferred lease rents and maintenance payments and
interest thereon and the reimbursement of $250,000 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"); (2) reduction of rents for the
DC-10-10s; and (3) the release of a $2.0 million security deposit in the form
of a letter of credit. In addition, the Company issued to AMR Corporation,
American's parent company ("AMR"), warrants (the "AMR Warrants") to acquire
up to 1,897,946 shares of Class A Common Stock at $1.10 per share.
- - Agreements with each of the Company's labor unions regarding certain
modifications to their respective collective bargaining unit agreements.
These modifications include certain wage concessions which will generate
significant annual cost savings to the Company.
See "Liquidity and Capital Resources - Recapitalization."
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CURRENT STATUS AND SUBSEQUENT FINANCIAL TRANSACTIONS
As of March 31, 1996, the Company significantly improved its working capital
by consummating a series of transactions including (1) the $20.0 million cash
investment by AIP and (2) the payment of up to $10.0 million of deferred
lease rents and maintenance payments (and accrued interest thereon) due
American through the issuance by the Company of the American Note. As of
March 31, 1996, the Company had a net working capital deficit of $21.7
million, which represents a $30.0 million improvement in the net working
capital deficit of $51.7 million at December 31, 1995.
The Company plans to make approximately $11.4 million of necessary capital
expenditures in the ordinary course of business during 1996. These
expenditures include $2.5 million for the capitalized portions of two
scheduled DC-9-50 maintenance checks (D-checks) and $3.1 million for a
portion of certain JT8D engine overhauls. The balance of the expenditures are
for the replacement of rotable equipment and other ground equipment, the first
of a series of investments in improved software and related hardware, the
completion of facilities necessary for the Company to consolidate its
overseas passenger and baggage processing operations into the Honolulu
Interisland Terminal (for which the State of Hawaii will provide a majority
of the financing) and certain other products. The Company had approximately
$1.7 million of capital expenditures in first quarter 1996.
On April 29, 1996, the Company's credit facility provided by CIT Group/Credit
Finance, Inc. (the "Credit Facility") was amended to increase the borrowing
capacity thereunder from $8.15 million to $15.0 million. The $15.0 million
Credit Facility consists of two secured term loans and a secured revolving
line of credit including up to $6.0 million of letters of credit. The term
loans are in the amounts of $5.4 million and $1.3 million and will amortize
in equal installments over periods of 48 and 60 months, respectively. The
outstanding principal amounts of the term loans will become due and payable
upon termination of the Credit Facility. Available credit is subject to
change determined by recalculation of the borrowing base, repayments due
under the term loans, repayments arising from the disposition and other
changes in the related collateral securing the Credit Facility. As of April
30, 1996, the total availability under the Credit Facility was $7.3 million,
including $5.9 million in letters of credit. The Credit Facility has an
initial term of three years from April 29, 1996, and renews automatically for
successive term of two years each, unless terminated by either party on at
least 60 days notice prior to the end of the then-current term. The Company
may terminate the Credit Facility at any time, on 30 days notice and payment
of certain early termination fees during the initial term and without any
payment during any renewal term.
The Credit Facility is secured by a first lien on substantially all of the
Company's property, excluding the Company's owned and leased aircraft, the
Company's aircraft engines while installed on an aircraft and certain
security deposits.
In connection with the AIP Investment, the Company agreed with GPA Group plc
and its affiliate AeroUSA, Inc. (collectively the "GPA Companies") that, if
the closing of the rights offering referred to below shall have occurred by
September 30, 1996, the Company would 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. At its option, the Company could
make such repurchase and repayment at any time prior to the closing of the
rights offering. As required by the provider of the Credit Facility in
connection with the amendment thereof, the Company exercised this option on
April 29, 1996. Based on 827,221 Class A Common Stock shares owned by the
GPA Companies and the carrying value of the notes as of such date, the
Company paid approximately $4.7 million to the GPA Companies to repurchase
the shares and repay the notes. These transactions resulted in an
extraordinary gain of approximately $682,000. The payment to the GPA
Companies was funded by borrowings under the Credit Facility on April 29,
1996.
The Company's capital resources have been increased substantially due to the
AIP Investment, the arrangements with American and the amendment of the
Credit Facility. The successful completion of the rights offering referred to
below would further improve the Company's liquidity. 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
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<PAGE>
provide early payment incentives to wholesalers and eliminate the Company's
historical dependence on ticket discounting, thereby further improving
yields, profitability and liquidity. Nevertheless, the Company will continue
to seek additional sources of liquidity. 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.
No assurance can be given that the Company will be successful in its attempts
to obtain additional sources of liquidity or that it will successfully
complete the rights offering.
The financial statements at March 31, 1996, 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.
HISTORICAL BACKGROUND
For several years prior to the AIP Investment in January 1996, the Company
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.
This working capital shortage caused the Company to defer certain discretionary
capital expenditures and had an unfavorable effect on yield, which, although
difficult to quantify, is believed to have been significant. In addition, the
Company found it necessary to offer its products to wholesalers and to the
public at reduced rates in order to enhance cash flow. While these promotional
fare ticket sales increased liquidity at the time, they also increased air
traffic liability, which could adversely affect yields, revenues and liquidity
in future periods. The Company's historical 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.
On October 31, 1994, the Company failed to make certain payments due to
American pursuant to the Aircraft Lease Agreement. 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 included, but were not
limited to, termination of the Aircraft Lease Agreement, repossession of
certain aircraft and engines, recovery of damages and drawings under letters of
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 December 31, 1994 and during the entire first quarter of 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
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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 the American Note.
RECAPITALIZATION
On January 31, 1996, the Company consummated the AIP Investment which consisted
of the issuance and sale to AIP of 18,181,818 shares of Class A Common Stock
(the "Shares") and four shares of the Company's Class B Special Preferred Stock
for an aggregate cash purchase price of $20.0 million. Upon consummation of the
AIP Investment, AIP owned 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. Pursuant to the Company's Amended Bylaws and
the terms of the Series B Special Preferred Stock, until such time as AIP
ceases to own at least 35.0% of the common equity, it will 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.
Of the $20.0 million gross proceeds from the AIP Investment, a portion was 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 $339,000 of deferred
Board of Directors' compensation. The balance of the proceeds are being used
to meet working capital needs.
As a result of the AIP Investment, certain outstanding warrants to purchase
shares of Class A Common Stock were adjusted, pursuant to the anti-dilution
provision of such warrants, to increase the number of shares purchasable upon
exercise of such warrants from 989,011 shares to 1,576,367 shares and the
exercise price was adjusted from $2.73 to $1.71 per share.
In connection with the AIP Investment, AIP agreed to use its best efforts to
cause the Company to make a rights offering to the Company's shareholders
(other than AIP) that would permit such shareholders to purchase shares of
Class A Common Stock at a discount to the market price.
Upon consummation of the AIP Investment and satisfaction of certain other
conditions, the Company entered into certain arrangements with American
pursuant to which the Company and American agreed to, among other things, the
following:
- - The payment of $10.0 million of deferred lease rents and maintenance
payments (and accrued interest thereon) under the Aircraft Lease Agreement
and the reimbursement of $250,000 of American's fees and expenses in
connection with the transaction through the issuance by the Company to
American of 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
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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;
The American Note is secured by a lien on substantially all of the personal
property of the Company. This lien is a first priority lien except that
through December 1997, 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 (January 31, 1996), and (y)
additional secured obligations of the Company incurred after such issuance.
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 issued
under the Credit Facility which secured the Company's obligations to American
under the Aircraft Lease Agreement; and
- - Issuance of the AMR warrants, which entitle AMR to acquire up to 1,897,946
shares of the Class A Common Stock (the "AMR Warrant Shares") 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.
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 effectively
permits 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 and
will result in the reduction of cash operating expenses by approximately $3.0
million per year for three years.
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 also became effective. The amendments to the agreements extend the
amendable date of all five labor union 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,
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2000. Management expects that these concessions will result in cash operating
expenses during the two-year period ending December 1997 being $10.0 million
less than otherwise would have been the case. 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 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.
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RESULTS OF OPERATIONS
During the first quarter of 1996, the Company generated operating income of
$396,000 and incurred a net loss of $582,000. This represents a $7.8 million
improvement from the first quarter 1995 operating loss of $7.4 million and a
$7.7 million improvement from the first quarter 1995 net loss of $8.3 million.
OPERATING REVENUES
The following table compares first quarter 1996 operating revenues to those in
first quarter 1995, in thousands, by service type:
Three Months Ended
March 31,
------------------- Increase
1996 1995 (Decrease)
---------------------------------
Interisland:
Passenger............ $34,275 $30,987 $ 3,288
Cargo................ 1,495 1,653 (158)
Other................ 1,617 1,450 167
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37,387 34,090 3,297
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Transpac:
Passenger............ 41,413 30,337 11,076
Cargo................ 2,738 1,805 933
Other................ 785 884 (99)
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44,936 33,026 11,910
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Southpac:
Passenger............ 4,123 4,277 (154)
Cargo................ 580 503 77
Other................ 65 55 10
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4,768 4,835 (67)
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Overseas Charter:
Passenger............ 6,971 3,557 3,414
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Total........... $94,062 $75,508 $18,554
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The following table compares applicable first quarter 1996 operating and
passenger revenue statistics to those in first quarter 1995:
Three Months Ended
March 31,
------------------------ Increase
1996 1995 (Decrease) %
-----------------------------------------------
Interisland:
Revenue passengers*....... 992 932 60 6.4
Revenue passenger miles*.. 130,642 122,041 8,601 7.0
Available seat miles*..... 221,453 221,332 121 0.1
Passenger load factor..... 59.0% 55.1% 3.9 7.1
Yield..................... 26.2 c 25.4 c 0.8 c 3.1
Transpac:
Revenue passengers*....... 264 205 59 28.8
Revenue passenger miles*.. 644,896 519,564 125,332 24.1
Available seat miles*..... 824,968 653,508 171,460 26.2
Passenger load factor..... 78.2% 79.5% (1.3) (1.6)
Yield..................... 6.4 c 5.8 c 0.6 c 10.3
Southpac:
Revenue passengers*....... 13 15 (2) (13.3)
Revenue passenger miles*.. 34,259 38,737 (4,478) (11.6)
Available seat miles*..... 66,104 64,703 1,401 2.2
Passenger load factor..... 51.8% 59.9% (8.1) (13.5)
Yield..................... 12.0 c 11.0 c 1.0 c 9.1
Overseas Charter:
Revenue passengers*....... 46 25 21 84.0
Revenue passenger miles*.. 125,660 69,268 56,392 81.4
Available seat miles*..... 131,767 70,530 61,237 86.8
* In thousands
Operating revenues totaled $94.1 million during first quarter 1996, an increase
of $18.6 million or 24.6% over 1995 first quarter operating revenues of $75.5
million. Significant period to period variances were as follows:
- - Revenues from Interisland passenger service totaled $34.3 million during
first quarter 1996, an increase of $3.3 million or 10.6% from first quarter
1995. Increases of 6.4% and 7.0% in Interisland passengers carried and
revenue passenger miles, respectively, were augmented by an increase in
Interisland yield of 0.8 CENTS or 3.1%. Increases in revenue passengers
carried and revenue passenger miles were primarily caused by the continued
recovery of the Hawaii tourism market. First quarter 1996 Interisland yield
increased due to (1) the effects of promotional fare ticket programs being
less prevalent in 1996 as most promotion tickets were sold in 1994 and used
throughout 1995 and (2) the Company maintaining and/or increasing certain
Interisland fares;
-13-
<PAGE>
- - Revenues from Transpac passenger operations amounted to $41.4 million
during first quarter 1996 compared to $30.3 million in first quarter 1995,
an increase of $11.1 million or 36.5%. The Company experienced increases of
28.8% and 24.1% in revenue passengers carried and revenue passenger miles,
respectively. Increased revenue passengers carried and revenue passenger
miles were a direct result of increased frequencies in the Transpac market as
denoted by the increase in Transpac available seat miles by 26.2%. Tranpac
yield also increased by 0.6CENTS or 10.3% in first quarter 1996 as compared
to first quarter 1995. Again, similar to the above, the increase in yield was
primarily caused by the effects of promotional fare ticket programs being
less prevalent in 1996 and general increases in certain Transpac fare bases;
and
- - Overseas charter revenues totaled $7.0 million in first quarter 1996,
representing an increase of $3.4 million or 96.0% from first quarter 1995.
The increase was due to the Company operating six charters per week in the
first quarter of 1996 versus three charters per week in the first quarter of
1995 between Honolulu, Hawaii and Las Vegas, Nevada.
Prior to 1996, the airline industry was subject to a 10.0% excise tax on each
ticket sold, a 6.25% cargo excise tax and a $6.0 international departure tax.
Efforts are underway to encourage the United States Congress to re-enact
legislation authorizing these taxes. If these taxes are reinstated, the
Company would either have to absorb the taxes, which would adversely affect
operating results, or raise ticket prices and cargo transportation fees in
order to offset the taxes. If the Company were to raise ticket prices and
cargo transportation fees, there is no assurance that the Company would be able
to maintain such increases or that operating results would not be adversely
affected by the increases.
-14-
<PAGE>
OPERATING EXPENSES
The following table compares operating expenses for first quarter 1996 with
first quarter 1995 by major category, in thousands of dollars:
Three Months Ended
March 31,
------------------ Increase
1996 1995 (Decrease)
---------------------------------
Wages and benefits....................... $29,077 $27,027 $ 2,050
Aircraft fuel, including taxes and oil... 17,018 12,444 4,574
Maintenance materials and repairs........ 15,479 13,009 2,470
Purchased services....................... 5,679 4,802 877
Aircraft rentals......................... 4,014 3,869 145
Sales commissions........................ 3,506 2,943 563
Passenger food........................... 2,417 2,248 169
Advertising and promotion................ 2,329 2,070 259
Rentals other than aircraft and engines.. 2,310 2,331 (21)
Landing fees............................. 2,104 1,897 207
Depreciation and amortization............ 2,026 1,854 172
Reservation fees and services............ 1,961 1,656 305
Personnel expenses....................... 937 960 (23)
Insurance-hull and liability............. 916 654 262
Interrupted trips........................ 586 541 45
Early retirement provision............... - 2,000 (2,000)
Other.................................... 3,307 2,630 677
------- ------- -------
Total.............................. $93,666 $82,935 $10,731
------- ------- -------
------- ------- -------
Operating expenses totaled $93.7 million in first quarter 1996, an increase of
$10.7 million or 12.9% over first quarter 1995. Significant period to period
variances were as follows:
- - Wages and benefits increased $2.1 million or 7.6% in 1996. The increase
was primarily attributable to (1) scheduled wage increases being in effect
which were terminated upon amendments to each of the Company's labor union
agreements becoming effective on January 31, 1996, as described above and (2)
$964,000 of noncash compensation expense related to options granted pursuant
to the terms of the Company's 1994 Stock Option Plan;
- - Aircraft fuel cost, including taxes and oil, increased by $4.6 million or
36.8% quarter over quarter. The general average cost per gallon, excluding
taxes, increased by 5.7 CENTS or 9.9% in first quarter 1996 versus first
quarter 1995. Further, approximately $1.1 million more in fuel taxes were
incurred in first quarter 1996 versus first quarter 1995 due to the Company
becoming subject to an additional 4.3 CENTS per gallon tax effective
October 1, 1995. The Company also consumed approximately 3.4 million or
17.6% more gallons of aircraft fuel due to increased frequencies in first
quarter 1996 as compared to first quarter 1995;
- - Maintenance materials and repairs increased $2.5 million or 19.0% over
1995. In first quarter 1996, the Company incurred approximately $3.0 million
more in DC-10-10 maintenance expense due to (1) the Company utilizing eight
DC-10-10 aircraft in first quarter 1996 versus seven DC-10-10 aircraft in
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<PAGE>
first quarter 1995 and (2) increased frequencies and maintenance rates in
first quarter 1996. The increase was offset by decreased maintenance expense
of $681,000 due to fewer service checks and required airframe maintenance on
the Company's DC-9-50 fleet; and
- - In first quarter 1995, the Company recognized a one-time, non-monetary
early retirement provision of $2.0 million representing the estimated effects
of an early retirement program on the Company's pension and postretirement
benefit obligations as of March 31, 1995. The program was offered to
qualified participants in the ground and salaried personnel defined benefit
plans in first quarter 1995 in an effort to reduce labor costs. No such
program was offered in first quarter 1996.
NEW ACCOUNTING PRONOUNCEMENTS
LONG-LIVED ASSETS
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." SFAS No. 121 requires that long-lived assets and certain identifiable
intangible assets held and used by an entity be reviewed 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.
Measurement of that loss is based on the fair value of that asset. Generally,
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 adopted the provisions of SFAS No. 121 on January 1, 1996. The
adoption of SFAS No. 121 did not have a material effect on the Company's
financial condition or results of operations.
STOCK-BASED COMPENSATION
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.
-16-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material developments in matters previously reported or
reportable events arising in the three months ended March 31, 1996
were noted.
ITEM 2. CHANGES IN SECURITIES
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.
As part of the AIP Investment, AIP received four shares of Series B
Special Preferred Stock, which entitles AIP to nominate directors as
described in Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition - Liquidity and Capital Resources -
Recapitalization." The Association of Flight Attendants ("AFA"),
International Association of Machinists and Aerospace Workers (AFL-
CIO) ("IAM") and Air Line Pilots Association, International ("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 transfer; and (5) does not have preemptive rights
in connection with future issuances of the Company's capital stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 30, 1996, the Company held a Special Meeting of
Shareholders in Honolulu, Hawaii (the "Special Meeting"). The
purpose of the Special Meeting was as follows: (1) to consider and
vote upon an equity investment agreement between the Company and AIP;
-17-
<PAGE>
(2) to elect 11 directors to serve until the 1996 Annual Meeting of
Shareholders; (3) to consider approval of the Company's Amended
Articles of Incorporation to increase the number of authorized shares
of Class A Common Stock of the Company by 20.0 million shares; and
(4) to consider approval to delete a provision of the Company's
Amended Articles of Incorporation that restricts certain transfers of
the Company's stock. At the close of business on the record date,
December 18, 1995, 6,845,105 shares of the Company's Class A Common
Stock were outstanding. Each share of Class A Common Stock entitled
the holder thereof to one vote. At the time the Special Meeting
convened, the record owners of not less than 5,014,533 shares of
Class A Common Stock were present in person or by proxy. Each of the
proposals submitted was approved by the Company's shareholders.
The 11 directors elected at the Special Meeting to serve for a term
ending at the next Annual Shareholders Meeting, currently scheduled
for June 6, 1996, or until their successors are duly elected and
qualified or until they resign or are removed, were the following
(each of whom received the vote of the number of shares indicated
next to his or her name): John W. Adams (4,973,452), Todd G. Cole
(4,972,596), Richard F. Conway (4,973,452), Robert G. Coo
(4,973,252), Carol A. Fukunaga (4,973,750), William Boyce Lum
(4,973,452), Richard K. Matros (4,973,452), Bruce R. Nobles
(4,969,898), Samson Po'omaihealani (4,967,738), Edward Z. Safady
(4,973,452) and David B. Urrea (4,973,838).
Regarding the proposal to approve the Stock Purchase Agreement with
AIP, not less than 4,893,237 votes, or 98% of the shares of Class A
Common Stock voted in person or by proxy were cast in favor of
approval, with 114,416 voting against and 6,900 abstaining. With
respect to amending Article IV of the Amended Articles of
Incorporation to increase the number of authorized shares, 4,890,206
votes, or 71% of the outstanding shares of Class A Common Stock, in
excess of the required two-thirds, voted in favor of approval, with
113,995 voting against and 10,352 abstaining. As for the proposal to
delete Article XIII from the Amended Articles of Incorporation,
4,892,305 votes, or 71% of the outstanding shares of Class A Common
Stock, in excess of the required two-thirds, voted in favor of
approval, with 109,398 voting against and 12,850 abstaining.
The matter of amending Article IV of the Amended Articles of
Incorporation to increase the number of authorized shares was also
unanimously approved through written consent by all holders of Class
B Common Stock voting as a separate class, of which 1,894,955 shares
were outstanding as of the December 18, 1995 record date. The
approval of the Class B Common Stock was not required in connection
with any of the other matters submitted for shareholder approval at
the Special Meeting.
-18-
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports of Form 8-K
(1) Current Report on Form 8-K dated January 10,
1996 (date of event-January 10, 1996) reporting Item 5
"Other Events" and Item 7 "Financial Statements, Proforma
Financial Information and Exhibits";
(2) Current Report on Form 8-K dated January 15,
1996 (date of event-January 15, 1996) reporting Item 5
"Other Events" and Item 7 "Financial Statements, Proforma
Financial Information and Exhibits";
(3) Current Report on Form 8-K dated January 18,
1996 (date of event-January 18, 1996) reporting Item 5
"Other Events" and Item 7 "Financial Statements, Proforma
Financial Information and Exhibits";
(4) Current Report on Form 8-K dated January 30,
1996 (date of event-January 30, 1996) reporting Item 5
"Other Events" and Item 7 "Financial Statements, Proforma
Financial Information and Exhibits";
(5) Current Report on Form 8-K dated January 31,
1996 (date of event-January 31, 1996) reporting Item 5
"Other Events" and Item 7 "Financial Statements, Proforma
Financial Information and Exhibits"; and
(6) Current Report on Form 8-K dated February 2,
1996 (date of event-February 2, 1996) reporting Item 5
"Other Events" and Item 7 "Financial Statements, Proforma
Financial Information and Exhibits".
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAWAIIAN AIRLINES, INC.
May 15, 1996 By /S/ JOHN L. GARIBALDI
---------------------------------
John L. Garibaldi
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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