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PROSPECTUS
12,100,000 SHARES
HAWAIIAN AIRLINES, INC.
COMMON STOCK
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Hawaiian Airlines, Inc., a Hawaii corporation (the "Company" or "Hawaiian
Airlines"), is distributing subscription rights entitling the holder of each
subscription right to purchase one share of the Company's Common Stock, par
value $0.01 per share (the "Common Stock"), for $3.25 (the "Subscription Price")
during a specified period. Of the subscription rights, approximately 8,250,000
(the "Shareholder Rights") will be distributed to holders of record of shares of
the Common Stock as of the close of business on August 7, 1996 (the "Record
Date"), other than Airline Investors Partnership, L.P. ("AIP"). In addition to
the Shareholder Rights, 1,000,000 subscription rights (the "Employee Rights")
will be distributed among the employees of the Company as of the Record Date who
were also employees at any time during 1995, other than members of senior
management (the "Eligible Employees"), PRO RATA based on each Eligible
Employee's W-2 earnings from the Company in 1995 relative to the aggregate W-2
earnings paid by the Company to all Eligible Employees in 1995. Shareholders
will be entitled to one Shareholder Right for each share of Common Stock held on
the Record Date. The Employee Rights will also entitle the holders thereof who
exercise their Employee Rights in full to subscribe for the shares of Common
Stock underlying Employee Rights that expire without being exercised and up to
1,000,000 of the shares of Common Stock underlying Shareholder Rights that
expire without being exercised, subject to proration as described in "The Rights
Offering -- Employee Rights" (the "Oversubscription Privilege"). Concurrently
with the distribution of the Shareholder Rights and the Employee Rights, the
Company is granting 600,000 options (the "Options") under its 1996 Stock
Incentive Plan to the holders of options under the Company's 1994 Stock Option
Plan and to the Company's Chief Operating Officer, entitling the holder of each
Option to purchase one share of Common Stock at the Subscription Price. The
Shareholder Rights, the Employee Rights and the Options are hereinafter referred
to as the "Rights." The Shareholder Rights and the Employee Rights will expire
at 5:00 p.m., New York time, on September , 1996 unless extended by the
Company (such date, as it may be extended on one or more occasions, is referred
to herein as the "Expiration Date") and the Options will expire on the 20th day
after the Expiration Date. The Shareholder Rights will be transferable but the
Options and the Employee Rights cannot be transferred. The distribution of the
Shareholder Rights and the Employee Rights, the granting of the Options and the
sale of shares of Common Stock in connection therewith are collectively referred
to herein as the "Rights Offering." The shares of Common Stock underlying the
Rights are referred to herein as the "Rights Shares" and holders of Rights are
referred to herein as "Holders." See "The Rights Offering."
The Company has entered into stock purchase agreements (the "Stock Purchase
Agreements") with certain institutional investors, high net worth individuals
and non-employee directors and senior management of the Company (each an
"Investor," and collectively, the "Investors") pursuant to which the Investors
have severally agreed to purchase from the Company at the Subscription Price an
aggregate of 2,250,000 shares of Common Stock (the "Base Shares") and an
additional number of shares of Common Stock, if any (the "Standby Shares"),
equal to (i) 7,692,308 (I.E., $25 million divided by the Subscription Price)
minus (ii) the total number of Rights Shares issued pursuant to the exercise of
Shareholder Rights and Employee Rights minus (iii) the Base Shares. The
Investors' obligation to purchase the Base Shares and the Standby Shares is
subject to certain conditions. The Investors will also have the option to
purchase any or all of a number of shares of Common Stock, if any (the
"Additional Shares"), determined pursuant to the formula set forth in "The
Investor Offering." The sale of the Base Shares, the Standby Shares and the
Additional Shares to the Investors is referred to herein as the "Investor
Offering." The Investor Offering will close on the sixth business day following
the Expiration Date. Jefferies & Company, Inc. ("Jefferies" or the "Financial
Advisor") assisted the Company in the identification of prospective Investors.
See "The Investor Offering."
The 12,100,000 shares of Common Stock issuable pursuant to the Rights
Offering and the Investor Offering have been approved for listing on the
American Stock Exchange (the "AMEX") and the Pacific Stock Exchange (the "PSE").
The closing price of a share of Common Stock on the AMEX on July 31, 1996 was
$4. There has been no prior market for the Rights. The Shareholder Rights have
been approved for listing on the AMEX and the PSE; however, no assurances can be
given that a market for the Shareholder Rights will develop or, if a market
develops, that such market will remain available throughout the Rights Offering.
Funds provided in payment of the Subscription Price will be held by
ChaseMellon Shareholder Services, L.L.C. as the Subscription Agent, until the
issuance of the related Rights Shares, which in the case of Shareholder Rights
will occur promptly after exercise, and in the case of Employee Rights will
occur promptly following the Expiration Date and in the case of Options will
occur promptly following the 20th day after the Expiration Date. The exercise of
Rights is irrevocable once made, and no interest will be paid to Holders
exercising their Rights.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREIN FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITER'S FEES
SUBSCRIPTION OR AND PROCEEDS TO
PURCHASE PRICE COMMISSIONS (1) COMPANY (2)
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Per Share...................................................... $3.25 N/A $3.25
Total (3)...................................................... $39,325,000 N/A $39,325,000
</TABLE>
(1) Jefferies will receive a capital raising fee equal to 5.5% of the aggregate
gross proceeds to the Company from the Investor Offering and any other
offering of Common Stock in which Jefferies provides financial advisory
services to the Company (a "Subsequent Offering") and which is necessary in
order that gross proceeds to the Company from the Rights Offering, the
Investor Offering and any Subsequent Offering equal or exceed $25,000,000.
In the event that the total gross proceeds to the Company from the Rights
Offering, the Investor Offering and any Subsequent Offering equal or exceed
$25,000,000, Jefferies will also receive (x) a financial advisory fee equal
to 1.5% of the aggregate gross proceeds to the Company from the Rights
Offering, the Investor Offering and any Subsequent Offering and (y)
reimbursement by the Company for Jefferies' out-of-pocket expenses, other
than its reasonable attorneys' fees and disbursements which the Company has
agreed to reimburse regardless of the outcome of its various offerings. In
addition, the Company has agreed to indemnify Jefferies against certain
liabilities. See "The Financial Advisor."
(2) Before deduction of fees and expenses payable by the Company (including fees
payable to the Financial Advisor) estimated at $2.6 million.
(3) Represents the maximum total subscription and purchase price and total
proceeds to the Company. The actual amounts could be less.
------------------------------
JEFFERIES & COMPANY, INC.
AUGUST , 1996
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[GRAPHIC DEPICTING THE HAWAIIAN AIRLINES
ROUTE SYSTEM]
IN CONNECTION WITH THIS OFFERING, JEFFERIES MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS AND THE
COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE AND THE
PACIFIC STOCK EXCHANGE, IN THE OVER THE COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANYTIME.
2
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Available Information............................ 3
Documents Incorporated by Reference.............. 4
Prospectus Summary............................... 5
Risk Factors..................................... 18
Purpose of the Rights Offering and Use of
Proceeds........................................ 27
The Rights Offering.............................. 28
The Investor Offering............................ 35
Certain Federal Income Tax Consequences.......... 35
Price Range of Common Stock and Dividend
Policy.......................................... 38
Capitalization................................... 39
Selected Historical Financial Information........ 40
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PAGE
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Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 43
Business......................................... 59
Management....................................... 78
Certain Relationships and Related Transactions... 81
Principal Shareholders........................... 82
Description of Capital Stock..................... 84
The Financial Advisor............................ 88
Legal Matters.................................... 89
Experts.......................................... 89
Index to Financial Statements.................... F-1
</TABLE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 (together with any amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Rights and the shares of
Common Stock subject to the Rights Offering and the Investor Offering. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. Such
additional information may be obtained from the Commission's principal office in
Washington, D.C.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports and other information with the Commission. The
Registration Statement and the exhibits thereto, as well as such reports and
other information, filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at 75 Park Place, 14th Floor, New York, New York 10007 and
Northwest Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained upon written request addressed to
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information concerning the Company may be inspected at the
offices of the American Stock Exchange, 86 Trinity Place, 14th Floor, New York,
New York 10006, or the Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for the year ended December 31,
1995, filed April 1, 1996, as amended by the Company's Annual Report on Form
10-K/A (Amendment No. 1) filed April 17, 1996, as amended by the Company's
Annual Report on Form 10-K/A (Amendment No. 2) filed May 1, 1996.
(ii) The Company's Quarterly Report on Form 10-Q, filed May 15, 1996, for
the quarter ended March 31, 1996;
(iii) The Company's Current Report on Form 8-K, filed January 10, 1996 (date
of event January 10, 1996);
(iv) The Company's Current Report on Form 8-K, filed January 17, 1996 (date
of event January 15, 1996);
(v) The Company's Current Report on Form 8-K, filed January 23, 1996 (date
of event January 18, 1996);
(vi) The Company's Current Report on Form 8-K, filed February 1, 1996 (date
of event January 30, 1996);
(vii) The Company's Current Report on Form 8-K, filed February 2, 1996 (date
of event January 31, 1996);
(viii) The Company's Current Report on Form 8-K, filed February 7, 1996 (date
of event February 2, 1996).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the Investor Offering, shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the respective
dates of the filing thereof. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that is also deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all documents incorporated by reference into this Prospectus that
are not delivered herewith, except the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
for such copies should be directed to: Investor Relations, Hawaiian Airlines,
Inc., 3375 Koapaka Street, Suite G-350, Honolulu, Hawaii 96819; telephone number
(808) 835-3700.
------------------------
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT RELATED TO
HISTORICAL RESULTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
COMPANY'S BUSINESS STRATEGY AND OBJECTIVES, FUTURE FINANCIAL POSITION AND
ESTIMATED COST SAVINGS, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT AND
INVOLVE RISKS AND UNCERTAINTIES. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS ON WHICH THESE FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE,
THERE CAN BE NO ASSURANCE THAT SUCH ASSUMPTIONS WILL PROVE TO BE ACCURATE AND
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS ARE
QUALIFIED IN THEIR ENTIRETY BY THIS CAUTIONARY STATEMENT.
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PROSPECTUS SUMMARY
THE MATERIAL IN THIS PROSPECTUS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
REFERENCES HEREIN TO THE "PREDECESSOR COMPANY" REFER TO HAWAIIAN AIRLINES AS
IT EXISTED PRIOR TO SEPTEMBER 12, 1994, THE DATE IT EMERGED FROM BANKRUPTCY, AND
REFERENCES HEREIN TO THE "REORGANIZED COMPANY" REFER TO HAWAIIAN AIRLINES AS IT
EXISTED ON AND AFTER SEPTEMBER 12, 1994.
THE COMPANY
Hawaiian Airlines is the largest airline headquartered in Hawaii, based on
operating revenues of $346.9 million for 1995. The Company is engaged primarily
in the scheduled transportation of passengers, cargo and mail over a route
system that services the six major islands of the State of Hawaii
("Interisland") and Las Vegas and four key U.S. West Coast gateway cities, Los
Angeles, San Francisco, Seattle and Portland ("Transpac"). In addition, Hawaiian
Airlines provides the only direct service from Hawaii to Pago Pago, American
Samoa and Papeete, Tahiti ("Southpac"). The Company also provides charter
service from Honolulu to Las Vegas ("Charter"). Hawaiian Airlines (i) is one of
two dominant Interisland air carriers in Hawaii, (ii) is the third largest air
carrier between the U.S. mainland and Hawaii based on 2.51 billion scheduled
Transpac revenue passenger miles ("RPMs") in 1995, (iii) has one of the highest
load factors in the United States with an overall scheduled load factor of 74.8%
in 1995 and (iv) has, management believes, one of the lowest cost structures in
the industry. Furthermore, Hawaiian Airlines has been rated one of the ten best
airlines in the U.S. for five consecutive years in a national travel magazine
reader's poll on the basis of scheduling, punctuality, cabin comfort/service,
food and baggage handling. The Company operates a fleet of 13 DC-9-50 aircraft
and eight DC-10-10 aircraft (a ninth DC-10-10 aircraft is being used on a
temporary basis to permit the scheduled overhaul of six of the other DC-10s
during 1996).
The Company was incorporated in January 1929 under the laws of the Territory
of Hawaii. The Common Stock trades on the AMEX and the PSE under the symbol
"HA." The closing price of the Common Stock on the AMEX on July 31, 1996 was $4.
The Company's principal offices are located at 3375 Koapaka Street, Suite G-350,
Honolulu, Hawaii, 96819 and its telephone number is (808) 835-3700.
STRATEGIC REPOSITIONING
In late 1989, the Company was the subject of a leveraged acquisition by an
investor group. Due to a number of factors, including the Gulf War, a
significant economic recession and a major natural disaster (Hurricane Iniki),
the Company experienced severe financial difficulties during the early 1990's.
Over the past three years, a new management team has conducted a strategic
repositioning of Hawaiian Airlines designed to improve its overall operating and
financial performance. The primary objectives of this repositioning have been to
(i) control and reduce operating costs, (ii) restructure the Company's balance
sheet and obtain additional liquidity through a recapitalization, and (iii)
enhance the Company's operating revenues through strategic alliances and certain
other opportunities. Management believes that the strategic repositioning has
significantly improved the Company's operations, balance sheet and financial
performance by reducing aircraft and labor costs and providing additional
liquidity. Moreover, this repositioning has allowed the Company to eliminate its
historical dependence on ticket discounting to generate capital, and has allowed
management to focus on the pursuit and implementation of its long-term operating
strategy and the identification and pursuit of potential growth opportunities.
COST REDUCTION PROGRAMS
As part of its strategic repositioning, the Company has effected a number of
significant changes that have contributed to Hawaiian Airlines having,
management believes, one of the lowest operating
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costs per total available seat mile ("CTASM") in the industry. Total available
seat miles ("TASM") represents the number of seats available for scheduled and
charter service multiplied by the number of miles those seats are flown.
REDUCED AIRCRAFT EXPENSE. In September 1994, the Company completed the
reconfiguration of its aircraft fleet by phasing out its DC-8, DHC-7 and L-1011
aircraft and leasing from American Airlines, Inc. ("American") lower cost and
more efficient used DC-10 aircraft for its Transpac, Southpac and Charter
operations. Furthermore, in conjunction with the January 1996 $20 million equity
infusion from AIP discussed below (the "AIP Investment"), the Company's
long-term lease agreement with American pursuant to which the Company leases six
of its DC-10 aircraft (the "Aircraft Lease Agreement") was amended to further
reduce costs. Under the Aircraft Lease Agreement, American maintains the
Company's entire DC-10 fleet (consisting of the six aircraft leased under the
Aircraft Lease Agreement and three additional aircraft leased from American, two
of which are leased on a short-term basis) on a fixed rate per flight hour
basis. Although the Company incurred significant non-recurring expenses in 1994
due to the reconfiguration of its aircraft fleet, the Company anticipates that,
as a result of the transition to DC-10 aircraft and the amendment to the
Aircraft Lease Agreement, cash outlays for aircraft rent, fuel, maintenance and
capitalized overhaul and spare parts from 1996 to 2000, in management's best
estimate, will average approximately $15.5 million per year less than would have
been the case if the Company had retained its old fleet, based on miles flown in
1995.
LABOR CONCESSIONS. Over the past several years the Company has also
obtained important concessions under the collective bargaining agreements with
its employees. In September 1993, the Company reached agreement with all
employee groups for revised labor agreements which, in management's best
estimate, resulted in cash savings measured per block hour against cost
increases that otherwise would have taken effect of approximately $10 million in
1994 and $10 million in 1995 and which, along with other productivity
improvement initiatives, are estimated to result in further cash savings through
1999. Additional modifications to the labor agreements were completed in
conjunction with the AIP Investment in January 1996, which modifications are
anticipated to result in cash operating expenses, before profit sharing costs,
for 1996, 1997, 1998 and 1999 being, in management's best estimate,
approximately $3.6 million, $7.6 million, $8.0 million and $5.5 million less,
respectively, than would otherwise be the case, based on the Company's flight
schedule as of June 1996. In addition, the amendable dates of all of the
Company's collective bargaining agreements have been extended from February 1997
to February 2000.
As a result of these and other cost reduction efforts, the Company has
lowered its CTASM from $0.085 for the year ended December 31, 1993 to $0.075 for
the year ended December 31, 1995.
RECAPITALIZATION
In response to the financial difficulties experienced by the Company in the
early 1990s, Hawaiian Airlines voluntarily commenced a Chapter 11 bankruptcy
reorganization in September 1993. Pursuant to a consolidated Plan of
Reorganization dated September 21, 1993 and subsequently amended (the "Plan of
Reorganization"), the Company emerged from bankruptcy on September 12, 1994.
While the Plan of Reorganization allowed the Company to convert approximately
$205 million in unsecured obligations into equity and institute a number of cost
savings measures, including the significant restructuring and simplification of
its fleet of aircraft, Hawaiian Airlines emerged from bankruptcy with limited
liquidity. To address its on-going liquidity needs, during 1995 the Company
developed a plan to (i) secure an equity infusion from a private capital source,
(ii) restructure and improve its relationship with American and (iii) effect a
rights offering to its existing shareholders to provide further liquidity and
strength to its balance sheet.
RESTRUCTURING THE BALANCE SHEET AND OBTAINING ADDITIONAL LIQUIDITY. On
January 31, 1996 the Company achieved the first two of its liquidity enhancement
objectives through the completion of the AIP Investment, which consisted of
AIP's purchase of 18,181,818 shares of Common Stock (which represented 69% of
the outstanding Common Stock on May 17, 1996) for $20 million in cash, and the
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amendment of the Aircraft Lease Agreement. This amendment accomplished a number
of objectives including the settling of certain lease and maintenance
obligations under the Aircraft Lease Agreement that became delinquent in
December 1994 and during the first quarter of 1995 and were then deferred by
American. These obligations were satisfied through the delivery of a six year
$10.25 million promissory note to American (the "American Note"). In addition,
American released a $2 million security deposit that was posted at the
commencement of the Aircraft Lease Agreement. In connection with these
arrangements with American, the Company issued to American's parent company, AMR
Corporation ("AMR"), warrants to purchase up to 1,897,946 shares of Common Stock
at $1.10 per share (the "AMR Warrants"). 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 issuance of up to 1,000,000 Rights Shares
upon the exercise of Employee Rights and the issuance of the Base Shares will
give rise to an increase in the number of AMR Warrants and a decrease in the
exercise price thereof pursuant to the anti-dilution provision of the AMR
Warrants, although the magnitude of these adjustments can not be determined
until after the Rights Offering and the Investor Offering are completed.
THE RIGHTS OFFERING. In recognition of the substantial dilutive effect of
the AIP Investment on the existing shareholders of the Company, AIP agreed to
use its best efforts to cause the Company, after completion of the AIP
Investment, to make a rights offering to the Company's shareholders other than
AIP. In addition to reducing the dilutive effect of the AIP Investment on the
other shareholders, the Rights Offering is intended to achieve the Company's
third liquidity enhancement objective by improving its working capital position
with the net proceeds of the Rights Offering.
ENHANCE OPERATING REVENUES
STRATEGIC ALLIANCES. The Company's relationship with American is a key
element in its operating strategy. In addition to the leasing and maintenance
services of its DC-10 aircraft, the Company is a participating carrier in
American's AAdvantage-Registered Trademark- frequent flyer program, which allows
travelers on Hawaiian Airlines to accrue mileage in the
AAdvantage-Registered Trademark- program. Moreover, the more than 32 million
AAdvantage-Registered Trademark- members may redeem their program miles for
travel on Hawaiian Airlines' flights. The Company also participates in
SABRE-Registered Trademark-, American's computerized reservations system, which
is used by more than 20 major travel providers in 70 countries. The Company,
working with FlyAAway-Registered Trademark- Vacations, the tour operations unit
of American, develops, markets and manages a line of package tours to all six
major Hawaiian islands. FlyAAway-Registered Trademark- Vacations is the world's
largest airline-owned tour operator.
On May 22, 1996, the Company entered into a cooperative marketing agreement
with Northwest Airlines, Inc. ("Northwest"), which provides for extensive
marketing cooperation, including a code sharing arrangement, coordinated airport
customer service and frequent flyer program cooperation. Under the code sharing
arrangement, a Northwest flight code will appear in travel agent computers on
many of Hawaiian Airlines' flights between Honolulu and several of the other
destinations in the Hawaiian islands. Northwest will coordinate its flight
schedules to Honolulu to provide convenient connections to the Company's
Interisland flights.
The Company entered into a code sharing agreement with Mahalo Air, Inc.
("Mahalo") in June 1996, pursuant to which the Company began placing its flight
code on Mahalo's five daily flights between Honolulu and Molokai and its five
daily flights between Honolulu and West Maui's Kapalua Airport starting July 1,
1996. This enables the Company to offer an expanded flight schedule to Molokai
and West Maui without incurring expansion costs. Pursuant to the agreement, the
Company also provides certain airport services to Mahalo.
REORGANIZED ROUTE STRUCTURE. Over the past three years, the Company has
adjusted its schedules between Honolulu and Los Angeles, San Francisco, Las
Vegas and American Samoa to maximize capacity and passenger load. In addition,
the Company has added non-stop service between Portland,
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Oregon and Honolulu. In the Interisland market, the Company introduced its
"Island Shuttle" service (the "Island Shuttle") on August 1, 1993, with
departures between Honolulu and Maui every half hour and between Honolulu and
Kauai every hour.
IMPROVED CUSTOMER SERVICE. The Company also continues to concentrate on
customer service, which it believes will have a positive effect on market share.
In recent years, the Company has achieved a number of significant operating
improvements, particularly with regard to on-time performance and reliability
and customer satisfaction.
LONG-TERM STRATEGY AND POTENTIAL GROWTH
Hawaiian Airlines is committed to becoming the first air carrier of choice
for travel to, from and among the Hawaiian Islands. The Company's strategy for
achieving this objective is based upon the following:
(i) INTERISLAND. Return the Company to its historic role as the leading
Interisland air carrier through (a) maintaining and improving its low cost
structure, (b) expanding its capacity and scheduling, particularly through
the Island Shuttle concept, and (c) forming strategic marketing agreements
with other air carriers, including the use of code sharing arrangements and
frequent flyer programs.
(ii) TRANSPAC. Expand its role as one of the major air carriers from its key
West Coast gateway cities through (a) maintaining and improving its position
as a low-cost scheduled carrier, (b) forming strategic marketing agreements
with other air carriers, including the use of code sharing arrangements and
frequent flyer programs, and (c) capitalizing on the unique "Hawaiian
Experience" provided by Hawaiian Airlines.
(iii) NICHE MARKETS. Dominate the local Hawaii market to Las Vegas in both
scheduled flights and charter service through maintaining and increasing its
scheduled and charter service.
(iv) SOUTHPAC. Maintain its dominant position in the Southpac market.
The Company also believes that it may have opportunities for continued
growth through (i) initiating direct service from its key West Coast gateway
cities to neighboring Hawaiian islands not currently served by the Company from
the West Coast, (ii) carrying passengers originating from other U.S. western and
southwestern cities through code sharing arrangements with regional mainland
carriers, (iii) carrying more passengers originating from Pacific Rim countries
such as Japan, South Korea and China by developing new or expanded relationships
with carriers based in Asia, (iv) securing joint marketing and strategic code
sharing relationships with other major and regional air carriers, (v) increasing
the utilization of the Company's existing assets by providing ground handling
and/or other services for other air carriers in Hawaii, (vi) capitalizing on the
increased business travel to Hawaii expected to result from the new Hawaii
Convention Center anticipated to open in Spring 1998, and (vii) increasing the
scope of its advertising strategy through cooperative marketing programs with
other Hawaii travel industry participants. However, no assurance can be given
that the Company will be able to effectively exploit any of the foregoing
strategies or opportunities.
RECENT OPERATING AND FINANCIAL RESULTS
As a result of its strategic repositioning, the Company's operating and
financial results improved substantially during the first quarter of 1996, which
has historically been the Company's weakest operating season. Hawaiian Airlines
recorded an operating profit of $396,000 during the first quarter of 1996, the
first such profit recorded in its first quarter since 1987. The positive
operating results represent the fourth consecutive quarter of operating profit
recorded by the Company.
Operating revenues increased 24.6% during the first quarter of 1996 to $94.1
million, as compared to $75.5 million during the same quarter in 1995. Operating
income (loss) improved from a loss of $7.4 million for the first quarter of 1995
to income of $396,000 during the first quarter of 1996. Net
8
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loss also improved from a loss of $8.3 million to a loss of $582,000 during the
respective periods. Available seat miles ("ASMs") and RPMs increased from 940
million and 680 million, respectively, during the first quarter of 1995 to 1.11
billion and 810 million, respectively, during the first quarter of 1996. Overall
load factors during the same periods were 72.4% and 72.8%, respectively. The
Company's CTASM for the first quarter of 1996 improved to $0.075 from a CTASM of
$0.082 during the first quarter of 1995.
The operating and net results for the first quarter of 1996 include
nonrecurring, noncash charges to earnings of $964,000, which were incurred
primarily in connection with the consummation of the AIP Investment. Excluding
the effect of these non-recurring charges, operating income for the quarter
would have been $1.4 million and net income for the quarter would have been
$382,000.
The Company currently expects to report operating income of approximately $3
million and net income of approximately $1.5 million for the second quarter of
1996 on operating revenues of more than $96 million, representing the fifth
consecutive quarter of operating profit recorded by the Company and the best
second quarter operating results in the Company's history. In the second quarter
of 1995, the Company reported operating income of $431,000 and a net loss of
$451,000 on operating revenues of $85.5 million. The Company expects to report
operating income of approximately $3.5 million and net income of approximately
$950,000 for the six months ended June 30, 1996 on operating revenues of more
than $190 million. For the six months ended June 30, 1995, the Company reported
an operating loss of $7.0 million and a net loss of $8.7 million on operating
revenues of $161.0 million. Net income for the second quarter of 1996 and the
six months ended June 30, 1996 includes a $340,000 extraordinary gain, net of
estimated income taxes, due to the early retirement of approximately $4.5
million of debt.
PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS
The price paid by AIP for its shares of Common Stock in the AIP Investment
represented a substantial discount from the market price of the Common Stock at
the time that AIP made its offer to the Company. On December 8, 1995, the date
that AIP and the Company entered into the agreement to consummate the AIP
Investment at a price of $1.10 per share, the closing price of a share of Common
Stock on the AMEX was $2 11/16. In recognition of the substantial dilutive
effect of the AIP Investment on the existing shareholders of the Company, the
investment agreement with AIP contained a provision in which AIP agreed to use
its best efforts to cause the Company, after the completion of the AIP
Investment, to make a rights offering to the Company's shareholders (other than
AIP) that would permit the shareholders to acquire shares of Common Stock at a
discount to the market price. In this way, the shareholders of the Company,
other than AIP, would have the opportunity to reduce the dilutive effect of the
AIP Investment on their equity investment in the Company.
In addition, the Rights Offering and the Investor Offering are intended to
raise a minimum of $25 million of gross proceeds as part of the Company's
on-going efforts to improve its liquidity. In establishing the size of the
Investor Offering, the Board of Directors consulted with the Financial Advisor
and management, and considered the Company's need for additional capital.
If the Rights Offering and the Investor Offering are consummated, the
maximum gross proceeds to the Company from the Rights Offering and the Investor
Offering would be approximately $39.3 million before payment of related fees and
expenses estimated to be $2.6 million. However, no assurance can be given that
any or all of the Rights will be exercised. Therefore, the actual proceeds from
the Rights Offering and the Investor Offering could be substantially lower. If
Standby Shares or Additional Shares are issued, the estimated fees and expenses
would increase due to the fee payable to the Financial Advisor in connection
with the issuance of such shares (see "The Financial Advisor"). In such event,
the total fees and expenses of the Company in connection with the Rights
Offering and the Investor Offering could be as high as $3.4 million.
The Company currently expects that the net proceeds from the Rights Offering
and the Investor Offering will be used for general working capital purposes
and/or prepayment of a portion of the
9
<PAGE>
Company's long-term debt, although a final determination as to the use or uses
will not be made until after the completion of the Rights Offering and the
Investor Offering. Factors that will be considered at that time in determining
how the net proceeds will be used will include: the amount of net proceeds
actually generated, the Company's actual and projected working capital
requirements at that time, interest rates in effect at that time, the amount of
any applicable debt prepayment discounts, and such other factors as the Board of
Directors considers to be relevant at that time. Pending use, the net proceeds
will be invested in short-term, interest-bearing securities. For a description
of the Company's long-term debt, including interest rates, maturity dates and
use of proceeds from such debt, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Current Status."
The Subscription Price has been established by the Board of Directors as
69.9% of the average closing price of the Common Stock on the AMEX for the 30
trading days ended July 25, 1996.
THE RIGHTS OFFERING
<TABLE>
<S> <C>
Shareholder Rights........... Shareholders other than AIP will receive one Right for each
share of Common Stock held on the Record Date. An aggregate
of approximately 8,250,000 Shareholder Rights will be
distributed. Holders are entitled to purchase at the
Subscription Price one share of Common Stock for each
Shareholder Right exercised. The Shareholder Rights will
expire on the Expiration Date. The Shareholder Rights will
be transferable.
Employee Rights.............. The Eligible Employees (I.E., all employees of the Company,
other than members of senior management, who were employed
at any time during 1995 and on the Record Date) will receive
an aggregate of 1,000,000 Rights. The Employee Rights will
be distributed among the Eligible Employees pro rata based
on each Eligible Employee's W-2 earnings from the Company in
1995 relative to the aggregate W-2 earnings paid by the
Company to all Eligible Employees in 1995. Holders are
entitled to purchase at the Subscription Price one share of
Common Stock for each Employee Right exercised. The Employee
Rights will expire on the Expiration Date. The Employee
Rights will not be transferable.
The Employee Rights will also entitle the Holders thereof to
the Oversubscription Privilege, pursuant to which such
Holders who exercise their Employee Rights in full will also
be able to subscribe for the Rights Shares underlying
Employee Rights that expire without being exercised and up
to 1,000,000 of the Rights Shares underlying Shareholder
Rights that expire without being exercised. If an
insufficient number of Rights Shares is available to satisfy
all exercises of the Oversubscription Privilege, then the
available Rights Shares will be prorated among Holders who
exercise the Oversubscription Privilege based upon the
respective number of Employee Rights of such Holders. Any
funds received by the Subscription Agent from Holders with
respect to the Oversubscription Privilege that are not
applied to the purchase of Rights Shares due to proration
will be returned by mail as soon as practicable, without
interest.
Options...................... An aggregate of 600,000 Options will be granted under the
Company's 1996 Stock Incentive Plan, as amended (the "1996
Stock Incentive Plan") to persons who hold options under the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Company's 1994 Stock Option Plan (the "1994 Stock Option
Plan") and to the Company's Chief Operating Officer. Holders
are entitled to purchase at the Subscription Price one share
of Common Stock for each Option exercised. The Options will
expire on the 20th day after the Expiration Date. The
Options will not be transferable.
Subscription Price........... $3.25 per Rights Share.
Record Date.................. August 7, 1996.
Transferability of Rights.... The Shareholder Rights will be transferable and are expected
to be listed for trading on the AMEX and the PSE until the
close of business on the last trading day prior to the
Expiration Date. The Options and the Employee Rights will
not be transferable.
The Subscription Agent will endeavor to sell Shareholder
Rights for Holders who have so requested and have delivered
one or more subscription certificate(s) evidencing such
Rights, with the instruction for sale included thereon
properly executed, to the Subscription Agent by 11:00 a.m.,
New York time, by the fifth business day prior to the
Expiration Date. If less than all sales orders received by
the Subscription Agent can be filled, sales proceeds will be
prorated among the Holders based upon the number of
Shareholder Rights each has instructed the Subscription
Agent to sell during such period, irrespective of when
during such period the instructions are received by the
Subscription Agent.
There can be no assurance that the Subscription Agent will
be able to sell any Shareholder Rights for Holders, that any
market for Shareholder Rights will develop or that if such a
market develops how long it will continue.
Expiration Date.............. 5:00 p.m., New York time, on September , 1996, unless
extended by the Company from time to time, provided that the
Expiration Date shall not be later than October , 1996,
unless the Board of Directors determines that a material
event has occurred that necessitates one or more further
extensions of the Expiration Date in order to permit
adequate disclosure to Holders of information concerning
such event. The Options will expire on the 20th day after
the Expiration Date.
Conditions to Exercise of
Options and Employee
Rights...................... The Holder of Options or Employee Rights will only be able
to exercise such Rights if such Holder (i) is an employee of
the Company as of the Expiration Date in the case of
Employee Rights or the 20th day after the Expiration Date in
the case of Options, (ii) agrees not to sell the underlying
Rights Share during the 90-day period immediately following
the Expiration Date (the "Lock-Up"), (iii) pays to the
Company, on or before the Expiration Date in the case of
Employee Rights or the 20th day after the Expiration Date in
the case of Options, the Withholding Amount (as defined in
"Payment of Withholding Amount Relating to Options and
Employee Rights" below) and (iv) executes and returns to the
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Company, on or before the Expiration Date in the case of
Employee Rights or the 20th day after the Expiration Date in
the case of Options, a Withholding Agreement and Worksheet.
Any such Holder who exercises a Right shall be deemed to
have agreed to the Lock-Up described above. Conditions (i)
and (ii) will not apply to Options granted to the former
Chief Financial Officer of the Company.
Procedure for Exercising
Rights...................... Shareholder Rights and Employee Rights may be exercised
(subject to the requirements described below applicable to
Employee Rights) by properly completing the certificate
evidencing such Rights (a "Subscription Certificate") and
forwarding such Subscription Certificate to the Subscription
Agent (or following the Guaranteed Delivery Procedures,
referred to below) on or prior to the Expiration Date,
together with payment in full of the Subscription Price with
respect to such Rights. If the mail is used to forward
Subscription Certificates, it is recommended that insured,
registered mail be used. The exercise of a Right may not be
revoked or amended. If time does not permit a Holder of a
Shareholder Right or an Employee Right to deliver its
Subscription Certificate to the Subscription Agent on or
before the Expiration Date, such Holder should make use of
the Guaranteed Delivery Procedures described under "The
Rights Offering -- Exercise of Rights."
Options may be exercised by providing the Company with
written notice and payment of the Subscription Price on or
prior to the 20th day after the Expiration Date.
THE EXERCISE OF RIGHTS IS IRREVOCABLE ONCE MADE, AND RIGHTS
SHARES RELATING TO OPTIONS AND EMPLOYEE RIGHTS WILL NOT BE
ISSUED UNTIL AFTER THE EXPIRATION DATE. NO INTEREST WILL BE
PAID ON THE MONEY DELIVERED IN PAYMENT OF THE SUBSCRIPTION
PRICE.
If paying by uncertified personal check, please note that
the funds paid thereby may take at least five business days
to clear. Accordingly, Holders who wish to pay the
Subscription Price by means of uncertified personal check
are urged to make payment sufficiently in advance of the
Expiration Date to ensure that such payment is received and
clears by such date and are urged to consider payment by
means of certified or cashier's check, money order or wire
transfer of funds.
A Right may not be exercised in part and fractional Rights
Shares will not be issued.
Payment of Withholding Amount
Relating to Options and
Employee Rights............. Holders of Employee Rights who exercise those Rights
generally will recognize ordinary income on the Expiration
Date equal to the excess, if any, of the fair market value
of the underlying Rights Shares on that date over the
Subscription Price. Holders of Options will be subject to
special tax rules as a result of the exercise of Options.
Ordinary income recognized in connection with an Option or
Employee Right will be subject to applicable withholding.
See
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
"Certain Federal Income Tax Consequences -- Options and
Employee Rights" and "The Rights Offering -- Payment of
Withholding Amount Relating to Options and Employee Rights."
As a condition to the exercise of Options or Employee
Rights, on or prior to the Expiration Date in the case of
Employee Rights, or the 20th day after the Expiration Date
in the case of Options, the Holder thereof must complete,
sign and return to the Company the Withholding Agreement and
Worksheet included with this Prospectus, and must pay to the
Company the "Withholding Amount," which will be determined
using the Withholding Agreement and Worksheet and will
include tax withholding amounts with respect to all Rights
Shares being subscribed for (including pursuant to the
Oversubscription Privilege). To the extent that a Holder's
Oversubscription Privilege is not fulfilled due to
proration, the related Withholding Amount will be returned
by mail as soon as practicable, without interest.
THE WITHHOLDING AMOUNT AND THE WITHHOLDING AGREEMENT AND
WORKSHEET MUST BE RECEIVED BY THE COMPANY ON OR BEFORE THE
EXPIRATION DATE IN THE CASE OF EMPLOYEE RIGHTS OR THE 20TH
DAY AFTER THE EXPIRATION DATE IN THE CASE OF OPTIONS.
FAILURE OF A HOLDER TO PAY THE FULL WITHHOLDING AMOUNT OR
RETURN THE WITHHOLDING AGREEMENT AND WORKSHEET IN A TIMELY
MANNER WILL VOID THE EXERCISE OF THE RIGHTS BEING EXERCISED
AND THE SUBSCRIPTION PRICE WILL BE RETURNED TO THE HOLDER,
WITHOUT INTEREST.
Rights Held by Company
Plans....................... The Shareholder Rights distributed with respect to the
Common Stock owned by the Hawaiian Airlines, Inc. 401(k)
Plan for Flight Attendants, the Hawaiian Airlines, Inc.
401(k) Savings Plan or the Hawaiian Airlines, Inc. Pilots'
401(k) Plan, will be allocated to the accounts of
participants in the plans. Each plan participant will then
have the right to instruct the plan trustee regarding the
sale or exercise of the Rights allocated to such
participant's account. Such instruction must be received by
the plan trustee no later than 1:00 p.m., New York time, on
September , 1996 (or such later day as shall be the fifth
business day preceding the Expiration Date), after which
time the plan trustee will use its best efforts to sell any
Rights as to which timely instructions have not been
received.
Persons Holding Shares, or
Wishing to Exercise Rights,
Through Others.............. Persons holding shares of Common Stock, and receiving
Shareholder Rights distributable with respect thereto,
through a broker, dealer, commercial bank, trust company or
other nominee, as well as persons holding certificates for
Common Stock personally who would prefer to have such
institutions effect transactions relating to the Shareholder
Rights on their behalf, should contact the appropriate
institution or nominee and request it to effect the
transactions for them.
Issuance of Common Stock..... Certificates representing Rights Shares issuable upon
exercise of Shareholder Rights will be delivered to the
Holder of such Rights as soon as practicable after such
Rights are validly exercised.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Rights Shares issuable upon exercise of Employee Rights
(including Rights Shares issuable pursuant to the
Oversubscription Privilege) will be issued as of the
Expiration Date but certificates representing such Rights
Shares will be held by the Subscription Agent until the
expiration of the Lock-Up. Rights Shares issuable upon
exercise of Options will be issued on the 20th day after the
Expiration Date but certificates representing such Rights
Shares will be held by the Subscription Agent or the Company
until the expiration of the Lock-Up. Funds delivered to the
Subscription Agent will be held in escrow by the
Subscription Agent until the issuance of the related Rights
Shares. No interest will be paid to Holders on funds held by
the Subscription Agent regardless of whether such funds are
applied to the Subscription Price or returned to the
Holders.
Subscription Agent........... ChaseMellon Shareholder Services, L.L.C.
Information Agent............ Any questions regarding the Rights Offering, including the
procedure for exercising Rights, and requests for additional
copies of this Prospectus, the Subscription Certificate or
the notice of guaranteed delivery should be directed to
ChaseMellon Shareholder Services, L.L.C. (the "Information
Agent") at (800) 814-0304.
Financial Advisor............ Jefferies & Company, Inc.
AMEX and PSE Common Stock
Symbol...................... HA.
AMEX and PSE Shareholder
Rights Symbol............... HA.Rt.
Maximum Shares of Common
Stock Outstanding after the
Rights Offering and the
Investor Offering........... 38,509,421 shares based on 26,409,421 shares outstanding on
July 3, 1996. Does not give effect to the issuance of the
following shares of Common Stock reserved for issuance: (i)
500,000 shares upon the exercise of options granted under
the 1994 Stock Option Plan; (ii) 1,897,946 shares upon the
exercise of the AMR Warrants; (iii) 1,576,367 shares upon
the exercise of warrants held by certain individuals (the
"Reorganization Warrants"); (iv) 445,176 shares under the
Plan of Reorganization (see "Business -- Claims and
Litigation"); and (v) 1,400,000 shares (exclusive of the
600,000 shares reserved for issuance upon exercise of the
Options) upon the exercise of options that may be granted
from time to time under the 1996 Stock Incentive Plan. The
issuance of up to 1,000,000 Rights Shares upon the exercise
of Employee Rights and the issuance of the Base Shares will
give rise to an increase in the number of AMR Warrants and
Reorganization Warrants pursuant to the anti-dilution
provisions of the AMR Warrants and the Reorganization
Warrants, although the magnitude of these adjustments can
not be determined until after the Rights Offering and the
Investor Offering are completed.
</TABLE>
For more information regarding the Rights Offering, including the procedure
for exercising Rights, see "The Rights Offering."
14
<PAGE>
THE INVESTOR OFFERING
The Company has entered into Stock Purchase Agreements with the Investors
(who are certain institutional investors, high net worth individuals and
non-employee directors and members of senior management of the Company) pursuant
to which the Investors have severally agreed, subject to certain conditions, to
purchase from the Company at the Subscription Price the 2,250,000 Base Shares
and the Standby Shares. The number of Standby Shares, if any, will equal (i)
7,692,308 (I.E., $25 million divided by the Subscription Price) minus (ii) the
total number of Rights Shares issued pursuant to the exercise of Shareholder
Rights and Employee Rights minus (iii) the Base Shares. The number of Standby
Shares will be 5,442,308 shares if no Rights Shares are issued and will decline
by an amount equal to the number of Rights Shares issued.
Each Investor will also have the option to purchase any or all of the
Additional Shares, if any. The number of Additional Shares will equal the lesser
of (i)(A) 11,500,000 minus (B) the total number of Rights Shares issued pursuant
to the exercise of Shareholder Rights and Employee Rights minus (C) the Base
Shares minus (D) the total number of Standby Shares issued, or (ii)(A) 7,692,308
(I.E., $25 million divided by the Subscription Price) minus (B) the Base Shares
minus (C) the total number of Standby Shares issued. If the number of Additional
Shares is insufficient to satisfy all exercises of the Investors' option, the
Additional Shares would be prorated among Investors electing to purchase
Additional Shares based upon the respective number of Base Shares purchased by
each such Investor.
The Investor Offering will close on the sixth business day following the
Expiration Date and the option to purchase Additional Shares will expire at that
time unless exercised.
Jefferies assisted the Company in the identification of prospective
Investors.
See "The Investor Offering."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
See "Certain Federal Income Tax Consequences" for a discussion of certain
tax consequences that should be considered in connection with the Rights
Offering.
RISK FACTORS
The purchase of Rights and the purchase of Common Stock in the Rights
Offering and the Investor Offering involve investment risks relating to the
Company, to the airline industry in general and to the Rights Offering.
Investors are urged to read and consider carefully the information set forth
under the heading "Risk Factors."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE FINANCIAL ADVISOR
MAKES ANY RECOMMENDATION TO HOLDERS WITH RESPECT TO WHETHER A HOLDER SHOULD
EXERCISE RIGHTS TO PURCHASE SHARES OF THE COMMON STOCK PURSUANT TO THE RIGHTS
OFFERING, TO INVESTORS WITH RESPECT TO WHETHER AN INVESTOR SHOULD PURCHASE
SHARES OF THE COMMON STOCK, OR TO PERSONS WITH RESPECT TO WHETHER A PERSON
SHOULD PURCHASE RIGHTS.
15
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 1, 1994 TO
DECEMBER 31, 1993 SEPTEMBER 11, 1994
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Passenger................. $ 273,386 $ 199,502
Charter................... 7,169(1) 135
Cargo..................... 15,000 11,039
Other..................... 8,554 6,147
---------- ----------
Total................... 304,109 216,823
Operating expenses.......... 328,947 223,244
---------- ----------
Operating income (loss)..... (24,838) (6,421)
Nonoperating income
(expense).................. (56,690) (14,253)
---------- ----------
Loss before income taxes,
extraordinary items and
cumulative effect of change
in accounting principles... (81,528) (20,674)
Net income (loss)........... (69,424) 169,389(2)
Net loss per share.......... N/M* N/M*
Weighted average shares
outstanding................ 6,170 7,137
OTHER DATA:
Revenue passengers (4)...... 4,337 3,363
Revenue passenger miles
(RPM) (5).................. 2,870,713 2,204,855
Available seat miles (ASM)
(6)........................ 3,850,133 2,944,822
Passenger load factor (7)... 74.6% 74.9%
Yield per RPM (8)........... 9.5 CENTS 9.0 CENTS
Total available seat miles
(TASM) (9)................. 3,871,071 2,945,679
Operating revenue per TASM.. 7.9 CENTS 7.4 CENTS
Costs per TASM (CTASM)
(10)....................... 8.5 CENTS 7.6 CENTS
EBITDA, as adjusted (11).... (4,869) (2,336)
Depreciation and
amortization expense....... (5,969) (4,085)
Capital expenditures........ 7,037 3,682
Net cash provided by (used
in) operating
activities)................ 13,909 6,096
Net cash provided by (used
in) investing activities... (9,845) (5,872)
Net cash provided by (used
in) financing activities... (1,719) (2,034)
<CAPTION>
REORGANIZED COMPANY
-------------------------------------------------------------------------------
PERIOD FROM
SEPTEMBER 12, 1994 QUARTER ENDED MARCH 31,
TO DECEMBER 31, YEAR ENDED -----------------------------------
1994 DECEMBER 31, 1995 1995 1996
------------------ ------------------ -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues:
Passenger................. $ 80,675 $ 297,527 $ 65,601 $ 79,811
Charter................... 536 22,200 3,557 6,971
Cargo..................... 5,300 18,169 3,961 4,813
Other..................... 2,646 9,008 2,389 2,467
---------- ---------- -------------- --------------
Total................... 89,157 346,904 75,508 94,062
Operating expenses.......... 95,425 348,805 82,935 93,666
---------- ---------- -------------- --------------
Operating income (loss)..... (6,268) (1,901) (7,427 ) 396
Nonoperating income
(expense).................. 117 (3,605) (867 ) (978 )
---------- ---------- -------------- --------------
Loss before income taxes,
extraordinary items and
cumulative effect of change
in accounting principles... (6,151) (5,506) (8,294 ) (582 )
Net income (loss)........... (6,151) (5,506) (8,294 ) (582 )
Net loss per share.......... $ (0.65) $ (0.59) $ (0.88 ) $ (0.03 )
Weighted average shares
outstanding................ 9,400(3) 9,400(3) 9,400 (3) 21,521 (3)
OTHER DATA:
Revenue passengers (4)...... 1,221 4,781 1,152 1,269
Revenue passenger miles
(RPM) (5).................. 675,484 3,171,366 680,342 809,797
Available seat miles (ASM)
(6)........................ 1,050,827 4,238,319 939,543 1,112,525
Passenger load factor (7)... 64.3% 74.8% 72.4 % 72.8 %
Yield per RPM (8)........... 11.9 CENTS 9.4 CENTS 9.6 CENTS 9.9 CENTS
Total available seat miles
(TASM) (9)................. 1,054,110 4,677,461 1,010,073 1,244,292
Operating revenue per TASM.. 8.5 CENTS 7.4 CENTS 7.5 CENTS 7.6 CENTS
Costs per TASM (CTASM)
(10)....................... 9.1 CENTS 7.5 CENTS 8.2 CENTS 7.5 CENTS
EBITDA, as adjusted (11).... (3,995) 5,536 (5,601 ) 2,256
Depreciation and
amortization expense....... (2,273) (7,437) (1,826 ) (1,860 )
Capital expenditures........ 3,603 9,165 2,483 1,680
Net cash provided by (used
in) operating
activities)................ (5,265) 18,788 7,574 (7,945 )
Net cash provided by (used
in) investing activities... 4,049 (4,940) (2,090 ) (1,161 )
Net cash provided by (used
in) financing activities... 2,254 (11,960) (3,598 ) 17,169
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31, 1996
------------------ --------------------------
1994 1995 ACTUAL AS ADJUSTED (12)
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,501 $ 5,389 $ 13,452 $ 13,452
Working capital (deficit)................................. (45,827) (51,699) (21,723) (20,511)
Property and equipment, net............................... 37,756 41,391 41,756 41,756
Total assets.............................................. 163,301 161,640 171,576 171,248
Long-term debt and capital leases, including current
maturities............................................... 36,217 24,314 29,948 30,158
Shareholders' equity...................................... 33,849 29,178 49,125 48,555
</TABLE>
- ------------------------------
* not meaningful
(1) Includes revenue derived from military charter flights flown prior to
January 1, 1993.
(2) Reflects an extraordinary gain of approximately $190.1 million primarily
due to the extinguishment of prepetition obligations.
(3) Includes shares reserved for issuance under the Plan of Reorganization.
(4) Represents the number of passengers flying on scheduled flights.
(5) Represents the number of flight miles flown by revenue passengers.
(6) Represents the number of seats available for revenue passengers multiplied
by the number of miles those seats are flown.
16
<PAGE>
(7) Represents RPMs divided by ASMs.
(8) Represents passenger revenue divided by RPMs.
(9) Represents the number of seats available for revenue passengers and charter
passengers multiplied by the number of miles those seats are flown.
(10) Represents operating expenses divided by TASMs.
(11) Consists of net income (loss) before nonoperating income (expense),
depreciation and amortization, income taxes, extraordinary items and
cumulative effect of change in accounting principles and certain other
charges, including restructuring charges of approximately $14.0 million in
1993. EBITDA, as adjusted is not intended to represent cash flows for the
period, nor has it been presented as an alternative to net income as an
indicator of financial performance and should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles. EBITDA, as
adjusted is presented solely as supplemental disclosure because the
Company understands that such data is used by certain investors to analyze
companies.
(12) Adjusted to give effect to the Company's (i) repurchase of 827,221 shares
of Common Stock from GPA Group plc and its affiliate AeroUSA, Inc. (the
"GPA Companies"), (ii) repayment of approximately $4.5 million of
long-term debt owed to the GPA Companies at a 15% discount and an
extraordinary gain of $340,000, net of estimated income taxes, and (iii)
borrowing of approximately $4.7 million under the Company's credit
facility to fund such repurchase and repayment, all of which occurred on
April 29, 1996.
17
<PAGE>
RISK FACTORS
IN MAKING AN INVESTMENT DECISION REGARDING THE RIGHTS OR THE COMMON STOCK,
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THOSE
DESCRIBED ELSEWHERE IN THIS PROSPECTUS. THE ORDER IN WHICH THESE CONSIDERATIONS
ARE PRESENTED SHOULD NOT BE INTERPRETED AS BEING INDICATIVE OF THEIR RELATIVE
IMPORTANCE TO PARTICULAR INVESTORS.
ABILITY OF COMPANY TO CONTINUE AS A GOING CONCERN
In 1995, the Company reported an operating loss and net loss for the ninth
consecutive year. The independent auditors' report with respect to the Company's
1995 financial statements stated that the Company's recurring losses from
operations, working capital deficit and limited sources of additional liquidity
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements as of and for the year ended December 31,
1995, were 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 the achievement of profitability, positive cash flow from operations and
the generation of adequate funds to meet its ongoing obligations. In the first
quarter of 1996, the Company increased its capital resources through the AIP
Investment and the related agreements with American and the Company's labor
unions. Nonetheless, at March 31, 1996 the Company had a working capital deficit
of $21.7 million. The Company continues to seek additional liquidity to improve
its working capital position through the Rights Offering and Investor Offering.
However, no assurance can be given that the Rights Offering and Investor
Offering will be successful or that the Company will be able to generate net
income in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto presented elsewhere in this Prospectus.
LIMITED LIQUIDITY AND CAPITAL RESOURCES; HIGH DEGREE OF FINANCIAL AND OPERATING
LEVERAGE
The Company emerged from bankruptcy in September 1994 with limited capital
resources. In January 1996, the Company was contemplating that it might have to
re-enter bankruptcy and halt operations if it could not complete the $20 million
AIP Investment, which was completed on January 31, 1996. Prior to the AIP
Investment, the Company's liquidity was limited to payment deferrals from
existing creditors such as American and promotional ticket sales. Although
promotional ticket sales increase current liquidity, they also increase air
traffic liability, which can adversely affect yields (fare levels) and revenues,
as well as liquidity in future periods. Although the AIP Investment and certain
related transactions have substantially increased the Company's capital
resources, the Company is seeking additional liquidity through the Rights
Offering, the Investor Offering and other sources in order to augment its
current and foreseeable capital resources. The Rights Offering and the Investor
Offering are part of the Company's on-going efforts to improve its liquidity.
However, there can be no assurances that the Rights Offering and the Investor
Offering will be successfully completed. There can also be no assurances that
any Subsequent Offering could be completed. 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.
Although the Company currently has no significant capital expenditure
commitments, the Company plans to make approximately $11.4 million of necessary
capital expenditures in the ordinary course of business in 1996 using internally
generated funds and specific project financing provided by the State of Hawaii.
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 $8.2 million to $15.0 million. As of April 30, 1996,
the Company had $7.3 million of borrowing capacity under the Credit Facility.
The Company's access to other sources of debt financing is limited because it
does not have any unencumbered assets. Moreover, there can be no assurances that
the Company can achieve or sustain profitable
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operations or, if necessary, that sufficient additional financing can be
obtained. See "Seasonality" below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The degree to which the Company is leveraged could have adverse
consequences, including (i) the Company's ability to obtain additional financing
in the future for working capital, capital expenditures or other purposes is
limited, (ii) the Company's degree of leverage and related debt service
obligations, as well as its obligations under operating leases for aircraft, may
make it more vulnerable than some of its competitors in an economic downturn,
and (iii) the Company's financial position may restrict its ability to pursue
new business opportunities and limit its flexibility in responding to changing
business conditions. See Note 7 to the financial statements presented elsewhere
in this Prospectus.
As is characteristic of the airline industry, the Company is subject to a
high degree of financial and operating leverage. Due to high fixed costs, the
expenses of each flight do not vary proportionately with the number of
passengers carried, but the revenues generated from a particular flight are
directly related to the number of passengers carried. Accordingly, while a
decrease in the number of passengers carried would cause a corresponding
decrease in revenue (if not offset by higher fares), it may result in a
disproportionately greater decrease in profits and would adversely affect
liquidity.
COMPETITION
The Company faces substantial competition from other well-established
airlines that serve the same routes that the Company serves. The Company's
competitors on its Transpac routes, primarily United Airlines, Inc. ("United"),
Delta Airlines, Inc. ("Delta") and Northwest, and to a lesser extent Continental
Airlines, Inc. ("Continental") and American, are larger and have substantially
greater name recognition and resources than the Company. The Company believes
that Transpac competition is primarily based on fare levels, flight frequency,
on-time performance and reliability, name recognition, frequent flyer programs,
customer service and in-flight service. The Company also experiences competition
on its Transpac routes from various charter operators. Charter carriers'
competitive position is enhanced by contractual relationships with tour
operators. The Company's primary competitor on its Interisland routes is Aloha
Airlines, Inc. ("Aloha"), which has the leading market share in the Interisland
market and a marketing relationship with United (including a code sharing
arrangement and frequent flyer program participation). The Company believes that
Interisland competition is primarily based on fare levels, flight frequency,
on-time performance and reliability, name recognition, frequent flyer programs,
customer service and aircraft type.
The Airline Deregulation Act of 1978, recodified into the Transportation
Act, has substantially eliminated government authority to regulate domestic
routes and fares, and has increased the ability of airlines to compete with
respect to destination, flight frequencies and fares. Airline profit levels are
highly sensitive to adverse changes in fuel costs, average yield and passenger
demand. The emergence in recent years of several new carriers, typically with
low cost structures, has further increased the competitive pressures on U.S.
airlines. The only significant barriers to entry in the U.S. airline industry
are government licensing, the limited availability of flight slots, the need for
capital and an increased number of competitors. The commencement of service by
new carriers on the Company's routes could negatively impact the Company's
operating results. Competing airlines have, and may in the future, undercut the
Company's fares and increased capacity on routes beyond market demand in order
to increase their market shares. Such activity by other airlines could reduce
fares or passenger traffic to levels where the Company could not be both
competitive and profitable. Due to its smaller size and limited resources and
liquidity, the Company may be less able to withstand aggressive marketing
tactics or a prolonged fare war initiated by its competitors. Although the
domestic airline industry has at present abandoned deeply discounted general
pricing structures, and fare levels have continued to increase from 1992 levels,
significant industry-wide discounts could be reintroduced at
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any time. The introduction of broadly available, deeply discounted fares by a
major U.S. airline would result in lower yields for the entire industry and
could have a material adverse effect on the Company's operating results.
Recent announcements of capacity increases to Hawaii by domestic carriers
may affect pricing levels on the Company's Transpac routes. Charter carriers
have increased capacity from secondary markets in the western portion of the
United States 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 its San
Francisco and Los Angeles routes. Subsequent announcements by United of direct
service from Los Angeles to Kona and Maui are believed to be in addition to the
9,000 seats mentioned above. The increasing presence of charter carriers and
United's expanded capacity are examples of the competitive pricing and capacity
issues facing the Company in the future. Management is not able to predict the
impact of these competitive pressures on the Company's operations.
See "Business -- Competition."
AIRLINE INDUSTRY CONDITIONS
The airline industry is a highly cyclical business with substantial
volatility. Airlines frequently experience short-term cash requirements caused
by both seasonal fluctuations in traffic, which 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. Because a substantial
portion of airline travel is discretionary, the industry tends to experience
adverse financial results in general economic downturns. Accordingly, airlines
require substantial liquidity to sustain continued operations under most
conditions. See "Limited Liquidity and Capital Resources; High Degree of
Financial and Operating Leverage" above.
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 leading to the U.S. airline industry having suffered unprecedented
losses in recent years. As a result, many airlines have been acquired or forced
to restructure (as was the case with the Company) or have ceased operations.
Although the industry produced a profit for 1995, no assurance can be given that
this performance can be sustained in the future. The Company has had a net loss
in each of 1995 and the preceding eight years.
DEPENDENCE ON HAWAIIAN TOURISM
Since the Company's operations are limited almost exclusively to flights to,
from and among, the Hawaiian Islands, the Company's profitability is linked to
the number of travelers to, from and among the Islands and a material reduction
in the number of such travelers would have a material adverse effect on the
Company's operations. Tourists constitute a majority of the travelers to Hawaii.
Because tourism levels are related to discretionary income, the level of
Hawaiian tourism is affected by the strength of the economies in the areas from
which tourists to Hawaii typically originate. Hawaiian tourism is also dependent
upon the popularity of Hawaii as a tourist destination and negative events such
as Hurricane Iniki and the availability of other tourist destinations and
opportunities could reduce tourist interest in Hawaii. In addition, from time to
time, various events such as the Persian Gulf War and industry-specific problems
such as strikes have had a negative impact on tourism in Hawaii. After reaching
its peak in 1990, the Hawaii tourism industry experienced three consecutive
years of decline. Although tourist counts have shown year over year improvements
in 1994 and 1995, local economists do not expect Hawaii tourism to return to
pre-1991 levels until 1997. No assurance can be given that the level of tourism
traffic to Hawaii will in fact return to such levels or that it will not decline
in the future. A decline in the level of Hawaii tourism traffic could have a
material adverse effect on the Company's operations.
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Preliminary results from the Hawaii Visitors Bureau indicate that of the
total number of visitors to Hawaii in 1995, approximately 40% came from Asia,
most of whom came from Japan, and approximately 19% came from California. In
recent years Japan and California have experienced the worst recession each
region has experienced since the 1940s. As a result, the number of visitors from
Asia declined in 1992 and again 1993, and the number of visitors from California
declined in each of 1991, 1992 and 1993 and is still below the peak number in
1990. A substantial decline in the number of visitors from either Japan or
California could have a material adverse effect on the Company's operations.
See "Business -- The Hawaii Travel Market."
SEASONALITY
The Company's results are sensitive to seasonal and cyclical volatility
primarily due to seasonal leisure and holiday travel. Traffic levels are
typically lowest in the first quarter of the year with strong travel periods
during June, July, August and December. Because certain of the Company's costs
do not vary significantly regardless of traffic levels, such seasonality
substantially affects the Company's profitability and liquidity. See "Limited
Liquidity and Capital Resources; High Degree of Financial and Operating
Leverage" above.
AIRCRAFT OPERATIONS
FUEL COSTS. Fuel costs, which represent a significant portion of the
Company's operating costs (approximately 16% for 1995), are volatile. For
example, the Company's average fuel cost per gallon (excluding taxes) in the
first quarter of 1996 was 9.7% higher than its average fuel cost in the first
quarter of 1995. Fuel prices are influenced by, among other factors, economic
and political factors and events throughout the world and applicable fuel taxes,
and the Company can neither predict nor control near- or longer-term fuel
prices. Significant changes in fuel costs would materially affect the Company's
operating results. Furthermore, changes in fuel prices may have a greater impact
on the Company than certain of its Transpac competitors with more modern, fuel
efficient aircraft. See "Reliance on Third Parties" below and "Business --
Aircraft Fuel."
MAINTENANCE COSTS; AIRCRAFT AGE. Aircraft maintenance costs represent
another significant operating cost for the Company (approximately 17% for 1995)
that will increase as the Company's aircraft increase in age. The average age of
the Company's DC-10 aircraft is 23 years and its DC-9 aircraft is 18 years. The
Company intends to replace some or all of its existing aircraft with replacement
aircraft in the next decade in order to reduce maintenance costs and achieve
other operating efficiencies, although no assurance can be given that the
Company will have the capital necessary to replace such aircraft. See "Business
- -- Strategic Repositioning -- Enhance Operating Revenues -- Relationship with
American -- Aircraft Lease Agreements" and Note 13 to the financial statements
appearing elsewhere in this Prospectus.
LEASED AIRCRAFT. The Company owns two DC-9-50 aircraft and leases eleven
DC-9-50s and nine DC-10-10s pursuant to leases that expire at various times
between 1996 and 2004. Two of the DC-10s are leased from American pursuant to
short-term leases, which can be terminated by American on 30 days notice. In
order to maintain its current operations, the Company will need to renew its
leases as they expire or purchase or lease replacement aircraft and, if the
Company decides to expand operations, the Company will need to purchase or lease
additional aircraft. There can be no assurance that lease renewals, additional
aircraft leases or aircraft purchases will be available on favorable terms or
that the Company will have sufficient capital resources to lease or purchase
additional aircraft. See "Business -- Properties."
LIMITED FLEET. The Company's fleet consists of 22 aircraft (including one
DC-10 being used on a temporary basis to permit the scheduled overhaul of six of
the other DC-10s during 1996). In the event one or more of the Company's
aircraft were to be out of service, the Company may have difficulty completing
its scheduled or chartered service. Any interruption of service caused by the
unavailability
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of aircraft due to unscheduled servicing or repair or otherwise, or lack of
availability of substitute aircraft, could have a material adverse effect on the
Company's service, reputation and profitability. As is customary in the airline
industry, the Company does not have business interruption insurance.
RELIANCE ON THIRD PARTIES
The Company has entered into agreements with contractors, including
American, Northwest and certain other airlines, to provide certain facilities
and services required for its operations, including aircraft, reservations,
computer services, frequent flyer program, aircraft maintenance, passenger
processing, fuel, ground facilities, baggage and cargo handling and personnel
training. This reliance on third parties to provide services subjects the
Company to various risks, including the risk that such services could be
discontinued without adequate replacement services being available.
The Company leases all of its DC-10 aircraft from American. American
maintains these aircraft and the Company pays a minimum monthly charge for
maintenance services, monthly in arrears. During 1995, the Company incurred in
excess of $45 million of lease and maintenance expenses under the American DC-10
aircraft leases. American has the right to terminate its obligation to provide
aircraft maintenance services on and after January 1, 1999, upon 180 days prior
notice. If American terminated the maintenance arrangement, the Company would
have to seek an alternate source of maintenance service or maintain its DC-10s
itself, and no assurance can be given that the Company would be able to do so on
a basis that is as cost-effective as the American maintenance arrangement.
The Company participates in American's AAdvantage-Registered Trademark-
frequent flyer program and SABRE-Registered Trademark- reservation system, which
make the Company more competitive. The Company's participation in the
AAdvantage-Registered Trademark- program expires in 1997, subject to renewal,
and its participation in SABRE-Registered Trademark- expires in 2001. The
Company's inability to continue in these programs or participate in comparable
programs offered by other airlines could have a material adverse effect on the
Company's operations. See "Business -- Strategic Repositioning -- Increase
Operating Revenue -- Relationship with American."
The Company purchases almost all of its aviation fuel from Northwest without
mark-up pursuant to an agreement between the two companies, which provides that,
in case of shortages, Northwest will provide fuel to its own fleet first and
then a portion of the remaining fuel available will be allocated between the
Company and any other applicable airlines. The agreement is renewed
automatically on December 31 of each year unless canceled by either of the
parties with 90 days prior written notice. No assurance can be given that the
Company would be able to secure an adequate supply of fuel from alternate
sources if a fuel shortage were to cause the supply from Northwest to be
inadequate or if Northwest were to cancel the agreement. The Company paid
Northwest approximately $44.1 million, $43.9 million and $53.0 million for the
fuel supplied under this agreement in 1993, 1994 and 1995, respectively. See
"Business -- Aircraft Fuel."
Approximately 74% of the Company's ticket sales are currently made by travel
agents, including wholesalers. Travel agents generally have a choice between one
or more airlines when booking a customer's flight. Accordingly, any effort by
travel agencies to favor another airline or to disfavor the Company could
adversely affect the Company. Although management intends to continue to offer
an attractive and competitive product to travel agencies and to maintain
favorable relations with travel agencies, there can be no assurance that travel
agencies will not disfavor the Company or favor other airlines in the future,
either of which could have an adverse effect on the Company's operations.
INSURANCE COVERAGE
The Company is exposed to potential losses that may be incurred in the event
of an aircraft accident. Any such accident could involve not only repair or
replacement of a damaged aircraft and its consequent temporary or permanent loss
of service, but also significant potential claims of injured passengers and
others. The Company is required by the U.S. Department of Transportation (the
"DOT") to carry liability insurance on each of its aircraft. The Company
currently maintains public liability insurance which management believes is
adequate and consistent with current industry
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practice. However, there can be no assurance that the amount of such coverage
will not be changed or that the Company will not bear substantial losses from
accidents. Substantial claims resulting from an accident in excess of related
insurance coverage could have a material adverse effect on the Company.
REGULATORY MATTERS; TICKET TAXES
As a certificated air carrier, Hawaiian Airlines is subject to the
regulatory jurisdiction of the DOT and the Federal Aviation Administration (the
"FAA"). To assure compliance with their regulations, the DOT and the FAA require
air carriers to obtain certain certificates, which may be suspended or revoked
for cause. The DOT has continuing jurisdiction to review the fitness of air
carriers to hold a certificate of public convenience and necessity. It may
review the carrier's fitness at any time and impose fines or other sanctions for
violations of the Transportation Act or DOT regulations. The FAA also conducts
safety audits and has the power to impose fines and other sanctions for
violations of aviation safety and security regulations. Hawaiian Airlines, as
are all airlines, is subject to inspections by the FAA in the normal course of
its business on an ongoing basis. In the last several years, the FAA has issued
to the airline industry a number of maintenance directives and other
regulations. The Company has incurred and expects to continue to incur
substantial expenditures for the purpose of complying with these directives and
regulations. See Note 13 to the financial statements appearing elsewhere in this
Prospectus.
Additional laws and regulations have been proposed from time to time that
could significantly increase the cost of airline operations by, for instance,
imposing additional requirements or restrictions on operations. Laws and
regulations also have been considered from time to time that would prohibit or
restrict the ownership and/or transfer of airline routes or takeoff and landing
slots. Also, the award of international routes to U.S. carriers (and their
retention) is regulated by the DOT and treaties and related agreements between
the United States and foreign governments, which are amended from time to time.
The Company cannot predict what laws and regulations will be adopted or what
changes to international air transportation treaties will be effected, if any,
or how they will affect the Company.
Prior to 1996, the airline industry was subject to a 10% excise tax on each
ticket sold (other than Transpac flights), a 6.25% cargo excise tax and a $6
international departure tax (including Transpac flights). Efforts are underway
to encourage the United States Congress to re-enact legislation authorizing
these excise taxes or to impose user fees in lieu of such taxes. The Senate has
approved a bill to reinstate the excise taxes, and it is reported that House and
Senate negotiators have agreed in principle to reinstate the excise taxes. If
the excise taxes are reinstated or user fees are implemented, the Company would
either have to absorb the excise taxes or user fees, which would adversely
affect operating results, or raise ticket prices and cargo transportation fees
in order to offset the excise taxes or user fees. 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.
See "Business -- Regulatory Matters."
LABOR AGREEMENTS
The majority of Hawaiian Airlines' employees are covered by collective
bargaining agreements, which are not amendable until February 2000, with the
International Association of Machinists and Aerospace Workers ("IAM"), the Air
Line Pilots Association, International ("ALPA"), the Association of Flight
Attendants ("AFA"), the Transport Workers Union ("TWU") and the Communications
Section Employees Union. As a result of the unionization of its employees, the
Company's flexibility in dealing with its employees may be restricted, thereby
resulting in an increase in costs. In the event of work stoppages or other labor
difficulties, operations of the Company may be hampered or halted, which could
have a material adverse effect on the reputation and operations of the Company.
See "Business -- Employees."
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CONTROL OF THE COMPANY
AIP owned 69% of the issued and outstanding Common Stock as of July 3, 1996
and through such ownership is able to control all actions to be taken by the
shareholders of the Company, except in the limited case where Hawaii law
requires shareholder action to be approved by 75% of the outstanding Common
Stock. John W. Adams, Chairman of the Board of Directors of the Company, is an
executive officer and the sole stockholder of the general partner of AIP and
thereby controls the voting of AIP's shares. After giving effect to the issuance
of approximately 16,520,000 shares of Common Stock pursuant to (i) the Plan of
Reorganization, (ii) the exercise in full of the AMR Warrants and the
Reorganization Warrants, (iii) the exercise in full of the options outstanding
under the 1994 Stock Option Plan, (iv) the exercise in full of the Rights and
(v) the consummation of the Investor Offering (including the issuance of the
Additional Standby Shares), AIP would own approximately 42% of the Common Stock.
However, even at such time as sufficient shares of Common Stock have been issued
to cause AIP to hold less than 50% of the Common Stock, its voting power would
still be substantially greater than that of any other existing shareholder.
Pursuant to the Company's Amended Bylaws (the "Bylaws"), until AIP ceases to own
at least 35% of the Common Stock, it has the right to nominate six of the 11
nominees to stand from time to time for election as directors of the Company. If
AIP's ownership of Common Stock were to fall below 35%, its right to nominate
directors would be reduced but would not be eliminated until AIP's ownership was
reduced below 5%. Thereafter, AIP will not have the right to nominate
individuals to the Board unless it reacquires at least 5% of the Common Stock
within 365 days. AIP is not expected to participate in the Investor Offering.
See "Principal Shareholders."
In addition, ALPA, IAM and AFA have the right, pursuant to their respective
collective bargaining agreements and the Bylaws, to nominate three of the
remaining five nominees to stand from time to time for election as directors,
thereby leaving the Board of Directors with the authority to nominate only two
of the director nominees. AIP has agreed to vote its shares of Common Stock in
favor of the labor unions' nominees.
Of the two positions on the Board of Directors as to which AIP and the labor
unions do not have the right to nominate nominees, (i) one is required to be an
outside director, defined as one who is not employed by the Company and is not
affiliated with the Company's labor unions, AIP or American, and (ii) the other
is required to be a senior management official of the Company.
For more information regarding the rights of AIP and the labor unions to
nominate directors, see "Principal Shareholders -- Control of the Board of
Directors" and "Description of Capital Stock -- Preferred Stock."
ANTITAKEOVER MATTERS
As a result of AIP's substantial ownership interest in the Common Stock, it
may be more difficult for a third party to acquire the Company. A potential
buyer would likely be deterred from any effort to acquire the Company absent the
consent of AIP or its participation in the transaction.
The Company is subject to Section 415-73 of the Hawaii Business Corporation
Act, which restricts mergers and consolidations. Subject to certain exceptions,
unless the Board of Directors and the holders of at least 75% of all the issued
and outstanding voting stock of the Company approve a merger or consolidation,
Section 415-73 prohibits such a transaction.
The Company's Amended Articles of Incorporation (the "Articles of
Incorporation") and the Bylaws include a number of provisions that may have the
effect of discouraging persons from pursuing non-negotiated takeover attempts.
These provisions include (i) a restriction on action by written consent of the
shareholders, unless such consent is unanimous, (ii) a prohibition on cumulative
voting, (iii) certain qualifications for directors and (iv) restrictions on the
filling of vacancies of directors.
The Articles of Incorporation authorize the issuance of up to 2,000,000
shares of preferred stock by the Company with such preferences, rights and
restrictions as may be determined by the Board of Directors. Accordingly, the
Board of Directors may, without shareholder approval, issue preferred stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the
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rights of holders of the Common Stock. The issuance of shares of preferred stock
may have the effect of rendering more difficult or discouraging an acquisition
of the Company or a change in control of the Company. See "Description of
Capital Stock -- Preferred Stock."
The Company has in place a shareholders' rights plan, which provides that,
subject to certain discretion of the Board of Directors, in the event that the
Company is acquired in certain transactions or in the event of certain
acquisitions of the Company's common stock that would cause the acquiror to own
more than 10% of the outstanding common stock, the Company (or the surviving
corporation in a merger in which the Company was not the survivor) would issue
to the Company's shareholders, other than the acquiror, additional shares of
common stock of the Company (or the survivor) at a discount, thereby
substantially diluting the acquiror's interest. The AIP Investment was expressly
excluded from the application of the shareholders' rights plan through an
amendment to the plan adopted by the Board of Directors at the time of the AIP
Investment. See "Description of Capital Stock -- Shareholders' Rights Plan."
DIVIDENDS
The Company has not paid cash dividends on its common stock in the last
several years and has no plans to do so in the foreseeable future. The Company
intends to retain its earnings, if any, to finance the development and growth of
its business. Moreover, the Company is prohibited from paying dividends by the
terms of the Credit Facility. The American Note limits the Company's ability to
pay dividends. See "Price Range of Common Stock and Dividend Policy."
DILUTION
Rights are being distributed to Eligible Employees, holders of Options and
holders of the Common Stock. To the extent that Rights are exercised by Eligible
Employees or holders of Options, shareholders will realize a dilution in their
percentage voting interest and ownership interest in future net earnings, if
any, of the Company. The Investor Offering will result in additional dilution.
To the extent that Rights are exercised by other shareholders, shareholders who
do not exercise their Rights in full will realize a dilution in their percentage
voting interest and ownership interest in future net earnings, if any, of the
Company. The Company is not able to predict the effect, if any, the Rights
Offering and the Investor Offering will have on the market price for the Common
Stock. See "Market Considerations; Volatility of Stock Price" below.
The Company currently has outstanding the options granted under the 1994
Stock Option Plan and the Reorganization Warrants, which are exercisable to
purchase an aggregate of 2,076,367 shares of Common Stock at exercise prices of
$1.62 and $1.71 per share, respectively. In addition, the AMR Warrants entitle
AMR to purchase 1,897,946 shares of Common Stock at $1.10 per share. 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 issuance of up
to 1,000,000 Rights Shares upon the exercise of Employee Rights and the issuance
of the Base Shares will give rise to an increase in the number of AMR Warrants
and Reorganization Warrants and a decrease in the exercise price thereof
pursuant to the anti-dilution provisions of the AMR Warrants and the
Reorganization Warrants, although the magnitude of these adjustments can not be
determined until after the Rights Offering and the Investor Offering are
completed. Exercise of the options granted under the 1994 Stock Option Plan, the
AMR Warrants or the Reorganization Warrants would further reduce a shareholder's
percentage voting and ownership interest and the net book value per share.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
availability of shares for future sale. Upon completion of the Rights Offering
and the Investor Offering and after giving effect to the issuance of
approximately 350,000 shares pursuant to the Plan of Reorganization, there would
be approximately 38,859,000 shares of Common Stock issued and outstanding. Of
these shares, approximately 20,150,000 would be freely transferable immediately
(subject to a 90-day holding
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period in the case of (i) Rights Shares issued pursuant to the exercise of
Employee Rights, (ii) 7,500 of the Rights Shares issuable upon the exercise of
Options by a Holder who is not an executive officer and (iii) possibly 582,000
shares held by a large institutional shareholder and the Rights Shares issued to
such shareholder). The remaining approximately 18,709,000 shares would be
"restricted securities" for purposes of the Securities Act and would be eligible
for resale at various times in the future, in each case subject to a 90-day
holding period and thereafter to the volume and manner of sale limitations of
Rule 144 under the Securities Act. Of these restricted shares, 18,181,818 shares
are owned by AIP and will be transferable after January 1998 but could be sold
sooner pursuant to registration rights that AIP received as part of the AIP
Investment. These rights entitle AIP, on up to two occasions, to require the
Company to use its best efforts to register all or any portion of AIP's shares
under the Securities Act at the Company's expense. In addition, if the Company
registers any other shares of its common stock for public sale under the
Securities Act at any time prior to January 2006, AIP would have the right to
include shares in the registration.
In addition, there are currently up to 3,974,313 shares of Common Stock
reserved for issuance pursuant to the options granted under the 1994 Stock
Option Plan, the AMR Warrants and the Reorganization Warrants. The number of AMR
Warrants and Reorganization Warrants will be increased in connection with the
Rights Offering and the Investor Offering. See "Dilution" above. AMR and the
holders of the Reorganization Warrants have registration rights with respect to
the shares reserved for issuance upon exercise of their warrants. These rights
entitle AMR and the Reorganization Warrant holders, on up to two occasions, to
require the Company to use its best efforts to register all or any portion of
their warrant shares under the Securities Act at the Company's expense. In
addition, if the Company registers any other shares of its common stock for
public sale under the Securities Act, AMR and the holders of the Reorganization
Warrants would have the right to include warrant shares in the registration. The
rights of AMR and the Reorganization Warrant holders to include warrant shares
in a Company registration expire in September 2001 and September 1999,
respectively.
As of July 3, 1996, the Company's various 401(k) plans held an aggregate of
approximately 1,490,000 shares of Common Stock and will receive a corresponding
number of Shareholder Rights. It is anticipated that plan participants will
elect to sell at least a portion of these Rights rather than exercise them. In
addition, plan participants may elect to sell shares of Common Stock already
held by the plans in order to generate proceeds to pay the Subscription Price
for their Rights. Such sales, depending on the volume, could adversely affect
the trading prices of the Shareholder Rights and/or the Common Stock.
RESALE RESTRICTION ON EMPLOYEE RIGHTS SHARES AND OPTIONS
The Rights Shares issuable upon the exercise of Employee Rights (including
Rights Shares issuable pursuant to the Oversubscription Privilege) and Options
will be subject to the Lock-Up and may not be transferred during the 90-day
period following the Expiration Date. As a result, during such period the
holders of such Rights Shares would not be able to take advantage of market
conditions that they believe warrant a sale of their Rights Shares.
MARKET CONSIDERATIONS; VOLATILITY OF STOCK PRICE
The Company cannot predict the effect that the Rights Offering and the
Investor Offering will have on the trading price of the Common Stock, although
the opening trading price of the Common Stock on the first day that shares trade
without the Rights attached (I.E., the "ex-Rights day"), which will be the
second trading day after the Record Date, may be lower than the closing price on
the previous trading day. The closing price of the Common Stock on the AMEX on
July 31, 1996 was $4. There can be no assurance that the market price of the
Common Stock will not fall below the Subscription Price or that, following the
exercise of Rights or purchase of the Committed Shares or Standby Shares, a
Holder or Investor will be able to sell shares acquired in the Rights Offering
or the Investor Offering at a price equal to or greater than the Subscription
Price. The exercise of Rights is irrevocable once made. Moreover, Rights Shares
issued upon the exercise of Options or Employee
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Rights (including Rights Shares issued pursuant to the Oversubscription
Privilege) can not be resold for 90 days after the Expiration Date. Since the
Company emerged from bankruptcy and the Common Stock recommenced trading on the
AMEX and the PSE in June 1995, the price range of the Common Stock has varied
widely and the price of the Common Stock or the Shareholder Rights may be
subject to significant fluctuation in the future. See "Price Range of Common
Stock and Dividend Policy." There has been no prior market for the Rights on
either the AMEX or the PSE.
EFFECT OF RIGHTS AND RELATED TRANSACTIONS ON THE COMPANY'S NET OPERATING LOSS
CARRYOVERS
The Company believes that substantially all of its net operating losses
("NOLs"), as computed for federal income tax purposes, are currently subject to
limitation under Section 382 of the Internal Revenue Code. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Tax
and Net Operating Loss Considerations." In the event an ownership change (as
defined in Section 382) of the Company were to occur in the future, the ability
of the Company to utilize NOLs incurred prior to that ownership change could be
subject to additional limitations under Section 382. While the Company believes
that the exercise of Rights and consummation of the Stock Purchase Agreements
will not result in an ownership change of the Company for Section 382 purposes,
the exercise of Rights and consummation of the Stock Purchase Agreements,
combined with any other significant future transactions in the Company's equity,
could result in an ownership change of the Company, which in turn could increase
the future tax liabilities of the Company.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE FINANCIAL ADVISOR
MAKES ANY RECOMMENDATION TO HOLDERS WITH RESPECT TO WHETHER A HOLDER SHOULD
EXERCISE RIGHTS TO PURCHASE SHARES OF THE COMMON STOCK PURSUANT TO THE RIGHTS
OFFERING, TO INVESTORS WITH RESPECT TO WHETHER AN INVESTOR SHOULD PURCHASE
SHARES OF THE COMMON STOCK, OR TO PERSONS WITH RESPECT TO WHETHER A PERSON
SHOULD PURCHASE RIGHTS.
PURPOSE OF THE RIGHTS OFFERING AND USE OF PROCEEDS
PURPOSE OF THE RIGHTS OFFERING
The price paid by AIP for its shares of Common Stock in the AIP Investment
in January 1996 represented a substantial discount from the market price of the
Common Stock at the time that AIP made its offer to the Company. On December 8,
1995, the date that AIP and the Company entered into the agreement to consummate
the AIP Investment at a price of $1.10 per share, the closing price of a share
of Common Stock on the AMEX was $2 11/16. In recognition of the substantial
dilutive effect of the AIP Investment on the existing shareholders of the
Company, the investment agreement with AIP contained a provision in which AIP
agreed to use its best efforts to cause the Company, after the completion of the
AIP Investment, to make a rights offering to the Company's shareholders (other
than AIP) that would permit the shareholders to acquire shares of Common Stock
at a discount to the market price. In this way, the shareholders of the Company,
other than AIP, would have the opportunity to reduce the dilutive effect of the
AIP Investment on their equity investment in the Company.
In addition, the Rights Offering and the Investor Offering are intended to
raise a minimum of $25 million of gross proceeds as part of the Company's
on-going efforts to improve its liquidity. In establishing the size of the
Investor Offering, the Board of Directors consulted with the Financial Advisor
and management, and considered the Company's need for additional capital.
The Subscription Price has been established by the Board of Directors as
69.9% of the average closing price of the Common Stock on the AMEX for the 30
trading days ended July 25, 1996.
USE OF PROCEEDS
If the Rights Offering and the Investor Offering are consummated, the
maximum gross proceeds to the Company from the Rights Offering and the Investor
Offering would be approximately $39.3 million (including up to $2.0 million of
proceeds received in the form of fully recourse secured
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promissory notes from Holders exercising Options (see "Certain Relationships and
Related Transactions")) before payment of related fees and expenses estimated to
be $2.6 million. However, no assurance can be given that any or all of the
Rights will be exercised. Therefore, the actual proceeds from the Rights
Offering and the Investor Offering could be substantially lower. If Standby
Shares or Additional Shares are issued, the estimated fees and expenses would
increase due to the fee payable to the Financial Advisor in connection with the
issuance of such shares (see "The Financial Advisor"). In such event, the total
fees and expenses of the Company in connection with the Rights Offering and the
Investor Offering could be as high as $3.4 million.
The Company currently expects that the net proceeds from the Rights Offering
and the Investor Offering will be used for general working capital purposes
and/or prepayment of a portion of the Company's long-term debt, although a final
determination as to the use or uses will not be made until after the completion
of the Rights Offering and the Investor Offering. Factors that will be
considered at that time in determining how the net proceeds will be used will
include: the amount of net proceeds actually generated, the Company's actual and
projected working capital requirements at that time, interest rates in effect at
that time, the amount of any applicable debt prepayment discounts, and such
other factors as the Board of Directors considers to be relevant at that time.
Pending use, the net proceeds will be invested in short-term, interest-bearing
securities. For a description of the Company's long-term debt, including
interest rates, maturity dates and use of proceeds from such debt, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Current Status."
THE RIGHTS OFFERING
SHAREHOLDER RIGHTS
Shareholders other than AIP will receive one Shareholder Right for each
share of Common Stock held on the Record Date. An aggregate of approximately
8,250,000 Shareholder Rights will be distributed. Holders are entitled to
purchase at the Subscription Price one share of Common Stock for each
Shareholder Right held. The Shareholder Rights will expire on the Expiration
Date. The Shareholder Rights will be transferable.
EMPLOYEE RIGHTS
The Eligible Employees (I.E., all employees of the Company, other than
members of senior management, who were employed at any time during 1995 and on
the Record Date) will receive an aggregate of 1,000,000 Employee Rights. The
Employee Rights will be distributed among the Eligible Employees PRO RATA based
on each Eligible Employee's W-2 earnings from the Company in 1995 relative to
the aggregate W-2 earnings paid by the Company to all Eligible Employees in
1995. Holders are entitled to purchase at the Subscription Price one share of
Common Stock for each Employee Right held. The Employee Rights will expire on
the Expiration Date. The Holder of an Employee Right will only be able to
exercise such Right if such Holder (i) is an employee of the Company as of the
Expiration Date, (ii) agrees not to sell the underlying Rights Share during the
90-day period following the Expiration Date, (iii) completes, signs and returns
to the Company on or before the Expiration Date the Withholding Agreement and
Worksheet, and (iv) pays to the Company, on or before the Expiration Date, the
Withholding Amount. Any such Holder who exercises a Right shall be deemed to
have agreed to the Lock-Up and certificates evidencing Rights Shares issued upon
the exercise of Employee Rights will be held by the Subscription Agent (or the
Company) until the expiration of the Lock-Up. The Employee Rights will not be
transferable.
The Employee Rights will also entitle the Holders thereof to the
Oversubscription Privilege, pursuant to which such Holders who exercise their
Employee Rights in full will also be able to subscribe for the Rights Shares
underlying Employee Rights that expire without being exercised and up to
1,000,000 of the Rights Shares underlying Shareholder Rights that expire without
being exercised. If an insufficient number of Rights Shares is available to
satisfy all exercises of the Oversubscription Privilege, then the available
Rights Shares will be prorated among Holders who
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exercise the Oversubscription Privilege based upon the respective number of
Employee Rights of such Holders. Any funds received by the Subscription Agent
from Holders with respect to the Oversubscription Privilege that are not applied
to the purchase of Rights Shares due to proration will be returned by mail as
soon as practicable, without interest.
OPTIONS
An aggregate of 600,000 Options will be granted under the 1996 Stock
Incentive Plan to persons who hold options under the 1994 Stock Option Plan and
to the Company's Chief Operating Officer. Holders are entitled to purchase at
the Subscription Price one share of Common Stock for each Option held. The
Options will expire on the 20th day after the Expiration Date. The Holder of an
Option will only be able to exercise such Option if such Holder (i) is an
employee of the Company as of the 20th day after the Expiration Date, (ii)
agrees not to sell any of the underlying Rights Shares during the 90-day period
immediately following the Expiration Date (I.E., the Lock-Up), (iii) completes,
signs and returns to the Company on or before the 20th day after the Expiration
Date the Withholding Agreement and Worksheet, and (iv) pays to the Company, on
or before the 20th day after the Expiration Date, the Withholding Amount.
Conditions (i) and (ii) will not apply to Options granted to the former Chief
Financial Officer of the Company. Any Holder who exercises an Option shall be
deemed to have agreed to the Lock-Up and certificates evidencing Rights Shares
issued upon the exercise of Options will be held by the Subscription Agent (or
the Company) until the expiration of the Lock-Up. The Options will not be
transferable.
EXPIRATION DATE
The Rights will expire at 5:00 p.m., New York time, on September , 1996
unless extended by the Company from time to time. Notwithstanding the foregoing,
the Expiration Date in no event shall be later than October , 1996, except
that the Company reserves the right to extend the exercise period on one or more
occasions if the Board of Directors determines that the occurrence of a material
event necessitates an amendment of the Registration Statement or recirculation
of this Prospectus, which forms a part thereof, in order to permit time for the
distribution of such information. After the Expiration Date, unexercised
Shareholder Rights and Employee Rights will be null and void. The Company will
not be obligated to honor any purported exercise of Shareholder Rights and
Employee Rights received by the Subscription Agent after the Expiration Date,
regardless of when the documents relating to such exercise were sent, except
pursuant to the Guaranteed Delivery Procedures described below.
If the Company elects to extend the Expiration Date, it will issue a press
release to such effect not later than the first day on which the AMEX is open
for trading following the most recently announced Expiration Date. In the event
the Company elects to extend the Expiration Date by more than 14 calendar days,
it will, in addition, cause written notice of such extension to be promptly sent
to all Holders of record.
EXERCISE OF RIGHTS
Shareholder Rights and Employee Rights may be exercised (subject to the
requirements described below applicable to Employee Rights) by delivering to the
Subscription Agent, on or prior to 5:00 p.m., New York time, on the Expiration
Date, the properly completed and executed Subscription Certificate evidencing
such Rights with any required signatures guaranteed, together with payment in
full of the Subscription Price for each Right exercised (except as permitted
pursuant to clause (iii) of the next sentence). Such payment in full must be by:
(i) check drawn upon a U.S. bank or postal, telegraphic or express money order
payable to ChaseMellon Shareholder Services, L.L.C. as Subscription Agent; or
(ii) wire transfer of funds to the account maintained by the Subscription Agent
for such purpose at The Chase Manhattan Bank, Account No. 323-213057, ABA No.
021-000-021, Reorganization Department. Payment of the Subscription Price will
be deemed to have been received by the Subscription Agent only upon (a)
clearance of any uncertified check, (b) receipt by the Subscription Agent of any
certified check drawn upon a United States bank or of any postal, telegraphic or
express money order, or (c) receipt of good funds in the Subscription Agent's
account designated above.
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IF PAYING BY UNCERTIFIED PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID
THEREBY MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS WHO
WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE
URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE
THAT SUCH PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER
PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER
OF FUNDS.
Options may be exercised by providing the Company with written notice and
payment of the Subscription Price on or prior to the 20th day after the
Expiration Date. The Subscription Price may be paid by the delivery of a
promissory note to the Company, in the form described under "Certain
Relationships and Related Transactions," in lieu of cash. The Subscription Price
for the exercise of Options should not be sent to the Subscription Agent.
In order to exercise an Option or an Employee Right, on or prior to the
Expiration Date in the case of an Employee Right or the 20th day after the
Expiration Date in the case of an Option, the Holder will also have to (i)
complete, sign and return to the Company the Withholding Agreement and Worksheet
included with this Prospectus and (ii) pay to the Company the Withholding
Amount. See "Payment of Withholding Amount Relating to Options and Employee
Rights" below.
The address to which the Subscription Certificates and payment of the
Subscription Price with respect to Shareholder Rights and Employee Rights should
be delivered is set forth below under "Subscription Agent."
If a Holder wishes to exercise Shareholder Rights or Employee Rights, but
time will not permit such Holder to cause the Subscription Certificate or
Subscription Certificates evidencing such Rights to reach the Subscription Agent
on or prior to the Expiration Date, such Rights may nevertheless be exercised if
all of the following conditions (the "Guaranteed Delivery Procedures") are met:
(i) such Holder has caused payment in full of the Subscription Price
for each Rights Share being subscribed for to be received (in the manner
set forth above) by the Subscription Agent on or prior to the Expiration
Date;
(ii) the Subscription Agent receives, on or prior to the Expiration
Date, a guaranteed notice (a "Notice of Guaranteed Delivery"),
substantially in the form distributed with the Subscription Certificates,
from a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc., or from a
commercial bank or trust company having an office or correspondent in the
United States (each, an "Eligible Institution"), stating the name of the
exercising Holder, the number of Rights represented by the Subscription
Certificate(s) held by such exercising Holder, the number of Rights
Shares being subscribed for and guaranteeing the delivery to the
Subscription Agent of any Subscription Certificate(s) evidencing such
Rights within three AMEX trading days following the date of the Notice of
Guaranteed Delivery;
(iii) the properly completed Subscription Certificate(s), with any
required signatures guaranteed, is received by the Subscription Agent
within three AMEX trading days following the date of the Notice of
Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery
may be delivered to the Subscription Agent in the same manner as
Subscription Certificates at the addresses set forth above, or may be
transmitted to the Subscription Agent by facsimile transmission (telecopy
nos. (201) 296-4293 or (201) 296-4291). Additional copies of the form of
Notice of Guaranteed Delivery are available upon request from the
Information Agent, whose address and telephone numbers are set forth
under "Information Agent" below; and
(iv) in the case of Employee Rights, such Holder has caused the
Company to receive on or prior to the Expiration Date (a) a completed and
signed Withholding Agreement and Worksheet and (b) payment of the
Withholding Amount.
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A Holder who holds shares of Common Stock for the account of others, such as
a broker, a trustee or a depository for securities, should notify the respective
beneficial owners of such shares as soon as possible to ascertain such
beneficial owner's intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the record holder of such Rights
should complete the Subscription Certificate and submit it to the Subscription
Agent with the proper payment. In addition, the beneficial owner of Common Stock
or Rights held through such a holder of record should contact the Holder and
request the Holder to effect transactions in accordance with the beneficial
owner's instructions.
Unless a Subscription Certificate (i) provides that the shares of Common
Stock to be issued pursuant to the exercise of Rights represented thereby are to
be delivered to the Holder or (ii) is submitted for the account of an Eligible
Institution, signatures on such Subscription Certificate must be guaranteed by
an Eligible Institution.
If either the number of Rights Shares being subscribed for is not specified
on the Subscription Certificate, or the amount delivered is not enough to pay
the Subscription Price for all Rights Shares stated to be subscribed for, the
number of Rights Shares subscribed for will be assumed to be the maximum amount
that could be subscribed for upon payment of such amount, after allowance for
the Subscription Price of any specified Rights Shares.
The Instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE
COMPANY.
THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE RIGHTS HOLDER, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES
AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK
TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT
LEAST FIVE BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR
WIRE TRANSFER OF FUNDS.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company, in its sole discretion, may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right. Subscriptions will not be deemed to have been received or accepted until
all irregularities have been waived or cured within such time as the Company
determines in its sole discretion. NEITHER THE COMPANY NOR THE SUBSCRIPTION
AGENT WILL BE UNDER ANY DUTY TO GIVE NOTIFICATION OF ANY DEFECT OR IRREGULARITY
IN CONNECTION WITH THE SUBMISSION OF SUBSCRIPTION CERTIFICATES OR INCUR ANY
LIABILITY FOR FAILURE TO GIVE SUCH NOTIFICATION.
Any questions or requests for assistance concerning the method of exercising
Rights or requests for additional copies of this Prospectus or the Notice of
Guaranteed Delivery should be directed to the Information Agent whose address
and telephone numbers are set forth under "Information Agent" below.
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THOSE RIGHTS, SUCH EXERCISE MAY NOT BE
REVOKED.
PAYMENT OF WITHHOLDING AMOUNT RELATING TO OPTIONS AND EMPLOYEE RIGHTS
A Holder exercising Options or Employee Rights must pay to the Company the
Withholding Amount, which will be determined using the Withholding Agreement and
Worksheet and will include tax withholding amounts with respect to all Rights
Shares being subscribed for (including pursuant to
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the Oversubscription Privilege). The Withholding Amount must be paid by check or
money order (except as otherwise described under "Certain Relationships and
Related Transactions") and must be received by the Company, together with a
properly completed and signed Withholding Agreement and Worksheet, on or before
the Expiration Date in the case of Employee Rights or the 20th day after the
Expiration Date in the case of Options. To the extent that a Holder's
Oversubscription Privilege is not fulfilled due to proration, the related
Withholding Amount will be returned by mail as soon as practicable, without
interest. By signing the Withholding Agreement and Worksheet, the holder of the
Option or Employee Right agrees that the Company may withhold from any
compensation due to the holder any additional amounts determined by the Company
to be necessary to satisfy the tax withholding obligations with respect to the
exercise of such Right, and that, upon request by the Company, the holder will
pay such additional amounts to the Company within five days following such
request.
The Withholding Amount and the Withholding Agreement and Worksheet must be
sent to the following address:
Hawaiian Airlines, Inc.
3375 Koapaka Street, Suite G-350
Honolulu, Hawaii 96819
Attention: Tax Withholding Agent
FAILURE OF A HOLDER TO COMPLETE, SIGN AND RETURN THE WITHHOLDING AGREEMENT
AND WORKSHEET OR TO PAY THE FULL WITHHOLDING AMOUNT IN A TIMELY MANNER WILL VOID
THE EXERCISE OF THE RIGHTS BEING EXERCISED AND THE SUBSCRIPTION PRICE WILL BE
RETURNED TO THE HOLDER, WITHOUT INTEREST.
DO NOT SEND THE WITHHOLDING AMOUNT OR THE WITHHOLDING AGREEMENT AND
WORKSHEET TO THE SUBSCRIPTION AGENT. THE WITHHOLDING AMOUNT AND THE WITHHOLDING
AGREEMENT AND WORKSHEET MUST BE SENT TO THE COMPANY.
FRACTIONAL SHARES
Fractional Rights will not be distributed by the Company and a Right may not
be exercised in part.
SPECIAL PROVISIONS REGARDING RIGHTS HELD BY STOCK PLANS
As shareholders of record as of the Record Date, the Hawaiian Airlines, Inc.
401(k) Plan for Flight Attendants, the Hawaiian Airlines, Inc. 401(k) Savings
Plan and the Hawaiian Airlines, Inc. Pilots 401(k) Plan (each a "Plan") will
receive Shareholder Rights. These Rights will be allocated by the Plan trustee
to the Plan accounts in which shares of Common Stock are held as of the Record
Date. Each Plan participant will then have the right to instruct the Plan
trustee regarding the sale or exercise of the Rights allocated to such
participant's account, including the liquidation of current investments in the
participants' Plan account to fund the Subscription Price.
The trustee of the Plans will provide participants with instructions on how
to instruct the trustee to exercise Rights. Such instructions must be received
by the Plan trustee no later than 1:00 p.m., New York time, on September ,
1996 (or such later day as shall be the fifth business day preceding the
Expiration Date), after which time the Plan trustee will use its best efforts to
sell any Rights as to which timely instructions have not been received.
Notwithstanding that the accounts of many participants in the Plans
currently hold fractional shares of Common Stock, the Rights distributed to the
Plans will be allocated by the Plan trustee among the various Plan accounts so
that each account will receive a number of Rights corresponding to the number of
whole shares of Common Stock held in such account. The Plan trustee will
aggregate the unallocated fractional Rights and use its best efforts to sell
such Rights and allocate the proceeds from the sale to the Plan accounts
otherwise entitled to such fractional Rights.
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METHOD OF TRANSFERRING SHAREHOLDER RIGHTS
The Shareholder Rights have been approved for listing on the AMEX and the
PSE. Once distributed, the Shareholder Rights will be able to be purchased or
sold through usual investment channels, including banks and brokers. Trading in
Shareholder Rights will cease on the close of business on the business day
preceding the Expiration Date.
The Shareholder Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate may be transferred (but only in units to
purchase whole shares) by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register such
portion of the Rights evidenced thereby in the name of the transferee (and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights). In such event, a new Subscription Certificate evidencing
the balance of the Rights will be issued to the Holder or, if the Holder so
instructs, to an additional transferee.
The Shareholder Rights evidenced by a Subscription Certificate also may be
sold, in whole or in part (but only in units to purchase whole shares), through
the Subscription Agent by delivering to the Subscription Agent such Subscription
Certificate properly executed for sale by the Subscription Agent. If only a
portion of the Rights evidenced by a single Subscription Certificate is to be
sold by the Subscription Agent, such Subscription Certificate must be
accompanied by instructions setting forth the action to be taken with respect to
the Rights that are not to be sold.
Promptly following the Expiration Date, the Subscription Agent will send the
Holder a check for the net proceeds from the sale of such Shareholder Rights. If
the Rights can be sold, sales of such Rights will be deemed to have been
effected at the weighted average price received by the Subscription Agent for
all Rights sold by it at the request of Holders, less any applicable brokerage
commissions, taxes and other direct expenses of sale. The Company will pay the
fees charged by the Subscription Agent for effecting such sales. Orders to sell
Rights must be received by the Subscription Agent prior to 11:00 a.m., New York
time, on the fifth business day preceding the Expiration Date. The Subscription
Agent's obligation to execute orders for the sale of Rights is subject to its
ability to find buyers.
Holders wishing to transfer all or a portion of their Shareholder Rights
(but only in units to purchase whole shares) should allow a sufficient amount of
time prior to the Expiration Date for (i) the transfer instructions to be
received and processed by the Subscription Agent, (ii) a new Subscription
Certificate to be issued and transmitted to the transferee or transferees with
respect to transferred Rights, and to the transferor with respect to retained
Rights, if any, and (iii) the Rights evidenced by such new Subscription
Certificates to be exercised or sold by the recipients thereof. If time does not
permit a transferee of a Right who wishes to exercise its Right to deliver its
Subscription Certificate to the Subscription Agent on or before the Expiration
Date, such transferee should make use of the Guaranteed Delivery Procedure
described under "Exercise of Rights" above. Neither the Company nor the
Subscription Agent shall have any liability to a transferee or transferor of
Rights if Subscription Certificates or new Subscription Certificates are not
received in time for exercise or sale prior to the Expiration Date.
Trading in the Rights will cease at the close of business on the business
day preceding the Expiration Date.
Except for the fees charged by the Subscription Agent (which will be paid by
the Company as described below), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred in connection with
the purchase, sale or exercise of Rights will be for the account of the
transferor of the Rights, and none of such commissions, fees or expenses will be
paid by the Company or the Subscription Agent.
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Shareholder Rights will be eligible for transfer through, and the exercise
of the Rights may be effected through, the facilities of Depository Trust
Company ("DTC"; Rights exercised through DTC are referred to as "DTC Exercised
Rights"). The holder of a DTC Exercised Right may exercise the Right in respect
of such DTC Exercised Right by properly executing and delivering to the
Subscription Agent at or prior to 5:00 p.m., New York time, on the Expiration
Date, respectively, a DTC Participant Right Exercise Form, together with payment
of the appropriate Subscription Price for the number of Rights Shares for which
the Rights are being exercised. Copies of the DTC Participant Right Exercise
Form may be obtained from the Information Agent.
SUBSCRIPTION AGENT
The Company has appointed ChaseMellon Shareholder Services, L.L.C. as
Subscription Agent for the Rights Offering. The Subscription Agent's address,
which is the address to which the Subscription Certificates and payment of the
Subscription Price must be delivered, as well as the address to which Notice of
Guaranteed Delivery must be delivered, is:
<TABLE>
<S> <C> <C>
IF BY MAIL: IF BY HAND: IF BY OVERNIGHT COURIER:
ChaseMellon Shareholder ChaseMellon Shareholder ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C. Services, L.L.C.
P.O. Box 837 120 Broadway, 13th Floor 120 Broadway, 13th Floor
Midtown Station New York, NY 10271 New York, NY 10271
New York, NY 10018 Attn: Reorganization Dept. Attn: Reorganization Dept.
Attn: Reorganization Dept.
</TABLE>
Subscription Price payments received by the Subscription Agent will be
deposited into escrow with Mellon Bank, N.A., as escrow agent, pending the
application or return of such payments in accordance with the terms of the
Rights Offering.
The Company will pay the Subscription Agent and the escrow agent reasonable
and customary compensation for their services in connection with the Rights
Offering and will reimburse them for their reasonable out-of-pocket expenses in
connection therewith.
INFORMATION AGENT
Any questions regarding the Rights Offering, including the procedures for
exercising Rights, and requests for additional copies of this Prospectus or the
Notice of Guaranteed Delivery should be directed to the Information Agent at
(800) 814-0304.
The Company will pay the Information Agent reasonable and customary
compensation for its services in connection with the Rights Offering and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE FINANCIAL ADVISOR
MAKES ANY RECOMMENDATION TO HOLDERS WITH RESPECT TO WHETHER A HOLDER SHOULD
EXERCISE RIGHTS TO PURCHASE SHARES OF THE COMMON STOCK PURSUANT TO THE RIGHTS
OFFERING, TO INVESTORS WITH RESPECT TO WHETHER AN INVESTOR SHOULD PURCHASE
SHARES OF THE COMMON STOCK, OR TO PERSONS WITH RESPECT TO WHETHER A PERSON
SHOULD PURCHASE RIGHTS.
34
<PAGE>
THE INVESTOR OFFERING
The Company has entered into Stock Purchase Agreements with certain
institutional investors, high net worth individuals and non-employee directors
and members of senior management of the Company (I.E., the Investors) pursuant
to which the Investors have severally agreed, subject to certain conditions, to
purchase from the Company at the Subscription Price the 2,250,000 Base Shares
and the Standby Shares. The number of Standby Shares will equal (i) 7,692,308
(I.E., $25 million divided by the Subscription Price) minus (ii) the total
number of Rights Shares issued pursuant to the exercise of Shareholder Rights
and Employee Rights minus (iii) the Base Shares. The number of Standby Shares
will be 5,442,308 shares if no Rights Shares are issued and will decline by an
amount equal to the number of Rights Shares issued..
Each Investor will also have the option to purchase any or all of the
Additional Shares, if any. The number of Additional Shares will equal the lesser
of (i)(A) 11,500,000 minus (B) the total number of Rights Shares issued pursuant
to the exercise of Shareholder Rights and Employee Rights minus (C) the Base
Shares minus (D) the total number of Standby Shares issued, or (ii)(A) 7,692,308
(I.E., $25 million divided by the Subscription Price) minus (B) the Base Shares
minus (C) the total number of Standby Shares issued. If the number of Additional
Shares is insufficient to satisfy all exercises of the Investors' option, the
Additional Shares would be prorated among Investors electing to purchase
Additional Shares based upon the respective number of Base Shares purchased by
each such Investor.
All of the Stock Purchase Agreements contain substantially the same terms. A
master form of Stock Purchase Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The obligations of
the Investors under the Stock Purchase Agreements are not subject to any
conditions relating to the absence of a material adverse change in the financial
condition, business or results of operations of the Company, or to the absence
of adverse developments in financial markets, the outbreak of hostilities or
other matters beyond the control of the Company.
The Investor Offering will close on the sixth business day following the
Expiration Date and the option to purchase Additional Shares will expire at that
time unless exercised.
Jefferies assisted the Company in the identification of prospective
Investors. See "The Financial Advisor."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, the
following are the federal income tax consequences of the Rights Offering that
are likely to be material to the Holders (other than the Holders described in
the following paragraph) upon the issuance, exercise, disposition and lapse of
the Rights.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), the Treasury Regulations promulgated thereunder, judicial
authority and current administrative rulings and practice, all of which are
subject to change on a prospective or retroactive basis and on the accuracy of
certain representations of the Company. The tax consequences of the Rights
Offering under state, local and foreign law are not discussed. Moreover, special
considerations not described herein may apply to certain taxpayers, such as
financial institutions, broker-dealers, life insurance companies, regulated
investment companies, foreign entities, individuals who are not residents of the
United States for federal income tax purposes, and tax-exempt organizations or
accounts (including any Plan). The discussion is limited to those who have held
the Common Stock, and will hold the Rights (other than Optionholder Rights and
Employee Rights) and any Common Stock acquired upon the exercise of Rights as
capital assets (generally, property held for investment) within the meaning of
Section 1221 of the Code. The discussion does not apply to purchases of Common
Stock pursuant to a Stock Purchase Agreement.
35
<PAGE>
SHAREHOLDER RIGHTS
ISSUANCE OF THE SHAREHOLDER RIGHTS. Holders of Common Stock will not
recognize taxable income for federal income tax purposes in connection with the
receipt of the Shareholder Rights.
BASIS AND HOLDING PERIOD OF THE SHAREHOLDER RIGHTS. If, either (i) the fair
market value of the Shareholder Rights on the date of issuance is equal to 15%
or more of the fair market value (on such date) of the Common Stock with respect
to which they are received or (ii) the shareholder properly elects, in the
shareholder's federal income tax return for the taxable year in which the
Shareholder Rights are received, to allocate part of the basis of such Common
Stock to the Shareholder Rights, then upon exercise or transfer of the
Shareholder Rights, the shareholder's basis in such Common Stock will be
allocated between the Common Stock and the Shareholder Rights exercised or
transferred in proportion to the fair market values of each on the date of
issuance. Except as provided in the preceding sentence, the basis of the
Shareholder Rights received by a shareholder as a distribution with respect to
such shareholder's Common Stock will be zero.
The holding period of a shareholder with respect to the Shareholder Rights
received as a distribution on such shareholder's Common Stock will include the
shareholder's holding period for the Common Stock with respect to which the
Shareholder Rights were issued.
In the case of a purchaser of Shareholder Rights, the tax basis of such
Shareholder Rights will be equal to the purchase price paid therefor, and the
holding period for such Shareholder Rights will commence on the day following
the date of the purchase.
TRANSFER OF THE SHAREHOLDER RIGHTS. A shareholder who sells the Shareholder
Rights prior to exercise will recognize gain or loss equal to the difference
between the amount realized from the sale and such shareholder's basis (if any)
in the Shareholder Rights sold. Such gain or loss will be capital gain or loss
if gain or loss from a sale of the underlying Rights Shares would be
characterized as capital gain or loss at the time of such sale. Any gain or loss
recognized on a sale of Shareholder Rights acquired by purchase will be capital
gain or loss if the underlying Rights Shares would be a capital asset in the
hands of the seller.
LAPSE OF THE SHAREHOLDER RIGHTS. Shareholders who allow the Shareholder
Rights received by them to lapse will not recognize any gain or loss, and no
adjustment will be made to the basis of the Common Stock, if any, owned by such
shareholders.
Purchasers of the Shareholder Rights will be entitled to a loss equal to
their tax basis in the Shareholder Rights, if such Shareholder Rights expire
unexercised. Any loss recognized on the expiration of the Shareholder Rights
acquired by purchase will be a capital loss if the underlying Rights Shares
would be a capital asset in the hands of the purchaser.
EXERCISE OF THE SHAREHOLDER RIGHTS; BASIS AND HOLDING PERIOD OF COMMON
STOCK. Holders of Shareholder Rights will not recognize any gain or loss upon
the exercise of Shareholder Rights. The basis of the Common Stock acquired
through exercise of the Shareholder Rights will be equal to the sum of the
Subscription Price paid therefor and the holder's basis in such Shareholder
Rights (if any).
The holding period for the Common Stock acquired through exercise of the
Shareholder Rights will begin on the date the Shareholder Rights are exercised.
OPTIONS AND EMPLOYEE RIGHTS
RECEIPT OF OPTIONS OR EMPLOYEE RIGHTS. Holders of Options and Employee
Rights should not recognize taxable income for federal income tax purposes in
connection with the receipt of such Rights.
LAPSE OF OPTIONS OR EMPLOYEE RIGHTS. There should be no tax consequences
upon the lapse of an Option or an Employee Right.
36
<PAGE>
EXERCISE OF OPTIONS OR EMPLOYEE RIGHTS. Holders of Options or Employee
Rights who exercise those Rights generally will recognize ordinary income on the
Expiration Date, in the case of Employee Rights, or the 20th day after the
Expiration Date, in the case of Options, in an amount equal to the excess, if
any, of the fair market value of the underlying Rights Shares on that date over
the Subscription Price. This amount will be subject to applicable withholding
and, as a condition to exercise of Options or Employee Rights, the Holders are
required to properly complete and sign a Withholding Agreement and Worksheet and
timely remit such form and the Withholding Amount to the Company, in addition to
remitting the Subscription Price to the Subscription Agent. See "The Rights
Offering -- Payment of Withholding Amount Relating to Options and Employee
Rights." Insiders (as defined below) are subject to special tax treatment as
described under "Special Rules Applicable to Insiders" below. In addition,
special rules may apply to Holders who finance the Subscription Price to
exercise an Option with proceeds of a loan from the Company, and such Holders
should consult their own tax advisors regarding the tax issues arising from such
financing.
SPECIAL RULES APPLICABLE TO INSIDERS. If a Holder of Options is a director,
officer or shareholder subject to Section 16 of the Exchange Act (an "Insider")
and exercises such Options, the timing and amount of any ordinary income may be
affected by any holding period imposed under Section 16(b) of the Exchange Act,
unless the Insider properly makes and files an election under Section 83(b) of
the Code (an "83(b) Election") within 30 days after the 20th day after the
Expiration Date to recognize ordinary income based on the value of the Common
Stock on the 20th day after the Expiration Date. Special rules may apply to an
Insider who exercises a Right if the Subscription Price is greater than the fair
market value of the underlying Rights Shares on the exercise date of the Right.
Insiders should consult their tax advisors to determine the tax consequences to
them of exercising Options.
BASIS AND HOLDING PERIOD OF COMMON STOCK. A Holder's basis in a share of
Common Stock received upon the exercise of an Option or an Employee Right will
equal the Subscription Price paid therefor (excluding withholding taxes paid
together with the Subscription Price) plus the amount includible in income as
ordinary income as discussed above.
The holding period for Common Stock acquired upon exercise of an Option or
an Employee Right by Holders other than Insiders will begin just after the
Expiration Date, in the case of Employee Rights, or just after the 20th day
after the Expiration Date, in the case of Options. The holding period for the
Common Stock acquired upon exercise of an Option by an Insider will begin upon
the expiration of the six-month holding period imposed under Section 16(b) of
the Exchange Act unless the Insider makes a timely and proper 83(b) Election
with respect to such stock, in which case the holding period would begin just
after the 20th day after the Expiration Date.
INFORMATION REPORTING AND WITHHOLDING
Under the backup withholding rules of the Code, Holders may be subject to
backup withholding at the rate of 31 percent with respect to payments made
pursuant to the Rights Offering unless such Holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (ii) provides a correct taxpayer identification number and certifies
under penalties of perjury that the taxpayer identification number is correct
and that the Holder is not subject to backup withholding because of a failure to
report all dividends and interest income. Any amount withheld under these rules
will be credited against such Holder's federal income tax liability. The Company
may require Holders to establish exemption from backup withholding or to make
arrangements satisfactory to the Company with respect to the payment of backup
withholding.
Withholding Amounts remitted by persons exercising Options or Employee
Rights will be applied against the related federal and state tax liabilities of
such Holders, and will be reported, together with the appropriate amount of
taxable income arising from such exercise, on a Form W-2 issued to such persons.
If the Withholding Amount paid by a Holder exceeds such Holder's actual
liability, such excess will not be refunded directly by the Company (except for
Withholding Amounts paid with respect to the Oversubscription Privilege and for
which the Holder did not receive Rights Shares), but may be refunded by the
applicable tax authority following timely and proper application therefor by
37
<PAGE>
the Holder. IN THE EVENT THE COMPANY DETERMINES THAT THE WITHHOLDING AMOUNT
REMITTED BY THE HOLDER IN RESPECT OF TAX WITHHOLDING IS INSUFFICIENT TO SATISFY
THE ACTUAL WITHHOLDING REQUIRED, THE COMPANY, WITHOUT FURTHER NOTICE, MAY
WITHHOLD THE ADDITIONAL AMOUNTS FROM OTHER COMPENSATION DUE TO THE HOLDER FROM
THE COMPANY AND, UPON REQUEST BY THE COMPANY, THE HOLDER WILL BE REQUIRED TO PAY
SUCH ADDITIONAL AMOUNTS TO THE COMPANY WITHIN FIVE DAYS FOLLOWING SUCH REQUEST.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY,
EACH HOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES OF THE RIGHTS OFFERING APPLICABLE TO HIS OR HER OWN
PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE
AND LOCAL INCOME AND OTHER TAX LAWS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is listed on the AMEX and the PSE. The following table
indicates the high and low sales prices for a share of the Common Stock as
reported by the AMEX for the periods indicated.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- --------- --------- ---------
<S> <C> <C> <C>
1996: Third Quarter (through July 31)......................................................... $ 5 1/8 $ 3 3/4
Second Quarter.......................................................................... $ 7 1/16 $ 2 7/8
First Quarter........................................................................... $ 3 1/2 $ 1 5/8
1995: Fourth Quarter.......................................................................... $ 3 7/8 $ 2 3/16
Third Quarter........................................................................... $ 6 7/16 $ 2 3/4
Second Quarter (commencing June 19)*.................................................... $ 13 1/2 $ 1 5/8
</TABLE>
- ------------------------
* The first day of trading of the Common Stock following the Reorganized
Company's emergence from bankruptcy.
On May 29, 1996, the day immediately preceding the day on which the
Registration Statement of which this Prospectus is a part was first filed with
the Commission, the closing sale price for a share of the Common Stock as
reported on the AMEX was $5 5/8.
The Reorganized Company has never declared a dividend on the Common Stock
and does not expect to declare a dividend in the foreseeable future.
Moreover, the Company is prohibited from paying dividends by the terms of
the Credit Facility. The American Note limits the Company's ability to pay
dividends.
38
<PAGE>
CAPITALIZATION
The table below presents the capitalization of the Company at March 31, 1996
on an actual and pro forma basis, and should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Prospectus.
The pro forma capitalization gives effect to the Company's (i) repurchase of
827,221 shares of Common Stock from the GPA Companies at $1.10 per share, (ii)
repayment of approximately $4.5 million of long-term debt owed to the GPA
Companies at a 15% discount and an extraordinary gain of $340,000, net of
estimated income taxes, and (iii) borrowing under the Credit Facility to fund
such repurchase and repayment, all of which occurred on April 29, 1996.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
-------------------------
ACTUAL PRO FORMA (1)
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................... $ 13,452 $ 13,452
---------- -------------
---------- -------------
Current portion of long-term debt and capital leases........................ $ 8,934 $ 7,708
---------- -------------
---------- -------------
Long-term debt:
Credit Facility........................................................... $ -- $ 4,734
American Note (2)......................................................... 6,684 6,684
Capitalized lease obligations............................................. 9,396 9,396
Other..................................................................... 4,934 1,636
---------- -------------
Total long-term debt.................................................... 21,014 22,450
---------- -------------
Shareholders' equity:
Common Stock, par value $.01 per share; 60,000,000 shares authorized;
27,582,000 shares issued and outstanding (26,755,000 shares pro forma)
(3)...................................................................... 276 268
Special Preferred Stock, par value $.01 per share; seven shares
authorized; seven shares issued and outstanding (seven shares pro forma
and as adjusted)......................................................... -- --
Capital in excess of par value............................................ 59,613 58,711
Warrants.................................................................. 2,646 2,646
Minimum pension liability................................................. (1,171) (1,171)
Accumulated deficit....................................................... (12,239) (11,899)
---------- -------------
Total shareholders' equity.............................................. 49,125 48,555
---------- -------------
Total capitalization.................................................. $ 70,139 $ 71,005
---------- -------------
---------- -------------
</TABLE>
- ------------------------
(1) Gives effect to (i) the repurchase and retirement of 827,221 shares of
Common Stock at $1.10 per share, (ii) the repayment of approximately $4.5
million of long-term debt owed to the GPA Companies at a 15% discount and an
extraordinary gain of $340,000, net of estimated income taxes, and (iii) the
borrowing of approximately $4.7 million under the Credit Facility to fund
such repurchase and repayment, all of which occurred on April 29, 1996.
(2) Net of debt issuance costs of approximately $1.9 million.
(3) Includes 445,176 shares reserved for issuance under the Plan of
Reorganization and excludes the following shares of Common Stock reserved
for issuance: (i) 500,000 upon the exercise of options granted under the
1994 Stock Option Plan; (ii) 1,897,946 shares upon the exercise of the AMR
Warrants; (iii) 1,576,367 shares upon the exercise of the Reorganization
Warrants; and (iv) 1,400,000 shares (exclusive of the 600,000 shares
reserved for issuance upon exercise of the Options) upon the exercise of
options that may be granted from time to time in the future under the 1996
Stock Incentive Plan.
39
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth for the periods indicated selected financial
data for the Company. The statement of operations data for the years ended
December 31, 1991, 1992, 1993 and 1995, the period from January 1, 1994 to
September 11, 1994, the period from September 12, 1994 to December 31, 1994 and
the balance sheet data at December 31, 1991, 1992, 1993, 1994 and 1995 and
September 11, 1994 have been derived from the Company's financial statements and
notes thereto, which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The report of KPMG Peat Marwick LLP on the
Company's December 31, 1995 financial statements contains an explanatory
paragraph that states that the financial statements of the Reorganized Company
reflect the impact of adjustments to reflect the fair value of assets and
liabilities under fresh start accounting and, as a result, the financial
statements of the Reorganized Company are presented on a basis different than
those of the Predecessor Company. In addition, the report of KPMG Peat Marwick
LLP on the Company's December 31, 1995 financial statements contains an
explanatory paragraph that states that the Company's recurring losses from
operations, deficit working capital and limited sources of additional liquidity
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
The following selected financial and operating data are qualified by the
more detailed financial statements of the Company and the notes thereto included
elsewhere in this Prospectus and should be read in conjunction with such
financial statements and notes and the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The statement of operations data for the quarters
ended March 31, 1995 and 1996 and the balance sheet data at March 31, 1995 and
1996 are derived from unaudited financial statements which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and contain all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for such periods. The results of operations for the
quarter ended March 31, 1996 are not necessarily indicative of results to be
expected for the full year.
40
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------------------------------------
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1994 TO
--------------------------------------------------------- SEPTEMBER 11,
1991 1992 1993 1994
----------------- ----------------- ----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues
Passenger................. $ 257,760(1) $ 342,096(1) $ 273,386 $ 199,502
Charter................... 87,853(2) 27,430(2) 7,169(3) 135
Cargo..................... 11,821 16,866 15,000 11,039
Other..................... 7,608 8,684 8,554 6,147
----------------- ----------------- ----------------- ------------------
Total................... 365,042 395,076 304,109 216,823
Operating expenses.......... 460,035(4) 506,117(4) 328,947 223,244
----------------- ----------------- ----------------- ------------------
Operating income (loss)..... (94,993) (111,041) (24,838) (6,421)
Nonoperating income
(expense).................. (6,165) 29,090 (56,690) (14,253)
Loss before income taxes,
extraordinary items and
cumulative effect of change
in accounting principles... (101,158) (81,951) (81,528) (20,674)
Net income (loss)........... (98,548) 28,963 (69,424) 169,389(5)
Net loss per share.......... N/M* N/M* N/M* N/M*
Weighted average shares
outstanding................ 2,777 5,123 6,170 7,137
OTHER DATA:
Revenue passengers (7)...... 3,765 4,647 4,337 3,363
Revenue passenger miles
(RPM) (8).................. 2,021,698 3,322,045 2,870,713 2,204,855
Available seat miles (ASM)
(9)........................ 3,203,842 4,710,795 3,850,133 2,944,822
Passenger load factor
(10)....................... 63.1% 70.5% 74.6% 74.9%
Yield per RPM (11).......... 12.7 CENTS 10.3 CENTS 9.5 CENTS 9.0 CENTS
Total available seat miles
(TASM) (12)................ 4,114,270 5,002,034 3,871,071 2,945,679
Operating revenue per
TASM....................... 8.9 CENTS 7.9 CENTS 7.9 CENTS 7.4 CENTS
Costs per TASM (CTASM)
(13)....................... 11.2 CENTS 10.1 CENTS 8.5 CENTS 7.6 CENTS
EBITDA, as adjusted (14).... (49,485) (67,374) (4,869) (2,336)
Depreciation and
amortization expense....... (8,799) (6,965) (5,969) (4,085)
Capital expenditures........ 6,896 15,373 7,037 3,682
Net cash provided by (used
in) operating activities... (22,941) (7,182) 13,909 6,096
Net cash provided by (used
in) investing activities... 2,164 10,467 (9,845) (5,872)
Net cash provided by (used
in) financing activities... 10,995 (9,780) (1,719) (2,034)
<CAPTION>
REORGANIZED COMPANY
------------------------------------------------------------------------------------
PERIOD FROM
SEPTEMBER 12, QUARTER ENDED
1994 TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------------------------
1994 1995 1995 1996
------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues
Passenger................. $ 80,675 $ 297,527 $ 65,601 $ 79,811
Charter................... 536 22,200 3,557 6,971
Cargo..................... 5,300 18,169 3,961 4,813
Other..................... 2,646 9,008 2,389 2,467
---------- ------------------ ------------------- -------------------
Total................... 89,157 346,904 75,508 94,062
Operating expenses.......... 95,425 348,805 82,935 93,666
---------- ------------------ ------------------- -------------------
Operating income (loss)..... (6,268) (1,901) (7,427 ) 396
Nonoperating income
(expense).................. 117 (3,605) (867 ) (978 )
Loss before income taxes,
extraordinary items and
cumulative effect of change
in accounting principles... (6,151) (5,506) (8,294 ) (582 )
Net income (loss)........... (6,151) (5,506) (8,294 ) (582 )
Net loss per share.......... $ (0.65) $ (0.59) $ (0.88 ) $ (0.03 )
Weighted average shares
outstanding................ 9,400(6) 9,400(6) 9,400 (6) 21,521 (6)
OTHER DATA:
Revenue passengers (7)...... 1,221 4,781 1,152 1,269
Revenue passenger miles
(RPM) (8).................. 675,484 3,171,366 680,342 809,797
Available seat miles (ASM)
(9)........................ 1,050,827 4,238,319 939,543 1,112,525
Passenger load factor
(10)....................... 64.3% 74.8% 72.4 % 72.8 %
Yield per RPM (11).......... 11.9 CENTS 9.4 CENTS 9.6 CENTS 9.9 CENTS
Total available seat miles
(TASM) (12)................ 1,054,110 4,677,461 1,010,073 1,244,292
Operating revenue per
TASM....................... 8.5 CENTS 7.4 CENTS 7.5 CENTS 7.6 CENTS
Costs per TASM (CTASM)
(13)....................... 9.1 CENTS 7.5 CENTS 8.2 CENTS 7.5 CENTS
EBITDA, as adjusted (14).... (3,995) 5,536 (5,601 ) 2,256
Depreciation and
amortization expense....... (2,273) (7,437) (1,826 ) (1,860 )
Capital expenditures........ 3,603 9,165 2,483 1,680
Net cash provided by (used
in) operating activities... (5,265) 18,788 7,574 (7,945 )
Net cash provided by (used
in) investing activities... 4,049 (4,940) (2,090 ) (1,161 )
Net cash provided by (used
in) financing activities... 2,254 (11,960) (3,598 ) 17,169
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
------------------------------------------------ SEPTEMBER 11,
1991 1992 1993 1994
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... 8,422 1,928 4,273 2,463
Working capital deficit......................... (108,096) (168,656) (41,224) (47,055)
Property and equipment, net..................... 65,317 38,956 36,558 33,312
Total assets.................................... 133,758 105,743 105,540 167,211
Long-term debt and capital leases, including
current maturities............................. 88,043 8,825 4,790 31,822
Shareholders' equity (deficit).................. (206,467) (142,720) (209,882) 40,000
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
---------------------------- ----------------------
1994 1995 1995 1996
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... 3,501 5,389 5,387 13,452
Working capital deficit......................... (45,827) (51,699) (50,140) (21,723)
Property and equipment, net..................... 37,756 41,391 39,203 41,756
Total assets.................................... 163,301 161,640 161,129 171,576
Long-term debt and capital leases, including
current maturities............................. 36,217 24,314 32,730 29,948
Shareholders' equity (deficit).................. 33,849 29,178 25,555 49,125
</TABLE>
41
<PAGE>
- ------------------------------
* not meaningful
(1) Includes revenue derived from a Honolulu to Fukuoka, Japan route operated
under a wet-lease arrangement with Northwest. Operating authority for the
route was transferred to Northwest on September 28, 1992.
(2) Includes revenue derived from military charter flights.
(3) Includes revenue derived from military charter flights flown prior to
January 1, 1993.
(4) Includes expenses incurred for a Honolulu to Fukuoka, Japan route operated
under a wet-lease arrangement with Northwest. Operating authority for the
route was transferred to Northwest on September 28, 1992. Also includes
expenses incurred for military charter flights.
(5) Includes an extraordinary gain of approximately $190.1 million primarily
due to the extinguishment of prepetition obligations.
(6) Includes shares reserved for issuance under the Plan of Reorganization.
(7) Represents the number of passengers flying on scheduled flights.
(8) Represents the number of flight miles flown by revenue passengers.
(9) Represents the number of seats available for revenue passengers multiplied
by the number of miles those seats are flown.
(10) Represents RPMs divided by ASMs.
(11) Represents passenger revenue divided by RPMs.
(12) Represents the number of seats available for revenue passengers and charter
passengers multiplied by the number of miles those seats are flown.
(13) Represents operating expenses divided by TASMs.
(14) Consists of net income (loss) before nonoperating income (expense),
depreciation and amortization, income taxes, extraordinary items, cumulative
effect of change in accounting principles and certain other charges,
including restructuring charges of approximately $36.7 million and $14.0
million in 1992 and 1993, respectively, and write-off of intangibles of
approximately $36.7 million in 1991. EBITDA, as adjusted is not intended to
represent cash flows for the period, nor has it been presented as an
alternative to net income as an indicator of financial performance and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. EBITDA, as adjusted is presented solely as supplemental
disclosure because the Company understands that such data is used by certain
investors to analyze companies.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Hawaiian Airlines was adversely affected by the unpredictable and often
unfavorable industry and economic conditions of the past five years. The
Interisland and Transpac routes served by the Company are highly competitive and
are subject to seasonal and cyclical volatility primarily due to seasonal
leisure and holiday travel. The Company typically experiences low traffic levels
in the first quarter of the year and 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. See "Business -- Operations."
In 1989, the Company was the subject of a leveraged acquisition by an
investor group. Due to a number of factors, the Company began to experience
severe financial difficulty and on 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 Plan of Reorganization (the "Effective Date"). 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 the effect of nonrecurring noncash
transactions, the Company improved its operating and net income 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 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 several years. Nonetheless, the Company had a $21.7
million working capital deficit at March 31, 1996. See "Risk Factors -- Ability
of Company to Continue as a Going Concern."
The report of KPMG Peat Marwick LLP on the Company's December 31, 1995
financial statements contains an explanatory paragraph that states that the
financial statements of the Reorganized Company reflect the impact of
adjustments to reflect the fair value of assets and liabilities under fresh
start accounting and, as a result, the financial statements of the Reorganized
Company are presented on a basis different than those of the Predecessor
Company. In addition, the report of KPMG Peat Marwick LLP on the Company's
December 31, 1995 financial statements contains an explanatory paragraph that
states that the Company's recurring losses from operations, deficit working
capital and limited sources of additional liquidity raise substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of that
uncertainty. Management recognizes that the continuation of the Company as a
going concern is dependent upon a return to profitability, positive cash flow
from operations and the generation of adequate funds to meet its ongoing
obligations.
The Rights Offering is intended to permit the Company's shareholders, other
than AIP, to acquire shares of Common Stock at a discount to the market price in
order to reduce the dilutive effect of the AIP Investment on their equity
investment in the Company. In addition, the Rights Offering is intended to raise
additional capital. The Shareholder Rights, Employee Rights and Options bear
identical terms and conditions relative to subscription right and price and have
substantially similar exercise periods. In addition, the Subscription Price for
all Rights is identical to the stock purchase price under the Investor Offering.
Accordingly, no compensation cost will be recognized relative to the issuance of
Options and Employee Rights.
The unpaid balance of fully recourse promissory notes tendered by Holders of
Options and accepted by the Company in satisfaction of the aggregate
Subscription Price of such Options (see
43
<PAGE>
"Certain Relationships and Related Transactions") will be reported as a
reduction of shareholders' equity. Income tax benefits to the Company, if any,
upon exercise of Options and Employee Rights will be credited to capital in
excess of par value, if deemed material. Management does not expect that the
issuance or exercise of Options and Employee Rights will have a material effect
on the Company's operations.
The Rights Offering and the Investor Offering are intended to raise a
minimum of $25 million of gross proceeds as part of the Company's on-going
efforts to improve its liquidity. However, there can be no assurances that the
Rights Offering and the Investor Offering can be successfully completed.
The following discussion should be read in conjunction with the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
RESULTS OF OPERATIONS
OPERATING REVENUES. The following table compares operating revenues, in
thousands, by service type:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- --------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Interisland:
Passenger.............................. $ 118,530 $ 119,750 $ 122,079 $ 30,987 $ 34,275
Charter................................ 1,016 25 33 -- --
Cargo.................................. 6,954 6,513 6,702 1,653 1,495
Other.................................. 5,569 5,645 5,665 1,450 1,617
----------- ----------- ----------- --------- ---------
132,069 131,933 134,479 34,090 37,387
----------- ----------- ----------- --------- ---------
Transpac:
Passenger.............................. 136,543 142,116 156,155 30,337 41,413
Cargo.................................. 6,121 7,688 9,555 1,805 2,738
Other.................................. 2,669 2,896 3,114 884 785
----------- ----------- ----------- --------- ---------
145,333 152,700 168,824 33,026 44,936
----------- ----------- ----------- --------- ---------
Southpac:
Passenger.............................. 18,313 18,311 19,293 4,277 4,123
Cargo.................................. 1,925 2,138 1,912 503 580
Other.................................. 178 252 229 55 65
----------- ----------- ----------- --------- ---------
20,416 20,701 21,434 4,835 4,768
----------- ----------- ----------- --------- ---------
Overseas Charter:
Passenger.............................. 6,153 646 22,167 3,557 6,971
Other.................................. 138 -- -- -- --
----------- ----------- ----------- --------- ---------
6,291 646 22,167 3,557 6,971
----------- ----------- ----------- --------- ---------
Total.................................. $ 304,109 $ 305,980 $ 346,904 $ 75,508 $ 94,062
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
44
<PAGE>
The following table compares applicable operating and financial passenger
revenue statistics, in thousands except as indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
---------------- ---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Interisland:
Revenue passengers.................... 3,386 3,639 3,721 932 992
Revenue passenger miles............... 438,979 476,051 490,044 122,041 130,642
Available seat miles.................. 770,171 854,073 937,736 221,332 221,453
Passenger load factor................. 57.0% 55.7% 52.3% 55.1% 59.0%
Yield................................. 27.0 CENTS 25.2 CENTS 24.9 CENTS 25.4 CENTS 26.2 CENTS
Transpac:
Revenue passengers.................... 885 880 994 205 264
Revenue passenger miles............... 2,257,472 2,231,106 2,506,774 519,564 644,896
Available seat miles.................. 2,784,980 2,857,081 3,034,177 653,508 824,968
Passenger load factor................. 81.1% 78.1% 82.6% 79.5% 78.2%
Yield................................. 6.0 CENTS 6.4 CENTS 6.2 CENTS 5.8 CENTS 6.4 CENTS
Southpac:
Revenue passengers.................... 66 65 66 15 13
Revenue passenger miles............... 174,262 173,182 174,548 38,737 34,259
Available seat miles.................. 294,983 284,495 266,406 64,703 66,104
Passenger load factor................. 59.1% 60.9% 65.5% 59.9% 51.8%
Yield................................. 10.5 CENTS 10.6 CENTS 11.1 CENTS 11.0 CENTS 12.0 CENTS
Overseas Charter:
Revenue passengers.................... 14 1 155 25 46
Revenue passenger miles............... 14,620 2,202 425,797 69,268 125,660
Available seat miles.................. 20,938 4,141 439,142 70,530 131,767
</TABLE>
45
<PAGE>
OPERATING EXPENSES. The following table compares operating expenses, in
thousands, by major category:
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- --------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total operating revenues................. $ 304,109 $ 305,980 $ 346,904 $ 75,508 $ 94,062
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
Wages and benefits....................... $ 101,292 $ 102,670 $ 108,274 $ 27,027 $ 29,077
Aircraft fuel, including taxes and oil... 49,777 47,682 56,724 12,444 17,018
Maintenance materials and
repairs................................. 40,986 46,541 60,581 13,009 15,479
Aircraft rentals......................... 29,342 23,966 16,477 3,869 4,014
Purchased services....................... 17,789 19,866 20,192 4,802 5,679
Sales commissions........................ 11,153 12,841 13,875 2,943 3,506
Rentals other than aircraft and
engines................................. 7,292 9,633 9,021 2,331 2,310
Passenger food........................... 8,150 8,972 8,185 2,248 2,417
Depreciation and amortization............ 7,442 6,797 7,859 1,854 2,026
Landing fees............................. 4,803 6,793 8,202 1,897 2,104
Reservation fees and services............ 5,762 6,635 6,808 1,656 1,961
Advertising and promotion................ 3,154 4,909 8,301 2,070 2,329
Personnel expenses....................... 4,199 4,056 3,868 960 937
Insurance-hull and liability............. 2,126 3,388 3,920 654 916
Interrupted trips........................ 4,074 2,038 1,823 541 586
Early retirement provision............... -- -- 2,000 2,000 --
Nonreorganization professional and legal
fees.................................... 3,872 1,656 2,032 309 688
Restructuring charges.................... 14,000 -- -- -- --
Other.................................... 13,734 10,226 10,663 2,321 2,619
----------- ----------- ----------- --------- ---------
Total operating expenses............. $ 328,947 $ 318,669 $ 348,805 $ 82,935 $ 93,666
----------- ----------- ----------- --------- ---------
----------- ----------- ----------- --------- ---------
</TABLE>
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
INTRODUCTION. 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. 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.
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 or 3.1%. Increases in revenue passengers carried and revenue
passenger miles were primarily the result of the continued recovery of the
Hawaii tourism market. First quarter 1996 Interisland yield increased due to (i)
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 (ii) the
Company maintaining and/or increasing certain Interisland fares.
46
<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%. Transpac yield also
increased by 0.6 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.
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 (other than Transpac flights), a 6.25% cargo excise tax and a
$6.0 international departure tax (including Transpac flights). Efforts are
underway to encourage the United States Congress to re-enact legislation
authorizing these excise taxes or to impose user fees in lieu of such taxes. The
Senate has approved a bill to reinstate the excise taxes, and it is reported
that House and Senate negotiators have agreed in principle to reinstate the
excise taxes. If the excise taxes are reinstated or user fees are implemented,
the Company would either have to absorb the excise taxes or user fees, which
would adversely affect operating results, or raise ticket prices and cargo
transportation fees in order to offset the excise taxes or user fees. 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.
OPERATING EXPENSES. Operating expenses totaled $93.7 million in first
quarter 1996, an increase of $10.7 million or 12.9% over first quarter 1995.
Wages and benefits increased $2.1 million or 7.6% in 1996. The increase was
primarily attributable to (i) approximately $500,000 of scheduled wage increases
being in effect in 1996 that were terminated upon amendments to each of the
Company's labor union agreements becoming effective on January 31, 1996, as
described above and (ii) $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 average cost per gallon, excluding taxes,
increased by 5.6 CENTS or 9.7% 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 3.6 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 maintenance expense due to (i) $2.6 million additional maintenance expense
as a result of the Company utilizing eight DC-10 aircraft in first quarter 1996
versus seven DC-10 aircraft in first quarter 1995 and (ii) approximately
$400,000 of additional maintenance costs due to higher maintenance rates in
first quarter 1996 compared to first quarter 1995. 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 fleet.
In first quarter 1995, the Company recognized a nonrecurring, noncash 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.
47
<PAGE>
1995 COMPARED TO 1994
INTRODUCTION. The 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 in all respects to the
Predecessor Company. 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 Company in
1994. Significant differences between 1995 and 1994 as a result of the
recapitalization and fresh start adjustments have been disclosed. See Note 2 to
the financial statements appearing elsewhere in this Prospectus.
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. 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 those relating to Interisland operations described above, the effects
of promotional fare ticket programs.
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 January 1995.
OPERATING EXPENSES. Operating expenses totaled $348.8 million in 1995, an
increase of $30.1 million or 9.5% 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 (i) $3.6 million of additional wages and
benefits due to wage increases between 5.0% to 6.7% effective September 1, 1994
and (ii) $2.0 million of noncash compensation expense recognized under the
provisions of the 1994 Stock Option Plan for officers and key employees of the
Company.
48
<PAGE>
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 14.0
million or 17.9% more gallons in 1995 than in 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 30.2% over 1994. The Company incurred approximately $9.8
million in maintenance costs for its L-1011 and DHC-7 aircraft during 1994, the
year these aircraft were phased out of service. However, the elimination of
maintenance costs related to these aircraft was offset by $23.8 million of
additional maintenance incurred in 1995 for the Company's DC-10 and DC-9 fleets.
Aircraft rentals decreased by $7.5 million or 31.3% year over year. The
decrease was a result of the following: (i) non-existence of rental expense for
L-1011 and DHC-7 aircraft in 1995 since these aircraft were phased out of
service in 1994, as compared to $3.3 million of L-1011 and DHC-7 rents in 1994;
(ii) a $4.2 million decrease in DC-9 aircraft and engine rents due to such rents
being restructured on the Effective Date (I.E., the effective date of the Plan
of Reorganization); and (iii) $4.4 million in additional rents for DC-10
aircraft.
Sales commissions totaled $13.9 million in 1995, an increase of $1.1 million
or 8.1% 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 Transpac markets
(specifically Los Angeles, Las Vegas and Portland) and the Interisland market.
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 represent $5.7 million and $7.6 million in legal
and professional fees and employee concession claims, respectively, associated
with the Predecessor Company's Chapter 11 process and $638,000 in fresh start
accounting and other reorganization adjustments recorded on the Effective Date
in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7").
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.
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
49
<PAGE>
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.
OPERATING REVENUES. 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 or 6.7%. Increases in revenue passengers carried,
revenue passenger miles and available seat miles were a direct result of (i) the
utilization of 13 DC-9 aircraft during a majority of 1994 versus four DHC-7 and,
on average nine DC-9 aircraft in 1993, and (ii) increased passenger counts due
to the overall increase in Hawaii tourism year over year and, newly implemented
operational concepts such as the Island Shuttle from Honolulu 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
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 aircraft fleet from an all L-1011 fleet for its Transpac
flights. In their current configuration, at full load, the DC-10 on average
accommodates 38 fewer passengers than the L-1011.
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 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 aircraft fleet in 1994 for the
Company's Southpac flights. Southpac yields increased in 1994 when a competitor
discontinued service on Southpac routes served by the Company.
Transpac cargo revenues increased by $1.6 million or 25.6% 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 or 6.4%.
Overseas charter revenues decreased by $5.5 million or 89.5% upon comparison
of 1994 to 1993. A majority of the decrease is associated with the Predecessor
Company 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. 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 wage increases between 5.0% to 6.7% effective September
1, 1994.
50
<PAGE>
Aircraft fuel, including taxes and oil decreased by $2.1 million or 4.2%
from $49.8 million 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.
Maintenance materials and repairs totaled $46.5 million in 1994 an increase
of $5.6 million or 13.6% over 1993. On a net basis, the Company incurred
approximately $5.1 million in additional maintenance expense from the transition
to DC-10 aircraft in 1994.
Aircraft rentals decreased by $5.4 million or 18.3%, of which $4.1 million
represents decreased rents due to DC-9 aircraft operating under capital versus
operating leases in 1994 and other DC-9 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 11.7%, 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 15.1% over total sales commissions of $11.2 million in 1993. The increase is
primarily attributable to approximately $1.1 million of additional sales
commissions in 1994 due 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 32.1% 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 41.4% to $6.8 million in 1994.
Increases associated with DC-9 aircraft landings and wide-body aircraft landings
of $1.4 million and $900,000, respectively, were experienced in 1994. Such
increases were due to (i) $1.5 million in additional landing fees due to
increased rates in Hawaii and Los Angeles, California and (ii) $800,000 in added
fees due to increased frequencies as a result of the implementation of the
Island Shuttle, schedule changes to Los Angeles and Las Vegas and commencement
of scheduled service to Portland.
Advertising and promotion totaled $4.9 million in 1994, an increase of $1.8
million or 55.6% 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 AAdvantage-Registered Trademark- frequent flyer program. The
remaining $700,000 increase is associated primarily with barter related expenses
for various promotional services provided to the Company in exchange for
tickets.
Insurance-hull and liability increased from $2.1 million in 1993 to $3.4
million in 1994. The $1.3 million or 59.4% increase was mainly due to an 63.7%
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 50.0% 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
1994.
Restructuring charges in 1993 represent the Predecessor Company's provision
for the anticipated return and termination of five of its DC-9 aircraft in the
second quarter of 1993.
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NONOPERATING INCOME (EXPENSE). Reorganization expenses in 1993 of $52.6
million primarily consist 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 ITEM. The $12.1 million extraordinary item in 1993 represents
a nonrecurring, noncash gain due to the reduction in the net accrued pension
benefit obligation of the Predecessor Company. Effective October 1, 1993, the
IAM and salaried employee defined benefit pension plans were frozen with no
future pay or credited service increases.
FREQUENT FLYER PROGRAM
The Company's Gold Plus frequent flyer program was initiated in 1983. As of
December 31, 1995, the Company's Gold Plus membership had more than 560,000
members, including approximately 361,000 active members.
The Gold Plus program rewards its members with mileage credits primarily for
travel on Hawaiian Airlines. Gold Plus members are entitled to a choice of
various awards based on accumulated mileage, with a majority of the awards being
certain free air travel at a later date. Travel awards available in the Gold
Plus program range from a 5,000 award, which offers a round trip Interisland
flight, to 60,000 mile and 65,000 mile awards, which offer a round trip
first-class Transpac flight and a round trip coach-class Southpac flight,
respectively. Miles traveled under the Gold Plus program are accounted for as
revenue passenger miles, which, in turn, are used in the calculation of the
Company's yield. Non-travel awards are valued at the incremental cost of tickets
exchanged for such awards.
The Company recognizes a liability in the period in which members have
accumulated sufficient mileage points to allow for award redemption. The
liability is adjusted based on net mileage earned and utilized for award
redemption on a monthly basis. The incremental cost method is used, computed
primarily on the basis of fuel and catering costs, exclusive of any overhead or
profit margin. In estimating the amount of such incremental costs to be accrued
in the liability for potential future Gold Plus free travel, a current average
cost per award mile is determined. Incremental fuel expended per passenger is
based on engineering formulas to determine the quantity used for the weight of
each added passenger and baggage. Such incremental quantity of fuel is priced at
current levels. Catering is based on average cost data per passenger for the
most recent 12 month period.
At December 31, 1994 and 1995, Gold Plus members had accumulated
approximately 3.0 and 3.3 billion miles, respectively, representing liabilities
totaling approximately $489,000 at the end of each year. The Company's accruals
assume full redemption of mileage points. During the years ended December 31,
1993, 1994 and 1995, 493.0 million, 636.0 million and 581.0 million award miles
were redeemed, respectively.
The Company believes that the usage of free travel awards will not result in
the displacement of revenue customers and, therefore, such usage will not
materially affect the Company's liquidity or operating results. The use of free
travel awards is subject to review by the Company to limit the possibility of
displacing revenue passengers. Usage of Gold Plus travel redemption accounted
for approximately 2.1%, 2.7% and 2.2% of Interisland traffic and a negligible
percentage of Transpac and Southpac traffic in 1993, 1994 and 1995,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
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 because 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 that management believes may improve
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profitability, such as (i) a series of investments in improved software that are
expected to improve operating efficiency and (ii) the outlay required to
consolidate operations into one terminal at Honolulu International Airport. The
working capital shortage also had an unfavorable impact 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 can 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 pursuant to which American
leases 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 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.
In December 1994 and during the first quarter of 1995, the Company again
failed to make certain rent and prepaid maintenance payments in full that were
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 satisfied by the
Company on January 31, 1996, through the delivery by the Company of the American
Note.
CURRENT STATUS
As of March 31, 1996, the Company significantly decreased its working
capital deficit by consummating a series of transactions including (i) the $20.0
million cash investment by AIP and (ii) 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. As of April 30, 1996, the net working
capital deficit had been reduced to $19.7 million.
The Company plans to make approximately $11.4 million of necessary capital
expenditures in the ordinary course of business during 1996 using internally
generated funds and specific project financing provided by the State of Hawaii.
These expenditures include $2.5 million for the capitalized portions of two
scheduled DC-9 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
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State of Hawaii will provide a majority of the financing) and certain other
projects. Certain of these expenditures had been deferred previously due to the
Company's historical working capital shortage. The Company had approximately
$1.7 million of capital expenditures in the first quarter of 1996.
On April 29, 1996, the Credit Facility, which is provided by CIT
Group/Credit Finance, Inc., was amended to increase the borrowing capacity
thereunder from $8.2 million to $15.0 million. The 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, and repayments arising from
the disposition of, 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 terms 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 early termination fees 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. Amounts
outstanding under the Credit Facility accrue interest at a rate of 2% over the
prime rate reported by Chase Manhattan Bank (National Association). The rate
will be reduced to 1.75% over the prime rate on January 1, 1998 if the Company
meets certain financial tests for 1996.
In connection with the AIP Investment, the Company agreed with the GPA
Companies that, if the closing of the Rights Offering shall have occurred by
September 30, 1996, the Company would repurchase all of the shares of 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 shares of
Common Stock 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 $340,000, net of estimated income taxes. The
payment to the GPA Companies was funded by borrowings under the Credit Facility
on April 29, 1996.
While 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 and the
Investor Offering 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 provide early
payment incentives to wholesalers and eliminate the Company's historical
dependence on ticket discounting to generate capital, 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 Rights Offering and the Investor Offering will
be successful or that the Company will be able to obtain other sources of
liquidity.
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The financial statements appearing elsewhere in this Prospectus 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 profitability,
positive cash flow from operations and the generation of adequate funds to meet
its ongoing obligations.
RECAPITALIZATION. The AIP Investment, in which AIP purchased 18,181,818
shares of the Common Stock and four shares of special preferred stock for $20.0
million in cash ($1.10 per share), was consummated on January 31, 1996. Of the
$20.0 million gross proceeds from the AIP Investment, a portion was used to pay
(i) through April 30, 1996, approximately $2.3 million of fees and expenses
associated with the AIP Investment and its related transactions, (ii)
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 (iii)
approximately $339,000 of deferred Board of Director compensation. The balance
of the proceeds is being used to meet working capital needs.
Upon consummation of the AIP Investment and satisfaction of other
conditions, including certain labor and creditor concessions, the Company
entered into certain arrangements with American pursuant to which American and
the Company agreed to, among other things, the following:
(i) The payment of (x) $10.0 million of deferred aircraft lease rents,
aircraft maintenance payments and accrued interest thereon under the
Aircraft Lease Agreement and (y) the reimbursement of fees and expenses
incurred by American in connection with the transaction through the
issuance by the Company to American of the $10.25 million American Note,
which is secured by certain assets of the Company. 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 may prepay it at any time
thereafter, in whole or in part, at its remaining principal balance,
without premium. In addition, 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 (x) liens of security
deposits held by credit card processors and (y) liens securing up to
$15.0 million in obligations of the Company consisting of (A) secured
obligations of the Company (other than credit card processor security
deposit liens) existing on the date of issuance of the American Note,
and (B) additional secured obligations of the Company incurred after
such issuance. As of March 31, 1996, in addition to its credit card
deposits, the Company had $7.3 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 as
valued from time to time;
(ii) 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
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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
(iii) 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 and accrued interest thereon 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 aircraft 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.
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 extended 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 result in cash operating expenses, before profit sharing
costs, for 1996, 1997, 1998 and 1999 being approximately $3.6 million, $7.6
million, $8.0 million and $5.5 million less, respectively, than otherwise would
have been the case, based on the Company's flight schedule as of June 1996. 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 estimated cash operating expense savings noted above do not include
estimated costs associated with these gain sharing and profit bonus plan
initiatives. 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.
AUTHORIZED CAPITAL STOCK; WARRANTS AND OPTIONS. In connection with the AIP
Investment, the Articles of Incorporation were amended to increase the
authorized number of shares of 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 Common Stock to
permit the exercise of Rights under the Rights Offering and the issuance of the
Committed Shares 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.
In connection with the arrangements with American described above, the
Company issued the AMR Warrants, which entitle AMR to acquire up to 1,897,946
shares of Common Stock at $1.10 per share. 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.
Pursuant to the Reorganization Plan, the Company granted the Reorganization
Warrants to certain individuals, which originally entitled such individuals to
purchase 989,011 shares of Common Stock at an exercise price of $2.73 per share.
Pursuant to the anti-dilution provisions of the Reorganization Warrants, upon
the consummation of the AIP Investment, the exercise price of the Reorganization
Warrants was adjusted to $1.71 per share and the holders of the Reorganization
Warrants
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received additional warrants to purchase 587,356 shares of Common Stock
exercisable at $1.71 per share. The holders of the Reorganization Warrants
waived the anti-dilution provisions thereof in connection with the issuance of
the AMR Warrants.
The purchase of up to 1,000,000 Rights Shares upon the exercise of Employee
Rights and the issuance of the Base Shares will give rise to an increase in the
number of AMR Warrants and Reorganization Warrants and a decrease in the
exercise price thereof pursuant to the anti-dilution provisions of the AMR
Warrants and the Reorganization Warrants. However, the magnitude of these
adjustments can not be determined until after the Investor Offering is
completed.
Options to acquire 600,000 shares of Common Stock were granted in 1995 and
1996 pursuant to the terms of the 1994 Stock Option Plan. The exercise price is
$1.62 per share. As a result of an amendment to the 1994 Stock Option Plan in
connection with the AIP Investment, the Option exercise period with respect to
592,500 of the Options was extended to February 2, 2005. This amendment resulted
in a new measurement date for the Options awarded in 1995, and as a result, the
Company recorded approximately $782,000 of noncash compensation expense in
January 1996. The balance of the Options expire on May 1, 2006. To date, 100,000
Options have been exercised.
The 1996 Stock Incentive Plan provides for discretionary option grants to
the Company's employees. There are 2,000,000 shares of Common Stock reserved for
issuance under the 1996 Stock Incentive Plan, which expires in 2006. No options
have been granted under this plan other than the 600,000 Options.
Except for shares of Common Stock that have been reserved in connection with
the Reorganization Warrants, the 1994 Stock Option Plan, the Plan of
Reorganization, the AMR Warrants, the Rights Offering, the Investor Offering and
the 1996 Stock Incentive Plan, the Company has no present agreements or
commitments to issue any additional shares of Common Stock.
CASH FLOWS
Cash and cash equivalents totaled $5.4 million at December 31, 1995, an
increase of $1.9 million from $3.5 million at December 31, 1994. Operating
activities for the year ended December 31, 1995 provided $18.8 million in cash
and cash equivalents. A majority of this increase is associated with deferred
payments to creditors with the largest creditor as of December 31, 1995 being
American with an outstanding balance of approximately $9.7 million. Net cash
used in investing and financing activities for the year ended December 31, 1995
aggregated $16.9 million, consisting of $9.2 million in property and equipment
additions and $13.6 million in long-term debt and capital lease obligation
payments, offset by $4.2 million in proceeds from sales of expendable inventory
parts and rotable flight equipment held for sale on consignment. Approximately
$5.1 million of the property and equipment additions in 1995 represented
capitalized heavy airframe checks on four of the Company's DC-9-50 aircraft.
Cash and cash equivalents decreased by approximately $800,000 from $4.3
million as of December 31, 1993 to $3.5 million at December 31, 1994. Operating
activities provided $831,000 in net cash and cash equivalents for the year ended
December 31, 1994. This inflow was offset by $1.8 million in net cash used in
investing activities, consisting of $7.3 million in miscellaneous additions and
improvements to property and equipment, net of $5.4 million from returned
security deposits and proceeds from sales of consigned inventory and parts.
Included in the $5.4 million is the return of $3.8 million in security deposits
originally required in 1993 by the State of Hawaii and the Airlines Reporting
Corporation as mentioned below.
Cash and cash equivalents totaled $4.3 million at December 31, 1993, an
increase of $2.4 million from $1.9 million of cash and cash equivalents at
December 31, 1992. Operating activities provided $13.9 million in net cash and
cash equivalents for the year ended December 31, 1993. Deferral of payments to
creditors throughout the year and commencement of the Company's Chapter 11
proceedings in September 1993 assisted in increasing operating cash flows for
the year ended December 31, 1993. Net cash used in investing and financing
activities for the year ended December 31, 1993
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aggregated $11.6 million, consisting of $3.9 million used to purchase a DC-9-50
aircraft and two engines, $2.7 million used on partial heavy airframe checks on
the then L-1011 aircraft fleet of the Company, $3.8 million in required security
deposits for the State of Hawaii and the Airlines Reporting Corporation and $1.7
million in long-term debt payments.
TAX AND NET OPERATING LOSS CONSIDERATIONS
The Company believes that the AIP Investment and related transactions
resulted in 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 (the "Old Limitation") was approximately
$2.4 million, plus certain "built-in" income items that increase the Section 382
Limitation. The Company currently believes that the ownership change resulting
from the AIP Investment and its related transactions resulted in a new Section
382 Limitation (the "New Limitation") of approximately $1.7 million as of
January 31, 1996, plus certain "built-in" income items that increase the Section
382 Limitation. The Company believes that, for federal income tax purposes, it
had approximately $130 million of NOLs subject to the New Limitation as of
December 31, 1995.
Subsequent changes in the Company's share ownership by "5 percent
shareholders" (as defined in Section 382, and which includes certain "public
groups"), whether by reason of the exercise of Rights or otherwise, could result
in another Section 382 Limitation to which any NOLs incurred prior to such
ownership change would be subject.
See "Risk Factors -- Effect of Rights and Related Transactions on the
Company's Net Operating Loss Carryovers" and Note 9 to the financial statements
appearing elsewhere in this Prospectus.
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 the asset.
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.
58
<PAGE>
BUSINESS
Hawaiian Airlines is the largest airline headquartered in Hawaii, based on
operating revenues of $346.9 million for 1995. The Company is engaged primarily
in the scheduled transportation of passengers, cargo and mail over a route
system that services the six major islands of the State of Hawaii (I.E.,
Interisland) and Las Vegas and four key U.S. West Coast gateway cities, Los
Angeles, San Francisco, Seattle and Portland (I.E., Transpac). In addition,
Hawaiian Airlines provides the only direct service from Hawaii to Pago Pago,
American Samoa and Papeete, Tahiti (I.E., Southpac). The Company also provides
charter service from Honolulu to Las Vegas. Hawaiian Airlines (i) is one of two
dominant Interisland air carriers in Hawaii, (ii) is the third largest air
carrier between the U.S. mainland and Hawaii based on 2.51 billion Transpac RPMs
in 1995 (2.9 billion combined Transpac RPMs and charter passenger miles), (iii)
has one of the highest load factors in the United States with an overall
scheduled load factor of 74.8% in 1995 and (iv) has, management believes, one of
the lowest cost structures in the industry. Furthermore, Hawaiian Airlines has
been rated one of the ten best airlines in the U.S. for five consecutive years
in a national travel magazine reader's poll on the basis of scheduling,
punctuality, cabin comfort/service, food and baggage handling. The Company
operates a fleet of 13 DC-9 aircraft and eight DC-10 aircraft (a ninth DC-10
aircraft is being used on a temporary basis to permit the scheduled overhaul of
six of the other DC-10s during 1996).
STRATEGIC REPOSITIONING
Since their arrival at the Company approximately three years ago, the
Company's senior management team has conducted a strategic repositioning of
Hawaiian Airlines designed to improve its overall operating and financial
performance. The primary objectives of this repositioning were to (i) control
and reduce operating costs, (ii) restructure the Company's balance sheet and
obtain additional liquidity through a recapitalization and (iii) enhance the
Company's operating revenues through strategic alliances and certain other
opportunities. Management believes that the strategic repositioning has
significantly improved the Company's operations, balance sheet and financial
performance by reducing aircraft and labor costs and providing additional
liquidity. Moreover, this repositioning has allowed the Company to eliminate its
historical dependence on ticket discounting to generate capital, and has allowed
management to focus its attention on the pursuit and implementation of its
long-term operating strategy and the identification and pursuit of potential
growth opportunities.
COST REDUCTION PROGRAMS
As part of its strategic repositioning, the Company has effected a number of
significant changes to the two major components of its operating costs (aircraft
and labor) that have contributed to the Company's CTASM being reduced from
$0.085 for 1993 to $0.075 for 1995, which, management believes, is among the
lowest CTASMs in the airline industry.
REDUCED AIRCRAFT EXPENSE. When new management arrived at the Company
beginning in June 1993, Hawaiian Airlines' fleet consisted of DC-9 aircraft and
inefficient and costly DC-8, DHC-7 and L-1011 aircraft. By 1993, Hawaiian
Airlines' seven unit L-1011 fleet had become increasingly expensive to maintain
as a result of a lack of manufacturer support from Lockheed (which had ceased
its commercial airplane business) and an extremely limited number of sources for
heavy maintenance. Hawaiian Airlines also found itself facing cash requirements
for mandatory heavy maintenance checks and aging aircraft work on the L-1011
airframes of $15 million over a span of approximately 15 months, and the L-1011
lessors declined to finance the work. After several months of discussions
directed at obtaining relief from its liabilities and a source of working
capital, the Company filed for protection under U.S. bankruptcy laws in
September 1993 and rejected the L-1011 leases.
In 1993 and during 1994, Hawaiian Airlines made important changes in its
aircraft fleet. The Company phased out its DC-8, DHC-7 and L-1011 aircraft and
transitioned to a lower cost and more efficient aircraft fleet. The Company now
operates two equipment types -- McDonnell Douglas DC-10-10 aircraft, for
overseas routes, and McDonnell Douglas DC-9-50 aircraft, for Interisland
59
<PAGE>
routes. This transition has resulted in a more standardized fleet of aircraft
types, which has had, and the Company believes should continue to have, a
favorable effect on parts, maintenance and engineering costs.
The Company's nine DC-10 aircraft are all leased to Hawaiian Airlines by
American. Six of the aircraft are leased pursuant to the Aircraft Lease
Agreement, which calls for fixed monthly rental payments with no cost
escalations during its approximately six year remaining term. A seventh aircraft
is leased under substantially similar terms with the same expiration date. The
other two aircraft are leased pursuant to short-term lease arrangements that are
terminable by American on 30 days notice. In addition, American is providing
virtually all-inclusive maintenance, repair and overhaul services on the DC-10
aircraft for a fixed rate per flight hour. Included in these services is access
to American's stock of spare parts and spare engines. The result is a major
reduction in overall maintenance expenses compared to the previous L-1011
operation and a reduction in the capital tied up in parts and engines.
Furthermore, in conjunction with the AIP Investment, the Aircraft Lease
Agreement was amended to reduce DC-10 rents by approximately 28.0% for three
years.
Although the Company incurred significant nonrecurring expenses in 1994 due
to the reconfiguration of its aircraft fleet, the Company anticipates that, as a
result of the transition to DC-10 aircraft and the amendment to the Aircraft
Lease Agreement, its cash outlays for rent, fuel, maintenance and capitalized
overhaul and spare parts from 1996 to 2000, in management's best estimate, will
average approximately $15.5 million per year less than would have been the case
if the Company had retained its old fleet, based on miles flown in 1995. The
Company estimates that the transition to DC-10s produced a savings of
approximately $7.8 million in direct operating costs for 1995, including (i)
aircraft and spare engine rent, (ii) fuel, oil and taxes, (iii) outside services
maintenance and materials and (iv) maintenance labor. Additionally, the Company
expects that its annual capitalized expenditures will be an average of $7.7
million lower with the DC-10 aircraft than with the L-1011 aircraft.
LABOR-RELATED CONCESSIONS AND INCREASED PRODUCTIVITY. Over the past several
years, the Company has also obtained important concessions under the collective
bargaining agreements with its employees. In September 1993, the Company reached
agreement with all employee groups for revised labor agreements which, in
management's best estimate, resulted in cash savings measured per block hour
against cost increases that otherwise would have taken effect of approximately
$10 million in 1994 and $10 million in 1995 and which, along with other
productivity improvement initiatives, are estimated to result in further cash
savings through 1999. Additional modifications to the labor agreements were
completed in conjunction with the AIP Investment in January 1996, which
modifications are anticipated to result in cash operating expenses for 1996,
1997, 1998 and 1999 being, in management's best estimate, approximately $3.6
million, $7.6 million, $8.0 million and $5.5 million less, respectively, than
would otherwise be the case, based on the Company's flight schedule as of June
1996. In addition, the amendable dates of all of the Company's collective
bargaining agreements have been extended from February 1997 to February 2000.
The modifications reflect certain economic concessions by the Company's labor
unions, including cancellation of certain scheduled pay increases with new pay
increases to be effective December 1, 1998 and January 1, 2000. In exchange for
the wage concessions, the Company agreed to negotiate gain-sharing programs to
provide employees the opportunity to receive wage rate increases resulting from
work rule and productivity modifications that produce cost savings to the
Company. In addition, the Company 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 estimated cash
operating expense savings noted above do not include estimated costs associated
with these gain sharing and profit bonus plan initiatives. The contracts as
modified provide additional furlough protection to employees under certain
specified circumstances. The Company and the unions also agreed to include
certain additional low-cost or no-cost provisions that are specific to each of
the respective union contracts.
Furthermore, in an effort to improve employee productivity, the Company
reduced average staffing levels by 6% from 2,271 employees (on a full-time
equivalent basis or "FTE") during 1993 to
60
<PAGE>
2,141 employees during 1995, while increasing TASMs by 21% between 1993 to 1995.
Comparing 1995 with 1993, employee productivity based on TASMs per FTE employee
improved by 28%. Additionally, between 1993 and 1995, employee productivity
measured by wages and benefits per TASM improved by 12% in current dollars and
20% in constant dollars.
The following table presents employee productivity statistics for 1993, 1994
and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Average number of employees (full-time equivalent)................................. 2,271 2,180 2,141
Block hours (1) per employee..................................................... 21.8 23.6 27.5
1,000 TASMs per employee......................................................... 1,705 1,835 2,185
Wages and benefits per block hour:
Current dollars.................................................................. $ 2,043 $ 2,000 $ 1,843
Constant dollars (2)............................................................. 2,002 1,862 1,638
Wages and benefits per 1,000 TASMs:
Current dollars.................................................................. $ 26.17 $ 25.67 $ 23.15
Constant dollars (2)............................................................. 25.66 23.91 20.58
</TABLE>
- ------------------------
(1) Time between aircraft's departure from origin terminal gate until arrival at
destination terminal gate.
(2) Presented on a pro forma basis assuming the wage rates in effect in January,
1993.
In an effort to further reduce labor costs, during the first quarter of
1995, the Company offered an early retirement program to qualified participants
in the defined benefit pension plans for the IAM and salaried employees.
Elections by qualified participants were completed with early retirements
scheduled to commence in the second quarter of 1995. Reflected in the financial
results for 1995 is a noncash early retirement provision of $2.0 million
representing the estimated effects of this early retirement program on the
Company's pension and postretirement benefit obligations as of March 31, 1995.
The Company anticipates that savings in labor and benefit costs, in management's
best estimate, will be in excess of $500,000 per year over the next four years
as a result of this program.
RECAPITALIZATION
In response to the financial difficulties experienced by the Company in the
early 1990s, Hawaiian Airlines voluntarily commenced a Chapter 11 bankruptcy
reorganization in September 1993. Pursuant to the Plan of Reorganization, the
Company emerged from bankruptcy on September 12, 1994. While the Plan of
Reorganization allowed the Company to convert approximately $205 million in
unsecured obligations into equity and institute a number of cost savings
measures, including the significant restructuring and simplification of its
fleet of aircraft, Hawaiian Airlines emerged from bankruptcy with limited
liquidity. To address its on-going liquidity needs, during 1995 the Company
developed a plan to (i) secure an equity infusion from a private capital source,
(ii) restructure and improve its relationship with American and (iii) effect a
rights offering to its existing shareholders to provide further liquidity and
strength to its balance sheet.
RESTRUCTURING THE BALANCE SHEET AND OBTAINING ADDITIONAL LIQUIDITY. On
January 31, 1996, the Company achieved the first two of its liquidity
enhancement objectives through the completion of the AIP Investment, a $20
million direct equity investment by AIP, and the amendment of the Aircraft Lease
Agreement. This amendment accomplished a number of objectives including the
settling of certain lease and maintenance obligations under the Aircraft Lease
Agreement that became delinquent in December 1994 and during the first quarter
of 1995 and were then deferred by American. These obligations were satisfied
through the delivery of the American Note. In addition, American released a $2
million security deposit that was posted at the commencement of the Aircraft
Lease Agreement. In connection with these arrangements with American, the
Company issued the AMR Warrants, which entitle AMR to purchase up to 1,897,946
shares of Common Stock at $1.10 per share. One-half of the AMR Warrants are
immediately exercisable, but the balance will only be exercisable if
61
<PAGE>
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 RIGHTS OFFERING. Finally, in recognition of the substantial dilutive
effect of the AIP Investment on the existing shareholders of the Company, AIP
agreed to use its best efforts to cause the Company, after completion of the AIP
Investment, to make a rights offering to the Company's shareholders other than
AIP. In addition to reducing the dilutive effect of the AIP Investment on the
other shareholders, the Rights Offering is intended to achieve the Company's
third liquidity enhancement objective by improving the Company's working capital
position with the net proceeds of the Rights Offering.
ENHANCE OPERATING REVENUES
RELATIONSHIP WITH AMERICAN. Hawaiian Airlines' relationship with American
is a key element in the Company's operating strategy. In addition to leasing and
maintaining the Company's DC-10 aircraft (see "Properties" below), American
provides various services and benefits to the Company, including computer
services, licensing of reservations system and participation in the
AAdvantage-Registered Trademark- frequent flyer program and the
SABRE-Registered Trademark- reservation system.
Effective May 1994, Hawaiian Airlines became a participating carrier in
American's AAdvantage-Registered Trademark- frequent flyer program. This
participation makes the Company more competitive by allowing travelers on
Hawaiian Airlines to accrue mileage in the AAdvantage-Registered Trademark-
program, and also allows the more than 32 million AAdvantager members to redeem
their program miles for free or reduced-rate travel on Hawaiian Airlines'
flights. The addition of a major airline frequent flyer program is intended to
have a positive impact on load factors on the Company's flights, both by
attracting passengers who would otherwise fly on other carriers in order to
obtain frequent flyer benefits and by adding passengers who redeem awards for
travel on Hawaiian Airlines. The Company's participation in the
AAdvantage-Registered Trademark- program will expire in 1997 unless extended by
mutual agreement.
In April 1994, the Company completed its conversion to
SABRE-Registered Trademark-, American's computerized reservations system, which
is used by more than 20 major travel providers in 70 countries, contains flight
schedules of more than 650 airlines that serve more than 986,000 city pairs and
also contains information on more than 45 million point-to-point airfares.
SABRE-Registered Trademark- allows other computerized reservation systems
("CRS") to sell and generate tickets for the Company's flights.
SABRE-Registered Trademark- has increased awareness of Hawaiian Airlines to
travel agents and informs its users of last seat availability on Hawaiian
Airlines' flights, which maximizes exposure of flights. The extra flights that
the Company schedules during peak periods are also available for sale by travel
providers through SABRE-Registered Trademark-. SABRE-Registered Trademark- also
provides address verification of credit card users, which may reduce potential
fraud when ticket mailing is requested. The Company's participation in
SABRE-Registered Trademark- expires in 2001.
The Company, through the creation of Hawaiian Airlines Vacations, has
contracted with FlyAAway-Registered Trademark- Vacations, the tour operations
unit of American and the world's largest airline-owned tour operator, to
develop, market and manage a line of package tours to all six major Hawaiian
Islands. Hawaiian Airlines Vacations offers packages designed for a range of
budgets, featuring accommodations at a variety of leading Hawaiian hotels and
condominiums for three to seven or more nights. Hawaiian Airlines Vacations also
markets the Hawaiian Airlines Island Pass, a popular product that offers
unlimited air travel among the Hawaiian Islands for specific time periods at a
set price. Air travel to and among the islands as part of the tours is provided
by Hawaiian Airlines.
NEW STRATEGIC ALLIANCES. On May 22, 1996, the Company entered into a
cooperative marketing agreement with Northwest, which provides for extensive
marketing cooperation, including a code sharing arrangement, coordinated airport
customer service and frequent flyer program cooperation. Under the code sharing
arrangement, a Northwest flight code will appear in travel agent computers on
many of Hawaiian Airlines' flights between Honolulu and several of the other
Hawaiian islands. Northwest will coordinate its flight schedules to Honolulu to
provide convenient connections to the
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<PAGE>
Company's Interisland flights. Northwest passengers will enjoy "seamless
service" from their point of origin to their final Hawaiian Airlines destination
through features such as issuance of all boarding passes and luggage tags at
initial check-in and credit in Northwest's frequent flyer program for all flight
mileage on Northwest and Northwest-coded Hawaiian Airlines flights. Northwest
has an extensive flight schedule to Honolulu from both the U.S. mainland and
Japan.
The Company entered into a code sharing agreement with Mahalo in June 1996,
pursuant to which the Company began placing its flight code on Mahalo's five
daily flights between Honolulu and Molokai and its five daily flights between
Honolulu and West Maui's Kapalua Airport starting July 1, 1996. This enables the
Company to offer an expanded flight schedule to Molokai and West Maui without
incurring expansion costs. Pursuant to the agreement, the Company also provides
certain airport services to Mahalo. Mahalo, which commenced service in October
1993, utilizes six ATR-42 aircraft with an average schedule of approximately 65
daily flights.
REORGANIZED ROUTE STRUCTURE. The Company's present route strategy is
designed to maximize the utilization of its aircraft in markets where the
Company believes it has a competitive advantage and to limit its commitments in
other markets. In contrast, prior management attempted to achieve increased
market share through broad-based growth. Current management believes that the
fluctuating route structure that resulted from prior management's strategy led
to an uneven revenue stream and poor operating results.
Over the past three years, the Company has adjusted its schedules and
created new routes after analyzing market demand. The Company adjusted its
schedules between Honolulu and Los Angeles, San Francisco, Las Vegas and
American Samoa during peak and off-peak periods to maximize capacity and
passenger load. The Company's commencement of scheduled service between Honolulu
and Portland and its increase in scheduled service between Honolulu and Los
Angeles to three flights daily and between Honolulu and Las Vegas from two
flights per week to seven flights per week, via Los Angeles, are examples of
such improvements in scheduling and capacity. In the Interisland market, the
Company introduced its Island Shuttle service in August 1993, with departures
between Honolulu and Maui every half hour and between Honolulu and Kauai every
hour.
ENHANCED MARKETING PROGRAM. The Company has entered into several joint
marketing campaigns with key partners to increase the effectiveness and
efficiency of advertising expenditures. Since the last quarter of 1994 Hawaiian
Airlines has participated in cooperative television and print campaigns with the
Hawaii Visitors Bureau and Waikiki Oahu Visitor Association ("WOVA"). In 1996,
the Company has participated in two campaigns with American Express Travel
Related Services Co., Inc. ("American Express"), advertising in READER'S DIGEST,
TRAVEL & LEISURE, SUNSET, DEPARTURES and other magazines. The first campaign, in
conjunction with WOVA and Pleasant Hawaiian Holidays, and the second, in
conjunction with the Maui Visitors Bureau and Classic Custom Vacations, routed
consumer calls to the nearest American Express retail office. These campaigns
are targeted and measurable, are believed to be efficient and are expected to
continue to represent the basis of the Company's promotional effort.
IMPROVED CUSTOMER SERVICE. The Company continues to concentrate on customer
service as the Company believes the quality of customer service has a direct
impact on its market share. Higher levels of performance have been achieved for
catering, passenger handling and on-time performance. In addition, seven of the
DC-10 aircraft have refurbished interiors, as do many of the DC-9s. In 1993, the
Company began leasing space in a new terminal at the Honolulu Airport for all
its Interisland flights to and from Honolulu. This consolidation allows the
Company to (i) perform passenger check-in at one location, (ii) provide better
service on Interisland routes and (iii) more conveniently connect passengers
from overseas flights to the Interisland routes. The Company plans to
consolidate check-in and baggage claim for all its flights to and from Honolulu
in the new terminal by the end of 1996. The Company plans to improve movement of
connecting passengers between its Interisland and overseas terminal, and thereby
reduce some connecting times to other airlines in order to improve its
competitive position.
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<PAGE>
In recent years, the Company has achieved a number of significant operating
improvements, particularly with regard to on-time performance and reliability
and customer satisfaction. Hawaiian Airlines' on-time performance, based on an
allowed five-minute variance for Interisland flights and fifteen-minute variance
for overseas flights, was 91.5% and 91.9% for the twelve-month periods ended
December 31, 1994 and 1995, respectively, which is better than the industry's
1994 and 1995 on-time performance of 81.5% and 78.6%, respectively, which
industry percentage not only allows for a fifteen-minute variance but also
excludes delays caused by maintenance. Due in large part to these operational
improvements, marketing initiatives and increased capacity, management estimates
that Hawaiian Airlines' share of the Interisland RPM market increased from a low
of 34.1% in October 1991 to an average of 41.3% in 1995 and management estimated
that its Transpac market position has risen from sixth in 1991 to third in 1995,
based on RPMs.
Management believes that the result of its initiatives in customer service
has been to improve travelers' overall perception of the airline. Hawaiian
Airlines was rated one of the ten best airlines in the United States for the
fifth consecutive year in CONDE NAST TRAVELER'S 1995 Readers' Choice Awards on
the basis of scheduling, punctuality, cabin comfort/service, food and baggage
handling. In May 1995, Hawaiian Airlines was awarded the 1995 Onboard Services
Award presented annually to airlines with innovative and excellent onboard
service programs by ONBOARD SERVICES, an international trade publication.
Hawaiian Airlines won the top award in the food service category for its first
class service over British Airways and Air Canada, among other major
international carriers. Previous winners of the award include United (1991), MGM
Grand Air (1992), Saudi Arabian Airlines (1993) and Northwest (1994).
The Company has continued to use vouchers, primarily in the Interisland
market, due to demand from the traveling public. Vouchers are more flexible than
normal airline ticket stock as they may be purchased in bulk, have no
prerequisite date of use or prespecified origin and destination and are
generally valid for one year from date of issuance.
LONG-TERM STRATEGY AND POTENTIAL GROWTH
Hawaiian Airlines is committed to becoming the first air carrier of choice
for travel to, from and among the Hawaiian Islands. The Company's strategy for
achieving this objective is based upon the following:
(i) INTERISLAND. Return the Company to its historic role as the leading
Interisland air carrier through (a) maintaining and improving its low cost
structure, (b) expanding its capacity and scheduling, particularly through
the Island Shuttle, and (c) forming strategic marketing agreements with
other air carriers, including the use of code sharing arrangements and
frequent flyer programs.
(ii) TRANSPAC. Expand its role as one of the major air carriers from its key
West Coast gateway cities through (a) maintaining and improving its position
as a low-cost scheduled carrier, (b) forming strategic marketing agreements
with other air carriers, including the use of code sharing arrangements and
frequent flyer programs, and (c) capitalizing on the unique "Hawaiian
Experience" provided by Hawaiian Airlines.
(iii) NICHE MARKETS. Dominate the local Hawaii market to Las Vegas in both
scheduled flights and charter service through maintaining and increasing its
scheduled and charter service.
(iv) SOUTHPAC. Maintain its dominant position in the Southpac market.
The Company believes that it may have opportunities for continued growth
through (i) initiating direct service from its key West Coast gateway cities to
neighboring Hawaiian islands not currently served by the Company from the West
Coast, (ii) carrying passengers originating from other U.S. western and
southwestern cities through code sharing arrangements with regional mainland
carriers, (iii) carrying more Interisland passengers originating from Pacific
Rim countries such as Japan, South Korea and China by developing new or expanded
relationships with carriers based in Asia, (iv) securing joint marketing and
strategic code sharing relationships with other major and regional
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<PAGE>
air carriers, (v) increasing the utilization of the Company's existing assets by
providing ground handling and/or other services for other air carriers in
Hawaii, (vi) capitalizing on the increased business travel to Hawaii expected to
result from the new Hawaii Convention Center anticipated to open in Spring 1998
and (vii) increasing the scope of its advertising strategy through cooperative
marketing programs with other Hawaii travel industry participants. However, no
assurance can be given that the Company will be able to successfully exploit any
of the foregoing strategies or opportunities.
The Company is seeking relationships with other airlines to establish
coordinated schedules and code sharing arrangements in the CRS similar to the
arrangement it now has with Northwest. In the CRS, on-line connections
(connections involving a single carrier or carriers with code sharing
arrangements) are given significant preferential treatment over off-line
connections (those connections involving multiple carriers without code sharing
arrangements). Travel agents' increased accessibility to the Company's flight
schedule could result in increased load factors at virtually no marginal cost,
resulting in enhanced revenue yields and incremental operating income. No
assurance can be given that the Company will be successful in obtaining any
additional marketing or code sharing arrangements.
THE HAWAII TRAVEL MARKET
The Company believes that Hawaii is one of the most popular destinations for
passengers flying on frequent flyer travel awards and is in general a popular
spot for vacation travelers. As such, Hawaiian Airlines typically experiences
strong travel periods during June, July, August and December. Fare levels and
load factors are higher during these peak travel periods. Conversely, Hawaiian
Airlines typically experiences weaker travel periods during January, May,
September and October with reduced fare levels and lower load factors.
Aggressive fare pricing strategies that increase the availability and size of
ticket discounts are utilized during weaker travel periods.
During the recessionary period commencing in 1990, Hawaii's visitor counts
decreased from over 6.9 million in 1990 to 6.1 million in 1993 as the Hawaiian
tourism industry experienced three consecutive years of decline during which its
two largest sources of visitors, California and Japan, both entered the worst
recession each region has experienced since the 1940s.
Preliminary 1995 statistics from the Hawaii Visitors Bureau reflect an
increase of 3.2% in visitor arrivals over 1994. Eastbound arrivals increased by
9.2% to reach a record level. Westbound arrivals in 1995 experienced a 0.5%
decrease over 1994, with strong increases in the Pacific Northwest (6.9%), the
Mountain Region (6.2%) and the West North Central Region (4.5%). California,
plagued by economic setbacks, produced 3.8% fewer Westbound visitors in 1995 but
still represents the major source of business for Hawaii with 1.23 million
Westbound arrivals in 1995, 17.4% lower than the peak of 1.49 million in 1990.
First time visitors, representing 44.6% of all visitors, increased by 0.9%.
The 6.63 million visitors in 1995 brought total arrivals to levels
experienced in 1989, but are still 4.8% lower than the peak of 6.97 million
recorded in 1990. Westbound arrivals reached 4.0 million in 1995, 15.7% lower
than the 4.72 million recorded in 1990, while Eastbound arrivals reached 2.66
million in 1995, which represents a 4.8% increase over the all-time high of 2.53
million recorded in 1992. The following chart summarizes the growth in visitor
arrivals from 1968 through 1995.
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<PAGE>
SUMMARY OF VISITOR ARRIVALS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SUMMARY OF VISITOR
ARRIVALS
<S> <C> <C> <C>
Total West Bound East Bound
1968 1,314,571 1,015,844 298,727
1969 1,527,012 1,181,029 345,983
1970 1,746,970 1,326,135 420,835
1971 1,818,944 1,430,325 388,619
1972 2,244,377 1,782,737 461,640
1973 2,630,952 2,067,861 563,091
1974 2,786,489 2,184,620 601,869
1975 2,829,105 2,207,417 621,686
1976 3,220,151 2,551,601 668,550
1977 3,433,667 2,763,312 670,355
1978 3,670,309 3,030,999 639,310
1979 3,960,531 3,139,455 821,076
1980 3,934,504 3,046,132 888,372
1981 3,934,623 2,974,791 959,832
1982 4,242,925 3,278,525 964,400
1983 4,368,105 3,396,115 971,990
1984 4,855,580 3,721,380 1,134,200
1985 4,884,110 3,708,610 1,175,500
1986 5,606,980 4,256,390 1,350,590
1987 5,799,830 4,204,010 1,595,820
1988 6,142,420 4,264,730 1,877,690
1989 6,641,820 4,705,320 1,936,500
1990 6,971,180 4,719,730 2,251,450
1991 6,873,890 4,584,480 2,289,430
1992 6,513,880 3,960,120 2,533,760
1993 6,124,230 3,764,520 2,359,710
1994 6,430,000 3,998,000 2,432,000
1995 6,634,000 3,978,000 2,656,000
</TABLE>
- ------------------------
Source: Hawaii Visitors Bureau.
Preliminary visitor arrival information from the Hawaii Visitors Bureau for
the first quarter of 1996 compared to the first quarter of 1995 shows total
visitor arrivals increased by 9.5% to approximately 1.75 million with westbound
arrivals increasing by 4.4% to approximately 1.05 million and eastbound arrivals
increasing by 18.2% to approximately 700,000. Westbound arrivals from California
increased by 5.7%, while arrivals from Oregon and Washington decreased by 3.2%
and 9.7%, respectively. Total visitors from Oahu to any neighbor island
increased by 3.2%.
Tourist counts have shown year over year improvements in 1994 and 1995.
Local economists project moderate growth for the next two years, with the Hawaii
tourism industry returning to pre-recession visitor counts in 1997. However, no
assurance can be given that the level of tourism traffic to Hawaii will in fact
return to pre-recession levels or that it will not decline in the future.
Hawaii tourism is affected by the state of the economies of areas from which
tourists to Hawaii typically originate, such as Japan and California. In
addition, from time to time various external events such as the Persian Gulf War
and the Kobe earthquake, as well as industry-specific problems such as strikes,
may adversely effect tourism to Hawaii. Furthermore, factors such as the
devaluation of the Mexican peso and Hurricane Iniki may cause other tourist
destinations or opportunities to become more popular than Hawaii.
INTERISLAND TRAVEL MARKET. Management estimates that approximately 70% of
the Company's Interisland passengers are tourists. There is an upward trend in
the number of islands that vacationers visit when in Hawaii. The Hawaii Visitors
Bureau reports that in 1994 the total number of visitors traveling to multiple
islands was up 5.7% over the same period in 1993. Kauai reported the largest
gain due to recovery from Hurricane Iniki. The island of Hawaii experienced a
slight lag in total visitors, but Maui showed an increase of 1.4% over 1993. In
1995, the total number of visitors traveling to multiple islands increased by
1.0% over 1994. Kauai, Molokai and Lanai showed increases of 5.2%, 7.9% and
15.9%, respectively. At the same time, Maui and the island of Hawaii experienced
decreases of 2.1% and 0.3%, respectively.
66
<PAGE>
TRANSPAC TRAVEL MARKET. The following table presents total visitor arrivals
to Hawaii:
HAWAII VISITOR ARRIVALS (1)
<TABLE>
<CAPTION>
YEAR
----------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 (2)
--------- --------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California.............................. 1,171 1,357 1,491 1,467 1,236 1,164 1,283 1,234
Other U.S. and Canada................... 2,619 2,899 2,732 2,702 2,190 2,083 2,239 2,265
Other Westbound......................... 475 449 497 416 554 517 476 479
--------- --------- --------- --------- --------- --------- --------- -----
Total Westbound......................... 4,265 4,705 4,720 4,585 3,980 3,764 3,998 3,978
Eastbound............................... 1,878 1,937 2,251 2,289 2,534 2,360 2,432 2,656
--------- --------- --------- --------- --------- --------- --------- -----
Total................................... 6,143 6,642 6,971 6,874 6,514 6,124 6,430 6,634
--------- --------- --------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- --------- --------- -----
<CAPTION>
COMPOUNDED ANNUAL GROWTH
RATES
------------------------
1994-95 1991-95
----------- -----------
<S> <C> <C>
California.............................. (3.8) % (4.2) %
Other U.S. and Canada................... 1.2 (4.3)
Other Westbound......................... 0.6 3.6
Total Westbound......................... (0.5) (3.5)
Eastbound............................... 9.2 3.8
Total................................... 3.2 % (0.9) %
</TABLE>
- ------------------------
(1) In thousands. Based upon statistics published by the Hawaii Visitors Bureau.
(2) Preliminary.
OPERATIONS
The Company's passenger airline business is its chief source of revenue.
Scheduled passenger service consists of, on average, approximately 158 flights
per day among the six major islands of the State of Hawaii (I.E., Interisland),
daily service to Las Vegas and four key U.S. West Coast gateway cities (I.E.,
Transpac), and twice weekly service to Pago Pago, American Samoa and weekly
service to Papeete, Tahiti (I.E., Southpac). The Company also provides charter
service to Las Vegas.
INTERISLAND OPERATIONS
The entire Interisland market averages approximately nine million passengers
annually. Management estimates approximately two-thirds of Interisland travelers
are visitors to Hawaii while the balance are Hawaii residents. Residents rely on
Interisland flights in much the same way as mainland residents rely on a state
highway system. While there are several small commuter and air taxi companies
that provide air transportation to airports that cannot be served with large
aircraft, the Interisland market is serviced primarily by two carriers, Hawaiian
Airlines and Aloha.
The Company's Interisland operations provide service to seven airports on
the six major Hawaiian islands of Oahu, Hawaii, Maui, Kauai, Molokai and Lanai.
On August 1, 1993, the Company inaugurated the Hawaiian Airlines Island Shuttle,
which offers flights departing between Oahu and Maui every half hour and between
Oahu and Kauai every hour. At March 31, 1996, Hawaiian Airlines' Interisland
fleet consisted of 13 DC-9 aircraft. During 1995, the Interisland passenger
revenue represented approximately 35.2% of the Company's total operating
revenues.
The Company's primary competition in the Interisland market is Aloha, whose
competitive position is strengthened by its marketing affiliation with United,
the largest carrier of passengers to Hawaii. Aloha participates in United's
frequent flyer program and also has a code sharing agreement with United. Aloha
principally utilizes 16 Boeing 737 aircraft with a schedule that averages
approximately 190 flights, which service the same basic Interisland routes as
the Company. Hawaiian Airlines has approximately 158 Interisland flights per
day.
Mahalo commenced Interisland service from Honolulu to Kauai, Maui and Kona
in October 1993. Mahalo later added service between Honolulu and Molokai. Mahalo
utilizes six 46-passenger ATR-42 aircraft with an average schedule of
approximately 65 daily flights. Statistical information regarding Mahalo is not
available but management believes that, due to its limited capacity, Mahalo has
not had a significant impact on the Interisland market.
67
<PAGE>
Until the late 1980s, Hawaiian Airlines held a leading share of the
Interisland market. Following the Company's leveraged acquisition in 1989, the
Company experienced a decline in its market share, due to customer service
difficulties and management turnover, as well as a decline in its available seat
miles. Hawaiian Airlines' RPM market share reached a low of 34.1% in October
1991. The Company subsequently implemented a number of operating strategies to
improve its market share, including focusing on customer service, on-time
performance and schedule and lift availability. The Company also strengthened
its competitive position when it began participating in American's
AAdvantage-Registered Trademark- frequent flyer program in 1994. Based on the
Company's interpretation of certain available statistical information on Aloha
and excluding the effects of Mahalo, the Company believes that these programs
and improvements are the reason for an increase in its Interisland market share
from the low of October 1991 to an average of 40.8%, 41.1% and 41.3% in 1993,
1994 and 1995, respectively. Similar statistics for the first quarter of 1996
showed that Hawaiian Airlines' RPM market share was 42.4% compared with 42.8%
during the first quarter of 1995.
1996 INTERISLAND SCHEDULE
<TABLE>
<CAPTION>
ONE WAY FLIGHT
SEGMENTS PER WEEK
------------------------
ROUTES SERVED AIR MILEAGE OFF-PEAK PEAK(1)
- -------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Honolulu -- Kahului, Maui................................................. 100 427 437
Honolulu -- Lihue, Kauai.................................................. 102 222 244
Honolulu -- Kona, Hawaii.................................................. 169 140 177
Honolulu -- Hilo, Hawaii.................................................. 216 116 138
Honolulu -- Hoolehua, Molokai............................................. 54 10 10
Honolulu -- Lanai City, Lanai............................................. 73 10 10
Kahului, Maui -- Kona, Hawaii............................................. 90 28 35
Kahului, Maui -- Hilo, Hawaii............................................. 121 28 24
Lanai City, Lanai -- Hoolehua, Molokai.................................... 28 10 10
Hilo, Hawaii -- Kona, Hawaii.............................................. 62 14 18
----- -----
TOTAL............................................................... 1,005 1,103
</TABLE>
- ------------------------
(1) The peak periods are generally from June 1 to August 31 and December 16 to
January 8.
TRANSPAC OPERATIONS
During 1995, the Company's Transpac operations served Las Vegas and the U.S.
West Coast gateway cities of Los Angeles, San Francisco, Seattle and Portland.
At March 31, 1996, eight DC-10 aircraft were used to service Transpac routes. In
1995, Transpac passenger revenues represented approximately 45.0% of the
Company's total operating revenues.
The Company primarily competes with major carriers such as United, Delta,
Northwest and, to a lesser extent, Continental and American on its Transpac
routes. In addition to the competition produced by the major carriers, 1995 saw
continued competition from charter carriers in the Transpac market. The presence
of charter carriers has placed additional downward pressure on fares.
During 1995, Hawaiian Airlines flew approximately 967,000 passengers or 2.5
billion scheduled RPMs between Hawaii and the cities of Los Angeles, San
Francisco, Seattle, Las Vegas and Portland. In addition, the Company flew
approximately 27,000 passengers between Los Angeles and the cities of Portland
and Las Vegas in 1995. Based on information filed with the DOT, the Company
believes that during 1995, Hawaiian Airlines maintained 19% of both the
available seat share and the passenger share and the position of second in
market share, based on those factors, for scheduled service in the Transpac
markets that it serves. The Company is the leading direct carrier between
Honolulu and each of Las Vegas and Portland based on ASMs. The Company is also
second in market share between Honolulu and Los Angeles, San Francisco and
Seattle on a combined basis based on ASMs.
68
<PAGE>
1996 TRANSPAC SCHEDULE
<TABLE>
<CAPTION>
ROUND-TRIP
FLIGHTS PER
ROUTES SERVED AIR MILEAGE WEEK
- ---------------------------------------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Honolulu -- Los Angeles................................................................. 2,556 21
Honolulu -- San Francisco............................................................... 2,396 7
Honolulu -- Seattle..................................................................... 2,677 7
Honolulu -- Portland.................................................................... 2,603 5
Los Angeles -- Las Vegas (1)............................................................ 236 7
Los Angeles -- Portland................................................................. 835 1
Honolulu -- Las Vegas (Charter)......................................................... 2,762 6
--
Total............................................................................. 54
</TABLE>
- ------------------------
(1) On a daily basis, Los Angeles -- Las Vegas service is operated as a tag to
one of the three daily flights between Honolulu and Los Angeles, thereby
providing Honolulu -- Las Vegas -- Honolulu one-stop service seven times per
week. This service is in addition to the non-stop charter service between
Honolulu and Las Vegas.
69
<PAGE>
The following table presents 1995 Transpac scheduled service market share
statistics for the cities served by the Company.
1995 SCHEDULED SERVICE MARKET SHARE
<TABLE>
<CAPTION>
LAX-HNL(1) SFO-HNL(2) PDX-HNL(3) SEA-HNL(4) HNL-LAS(5) COMBINED
------------ ------------ ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ONBOARD PASSENGERS:
Hawaiian................... 467,302 182,269 107,869 184,828 24,346 966,614
American................... 361,102 157,750 0 0 0 518,852
Continental................ 286,191 159,833 0 0 0 446,024
Delta...................... 720,741 11,380 0 0 0 732,121
Northwest.................. 338,861 165,345 0 311,807 0 816,013
TWA (6).................... 3,234 348 0 0 0 3,582
United..................... 737,234 802,143 0 0 0 1,539,377
------------ ------------ ------------- ------------ ------------- -----------
TOTAL...................... 2,914,665 1,479,068 107,869 496,635 24,346 5,022,583
PERCENTAGE OF ONBOARD
PASSENGERS:
Hawaiian................... 16% 12% 100% 37% 100% 19%
American................... 12 11 0 0 0 10
Continental................ 10 11 0 0 0 9
Delta...................... 25 1 0 0 0 15
Northwest.................. 12 11 0 63 0 16
TWA........................ 0 0 0 0 0 0
United..................... 25 54 0 0 0 31
------------ ------------ ------------- ------------ ------------- -----------
TOTAL...................... 100% 100% 100% 100% 100% 100%
AVAILABLE SEATS:
Hawaiian................... 552,654 220,588 131,203 223,728 29,139 1,157,312
American................... 420,015 210,708 0 0 0 630,723
Continental................ 343,250 207,274 0 0 0 550,524
Delta...................... 927,909 19,321 0 0 0 947,230
Northwest.................. 409,641 209,376 0 365,658 0 984,675
TWA........................ 3,957 433 0 0 0 4,390
United..................... 873,288 953,660 0 0 0 1,826,948
------------ ------------ ------------- ------------ ------------- -----------
TOTAL...................... 3,530,714 1,821,360 131,203 589,386 29,139 6,101,802
PERCENTAGE OF AVAILABLE
SEATS:
Hawaiian................... 16% 12% 100% 38% 100% 19%
American................... 12 12 0 0 0 10
Continental................ 10 11 0 0 0 9
Delta...................... 26 1 0 0 0 16
Northwest.................. 11 12 0 62 0 16
TWA........................ 0 0 0 0 0 0
United..................... 25 52 0 0 0 30
------------ ------------ ------------- ------------ ------------- -----------
TOTAL...................... 100% 100% 100% 100% 100% 100%
</TABLE>
- ------------------------------
(1) Between Los Angeles and Honolulu.
(2) Between San Francisco and Honolulu.
(3) Between Portland and Honolulu.
(4) Between Seattle and Honolulu.
(5) Non-stop between Las Vegas and Honolulu.
(6) Trans World Airlines, Inc.
Source: Filings with the U.S. Department of Transportation on Form T-1
SOUTHPAC OPERATIONS
Hawaiian Airlines currently is the sole carrier providing direct air service
from Honolulu to American Samoa and Tahiti. As a result of this lack of
competition, fares are relatively stable throughout the year. Southpac routes
are serviced with DC-10 aircraft. During 1995, Southpac passenger revenues
represented approximately 5.6% of the Company's total operating revenues.
70
<PAGE>
1996 SOUTHPAC SCHEDULE
<TABLE>
<CAPTION>
ROUND-TRIP
ROUTES SERVED AIR MILEAGE FLIGHTS PER WEEK
- ------------------------------------------------------------------------------ ------------- ----------------
<S> <C> <C>
Honolulu -- Pago Pago, American Samoa......................................... 2,611 2(1)
Honolulu -- Papeete, Tahiti................................................... 2,743 1
-
Total....................................................................... 3
</TABLE>
- ------------------------
(1) During the peak period, generally June 1 to August 31 and December 16 to
January 8, the Company intends to operate three round-trip flights per
week to Pago Pago, American Samoa.
OVERSEAS CHARTER
In addition to its regularly scheduled service to Las Vegas, Nevada, in
January 1995, the Company commenced, in association with a Hawaii tour operator,
charter service to Las Vegas. The Company operates six charter flights per week
utilizing DC-10 aircraft. The Company's overseas charter operation produced 6.4%
of the Company's total revenues in 1995.
AIRCRAFT FUEL
Aviation fuel is a significant expense for any air carrier and even marginal
changes in fuel prices can greatly impact a carrier's profitability. The
following table sets forth Hawaiian Airlines' aviation fuel consumption and cost
for each of the periods indicated:
<TABLE>
<CAPTION>
TOTAL COST, AVERAGE % OF
GALLONS INCLUDING COST PER OPERATING
PERIOD CONSUMED TAXES GALLON EXPENSES
- --------------------------------------------------------------------- ----------- -------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Quarter ended March 31:
1996............................................................... 24,001 $ 16,950 $ 0.706 18.1%
1995............................................................... 20,404 12,385 0.607 14.9
Year ended December 31:
1995............................................................... 92,167 $ 56,463 $ 0.613 16.2%
1994............................................................... 78,180 47,457 0.607 14.9
1993............................................................... 74,939 49,570 0.661 15.0
</TABLE>
The single most important factor affecting petroleum product prices,
including the price of aviation fuel, continues to be the actions of the OPEC
countries in setting targets for the production and pricing of crude oil. In
addition, aviation fuel prices are affected by the markets for heating oil,
diesel fuel, automotive gasoline and natural gas. All petroleum product prices
continue to be subject to unpredictable economic, political and market factors.
Also, the balance among supply, demand and price has become more reactive to
world market conditions. Accordingly, the price and availability of aviation
fuel, as well as other petroleum products, continue to be unpredictable. In the
event of a fuel supply shortage resulting from a disruption of oil imports or
otherwise, higher fuel prices or curtailment of scheduled service could result.
A one cent change in the cost per gallon of fuel has an impact on the Company's
operating expenses of approximately $80,000 per month (based on first quarter
1996 consumption). Changes in fuel prices may have a greater impact on the
Company than certain of its Transpac competitors with more modern, fuel
efficient aircraft.
In 1993, new taxes were placed on the production of certain fuels based on
their energy content. The airlines industry received a two year moratorium from
the effects of such taxes. In October 1995, the industry, and therefore the
Company, became subject to an additional 4.3 cents per gallon tax which may
result in as much as $3.5 to $4.0 million per year in additional fuel expense to
the Company (based on 1995 consumption). Based on gallons consumed in the first
quarter of 1996, the Company incurred $1.1 million more in fuel taxes in the
first quarter of 1996 than in the first quarter of 1995.
71
<PAGE>
The Company cannot predict whether or to what extent it has been or will be able
to pass on such additional costs to its customers. Legislation to repeal the tax
has been approved by the U.S. House of Representatives and is pending in the
Senate. No assurance can be given that the tax will be repealed.
Although Hawaiian Airlines has contracts with several different fuel
suppliers, almost all of its aviation fuel is purchased from Northwest pursuant
to an agreement between the two companies which renews automatically on December
31 of each year unless canceled by either of the parties with 90 days' notice.
This agreement requires Northwest to provide Hawaiian Airlines with aviation
fuel at Northwest's actual acquisition cost without markup for profit and with
reimbursement only for out-of-pocket costs. Hawaiian Airlines is prohibited from
reselling such fuel. In case of shortages, Northwest will provide fuel to its
own fleet first and then a portion of the remaining fuel available, if any, will
be allocated between Hawaiian Airlines and any other applicable airlines.
Hawaiian Airlines paid Northwest approximately $44.1 million, $43.9 million and
$53.0 million for the fuel supplied under this agreement in 1993, 1994 and 1995,
respectively.
EMPLOYEES
During the month of March 1996, Hawaiian Airlines employed 2,401 employees,
of which 2,049 were employed on a full-time basis. The majority of Hawaiian
Airlines' employees are covered by labor agreements with IAM, ALPA, AFA, TWU and
the Communications Section Employees Union. The Company believes that it
maintains good relations with its employees.
In connection with the AIP Investment, in January 1996 IAM, ALPA, AFA, TWU
and the Communications Section Employees Union ratified modifications to their
respective collective bargaining agreements. The unions agreed to certain
economic concessions, which include cancellation of certain scheduled pay
increases. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Current Status --
Recapitalization."
PROPERTIES
The Company leases office space for its headquarters, airport facilities,
ticket offices and certain ground equipment in varying terms to 2008.
The Company's fleet consists of nine DC-10-10 and 13 DC-9-50 aircraft. All
of the Company's aircraft are leased except for two DC-9s that are owned by the
Company. Of the DC-10s, six are leased under the Aircraft Lease Agreement, which
is an operating lease that expires in 2001. A seventh DC-10 aircraft was leased
in May 1996 under an operating lease with substantially similar terms and the
same expiration date as the Aircraft Lease Agreement. Two DC-10s are leased
under short-term operating leases, one of which expires in December 1996 and the
other of which expires at the earlier of May 1997 or when 2,600 hours remain
until the next FAA mandated major overhaul (IE, a C-check) is scheduled.
American has the option to terminate either of the two short-term leases with 30
days' written notice to the Company. Between May and November 1996, American
will perform C-checks on the six aircraft leased pursuant to the Aircraft Lease
Agreement, one aircraft at a time. During this period, one aircraft will be out
of service at all times so that the Company will be operating eight DC-10s. Of
the leased DC-9s (including related flight equipment), seven are leased under
operating leases and four are leased under capital leases that expire at various
times through the year 2004.
72
<PAGE>
The following table sets forth certain information regarding the Company's
aircraft fleet:
<TABLE>
<CAPTION>
LEASE NEXT
OWNED/ EXPIRATION DATE OF SCHEDULED
AIRCRAFT LEASED LESSOR DATE MANUFACTURE MAJOR CHECK STAGE (1)
- ----------- ----------- ------------------------------------------------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
DC-9-50 Owned N/A N/A 12/19/75 7/00 2
DC-9-50 Owned N/A N/A 8/25/78 7/03 2
DC-9-50 Leased GPA Finance Limited 11/5/00 1/27/81 6/97 2
DC-9-50 Leased GPA Finance Limited 4/28/00 4/18/79 10/02 2
DC-9-50 Leased GPA Finance Limited 4/4/00 6/21/77 5/02 2
DC-9-50 Leased AeroUSA, Inc. 5/31/00 5/2/79 8/00 2
DC-9-50 Leased USL Capital Corporation 2/1/04 3/10/76 5/01 2
DC-9-50 Leased Scandinavian Airlines of North America, Inc. 3/31/99 11/19/75 5/03 2
DC-9-50 Leased Aircraft Income Partners L.P. (2) 11/30/99 9/29/76 9/96 2
DC-9-50 Leased BA Leasing & Capital Corporation 6/1/00 8/25/78 11/97 2
DC-9-50 Leased Security Pacific Equipment Leasing, Inc. 6/1/00 12/18/76 5/00 2
DC-9-50 Leased Security Pacific Equipment Leasing, Inc. 6/1/00 12/3/77 8/02 2
DC-9-50 Leased Protective Life Insurance Company 3/1/00 2/4/77 12/02 2
DC-10-10 Leased American Airlines, Inc. 9/11/01 7/14/72 8/96 3
DC-10-10 Leased American Airlines, Inc. 9/11/01 8/12/72 6/96 3
DC-10-10 Leased American Airlines, Inc. 9/11/01 9/18/72 9/96 3
DC-10-10 Leased American Airlines, Inc. 9/11/01 1/12/72 7/96 3
DC-10-10 Leased American Airlines, Inc. 9/11/01 10/13/72 5/96 3
DC-10-10 Leased American Airlines, Inc. 9/11/01 11/19/71 6/96 3
DC-10-10 Leased American Airlines, Inc. 9/11/01 11/16/72 5/98 3
DC-10-10 Leased American Airlines, Inc. 12/15/96 5/10/72 3/97 3
DC-10-10 Leased American Airlines, Inc. (3) 6/25/75 5/97 3
</TABLE>
- ------------------------
(1) See "Business -- Regulatory Matters -- Maintenance Directives and Other
Regulations."
(2) Not affiliated with AIP.
(3) Earlier of May 1997 or next scheduled C-Check.
COMPETITION
The airline industry is highly competitive and susceptible to price
discounting, primarily due to the effects of the Transportation Act, which has
substantially eliminated government authority to regulate domestic routes and
fares, and has increased the ability of airlines to compete with respect to
destination, flight frequencies and fares. Airline profit levels are highly
sensitive to, and from 1990 to 1992 were severely impacted by, adverse changes
in fuel costs, average yield and passenger demand. The emergence in recent years
of several new carriers, typically with low cost structures, has further
increased the competitive pressures on U.S. airlines. Aircraft, skilled labor
and gates at most airports continue to be available to start-up carriers. In
some cases, the new entrants have initiated or triggered price discounting. The
commencement of service by new carriers on the Company's routes could negatively
impact the Company's operating results. Many of the Company's competitors are
larger and have substantially greater resources than the Company. Competing
airlines have, and may in the future, undercut the Company's fares and increase
capacity on routes beyond market demand in order to increase their market
shares. Such activity by other airlines could reduce fares or passenger traffic
to levels where profitable operations could not be achieved. Due to its smaller
size and limited liquidity, the Company may be less able to withstand aggressive
marketing tactics or a prolonged fare war initiated by its competitors.
Although the domestic airline industry has at present abandoned deeply
discounted general pricing structures, and fare levels have continued to
increase from 1992 levels, significant industry-
73
<PAGE>
wide discounts could be reimplemented at any time, and the introduction of
broadly available, deeply discounted fares by a major U.S. airline would result
in lower yields for the entire industry and could have a material adverse effect
on the Company's operating results.
Airlines are subject to a high degree of financial and operating leverage.
Due to high fixed costs, the expenses of each flight do not vary proportionately
with the number of passengers carried, but the revenues generated from a
particular flight are directly related to the number of passengers carried.
Accordingly, while a decrease in the number of passengers carried would cause a
corresponding decrease in revenue (if not offset by higher fares), it may result
in a disproportionately greater decrease in profits. However, an increase in the
number of passengers carried would have the opposite effect.
The airline industry is highly sensitive to general economic conditions.
Because a substantial portion of airline travel, both personal and to a lesser
extent business, is discretionary, the industry tends to experience severely
adverse financial results during general economic downturns. The operating and
financial results of the Company may be negatively impacted by any downturn in
national or regional economic conditions in the United States, particularly
California, and certain Asian countries, particularly Japan. Any prolonged
general reduction in airline passenger traffic may adversely affect the Company.
The airline industry is characterized by low gross profit margins and revenues
that vary to a substantially greater degree than do the related costs.
Accordingly, a significant shortfall from expected revenue levels could have a
material adverse affect on the Company's operations.
The Company's primary competition on its Interisland routes is Aloha, whose
competitive position is strengthened by its marketing affiliation with United.
Aloha participates in United's frequent flyer program and also has a code
sharing agreement with United. Aloha principally utilizes 16 Boeing 737 aircraft
with a schedule that averages approximately 190 flights which service the same
basic Interisland routes that the Company serves with approximately 158 flights.
The Company believes that Interisland competition is primarily based on fare
levels, flight frequency, on-time performance and reliability, name recognition,
frequent flyer programs, customer service and aircraft type. Until the late
1980s, Hawaiian Airlines held a leading share of the Interisland market but
following the Company's leveraged acquisition in 1989, the Company's RPM market
share declined to an estimated low of 34.1% in October 1991. The Company
subsequently implemented a number of operating strategies to improve its market
share, including focusing on customer service, on-time performance and schedule
and lift availability. The Company also strengthened its competitive position
when it began participating in American's AAdvantage-Registered Trademark-
frequent flyer program in 1994. Based on the Company's interpretation of certain
statistical information on Aloha and excluding the effects of Mahalo, the
Company believes that these programs and improvements are the reason for an
increase in its Interisland RPM market share to an estimated average of 41.3% in
1995. See "Operations -- Interisland Operations" above.
The Company competes on its Transpac routes primarily with United, Delta and
Northwest and to a lesser extent with Continental and American, all of which are
larger and have substantially greater name recognition and resources than the
Company. The Company also experiences competition from various charter
operators. The Company believes that Transpac competition is primarily based on
fare levels, flight frequency, on-time performance and reliability, name
recognition, frequent flyer programs, customer service and in-flight service.
During 1995, Hawaiian Airlines flew approximately 967,000 passengers or 2.5
billion scheduled RPMs between Hawaii and the cities of Los Angeles, San
Francisco, Seattle, Las Vegas and Portland. In addition, the Company flew
approximately 27,000 passengers between Los Angeles and the cities of Portland
and Las Vegas in 1995. Based on information obtained from the State of Hawaii
Department of Transportation, the Company believes that based on the number of
flights during peak seasonal travel periods in 1995, the Company maintained
14.3% and 12.3% of the total passenger market from U.S. gateway cities into
Honolulu and
74
<PAGE>
the State of Hawaii, respectively. The Company is the leading direct carrier
between Honolulu and each of Las Vegas and Portland based on ASMs. The Company
is also second in market share between Honolulu and Los Angeles, San Francisco
and Seattle on a combined basis based on ASMs.
Charter carriers that compete against the Company's Transpac operations
include American Transair and Rich International Airways. This competition is
greatest during the summer. Based on currently available information, the
Company expects that American Transair and Rich International Airways will
operate approximately 33 round trip flights per week between Hawaii and the West
Coast (San Francisco and Los Angeles) during the summer of 1996. The Company
believes that the number of charter flights to be flown during summer 1996 is
lower than the number of charter flights flown during the two previous summer
seasons. The availability of charter flights to Hawaii results in reduced demand
for the Company's flights and lowers yields during the high summer season.
Charter carriers' competitive position is enhanced by contractual relationships
with tour operators.
Recent announcements of capacity increases to Hawaii by domestic carriers
may affect pricing levels on the Company's Transpac routes. Charter carriers
have increased capacity from secondary markets in the western portion of the
United States 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 its San
Francisco and Los Angeles routes. Subsequent announcements by United of direct
service from Los Angeles to Kona and Maui are believed to be in addition to the
9,000 seats mentioned above. The increasing presence of charter carriers and
United's expanded capacity are examples of the competitive pricing and capacity
issues facing the Company in the future. Management is not able to predict the
impact of these competitive pressures on the Company's operations.
The following table sets forth the number of non-stop round trip flights per
week flown by the Company and each of its competitors that offer scheduled
service from the West Coast, including Las Vegas, to Hawaii, including the
neighbor islands, based on the summer schedule effective as of mid-June 1996,
which includes the additional flights recently added by United:
<TABLE>
<CAPTION>
BETWEEN HAWAII AND: HAWAIIAN AMERICAN CONTINENTAL DELTA
- ----------------------------------------------------------------- ------------- ------------- --------------- -----
<S> <C> <C> <C> <C>
Las Vegas........................................................ 6 -- -- --
Los Angeles (1).................................................. 21 14 14 42
Portland......................................................... 5 -- -- --
San Francisco (2)................................................ 7 7 7 7
Seattle.......................................................... 7 -- -- --
-- -- -- --
Total.......................................................... 46 21 21 49
<CAPTION>
BETWEEN HAWAII AND: NORTHWEST UNITED
- ----------------------------------------------------------------- --------------- -----------
<S> <C> <C>
Las Vegas........................................................ -- --
Los Angeles (1).................................................. 14 42
Portland......................................................... -- --
San Francisco (2)................................................ 7 49
Seattle.......................................................... 14 --
-- --
Total.......................................................... 35 91
</TABLE>
- ------------------------
(1) American Transair and Rich International Airways operate 12 and seven,
respectively, round trip charter flights per week between Los Angeles and
Hawaii.
(2) American Transair and Rich International Airways both operate seven round
trip charter flights per week between San Francisco and Hawaii.
See "Operations -- Transpac Operations" above for Transpac scheduled service
market share statistics for the cities served by the Company.
There is currently no competitor providing direct service on the Company's
Southpac routes or direct charter service between Hawaii and Las Vegas.
REGULATORY MATTERS
GENERAL. As a certificated air carrier, Hawaiian Airlines is subject to the
regulatory jurisdiction of the DOT and the FAA. The DOT has jurisdiction over
certain aviation matters such as the carrier's certificate of public convenience
and necessity, international routes and fares, consumer protection policies,
including baggage liability and denied-boarding compensation, and unfair
competitive practices as set forth in the Transportation Act. Hawaiian Airlines
and all other domestic airlines are subject to regulation by the FAA under the
Transportation Act. The FAA has regulatory jurisdiction
75
<PAGE>
over flight operations generally, including equipment, ground facilities,
security systems, maintenance and other safety matters. To assure compliance
with its operational standards, the FAA requires air carriers to obtain
operations, air worthiness and other certificates which may be suspended or
revoked for cause. The FAA also conducts safety audits and has the power to
impose fines and other sanctions for violations of aviation safety and security
regulations. Hawaiian Airlines, as are other carriers, is subject to inspections
by the FAA in the normal course of its business on a routine ongoing basis.
Hawaiian Airlines operates under a Certificate of Public Convenience and
Necessity issued by the DOT (authorizing it to provide commercial aircraft
service) as well as a Part 121 Scheduled Carrier Operating Certificate issued by
the FAA.
LIMITATION ON FOREIGN OWNERSHIP OF SHARES. The Transportation Act prohibits
non-U.S. citizens from owning more than 25% of the voting interest of a U.S. air
carrier. The Articles of Incorporation provide that the ownership or control of
more than 25% (to be increased or decreased from time to time to that percentage
permissible under the laws of the United States) of issued and outstanding
voting capital stock of the Corporation by persons who are not "citizens of the
United States" is prohibited. As of the Record Date, less than 6% of the Common
Stock was known to be held by non-U.S. citizens.
MAINTENANCE DIRECTIVES AND OTHER REGULATIONS. In the last several years,
the FAA has issued a number of maintenance directives and other regulations
relating to, among other things, collision avoidance systems, airborne windshear
avoidance systems, noise abatement and increased inspection requirements. The
Company expects to continue to incur substantial expenditures for the purpose of
complying with these new regulations. See Note 13 to the financial statements
appearing elsewhere in this Prospectus. Additional laws and regulations have
been proposed from time to time that could significantly increase the cost of
airline operations by, for example, imposing additional requirements or
restrictions on operations. Laws and regulations also have been considered from
time to time that would prohibit or restrict the ownership and/or transfer of
airline routes or takeoff and landing slots. Also the award of international
routes to U.S. carriers (and their retention) is regulated by treaties and
related agreements between the United States and foreign governments which are
amended from time to time. The Company cannot predict what laws and regulations
will be adopted or what changes to international air transportation treaties
will be effected, if any, or how they will affect the Company.
The FAA frequently issues air worthiness directives, often in response to
specific incidents or reports by operators or manufacturers, requiring operators
of specified equipment to perform prescribed inspections, repairs or
modifications within stated time periods or numbers of cycles. Hawaiian Airlines
has developed extensive maintenance programs which consist of a series of phased
checks of each aircraft type. These checks are performed at specified intervals
measured either by time flown or by the number of takeoffs and landings
("cycles") performed. Checks range from daily "walk around" inspections, to more
involved overnight maintenance checks, to exhaustive and time consuming
overhauls. Aircraft engines are subject to phased, or continuous, maintenance
programs designed to detect and remedy potential problems before they occur. The
service lives of certain parts and components of both airframe and engines are
time or cycle controlled. Parts and other components are replaced or overhauled
prior to the expiration of their time or cycle limits. The FAA approves all
airline maintenance programs, including changes to the programs. In addition,
the FAA licenses the mechanics who perform the inspections and repairs, as well
as the inspectors who monitor the work.
Hawaiian Airlines believes that it is in compliance with all requirements
necessary to maintain in good standing its operating authority granted by the
DOT and its air carrier operating certificate issued by the FAA. A modification,
suspension or revocation of any of the Company's DOT or FAA authorizations or
certificates would have a materially adverse effect upon the Company.
Several aspects of airlines' operations are subject to regulation or
oversight by Federal agencies other than the FAA and DOT. The antitrust laws are
enforced by the U.S. Department of Justice. The U.S. Postal Service has
jurisdiction over certain aspects of the transportation of mail and related
services provided by the Company's cargo services. Labor relations in the air
transportation industry
76
<PAGE>
are generally regulated under the Railway Labor Act. The Company and other
airlines certificated prior to October 24, 1978 are also subject to preferential
hiring rights granted by the Deregulation Act to certain airline employees who
have been furloughed or terminated (other than for cause).
In 1990, Congress passed legislation phasing out the use of Stage 2 aircraft
in the U.S. by December 31, 1999, with the possibility of certain waivers until
December 31, 2003 when full phase-out is required. Congress provided an
exemption for air carriers operating in Hawaii, or between a place in Hawaii and
a place outside the forty-eight contiguous states, to operate as many Stage 2
aircraft of a certain weight as they operated on November 5, 1990. Any air
carrier that provided "turnaround service" (as defined in the legislation) in
Hawaii on November 5, 1990 may include in the number of Stage 2 aircraft under
the exemption all Stage 2 aircraft that it owned or leased on November 5, 1990,
whether or not the aircraft were operated by the carrier on that date. However,
an air carrier may provide flights between places only in Hawaii using Stage 2
aircraft only if the carrier provided the service on November 5, 1990. These
exemptions restrict air carriers other than the Company and Aloha from operating
Stage 2 aircraft in Hawaii. Since Stage 2 aircraft are less expensive to acquire
than Stage 3 aircraft, the Company believes that this exemption provides limited
protection against the entry of another carrier, which would have to operate an
all Stage 3 fleet. This advantage is partially offset by the fact that Stage 3
aircraft are generally less expensive to operate and maintain, as well as the
fact that in any event over time, carriers will move toward having an all Stage
3 fleet.
TICKET AND CARGO TAX. Prior to 1996, the airline industry was subject to a
10% excise tax on each ticket sold (other than Transpac flights), a 6.25% cargo
excise tax and a $6 international departure tax (including Transpac flights).
Efforts are underway to encourage Congress to re-enact legislation authorizing
these excise taxes or to impose user fees in lieu of such taxes. The Senate has
approved a bill to reinstate the excise taxes, and it is reported that House and
Senate negotiators have agreed in principle to reinstate the excise taxes. If
the excise taxes are reinstated or user fees are implemented, the Company would
either have to absorb the excise taxes or user fees, which would adversely
affect operating results, or raise ticket prices and cargo transportation fees
in order to offset the excise taxes or user fees. 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.
CLAIMS AND LITIGATION
Four claims remain asserted against the Company for alleged prepetition
and/or administrative claims on or before the Effective Date of the Plan of
Reorganization. Management believes that the Company has established adequate
reserves for these bankruptcy related claims.
Under the Plan of Reorganization, the Company was to issue 9,400,000 shares
of its common stock to all of the unsecured creditors of the Predecessor Company
with claims allowed under the Plan of Reorganization. As each disputed claim is
resolved, the creditor holding such claim will receive a distribution of stock.
As of July 3, 1996, 8,954,824 of the 9,400,000 shares had been issued and the
Company anticipates issuing approximately 45,000 additional shares under the
Plan of Reorganization by late 1996 in satisfaction of certain disputed
bankruptcy claims outstanding as of December 31, 1995. Any shares withheld in
excess of the amount distributed to the holders of such claims will be held
until all disputed claims have been resolved. The disputed claims consist of an
aggregate of $492,000 for alleged prepetition violations asserted by various
governmental agencies and $5.2 million for damages arising from the return of
aircraft asserted by the Federal Deposit Insurance Corporation, as receiver.
Upon resolution of all disputed claims, there will be a final distribution of
any remaining withheld shares to all general unsecured creditors of the
Predecessor Company on a pro rata basis.
In addition, the Company is a party to several other claims and legal
actions. In the opinion of management, and after consultation with legal
counsel, the Company believes that the ultimate disposition of these matters
will not have a material adverse effect on the Company's operations or financial
condition.
77
<PAGE>
MANAGEMENT
DIRECTORS
The following eleven Directors comprise the Board of Directors of the
Company:
JOHN W. ADAMS, 52, has been Chairman of the Board since February 2, 1996. He
has been the President of Smith Management Company, a New York based investment
firm since 1984. He has been Chairman of the Board of Directors of Regency
Health Services, Inc. since 1994. He is also Chairman of the Board of Servico,
Inc. and a director of Harvard Industries, Inc. He has been a director of
Hawaiian Airlines since January 31, 1996.
TODD G. COLE, 75, was Chairman and Chief Executive Officer of CIT Financial
Corporation from 1982 until his retirement in 1986. He has served as Managing
Director of SH&E, Inc., a consulting firm specializing in aviation from 1992
until 1995, President and Chief Executive Officer of Frontier Airlines, Inc.
D.I.P. from 1986 until 1990 and Vice Chairman of Eastern Airlines, Inc. D.I.P.
from 1989 until 1991. He is Vice Chairman of CapMAC Holdings, Inc. and is a
Director of Kaiser Ventures, Inc., NAC Re Corporation, Delta Insurance
Corporation, Dillon Read Structured Finance Corporation and Arrow Air, Inc. He
has been a director of Hawaiian Airlines since 1994 and is a member of the Audit
Committee.
RICHARD F. CONWAY, 42, has been Vice President of Smith Management Company
since 1994. He was Senior Vice President of Needham & Company, a New York based
investment banking firm from 1992 until 1994 and he was Vice President of
Security Pacific Merchant Bank from 1990 until 1991. He is a director of Inland
Resources, Inc. He has been a director of Hawaiian Airlines since January 31,
1996 and is the Chairman of the Nominating Committee and a member of the
Compensation Committee.
ROBERT G. COO, 54, has been an independent financial consultant since 1995.
He was Vice President, Chief Financial Officer and Secretary of Pengo
Industries, Inc., an industrial holding company, from 1990 until 1995. He is a
director of First National Bank in San Diego, California and of Regency Health
Services, Inc. in Tustin, California. He has been a director of Hawaiian
Airlines since January 31, 1996 and is the Chairman of the Audit Committee and a
member of the Nominating Committee.
CAROL A. FUKUNAGA, 48, has been a Hawaii State Senator since 1992. She was a
Hawaii State House of Representative from 1978 until 1992. She has been a
director of Hawaiian Airlines since 1991 and is a member of the Nominating
Committee.
WILLIAM BOYCE LUM, 58, is a psychologist and an attorney. He has been on the
faculty and a training analyst with the Institute for Psychoanalysis and
Psychotherapy of New Jersey since 1988. He has been Of Counsel with the law firm
of Lum, Danzis, Drasco, Positan & Kleinberg in Roseland, New Jersey since 1981.
He was a director of The Summit Bancorporation from 1981 until 1996. He has been
a director of Hawaiian Airlines since January 31, 1996.
RICHARD K. MATROS, 42, has been Chief Executive Officer and President of
Regency Health Services, Inc. since April 1994. He was Chief Executive Officer
and President of Care Enterprises, Inc. from January 1994 until April 1994, at
which time Care Enterprises, Inc. was merged into Regency Health Care Services,
Inc. He was President and Chief Operating Officer of Care Enterprises, Inc. from
1991 until January 1994 and Executive Vice President of Operations of Care
Enterprises, Inc. from 1988 until 1991. He has been President of the California
Association of Health Facilities since 1995. He has been a director of Hawaiian
Airlines since January 31, 1996 and is the Chairman of the Compensation
Committee.
RENO F. MORELLA, 47, has been a pilot for Hawaiian Airlines since 1978. He
is currently a Captain for DC-10 aircraft. He has been Chairman of the Hawaiian
Master Executive Council of ALPA since 1994. He was the First Officer Category
Representative for Council 102 of ALPA from 1993 until 1994. He has been a
director of Hawaiian Airlines since March 1, 1996.
78
<PAGE>
BRUCE R. NOBLES, 49, has been the President and Chief Executive Officer of
Hawaiian Airlines since 1993. He was Chairman of the Board of Hawaiian Airlines
from September 1994 until February 1996. In 1991 he was President and Chief
Executive Officer of L'Express, Inc. in New Orleans, Louisiana. He was President
and Chief Operating Officer of Trump Shuttle, Inc. in New York, New York from
1988 until 1990. He has been a director of Hawaiian Airlines since 1993.
SAMSON POOMAIHEALANI, 55, is a ramp serviceman for United who has been on a
leave of absence since 1987. He began working at United in 1963. He has been the
Assistant General Chairman of the Airline Machinists District 141 of the IAM
since 1987, a director of Hawaiian Airlines since 1990 and is a member of the
Compensation Committee.
EDWARD Z. SAFADY, 39, has been a Vice President of Smith Management Company
since October 1995. He was President and Chief Executive Officer of Liberty
National Bank in Austin, Texas from 1988 until 1995. He currently serves as
Chairman of the Board of Norwest Bank Texas in Austin, Texas. He is also
Chairman of the Board of First National Bank in San Diego, California and a
director of U.S. Medical Products, Inc. He has been a director of Hawaiian
Airlines since January 31, 1996 and is a member of the Audit Committee.
EXECUTIVE OFFICERS
The following eleven officers comprise the Executive Officers of the
Company:
BRUCE R. NOBLES, 49, has been the President and Chief Executive Officer of
Hawaiian Airlines since 1993. See description in "Directors" above for other
principal occupations during the past five years.
MICHAEL J. MCQUAY, 47, has been Executive Vice President-Operations and
Chief Operating Officer of Hawaiian Airlines since June 15, 1996. He was
employed by Continental from 1971 to 1996, where he was Vice President of Hub
Operations from 1994 until 1996, Vice President of Maintenance from 1992 until
1994 and Vice President of Customer Service, Sales and Support from 1990 until
1992.
JOHN L. GARIBALDI, 43, has been Executive Vice President and Chief Financial
Officer of Hawaiian Airlines since May 1, 1996. He was Vice President and Chief
Financial Officer for The Queen's Health Systems from 1992 until 1996 and Senior
Vice President-Finance and Planning and Chief Financial Officer for Aloha
Airgroup, Inc./Aloha Airlines, Inc. from 1985 until 1992.
PETER W. JENKINS, 55, has been Senior Vice President-Marketing and Sales for
Hawaiian Airlines since 1994. He was the Director of Communications at ITT
Sheraton Corporation from 1987 until 1994 in Honolulu, Hawaii.
RAE A. CAPPS, 44, has been Vice President, General Counsel and Corporate
Secretary of Hawaiian Airlines since 1993. She was an attorney at the law firm
of Goodsill Anderson Quinn & Stifel in Honolulu, Hawaii from 1990 until 1993.
CLARENCE K. LYMAN, 50, has been Vice President-Finance, Treasurer and
Assistant Corporate Secretary of Hawaiian Airlines since 1991. He was Vice
President-Treasurer and Assistant Corporate Secretary of the Company from 1989
until 1991.
ALEXANDER D. JAMILE, 56, has been Vice President-Government and Community
Affairs of Hawaiian Airlines since 1993. He was Vice
President-Administration/Governmental and Community Affairs of the Company from
1992 until 1993. From 1987 until 1992, he was Director-Operations at Young
Bros., Ltd. in Honolulu, Hawaii.
JOHN P. SOLOMITO, 58, has been Vice President-Customer Services of Hawaiian
Airlines since 1992. He was the General Manager of Pan American World Airways,
Inc. in Los Angeles, California from 1988 until 1992.
79
<PAGE>
JAMES H. DAVIS, JR., 58, has been Vice President-Flight Operations of
Hawaiian Airlines since 1995. He was Vice President of Operations of Hawaii
Aviation Contract Services, Inc. from 1990 until 1994. He has been a pilot for
Hawaiian Airlines since 1968, and was also the DC-10 Chief Pilot of Japan Air
Charter from 1990 until 1994 (when on leave of absence from the Company).
GLEN L. STEWART, 53, has been Vice President-Transpacific and Southpacific
Marketing of Hawaiian Airlines since 1993. He was Senior Vice
President-Transpacific of the Company from 1991 to 1993, Senior Vice
President-North American Sales of the Company in 1991 and Senior Vice President-
Finance and Chief Financial Officer of Hawaiian Airlines from 1989 until 1991.
GLENN G. TANIGUCHI, 53, has been Vice President-Schedule Planning and
Reservations of Hawaiian Airlines since 1995. He was Staff Vice
President-Schedule Planning and Reservations for the Company from 1991 until
1995 and Director-Schedule Planning and Reservations of the Company from 1986
until 1991.
The Company's former Chief Operating Officer, Frank L. Forster, retired in
June 1996 and was succeeded by Mr. McQuay. The Company's former Chief Financial
Officer, C.J. David Davies, retired in May 1996 and was succeeded by Mr.
Garibaldi.
All officers are appointed annually by the Board of Directors at the Board
of Directors' first meeting after the annual meeting of the shareholders at
which the Board of Directors is elected. No executive officer or director of the
Company bears any relationship by blood, marriage or adoption to any other
executive officer or director, except for Mr. Adams and Mr. Coo, who are related
through marriage.
In September 1993, the Company, HAL, INC. and West Maui Airport, Inc. filed
a voluntary petition of relief under Chapter 11. At the time or within two years
before the time of the Chapter 11 filing, the present executive officers of the
Company except Messrs. Garibaldi, Forster, Jenkins, Taniguchi and Davis were
executive officers of the Company, HAL, INC. and/or West Maui Airport, Inc. and
Messrs. Nobles and Poomaihealani and Ms. Fukunaga were directors of the Company,
HAL, INC. and/or West Maui Airport, Inc.
80
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two of the Company's directors, Messrs. John W. Adams and Richard F. Conway,
are executive officers of the general partner of AIP and Mr. Adams is the sole
stockholder of the general partner. In the AIP Investment, AIP acquired
18,181,818 shares of Common Stock and four shares of special preferred stock at
a price of $1.10, which was a substantial discount to the then-market price of
the Common Stock. Pursuant to the Bylaws, AIP has the right to nominate six of
the 11 nominees to stand from time to time for election to the Company's Board
of Directors. See "Principal Shareholders -- Control of the Board of Directors"
and "Description of Capital Stock -- Preferred Stock."
As part of the AIP Investment, AIP received registration rights that entitle
AIP, on up to two occasions, to require the Company to use its best efforts to
register all or any portion of AIP's shares under the Securities Act at the
Company's expense. In addition, if the Company registers any other shares of its
common stock for public sale under the Securities Act at any time prior to
January 2006, AIP would have the right to include shares in the registration.
The Company has agreed to extend loans to the 11 Holders of Options, all but
two of whom are executive officers of the Company, to enable such Holders to
exercise the Options. Assuming that each such Holder borrows money from the
Company to pay the aggregate Subscription Price with respect to all of his
Options, the principal amount to be loaned to any executive officer where such
amount would exceed $60,000 and the principal amount to be loaned to all
executive officers as a group would be as follows:
<TABLE>
<S> <C>
Bruce R. Nobles................................................ $ 975,000
Michael J. McQuay.............................................. 162,500
John L. Garibaldi.............................................. 186,875
Peter W. Jenkins............................................... 130,000
Clarence K. Lyman.............................................. 162,500
All executive officers as a group (9 persons).................. 1,714,375
</TABLE>
In addition, the Company will loan the holders the Withholding Amount that
each holder will be required to pay upon the exercise of his or her Options.
Each loan will be evidenced by a promissory note delivered to the Company by
the Option Holder to whom the loan is made, which note will be fully recourse
and secured by the Rights Shares issued to such Option Holder. Each note will
bear interest at a variable rate equal to the prime rate in effect from time to
time and will be due and payable upon the earlier of (i) the date that the
Option Holder sells the Rights Shares securing the note or (ii) the expiration
date of such Holder's options under the 1994 Stock Option Plan. All such options
expire in 2005 except for those of Mr. Garibaldi, which expire in 2006. Because
Mr. McQuay does not hold any options under the 1994 Stock Option Plan, his note
will be due and payable upon the earlier of (i) the date that he sells his
Rights Shares or (ii) the tenth anniversary of the Expiration Date. The notes
may be prepaid in whole or in part at any time without penalty.
Certain of the directors of the Company may purchase shares of Common Stock
in the Investor Offering.
81
<PAGE>
PRINCIPAL SHAREHOLDERS
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information relating to the beneficial
ownership, as of July 3, 1996, of the Company's voting stock of each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock, Series B Special Preferred Stock, Series C
Special Preferred Stock, Series D Special Preferred Stock and Series E Special
Preferred Stock. This table also lists the beneficial ownership, as of July 3,
1996, of the Company's Common Stock by each of the directors, by each of the
named executive officers, and by all directors and executive officers as a
group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS (1) (2) PERCENT AND CLASS OF STOCK
- -------------------------------------------------- ------------------- --------------------------------------------------
<S> <C> <C>
AIP General Partner, Inc. ........................ 18,181,818(3) 68.9% of Common Stock
885 Third Avenue (3) 4 100% of Series B Special Preferred Stock
34th Floor
New York, New York 10022
Airline Investors Partnership, L.P. .............. 18,181,818(3) 68.9% of Common Stock
885 Third Avenue (3) 4 100% of Series B Special Preferred Stock
34th Floor
New York, New York 10022
Association of Flight Attendants ................. 1 100% of Series C Special Preferred Stock
National Office
1625 Massachusetts Avenue, N.W.
Washington, D.C. 20036
International Association of Machinists .......... 1 100% of Series D Special Preferred Stock
and Aerospace Workers
1001 Dillingham Boulevard, Ste 204
Honolulu, Hawaii 96817
Hawaiian Master Executive Council ................ 1 100% of Series E Special Preferred Stock
c/o Airline Pilots Association
5959 West Century Boulevard, Ste 576
Los Angeles, California 90045
Attn: Master Chairman, Hawaiian MEC
John W. Adams..................................... 18,181,818(3) 68.9% of Common Stock
(3) 4 100% of Series B Special Preferred Stock
Todd G. Cole...................................... -- --
Richard F. Conway................................. -- --
Robert G. Coo..................................... -- --
Carol A. Fukunaga................................. -- --
William Boyce Lum................................. -- --
Richard K. Matros................................. -- --
Reno F. Morella................................... (42,141)(5) Common Stock*
Bruce R. Nobles................................... 304,343(6)(5) 1.1 % of Common Stock
Samson Poomaihealani.............................. -- --
Edward Z. Safady.................................. -- --
Peter W. Jenkins.................................. (40,0007) Common Stock*
John L. Garibaldi................................. (8) -- Common Stock*
Michael J. McQuay................................. (91,000) Common Stock*
Clarence K. Lyman................................. (51,67110)(5) Common Stock*
All directors and executive officers ............. 18,620,404(11)(5) 69.4% of Common Stock
as a group including those named
above (21 persons)
</TABLE>
82
<PAGE>
- ------------------------
(1) The address of each of the executive officers and directors is 3375 Koapaka
Street, Suite G-350, Honolulu, Hawaii 96819.
(2) Each executive officer and director has sole voting and investment power
with respect to the shares listed after his or her name except for shares
issued to the Hawaiian Airlines, Inc. 401(k) Savings Plan (the "Savings
Plan"), and the Hawaiian Airlines, Inc. Pilots' 401(k) Plan (the "Pilots'
Plan") or as otherwise indicated below. The shares owned by each person, or
by the group, and the shares included in the total number of shares
outstanding have been adjusted, and the percentage owned (where the
percentage exceeds 1%) have been computed in accordance with Rule
13d-3(d)(1) under the Securities Exchange Act of 1934, as amended. Shares of
the Common Stock allocated to participants' accounts in the Savings Plan are
voted by the Vanguard Group, Inc. (the "Savings Plan Trustee"), pursuant to
written directions of the participants, on matters presented at meetings of
shareholders; shares with respect to which no participant directions are
received are voted according to the direction of the majority of number of
shares for which the Savings Plan Trustee received written directions; and
unallocated shares are voted by fiduciaries designated under the Savings
Plan. Shares of the Common Stock allocated to participants' accounts in the
Pilots' Plan are voted by Vanguard Group, Inc. (the "Pilots' Plan Trustee"),
pursuant to written directions of the participants, on matters presented at
meetings of shareholders; shares with respect to which no participant
directions are received are voted according to the direction of the majority
of number of shares for which the Pilots' Plan Trustee received written
directions; and unallocated shares are voted by fiduciaries designated under
the Pilots' Plan.
(3) The shares reported as owned by AIP, of which AIP General Partner, Inc. is
its general partner and John W. Adams is AIP General Partner, Inc.'s sole
shareholder, include the shares reported as beneficially owned by AIP
General Partner, Inc. and John W. Adams. According to their Schedule 13D
dated January 31, 1996, AIP, AIP General Partner, Inc. and John W. Adams
exercise sole voting and dispositive power with respect to all such shares.
(4) Consists entirely of 2,141 shares issued to the Pilots' Plan. Excludes a
corresponding number of Rights Shares underlying Rights to be distributed in
the Rights Offering.
(5) An investment in the Pilots' Plan or the Savings Plan is tracked using a
unit value accounting method, similar to a mutual fund. To determine the
equivalent number of whole shares represented by the fund units, the market
value of the shareholder's balance in the Pilot's Plan or Savings Plan was
divided by the share price of the Company's Common Stock.
(6) Includes fully vested and exercisable Options to purchase 300,000 shares of
Common Stock granted on February 2, 1995 under the 1994 Stock Option Plan
and expiring ten years from the date of grant; and 4,344 shares issued to
the Savings Plan. Excludes a corresponding number of Rights Shares
underlying Rights to be distributed in the Rights Offering.
(7) Consists entirely of fully vested and exercisable Options to purchase
40,000 shares of Common Stock granted on February 2, 1995 under the 1994
Stock Option Plan and expiring ten years from the date of grant. Excludes a
corresponding number of Rights Shares underlying Rights to be distributed in
the Rights Offering.
(8) Excludes Options to purchase 7,500 shares of Common Stock granted on May 1,
1996 under the
1994 Stock Option Plan and expiring on May 1, 2006, which Options will not
vest until May 1, 1997, and 57,500 Rights Shares underlying Options to be
granted in the Rights Offering.
(9) Excludes 50,000 Rights Shares underlying Options to be granted in the
Rights Offering.
(10) Includes fully vested and exercisable Options to purchase 50,000 shares of
Common Stock granted on February 2, 1995 under the 1994 Stock Option Plan
and expiring ten years from the date of grant; and 1,671 shares issued to
the Savings Plan. Excludes a corresponding number of Rights Shares
underlying Rights to be distributed in the Rights Offering.
(11) The number of shares reported includes the equivalent number of shares held
by certain directors and officers through the Pilot's Plan or the Savings
Plan.
* Less than 1%
83
<PAGE>
CONTROL OF THE BOARD OF DIRECTORS
Pursuant to the Bylaws, AIP has the right to nominate six of the eleven
nominees to stand from time to time for election to the Board of Directors so
long as it owns 35% of the outstanding common stock of the Company on a fully
diluted basis. AIP's right to nominate directors will be reduced to five so long
as it retains 25% of such common stock, reduced to four so long as it retains
10% of such common stock, and reduced to three so long as it retains 5% of such
common stock. Thereafter, AIP will not have the right to nominate any
individuals to the Board unless it reacquires at least 5% of such common stock
within 365 days. To the extent Board members are not required to be nominated by
AIP because of the reductions in AIP's stock holdings, such Board members are to
be outside directors.
Pursuant to their respective collective bargaining agreement and the Bylaws,
each of AFA, IAM and ALPA has the right to nominate one nominee to stand from
time to time for election to the Board. Of the two other remaining directors,
(i) one is required to be an outside director, defined as one who is not
employed by the Company and is not affiliated with the Company's labor unions,
AIP or American, and (ii) the other is required to be a senior management
official of the Company.
AIP has agreed with each of the labor unions that so long as the right to
have a representative on the Board is in the labor union's collective bargaining
agreement, AIP will vote its shares in favor of such union's nominee for the
Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, par value $.01 per share and 2,000,000 shares of preferred stock,
par value, $.01 per share. The following statements are summaries of certain
provisions applicable to the Company's capital stock.
COMMON STOCK
As of July 3, 1996, there were 26,409,421 shares of Common Stock outstanding
held by 955 record holders. The holders of Common Stock are entitled to one vote
per share on all matters submitted to a vote of shareholders. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities, and after payment in full of any preferential amount to which
holders of preferred stock may be entitled. Holders of Common Stock have no
preemptive rights unless such rights are specifically granted by the Board of
Directors, and no such rights currently exist. Holders of Common Stock have no
redemption, sinking fund or conversion rights. All of the currently outstanding
shares of Common Stock are, and the Rights Shares and Committed Shares, upon
their issuance in accordance with the terms of the Rights and the Stock Purchase
Agreements, respectively, will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has authority to issue 2,000,000 shares of preferred
stock in one or more series and to fix the voting powers, designations,
preferences and participating, optional, relative or other special rights, and
qualifications, limitations or restrictions thereof, without any further vote or
action by the Company's shareholders. The issuance of preferred stock in certain
circumstances may have the effect of delaying, deferring or preventing a change
of control of the Company without further action by the shareholders, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of, and the voting and
other rights of the holders of, Common Stock.
In connection with and upon consummation of the AIP Investment, on January
31, 1996, the Company issued shares of four new series of preferred stock,
denominated Series B Special Preferred Stock, par value $.01 per share, Series C
Special Preferred Stock, par value $.01 per share, Series D Special Preferred
Stock, par value $.01 per share, and Series E Special Preferred Stock, par value
$.01 per share (collectively, the four series of preferred stock are hereinafter
referred to as "Special
84
<PAGE>
Preferred Stock"). AIP holds four shares of Series B Special Preferred Stock,
and each of AFA, IAM and ALPA holds one share of Series C Special Preferred
Stock, Series D Special Preferred Stock and Series E Special Preferred Stock,
respectively, which shares comprise all of the issued and outstanding shares of
each series of Special Preferred Stock.
Pursuant to the Bylaws, the holders of the Special Preferred Stock have the
right to nominate persons to stand from time to time for election to the Board
of Directors. See "Principal Shareholders -- Control of the Board of Directors."
In addition, holders of each series of Special Preferred Stock have the
following rights, preferences and privileges:
(i) a right to receive, out of the assets of the Company, $.01 per share
before any payment shall be made or any assets distributed to the holders of
the Common Stock in the event of liquidation, dissolution or winding up of
the Company;
(ii) the right to one vote per share together with the Common Stock,
voting as a single class, with respect to any matters submitted to the
holders of Common Stock, and as required by law;
(iii) the right to fill a vacancy on the Board of Directors caused by the
removal, resignation or death of a director whom the holders of such series
are entitled to nominate pursuant to the Bylaws, if such vacancy is not
filled by the Board of Directors within 30 days; and
(iv) a dividend per share, when and as declared and paid by the Board of
Directors on the Common Stock, equal to twice the dividend per share paid on
the Common Stock.
The rights and preferences of the Special Preferred Stock cease to exist
once the outstanding shares are converted into Common Stock, on a share for
share basis, which occurs automatically upon transfer of such shares to any
person who is not an affiliate of the initial holder of the Special Preferred
Stock; and in the case of the Series B Special Preferred Stock, if such holder
is the holder of record of less than five percent of the outstanding common
equity interest of the Company for 365 consecutive days; and in the case of each
of the Series C Special Preferred Stock, Series D Special Preferred Stock and
Series E Special Preferred Stock, if the collective bargaining agreement by and
between the holders of such share and the Company is amended through collective
bargaining so that such agreement no longer entitles such holders to nominate a
representative to the Board of Directors. The holders of shares of the Special
Preferred Stock are not entitled to preemptive, subscription redemption or
sinking fund rights.
In connection with the Company's shareholders' rights plan described below,
the Board of Directors has authorized a series of preferred stock, denominated
Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per
share (the "Series A Preferred Stock"). The 20,000 authorized shares of Series A
Preferred Stock will be issuable in increments of 1/1000th of a share upon the
exercise of purchase rights under the shareholders' rights plan. See
"Shareholders' Rights Plan" below.
SHAREHOLDERS' RIGHTS PLAN
In December 1994, the Board of Directors adopted a shareholders' rights plan
(the "Rights Plan"). The Rights Agreement setting forth the terms of the Rights
Plan is an exhibit to the Registration Statement of which this Prospectus is a
part. See "Available Information."
The Rights Plan provides that one preferred stock purchase right (a
"Purchase Right") is attached to each share of Common Stock currently
outstanding and a Purchase Right will be issued with each share of Common Stock
issued prior to the Purchase Rights Distribution Date (as defined below). Prior
to the Purchase Rights Distribution Date, the Purchase Rights are not
exercisable, are attached to and trade in tandem with the Common Stock on the
American Stock Exchange and the Pacific Stock Exchange and are evidenced by the
same stock certificates that evidence the related shares of Common Stock. On the
Purchase Rights Distribution Date, the Purchase Rights will detach from the
Common Stock, will trade separately and will be evidenced by separate Purchase
Rights certificates.
85
<PAGE>
The "Purchase Rights Distribution Date" will be the earliest of (i) the
tenth business day following a public announcement that a person has become the
beneficial owner of 10% or more of the outstanding Common Stock (such a person
being referred to as a "10% Shareholder" and the date of such announcement being
referred to as the "10% Ownership Date"), (ii) the tenth business day (or such
later day as may be designated by the Board of Directors) following the date of
the commencement of, or the announcement of an intention to make, a tender offer
or exchange offer, the consummation of which would cause any person to become a
10% Shareholder (the date of such tenth business day (or later day) being the
"Tender/Exchange Offer Date") or (iii) the first date, on or after the 10%
Ownership Date, upon which the Company is acquired in a merger or other business
combination in which the Company is not the surviving corporation or in which
the outstanding Common Stock is changed into or exchanged for stock or assets of
another person, or upon which 50% or more of the Company's consolidated assets
or earning power are sold (other than in transactions in the ordinary course of
business) (the date of such merger, combination, sale or transfer being the
"Flip-Over Date").
Once the Purchase Rights Distribution Date has occurred, the Purchase Rights
will be exercisable. Between the Purchase Rights Distribution Date and the
earlier to occur of the Flip-In Date (as defined below) or the Flip-Over Date,
each Purchase Right will be exercisable to purchase from the Company 1/1000th of
a share of Series A Preferred Stock at an exercise price of $8.00.
It is intended that each 1/1000th of a share of the Series A Preferred Stock
will have a theoretical value equal to one share of the Common Stock. Each
1/1000th of a share of the Series A Preferred Stock will be entitled to a
preferential quarterly dividend, subject to the rights of the shares of any
other series of preferred stock equal to the larger of (i) an amount equal to
the dividend, if any, declared for a share of the Common Stock or (ii) $.001. In
the event of liquidation, the holder of each 1/1000th of a share of the Series A
Preferred Stock will be entitled to a preferential liquidation payment equal to
the larger of (i) an amount equal to the amount to be distributed with respect
to each share of Common Stock or (ii) $.001 plus accrued and unpaid dividends
and distributions on the Series A Preferred Stock. Each 1/1000th of a share of
Series A Preferred Stock will have one vote and will vote together with the
shares of Common Stock. In the event of any merger, consolidation or other
transaction in which shares of Common Stock are exchanged, each 1/1000th of a
share of the Series A Preferred Stock will be entitled to receive an amount
equal to that received per share of Common Stock. These Purchase Rights are
protected by customary antidilution provisions. The Series A Preferred Stock
will be junior to any other series of Preferred Stock that may be authorized and
issued by the Company, unless the terms of any such other series provide
otherwise. The Series A Preferred Stock is issuable only upon the exercise of
Purchase Rights and will not be redeemable. Once the shares of Series A
Preferred Stock are issued, the Articles of Incorporation may not be amended in
a manner that would materially alter or change the powers, preferences or
special rights of the Series A Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of two-thirds or more of the
outstanding shares of Series A Preferred Stock, voting separately as a class. At
any time that dividends on the Series A Preferred Stock in an aggregate amount
equal to dividends payable for six quarters are in arrears, the holders of the
Series A Preferred Stock will have the right to a separate class vote to elect
one director to the Board of Directors ((or, in the event such other series of
preferred stock is entitled to a greater number of directors, such number of
directors, which shall be cumulative and not in addition to the one director
provided herein) (in addition to the then authorized number of directors)) at
the next annual meeting of shareholders. Upon payment of all dividend
arrearages, the terms of the director(s) elected by the holders of the Series A
Preferred Stock will expire.
Following the close of business on the tenth business day following the 10%
Ownership Date (such day being the "Flip-In Date"), each Purchase Right (other
than Purchase Rights held by the 10% Shareholder, which shall be void) will be
exercisable to purchase, at the then current exercise price, shares of Common
Stock (or, in certain circumstances, cash, assets or other securities of the
Company) having a market value equal to two times the exercise price of the
Purchase Right.
86
<PAGE>
If, on or after the 10% Ownership Date, (i) the Company is acquired in a
merger or other business combination transaction in which the Company is not the
surviving corporation or the Common Stock is changed or exchanged for stock or
assets of another person or (ii) 50 percent or more of the Company's assets or
earning power is sold, each Purchase Right (other than Purchase Rights held by
the 10% Shareholder, which shall be void) will be exercisable to purchase, at
the then current exercise price, shares of common stock of the surviving
corporation or the acquirer having a market value equal to two times the
exercise price of the Purchase Right.
At any time prior to the earliest of the Tender/Exchange Offer Date, the
Flip-In Date or the Flip-Over Date, the Board of Directors serving prior to the
date the event triggering the Purchase Right may, at its option, call the
Purchase Rights for redemption in whole, but not in part, at a price of $.01 per
Purchase Right. Immediately upon the calling of the Purchase Rights for
redemption, the right to exercise Purchase Rights will terminate and the only
right of the holders of Purchase Rights thereafter will be to receive the
redemption price.
At any time after the 10% Ownership Date and prior to the first date
thereafter upon which a 10% Shareholder becomes the beneficial owner of 50% or
more of the outstanding Common Stock, the Board of Directors may, at its option,
direct the Company to exchange all but not less than all, of the then
outstanding Purchase Rights for Common Stock at an exchange ratio per Purchase
Right equal to a number of shares of Common Stock that, as of the date of the
Board of Directors' action, has a current market value equal to the difference
between the exercise price of a Purchase Right and the current market price of
the shares that would otherwise be issuable upon exercise of a Purchase Right on
such date. Immediately upon such action by the Directors, the right to exercise
Purchase Rights will terminate and the only right of the holders of Purchase
Rights thereafter will be to receive the number of shares of Common Stock to be
issued in such exchange.
The Board of Directors may, from time to time, without the approval of any
holder of Purchase Rights, supplement or amend any provision of the Rights Plan,
whether or not such supplement or amendment is adverse to any holder of Purchase
Rights; provided, however, that from and after the earliest of the
Tender/Exchange Offer Date, the 10% Ownership Date, the Flip-In Date the
Flip-Over Date or the date of the redemption of the Purchase Rights, the Rights
Plan may not be supplemented or amended in any manner that would materially and
adversely affect any holder of outstanding Purchase Rights other than a 10%
Shareholder; provided further, that from and after the 10% Ownership Date, the
Rights Plan may not be supplemented or amended in any manner without the
approval of a majority of the directors who were directors prior to such date.
Until a Purchase Right is exercised, the holder thereof, as such, will have
no rights as a shareholder of the Company, including without limitation, the
right to vote or to receive dividends. While the distribution of the Purchase
Rights will not be taxable to shareholders or to the Company, shareholders may,
depending upon the circumstances, recognize taxable income in the event that the
Purchase Rights become exercisable for shares of Common Stock (or other
consideration) or for common stock of the surviving corporation or the acquirer.
The Purchase Rights will expire in December 2004 (unless they have been
earlier redeemed or exchanged) unless the Purchase Rights Distribution Date
occurs prior to that time, in which case the Purchase Rights will expire on the
tenth anniversary of the Purchase Rights Distribution Date.
The Purchase Rights will have certain anti-takeover effects as they will
cause substantial dilution to a person or group that acquires a substantial
interest in the Company without the prior approval of the Board of Directors.
The effect of the Purchase Rights may be to inhibit a change in control of the
Company (including through a third party tender offer at a price that reflects a
premium to then prevailing trading prices) that may be beneficial to the
Company's shareholders.
The consummation of the AIP Investment would have rendered AIP a 10%
Shareholder. However, the Board of Directors, pursuant to authority granted to
it under the Rights Plan, made a determination that AIP would not be a 10%
Shareholder and the Rights Plan was amended to so provide.
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<PAGE>
ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
In addition to the Rights Plan, the Company is subject to Section 415-73 of
the Hawaii Business Corporation Act, which restricts mergers and consolidations.
Subject to certain exceptions, unless the Board of Directors and the holders of
at least 75% of all the issued and outstanding voting stock of the Company
approve a merger or consolidation, Section 415-73 prohibits such a transaction.
The Articles of Incorporation and Bylaws include a number of provisions that
may have the effect of discouraging persons from pursuing non-negotiated
takeover attempts. These provisions include (i) a restriction on action by
written consent by the shareholders, unless such consent is unanimous, (ii) a
prohibition on cumulative voting, (iii) certain qualifications for directors and
(iv) restrictions on the filling of vacancies of directors. See "Principal
Shareholders -- Control of the Board of Directors."
THE FINANCIAL ADVISOR
The Company has engaged Jefferies to act as its financial advisor in
connection with its assessment of strategic alternatives and the Rights
Offering. The Financial Advisor was engaged because of its general experience
and expertise in financial matters. The Financial Advisor, as part of its
investment banking business, is continually engaged in the valuation of
securities in connection with acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for various other purposes. As specialists in securities, it has
experience in, and knowledge of, the valuation of airline enterprises. In the
ordinary course of its business as broker-dealer, it may, from time to time,
purchase securities from, and sell securities to, the Company and, as a market
maker in securities, it may from time to time have a long or short position in,
and buy or sell, debt or equity securities of the Company for its own account
and for the accounts of its customers.
In its capacity as financial advisor, the Financial Advisor provided advice
to the Board of Directors of the Company regarding the determination of the
Subscription Price and the financial impact of the Rights Offering on the
Company from a financial point of view and discussed with management and the
Board of Directors of the Company the possible effects of the Rights Offering.
See "Purpose of the Rights Offering and Use of Proceeds." The Financial Advisor
assisted the Company in identifying potential Investors, but has not been
retained to, and will not, solicit Holders of Rights to purchase Common Stock in
connection with the Rights Offering. See "The Investor Offering."
Under applicable law, Jefferies may bid for and purchase Rights for certain
purposes. Such purchases will be subject to certain price and volume limitations
when Jefferies owns Rights without an offsetting short position in the Common
Stock. Such limitations provide, among other things, that subject to certain
exceptions, not more than one bid to purchase Rights may be maintained in any
one market at the same price at the same time and that, with certain limited
exceptions, the initial bid for or purchase of Rights may not be made at a price
higher than the highest current independent bid price or the last independent
sales price on the AMEX or the PSE. Any such price may not be increased, subject
to certain exceptions, unless Jefferies has not purchased any Rights for a full
business day or the independent bid price for such Rights has exceeded such
price for a full business day.
From the date of this Prospectus, Jefferies may offer and sell shares of
Common Stock at prices it sets from time to time, which prices may be higher or
lower than the Subscription Price. Prior to the Expiration Date, each of these
prices when set will not exceed the higher of the last sale price or current
asked price of the Common Stock on the AMEX or the PSE plus, in each case, an
amount equal to an exchange commission, and any offering price set on any
calendar day will not be increased more than once during that day. Any offering
by Jefferies may include shares of Common Stock acquired or to be acquired
through the exercise of the Rights. As a result of those offerings, Jefferies
may realize profits or losses independent of its financial advisory and capital
raising fees it receives.
88
<PAGE>
Jefferies will receive a capital raising fee equal to 5.5% of the aggregate
gross proceeds to the Company from (i) the Investor Offering as compensation in
connection with its efforts to arrange commitments of the Investors to purchase
shares of Common Stock and (ii) any other offering of Common Stock in which
Jefferies provides financial advisory services to the Company (I.E., a
Subsequent Offering) and which is necessary in order that gross proceeds to the
Company from the Rights Offering, the Investor Offering and any Subsequent
Offering equal or exceed $25,000,000. In the event that the total gross proceeds
to the Company from the Rights Offering, the Investor Offering and any
Subsequent Offering equal or exceed $25,000,000, Jefferies will also receive (1)
a financial advisory fee equal to 1.5% of the aggregate gross proceeds to the
Company from the Rights Offering, the Investor Offering and any Subsequent
Offering and (2) reimbursement by the Company for Jefferies' out-of-pocket
expenses, other than its reasonable attorneys' fees and disbursements, which the
Company has agreed to reimburse regardless of the amount of proceeds from the
various offerings. In addition, the Company has agreed to indemnify Jefferies
against certain liabilities.
The Financial Advisor has provided investment banking services to the
Company in the past, including in connection with the AIP Investment, and
received commissions in connection therewith and may continue to perform these
and other services and receive fees therefor in the future. In connection with
the AIP Investment, the Company paid Jefferies fees of (i) $150,000 for
rendering its December 7, 1995 fairness opinion regarding the AIP Investment and
(ii) $1.2 million upon consummation of the AIP Investment. The Company also
reimbursed Jefferies for its fees and expenses in connection with the AIP
Investment.
LEGAL MATTERS
The tax matters discussed under "Certain Federal Income Tax Consequences"
are being passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los
Angeles, California. The validity of the authorization and issuance of the
securities offered hereby are being passed upon for the Company by Goodsill
Anderson Quinn & Stifel.
EXPERTS
The financial statements of Hawaiian Airlines, Inc. as of December 31, 1995
and 1994, and for the year ended December 31, 1995, the period September 12,
1994 through December 31, 1994, the period January 1, 1994 through September 11,
1994, and the year ended December 31, 1993, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, dated March 15, 1996, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The report of KPMG Peat Marwick LLP dated March 15, 1996, contains an
explanatory paragraph that states that the financial statements of the
Reorganized Company reflect the impact of adjustments to reflect the fair value
of assets and liabilities under fresh start accounting and, as a result, the
financial statements of the Reorganized Company are presented on a basis
different than those of the Predecessor Company.
In addition, the report of KPMG Peat Marwick LLP dated March 15, 1996,
contains an explanatory paragraph that states that the Company's recurring
losses from operations, deficit working capital and limited sources of
additional liquidity raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
89
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Independent Auditors' Report............................................................................. F-2
Balance Sheets as of December 31, 1994 and 1995.......................................................... F-3
Statements of Operations for the Year ended December 31, 1993, the Period from January 1, 1994 to
September 11, 1994, the Period from September 12, 1994 to December 31, 1994 and the Year ended December
31, 1995................................................................................................ F-4
Statements of Shareholders' Equity (Deficit) for the Year ended December 31, 1993, the Period from
January 1, 1994 to September 11, 1994, the Period from September 12, 1994 to December 31, 1994 and the
Year ended December 31, 1995............................................................................ F-5
Statements of Cash Flows for the Year ended December 31, 1993, the Period from January 1, 1994 to
September 11, 1994, the Period from September 12, 1994 to December 31, 1994 and the Year ended December
31, 1995................................................................................................ F-6
Notes to Financial Statements............................................................................ F-8
Supplemental Financial Information: Unaudited Quarterly Financial Information for the Years ended
December 31, 1994 and 1995.............................................................................. F-37
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Condensed Balance Sheets as of December 31, 1995 and March 31, 1996 (unaudited).......................... F-38
Condensed Statements of Operations for the Three Months ended March 31, 1995 and 1996 (unaudited)........ F-39
Condensed Statements of Cash Flows for the Three Months ended March 31, 1995 and 1996 (unaudited)........ F-40
Notes to Unaudited Condensed Financial Statements........................................................ F-41
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hawaiian Airlines, Inc.:
We have audited the accompanying balance sheets of Hawaiian Airlines, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the year ended December 31,
1995, the period September 12, 1994 through December 31, 1994, the period
January 1, 1994 through September 11, 1994, and the year ended December 31,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hawaiian Airlines, Inc. as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the year ended December 31, 1995, the period September 12, 1994
through December 31, 1994, the period January 1, 1994 through September 11,
1994, and the year ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 2 to the financial statements, on September 12,
1994, Hawaiian Airlines, Inc. emerged from bankruptcy. The financial statements
of the Reorganized Company reflect the impact of adjustments to reflect the fair
value of assets and liabilities under fresh start reporting. As a result, the
financial statements of the Reorganized Company are presented on a different
basis than those of the Predecessor Company and, therefore, are not comparable
in all respects.
The accompanying financial statements have been prepared assuming that
Hawaiian Airlines, Inc. will continue as a going concern. As discussed in note
16 to the financial statements, the Company's recurring losses from operations,
deficit working capital and its limited sources of additional liquidity raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 16. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
March 15, 1996
F-2
<PAGE>
HAWAIIAN AIRLINES, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 (REORGANIZED COMPANY)
ASSETS
<TABLE>
<CAPTION>
REORGANIZED COMPANY
--------------------
1994 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................................. $ 3,501 $ 5,389
Accounts receivable, net of allowance for doubtful accounts of $500 in 1994 and $800 in
1995..................................................................................... 16,275 18,178
Inventories, net of allowance for obsolescence of $315 in 1994 and 1995................... 6,234 7,648
Assets held for sale...................................................................... 1,594 1,344
Prepaid expenses.......................................................................... 6,079 5,804
--------- ---------
Total current assets.................................................................... 33,683 38,363
--------- ---------
Property and Equipment
Flight equipment.......................................................................... 34,702 40,659
Ground equipment, buildings and leasehold improvements.................................... 3,976 5,775
--------- ---------
Total................................................................................... 38,678 46,434
Accumulated depreciation and amortization................................................. (922) (5,043)
--------- ---------
Property and equipment, net............................................................. 37,756 41,391
--------- ---------
Other Assets:
Assets held for sale...................................................................... 11,789 8,336
Lease security and other deposits......................................................... 603 1,053
Long-term prepayments and other........................................................... 8,536 5,164
Reorganization value in excess of amounts allocable to identifiable assets, net........... 70,934 67,333
--------- ---------
Total other assets...................................................................... 91,862 81,886
--------- ---------
Total Assets............................................................................ $ 163,301 $ 161,640
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................................................... $ 6,394 $ 6,027
Current portion of capital lease obligations.............................................. 2,907 2,662
Accounts payable.......................................................................... 17,529 35,182
Air traffic liability..................................................................... 40,382 30,461
Other accrued liabilities................................................................. 4,916 8,293
Current portion of accrued vacation liability............................................. 5,040 5,052
Accrued salaries and wages................................................................ 2,342 2,385
--------- ---------
Total current liabilities............................................................... 79,510 90,062
--------- ---------
Long-Term Debt.............................................................................. 14,152 5,523
--------- ---------
Capital Lease Obligations................................................................... 12,764 10,102
--------- ---------
Other Liabilities and Deferred Credits:
Noncurrent portion of accrued vacation liability.......................................... 485 425
Accumulated pension and other postretirement benefit obligations.......................... 22,013 25,259
Other..................................................................................... 528 1,091
--------- ---------
Total other liabilities and deferred credits............................................ 23,026 26,775
--------- ---------
Shareholders' Equity:
Class A Common Stock -- $.01 par value, 20,000,000 and 40,000,000 shares authorized in
1994 and 1995, respectively, no shares and 6,845,105 shares issued and outstanding in
1994 and 1995, respectively (636,247 shares issuable in 1996)............................ -- 75
Class B Common Stock -- $.01 par value, no shares and 3,050,000 shares authorized in 1994
and 1995, respectively, no shares and 1,894,955 shares issued and outstanding in 1994 and
1995, respectively....................................................................... -- 19
Capital in excess of par value............................................................ -- 41,193
Warrants.................................................................................. -- 900
Unearned compensation..................................................................... -- (182)
Minimum pension liability................................................................. -- (1,170)
Common Stock, warrants and options issuable............................................... 40,000 --
Accumulated deficit....................................................................... (6,151) (11,657)
--------- ---------
Shareholders' equity.................................................................... 33,849 29,178
--------- ---------
Commitments and Contingent Liabilities (Notes 6, 7, 8, 10, 11, 13 and 15)
Subsequent Events (Notes 1 and 16)
Total Liabilities and Shareholders' Equity.............................................. $ 163,301 $ 161,640
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Financial Statements
F-3
<PAGE>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993 (PREDECESSOR), THE PERIOD FROM JANUARY 1,
1994 TO SEPTEMBER 11, 1994 (PREDECESSOR), THE PERIOD FROM SEPTEMBER 12, 1994 TO
DECEMBER 31, 1994 (REORGANIZED COMPANY) AND THE YEAR ENDED DECEMBER 31, 1995
(REORGANIZED COMPANY)
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED COMPANY
-------------------------- --------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 12,
1994 TO 1994 TO
SEPTEMBER 11, DECEMBER 31,
1993 1994 1994 1995
----------- ------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating Revenues:
Passenger.............................................. $ 273,386 $ 199,502 $ 80,675 $ 297,527
Charter................................................ 7,169 135 536 22,200
Cargo.................................................. 15,000 11,039 5,300 18,169
Other.................................................. 8,554 6,147 2,646 9,008
----------- ------------- ------------- -----------
Total................................................ 304,109 216,823 89,157 346,904
----------- ------------- ------------- -----------
Operating Expenses:
Flying operations...................................... 107,959 71,768 28,650 104,847
Maintenance............................................ 65,963 47,281 21,547 79,156
Passenger service...................................... 33,748 25,224 10,647 39,210
Aircraft and traffic servicing......................... 44,135 34,324 16,720 54,616
Promotion and sales.................................... 35,563 28,499 10,892 43,162
General and administrative............................. 21,610 12,063 4,696 18,377
Depreciation and amortization.......................... 5,969 4,085 2,273 7,437
Early retirement provision............................. -- -- -- 2,000
Restructuring charges.................................. 14,000 -- -- --
----------- ------------- ------------- -----------
Total................................................ 328,947 223,244 95,425 348,805
----------- ------------- ------------- -----------
Operating Loss....................................... (24,838) (6,421) (6,268) (1,901)
----------- ------------- ------------- -----------
Nonoperating Income (Expense):
Interest and amortization of debt expense.............. (5,066) (1,150) (1,286) (4,341)
Interest income........................................ 360 300 318 762
Gain (loss) on disposition of equipment................ (659) 45 558 (233)
Other, net............................................. 1,312 502 527 207
Reorganization expenses................................ (52,637) (13,950) -- --
----------- ------------- ------------- -----------
Total................................................ (56,690) (14,253) 117 (3,605)
----------- ------------- ------------- -----------
Loss Before Extraordinary Items.......................... (81,528) (20,674) (6,151) (5,506)
Extraordinary gain, net.................................. 12,104 190,063 -- --
----------- ------------- ------------- -----------
Net Income (Loss)........................................ $ (69,424) $ 169,389 $ (6,151) $ (5,506)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Pro Forma Loss Per Common Share (Unaudited):
Before extraordinary items............................. $ N/M* $ N/M* $ (0.65)** $ (0.59)**
Extraordinary gain, net................................ N/M* N/M* --** --**
----------- ------------- ------------- -----------
Net Income (Loss)........................................ $ N/M $ N/M $ (0.65 )** $ (0.59)**
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Weighted Average Number of Common Shares Outstanding..... 6,170 7,137 9,400** 9,400**
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
- ------------------------
* Not Meaningful -- Per share data is not meaningful as the Predecessor was
recapitalized and adopted fresh start reporting as of September 12, 1994.
** Proforma per share data has been calculated assuming that the Reorganized
Company will issue approximately 9.4 million shares of Common Stock pursuant
to the Reorganization Plan.
See accompanying Notes to Financial Statements
F-4
<PAGE>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1993 (PREDECESSOR), THE PERIOD FROM JANUARY 1,
1994 TO SEPTEMBER 11, 1994 (PREDECESSOR),
THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED COMPANY)
AND THE YEAR ENDED DECEMBER 31, 1995 (REORGANIZED COMPANY)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON CLASS A CLASS B EXCESS OF
STOCK COMMON STOCK COMMON STOCK PAR VALUE WARRANTS
----------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31, 1992................................ $ 37,622 $ -- $ -- $ 12,479 $ --
Net loss.................................................. -- -- -- -- --
Exercise of warrants for 1,075,268 shares of Common
Stock.................................................... 11 -- -- -- --
Issuance of 348,038 shares of Common Stock to the Employee
Stock Ownership Plans.................................... 2,871 -- -- -- --
Accretion in value of Class B Preference Stock............ -- -- -- -- --
----------- --- --- ----------- -----
Balance, December 31, 1993................................ 40,504 -- -- 12,479 --
Net income................................................ --
Fresh start adjustments, net.............................. (40,504) -- -- (12,479) --
----------- --- --- ----------- -----
REORGANIZED COMPANY
Balance, September 12, 1994............................... -- -- -- -- --
Net loss.................................................. -- -- -- -- --
----------- --- --- ----------- -----
Balance, December 31, 1994................................ -- -- -- -- --
Net loss.................................................. -- -- -- -- --
Issuance of 6,845,105 shares of Class A Common Stock and
1,894,955 shares of Class B Common Stock (636,247 shares
of Class A Common Stock issuable)........................ -- 75 19 39,006 --
Issuance of warrants to acquire 989,011 shares of Class A
Common Stock............................................. -- -- -- -- 900
Grant of options to acquire 592,500 shares of Class A
Common Stock............................................. -- -- -- 2,187 --
Amortization of Unearned Compensation on options to
acquire 592,500 shares of Class A Common Stock........... -- -- -- -- --
Recordation of minimum pension liability.................. -- -- -- -- --
----------- --- --- ----------- -----
Balance, December 31, 1995................................ $ -- $ 75 $ 19 $ 41,193 $ 900
----------- --- --- ----------- -----
----------- --- --- ----------- -----
<CAPTION>
COMMON
STOCK,
MINIMUM WARRANTS AND
UNEARNED PENSION OPTIONS ACCUMULATED
COMPENSATION LIABILITY ISSUABLE DEFICIT
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31, 1992................................ $ -- $ -- $ -- $ (192,822)
Net loss.................................................. -- -- -- (69,424)
Exercise of warrants for 1,075,268 shares of Common
Stock.................................................... -- -- -- --
Issuance of 348,038 shares of Common Stock to the Employee
Stock Ownership Plans.................................... -- -- -- --
Accretion in value of Class B Preference Stock............ -- -- -- (619)
------------- ----------- ------------ ------------
Balance, December 31, 1993................................ -- -- -- (262,865)
Net income................................................ 169,389
Fresh start adjustments, net.............................. -- -- 40,000 93,476
------------- ----------- ------------ ------------
REORGANIZED COMPANY
Balance, September 12, 1994............................... -- -- 40,000 --
Net loss.................................................. -- -- -- (6,151)
------------- ----------- ------------ ------------
Balance, December 31, 1994................................ -- -- 40,000 (6,151)
Net loss.................................................. -- -- -- (5,506)
Issuance of 6,845,105 shares of Class A Common Stock and
1,894,955 shares of Class B Common Stock (636,247 shares
of Class A Common Stock issuable)........................ -- -- (39,100) --
Issuance of warrants to acquire 989,011 shares of Class A
Common Stock............................................. -- -- (900) --
Grant of options to acquire 592,500 shares of Class A
Common Stock............................................. (2,187) -- -- --
Amortization of Unearned Compensation on options to
acquire 592,500 shares of Class A Common Stock........... 2,005 -- -- --
Recordation of minimum pension liability.................. -- (1,170) -- --
------------- ----------- ------------ ------------
Balance, December 31, 1995................................ $ (182) $ (1,170) $ -- $ (11,657)
------------- ----------- ------------ ------------
------------- ----------- ------------ ------------
</TABLE>
See accompanying Notes to Financial Statements
F-5
<PAGE>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993 (PREDECESSOR), THE PERIOD FROM JANUARY 1,
1994 TO SEPTEMBER 11, 1994 (PREDECESSOR), THE PERIOD FROM SEPTEMBER 12, 1994 TO
DECEMBER 31, 1994 (REORGANIZED COMPANY) AND THE YEAR ENDED DECEMBER 31, 1995
(REORGANIZED COMPANY)
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED COMPANY
------------------------ ------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 12,
1994 TO 1994 TO
SEPTEMBER 11, DECEMBER 31,
1993 1994 1994 1995
--------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)............................................ $ (69,424) $ 169,389 $ (6,151) $ (5,506)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................. 5,969 4,085 1,183 3,836
Amortization of reorganization value in excess of
identifiable assets....................................... -- -- 1,090 3,601
Amortization of debt discount.............................. -- -- 136 557
Allowance for doubtful accounts............................ 4,811 422 -- 719
Net periodic postretirement benefit cost................... 2,916 1,988 903 3,309
Stock option compensation.................................. -- -- -- 2,005
Early retirement provision................................. -- -- -- 2,000
(Gain) loss from disposition of equipment.................. 659 (45) (558) 233
Extraordinary items........................................ (12,104) (190,063) -- --
(Increase) decrease in accounts receivable................. 44 (6,223) 3,401 (2,622)
(Increase) decrease in inventories......................... (419) 497 220 (1,414)
(Increase) decrease in prepaid expenses.................... (406) (1,133) (2,233) 275
(Decrease) increase in accounts payable.................... (22,923) 5,774 (1,966) 17,653
(Decrease) increase air traffic liability.................. (14,319) 10,602 (319) (9,921)
(Decrease) increase in accrued liabilities................. 66,408 (734) (1,323) 3,432
Other, net................................................. 60 738 352 631
--------- ------------- ------------- ---------
Net cash provided by (used in) operations before
reorganization expenses................................. (38,728) (4,703) (5,265) 18,788
Reorganization expenses.................................... 52,637 10,799 -- --
--------- ------------- ------------- ---------
Net cash provided by (used in) operating activities...... 13,909 6,096 (5,265) 18,788
--------- ------------- ------------- ---------
Cash Flows From Investing Activities:
Return (issuance) of security deposits....................... (3,800) (3,007) 6,979 --
Additions to property and equipment.......................... (7,037) (3,682) (3,603) (9,165)
Net proceeds from disposition of equipment................... 992 817 673 4,225
--------- ------------- ------------- ---------
Net cash provided by (used in) investing activities...... (9,845) (5,872) 4,049 (4,940)
--------- ------------- ------------- ---------
Cash Flows From Financing Activities:
Issuance of long-term debt................................... -- -- 5,393 1,591
Repayment of long-term debt.................................. (1,730) (689) (2,095) (10,644)
Repayment of capital lease obligations....................... -- (1,345) (1,044) (2,907)
Issuance of Common Stock..................................... 11 -- -- --
--------- ------------- ------------- ---------
Net cash provided by (used in) financing activities...... (1,719) (2,034) 2,254 (11,960)
--------- ------------- ------------- ---------
Net increase (decrease) in cash and cash equivalents..... 2,345 (1,810) 1,038 1,888
Cash and cash equivalents -- Beginning of Year or Period....... 1,928 4,273 2,463 3,501
--------- ------------- ------------- ---------
Cash and cash equivalents -- End of Year or Period............. $ 4,273 $ 2,463 $ 3,501 $ 5,389
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
</TABLE>
See accompanying Notes to Financial Statements
F-6
<PAGE>
HAWAIIAN AIRLINES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993 (PREDECESSOR), THE PERIOD FROM JANUARY 1,
1994 TO SEPTEMBER 11, 1994 (PREDECESSOR), THE PERIOD FROM SEPTEMBER 12, 1994 TO
DECEMBER 31, 1994 (REORGANIZED COMPANY) AND THE YEAR ENDED DECEMBER 31, 1995
(REORGANIZED COMPANY)
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED COMPANY
------------------------ ------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 12,
1994 TO 1994 TO
SEPTEMBER 11, DECEMBER 31,
1993 1994 1994 1995
--------- ------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................. $ 1,584 $ 1,009 $ 988 $ 3,824
Reorganization expenses paid................................... 535 3,151 -- --
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Reclassification of liabilities subject to compromise.......... 161,039 -- -- --
Reclassification of redeemable Preferred and Preference Stock
subject to compromise......................................... 5,973 -- -- --
Other capital transactions:
Reclassification of Common Stock, warrants and options
issuable to Class A Common Stock............................ -- -- -- 75
Reclassification of Common Stock, warrants and options
issuable to Class B Common Stock............................ -- -- -- 19
Reclassification of Common Stock, warrants and options
issuable to Capital in excess of par value.................. -- -- -- 39,006
Reclassification of Common Stock, warrants and options
issuable to Warrants........................................ -- -- -- 900
Grant of options to acquire 592,500 shares of Class A Common
Stock....................................................... -- -- -- 2,187
Recordation of minimum pension liability..................... -- -- -- 1,170
Exercise of warrants for Common Stock........................ 8,000 -- -- --
Issuance of 348,038 shares of Common Stock to the Employee
Stock Ownership Plans....................................... 2,871 -- -- --
Class B Preference Stock accretion........................... 619 -- -- --
</TABLE>
See accompanying Notes to Financial Statements
F-7
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Hawaiian Airlines, Inc. was incorporated in January 1929 under the laws of
the Territory of Hawaii and maintains its principal offices in Honolulu, Hawaii.
Based on operating revenues, Hawaiian Airlines, Inc. is the largest airline
headquartered in Hawaii and is engaged primarily in the scheduled transportation
of passengers, cargo and mail over a route system which services the six major
islands of the State of Hawaii, several cities primarily in the U.S. West Coast
region and certain destinations in the South Pacific.
The Company's passenger airline business is its chief source of revenue.
Scheduled passenger service consists of, on average, approximately 150 flights
per day among the six major islands of the State of Hawaii ("Interisland"),
daily service to four U.S. West Coast cities and Las Vegas ("Transpac"), and two
flights per week to Pago Pago, American Samoa and one flight per week to
Papeete, Tahiti in the South Pacific ("Southpac"). The Company also provides
charter service to Las Vegas.
On September 21, 1993, Hawaiian Airlines together with HAL, INC., Hawaiian
Airlines' parent company, and West Maui Airport, Inc., another wholly owned
subsidiary of HAL, INC. (collectively the "Predecessor"), commenced
reorganization cases by filing voluntary petitions for relief under Chapter 11,
Title 11 of the United States Code in the U.S. Bankruptcy Court for the District
of Hawaii. Concurrently therewith, the Debtors filed a Consolidated Plan of
Reorganization dated September 21, 1993 (as amended through the most recent
amendment dated April 20, 1995, the "Reorganization Plan" or the "Plan"). The
Company emerged from the Chapter 11 process less than a year later with the
Reorganization Plan becoming effective on September 12, 1994 (the "Effective
Date"). 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. Further, pursuant to the Reorganization Plan, on the Effective
Date, first West Maui Airport, Inc. and then HAL, INC. were merged with and into
Hawaiian Airlines with Hawaiian Airlines being the sole surviving corporation.
Upon the effectiveness of the mergers, all of the outstanding equity securities
of the Company, HAL, INC., and West Maui Airport, Inc. were canceled.
Under the Plan, the Company will issue and distribute approximately
9,400,000 shares of its common stock to all of the unsecured creditors with
claims allowed under the Plan. At December 31, 1995, the Company's common stock
consisted of two classes, one with full voting rights, Class A Common Stock, and
the other with limited voting rights, Class B Common Stock. On June 19, 1995,
the Company commenced distribution of its Class A and Class B Common Stock and
as of December 31, 1995, 6,845,105 shares of Class A Common Stock and 1,894,955
shares of Class B Common Stock were issued and outstanding. The Company
anticipates issuing 636,247 shares of Class A Common Stock under the Plan by
late 1996 in satisfaction of disputed claims outstanding as of December 31,
1995. Any shares withheld in excess of the amount distributed to the holders of
such claims will be held until all disputed claims have been resolved. The
disputed claims consist of an aggregate $534,000 for alleged prepetition
violations and various other claims asserted by various governmental agencies
and $5.2 million for damages arising from the return of aircraft asserted by the
Federal Deposit Insurance Corporation, as receiver. Upon resolution of all
disputed claims, there will be a final distribution of any remaining withheld
shares to all general unsecured creditors on a pro rata basis.
Following the consummation of the AIP Investment, as defined below, each
share of the Class B Common Stock issued pursuant to the Reorganization Plan was
converted into one share of Class A Common Stock.
Pursuant to the Reorganization Plan, the Company (1) granted warrants to
purchase an additional 989,011 shares of its Class A Common Stock (the "Existing
Warrants"), none of which have
F-8
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
been exercised, and (2) reserved 600,000 shares of the Class A Common Stock for
issuance to certain employees under the Company's 1994 Stock Option Plan, as
amended. The Class A Common Stock began trading on the American Stock Exchange
(the "AMEX") and the Pacific Stock Exchange on June 21, 1995.
In February 1995, the Company's Board of Directors began 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 outside financial advisor,
identified and met with potential investors, including Airline Investors
Partnership, L.P. ("AIP"), regarding a possible equity investment in the
Company. AIP ultimately agreed to make a $20.0 million cash investment in the
Company through the purchase of 18,181,818 shares of Class A Common Stock, par
value $.01 per share, and four shares of the Company's Series B Special
Preferred Stock, par value $.01 per share (the "AIP Investment"). On January 31,
1996, the AIP Investment and a series of related transactions, which were
dependent and effective upon one another, were consummated. Among other things,
the related transactions included:
- Certain agreements and arrangements with American Airlines, Inc.
("American"), including amendment to the long-term aircraft lease agreement
pursuant to which American leases DC-10-10 aircraft to the Company, (the
"Aircraft Lease Agreement"), which provide for, among other things, the
making of $10.0 million of previously deferred rent and maintenance
payments and interest thereon with a secured promissory note, rent
reduction and 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. 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; and
- 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 Note 16.
2. FRESH START REPORTING
The fresh start reporting common equity value of approximately $40.0 million
was determined by the Reorganized Company's management and was calculated by
employing a methodology based on a multiple of earnings before interest and
taxes. Analyses of publicly available information of other companies believed to
be comparable to the Reorganized Company were used in determining a multiple
which was then applied to financial projections of the Reorganized Company.
Management's estimate of common equity value considered a number of factors
including relevant industry and economic conditions, expected future
performance, and the amount of available cash and current market conditions.
Under fresh start reporting, the reorganization value of the entity was
allocated to the Reorganized Company's assets and liabilities on a basis
substantially consistent with the purchase method of accounting. The portion of
reorganization value not attributable to specific tangible or identifiable
intangible assets of the Reorganized Company is reflected as "Reorganization
value in excess of amounts allocable to identifiable assets" in the accompanying
balance sheets.
F-9
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FRESH START REPORTING (CONTINUED)
The effects of the Plan and fresh start reporting in accordance with the
provisions of the American Institute of Certified Public Accountants Statement
of Position (the "SOP") 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" on the Reorganized Company's balance sheet as of the
Effective Date are as follows, in thousands:
<TABLE>
<CAPTION>
REORGANIZED
PREDECESSOR COMPANY'S
BALANCE SHEET DEBT FRESH START BALANCE SHEET
SEPTEMBER 11, DISCHARGE ADJUSTMENTS SEPTEMBER 11,
1994 (A) (B) 1994
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 2,463 $ -- $ -- $ 2,463
Accounts receivable, net................................. 20,052 -- (376) 19,676
Inventories, net......................................... 10,714 -- (4,260) 6,454
Assets held for sale..................................... -- -- 1,594 1,594
Prepaid expenses and other............................... 5,048 (549) (653) 3,846
------------- ---------- ----------- -------------
Total current assets................................... 38,277 (549) (3,695) 34,033
Property and equipment, net................................ 48,516 -- (15,204) 33,312
Nonoperating assets........................................ 25,818 (20,968) (4,850) --
Assets held for sale....................................... -- -- 11,925 11,925
Reorganization value in excess of amounts allocable to
identifiable assets....................................... -- -- 72,024 72,024
Other assets............................................... 15,172 (882) 1,627 15,917
------------- ---------- ----------- -------------
Total assets......................................... $ 127,783 $ (22,399) $ 61,827 $ 167,211
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
</TABLE>
F-10
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FRESH START REPORTING (CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED
PREDECESSOR COMPANY'S
BALANCE SHEET DEBT FRESH START BALANCE SHEET
SEPTEMBER 11, DISCHARGE ADJUSTMENTS SEPTEMBER 11,
1994 (A) (B) 1994
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt........................ $ 1,416 $ 4,418 $ (145) $ 5,689
Current portion of capital lease obligations............. 2,121 -- -- 2,121
Accounts payable......................................... 34,787 (14,789) (504) 19,494
Accrued liabilities...................................... 12,774 (129) 439 13,084
Air traffic liability.................................... 40,639 -- 61 40,700
------------- ---------- ----------- -------------
Total current liabilities.............................. 91,737 (10,500) (149) 81,088
Long-term debt............................................. 2,684 8,737 -- 11,421
Capital lease obligations.................................. 12,591 -- -- 12,591
Other liabilities and deferred credits..................... 31,789 -- (9,678) 22,111
------------- ---------- ----------- -------------
Total liabilities not subject to compromise............ 138,801 (1,763) (9,827) 127,211
Total liabilities subject to compromise.................... 204,726 (204,726) -- --
------------- ---------- ----------- -------------
Total liabilities.................................... 343,527 (206,489) (9,827) 127,211
------------- ---------- ----------- -------------
Redeemable Preferred and Preference Stock Subject to
Compromise................................................ 5,973 (5,973) -- --
Shareholders' Equity (Deficit):
Common stock............................................. 40,504 -- (40,504) --
Capital in excess of par value........................... 12,479 -- (12,479) --
Common stock, warrants and options issuable.............. -- -- 40,000 40,000
Accumulated deficit...................................... (274,700) 190,063 84,637 --
------------- ---------- ----------- -------------
Shareholders' equity (deficit)....................... (221,717) 190,063 71,654 40,000
------------- ---------- ----------- -------------
Total liabilities and shareholders' equity
(deficit)........................................... $ 127,783 $ (22,399) $ 61,827 $ 167,211
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
</TABLE>
- ------------------------
(a) To record the discharge or reclassification of obligations pursuant to the
Plan. Substantially all of these obligations are only entitled to receive
such distributions of Common Stock as provided under the Plan. Portions of
these obligations were restructured and will continue, as restructured, to
be liabilities of the Reorganized Company.
(b) To record adjustments to reflect assets and liabilities at estimated fair
value (including the establishment of Reorganization value in excess of
amounts allocable to identifiable assets), the establishment of the
Reorganized Company's equity value of $40.0 million and the cancellation of
the Predecessor's equity.
F-11
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's financial statements, up to and including the Effective Date,
included herein have been prepared in accordance with SOP 90-7. For accounting
purposes, the Effective Date of the Plan and inception date for the Reorganized
Company is deemed to be September 12, 1994. Under fresh start reporting, the
reorganization value of the entity has been allocated to the Reorganized
Company's assets and liabilities on a basis substantially consistent with the
purchase method of accounting. The portion of reorganization value not
attributable to specific tangible or identifiable intangible assets of the
Company is reflected as "Reorganization value in excess of amounts allocable to
identifiable assets" in the accompanying balance sheets.
Because of the application of fresh start reporting, the financial
statements for periods after reorganization are not comparable to the financial
statements for periods prior to the reorganization.
CASH AND CASH EQUIVALENTS
The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents. Short-term cash investments at
December 31, 1994 and 1995 were valued at cost and amounted to $2.6 and $2.5
million, respectively.
INVENTORIES
Inventories consisting of flight equipment, expendable parts and supplies
are stated at average cost, less an allowance for obsolescence.
ASSETS HELD FOR SALE
Assets held for sale consisting of expendable inventory parts and rotable
flight equipment are stated at the lower of average cost or net realizable
value. As of December 31, 1994 and 1995, the Company had approximately $13.4
million and $9.7 million, respectively, of expendable inventory parts and
rotable flight equipment held for sale internally or on a consignment basis with
a third party.
PROPERTY AND EQUIPMENT
Owned property and equipment are stated at cost. Costs of major improvements
are capitalized. Depreciation and amortization are provided on a straight-line
basis over the following estimated useful lives:
<TABLE>
<S> <C>
Flight equipment.............. 12-15 years, 15% residual value
Ground equipment.............. 5-15 years
Airport terminal facility..... 30 years
Buildings..................... 15-20 years
Leasehold improvements........ Shorter of lease term or useful life
</TABLE>
Maintenance and repairs are charged to operations as incurred, except that
(1) costs of overhauling engines are charged to operations in the year the
engines are removed for overhaul and (2) scheduled heavy airframe overhauls on
DC-9-50 aircraft are recorded under the deferral method whereby the cost of
overhaul is capitalized and amortized over the shorter of the period benefited
or the lease term. Additionally, provision is made for the estimated cost of
scheduled heavy airframe overhauls required to be performed on leased DC-9-50
aircraft prior to their return to lessors. Maintenance and repairs on DC-10-10
aircraft are charged to operations on a flight hour basis.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets
is amortized on a straight-line basis over 20 years. Accumulated amortization at
December 31, 1994 and 1995 totaled
F-12
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximately $1.1 and $4.7 million, respectively. The Company will continue to
assess and evaluate whether the remaining useful life of the asset requires
revision or, through the use of estimated future undiscounted cash flows over
the remaining life of the asset, whether the remaining balance of the asset may
not be recoverable. The assessment of the recoverability of the unamortized
amount will be impacted if estimated future operating cash flows are not
achieved.
OTHER ASSETS
Material preoperating costs associated with the introduction of new flight
equipment are amortized on a straight-line basis over the shorter of the lease
period or five years.
ACCRUED VACATION LIABILITY
Accrued vacation in excess of the amount expected to be taken by employees
during the following year are classified as a noncurrent liability.
FREQUENT FLYER AWARDS
A liability for frequent flyer awards is recognized on the incremental cost
basis in the period during which passengers have accumulated sufficient mileage
for award redemption. Incremental costs primarily include fuel and catering.
PASSENGER REVENUES
Passenger fares are recorded as operating revenues when the transportation
is provided. The value of unused passenger tickets is included as Air traffic
liability.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
INCOME (LOSS) PER SHARE
Income (loss) per share is based on the weighted average number of common
stock shares and, if dilutive, common stock equivalents outstanding during each
year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of Air traffic liability and the amounts reported
for Accumulated pension and other postretirement benefit obligations. Management
believes that such estimates have been appropriately established in accordance
with generally accepted accounting principles.
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-
F-13
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash and cash equivalents, Accounts receivable,
Lease security and other deposits, Accounts payable, Other accrued liabilities,
Accrued vacation liability and Accrued salaries and wages approximate fair value
due to the short maturity of those instruments.
The estimated fair values of Long-term debt amounted to $20.5 million and
$11.4 million at December 31, 1994 and 1995, respectively, and Capital lease
obligations amounted to $14.9 million and $12.2 million at December 31, 1994 and
1995, respectively. These fair values were estimated by discounting the future
cash flow requirements of each instrument at rates currently offered at the
respective year-end dates to the Company for similar debt and lease instruments
of comparable maturities.
5. FLIGHT EQUIPMENT
All of the Company's aircraft are leased except for two DC-9-50s. At
December 31, 1994 and 1995, the composition of the Company's aircraft fleet is
as follows:
<TABLE>
<CAPTION>
1994 1995
------------------------ ------------------------
AIRCRAFT TYPE LEASED OWNED LEASED OWNED
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DC-10-10.................................................. 7 -- 8 --
DC-9-50................................................... 12 1 11 2
-- -- -- --
Total................................................... 19 1 19 2
-- -- -- --
-- -- -- --
</TABLE>
F-14
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASES
AIRCRAFT LEASES
Six DC-10-10 aircraft are leased under operating leases which expire in
2001. Two DC-10-10 aircraft are leased under short term operating leases which
expire in 1996. Seven and four DC-9-50 aircraft and related flight equipment are
leased under operating and capital leases, respectively, for various periods
ranging through the year 2004.
Most of the aircraft under operating leases include renewal options and fair
market value purchase options at the end of the lease period.
OTHER LEASES
The Company leases office space for its headquarters, airport facilities,
ticket offices and certain ground equipment in varying terms to 2008.
GENERAL
Rent expense for aircraft, office space, real property and other equipment
during 1993, 1994 and 1995 was $36.6 million, $33.6 million and $25.5 million,
respectively, net of sublease rental income from operating leases of $48,000,
$368,000 and $75,000, respectively.
Scheduled future minimum lease commitments under operating and capital
leases for the Company as of December 31, 1995, in thousands, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- ---------
<S> <C> <C>
1996................................................................... $ 17,414 $ 3,715
1997................................................................... 16,405 3,643
1998................................................................... 15,786 3,281
1999................................................................... 15,215 3,281
2000................................................................... 12,302 1,501
Thereafter............................................................. 19,095 --
--------- ---------
Total minimum lease payments......................................... $ 96,217 $ 15,421
---------
---------
Less amount representing interest.................................... 2,657
---------
Present value of capital lease obligations........................... 12,764
Less current portion of capital lease obligations.................... 2,662
---------
Capital lease obligations, excluding current portion................. $ 10,102
---------
---------
</TABLE>
In addition to scheduled future minimum lease payments, the Company is
required to pay for, under agreement with American, monthly DC-10-10 maintenance
charges. These charges are based on estimated flight hours for the month and are
expensed as incurred. For the years ended December 31, 1994 and 1995, the
Company incurred $8.9 million and $37.6 million, respectively, in maintenance
charges under such agreement.
Commencing October 1994 and throughout 1995, the Company was delinquent in
making certain payments due American under the Aircraft Lease Agreement. As of
December 31, 1995, the Company was delinquent on scheduled payments amounting to
approximately $9.7 million under this lease arrangement. Although American
notified the Company that the failure to make these certain rent and prepaid
maintenance payments constituted an event of default under the lease agreement,
it did not declare the lease agreement in default or exercise any remedies
available to it. Certain additional payments were made by the Company to
American and amendments to the Aircraft Lease Agreement providing for deferrals
of payment of any remaining delinquent amounts owed by the Company over
F-15
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LEASES (CONTINUED)
scheduled dates were effected throughout 1995. Effective January 31, 1996, the
Company and American agreed to terms for the satisfaction of these delinquent
amounts. In addition, effective January 31, 1996, the Company and American
agreed to a reduction in basic rents due on DC-10-10 operating leases. The above
schedule of future minimum lease commitments does not reflect such reduction.
See Notes 12 and 16.
The net book value of property held under capital leases as of December 31,
1994 and 1995 totaled $17.3 million and $15.5 million, respectively.
7. DEBT
At December 31, 1994 and 1995, the Company's long-term debt, including
obligations under capital leases, consists of the following, in thousands:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Secured obligations due 1996-1999................................................ $ 13,537 $ 8,542
Tax obligations due 1996-2000.................................................... 668 158
Unsecured obligations due 1996-1997.............................................. 6,341 2,850
Capital lease obligations due 1996-2000.......................................... 15,671 12,764
--------- ---------
36,217 24,314
Current portion.................................................................. (9,301) (8,689)
--------- ---------
Long-term debt and capital lease obligations, excluding current portion........ $ 26,916 $ 15,625
--------- ---------
--------- ---------
</TABLE>
Secured obligations due 1996-1999 are as follows:
- A note payable executed in 1994 in settlement of $6.0 million of
administrative claims related to unpaid prepetition L-1011 and DC-9-50
aircraft rents. The note is due in 1999, bears interest at 8.0% per annum
and is payable in monthly installments of principal and interest of
$121,658. At December 31, 1994 and 1995, $5.8 million and $4.7 million
were outstanding, respectively;
- A secured note payable executed in 1992 pursuant to a settlement agreement
with the Government of Canada related to two DHC-7 aircraft and related
flight equipment. The note is due in 1996 and is payable in installments
of $50,000 per month. As the note bears no interest, interest has been
imputed as of the Effective Date at 10.0% per annum. As of December 31,
1994 and 1995, $1.0 million and $569,000 were outstanding, respectively.
In January 1996, the note was paid in full;
- A secured note executed in 1993 for the purchase of a DC-9-50 aircraft
from a lessor. The mortgage note is due in 1999 and is payable in monthly
installments of principal and interest of $59,876. Interest accrues at
10.315% per annum. At December 31, 1994 and 1995, $2.6 million and $2.1
million were outstanding, respectively; and
- The Company has available a credit facility provided by CIT Group/Credit
Finance, Inc. (the Credit Facility). At December 31, 1995, the Credit
Facility consisted of an $8.15 million secured revolving line of credit
including up to $3.0 million of letters of credit. Borrowings under the
revolving line of credit have been recorded net of discount representing
the fair value of the Existing Warrants as discussed in Note 11. Available
credit is subject to reduction determined by recalculation of the
borrowing base and repayments arising from disposition of collateral. At
December 31, 1994, $4.1 million and $2.1 million of borrowings and letters
of credit, respectively, were outstanding. As of December 31, 1995, the
total availability under the Credit Facility amounted to approximately
$3.4 million, which amount was fully drawn in the form of
F-16
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
$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
in conjunction with the consummation of the AIP Investment and its related
transactions. See Note 16.
Tax obligations due 1996-2000 represent allowed priority tax claims for
various taxing jurisdictions, which in accordance with the provisions of the
Plan, bear interest at 7.0% per annum and are payable in 24 quarterly
installments commencing on the first through sixth anniversaries of the
Effective Date. The Company is currently in negotiations with respective tax
jurisdictions regarding approximately $500,000 of tax obligations. At December
31, 1995, the $500,000 is included in Accounts payable in the accompanying
balance sheets.
Unsecured obligations due 1996-1997 are as follows:
- A note executed in 1994 in settlement of $4.7 million of administrative
claims related to unpaid postpetition L-1011 aircraft rents. The note is
due in 1996, bears interest at prime plus 3.0% (11.5% at December 31,
1995) and is payable in monthly installments of principal and interest of
$194,010. At December 31, 1994 and 1995, $3.9 million and $1.6 million
were outstanding, respectively;
- A note executed in 1994 in settlement of $2.8 million of administrative
claims related to unpaid prepetition airport use and occupancy fees to the
State of Hawaii. The note is due in 1997 and is payable in monthly
installments of $100,000. The note bears no interest; however, interest
has been imputed at 10.0% per annum. As of December 31, 1994 and 1995,
$2.2 million and $1.2 million were outstanding, respectively; and
- A note executed in 1994 in settlement of $276,000 of administrative claims
related to unpaid L-1011 aircraft rents. The note is due in 1996, accrues
interest at prime plus 3.0% per annum (11.5% at December 31, 1995) and is
payable in monthly principal installments of $11,518. At December 31, 1994
and 1995, $254,000 and $115,000 were outstanding, respectively.
Obligations under capital leases represent the present value of aggregate
future minimum lease payments discounted using interest rates ranging from 8.5%
to 9.0%. See Note 6.
The following table represents a summary of the Company's assets which are
pledged as security for the indicated obligations as of December 31, 1995:
<TABLE>
<CAPTION>
NET BOOK VALUE OF
SECURITY AS OF DECEMBER BALANCE OF OBLIGATION AS OF
ASSET/NATURE OF SECURITY 31, 1995 CREDITOR DECEMBER 31, 1995
- ----------------------------------- ------------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Security interest in certain DC-9 $6.1 million GPA Group PLC and AEROUSA, INC $4.7 million note due 1999
rotable parts
Security interest in certain ground $1.0 million Canadian Government $569,000 note due 1996
and flight equipment, $15.0
million stipulated judgment to be
filed upon default of payments due
</TABLE>
F-17
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
<TABLE>
<CAPTION>
NET BOOK VALUE OF
SECURITY AS OF DECEMBER BALANCE OF OBLIGATION AS OF
ASSET/NATURE OF SECURITY 31, 1995 CREDITOR DECEMBER 31, 1995
- ----------------------------------- ------------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Mortgage interest in DC-9-50 $2.7 million GATX Capital Corporation $2.1 million mortgage note due
aircraft 1999
First priority security interest in Unspecified CIT Group/Credit Finance, Inc $1.3 million revolving credit
substantially all assets, with facility obligation due 1996,
certain limited exceptions $2.1 million letters of
including prior liens contemplated credit
by the Plan, $2.0 million letters
of credit (See Note 11)
</TABLE>
8. REORGANIZATION AND NONRECURRING OPERATING ITEMS
During 1993, the Predecessor returned or terminated the respective leases
under five of its DC-9-50 aircraft. As a result, the Company provided for $14.0
million in anticipated aircraft rental and return costs. In accordance with SOP
90-7, the Predecessor classified reorganization and other costs associated with
the bankruptcy proceeding as nonoperating reorganization expenses. The balance
for the period from September 22, 1993 through December 31, 1993 includes the
following, in thousands:
<TABLE>
<S> <C>
Provisions for claims related to rejection of L-1011 and DHC-7
aircraft leases.................................................. $ 51,456
Provisions for claims related to various contract disputes,
litigation and other matters..................................... 346
Professional fees and expenses related to reorganization
proceedings...................................................... 835
---------
$ 52,637
---------
---------
</TABLE>
Charter revenues in 1993 include $3.9 million received from the Military
Airlift Command in May 1993 following a settlement with the Predecessor on its
claim for additional compensation for charter operations during Operations
Desert Shield and Desert Storm in 1991 and 1990.
The following reorganization and other items associated with the bankruptcy
proceeding were incurred by the Predecessor during the period from January 1,
1994 to September 11, 1994, in thousands:
<TABLE>
<S> <C>
Reorganization Items:
Professional fees....................................................... $ 5,744
Employee share of common stock distribution............................. 7,568
Other................................................................... 268
Revaluation of assets and liabilities..................................... 370
---------
$ 13,950
---------
---------
</TABLE>
In 1993, the Predecessor entered into new collective bargaining agreements
with the International Association of Machinists and Aerospace Workers (AFL-CIO)
(IAM), the Air Line Pilots Association, International (ALPA), Association of
Flight Attendants (AFA) and Transport Workers Union
F-18
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. REORGANIZATION AND NONRECURRING OPERATING ITEMS (CONTINUED)
(TWU) and made certain changes to the compensation and benefits of salaried
employees. These new agreements contemplated that employees would have claims
relating to ratified concessions which would be satisfied through the issuance
of the new Common Stock of the Reorganized Company. A charge of $7.6 million in
1994 was included as a reorganization item in satisfaction of these claims.
Operating expenses in 1995 were reduced by the reversal of $1.8 million in
preconfirmation contingency accruals initially provided for on the Effective
Date.
9. INCOME TAXES
As a result of net operating losses (NOLs) in the current year and NOLs
carried forward from prior years, the Company and the Predecessor were not
required to provide for federal and state income taxes for 1993, 1994 and 1995.
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and deferred tax liabilities at
December 31, 1994 and 1995 are presented below, in thousands:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts...... $ 198 $ 320
Accrued pension and post-retirement benefits................................. 10,448 10,104
Accrued vacation............................................................. 1,644 1,646
Net operating loss carryforwards............................................. 34,181 20,115
Investment tax credit carryforwards.......................................... 2,569 2,569
Airframe return provision.................................................... 76 964
Other........................................................................ 3,813 4,564
---------- ----------
Total gross deferred tax assets............................................ 52,929 40,282
Less valuation allowance................................................... (47,086) (34,167)
---------- ----------
Net deferred tax assets.................................................... 5,843 6,115
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation.......... (5,843) (6,115)
Other........................................................................ -- --
---------- ----------
Total gross deferred tax liability......................................... (5,843) (6,115)
---------- ----------
Net deferred taxes......................................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1994 and
1995 was $66.4 million and $47.1 million, respectively. The net change in the
total valuation allowance for the years ended December 31, 1994 and 1995 was a
decrease of $19.3 million and a decrease of $12.9 million, respectively. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
The Chapter 11 reorganization of the Company resulted in an ownership change
of the Company under Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), which resulted in a
F-19
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
limitation on the use of its NOL carryforwards. In order to preserve a portion
of the Company's NOLs in the event of an ownership change within two years of
its bankruptcy reorganization, the Company made a special election in its 1994
federal income tax return to have its NOLs be subject to Section 382 of the Code
following its bankruptcy reorganization (the Section 382(l)(6) election). The
purpose of the Section 382(l)(6) election was to preserve the Company's ability
to utilize a portion of its NOLs even if it underwent an ownership change within
two years from the ownership change resulting from its bankruptcy
reorganization. Absent that election, if the Company underwent an ownership
change within two years following the ownership change resulting from its
bankruptcy reorganization, it would have been precluded from using any NOLs
incurred prior to that second ownership change to offset taxable income for
periods following that ownership change.
As a result of the Section 382(l)(6) election, the Company's NOLs
attributable to the period prior to the ownership change resulting from its
bankruptcy reorganization, as computed for federal and state income tax
purposes, available to be used to offset future taxable income generally was
limited to an annual amount (the Section 382 Limitation) equal to the value of
the Company's equity immediately after that ownership change multiplied by the
then long-term tax-exempt rate. The Section 382 Limitation may also be increased
by certain built-in income items recognized following an 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 any
built-in income items as previously discussed. NOLs incurred following that time
were not subject to that limitation. In general, to the extent taxable income
for a year is less than the Section 382 Limitation applicable to that year, the
excess Section 382 Limitation increases the Section 382 Limitation available for
the immediately succeeding year. To the extent the Company's taxable income for
a year exceeds the Section 382 Limitation applicable to that year, plus the
amount of any unused NOLs not subject to the Section 382 Limitation (e.g.,
because they are Post-Change NOLs), the Company will have federal taxable income
subject to tax at a maximum rate of 35.0% (plus any applicable state taxes).
Unused NOLs generally expire 15 years after they are incurred.
At December 31, 1995, the Company has approximately $50.3 million of NOLs
(and equivalent tax credit carryforwards) available to offset future federal and
state taxable income, subject to the application of Section 382 of the Code, as
discussed above. If the Company, in future tax periods, were to recognize tax
benefits attributable to tax attributes of the Predecessor (such as net
operating loss and other carryforwards), any such benefit would first be applied
to reduce the balance of Reorganization value in excess of amounts allocable to
identifiable assets.
Subsequent to December 31, 1995, a series of transactions were consummated
which may have affected the Company's NOLs. See Note 16.
10. BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
The Company sponsors several defined benefit pension plans covering
substantially all of its employees hired on or prior to September 1, 1992.
Pilots and ground personnel are covered under three defined benefit pension
plans which provide benefits based primarily on years of service and employee
compensation near retirement. The IAM and salaried defined benefit pension plans
were frozen effective October 1, 1993. Funding for the ground personnel plans is
based on minimum Employee Retirement Income Security Act requirements. Pension
cost for the pilot plan is funded on a
F-20
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED)
current basis based on the amortization of prior service cost over 20 years.
Plan assets consist primarily of common stocks, government securities, insurance
contract deposits and cash management funds.
The following table summarizes the funded status of the defined benefit
plans of the Company as of December 31, 1994, in thousands:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Fair value of plans assets................................................................ $ 122,625
------------
Accumulated benefit obligation:
Vested.................................................................................. (108,119)
Non-vested.............................................................................. (7,991)
------------
(116,110)
Additional benefits based on future salary levels......................................... (10,244)
------------
Projected benefit obligation.............................................................. (126,354)
------------
Projected benefit obligation in excess of plan assets..................................... (3,729)
Unrecognized actuarial net loss........................................................... 5,956
------------
Prepaid pension cost.................................................................. $ 2,227
------------
------------
</TABLE>
The projected benefit obligation was determined using an assumed
weighted-average discount rate of 8.25% for 1994. The assumed weighted-average
rate of compensation increase was 4.25% for pilots and 0.00% for ground
personnel at December 31, 1994. The assumed weighted-average expected long-term
rate of return on plan assets was 9.0% for 1994.
The following table summarizes the funded status of the defined benefit
plans of the Company as of December 31, 1995, in thousands:
<TABLE>
<CAPTION>
1995
------------------------------
PLANS FOR PLANS FOR
WHICH WHICH ASSETS
ACCUMULATED EXCEED
BENEFITS ACCUMULATED
EXCEED ASSETS BENEFITS
-------------- --------------
<S> <C> <C>
Fair value of plans assets............................................. $ 88,877 $ 50,736
-------------- --------------
Accumulated benefit obligation:
Vested............................................................... (86,807) (42,160)
Non-vested........................................................... (7,803) (2,174)
-------------- --------------
(94,610) (44,334)
Additional benefits based on future salary levels...................... (13,860) --
-------------- --------------
Projected benefit obligation........................................... (108,470) (44,334)
-------------- --------------
Plan assets in excess of (less than) projected benefit obligation...... (19,593) 6,402
Unrecognized actuarial net loss........................................ 8,149 3,435
Amount reflected as minimum pension liability.......................... (1,170) --
-------------- --------------
Prepaid (accrued) pension cost..................................... $ (12,614) $ 9,837
-------------- --------------
-------------- --------------
</TABLE>
F-21
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED)
The projected benefit obligation was determined using an assumed
weighted-average discount rate of 7.25% for 1995. At December 31, 1995, the
assumed weighted-average rate of compensation increase was 4.50% for pilots and
0.00% for ground personnel. The assumed weighted-average expected long-term rate
of return on plan assets was 9.0% for 1995.
The provisions of SFAS No. 87, "Employers' Accounting for Pensions", require
the recognition of an additional minimum liability for each defined benefit plan
for which the accumulated benefit obligation exceeds plan assets. This amount is
recorded as a long-term liability in Accumulated pension and other
postretirement benefits obligations and a separate reduction of Shareholders'
Equity in the accompanying balance sheets.
Net periodic pension gain for 1993 included the following components, in
thousands:
<TABLE>
<CAPTION>
PREDECESSOR
-----------
1993
-----------
<S> <C>
Service cost-benefits earned during the year............................................... $ 5,740
Interest cost on projected benefit obligation.............................................. 9,919
Actual return on plan assets............................................................... (11,455)
Net amortization and deferral.............................................................. 645
Curtailment gain........................................................................... (12,104)
-----------
Net periodic pension gain.............................................................. $ (7,255)
-----------
-----------
</TABLE>
The net periodic pension cost in 1993 was determined using an assumed
weighted-average discount rate of 7.25%.
Curtailment gain of $12.1 million represents the actuarial equivalent of the
reduction in the net accrued pension benefit obligation as of September 30, 1993
and is reflected in the accompanying financial statements as an extraordinary
item. The gain results from the cessation of future pay and credited service
increases due to the aforementioned freezing of the IAM and salaried employee
defined benefit pension plans as of October 1, 1993.
Net periodic pension (gain) cost for 1994 included the following components,
in thousands:
<TABLE>
<CAPTION>
REORGANIZED
PREDECESSOR COMPANY
------------------ ------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1994 SEPTEMBER 12, 1994
TO TO
SEPTEMBER 11, 1994 DECEMBER 31, 1994
------------------ ------------------
<S> <C> <C>
Service cost-benefits earned during the period.................. $ 2,326 $ 818
Interest cost on projected benefit obligation................... 6,828 2,831
Actual return on plan assets.................................... (2,244) 3,109
Net amortization and deferral................................... (5,515) (6,366)
Fresh start adjustment.......................................... (8,284) --
------- -------
Net periodic pension (gain) cost............................ $ (6,889) $ 392
------- -------
------- -------
</TABLE>
The net periodic pension cost in 1994 was determined using an assumed
weighted-average discount rate of 7.25% and 8.25% for the period from January 1,
1994 to September 11, 1994 and the period from September 12, 1994 to December
31, 1994, respectively.
In the third quarter of 1994, ALPA further ratified certain funding
assumption changes to its defined benefit pension plan which resulted in
decreased required cash contributions to the plan. The changes were ratified by
ALPA in exchange for 1) an additional allowed general unsecured claim
F-22
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED) (CONTINUED)
under the Predecessor's Chapter 11 process; 2) payment by the Reorganized
Company of the pilots' pension plan investment and advisory fees and
administrative expenses in 1994 and 1995, with payments being limited to
$100,000 in 1994; 3) if applicable, future payment directly by the Reorganized
Company for retirement benefits accrued in excess of statutory compensation
limits; and 4) forgiveness of certain immaterial fees due from ALPA.
Fresh start adjustment of $8.3 million represents the net effect of fresh
start accounting, as applied by the Company in accordance with SOP 90-7, on the
pension benefit obligation as of September 12, 1994.
Net periodic pension cost for 1995 included the following components, in
thousands:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
-----------
1995
-----------
<S> <C>
Service cost-benefits earned during the year............................................... $ 3,248
Interest cost on projected benefit obligation.............................................. 10,411
Actual return on plan assets............................................................... (24,180)
Net amortization and deferral.............................................................. 12,868
Early retirement provision................................................................. 1,496
-----------
Net periodic pension cost.............................................................. $ 3,843
-----------
-----------
</TABLE>
The net periodic pension cost in 1995 was determined using an assumed
weighted-average discount rate of 8.25%.
In the first quarter of 1995, an early retirement program was offered by the
Company to qualified participants of the IAM and salaried defined benefit plans.
The Company recognized a $2.0 million charge to operations in 1995 which amount
includes the impact of the early retirement program on the estimated accumulated
benefit obligations of the IAM and salaried defined benefit plans.
POSTRETIREMENT PLANS
In addition to providing pension benefits, the Company sponsors defined
benefit postretirement plans. Employees in the Company's non-pilot group are
eligible for certain medical benefits under one plan if they meet certain age
and service requirements at the time of retirement. Employees in the Company's
pilot group are eligible for certain medical, dental and life insurance benefits
under another plan if they become disabled or reach normal retirement age while
working for the Company. The Company continues to fund the cost of medical,
dental and life insurance benefits in the year incurred.
The Company's postretirement benefit plans' combined benefit obligations as
of December 31, 1994 and 1995 are as follows, in thousands:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Accumulated benefit obligation:
Retirees and dependents...................................................... $ (5,278) $ (5,848)
Fully eligible active plan participants...................................... (346) (341)
Other active plan participants............................................... (16,391) (12,735)
---------- ----------
Unfunded accumulated postretirement benefit obligation......................... (22,015) (18,924)
Unrecognized net (gain) loss................................................... 2 (6,398)
---------- ----------
Accrued postretirement benefit obligation.................................. $ (22,013) $ (25,322)
---------- ----------
---------- ----------
</TABLE>
F-23
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED) (CONTINUED)
The accumulated postretirement benefit obligation was determined using an
assumed weighted-average discount rate of 8.25% and 7.25% for 1994 and 1995,
respectively.
Net periodic postretirement benefit cost in 1993 included the following
components, in thousands:
<TABLE>
<CAPTION>
PREDECESSOR
-----------
1993
-----------
<S> <C>
Service cost-benefits attributed to service during the year................................ $ 1,480
Interest cost on accumulated postretirement benefit obligation............................. 1,479
Net amortization and deferral.............................................................. (43)
-----------
Net periodic postretirement benefit cost............................................... $ 2,916
-----------
-----------
</TABLE>
Net periodic postretirement benefit cost in 1993 was determined using an
assumed weighted-average discount rate of 7.25%.
Net periodic postretirement benefit cost in 1994 included the following
components, in thousands:
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED COMPANY
------------------ -------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1994 SEPTEMBER 12, 1994
TO TO
SEPTEMBER 11, 1994 DECEMBER 31, 1994
------------------ -------------------
<S> <C> <C>
Service cost-benefits attributed to service during the period... $ 1,074 $ 444
Interest cost on accumulated postretirement benefit
obligation..................................................... 986 459
Net amortization and deferral................................... (72) --
------- -----
Net periodic postretirement benefit cost.................... $ 1,988 $ 903
------- -----
------- -----
</TABLE>
A weighted average discount rate of 7.25% and 8.25% was used for the period
from January 1, 1994 to September 11, 1994 and the period from September 12,
1994 to December 31, 1994, respectively.
Net periodic postretirement benefit cost in 1995 included the following
components, in thousands:
<TABLE>
<CAPTION>
REORGANIZED
COMPANY
-----------
1995
-----------
<S> <C>
Service cost-benefits attributed to service during the year................................ $ 1,593
Interest cost on accumulated postretirement benefit obligation............................. 1,785
Early retirement provision................................................................. 411
-----------
Net periodic postretirement benefit cost............................................... $ 3,789
-----------
-----------
</TABLE>
A weighted average discount rate of 8.25% was used for the year ended
December 31, 1995.
As noted above, in the first quarter of 1995, an early retirement program
was offered by the Company to qualified participants of the IAM and salaried
defined benefit pension plans. The Company recognized a $2.0 million charge to
operations in 1995 for the combined effects of the early retirement program on
the estimated accumulated pension and postretirement benefit obligations.
F-24
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. BENEFIT PLANS (CONTINUED) (CONTINUED)
For measurement purposes, the following ranges of graded rates were used in
the per capita cost of covered medical benefits:
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED COMPANY
---------------------------------- ----------------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, 1994 SEPTEMBER 12, 1994
TO TO
1993 SEPTEMBER 11, 1994 DECEMBER 31, 1994 1995
----------- --------------------- --------------------- -----------
<S> <C> <C> <C> <C>
Initial rates................................ 14.0% 14.0% 15.0% 14.0%
Termination rates............................ 5.0% 5.0% 6.0% 5.0%
</TABLE>
The medical cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed medical cost trend rates
by 1.0% in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1993, 1994 and 1995 by $3.5 million, $3.7 million
and $2.9 million, respectively, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the years then
ended by $593,000, $584,000 and $632,000, respectively.
OTHER
The Company also sponsors separate deferred compensation plans (401(k)) for
its pilots, flight attendants and ground and salaried personnel. Participating
employer cash contributions are not required under the terms of the pilots'
plan. However, the Company made contributions of 7.0% in 1993, 5.0% in 1994 and
5.0% in 1995, of defined compensation pursuant to the terms of the flight
attendants' plan. Effective January 1, 1994, the Company is required to match
employee contributions up to an additional 2.0% in the flight attendants' plan.
Contributions to the flight attendants' plan are funded currently and totaled
approximately $868,000, $889,000 and $555,000 in 1993, 1994 and 1995,
respectively.
Effective September 1, 1993, the Company was required to contribute 2.0% of
eligible earnings to the 401(k) plan for ground and salaried personnel.
Effective September 1, 1994, the Company is required to contribute 4.0% of
eligible earnings to the ground and salaried personnel plan. Contributions from
the Company are required only for those employees who were participants in the
plan as of September 1, 1993. Contributions to the ground and salaried 401(k)
plan totaled $288,000, $1.1 million and $1.6 million in 1993, 1994 and 1995,
respectively.
11. COMMON STOCK WARRANTS, RIGHTS AND OPTIONS
EXISTING WARRANTS
In conjunction with the Credit Facility, $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 Credit Facility. One such letter of credit
in the amount of $1.0 million is guaranteed by Mr. Martin Anderson, a member of
the Board of Directors for fiscal year 1995. The persons providing the letters
of credit received a subordinated security interest in the assets securing the
Financing and received warrants to purchase 989,011 shares of the Reorganized
Company's Class A Common Stock. The warrants have a five-year term, expiring
September 12, 1999, and are exercisable at a price equal to $2.73 per common
share, subject to adjustment pursuant to anti-dilution provisions. No warrants
had been exercised as of December 31, 1995.
SHAREHOLDER RIGHTS PLAN
On December 1, 1994, the Board of Directors of the Company authorized
adoption of a shareholder rights plan (the "Rights Plan") pursuant to which
there would be attached to each share of common stock of the Reorganized Company
one preferred stock purchase right (a "PSP Right"). The
F-25
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK WARRANTS, RIGHTS AND OPTIONS (CONTINUED)
Rights Plan provides that in the event any person becomes the beneficial owner
of 10.0% or more of the outstanding common shares, each PSP Right (other than a
PSP Right held by the 10.0% shareholder) will be exercisable, on and after the
close of business on the tenth business day following such event, to purchase
Hawaiian Airlines Series A Preferred Stock having a market value equal to two
times the then current exercise price (initially $8.00). The Rights Plan further
provides that if, on or after the occurrence of such event, the Company is
merged into any other corporation or 50.0% or more of the Company's assets or
earning power are sold, each PSP Right (other than a PSP Right held by the 10.0%
shareholder) will be exercisable to purchase common shares of the acquiring
corporation having a market value equal to $16.00. The PSP Rights expire on
December 1, 2004 (unless previously triggered) and are subject to redemption by
the Company at $0.01 per PSP Right at any time prior to the first date upon
which they become exercisable.
1994 STOCK OPTION PLAN
Pursuant to the terms of the Plan of Reorganization, 600,000 shares of the
Company's Class A Common Stock have been reserved for issuance under a 1994
Stock Option Plan. The 1994 Stock Option Plan provides for issuance of options
to officers and key employees of the Company, with the terms of such options and
the recipients of such options to be determined by a committee. In February
1995, the Compensation Committee of the Board of Directors approved a form of
nonqualified stock option agreement and granted options to acquire 592,500
shares of the Company's Class A Common Stock. The Compensation Committee
established the exercise price of the options granted as 25.0% of the average of
the closing prices of the Class A Common Stock reported on the AMEX for the 10
consecutive days of trading beginning on June 26, 1995. The application of the
aforementioned formula resulted in an option exercise price of $1.62 per share.
The options vest and are exercisable upon the earlier of February 2, 1996 or
upon a change of control, as described in the 1994 Stock Option Plan. If the
options vest through lapse of time, they may be exercised at any time prior to
February 2, 2005; however, if the options vest due to a change of control, they
may be exercised immediately prior to such change of control, after which any
unexercised options lapse. Noncash compensation expense of approximately $2.0
million for the granted options has been recognized during the year ended
December 31, 1995. The remaining $182,000 of compensation cost has been
reflected as Unearned compensation in the Shareholders' Equity section in the
accompanying balance sheets and will be recognized in January 1996. No options
had been exercised as of December 31, 1995 (options to acquire 592,500 shares
are outstanding).
In January 1996, the AIP Investment and a series of related transactions
were consummated. The AIP Investment and its related transactions resulted in
the immediate vesting of the aforementioned stock options, the Company issuing
warrants to AMR and additional warrants to the holders of the Existing Warrants
and changes to the provisions of the Rights Plan and 1994 Stock Option Plan. See
Note 16.
12. TRANSACTIONS WITH AMERICAN AND CERTAIN OF ITS AFFILIATES
A variety of agreements exist between the Company and American and AMR
Training & Consulting Group, Inc. and its affiliates for certain services,
including data processing, licensing of reservations system, leasing of DC-10-10
aircraft, maintenance services on such DC-10-10 aircraft and participation in
the AAdvantage-Registered Trademark- frequent flyer program. At December 31,
1995, the obligations of the Company under these agreements were secured by a
$2.0 million letter of credit issued under the Company's working capital line of
credit. See Note 7.
F-26
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. TRANSACTIONS WITH AMERICAN AND CERTAIN OF ITS AFFILIATES (CONTINUED)
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 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.
In December 1994 and during the 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 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.
On January 31, 1996, establishment of terms for the repayment of these
delinquencies and certain other agreements and arrangements with American and
AMR were effected upon consummation of the AIP Investment. See Note 16.
13. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
The Company is party to a small number of lawsuits. Four claims remain
asserted against the Reorganized Company for alleged prepetition and/or
administrative claims on or before the Effective Date of the Plan. Management
believes that the Reorganized Company has established adequate reserves for
these bankruptcy related claims.
In addition, the Company is a party to several other claims and legal
actions. In the opinion of management, and after consultation with legal
counsel, the Company believes that the ultimate disposition of these matters
will not have a material adverse effect on the Company's operations or financial
condition.
AIRCRAFT MAINTENANCE
Maintenance on the Company's DC-10-10 aircraft fleet is being performed by
American in accordance with FAA regulations and Hawaiian Airlines' approved
maintenance program. In October 1994, December 1994 and during the first quarter
of 1995, the Company was delinquent in making certain payments due American
under its lease arrangement. The October 1994 delinquency was paid in November
1994. The December 1994 and first quarter 1995 delinquencies were deferred by
American throughout 1995. Establishment of terms for the repayment of these
deferrals and certain other arrangements with American were effected subsequent
to December 31, 1995 upon consummation of the AIP Investment and its related
transactions. See Notes 6, 12 and 16.
F-27
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Due to the U.S. Government's decision to phase out the VLF/Omega stations,
the Omega navigation system aboard the DC-10-10 aircraft must be updated to
continue overseas operations. The current plan is to change to a dual Global
Positioning System during the heavy phase checks scheduled for 1996. The
estimated cost is $125,000 per aircraft.
Hawaiian Airlines anticipates that in the period 1996 through 1999, five of
its 13 DC-9-50 aircraft will require a heavy airframe overhaul check (the "D
Check"). The D Check for a DC-9-50 requires more than 10,000 man-hours of
maintenance work and includes stripping the airframe, extensively testing the
airframe structure and a large number of parts and components, and reassembling
the overhauled airframe with new or rebuilt components. The Company anticipates
each D Check to cost approximately $1,200,000.
As a result of certain incidents in 1989 and 1988 involving structural
damage to aircraft in flight operated by carriers other than the Company, the
Federal Aviation Administration (the "FAA") is requiring or is expected to
require structural modifications and the replacement of certain parts, as well
as the implementation of additional maintenance programs or changes to current
programs, with respect to various types of aircraft over a certain age. These
requirements vary, depending on the type of aircraft covered. Based on
information currently available, the Company estimates that the total cost of
complying with the aging aircraft requirements over the 1996 through 2000 period
will approximate $600,000 per DC-9-50 aircraft.
In addition, the Company expects to incur approximately $100,000 per DC-9-50
aircraft per year, for maintenance required under a corrosion prevention and
control program. This program is anticipated to continue indefinitely in the
future.
During the period from 1996 through 2000, the Company anticipates
implementing its supplemental inspection document program for certain of its
DC-9-50 aircraft which is estimated to range up to $50,000 per aircraft.
The estimated future cost of complying with FAA regulations as discussed in
the preceding paragraphs will be in addition to the costs of the Company's
current DC-10-10 and DC-9-50 fleet maintenance programs.
LOS ANGELES AIRPORT OPERATING TERMINAL
On December 1, 1985, the Company entered into an Interline Agreement with
other airlines for, among other things, the sharing of costs, expenses and
certain liabilities related to the acquisition, construction and renovation of
certain passenger terminal facilities at the Los Angeles International Airport
("Facilities"). Current tenants and participating members of LAX Two Corporation
(the "Corporation"), a mutual benefit corporation, are jointly and severally
obligated to pay their share of debt service payments related to Facilities
Sublease Revenue Bonds issued to finance the acquisition, construction and
renovation of the Facilities which totaled $111.9 million at completion. The
Corporation leases the Facilities from the Regional Airports Improvement
Corporation under a lease agreement. In addition, the Corporation is also
obligated to make annual payments to the city of Los Angeles for charges related
to its terminal ground rental. All leases of the Corporation are accounted for
as operating leases with related future commitments as of December 31, 1995
amounting to approximately $201.7 million. Rent expense relating to these
operating leases totaled $3.6 million, $4.4 million and $5.9 million in 1993,
1994 and 1995, respectively.
F-28
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Member airlines pay the expenses associated with the Facilities on a prorata
share basis calculated primarily upon their respective numbers of passengers
utilizing the Facilities. The Company accounts for its obligation under this
agreement as an operating lease and incurred $672,000, $737,000 and $842,000 of
rent expense in 1993, 1994 and 1995, respectively.
FREQUENT FLYER PROGRAM
The Company's Gold Plus frequent flyer program offers a variety of awards
based on accumulated mileage. The Company recognizes a liability in the period
in which members have accumulated sufficient mileage points to allow for award
redemption. The incremental cost method is used, computed primarily on the basis
of fuel and catering costs, exclusive of any overhead or profit margin.
Non-travel awards are valued at the incremental cost of tickets exchanged for
such awards.
As of December 31, 1994 and 1995, Gold Plus members had accumulated
approximately 3.0 billion and 3.3 billion miles, respectively, representing
liabilities totaling approximately $489,000 at the end of each year. The
Company's accruals assume full redemption of mileage points. During the years
ended December 31, 1993, 1994 and 1995, 493.0 million, 636.0 million and 581.0
million award miles were redeemed, respectively.
The Company believes that the usage of free travel awards will not result in
the displacement of revenue customers and, therefore, such usage will not
materially affect the Company's liquidity or operating results. The use of free
travel awards is subject to effective capacity control/yield management programs
maintained by the Company to limit the possibility of displacing revenue
passengers. Usage of Gold Plus travel redemption accounted for approximately
2.1%, 2.7% and 2.2% of Interisland traffic and an insignificant percentage of
Transpac and Southpac traffic in 1993, 1994 and 1995, respectively.
14. CONCENTRATION OF BUSINESS RISK
The Company's scheduled service operations are primarily focused on
providing air transportation service to, from, or throughout the Hawaiian
Islands. Therefore, the Company's operations, including its ability to collect
its outstanding receivables, are significantly affected by economic conditions
in the State of Hawaii and by other factors affecting the level of tourism in
Hawaii.
The Company's Interisland, Transpac and Southpac scheduled service is
marketed through a number of wholesalers. In 1993, one wholesaler accounted for
approximately 11.0% of total passenger revenues. The wholesaler purchased
approximately $31.0 million of tickets in 1993, primarily in the Interisland and
Transpac markets. No wholesaler accounted for more than 10.0% of total passenger
revenues in 1994 or 1995.
15. RELATED PARTY TRANSACTIONS
During 1995, the law firm Goodsill Anderson Quinn & Stifel, of which Mr.
Martin Anderson, a member of the Board of Directors and chairman of the
Compensation Committee during fiscal year 1995, 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. In addition, 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
Credit Facility. 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
F-29
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
security interest in the assets securing the Credit Facility 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 exercisable
at a price equal to $2.73 per share, subject to adjustment pursuant to
anti-dilution provisions. See Note 11.
Mr. Clifton Kagawa, a member of the Board of Directors and the Compensation
Committee during fiscal year 1995, 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. 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 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 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.
Upon consummation of the AIP Investment and its related transactions in
January 1996, both Mr. Anderson and Mr. Kagawa agreed not to stand for
reelection to the Board of Directors and effectively resigned upon the election
of the new Board of Directors at the special meeting of shareholders. Also, the
shares and the exercise price on such shares associated with Mr. Anderson's
warrants were adjusted pursuant to the anti-dilution provisions of the warrants.
See Note 16.
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 agreement (the "Investment Agreement") setting
F-30
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT INVESTMENT AND FINANCIAL
TRANSACTIONS (CONTINUED)
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 (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
Pursuant to the Investment Agreement, AIP agreed 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"). The following is
a description of the Rights Offering as contemplated on March 15,
F-31
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT INVESTMENT AND FINANCIAL
TRANSACTIONS (CONTINUED)
1996. Pursuant to the Rights Offering, 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. As of March 15, 1996 the Company had not exercised this option.
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
balance, without premium. The
F-32
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT INVESTMENT AND FINANCIAL
TRANSACTIONS (CONTINUED)
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
F-33
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT INVESTMENT AND FINANCIAL
TRANSACTIONS (CONTINUED)
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.
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.
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
F-34
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT INVESTMENT AND FINANCIAL
TRANSACTIONS (CONTINUED)
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.
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.
F-35
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT INVESTMENT AND FINANCIAL
TRANSACTIONS (CONTINUED)
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.
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 as of March 15, 1996 was 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.
F-36
<PAGE>
HAWAIIAN AIRLINES, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PREDECESSOR REORGANIZED COMPANY
-------------------------------------------- --------------------------
FIRST SECOND FOURTH
QUARTER QUARTER (A) (B) QUARTER
------------- ------------- -------------- ------------ ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1994:
Operating revenues...................... $ 70,977 $ 72,515 $ 73,331 $ 13,171 $ 75,986
Operating income (loss)................. (6,456) (6,683) 6,718 (3,114) (3,154)
Loss before income taxes................ (7,351) (8,765) (4,558) (3,179) (2,972)
Net income (loss)....................... (7,351) (8,765) 185,505 (3,179) (2,972)
Proforma loss per share................. N/M** N/M** N/M** (0.34)* (0.31)*
</TABLE>
<TABLE>
<CAPTION>
REORGANIZED COMPANY
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
1995:
Operating revenues....................................... $ 75,508 $ 85,464 $ 93,355 $ 92,577
Operating income (loss).................................. (7,427) 431 4,436 659
Net income (loss)........................................ (8,294) (451) 3,363 (124)
Proforma income (loss) per share......................... (0.88)* (0.05)* 0.33* (0.01)*
</TABLE>
The results of operations for the first three quarters of 1994 were adjusted
for the impact of certain significant fourth quarter adjustments which related
to the prior quarters. These adjustments were corrections of errors which
resulted from mathematical mistakes, mistakes in the application of accounting
principles or oversight or misuse of facts that existed at the time the
financial statements were prepared.
(a) Period from July 1, 1994 to September 11, 1994.
(b) Period from September 12, 1994 to December 31, 1994.
* Proforma per share data has been calculated assuming that the Reorganized
Company will issue approximately 9.4 million shares of Common Stock pursuant
to the Reorganization Plan.
** Not Meaningful -- per share data is not meaningful as the Predecessor was
recapitalized and adopted fresh start reporting as of September 12, 1994.
F-37
<PAGE>
HAWAIIAN AIRLINES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................................... $ 5,389 $ 13,452
Accounts receivable, net............................................................ 18,178 23,715
Inventories, net.................................................................... 7,648 7,554
Assets held for sale................................................................ 1,344 1,344
Prepaid expenses.................................................................... 5,804 5,243
------------ -----------
Total current assets.............................................................. 38,363 51,308
------------ -----------
Property and equipment, less accumulated depreciation and
amortization of $6,166 and $5,043 in 1996 and 1995, respectively..................... 41,391 41,756
Assets held for sale.................................................................. 8,336 7,274
Other assets.......................................................................... 6,217 4,805
Reorganization value in excess of amounts allocable
to identifiable assets, net.......................................................... 67,333 66,433
------------ -----------
Total Assets...................................................................... $ 161,640 $ 171,576
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt................................................... $ 6,027 $ 6,210
Current portion of capital lease obligations........................................ 2,662 2,724
Accounts payable.................................................................... 35,182 24,254
Air traffic liability............................................................... 30,461 28,771
Accrued liabilities................................................................. 15,730 11,072
------------ -----------
Total current liabilities......................................................... 90,062 73,031
------------ -----------
Long-Term Debt........................................................................ 5,523 11,618
Capital Lease Obligations............................................................. 10,102 9,396
Other Liabilities and Deferred Credits................................................ 26,775 28,406
------------ -----------
Shareholders' Equity:
Common and Special Preferred Stock.................................................. 94 276
Capital in excess of par value...................................................... 41,193 59,613
Warrants............................................................................ 900 2,646
Unearned compensation............................................................... (182) --
Minimum pension liability........................................................... (1,170) (1,171)
Accumulated deficit................................................................. (11,657) (12,239)
------------ -----------
Shareholders' equity.............................................................. 29,178 49,125
------------ -----------
Total Liabilities and Shareholders' Equity........................................ $ 161,640 $ 171,576
------------ -----------
------------ -----------
</TABLE>
F-38
<PAGE>
HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Operating Revenues:
Passenger................................................................................ $ 65,601 $ 79,811
Charter.................................................................................. 3,557 6,971
Cargo.................................................................................... 3,961 4,813
Other.................................................................................... 2,389 2,467
--------- ---------
Total.................................................................................. 75,508 94,062
--------- ---------
Operating Expenses:
Flying operations........................................................................ 24,289 29,315
Maintenance.............................................................................. 17,781 20,055
Passenger service........................................................................ 9,268 10,538
Aircraft and traffic servicing........................................................... 13,542 14,515
Promotion and sales...................................................................... 10,198 11,620
General and administrative............................................................... 4,031 5,763
Depreciation and amortization............................................................ 1,826 1,860
Early retirement provision............................................................... 2,000 --
--------- ---------
Total.................................................................................. 82,935 93,666
--------- ---------
Operating Income (Loss)................................................................ (7,427) 396
--------- ---------
Nonoperating Income (Expense):
Interest expense, net.................................................................... (1,027) (956)
Gain on disposition of equipment......................................................... 48 8
Other, net............................................................................... 112 (30)
--------- ---------
Total.................................................................................. (867) (978)
--------- ---------
Net Loss................................................................................... $ (8,294) $ (582)
--------- ---------
--------- ---------
Pro Forma Loss Per Common Share............................................................ $ (0.88)* $ (0.03)*
--------- ---------
--------- ---------
Weighted Average Number of Common Shares Outstanding....................................... 9,400* 21,521*
--------- ---------
--------- ---------
</TABLE>
- ------------------------
* Proforma per share data has been calculated utilizing issued and outstanding
and issuable common shares as of March 31, 1995 and 1996.
F-39
<PAGE>
HAWAIIAN AIRLINES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................................................. $ (8,294) $ (582)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization.......................................................... 1,826 1,860
Net periodic postretirement benefit cost............................................... 876 567
Stock option compensation.............................................................. -- 964
Early retirement provision............................................................. 2,000 --
Gain from disposition of equipment..................................................... (48) (8)
Increase in accounts receivable........................................................ (1,562) (3,847)
Decrease (increase) in inventories..................................................... (470) 94
Decrease in prepaid expenses........................................................... 823 561
Increase (decrease) in accounts payable................................................ 7,347 (1,407)
Decrease air traffic liability......................................................... (529) (1,690)
Increase (decrease) in accrued liabilities............................................. 901 (5,758)
Other, net............................................................................. 4,704 1,301
--------- ---------
Net cash provided by (used in) operating activities.................................. 7,574 (7,945)
--------- ---------
Cash Flows From Investing Activities:
Purchase of property and equipment....................................................... (2,483) (1,680)
Net proceeds from disposition of equipment............................................... 393 519
--------- ---------
Net cash used in investing activities.................................................. (2,090) (1,161)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock................................................... -- 20,000
Issuance of long-term debt............................................................... 179 124
Repayment of long-term debt.............................................................. (3,049) (2,311)
Repayment of capital lease obligations................................................... (728) (644)
--------- ---------
Net cash provided by (used in) financing activities.................................. (3,598) 17,169
--------- ---------
Net increase in cash and cash equivalents............................................ 1,886 8,063
Cash and cash equivalents -- Beginning of Period........................................... 3,501 5,389
--------- ---------
Cash and cash equivalents -- End of Period................................................. $ 5,387 $ 13,452
--------- ---------
--------- ---------
</TABLE>
F-40
<PAGE>
HAWAIIAN AIRLINES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 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.
The accompanying financial statements should be read in conjunction with the
financial statements and the notes thereto contained in this Prospectus.
2. INVESTMENT AND FINANCIAL TRANSACTIONS
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 or 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.
3. INCOME TAXES
The Company believes that the AIP Investment and related transactions
resulted in 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.
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HAWAIIAN AIRLINES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 (the "Old Limitation") was approximately
$2.4 million, plus certain "built-in" income items that increase the Section 382
Limitation. The Company currently believes that the ownership change resulting
from the AIP Investment and its related transactions resulted in a new Section
382 Limitation (the "New Limitation") of approximately $1.7 million as of
January 31, 1996, plus certain "built-in" income items that increase the Section
382 Limitation. The Company believes that, for federal income tax purposes, it
has approximately $130 million of NOLs subject to the New Limitation as of
December 31, 1995.
Subsequent changes in the Company's share ownership by "5 percent
shareholders" (as defined in Section 382, and which includes certain "public
groups"), whether by reason of the exercise of Rights or otherwise, could result
in another Section 382 Limitation to which any NOLs incurred prior to such
ownership change would be subject.
4. SUBSEQUENT EVENTS
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, and repayments arising from the disposition of 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 terms 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 termination fees 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 Company's pending 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 $340,000, net
of estimated income taxes. The payment to the GPA Companies was funded by
borrowings under the Credit Facility on April 29, 1996.
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