UNITED STATES OF AMERICA
In the Matter of
HAWAIIAN AIRLINES, INC.,
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Hawaiian Airlines, Inc. ("Hawaiian" or "Respondent").
In anticipation of the institution of these proceedings, Hawaiian has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds1 that:
1. This matter involves the failure to disclose material changes during the course of a $25,000,000 issuer tender offer by Hawaiian (in which Hawaiian bought back its own outstanding stock) in mid-2002. This offer was intended to allow Hawaiian's majority shareholder, a partnership controlled by Hawaiian's then CEO, to cash out some of its Hawaiian holdings. Hawaiian failed to disclose to its shareholders that, prior to the closing of the tender offer, the company had experienced two months of financial results falling far short of Hawaiian's internal projections and casting doubt on Hawaiian's stated conclusion in the offering materials that the tender offer would not impair its future solvency. Had they disclosed the information, a higher proportion of Hawaiian's shareholders reasonably could have decided to tender their shares, reducing the sales proceeds for Hawaiian's majority shareholder. Instead, non-tendering shareholders retained their shares, to their detriment; nine months later, Hawaiian filed for bankruptcy.
2. According to the Offer to Purchase statement ("OTP") filed by Hawaiian with the Commission, the board of directors had determined that the $25 million tender offer was "a prudent use of Hawaiian's financial resources." The OTP represented that the board of directors also had determined that paying for the tender offer would not render Hawaiian insolvent under Hawaii law. Hawaiian based these conclusions on the opinion of an outside consultant retained by the board to determine that, as required by Hawaii law, the tender offer would not render the company insolvent. However, the consultant's opinion relied on internal projections that were no longer valid. For example, the projections given to the consultant in April 2002 forecast a $12 million net profit for the fiscal year ending December 31, 2002; by mid-June, just prior to the closing of the tender offer, Hawaiian had experienced two consecutive months of disappointing results and had revised its internal forecasts to project a $13 million loss for the year. Hawaiian never disclosed the dramatic change in the company's financial condition to its shareholders, and made no revisions to the OTP.
3. Hawaiian Airlines, Inc. is a Hawaii corporation headquartered in Honolulu, Hawaii. Hawaiian is an airline engaged primarily in the scheduled transportation of passengers, cargo and mail. During the relevant period, Hawaiian's stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and was listed on the American Stock Exchange and Pacific Exchange. In August 2002, Hawaiian restructured and became a wholly owned subsidiary of Hawaiian Holdings, Inc. ("Holdings"). In the restructuring, each share of Hawaiian was traded for a share of Holdings, which began trading on the American Stock Exchange and Pacific Exchange. Hawaiian filed for bankruptcy protection under Chapter 11 in March 2003, and continues to operate. Holdings did not file for bankruptcy, and its shares continue to trade in the market.
4. After experiencing net losses in four of five years from 1996 to 2000, Hawaiian experienced significant financial hardship as a result of the terrorist attacks on September 11, 2001. In late 2001, Hawaiian received $25 million in payments from the federal government to compensate air carriers for losses related to the attacks.
5. In May 2002, Hawaiian's then CEO, who also served as the managing partner of Hawaiian's majority shareholder, proposed to Hawaiian's board a $25 million issuer tender offer, in which Hawaiian would purchase just under six million shares from the company's shareholders at $4.25 per share. The majority shareholder indicated its intention to tender all of its shares subject to the condition that it would retain over fifty percent of Hawaiian's outstanding shares after the tender offer. In the event that more than six million shares were tendered, Hawaiian would purchase the shares on a pro rata basis.
6. On March 25, 2002, Hawaiian's outside legal counsel informed Hawaiian's then-CEO that under Section 414 111 of Hawaii's Business Corporations Act, Hawaiian could purchase its shares only if, after giving effect to the tender offer: (i) Hawaiian's assets would exceed the sum of its liabilities; and (ii) Hawaiian would be able to pay its debts as they became due in the usual course of business (together, the "solvency test"). Hawaiian's counsel advised Hawaiian's then-CEO that the solvency test should be measured at the time of the distribution of the tender offer proceeds, and that Hawaiian's balance sheet was expected to show a deficit at that time. Hawaiian's counsel further advised Hawaiian's then-CEO that instead of relying on Hawaiian's balance sheet, Hawaiian could retain an expert to provide an opinion to Hawaiian's board as to an alternative method of measuring the assets and liabilities of Hawaiian. Hawaiian hired an outside firm to provide an opinion that the tender offer would not violate the Hawaii statute.
7. Hawaiian provided the expert with certain internal projections that had been prepared in April 2002. In mid-May 2002, relying on these projections, the expert informed the company that it would be able to issue an opinion that Hawaiian could conduct the tender offer without violating Hawaii law.
8. On May 29, 2002, Hawaiian's board convened a telephonic board meeting for the special purpose of considering the tender offer. Hawaiian's expert, relying on the April projections, informed Hawaiian's board that the $25 million tender offer would not render the company insolvent under Hawaii law. Hawaiian's board voted to approve the tender offer subject to further review of Hawaiian's financial condition at a board meeting on June 14, 2002.
9. On May 31, 2002, two days after Hawaiian's board voted to approve the tender offer, Hawaiian publicly announced the tender offer and Hawaiian filed tender offer documents with the Commission. The terms of the tender offer required Hawaiian shareholders to tender their shares by June 27, 2002. Hawaiian could, at its option, rescind the tender offer up until June 27, 2002, if it experienced, or would likely experience, a "material adverse effect" in its income or operations. Further, Hawaiian stated in its tender offer documents that it was required to disclose any material changes in the information that it provided to shareholders concerning the offer.
10. Hawaiian's OTP stated that Hawaiian's board made no recommendation as to whether shareholders should tender or refrain from tendering their shares. However, the OTP represented that: (1) Hawaiian's board believed the "Offer is a prudent use of Hawaiian's financial resources"; (2) the board had conducted a review of Hawaiian's financial position and had determined that Hawaiian could complete the tender offer and still pass the solvency test under Hawaii law; (3) Hawaiian's remaining cash would "still provide sufficient working capital for our operations for the foreseeable future"; and (4) shareholders who did not tender might receive a benefit because they would own a larger interest in Hawaiian.
11. Between the May 31st tender offer announcement and the June 27, 2002 closing date, Hawaiian (but not Hawaiian's minority shareholders) learned that the company's financial condition had materially deteriorated. In preparation for a June 14, 2002 board meeting, Hawaiian prepared final financial results for April 2002 and "flash" financial results for May 2002. The April results reflected a $7.7 million net loss for that month compared to a projected net loss of only $500,000 as provided to Hawaiian's expert in the April projections. The flash May results reflected a likely operating loss for May of $7 million, in contrast to the $2.3 million projected loss contained in the projections relied upon by the expert. Based on the April final and May flash results, Hawaiian once again revised its financial forecast for fiscal year 2002 downward. The revised forecast projected a $9.3 million operating loss for 2002, rather than the $12 million operating profit as reflected in the projections provided to and relied upon by Hawaiian's expert. Hawaiian did not file a notice of material change to inform minority shareholders that prior representations about the company's solvency were based on projections that had been rendered obsolete by two months of disappointing financial results.
12. On June 17, 2002, Hawaiian prepared its final May results. Those results showed an operating loss of $10.8 million for May (compared to the $2.3 million loss for May in the projections provided to Hawaiian's expert). For April and May combined, Hawaiian experienced actual operating losses of $18.5 million, compared to the $3.5 million operating loss for those months in the projections provided to Hawaiian's expert. Hawaiian now revised its fiscal year projections to show a $13 million operating loss compared to the projected $12 million operating profit provided to Hawaiian's expert. Once again, Hawaiian did not disclose the substantial decline in the company's financial health to its minority shareholders.
13. The tender offer closed on June 27, 2002. Of Hawaiian's nearly 34 million outstanding shares, over 26 million shares were tendered. Because the tender offer was oversubscribed, Hawaiian accepted the tendered shares on a pro rata basis. Hawaiian's majority shareholder had over 4 million shares accepted, and received proceeds of over $17 million.
14. Hawaiian's financial condition continued to deteriorate after the tender offer closed. On March 21, 2003 (less than nine months after funding the tender offer), Hawaiian filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code.
15. Section 13(e)(1) of the Exchange Act prohibits an issuer from purchasing its own shares in a self-tender offer if to do so would violate rules and regulations adopted by the Commission. Rule 13e 4(j)(2) thereunder prohibits an issuer from making a self-tender offer unless it complies with, among other things, the disclosure requirements in Rules 13e 4(c), (d) and (e).
16. Rules 13e 4(c), (d), and (e) of the Exchange Act require an issuer conducting a self-tender offer to disclose promptly any material changes in the information provided to securities holders. Hawaiian failed to disclose to its shareholders that its financial results for April and May 2002, and the revised projections based on those results, materially undermined statements made by Hawaiian in the tender offer documents.
17. As a result of the conduct above, Hawaiian violated Section 13(e)(1) of the Exchange Act and Rule 13e-4(j)(2) thereunder.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent Hawaiian's Offer.
Accordingly, it is hereby ORDERED pursuant to Section 21C of the Exchange Act, that Respondent Hawaiian cease and desist from committing or causing any violations and any future violations of Section 13(e)(1) of the Exchange Act and Rule 13e-4(j)(2) thereunder.
By the Commission.
Jonathan G. Katz
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