Posted on: Sunday, April 20, 2003

Hawaiian Air chief thrives on adversity

By Andrew Gomes
Advertiser Staff Writer

As leaders of Hawaiian Airlines dig in for a fight to keep control of the airline in bankruptcy, the man in the pilot's seat is no stranger to high-stakes battles for struggling multimillion-dollar companies.

But that has been John Adams' business.

The 59-year-old private investor, a trained tax and corporate-issues attorney from New Jersey, has controlled Hawaiian for seven years. But for a decade or two he has assumed command of other troubled companies — riding some to fortune and others to collapse.

At Hawaiian, Adams has one of his tightest grips on a public company and longest tenures of his career. However, his future with the airline and the result of his investment in it have yet to be decided, as is the case with how history will regard Adams' leadership at one of Hawai'i's largest and oldest companies.

Adams is the hands-on-manager of the New York-based exclusive private investment firm Smith Management LLC. Founded in 1984, the firm is largely financed by a very private, savvy investor Randall D. Smith, who made millions in the early 1980s trading bonds of distressed companies.

Corporate executives, creditors and competitors have criticized Adams and Smith over the years, painting them generally as ferocious vulture capitalists.

But others say Adams and Smith are comfortable players in the inherently messy business of making and protecting high-risk investments in unstable businesses.

The criticism has ebbed and flowed around Hawaiian since Adams, through a partnership involving Smith Management investors, made a $20 million infusion into the airline in 1996 shortly after it emerged from bankruptcy lean on operating cash.

Since then, Adams, with absolute board control as majority shareholder, helped the carrier grow and acquire a new fleet only to wind up in bankruptcy again after 9/11 and the Iraq War, as have other airlines.

Now aircraft lessor Boeing Capital Corp. is waging a campaign in bankruptcy court to remove Hawaiian management, including Adams as Hawaiian chairman and chief executive officer.

Boeing has suggested that the airline misused $30 million in post-9/11 federal air transportation stabilization benefits to repurchase company stock at a premium, netting Adams $17 million at the expense of creditors. Other conflict-of-interest issues also have been raised by Boeing.

Hawaiian spokesman Keoni Wagner has said Boeing's allegations are thinly veiled attempts to distract the airline from its effort to negotiate lower lease payments.

Wagner has also defended the buyback made nearly a year ago, saying it happened at a time when economic forecasts predicted recovery and was validated by an independent adviser as a good way to enhance shareholder value.

Wagner said Adams was traveling and unavailable for comment Friday, but said his boss "feels good about what's happening here."

'Ultimate pragmatist'

When Adams invested in Hawaiian seven years ago, his plan was to help improve the airline, raise its stock price and exit with a profit by selling his interest or cashing out in some other way such as a merger or acquisition.

Seeing the plan to fruition was highly uncertain, given Hawaiian's instability then, but the design was one that Adams has practiced with variation numerous times — using businesses operating nursing homes, banks, hotels and even an automobile accessories manufacturer.

One of his riskiest endeavors, though, was in aviation. The startup Colorado-based Western Pacific Airlines was two years old when it filed for bankruptcy in 1997, financially devastated in part by rival upstart Frontier Airlines.

Adams, backed by Smith, made a conditional offer in bankruptcy court to provide Western Pacific $40 million to $50 million with the idea he could rescue the airline and partner it with Hawaiian.

But Adams also tried to arrange a takeover of Frontier and consolidate the two airlines, a tactic that troubled some creditors of Western Pacific and others.

"His idea was that (Frontier) should go bankrupt, and let him acquire (both airlines), which I thought was a fairly pragmatic idea," said Frontier Chairman Sam Addoms, who at the time was Frontier's chief executive officer.

"I mean, it was loaded with self-interest and not very helpful to us," Addoms said, " ... but I came away with the impression that John was sort of the ultimate pragmatist. He is going to do whatever it takes to survive and, perhaps more importantly, whatever it takes to enhance his own position whether it's financial or otherwise."

The dual bankruptcy merger did not happen, and after pouring $23 million into Western Pacific over seven weeks, Adams cut off the cash, leaving the airline to fail. He recovered what he could by liquidating aircraft leases and other assets as first priority creditor.

Addoms said that as strange as it was, he liked Adams, though the Frontier chief said he considered making Western Pacific's shutdown day, Feb. 4, 1998, a company holiday to recognize Frontier's clearer future.

The Frontier chairman still has mixed feelings about Adams and Smith, whom he met later, regarding them as nice but tough individuals he was glad to step away from.

"They work in tough environments," Addoms said. "I'd rather deal with people who have a little less harsh sense of reality."

Never saw 'ruthless' side

David Buddemeyer, former chief executive officer of Florida-based Servico Inc., got to know Adams and Smith as investors who helped grow the hotel company now known as Lodgian.

It was shortly after Servico emerged from bankruptcy in 1992 when an investment group including Adams and Smith bought a large chunk of company stock with their familiar cash-infusion plan.

Buddemeyer recalled: "They called one day and introduced themselves and said, 'We want to help you grow. What do you need?' What we needed was capital."

Adams, who became Servico chairman in 1994, partnered with Servico to purchase more than a dozen hotels the company couldn't afford on its own.

Buddemeyer said Servico's expansion led to improved finances and stock price gains that allowed the company to acquire full ownership in the hotels Adams helped purchase. In late 1997, Adams resigned as chairman and made what Buddemeyer said was an orderly exit of stock holdings.

Buddemeyer said at times he disagreed with Adams or Smith as a chief executive naturally would in business, but on balance the two were insightful and helpful.

"They did well on their investment," Buddemeyer said, calling Adams an astute businessman and Smith an "extremely astute" businessman.

Buddemeyer said he went so far as to buy several hundred shares of Hawaiian stock, never having heard of the airline. Also after leaving Servico and forming his own hotel company, Driftwood Ventures, he partnered with Smith to buy hotels, including the Outrigger Kauai Beach Hotel.

"I can't tell you how many people told me to watch out for (Smith)," Buddemeyer said. "I've had him described as ruthless ... but I never saw any side of that. Certainly Randy is a sharp guy and when you're in negotiations with him, you're negotiating with a sharp guy."

Not all successes

Smith rarely gives interviews to the media.

Among other Smith/Adams investment successes were First Pacific National Bank in California, from which Smith Management executives cashed out profits in 1995 after investing $8 million into the near-insolvent institution two years earlier.

But like Hawaiian and Western Pacific, other risky investments have faltered. Such was the case with Fortune 500 company Harvard Industries, a New Jersey-based manufacturer of automobile accessories that lost $131 million one year after emerging from bankruptcy in 1992.

Following the huge loss, Smith bought about $15 million of stock in the company in late 1994, and Adams joined the board and became chairman and chief executive officer in February 1997 after a poor year of financial results.

Three months later, Harvard Industries was back in bankruptcy, and when it emerged in 1998 Adams was replaced.

Still, Adams has been rewarded while running or serving on the boards of companies, including private firms for which public information is scarce.

At Harvard, he earned $250,000 while CEO for eight months. At Servico, he earned $100,000 a year for being chairman for nearly two years, plus $18,000 a year as director of the company for two earlier years.

At Hawaiian, Adams' annual salary was $200,000 from 1997 to 2000. His pay rose to $367,000 in 2001 and was set at $400,000 last year.

In addition, Smith Management, where Adams is president, was paid $2 million for corporate, financial and tax services previously rendered. Since last May, the airline pays Smith Management $75,000 a month for continued advisory work, according to the company.

Adams, through Airline Investors Partnership, a company formed to technically own 51 percent of Hawaiian stock, has majority voting power and the power to prevent any shareholder action from being approved.

Boeing would like to remove Adams from Hawaiian, though that remains an uphill battle, according to bankruptcy experts not involved with the case.