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The Honolulu Advertiser
Updated at 12:10 p.m., Friday, May 9, 2003

Court hears Hawaiian case

By Kelly Yamanouchi
Advertiser Staff Writer

Boeing Capital Corp. continued to argue in bankruptcy court today that Hawaiian Airlines' management should be replaced by a trustee because the management made poor financial decisions, engaged in deception and left the company insolvent.

Attorneys for Hawaiian, which filed for bankruptcy protection on March 21, said managers did nothing wrong. Hawaiian's attorney, John Karaczynski, warned yesterday that "the appointment of a trustee at this point, at this time, would be nothing short of an unmitigated disaster."

Boeing Capital, the leasing arm of the aircraft manufacturer, is asking the court to appoint a trustee to manage Hawaiian as it reorganizes under Chapter 11 of the bankruptcy code.

Attorney Steve Hedberg, representing Boeing Capital, said in opening arguments he would present "a remarkable pattern of self-dealing" involving Hawaiian chief executive John Adams. Hedberg called particular attention to Hawaiian's $25 million stock buyback to compensate investors last June, describing it as "an undeniable fraudulent transfer."

"It's created huge conflicts of interest now for the insiders," Hedberg said. "Mr. Adams used this process as a personal quest. ... He sought to take out and in fact did take out $17 million from the company. It was done through a remarkable succession of half truths and twisted facts."

But Karaczynski disagreed. "There's been no fraud here. There's been no dishonesty ... Clearly there's been no mismanagement," he said.

While Boeing is criticizing the stock buyback in hindsight, he said, the company "made a good-faith business decision at the time."

Support for trustee

A revelation in court yesterday came from an attorney for Hawaiian's creditors committee, which argued in favor of appointment of a trustee.

Attorney Brett Miller said the committee has received calls from three investors who said they are interested in acquiring or investing in Hawaiian Airlines, but only if John Adams, and companies he manages — Smith Management and Airline Investors Partnership — "are removed from the scene."

"There is no investor confidence" in Adams, Smith and AIP, Miller said. He would not disclose whom the investors were. Miller also said the committee has no confidence in present management.

Miller said Hawaiian's management left the company with insufficient cash and "has given the committee no choice but to seek their ouster."

He also said Hawaiian's prediction that a trustee would liquidate the company "is absolutely misplaced. That's just not going to happen with a trustee," Miller said.

Boeing Capital's arguments are built in part on when Hawaiian management knew the airline was in financial trouble.

Louis DeArias, a forensic accountant with Pricewaterhouse-Coopers who appeared as a Boeing Capital witness, said Hawaiian could see when the stock buyback offer closed that its summer 2002 business was not healthy.

"The company knew on June 27 that June was not going to be doing well, but also July and August," DeArias said. "In a company like this, June, July and August are like a Christmas season for a retailer. If a company like this doesn't make its budget at this time, it is in trouble."

Karaczynski, Hawaiian's attorney, responded that last summer, "people were beginning to expect things were turning around."

"Yes," DeArias said, "but you don't go spending $25 million."

Stock buyback criticized

Frank Berardino, an aviation industry consultant for the federal Air Transportation Stabilization Board who appeared as a Boeing Capital witness, said Hawaiian's plan to expand the airline's fleet last summer was "incomprehensible."

"Everybody was staring at the world from the bottom of a hole. They were all in deep trouble," Berardino said. He said he did not think Hawaiian would have been approved for a federal loan guarantee, which airlines such as Aloha Airlines received to weather the tough aviation environment.

The stock buyback "left the debtor insolvent," Hedberg argued. "It was either insolvent at the time ... or left with unreasonably small capital."

Adams, who the company calls the "lightning rod" in the case, defended Hawaiian's decision on the stock buyback, his salary and Hawaiian's payments to consultant Smith Management.

He said Hawaiian offered a premium price of $4.25 per share in the $25 million stock buyback because the carrier had terminated its planned merger with Aloha Airlines and the stock price fell. If a premium was not offered, "people who bought during that time would have had a number of concerns."

Hedberg cited an e-mail sent last year by Hawaiian pilot Reno Morella, who as a Hawaiian Airlines board member questioned whether the stock repurchase should be carried out.

But Karaczynski said there was "a legitimate corporate purpose" for the stock buyback. The aim was "to restore investor confidence at a time when the merger possibilities had gone by the wind."

"This isn't some instance of a company secretly funneling off funds. Everything was disclosed," Karaczynski said.

However, Miller argued: "Enron filed SEC filings. WorldCom filed SEC filings. It's just what happens later."

According to Karaczynski, Hawaiian had $93.6 million in cash at the end of March 2002, and "ample cash" at the end of 2002. But Boeing Capital argued Hawaiian's liabilities made its cash position weaker than it appeared.

"These numbers are only going to get worse, and the company knew it," DeArias said. "It was borrowing on its future, absolutely."

Using income from prepaid tickets, DeArias said, "the company was essentially employing "the flying public's cash to fund ongoing losses."

Hawaiian argued, however, that ticket sales are its primary source of revenue to pay for operations.

Little about judge's leanings

Boeing also criticized Hawaiian Airlines for paying $500,000 to Hawaiian Holdings, the parent company of the carrier, about a week before filing for bankruptcy protection. Karaczynski said management decided "it was a prudent business decision to transfer the funds." If the payment wasn't made, it could mean "in essence catapulting another company into Chapter 11 proceedings," Karaczynski said.

Judge Faris said little about his leanings during the first day of the two-day hearing. However, after reading a petition from 224 employees and "friends of Hawaiian Airlines" against appointment of a trustee, he said, the question isn't how many people are on one side or the other.

"The question is whether the legal standards are met," he said.

Shares of parent Hawaiian Holdings were up 5 cents to 90 cents a share today.

Reach Kelly Yamanouchi at 535-2470 or kyamanouchi@honoluluadvertiser.com.