SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 17, 1999 (April 9, 1999)
Fine Air Services Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-59359 65-0838357
-------- --------- ----------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
2261 N.W. 67th Avenue
Building 700
Miami, Florida 33122
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 871-6606
------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
CURRENT REPORT ON FORM 8-K/A
FINE AIR SERVICES CORP.
May 17, 1999
This Amendment No.1 amends Item 7 of the Current Report on Form 8-K
dated April 9, 1999 (the "Current Report"), of Fine Air Services Corp. (the
"Company"), a Delaware corporation, filed with Securities and Exchange
Commission on April 26, 1999, relating to the Company's acquisition of the
capital stock of Arrow Air, Inc. ("Arrow") and certain assets generally
consisting of (i) three cargo L1011-200 aircraft, one passenger L1011-500
aircraft, and 12 cargo DC8 aircraft and one passenger DC8 aircraft, (ii)
serviceable and repairable Pratt & Whitney JT3D and JT8D aircraft engines, Rolls
Royce RB211 aircraft engines and General Electric CF6 aircraft engines, (iii)
inventories of aircraft and engine parts and (iv) all inventories, parts, and
related equipment used in the operations of the airline business of Arrow
(collectively, the "Assets").
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
In accordance with Item 7(a) attached as Exhibit 99.01 are the
audited financial statements of Arrow Air, Inc. as of March 31, 1998
and 1997 and for each of the years in the three-year period ended
March 31, 1998 and the unaudited financial information as of
December 31, 1998 and for the nine month periods ended December 31,
1998 and 1997.
(b) Pro Forma Financial Information.
In accordance with Item 7(b)(1), attached as Exhibit 99.02 are the
unaudited pro forma combined financial statements and accompanying
notes for the Company after reflecting the acquisition of Arrow and
the Assets.
(c) Exhibits
Exhibit No. Description
----------- -----------
99.01 Audited Financial Statements of Arrow
Air, Inc.
99.02 Unaudited Pro Forma Combined Financial
Statements of Arrow Air, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999
FINE AIR SERVICES CORP.
By: /s/ Orlando Machado
-------------------------------
Orlando Machado
Senior Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.01 Audited Financial Statements of Arrow Air, Inc.
99.02 Unaudited Pro Forma Combined Financial Statements
of Arrow Air, Inc.
Independent Auditors' Report
The Stockholder and
Board of Directors
Arrow Air, Inc.:
We have audited the accompanying balance sheets of Arrow Air, Inc. (a wholly
owned subsidiary of Air Flite Operations, Inc.) as of March 31, 1998 and 1997,
and the related statements of operations, stockholder's deficit, and cash flows
for each of the years in the three-year period ended March 31, 1998. 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 Arrow Air, Inc. (a wholly owned
subsidiary of Air Flite Operations, Inc.) as of March 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the years in the
three-year period ended March 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Miami, Florida
November 27, 1998, except as to note 15,
which is as of April 9, 1999
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------- 1998
Assets 1998 1997 (unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash, including cash equivalents of $658,000, $2,548,000
and $3,258,386 in March 31, 1998 and 1997 and
December 31, 1998 (unaudited), respectively $ 1,948,794 2,089,925 2,254,868
Certificates of deposit 137,623 137,080 135,000
Receivables:
Trade, less allowance for doubtful accounts
of $1,656,793, $1,227,085 and $2,289,807 in
March 31, 1998 and 1997 and December 31,
1998 (unaudited), respectively 6,691,479 8,683,868 7,841,427
Due from affiliates -- 15,880 --
------------ ------------ ------------
Total receivables 6,691,479 8,699,748 7,841,427
Prepaid expenses and other current assets 413,848 1,779,269 475,066
------------ ------------ ------------
Total current assets 9,191,744 12,706,022 10,706,361
Property and equipment 7,852,953 6,262,517 9,231,280
Less accumulated depreciation and amortization (6,169,933) (5,790,121) (6,763,686)
------------ ------------ ------------
1,683,020 472,396 2,467,594
------------ ------------ ------------
Security deposits -- 116,128 389,397
Other assets 447,213 356,680 --
------------ ------------ ------------
$ 11,321,977 13,651,226 13,563,352
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
---------------------------- 1998
Liabilities and Stockholder's Deficit 1998 1997 (unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 4,394,083 1,671,434 2,380,055
Accrued expenses 10,277,690 4,870,443 5,596,268
Accrued maintenance reserves 5,612,605 2,025,055 6,707,267
Due to affiliates 23,941,137 3,724,270 44,049,095
Deferred revenue 36,552 306,248 --
Current portion of note payable to
International Air Leases, Inc. 3,100,000 3,100,000 3,100,000
Note payable to affiliates 2,750,000 2,750,000 2,650,000
------------ ------------ ------------
Total current liabilities 50,112,067 18,447,450 64,482,685
------------ ------------ ------------
Stockholder's deficit:
Common stock, $1 par value. Authorized,
issued, and outstanding 100 shares 100 100 100
Additional paid-in capital 30,240,436 30,240,436 35,240,436
Accumulated deficit (69,030,626) (35,036,760) (86,159,869)
------------ ------------ ------------
Total stockholder's deficit (38,790,090) (4,796,224) (50,919,333)
Commitments and contingencies
------------ ------------ ------------
$ 11,321,977 13,651,226 13,563,352
============ ============ ============
</TABLE>
3
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Statements of Operations
<TABLE>
<CAPTION>
Nine months ended
December 31,
March 31, (unaudited)
----------------------------------------------- ------------------------------
1998 1997 1996 1998 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Scheduled cargo services $ 46,722,314 37,223,759 20,406,607 31,778,950 36,610,144
ACMI services and charters 40,767,619 31,982,697 16,982,140 33,605,767 30,583,085
Other 592,381 119,042 113,060 2,205,720 413,766
------------- ------------- ------------- ------------- -------------
Total operating revenues 88,082,314 69,325,498 37,501,807 67,590,437 67,606,995
------------- ------------- ------------- ------------- -------------
Operating expenses:
Maintenance 46,691,173 26,969,610 16,438,800 35,497,358 35,636,027
Aircraft rent and insurance 21,209,774 17,885,900 11,010,188 15,484,029 16,031,140
Aircraft and traffic servicing 10,254,231 8,085,692 4,517,919 6,800,712 7,574,663
Flying operations 29,690,061 22,574,495 11,715,734 19,803,939 23,599,000
General and administrative 3,746,393 2,888,908 4,651,758 3,305,460 1,625,054
Selling 3,387,260 1,916,867 793,882 2,427,564 2,425,957
Depreciation and amortization 497,592 464,309 567,800 604,998 293,139
------------- ------------- ------------- ------------- -------------
Total operating expenses 115,476,484 80,785,781 49,696,081 83,924,060 87,184,980
------------- ------------- ------------- ------------- -------------
Operating loss (27,394,170) (11,460,283) (12,194,274) (16,333,623) (19,577,985)
------------- ------------- ------------- ------------- -------------
Other income (expense):
FAA remedial payment and related fees (5,000,000) -- (340,000) -- (5,000,000)
Interest:
Affiliates (1,598,666) (569,400) (755,385) (792,069) (1,355,093)
Other 143,602 183,867 265,193 65,227 120,442
Other (144,632) (28,716) (671) (68,778) (139,212)
------------- ------------- ------------- ------------- -------------
(6,599,696) (414,249) (830,863) (795,620) (6,373,863)
------------- ------------- ------------- ------------- -------------
Net loss $ (33,993,866) (11,874,532) (13,025,137) (17,129,243) (25,951,848)
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Statements of Stockholder's Deficit
<TABLE>
<CAPTION>
Common stock
------------------------- Additional Total
Number Par paid-in Accumulated stockholder's
of shares value capital deficit deficit
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 100 $ 100 13,781,436 (10,137,091) 3,644,445
Capital contribution -- -- 4,959,000 -- 4,959,000
Net loss -- -- -- (13,025,137) (13,025,137)
----------- ----------- ----------- ----------- -------------
Balance at March 31, 1996 100 100 18,740,436 (23,162,228) (4,421,692)
Capital contribution -- -- 11,500,000 -- 11,500,000
Net loss -- -- -- (11,874,532) (11,874,532)
----------- ----------- ----------- ----------- -------------
Balance at March 31, 1997 100 100 30,240,436 (35,036,760) (4,796,224)
Net loss -- -- -- (33,993,866) (33,993,866)
----------- ----------- ----------- ----------- -------------
Balance at March 31, 1998 100 100 30,240,436 (69,030,626) (38,790,090)
Capital contribution
(unaudited) -- -- 5,000,000 -- 5,000,000
Net loss (unaudited) -- -- -- (17,129,243) (17,129,243)
----------- ----------- ----------- ----------- -------------
Balance at December 31,
1998 (unaudited) 100 $ 100 35,240,436 (86,159,869) (50,919,333)
=========== =========== =========== =========== =============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended
December 31,
March 31, (unaudited)
------------------------------------------- ---------------------------
1998 1997 1996 1998 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(33,993,866) (11,874,532) (13,025,137) (17,129,243) (25,951,848)
Adjustments to reconcile net loss to net cash
used in operating activities:
Deferred revenue recognized (269,696) (93,752) -- (36,552) (191,092)
Depreciation and amortization 497,592 464,309 567,800 604,998 293,139
Provision for doubtful accounts 429,708 520,000 50,000 260,000 390,000
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade accounts receivable 1,562,681 (3,072,510) 642,283 (1,409,948) 1,700,820
Due from affiliates 15,880 (15,880) 1,566,183 -- 15,880
Inventories -- -- 1,069,205 -- --
Prepaid expenses and other current assets 1,365,421 (329,574) (731,341) (61,218) 1,616,969
Security deposits 116,128 (30,422) 311,816 (389,397) (60,000)
Other assets (90,533) (356,680) -- 447,213 (299,141)
Increase (decrease) in:
Accounts payable 2,722,649 (119,735) 1,414,838 (2,014,028) 255,326
Accrued expenses 5,407,247 608,143 (1,685,726) (4,681,422) 6,250,464
Accrued maintenance reserves 3,587,550 400,725 657,476 1,094,662 9,693,203
Due to affiliates 567,647 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (18,081,592) (13,899,908) (9,162,603) (23,314,935) (6,286,280)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (1,708,216) (6,000) (66,912) (1,389,572) (1,344,482)
Purchases of certificates of deposit (137,623) (137,080) -- (135,000) (100,000)
Proceeds from maturities of certificates of deposit 137,080 136,553 190,686 137,623 137,080
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
investing activities (1,708,759) (6,527) 123,774 (1,386,949) (1,307,402)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Net advances from affiliates 19,649,220 12,061,141 5,499,090 20,107,958 7,775,385
Capital contribution -- -- -- 5,000,000 --
Cash received from business incentive agreement -- 400,000 -- -- --
Payments made on notes payable to affiliates -- -- -- (100,000) --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 19,649,220 12,461,141 5,499,090 25,007,958 7,775,385
Net (decrease) increase in cash
and cash equivalents (141,131) (1,445,294) (3,539,739) 306,074 181,703
Cash and cash equivalents, beginning of period 2,089,925 3,535,219 7,074,958 1,948,794 2,089,925
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 1,948,794 2,089,925 3,535,219 2,254,868 2,271,628
============ ============ ============ ============ ============
<PAGE>
Supplemental disclosures of cash flow information:
Interest paid -- 305,359 617,508 -- --
Supplemental schedule of noncash investing
and financing activities:
Capital contributions recorded in
settlement of due to affiliates $ -- 11,500,000 -- --
============ ============ ============ ============ ============
Capital contribution for tax benefit
allocated to the Company by the Parent $ -- -- 4,959,000 -- --
============ ============ ============ ============ ============
Note payable assumed in settlement of
due to affiliates, net $ 2,750,000 -- --
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
Arrow Air, Inc. (the "Company") operates as a scheduled and charter
cargo air carrier under a Federal Aviation Administration ("FAA")
Part 121 Certificate. The Company is a wholly owned subsidiary of
Air Flite Operations, Inc. ("Air Flite" or "Parent"), which is a
subsidiary of International Air Leases, Inc. ("International"). The
Company has and will remain economically dependent on International
for additional credit or advances until it achieves profitable
operations. (See note 15.)
(b) Interim Financial Statements
The financial statements as of December 31, 1998 and for the
nine-month periods ended December 31, 1998 and 1997, and all related
footnote information for these periods, are unaudited, and reflect
all normal and recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim periods.
The results of operations for the nine-months ended December 31,
1998 are not necessarily indicative of the results to be achieved
for the entire fiscal year ending March 31, 1999.
(c) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
(e) Certificates of Deposit
At March 31, 1998 and 1997, the Company had certificates of deposit
guaranteeing two standby letters of credit expiring in August 1998
and August 1997, respectively, amounting to $100,000.
(f) Property and Equipment
Property and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets. Amortization of leasehold improvements is computed using
the straight-line method over the estimated useful life or the
remaining lease term, whichever is shorter. When assets are retired
or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or
loss is recognized in operations for the period. The cost of
maintenance and repairs is charged to operations as incurred.
7
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
(g) Revenue Recognition
Revenue for scheduled cargo services, aircraft, crew, maintenance
and insurance ("ACMI") services and charters are recognized as
earned when the transportation is provided.
(h) Maintenance
The Company records maintenance expense for the estimated costs of
overhauls based on block hours flown. The provisional rate per block
hour is adjusted periodically to reflect actual experience in the
costs of overhauls.
(i) Income Taxes
The Company is included with its Parent and affiliates in filing
consolidated U.S federal and state income tax returns. For financial
reporting purposes, the Company calculates its income taxes as if
the Company filed its federal and state income tax returns on a
stand alone basis. Any differences between tax expense (or benefit)
allocated and payment made (or received from) the Parent for tax
expense (or benefit) are treated as capital transactions. For the
years ended March 31, 1998, 1997 and 1996 there were $0, $0 and
$4,959,000, respectively, of capital contributions from the Parent
as a result of tax benefits allocated to the Company.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be
applied to taxable income in the 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.
(j) New Accounting Pronouncements
On April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of financial statements. SFAS No. 130
requires only additional disclosures in the financial statements; it
does not affect the Company's financial position or results of
operations. For the years ended March 31, 1998, 1997 and 1996,
comprehensive loss is equal to net loss.
In June 1997, the Financial Accounting Standards board issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 requires companies to present segment
information using the management approach. The management approach
is based upon the way that management organizes the segments within
a Company for making
8
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
operating decisions and assessing performance. SFAS No. 131 is
effective for the Company for the fiscal year beginning April 1,
1999. Adoption of this standard will not impact the Company's
financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133
establishes methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging
activities. The Company will be required to implement SFAS No. 133
for the year ending March 31, 2000. Because the Company does not
currently hold any derivative instruments and does not engage in
hedging activities, the Company does not expect that the adoption of
SFAS No. 133 will have a material impact on its financial position
or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the
Costs of Start-Up Activities," SOP No. 98-5 requires that all
start-up costs related to new operations must be expensed as
incurred. In addition, all start-up costs that were capitalized in
the past must be written off when SOP No. 98-5 is adopted. The
Company adopted SOP No. 98-5 beginning April 1, 1999. The adoption
of SOP No. 98-5 did not have a material impact on the Company's
financial position or results of operations since the Company did
not have any capitalized start-up costs.
(k) Reclassifications
Certain reclassifications were made to the 1997 and 1996 financial
statements to conform with the 1998 presentation.
(2) Business Risk
The Company is impacted by the general economic conditions of the
commercial aviation industry. The Company's industry is also subject to
regulation by various governmental agencies with responsibilities over
civil aviation. Increased regulations imposed by organizations such as the
Federal Aviation Administration (the "FAA") and the Civil Aviation
Authority may significantly affect industry operations. Accordingly,
economic and regulatory changes in the marketplace may affect management's
estimates and future performance.
(3) Related-Party Transactions
At March 31, 1998 and 1997, the Company has an outstanding note payable to
International. The note bears interest at 6 percent per annum and requires
interest-only monthly payments for the first 18 consecutive months. The
note is being amortized starting on the twenty-first month, December 31,
1996, via 20 equal consecutive quarterly installments of principal and
interest amounting to $180,562. At March 31, 1998, the note is in default
and is accruing interest at the default rate of 18 percent.
9
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
At March 31, 1998 and 1997, the Company has an outstanding note payable to
an affiliate. The note bears interest at 6 percent per annum payable
quarterly on the unpaid balance. The terms of the note require 20 equal
consecutive quarterly installments of principal beginning January 5, 1997.
At March 31, 1998, the note is in default since the principal payment due
January 5, 1997 was not paid. At March 31, 1998, the note is accruing
interest at the default rate of 18 percent.
During the years ended March 31, 1998, 1997 and 1996 the Company acquired
approximately $624,200, $495,300 and $373,600, respectively, related to
the purchase of parts for aircraft maintenance from an affiliate.
At March 31, 1998, the Company leased eleven aircraft under operating
leases from International and its subsidiaries and one from an affiliate.
The following is a schedule of future minimum lease payments at March 31,
1998 for operating leases (with initial noncancelable lease terms in
excess of one year):
Year ending
March 31, Amount
----------- ------------
1999 $ 18,327,613
2000 13,522,668
2001 11,976,000
2002 9,318,000
2003 1,620,000
Thereafter 901,452
------------
$ 55,665,733
============
Aircraft-rental expense under the leases above during the years ended March
31, 1998, 1997 and 1996, approximated $18,657,000, $12,875,000 and
$7,212,000, respectively. Maintenance reserves and other maintenance
charges from International and its subsidiaries approximated $12,941,000,
$7,940,000 and $5,187,000 for the years ended March 31, 1998, 1997 and
1996, respectively (see note 15).
10
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
(4) Property and Equipment
Property and equipment consists of the following at:
<TABLE>
<CAPTION>
March 31 December 31,
-------------------------- 1998 Estimated
1998 1997 (unaudited) useful lives
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Flight equipment $ 3,344,753 2,489,274 4,366,303 5 years
Improvements to leased flight
equipment 1,183,722 850,127 1,183,722 Life of lease
Ground equipment 2,383,005 2,005,440 2,427,260 5 years
Office furniture and equipment 917,676 917,676 1,105,663 3-5 years
Leasehold and other improvements 23,797 -- 148,332 5 years
----------- ----------- -----------
7,852,953 6,262,517 9,231,280
Less accumulated depreciation and
amortization (6,169,933) (5,790,121) (6,763,686)
----------- ----------- -----------
$ 1,683,020 472,396 2,467,594
=========== =========== ===========
</TABLE>
Depreciation and amortization of property and equipment charged to
operations totaled $497,592, $464,309 and $567,800 for the years ended
March 31, 1998, 1997 and 1996, respectively.
(5) Accrued Expenses
The following is a summary of accrued expenses:
March 31, December 31,
------------------------- 1998
1998 1997 (unaudited)
----------- --------- ------------
Salaries, wages and benefits $ 2,141,236 1,278,035 1,175,796
Legal contingency (note 11) 5,000,000 -- --
Interest 319,905 401,919 991,243
Landing, ground handling
and navigation fees 796,689 859,894 965,708
Insurance 652,019 375,500 83,572
Other 1,367,841 1,955,095 2,379,949
----------- --------- ------------
$10,277,690 4,870,443 5,596,268
=========== ========= ============
11
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
(6) Fair Value Information
The carrying amounts for cash, trade accounts receivable, and current
liabilities approximate fair value because of the short maturity of these
instruments. The fair value of notes payable to affiliate approximates
fair value due to the default interest rate of 18 percent that these
instruments are accruing at.
(7) Income Taxes
Income tax expense (benefit) for the years ended March 31, 1998, 1997 and
1996 is $-0-.
The following is a reconciliation of the "expected" income tax benefit
(computed by applying the U.S. federal corporate income tax rate of 34
percent to loss before income taxes) and the actual income tax benefit for
the year ended March 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" income tax benefit $(11,557,914) (4,037,341) (4,428,547)
Increase (reduction) in income taxes resulting from:
Change in valuation for deferred tax asset 10,893,443 4,422,670 4,851,100
State income taxes, net of federal income tax
benefit (626,406) (254,317) (326,618)
Penalties 1,700,000 -- --
Other, net (409,123) (131,012) (95,935)
------------ ------------ ------------
$ -- -- --
============ ============ ============
</TABLE>
As of March 31, 1998 and 1997, the Company had a total net deferred tax
asset of $-0-. The tax effects of temporary differences between financial
statement carrying amounts and tax basis of assets that give rise to
significant portions of the deferred tax assets as of March 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for returns and doubtful accounts $ 617,073 457,028
Net operating loss carryforwards 18,157,904 8,759,237
Compensation absences, principally due to accrual
for financial reporting purposes 130,730 132,190
Reserves 2,090,414 754,223
------------ ------------
Total gross deferred tax assets 20,996,121 10,102,678
Less valuation allowance (20,996,121) (10,102,678)
Net deferred tax assets $ -- --
============ ============
</TABLE>
12
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
The valuation allowance for deferred tax assets at March 31, 1998 and 1997
was $20,996,121 and $10,102,678, respectively. The net change in the total
valuation allowance for the years ended March 31, 1998 and 1997 was an
increase of $10,893,443 and $4,422,670, respectively.
(8) 401(k) Plan
The Company has a 401(k) plan for its employees. Eligible participants
include all employees over 21 years of age who have completed six months
of service. Participants are able to contribute between 1 percent and 20
percent of their compensation, for which the Company will match 25 percent
of the first 4 percent of the participant's compensation, up to a maximum
of $1,000 per year. Amounts matched by the Company are fully vested to the
participant after five years. For the years ended March 31, 1998, 1997 and
1996, the Company's matching amounts were approximately $49,000, $46,000
and $34,000, respectively.
It has recently come to the Company's attention that Form 5500,
"Return/Report of Employee Benefit Plan" has not been filed by the Company
for the prior eight (8) years. Immediately upon discovery of this
omission, the Company secured the services of professional experts in the
area of preparing and filing Form 5500. The retained professionals,
together with the Company's management, are implementing an aggressive
plan of action to complete and file the required Form 5500s. Management
believes that this voluntary and immediate corrective action undertaken by
the Company to address this omission should mitigate any adverse
consequences. In management's opinion this noncompliance issue will not
have a material adverse effect on the Company's financial position or
results of operations.
(9) Year 2000 (Unaudited)
The Company utilizes a number of computer systems, including applications
to facilitate its cargo, flight and maintenance operations and for sales
and marketing and various other administrative functions. The Company has
undertaken a preliminary evaluation of its principal computer systems to
determine whether any problems may exist related to the Year 2000. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable years.
13
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
Third-party hardware and software used by the Company are, for the most
part, Year 2000 compliant; those that are not compliant will be upgraded
or replaced. Initial review of the Company's DC-8 and L-1011 aircraft
computer systems indicate that most of the systems are compliant. The
Company has also initiated formal communications with all of its
significant suppliers, vendors and/or large customers to determine the
extent to which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issue. Assuming that remediation projects
can be implemented as planned, the Company believes future costs relating
to the Year 2000 issue, which will be expensed as incurred, will not have
a material adverse effect on the Company's business, operations or
financial condition.
While the Company believes it is taking all the necessary steps to assure
its Year 2000 compliance, it is dependent on key business partner
compliance to some extent. The Company plans to have all company
controllable systems tested and compliant by mid-1999. The Year 2000
problem is pervasive and complex as virtually all computer systems
worldwide will be affected in some way. Consequently, no assurance can be
given that all Company used third-party systems and vendors/suppliers can
achieve Year 2000 compliance.
(10) Federal Aviation Administration ("FAA") Investigation
The Company's operations were temporarily suspended by the FAA from March
17, 1995 to June 9, 1995, following an FAA investigation. On March 17,
1995, the Company agreed to temporarily suspend operations after the FAA
charged that the Company had failed to keep adequate maintenance records.
On April 29, 1995, the Company reached a settlement with the FAA which
provided for the resumption of its operations upon satisfactory completion
of the following conditions: (i) the Company pays $1.5 million as a
remedial payment to defray costs of the FAA's investigation, (ii) the
Company replaces certain key management personnel, and (iii) the Company
demonstrates to the FAA that it is qualified and capable of exercising the
privileges of the holder of an air-carrier operating certificate. On June
9, 1995, the FAA issued an Abatement of Order of Suspension and the
Company commenced operations. In addition to the $1.5 million settlement,
management of the Company also accrued at March 31, 1996 approximately
$340,000 in legal and consulting fees associated with the FAA's
investigation.
(11) Grand Jury Investigation and Subsequent Event
The Company was investigated by a federal grand jury for alleged criminal
violations of the Federal Aviation Regulations. The focus of the grand
jury specifically related to the placement of incorrect tags on parts
removed by the Company from an aircraft that it was contracted to
dismantle. Subsequent to March 31, 1998, the Company plead guilty to a six
count information and paid a total of $5 million in connection with the
Grand Jury Investigation. The $5 million, which was accrued at
14
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
December 31, 1997 (unaudited), was divided as follows: (i) a $3 million
fine and (ii) a $2 million restitution to Embry Riddle University to help
finance the school's aerospace safety program. The Company was placed on
probation for a five-year period or until such time that the court is
satisfied that the Company's corporate compliance program has been
implemented and is an effective program to deter and detect criminal
activity.
(12) Rich International Airways, Inc.
The Company entered into an agreement with Rich International Airways,
Inc. ("Rich") for the purpose of operating two (2) L1011-200F aircraft
under an ACMI Agreement (aircraft, crew, maintenance and insurance)(the
"Agreement") during the summer of 1996. Rich filed an adversary proceeding
against the Company for payment of approximately $1.4 million under the
Agreement. Discovery on this case has been completed and the case is
anticipated to go to trial in the summer of 1999. The Company has not
accrued for any potential loss contingency related to this claim. The
Company believes that the ultimate outcome of the above matter will not
adversely affect the Company's financial condition.
(13) Commitments and Contingencies
In addition to the matters noted above (notes 10, 11 and 12), the Company
is involved in various other litigation arising out of the ordinary course
of business. Management believes that the results of such litigation will
not have a material effect on the Company's financial condition or results
of operations.
The Company joins with its Parent, International and other affiliates and
file consolidated U.S. federal and state income tax returns. The Internal
Revenue Service ("IRS") has completed an examination of the consolidated
federal income tax returns for fiscal years 1987 through 1992 and has
proposed certain adjustments relating to the timing of deductions taken.
International is engaged in settlement discussions with the IRS Appeals
Officer assigned the subject tax matter. International is analyzing the
impact of alternative settlement proposal. Accordingly, management
believes it is too early to access the possible outcome of the settlement
discussions. The statute of limitations for the years at issue have been
extended under a Form 872-A. In the event the taxing authorities made an
assessment against International, Arrow Air, as a member of the
consolidated group for the years under investigation, would be jointly and
severally liable for any assessment or penalties. In the opinion of
management, the ultimate resolution of the proposed adjustments will not
have a material adverse effect on the Company's financial position or
results of operations.
15
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
(14) Segment Information and Concentration of Credit Risk
Substantially all of the Company's revenues are derived from domestic and
Latin American transportation and/or forwarding of air freight and express
shipments. Domestic is defined as any shipment with an origin and
destination within the U.S., Puerto Rico or Canada. One of the Company's
customer represents 13.4 percent, 6.7 percent, and 5.7 percent of total
revenues as of March 31, 1998, 1997 and 1996, respectively, and 5.9
percent and 2.9 percent of net accounts receivable as of March 31, 1998
and 1997, respectively. As of December 31, 1998, the customer did not
renew the charter agreement it had with the Company.
Years ended March 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Domestic $52,346,703 36,347,749 23,113,293
International 35,735,611 32,977,749 14,388,514
----------- ---------- ----------
Total $88,082,314 69,325,498 37,501,807
=========== ========== ==========
(15) Subsequent Events
On November 12, 1998, International entered into a stock purchase
agreement with International Air Leases of PR, Inc. ("IALPR") to sell all
of the capital stock of International and certain subsidiaries of
International (including Air Flite Operations, Inc. and Arrow Air, Inc.)
to IALPR. The sale was completed on February 10, 1999 and Arrow Air, Inc.
became a wholly owned subsidiary of IALPR.
On February 5, 1999 as amended, IALPR entered into a stock purchase
agreement (the "Stock Purchase Agreement") with Fine Air Services Corp.
("Fine Air") to sell all of the capital stock of Arrow Air, Inc. and
certain operating assets. This transaction was completed on April 9, 1999
( the "Closing Date" ) and Arrow Air, Inc. became a wholly owned
subsidiary of Fine Air. The operating assets acquired by Fine Air exclude
the following (the "Excluded Assets"): (a) all cash, marketable
securities, bank accounts and related cash items of Arrow Air; (b) all
accounts receivable or other rights of Arrow Air to receive payments from
customers as of the Closing Date (the "Receivables"); provided, however,
that the Receivables shall not include any lease obligations or other
debts, accruals or liabilities in existence prior to the Closing date owed
to IALPR or its subsidiaries by Arrow Air under any operating or
capitalized lease to which Arrow Air shall be the lessee. All such
Excluded Assets shall be retained by IALPR on and following the Closing
Date. On the Closing Date, Fine Air shall assume and be responsible to pay
for and perform only the obligation for all "C" checks and "D" maintenance
checks, and overhauls and repairs on engines and/or rotables which are in
process as of the Closing Date (the "Assumed Liabilities"). Except for the
Assumed Liabilities neither Fine Air or Arrow Air, nor any other
16
<PAGE>
ARROW AIR, INC.
(A Wholly Owned Subsidiary of
Air Flite Operations, Inc.)
Notes to Financial Statements
March 31, 1998 and 1997
subsidiary of Fine Air shall assume or otherwise be liable or responsible
to pay or perform any obligations, claims, liabilities, costs, debts,
charges, accruals penalties, fines, expenses or other obligations of any
kind or description relating to (a) the ownership and/or operators of
IALPR and any other direct or indirect subsidiary of IALPR at any time,
whether prior to or following the Closing Date, or (b) the ownership or
operation of the business of Arrow Air at any time up to and including the
Closing Date (collectively, the "Excludes Liabilities").
The Excluded Liabilities shall include, without limitation, all accounts
payable, accrued expense, indebtedness for money borrowed, capitalized
lease obligations, and any accrued obligations to pay for all "C" and "D"
maintenance checks, and overhauls and repairs on engines and/or rotables
which have been completed as of the Closing Date. The Stock Purchase
Agreement also provided for any indemnification from IALPR to Fine Air
whereby IALPR agrees that it will indemnify Fine Air an Arrow Air from and
against demand for payment of, any and all liabilities, obligations,
losses, damages, deficiencies, interest, penalties, claims, suits,
actions, costs, expenses and disbursements arising from the operation of
Arrow Air at any time up to the Closing Date.
Also on February 5, 1999, as amended, IALPR's entered into an agreement
for the purchase and sale of assets with Fine Air to sell a total of 17
aircraft and certain other assets to Fine Air. The 17 aircraft purchased
by Fine Air include all of the aircraft that Arrow Air operated and leased
from International. These aircraft leases terminated with International
upon the closing of the sale to Fine Air on March 10, 1999 and Arrow Air
entered into new aircraft leases for its fleet with a subsidiary of Fine
Air.
17
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following sets forth the Company's Unaudited Pro Forma Combined Statement of
Operations for the year ended December 31, 1998 and the Company's Unaudited Pro
Forma Combined Balance Sheet at December 31, 1998, in each case giving effect to
the acquisition of Arrow and the Assets under the "purchase" method of
accounting. The Company's Unaudited Pro Forma Combined Statement of Operations
presents the purchase of Arrow and the Assets as if they had been consummated as
of January 1, 1998. The Company's Unaudited Pro Forma Combined Balance Sheet
presents Arrow and the Assets as if it had been consummated on December 31,
1998. The Unaudited Pro Forma Combined Financial Information of the Company is
presented for illustrative purposes only and, therefore, does not purport to
present the financial position or results of operations of the Company had Arrow
and the Asset acquisition occurred on the dates indicated, nor are they
necessarily indicative of the results of operations which may be expected to
occur in the future.
The historical balance sheet of the Company and Arrow has been derived from the
audited December 31, 1998 consolidated balance sheet of the Company and the
unaudited December 31, 1998 balance sheet of Arrow. The unaudited pro forma
combined statement of operations for the year ended December 31, 1998 has been
derived from the audited consolidated statement of operations of the Company for
the year ended December 31, 1998 and the addition of Arrow's audited statement
of operations for the year ended March 31, 1998, plus the unaudited nine months
ended December 31, 1998 less Arrow's unaudited nine months ended December 31,
1997. The pro forma adjustments relating to the integration of the Arrow
business represent the Company's preliminary determinations of these adjustments
and are based upon available information and certain assumptions that the
Company considers reasonable under the circumstances. Final amounts could differ
from those set forth therein. The unaudited interim historical financial
information of the Arrow business referred to above, in the opinion of
management of Arrow, includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results of the
Arrow business for the unaudited interim periods.
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Fine Air Arrow Air Pro Forma Pro Forma
As Reported (Unaudited) Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 124,632,274 $ 2,389,868 $(117,389,868) 3(a,b) $ 9,632,274
Investment securities 49,577 -- 49,577
Accounts receivables 12,240,690 7,841,427 (7,841,427) 3(c) 12,240,690
Loans receivable, current portion 2,470,757 -- 2,470,757
Expendable parts 302,325 -- 302,325
Inventories -- -- 21,857,987 3(d) 21,857,987
Prepaid expenses and other current assets 487,287 475,066 962,353
------------- ------------- ------------- -------------
Total current assets 140,182,910 10,706,361 (103,373,308) 47,515,963
Property and equipment
Flight equipment 91,339,013 4,366,303 73,710,000 3(e) 169,415,316
Other 36,013,106 4,864,977 11,014,914 3(f,n) 51,892,997
------------- ------------- ------------- -------------
127,352,119 9,231,280 84,724,914 221,308,313
Less accumulated depreciation and amortization (44,892,542) (6,763,686) 6,763,686 3(n) (44,892,542)
------------- ------------- ------------- -------------
Net property and equipment 82,459,577 2,467,594 91,488,600 176,415,771
Other Assets
Restricted cash 303,504 -- 303,504
Aircraft held for sale -- -- 14,670,000 3(e) 14,670,000
Accounts receivable from related party 3,849,707 -- 3,849,707
Loans receivable, less current portion 9,351,084 -- 9,351,084
Deposits and other assets 1,594,731 389,397 5,000,000 3(g) 6,984,128
Deferred debt issuance costs 6,316,209 -- 6,316,209
------------- ------------- ------------- -------------
Total assets $ 244,057,722 $ 13,563,352 $ 7,785,292 $ 265,406,366
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,186,345 $ 2,380,055 $ (2,380,055) 3(j) $ 4,186,345
Due to affiliates -- 49,799,095 (49,799,095) 3(h) --
Interest payable 1,653,248 -- 1,653,248
Accrued expenses 5,750,111 12,303,535 9,045,109 3(i,k,l) 27,098,755
Capital lease obligation, current portion 135,445 -- 135,445
------------- ------------- ------------- -------------
Total current liabilities 11,725,149 64,482,685 (43,134,041) 33,073,793
Capital lease obligations, less current portion 81,752 -- 81,752
9-7/8% Senior Notes due 2008 190,000,000 -- 190,000,000
------------- ------------- ------------- -------------
Total liabilities 201,806,901 64,482,685 (43,134,041) 223,155,545
------------- ------------- ------------- -------------
Stockholders' equity
Common stock 30 100 (100) 3(m) 30
Additional paid-in capital -- 35,240,436 (35,240,436) 3(m) --
Retained earnings (accumulated deficit) 42,250,791 (86,159,869) 86,159,869 3(m) 42,250,791
------------- ------------- ------------- -------------
Total stockholders' equity 42,250,821 (50,919,333) 50,919,333 42,250,821
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 244,057,722 $ 13,563,352 $ 7,785,292 $ 265,406,366
============= ============= ============= =============
</TABLE>
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Fine Air Arrow Pro Forma Pro Forma
As Reported (unaudited) Adjustments Combined
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Scheduled cargo services $ 76,079,187 $ 41,891,120 $ -- $ 117,970,307
ACMI services and charter 37,645,389 43,790,301 81,435,690
Repairs, training and other 2,378,847 2,384,335 4,763,182
------------- ------------- ------------- -------------
Total operating revenues 116,103,423 88,065,756 -- 204,169,179
Operating Expenses
Flying operations 39,505,917 25,895,000 65,400,917
Aircraft rent and insurance -- 20,662,663 (19,173,000) 2 (a) 1,489,663
Aircraft and traffic servicing 12,085,255 9,480,280 21,565,535
Maintenance 18,004,391 46,552,504 (27,292,000) 2 (b) 37,264,895
General and administrative 18,055,817 5,426,799 23,482,616
Selling 6,152,126 3,388,867 9,540,993
Depreciation and amortization 13,235,861 809,451 5,635,833 2 (c,g) 19,681,145
------------- ------------- ------------- -------------
Total operating expenses 107,039,367 112,215,564 (40,829,167) 178,425,764
------------- ------------- ------------- -------------
Operating income (loss) 9,064,056 (24,149,808) 40,829,167 25,743,415
Other income (expense)
Interest income 4,855,241 88,387 (3,337,241) 2 (e) 1,606,387
Interest expense (12,830,307) (1,035,642) (5,586,551) 2 (d,e) (19,452,500)
Other, net 3,609,390 (74,198) 3,535,192
------------- ------------- ------------- -------------
Total other, net (4,365,676) (1,021,453) (8,923,792) (14,310,921)
Extraordinary gain on repurchase of Senior Notes 165,520 (165,520) 2 (f) --
------------- ------------- ------------- -------------
Net income (loss) from continuing operations $ 4,863,900 $ (25,171,261) $ 31,739,855 $ 11,432,494
============= ============= ============= =============
Net income per common share - basic $ 1,621.30 $ 3,810.83
============= =============
Weighted average number of common shares
outstanding 3,000 3,000
============= =============
</TABLE>
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(unaudited)
1. The Unaudited Pro Forma Combined Financial Information is presented for
illustrative purposes only, giving effect to the Arrow and Asset
acquisition by the Company, accounted for as a "purchase" as such term is
used under generally accepted accounting principles.
Certain amounts reported in the Arrow's historical financial information
have been reclassified to conform with the Company presentations in the
Unaudited Pro Forma Combined Balance Sheet and Statement of Operations.
The purchase price is $136,348,644 less the value of certain assumed
liabilities as of the closing date. Based upon the Arrow's December 31,
1998 balance sheet, the purchase price would have been calculated as
follows:
Purchase Price determination:
Gross purchase price $ 136,348,644
Less value of assumed liabilities (21,348,644)
-------------
Net purchase price $ 115,000,000
=============
Purchase price allocation:
Inventories $ 21,857,987
Prepaid expense and other current assets 475,066
Property and equipment 93,956,194
Aircraft held for sale 14,670,000
Deposits and other assets (including $5 million
of intangibles) 5,389,397
Accrued Expenses (21,348,644)
-------------
Net purchase price $ 115,000,000
=============
The foregoing purchase price determination and allocation are based on the
December 31, 1998 Arrow balance sheet and preliminary estimates of fair
values. The final purchase price determination and allocation will be
contingent upon final assessment or appraisal of the fair value of the net
assets acquired, and the balance sheet of Arrow as it relates to certain
items being acquired or assumed as of the closing date.
2. The Company's pro forma combined statement of operations for the year
ended December 31, 1998 present the effects on the historical financial
statements for the Arrow and Asset acquisition, as if it occurred as of
the beginning of such period, including:
<TABLE>
<CAPTION>
Year ended
December 31,
(Increase) decrease in income: 1998
------------
<S> <C>
a. Elimination of aircraft rent expense under leases for aircraft that were purchased under
the Asset acquisition. Arrow leased twelve aircraft under operating leases from
affiliates $(19,173,000)
b. Elimination of maintenance reserves and other maintenance charges from affiliates and
third parties based on the Company's accounting policy which requires such costs to
be capitalized as incurred (27,292,000)
</TABLE>
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(unaudited)
<TABLE>
<S> <C>
c. Increase in depreciation expense to reflect the fair value and useful lives of the acquired
property and equipment 5,302,500
d. Elimination of interest expense for an outstanding note payable to Arrow's affiliates
which was not assumed (1,035,642)
e. Reflects adjustments for the acquisition financing and repayment of certain indebtedness
as if they were consummated at the beginning of the year. On June 5, 1998 the
Company consummated the sale of $200,000,000 9-7/8% Senior Notes due June 1,
2008. Contemporaneous with the sale of the Senior Notes the Company repaid all
outstanding debts totaling $40,500,000. On August 14, 1998, the Company
repurchased $10,000,000 of par value of the Senior Notes
Interest expense on:
$190.0 million borrowings under the Senior Notes at 9-7/8% $ 18,762,500
$ 6.9 million of deferred financing costs amortized over the terms of notes 690,000
------------
Interest expense, as adjusted $ 19,452,500
Historical interest expense (12,830,307)
------------
Adjustment necessary to increase interest expense $ 6,622,193
============
Interest income on:
$ 27.6 million of borrowings available to invest at 5-1/2% $ (1,518,000)
Historical interest income 4,855,241
------------
Adjustment necessary to decrease interest income $ 3,337,241
============
f. To eliminate the gain on the repurchase of $10,000,000 Senior Notes. The pro forma 165,520
adjustments assume a net sale of $190,000,000 of Senior Notes
g. Adjustment to record the amortization of the fair value assigned to Arrow's operating
certificate and route authorities 333,333
</TABLE>
3. For purposes of preparing the Unaudited Pro Forma Balance Sheet, the Arrow
and Asset acquisition has been recorded at estimated fair values. A final
determination of the required purchase accounting adjustments and of the
fair values of the assets and liabilities of Arrow and the Assets have not
been made. Accordingly, the purchase accounting adjustments made in
connection with the development of the unaudited pro forma financial
information reflect the Company's management's best estimates based upon
currently available information.
<TABLE>
<CAPTION>
As of
December 31,
1998
------------
<S> <C>
a. Cash has been adjusted to eliminate accounts not being contractually acquired by the
Company $ (2,389,868)
b. Cash has been adjusted to reflect the payment of the purchase price for Arrow and
the Assets acquired (115,000,000)
c. Accounts receivable has been adjusted to eliminate accounts not being contractually
acquired by the Company (7,841,427)
d. Inventories have been adjusted to reflect the fair value based on the Company's
accounting and valuation policies 21,857,987
</TABLE>
<PAGE>
FINE AIR SERVICES CORP. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL INFORMATION
(unaudited)
<TABLE>
<S> <C>
e. The following have been recorded at their estimated fair values. The DC-8 aircraft and
the L-1011 aircraft will be depreciated on a straight line basis over 10 and 15 years,
respectively. Aircraft are assigned a 10% salvage value
Flight equipment 73,710,000
Aircraft held for sale 14,670,000
f. Property and equipment-other have been recorded at the estimated fair value 17,778,600
g. Deposits and other assets have been adjusted for the Arrow operating certificate and
route authorities to reflect the fair value based on the Company's accounting and
valuation policies. The operating certificate and route authorities will be amortized on a
straight line basis over a 15 year period 5,000,000
h. Elimination of all liabilities to Arrow's affiliates not assumed (49,799,095)
i. Accrued expenses have been adjusted to record liabilities due for all "C" checks, "D"
checks, and overhauls and repairs on engines and/or rotables which were in process
as of the closing date 12,452,677
j. Accounts payable has been adjusted to eliminate accounts not being contractually
assumed by the Company (2,380,055)
k. Accrued expenses has been adjusted to eliminate accounts not being contractually
assumed by the Company (12,303,535)
l. Accrued expenses include the following liabilities assumed:
Relocation of certain of the equipment and related inventories 1,835,000
Cost to be incurred in connection with environmental and safety matters 364,500
Liabilities for contractual management services 620,000
Cost to be incurred or accommodations due to seller 3,625,628
Cost to be incurred for the acquisition 2,450,839
-------------
Total adjustments 8,895,967
=============
m. Elimination of Arrow's stockholders' deficit 50,919,333
n. Elimination of asset and corresponding accumulated depreciation of the acquired
assets of Arrow to arrive at estimated fair value 6,763,686
</TABLE>
