U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR (15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
Commission File No. 0-23444
PAN AM CORPORATION
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0450311
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(State of other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
9300 N.W. 36TH STREET, MIAMI, FLORIDA 33178
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(Address of principal executive offices)
(305) 873-3000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 1, 1997, the Company had a total of 21,058,682 shares of Common
Stock, par value $.0001 per share outstanding.
As of November 1, 1997, the Company had 245,000 shares of Series A Convertible
Preferred Stock and 185,000 shares of Series B Convertible Preferred Stock, par
value $.0001 per share outstanding.
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PAN AM CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
PAGE NO.
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Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996....................................................................... 3
Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996............................................................. 4
Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1996............................................................. 5
Consolidated Statement of Stockholders' Equity for the nine months
ended September 30, 1997................................................................ 6
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996............................................................. 7
Notes to the Consolidated Financial Statements.......................................... 8-16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 17-22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 23
Item 2. Changes in Securities................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders..................................... 23-24
Item 6. Exhibits and Reports on Form 8-K........................................................ 25
Signature........................................................................................ 26
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PAN AM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,513,805 $ 15,005,669
Trade accounts receivables, principally traffic
(net of an allowance of $763,881) 15,822,170 2,930,723
Notes and other receivables 1,623,431 302,345
Expendable aircraft parts 1,050,368 261,787
Prepaid expenses and other assets 6,546,349 1,623,317
------------- -------------
Total current assets 39,556,123 20,123,841
PROPERTY - Net 33,978,749 2,066,308
OTHER ASSETS:
Goodwill (Note 2) 145,450,603
Intangible assets (net of accumulated amortization
of $206,842 and $147,103) 16,684,310 1,609,149
Deposits and other assets 10,698,797 2,745,352
Leasehold interest (net of accumulated amortization
of $117,000) 4,326,432
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TOTAL $ 250,695,014 $ 26,544,650
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 34,381,735 $ 7,084,751
Air traffic liability 28,705,795 4,164,313
Accrued compensation 2,865,041 243,900
Deferred income taxes 155,421 155,421
Other accrued expenses 24,902,361 612,602
Current portion of long-term debt (Note 8) 15,003,190 2,949
------------- -------------
Total current liabilities 106,013,543 12,263,936
------------- -------------
Long-term debt less current maturities (Note 8) 8,169 10,593
Provision for asset impairment and early termination
of aircraft leases (Note 11) 23,265,000
Deferred aircraft lease obligations 3,631,693 1,664,693
Dade County Loan (Note 10) 5,000,000
Stock subscriptions and warrants (Note 6) 10,977,881 945,381
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $100 stated value,
$.0001 par value, 500,000 authorized, 435,000
shares issued and outstanding (Note 5) 43,500,000
Common stock, $.0001 par value, 100,000,000 shares
authorized, 20,936,420 shares and 10,920,191
shares issued and outstanding 2,094 1,092
Capital surplus 138,583,291 39,555,374
Accumulated deficit (80,245,179) (27,554,831)
Receivable from officers (11,750 shares) (41,478) (341,588)
-------------- -------------
Total stockholders' equity 101,798,728 11,660,047
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TOTAL $ 250,695,014 $ 26,544,650
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See accompanying notes to consolidated financial statements.
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PAN AM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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REVENUES:
Passenger $ 36,891,119 $ 125,000
Cargo and mail 347,189 450
Other income 74,305 53,307
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Total revenues 37,312,613 178,757
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EXPENSES:
Aircraft fuel and oil 8,749,486 361,316
Aircraft rentals 7,834,751 604,792
Aircraft maintenance reserves,
materials and repairs 6,412,677 606,643
Wages and related costs 5,914,624 2,639,542
Reservations and sales 4,303,844 687,843
Ground handling and landing fees 4,321,401 127,250
Facilities and other rents 3,546,880 218,018
Traffic commissions 2,900,257 6,250
Advertising 1,524,768 951,807
Passenger food expense 1,955,574 20,418
Professional and technical 1,472,950 941,951
Materials and supplies - other 1,196,516 481,347
Insurance 1,002,224 253,996
Personnel expenses 952,589 234,546
Communications 234,122 106,905
Depreciation and amortization 305,251 90,199
Other 1,262,742 682,799
------------ ------------
Total expenses 53,890,656 9,015,622
------------ ------------
OPERATING LOSS (16,578,043) (8,836,865)
------------ ------------
NON-OPERATING
INCOME (EXPENSES):
Provision for termination of aircraft leases (4,847,000) --
Interest income 328,081 155,851
Other 19,624 (25,701)
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Total non-operating income (4,499,295) 130,150
------------ ------------
NET LOSS $(21,077,338) $ (8,706,715)
============ ============
NET LOSS PER SHARE $ (1.83) $ (1.11)
============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 11,826,689 7,823,615
============ ============
See accompanying notes to consolidated financial statements.
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PAN AM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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REVENUES:
Passenger $ 87,037,014 $ 125,000
Cargo and mail 848,864 450
Other income 710,164 73,176
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Total revenues 88,596,042 198,626
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EXPENSES:
Aircraft fuel and oil 22,126,785 361,316
Aircraft rentals 20,576,424 608,792
Aircraft maintenance reserves,
materials and repairs 15,983,333 613,664
Wages and related costs 14,883,633 4,189,022
Reservations and sales 11,683,470 687,843
Ground handling and landing fees 10,691,855 127,250
Facilities and other rents 8,193,287 406,878
Traffic commissions 6,134,680 6,250
Advertising 5,557,684 1,291,244
Passenger food expense 5,544,763 20,418
Professional and technical 4,549,766 2,134,959
Materials and supplies - other 2,889,432 637,892
Insurance 2,735,136 290,003
Personnel expenses 2,450,788 529,498
Communications 479,972 156,320
Depreciation and amortization 697,341 168,512
Other 2,157,774 1,010,506
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Total expenses 137,336,123 13,240,367
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OPERATING LOSS (48,740,081) (13,041,741)
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NON-OPERATING
INCOME (EXPENSES):
Provision for termination of aircraft leases (4,847,000) --
Interest income 857,020 390,064
Write-down of investment -- (17,000)
Other 39,713 6,907
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Total non-operating income (3,950,267) 379,971
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LOSS BEFORE DEFERRED
INCOME TAX PROVISION (52,690,348) (12,661,770)
DEFERRED INCOME
TAX PROVISION -- (155,421)
------------- -------------
NET LOSS $ (52,690,348) $ (12,817,191)
============= =============
NET LOSS PER SHARE $ (4.72) $ (2.21)
============= =============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 11,373,928 5,787,976
============= =============
See accompanying notes to consolidated financial statements.
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PAN AM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
PREFERRED COMMON CAPITAL ACCUMULATED
STOCK STOCK SURPLUS DEFICIT
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BALANCE, DECEMBER 31, 1996 $ 1,092 $ 39,555,374 $(27,554,831)
Issuance of 45,000 shares for stock subscription 4 324,496
Settlement of Stockholder Note (Note 6)
Issuance of 297,419 shares in settlement of
stockholder contribution (Note 6) 30 1,049,859
Issuance of 9,523,810 shares in exchange
for Pan American Airways Corp.'s
common stock (Note 2) 953 98,808,577
Issuance of 250,000 shares (Note 5) - Series A $25,000,000 (980,000)
Issuance of 185,000 shares (Note 5) - Series B 18,500,000 (925,000)
Issuance of 150,000 shares for warrants (Note 6) 15 749,985
Net loss for the nine months ended September 30, 1997 (52,690,348)
----------- --------- ------------ ------------
BALANCE, SEPTEMBER 30, 1997 $43,500,000 $ 2,094 $138,583,291 $(80,245,179)
=========== ========= ============ ============
RECEIVABLE
FROM OFFICERS TOTAL
---------------- -------------
BALANCE, DECEMBER 31, 1996 $ (341,588) $ 11,660,047
Issuance of 45,000 shares for stock subscription 324,500
Settlement of Stockholder Note (Note 6) 300,110 300,110
Issuance of 297,419 shares in settlement of
stockholder contribution (Note 6) 1,049,889
Issuance of 9,523,810 shares in exchange
for Pan American Airways Corp.'s
common stock (Note 2) 98,809,530
Issuance of 250,000 shares (Note 5) - Series A 24,020,000
Issuance of 185,000 shares (Note 5) - Series B 17,575,000
Issuance of 150,000 shares for warrants (Note 6) 750,000
Net loss for the nine months ended September 30, 1997 (52,690,348)
------------ -------------
BALANCE, SEPTEMBER 30, 1997 $ (41,478) $ 101,798,728
============ =============
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See accompanying notes to consolidated financial statements.
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PAN AM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(52,690,348) $(12,817,191)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization - Operating property 697,341 168,512
Depreciation and amortization - Non-transport property 243,055
Deferred compensation amortization -- 1,167,264
Deferred income taxes -- 155,421
Amortization of prepaid rent -- 300,110
Write-off of investment in affiliate -- 17,000
Provision for early termination of aircraft leases (Note 11) 4,847,000 --
Changes in certain assets and liabilities, net of effect of acquisition:
Increase in notes and accounts receivables (13,888,113) (863,622)
Increase in prepaid expenses and other assets (2,356,148) (820,217)
Increase in accounts payable 9,260,049 3,390,951
Increase in air traffic liability 3,745,073 539,812
Increase in deferred credits - aircraft leases 3,631,693 --
Increase in accrued compensation 535,673 120,000
Increase in other accrued expenses 4,531,502 153,080
------------ ------------
Net cash used in operating activities (41,443,223) (8,488,880)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash realized from acquisition 879,088 --
Purchase of property and equipment (7,398,677) (620,034)
Acquisition of airline designator code (210,000) --
Investment in affiliate -- (18,000)
Deposits (1,336,370) (1,484,280)
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Net cash used in investing activities (8,065,959) (2,122,314)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in receivable from stockholder 300,110 --
Proceeds from Dade County bridge loan 5,000,000 --
Increase in note payable -- 1,500,000
Principal payments on long-term debt (2,182) --
Issuance of preferred stock, net 41,595,000 --
Issuance of common stock 2,124,390 31,997,965
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Net cash provided by financing activities 49,017,318 33,497,965
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NET (DECREASE) INCREASE IN CASH (491,864) 22,886,771
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 15,005,669 --
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 14,513,805 $ 22,886,771
============ ============
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See accompanying notes to consolidated financial statements.
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PAN AM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet at September 30, 1997
reflects the acquisition of Carnival Air Lines as described below. The results
of operations of Carnival Air Lines will be included in the Company's
consolidated statement of operations beginning October 1, 1997.
The accompanying consolidated financial statements of Pan Am
Corporation and subsidiaries (the "Company" or "Pan Am") have been prepared in
accordance with instructions for reporting interim financial information on Form
10-Q and, therefore, do not include all information and footnotes necessary for
a fair presentation of financial position, results of operations and cash flows
in conformity with generally accepted accounting principles. Accordingly, such
financial statements should be read in conjunction with the Company's
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The interim consolidated financial statements as of and for the nine
and three months ended September 30, 1997 and 1996 are unaudited and, in the
opinion of management, include all adjustments (which include only normal
recurring adjustments) necessary to present fairly, in all material respects,
the financial position of the Company and the results of operations and cash
flows for such periods. Results for the nine months ended September 30, 1997 are
not necessarily indicative of results to be expected for the full fiscal year
ending December 31, 1997.
2. ACQUISITION OF CARNIVAL AIR LINES, INC.
On September 26, 1997, Pan Am Corporation completed the acquisition of
Carnival Air Lines, Inc. pursuant to an Acquisition Agreement, dated March 20,
1997, as amended, among Pan Am, CAL Acquisition Corporation, a wholly-owned
subsidiary of Pan Am, Air Holding Company and Carnival Air Lines, Inc. All of
the outstanding shares of Common Stock, par value $0.0002105 per share, of
Carnival Air Lines, Inc. were converted into an aggregate of 9,523,810 shares of
the Common Stock, par value $0.0001 per share, of Pan Am. Carnival Air Lines,
Inc. became a wholly-owned subsidiary of Pan Am and changed its name to "Pan
American Airways Corp." Pan Am's shareholders approved the Merger and the
issuance of the exchange shares at Pan Am's Annual Meeting of Shareholders held
on September 26, 1997.
For discussion purposes, Carnival Air Lines, Inc. will hereafter be
referred to as Carnival Air for pre-merger activities and Pan American Airways
for post-merger activities.
The consolidated balance sheet at September 30, 1997 reflects the
acquisition described above. The Merger was accounted for by Pan Am under the
"purchase" method of accounting in accordance with generally accepted accounting
principles. The results of operations of Pan American Airways will be included
in the Company's consolidated statement of operations beginning October 1, 1997.
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The investment and acquisition basis in Carnival Air was determined as
follows:
(AMOUNTS IN THOUSANDS)
----------------------
Exchange of 9,523,810 shares of Pan Am
common stock at $10.375 $ 98,810
Accumulated deficit of Carnival Air 67,153
-----------
$ 165,963
===========
The cost of the acquisition has been allocated to the assets acquired
and liabilities assumed based upon the fair values at the date of acquisition as
determined by management with the assistance of internal appraisals. As of
September 30, 1997, Pan Am management is assessing the realization of the excess
of the fair value of net identifiable assets (Goodwill) of approximately $145
million. Such goodwill is being amortized over an estimated life of 10 years.
The results of this assessment may have a material impact on the financial
position and results of operations for the year ended December 31, 1997.
Set forth below is a summary of the adjustments to assets and
liabilities at September 30, 1997 to reflect Pan Am's investment basis in
Carnival Air.
INCREASE/(DECREASE)
(AMOUNTS IN THOUSANDS)
----------------------
Rotable equipment $ 5,678
Flight equipment (92)
Aircraft leasehold interest 14,926
Goodwill 145,451
----------
$ 165,963
==========
The following unaudited condensed pro forma consolidated statements of
operations give effect to the acquisition referred to above as if it had
occurred at the beginning of each such year, including adjustments to the
historical financial statements for additional amortization of intangible
assets. These statements are presented for informational purposes only and are
not necessarily indicative of what results from operations actually would have
been had the acquisition been consummated at the beginning of each such year, or
of future results of operations.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS
OF OPERATIONS
(Amounts in thousands, except per share amounts)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
--------- --------
Operating revenues $283,653 $205,726
Operating income (loss) (145,694) (34,374)
Net income (loss) (148,623) (35,070)
Net income (loss) per share (7.10) (1.72)
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In addition to the significant accounting policies described in the
footnotes to the Company's consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996, the
Company has adopted the following accounting policy during the quarter ended
September 30, 1997:
Goodwill: The Company records the excess of cost over the fair
value of net assets acquired in purchase business
combinations as goodwill, which is being amortized on a
straight-line basis over periods of up to forty years,
with a weighted average period of ten years. Management
periodically evaluates the carrying value of goodwill
for impairment.
3. NON CASH INVESTING ACTIVITIES ($000)
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Financing and Investing Activities Not Affecting Cash:
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A. Issuance of 45,000 shares of the Company's common stock in
satisfaction of a debt to a certain vendor $ 325
B. Purchase of office complex and related office equipment with
1,294,625 common stock warrants 10,357
C. Purchase of Carnival Air Lines, Inc. through the exchange of
9,523,810 shares of the Company's common stock 98,810
-----------
$ 109,492
===========
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4. AIRCRAFT FLEET
As of September 30, 1997, Pan Am operated the following aircraft fleet
through its two airline subsidiaries, Pan American Airways Corp. and Pan
American World Airways, Inc. ("Pan American World").
FLEET INVENTORY AS OF SEPTEMBER 30, 1997
TYPE OWNED LEASED TOTAL
------- ------ ------ -----
737-200 1 1 2
737-400 0 7 7
A300 0 10 10
727-200 2 5 7
---- ---- ----
3 23 26
==== ==== ====
Pan American Airways leases 18 (plus 1 thru an intercompany transaction
with Pan American World) of its aircraft under operating leases expiring between
February 1998 and July 2004, ten of which
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are subject to power by the hour leases. Pan American World's leased aircraft
are operated under conventional operating leases expiring between July 2001 and
June 2003. Under the operating leases, the airlines pay monthly maintenance
reserves to the lessors to cover major engine restorations and certain airframe
overhauls on a flight hour usage basis. Any overhaul or restoration costs that
are in excess of available reserves are capitalized and amortized until the next
scheduled overhaul or lease term which ever is shorter. With respect to the
A-300 aircraft, the Company is currently negotiating for the satisfactory return
of the aircraft and the termination of the respective leases. See Note 11.
5. PREFERRED STOCK
A. SERIES A
In March 1997, the Company authorized the issuance of 250,000 shares of
a Series A Convertible Preferred Stock. Each share of Series A Preferred Stock
has a stated value equal to $100 per share and a term of three years. Each share
of Series A Preferred Stock accumulates dividends at the rate per share (as a
percentage of stated value per share) equal to 8% per annum, payable in shares
of Series A Preferred Stock in arrears on the date that the Series A Preferred
Stock becomes convertible into shares of Common Stock. The Series A Preferred
Stock is convertible at the option of the holders thereof into shares of Common
Stock (following the registration of such underlying shares of Common Stock) at
the lesser of a fixed price (the "Series A Fixed Price") or a floating price
(the "Series A Floating Price") (the Series A Fixed Price or the Series A
Floating Price is sometimes hereinafter referred to as the "Series A Conversion
Price"). The Series A Fixed Price is equal to $8.50 per share (subject to a
reset option as described in the Articles of Amendment). The Series A Floating
Price is a discount to market beginning at 97%, with such discount increasing 1%
per month until said discount reaches 80%. Each share of Series A Preferred
Stock is convertible into shares of Common Stock equal to the stated value per
share divided by the applicable Series A Conversion Price (the "Series A
Conversion Ratio"). Upon the expiration of the three year term, each share of
Series A Preferred Stock will be mandatorily converted into shares of Common
Stock at such Series A Conversion Ratio. Pan Am also has the option to redeem
the Series A Preferred Stock for a cash value equal to the value of the shares
of Common Stock issuable upon conversion at 80% discount, plus the issuance of a
warrant to purchase shares of Common Stock in an amount equal to the value of
the Series A Preferred Stock so redeemed, with an exercise price equal to the
Series A Fixed Price and a term expiring on March 18, 2000. The Series A
Preferred Stock is subject to a performance adjustment in favor of the Company
to the Series A Fixed Price if the Common Stock increases by greater than 40%.
In no event shall a holder of shares of Series A Preferred Stock (or warrants)
be entitled to receive shares of Common Stock to the extent that the sum of (a)
the number of shares of Common Stock beneficially owned by the holder and (b)
the number of shares of Common Stock issuable upon the conversion of the shares
of Series A Preferred Stock (or warrants) would result in beneficial ownership
by the holder of more than 4.9% of the outstanding shares of Common Stock.
The Series A Preferred Stock ranks prior to all classes or series of
equity securities of Pan Am, including Common Stock and, except as otherwise
provided by law, the Series A Preferred Stock has no voting rights. Upon any
liquidation, dissolution or winding-up of the Company, the Series A Holders
shall be entitled to receive out of the assets of the Company, for each share of
Series A Preferred Stock, an amount equal to the stated value, plus an amount
equal to the accrued but unpaid dividends per share, before any distribution or
payment is made to the holders of any junior securities. The Series A Preferred
Stock has full priority over the Series B Preferred Stock in the event of
liquidation of the Company.
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As of September 30, 1997, the Company has issued 250,000 shares of the
Series A Preferred Stock, resulting in net proceeds of $24.0 million. In
connection with the offering, 668,450 warrants were granted which are
exercisable at $9.35 per common share.
In October 1997, 5,000 shares of the Series A Preferred Stock plus
accrued interest were converted into 122,262 shares of the Company's Common
Stock.
B. SERIES B
In May 1997, the Company authorized the issuance of 250,000 shares of a
Series B Convertible Preferred Stock. Each share of Series B Preferred Stock has
a stated value equal to $100 per share and a term of three years. Holders of
Series B Preferred Stock are entitled to cumulative dividends at a rate per
share (as a percentage of stated value per share) equal to 7.25% per annum
payable in shares of Common Stock in arrears, the number of shares of which are
determined by dividing the aggregate cash value of such dividends payable by the
closing bid price per share of Common Stock on the day prior to the date on
which the Series B Holder specifies that a Series B conversion into shares of
Common Stock is to be effected. For nine months following the date that the
Series B Preferred Stock is first issued (the "Series B Issuance Date"), the
Series B Preferred Stock is convertible at the option of the holders thereof
into shares of Common Stock (following the registration of such underlying
shares of Common Stock) at a fixed price (the "Series B Fixed Price");
thereafter, the Series B Preferred Stock is convertible at the lesser of the
Series B Fixed Price or a floating price (the "Series B Floating Price") (the
Series B Fixed Price or the Series B Floating Price, whichever applicable, is
sometimes hereinafter referred to as the "Series B Conversion Price"). The
Series B Fixed Price is equal to $8.39. The Series B Floating Price is a
discount to market beginning at 97%, with such discount increasing 1.5% per
month until said discount reaches 80%. Each share of Series B Preferred Stock is
convertible into shares of Common Stock equal to the stated value per share
divided by the applicable Series B Conversion Price (the "Series B Conversion
Ratio"). Upon the expiration of the three year term, each share of Series B
Preferred Stock will be mandatorily converted into shares of Common Stock at
such Series B Conversion Ratio. Pan Am also has the option to redeem the Series
B Preferred Stock for (i) a cash value equal to the value of the shares of
Common Stock issuable upon conversion at such 80% discount, (ii) a cash value
equal to all accrued dividends payable and (iii) the issuance of a warrant to
purchase shares of Common Stock in an amount equal to the value of the Series B
Preferred Stock so redeemed, with an exercise price equal to the Series B Fixed
Price and a term expiring on May 15, 2000. The Company has the option to convert
the Series B Preferred Stock into shares of Common Stock at any time at the
lesser of the Series B Fixed Price, or the Series B Floating Price with the 80%
discount. The Company will not require such conversion if such conversion will
cause a Series B Holder to either own more than 4.9% of the shares of Common
Stock or file a Schedule 13D or Schedule 13G under the Exchange Act.
The Series B Preferred Stock ranks prior to all classes or series of
equity securities of Pan Am, including Common Stock, except for the Series A
Preferred Stock, and, except as otherwise provided by law, the Series B
Preferred Stock has no voting rights. Upon any liquidation, dissolution or
winding-up of the Company, the Series B Holders shall be entitled to receive out
of the assets of the Company, for each share of Series B Preferred Stock, an
amount equal to the stated value, plus an amount equal to the accrued but unpaid
dividends per share, before any distribution or payment is made to the holders
of any junior securities.
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As of September 30, 1997, the Company had issued 185,000 shares of the
Series B Preferred Stock, resulting in net proceeds of $17.6 million. In
connection with the offering, 382,229 warrants were granted which are
exercisable at $9.23 per share of common stock.
6. RELATED PARTY TRANSACTIONS
In 1996, the Company issued shares of common stock to a certain
stockholder pursuant to the terms of a Contribution Agreement, whereby the
stockholder contributed its interest in a certain promissory note executed by
the LIFECO travel agency with a face value of $1.35 million (the "Lifeco Note")
to the Company. At the time of the contribution of the Lifeco Note, the
stockholder could not state with certainty that the Company actually would
recover the full $1.35 million. Consequently, the stockholder initially accepted
a reduced value of $300,000 (the "Estimated Value") reflected by receipt of
85,017 shares of common stock in exchange for the Lifeco Note (representing a
value of $3.53 per share). It was further agreed, that if the Company received
value which exceeded the Estimated Value, the stockholder would be entitled to
additional shares of common stock at the $3.53 per share valuation. In early
1997, the full collection of the Lifeco Note by the stockholder became
reasonably certain. Accordingly, the Company received full value for the Lifeco
Note from the stockholder, and in turn, issued shares of common stock at the
agreed upon price of $3.53 per share. The Company received $800,000 in cash and
spare parts with an estimated value in excess of $550,000 from the stockholder
in exchange for the note receivable and the issuance of an additional 297,419
shares of the Company's Common Stock.
On March 31, 1997, the Company completed the purchase of an office
complex and related office equipment pursuant to a closing agreement dated
February 11, 1997, which will temporarily act as the Company's corporate
headquarters, from a certain stockholder. The property consists of the leasehold
interest in certain buildings and real property and approximately 18.0 acres of
land, valued at $4.44 million and $5.85 million, respectively. The total
transaction, valued at $10.4 million (which also includes tangible personal
property valued at $110,000), was completed through the issuance of 1,294,625
warrants which are convertible into an equal number of shares of common stock of
the Company upon the occurrence of certain events. This transaction was a
non-cash financing and investing activity.
In April 1997, Pan American World purchased from Carnival Air one
Boeing 727-200 aircraft and selected A300 aircraft parts for $5.0 million in
cash. Carnival Air has subsequently leased back the aircraft on a short-term
basis for monthly lease rent of $30,625 plus overhaul reserves at $347 per
flight hour.
On June 1, 1997, Carnival Air began operating the Chicago Midway to
Miami to San Juan flights with its own aircraft on a code-share arrangement with
Pan American World whereby Pan American World agreed to a guaranteed seat
purchase commitment. By June 30, 1997, Pan American World had arranged a
marketing code-share on the remaining Carnival Air flights. During the quarter
ended September 1997, Pan American World had recorded an expense of $363,187 to
Carnival Air relating to these operations.
On May 19, 1997, certain holders exercised warrants to purchase 150,000
shares of common stock at $5.00 per share, totaling $750,000.
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7. INVESTMENT IN AFFILIATE
The Company's investment in affiliate, which is carried at its net
realizable value, consists of a 30% interest in Chalk's Air Bridge, Inc., which
owns 100% of Flying Boat, Inc., a Delaware corporation. Flying Boat, Inc. is the
owner and operator of Pan Am Air Bridge (f/k/a Chalks International Airlines), a
historic seaplane airline operation. The Company has granted, without royalties
or fees, a license to Flying Boat, Inc. to use the Pan Am trade name, subject to
termination only upon the occurrence of specific events.
Through September 30, 1997, the Company had loaned $329,583 to Flying
Boat, Inc.
8. CREDIT FACILITY
On July 28, 1997, Carnival Air, as borrower, Pan Am and Mr. Micky
Arison, as guarantors, and NationsBank, N.A., as Lender (the "Lender"), executed
a Credit Agreement (the "NationsBank Credit Agreement") pursuant to which the
Lender provides two revolving credit bridge facilities (each a "Facility" and
collectively, the "NationsBank Facility") of up to an aggregate of $25 million
which allowed for and was used by Carnival Air for working capital and general
corporate purposes and for the repayment by Carnival Air of up to $5 million in
existing bank debt. Each of the Facilities permitted Carnival Air to borrow up
to $12.5 million, with borrowings under such Facilities maturing one year after
the date of closing, subject to certain repayment requirements.
Prior to the consummation of the Merger, Mr. Micky Arison, an affiliate
of the principal shareholder of Carnival Air, provided a guaranty of payment
with respect to one of the Facilities ("Facility B"), and after the consummation
of the Merger, this guaranty was converted to a guaranty of collection. Prior to
the consummation of the Merger, Pan Am provided a guaranty of collection of the
other Facility ("Facility A"), which was binding on Pan Am whether or not the
Merger was consummated. When the Merger was consummated, Pan Am's guaranty of
Facility A was converted into a guaranty of payment of the entire NationsBank
Facility. Pan Am's guaranty is secured by a first priority lien on all or
substantially all of its assets.
Pan Am was required to issue to the Lender, as further consideration,
warrants to purchase up to 550,000 shares of Pan Am Common Stock at an exercise
price of $7.917 per share, exercisable over ten years with a staggered vesting
schedule based on the funding of the NationsBank Facility.
As of September 30, 1997, $7.5 million of Facility A and $7.5 million
of Facility B for a total of $15.0 million was outstanding under the
NationsBank Facility. In addition, on November 13, 1997, the Company drew down
an additional $5.0 million under Facility B. The Facility bears interest at the
sum of (x) the greater of (1) the Federal Fund rate plus 0.5% or (2) the prime
rate plus (y) the applicable margins. The applicable margins range from 0% to 6%
depending on the Facility and the period in which they are outstanding. Through
September 30, 1997, the effective interest rate was: Facility A, 11.5%, and
Facility B, 8.5%. An unused commitment fee is applicable as follows: Facility A,
0.5%, and Facility B, 0.25%. Interest is to be paid in arrears at the end of
each calendar quarter, calculated on the daily amounts outstanding during the
quarter using the basis of a year of 360 days.
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<PAGE>
9. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128, which supersedes Accounting Principles Board ("APB")
Opinion No. 15, requires a dual presentation of basic and diluted earnings per
share on the face of the income statement. Basic earnings per share excludes
dilution and is computed by dividing income or loss attributable to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted earnings per share is
computed similarly to fully diluted earnings per share under APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. Had SFAS No. 128 been adopted for the nine months ended September 30,
1997 and 1996, basic net loss per share would have been $4.72 and $2.21,
respectively, and diluted net loss per share would have been anti-dilutive.
In March 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". The statement applies to all entities that have issued
securities addressed by this statement and is effective for financial statements
for periods ending after December 15, 1997. The statement establishes standards
for disclosing information about an entity's capital structure requiring that an
entity describe the pertinent rights and privileges of the various securities
outstanding. The Company believes SFAS No. 129 will have little, if any, effect
on the information already disclosed in the Company's consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies report
selected information about segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for the periods beginning after December 15,
1997. The Company has not determined the effects, if any, SFAS No. 131 will have
on the disclosures in its consolidated financial statements.
10. DADE COUNTY LOAN
In March 1997, the Company agreed with Dade County, Florida and various
state and federal entities on a $7.3 million incentive package as an inducement
to locate its corporate headquarters within the County. The Company received
$5.0 million in cash in the form of a "bridge loan" from Dade County. In
September 1997, Pan Am was notified of the approval by the U.S. Department of
Housing and Urban Development ("HUD") of a Loan Guarantee Commitment to
Metropolitan Dade County for fiscal year 1997 under its Section 108 Loan
Guarantee Program in the amount of $5.75 million. Based upon this notice, it is
anticipated that the bridge loan will be converted to a long-term debt
instrument.
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<PAGE>
11. SUBSEQUENT EVENTS
Subsequent to the Merger, the Company announced in early October 1997
its plan to consolidate the two airline operations. Such realignment focused
on achieving a more efficient utilization of its resources through a combined
operation resulting in a reduction of 465 personnel primarily in the areas of
passenger services, flight crew (both flight attendants and pilots), maintenance
and other technical operating areas. In connection with this work force
reduction, the Company recorded a provision of $269,000 relating to notice pay.
The Merger has provided the Company with access to narrowbody aircraft.
The capacity of which more appropriately matches the traffic flow expected by
the combined airline operations. The Company has determined to reduce its
widebody aircraft operations with a view toward eliminating such scheduled
service completely. Consequently, seven (7) of the Company's A-300 widebody
aircraft were removed from scheduled service with negotiations being commenced
for their satisfactory return to the lessors and the termination of the
respective leases. As a result of this action, Pan American World and Carnival
Air recorded one-time charges of $4.8 million and $13.2 million, respectively,
reflecting the estimated costs associated with the return condition provisions
of the lease agreements, including minimum monthly lease rentals.
12. COMMITMENTS AND CONTINGENCIES
Various claims, contractual disputes and lawsuits against the Company
arise periodically involving complaints which are normal and reasonably
foreseeable in light of the nature of the Company's business. The majority of
these suits are covered by insurance. In the opinion of management, the
resolutions of these claims will not have a material adverse effect on the
business, operating results or financial condition of the Company.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company began flight operations on September 26, 1996 with two
leased A300 widebody aircraft providing daily round trip flights between New
York, New York and Miami, Florida and New York, New York and Los Angeles,
California. The Company has continued to expand its operations and as a result
of the Merger the combined operations currently serve 17 cities in the eastern
United States and the Caribbean with approximately 50 daily departures primarily
utilizing narrowbody aircraft.
On September 26, 1997, Pan Am Corporation completed the acquisition of
Carnival Air Lines, Inc. pursuant to an Acquisition Agreement, dated March 20,
1997, as amended, among Pan Am, CAL Acquisition Corporation, a wholly-owned
subsidiary of Pan Am, Air Holding Company and Carnival Air Lines, Inc.
("Carnival Air").
The following discussion of the results of operations reflect those of
Pan Am only and not the combined merged operations.
RESULTS OF OPERATIONS
Since the Company commenced airline operations on September 26, 1996,
management does not believe that a discussion of the results for comparative
prior year periods would be meaningful as it relates to the new operating
entity. Consequently, the following summary and discussion of selected financial
and operating data has been limited to the quarters ended September 30, 1997,
and June 30, 1997, respectively, and the nine months ended September 30, 1997,
which management believes reflects the airline's performance for those periods
of operations.
Since the inception, the Company has incurred substantial losses
amounting to $80.2 million, of which, $67.4 million relates to airline
operations through September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 JUNE 30, 1997
------------------ ------------------- ---------------
<S> <C> <C> <C>
Operating Revenues $88,596,000 $37,312,600 $29,510,700
Total Expenses $141,286,300 $58,389,900 $46,567,100
Net Loss $ 52,690,300 $21,077,300 $17,056,400
Revenue Passengers Carried 684,248 271,385 221,896
Revenue Passenger Miles (RPMs) 1,056,817,000 456,044,000 336,770,000
Available Seat Miles (ASMs) 1,610,060,900 646,358,000 570,401,000
Yield Per RPM 8.2/cent/ 8.1/cent/ 8.5/cent/
Load Factor 65.6% 70.6% 59.0%
Revenue Per ASM 5.50/cent/ 5.77/cent/ 5.17/cent/
Cost Per ASM 8.51/cent/ 8.32/cent/ 8.19/cent/
</TABLE>
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<PAGE>
REVENUES
GENERAL. Airline revenue is primarily a function of passenger load
factors and fares charged by the airline. The passenger load factor represents
the percentage of available seats occupied by revenue paying passengers and is
calculated by dividing revenue passenger miles flown by total available seat
miles. Revenue passenger miles are the total miles flown by revenue passengers
during the period. Available seat miles are the product of total seats available
for sale during the period multiplied by the total flight miles operated during
the period.
The Company anticipates that its business will follow the traditional
seasonal trends of the domestic United States airline industry for the markets
it serves, with traffic and revenues typically higher during the winter, summer
and late fall periods when business travel is supplemented by discretionary
leisure travel.
In addition to passenger revenue, the Company generates revenue from
the shipment of general freight and mail. The Company also generates revenue
from the sale of in-flight services such as liquor and movie headsets.
PASSENGER REVENUE. Passenger revenues totaled $36,891,119 for the three
months ended September 30, 1997 compared to $28,666,841 for the three months
ended June 30, 1997, or an increase of 28.6%. The number of revenue passengers
carried was 273,395 for the three months ended September 30, 1997 compared to
221,896 for the three months ended June 30, 1997, or an increase of 23.2%. The
Company's operating schedule for the three months ended September 30, 1997
produced a quarterly increase in ASMs of 75,957,000 or 33.2%, resulting in a 12
percentage points increase in load factor.
Other revenues, consisting primarily of sales from freight and mail
service and liquor sales and headset rentals, totaled $421,494 and $843,821 for
the three months ended September 30, 1997 and June 30, 1997, respectively,
representing 1.1% and 2.9% of total operating revenues, respectively.
OPERATING EXPENSES
Operating expenses include those related to flying operations, such as
aircraft fuel and rent, aircraft maintenance, ground handling and landing fees,
advertising, traffic commissions, wages and related costs, administrative costs,
and depreciation and amortization. Total operating expenses for the three months
ended September 30, 1997 were $53,170,272 as compared to $46,877,598 for the
three months ended June 30, 1997 for an increase of 13.4%.
Aircraft fuel expense includes the direct product cost of fuel and
associated taxes. Aircraft fuel costs of $8,749,486 for 12,336,671 gallons
consumed resulting in an average fuel cost of 70.9 cents per gallon and
represented 16.5% of total operating expenses for the three months ended
September 30, 1997, as compared to $7,409,110 for 10,604,383 gallons consumed
resulting in an average fuel cost of 69.9 cents per gallon and represented 15.8%
of total operating expenses for the three months ended June 30, 1997. Fuel
prices are subject to change weekly as the Company does not maintain inventories
of its own. In addition, fuel prices may be volatile subject to demand based
upon a number of factors outside the control of the Company. Any increase in the
price of fuel which could not be offset through increased fares could have a
material adverse impact upon the financial results of the Company.
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<PAGE>
Aircraft rentals totaling $7,834,751, or 14.7% of total operating
expenses for the three months ended September 30, 1997, as compared to
$6,766,442 or 14.4% of total operating expenses for the three months ended June
30, 1997, include lease payments relating to A300 aircraft operated by the
Company and the wet-leasing of aircraft operated by third parties and Carnival
Air. The Company made a corporate decision to reduce its widebody operations.
Accordingly, it is in the process of removing the A-300 aircraft from service
with the goal of satisfactorily terminating the respective leases. The Company
has recorded a one-time charge to expense of $4,847,000 for anticipated
contingencies associated with the returns of the A-300 fleet.
Wages, salaries and related costs totaling $5,914,624 represented 11.1%
of total operating expenses for the three months ended September 30, 1997, as
compared to $5,106,384 representing 10.9% of total operating expenses for the
three months ended June 30, 1997. There were 786 employees as of September 30,
1997, an increase of 20.6% over the June 30, 1997 base of 652 employees. The
Company announced in early October 1997 its plan to consolidate the two airline
operations. Such realignment focused on achieving a more efficient utilization
of its resources through a combined operation resulting in a reduction of 465
personnel primarily in the areas of passenger services, flight crew (both flight
attendants and pilots), maintenance and other technical operating areas. In
connection with this work force reduction, the Company recorded a provision of
$269,000 relating to notice pay.
Maintenance reserves, material and repairs totaling $6,412,677,
representing 12.0% of total operating expenses for the three months ended
September 30, 1997, as compared to $5,772,351, representing 12.3% of total
operating expenses for the three months ended June 30, 1997, are comprised
substantially of airframe and engine overhaul reserves which accrue to the
lessors of the A300 aircraft. Flight hours increased to 4103.1 for the three
months ended September 30, 1997, as compared to 3632.1 for the three months
ended June 30, 1997, a 13.0% increase.
Ground handling and landing fees amounting to $4,321,401, or 8.1% of
total operating expenses for the three months ended September 30, 1997, as
compared to $3,757,071 or 8.0% of total operating expenses for the three months
ended June 30, 1997, primarily relate to passenger handling costs, including
ticket counter, boarding gate and baggage loading. Landing fees are principally
based upon the number of aircraft operations, the type of aircraft flown, and
the airports served.
Advertising amounted to $1,524,768, or 2.9% of total operating expenses
for the three months ended September 30, 1997, as compared to $1,652,345 or 3.5%
of total operating expenses for the three months ended June 30, 1997.
All other operating costs totaling $18,412,565, or 34.6% of total
operating expenses for the three months ended September 30, 1997, as compared to
$16,413,895, or 35.0% of total operating expenses for the three months ended
June 30, 1997, are of a nature normally incurred by an airline and are typical
within the industry, such as reservations and sales expenses, passenger meals,
traffic commissions, insurance, professional and technical fees, and facilities
rent.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The combined companies are currently experiencing a significant
liquidity shortfall. From inception in early 1996, Pan Am has incurred
substantial losses amounting to $80.2 million through September 30, 1997, of
which approximately $67.4 million has been incurred since the commencement of
its airline operation in September of 1996. For the same period, cash utilized
by airline operating activities amounted to $47.9 million, with $41.1 and
$18.8 million being attributable to the nine and three months ended September
30, 1997, respectively. Carnival Air has also incurred significant operating
losses resulting in a concurrent demand on cash resources. For the nine months
ended September 30, 1997, Carnival Air had operating losses totaling $82.3
million, of which $16.5 million in cash was utilized by operations. At
September 30, 1997, the combined companies had a working capital deficit of
$66.5 million, resulting primarily from a consolidated operating loss of $131.0
million for the nine months ended September 30, 1997. Cash utilized by
operations for the nine months ended September 30, 1997 totaled $57.6 million.
Since September 30, 1997, the Company's financial condition has continued to
deteriorate.
The Company currently has a credit facility with NationsBank which
permits borrowings up to a maximum of $20 million. On November 13, 1997, the
Company borrowed its remaining $5 million of availability under the NationsBank
Facility. The Company is seeking to increase the NationsBank facility for up to
an additional $5 million. Certain of the major shareholders of the Company have
agreed in principle to execute direct or indirect limited guarantees in
connection with such proposed increase. Although management is optimistic that
such increase of the NationsBank Facility can be effectuated, NationsBank has
not committed to advance such additional funds and, accordingly, there is no
assurance that any such increase will occur. Presently, management estimates
that the existing cash reserves of the combined companies will not, without
additional financing, sustain operations beyond the immediate future.
In addition to any increase of the NationsBank Facility, the Company
will still be required to raise significant additional funds to maintain an
adequate level of liquidity for its operations through the next calendar year.
The Company intends to seek to raise such funds through the sale of debt or
equity securities and there can be no assurance that it will be able to sell
such securities on terms acceptable to the Company or at all. Further, the
Company's ability to raise such funds may be hindered by the Company's inability
to successfully complete its recent private offering of convertible preferred
stock and the aggregate recent losses experienced by the combined companies.
The fund the Company's continuing operating losses, the Company's
principal financing activities during the first nine months of 1997 included the
completion of an offering of a Series A Convertible Preferred Stock for $25
million, of which the company received net cash proceeds of $24 million; an
incentive package from Dade County, Florida, and various state and federal
entities in an aggregate cash amount of $5 million as an inducement to locate
its corporate headquarters within Dade County; the completion of an offering of
a Series B Convertible Preferred Stock for $18 million, of which the Company
received net proceeds of $17.6 million; and the exercise of warrants for the
issuance of Common Stock for cash proceeds of $750,000.
Pan Am's ability to sustain operations and ultimately achieve
profitability is dependent in part upon the general state of the economy, and
upon Pan Am's ability to successfully integrate the Carnival Air operations, to
increase the combined companies' revenues, to decrease the combined companies'
costs and in achieving the other synergies the Company anticipated would be
realized pursuant to the Merger. Carnival Air has experienced an approximate 50%
decline in booking levels following the Merger from the level expected by
management based upon Carnival Air's historical booking levels. The Company has
made significant efforts to increase such booking levels to those previously
experienced by Carnival Air. Current booking levels have increased but have not
yet returned to the expected level of bookings based upon Carnival Air's
historical booking levels. Such decline has significantly reduced the Company's
cash flow. The Company cannot predict whether its efforts to increase the
booking rates at Carnival Air will yield any further success. Any failure by it
to promptly increase such bookings could have a material adverse effect upon the
short term financial condition of the Company.
Additionally, in early October 1997, the Company initiated a
consolidation plan for the two airline operations. Such consolidation plan
resulted in a reduction of 465 personnel primarily in the areas of passenger
services, flight crew (both flight attendants and pilots), maintenance and
other
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<PAGE>
technical operating areas. The Company may be required to make further
reductions in personnel.
The Company also has determined to focus on utilizing Carnival Air's
narrowbody aircraft which management believes can be deployed more efficiently
on existing routes given existing traffic flow. The Company intends to reduce
its widebody operations with a view toward eliminating such service completely.
Accordingly, seven (7) of the combined companies' nine (9) A-300 widebody
aircraft were removed from scheduled service and negotiations have been
commended for their return to the lessors and the termination of their
respective leases. While the Company is negotiating a settlement with the
lessors for the early termination of the leases, there is no assurance that an
acceptable settlement can be reached and the Company has placed reserves of
$23.3 million on its financial statements relating to such early termination.
Nevertheless, management believes that a settlement may be reached with such
lessors on more favorable terms. In any event, regardless of whether a
settlement may be reached with such lessors, the Company's decision to reduce
its widebody operations could have a material adverse effect on the Company.
There is no assurance that the Company will generate sufficient cash to
fund operations and the necessary cash requirements thereof. Consequently, there
can be no assurance that the Company will be able to fund all of its cash
requirements and operating losses beyond the immediate future or that any
additional financing will be available to the Company on acceptable terms, if at
all. Presently, the Company is in discussions with several financial
institutions regarding additional sources of financing to fund operations on an
interim basis as well as to provide a base level of liquidity to sustain
operations on a short term basis. Management cannot predict with any certainty
that such financing will be obtained. To the extent the Company is not able to
generate sufficient revenues or obtain additional financing and its cash
requirements were to continue to exceed its available capital and financing, Pan
Am would be forced to adopt one or more alternatives, such as reducing or
delaying expansions, reducing or discontinuing some or all of its operations or
seeking protection under the federal bankruptcy laws.
SUBSEQUENT EVENTS
Subsequent to the Merger, the Company announced in early October 1997
its plan to consolidate the two airline operations. Such realignment focused on
achieving a more efficient utilization of its resources through a combined
operation resulting in a reduction of 465 personnel primarily in the areas of
passenger services, flight crew (both flight attendants and pilots), maintenance
and other technical operating areas. In connection with this work force
reduction, the Company recorded a provision of $269,000 relating to notice pay.
The Merger has provided the Company with access to narrowbody aircraft.
The capacity of which more appropriately matches the traffic flow expected by
the combined airline operations. The Company has determined to reduce its
widebody aircraft operations with a view toward eliminating such scheduled
service completely. Consequently, seven (7) of the Company's A-300 widebody
aircraft were removed from scheduled service with negotiations being commenced
for their satisfactory return to the lessors and the termination of the
respective leases. As a result of this action, Pan American World and Carnival
Air recorded one-time charges of $4.8 million and $13.2 million, respectively,
reflecting the estimated costs associated with the return condition provisions
of the lease agreements, including minimum monthly lease rentals.
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<PAGE>
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for historical information contained herein, the matters
discussed in this report are forward-looking statements made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995. These
forward-looking statements may at times be preceded, followed by or include the
words, "may," "believes," "expects," "intends," "estimates," or "anticipates,"
or the negation thereof or similar expressions. The achievement of the outcomes
described in such forward-looking statements is subject to both known and
unknown risks, uncertainties and other factors that may cause actual results,
performance or achievements of the airline industry generally, and of the
Company in particular, to be materially different from any outcomes expressed or
implied by such forward-looking statements and other risks and factors discussed
elsewhere in this report and the documents filed by the Company with the
Securities and Exchange Commission. These risks and factors include, among other
things, economic, competitive and regulatory conditions, demographic trends,
financial market conditions, availability of financings and future business
decisions (the Company and its competitors), all of which are difficult or
impossible to predict accurately and many of which are beyond the control of Pan
Am. In light of these risks and uncertainties, there can be no assurance that
the forward-looking information contained in this report will, in fact, occur.
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<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Pan Am is presently involved in litigation in the United States
District Court, Southern District of New York, with Eclipse Holdings,
Inc. ("Eclipse"). Such litigation commenced on April 20, 1995 and is
captioned: PAN AMERICAN WORLD AIRWAYS, INC. V. ECLIPSE HOLDINGS,
INC., DAVID LOCKWOOD, DAVID SCOTT AND RICHARD BARTEL, 95 Civ. 2763
(LMM). Eclipse had initially submitted the winning bid in bankruptcy
court to purchase the Pan Am Intellectual Property, but was unable to
secure financing for its bid and subsequently assigned its rights to
purchase the Pan Am Intellectual Property to Pan Am. Pan Am has an
action against Eclipse seeking to compel Eclipse to execute and
deliver the assignment documentation in order to register the Pan Am
Intellectual Property in certain foreign countries. Pursuant to such
action, Eclipse was compelled to execute such assignment
documentation. Eclipse has appealed such order. Additionally, Eclipse
has filed an action against Pan Am challenging Pan Am's ownership of
the Pan Am Intellectual Property. Management believes the suit will
be resolved in Pan Am's favor. However, the loss by Pan Am of the Pan
Am Intellectual Property would have a material adverse effect on Pan
Am.
Pan Am is presently involved in litigation in the United States
District Court, Southern District of Florida, CARNIVAL AIR LINES,
INC. VS. BABCOCK & BROWN AIRCRAFT MANAGEMENT, INC., et al; Case No.
97-1704-CIV-KEHOE and in Circuit Court of Broward County, Florida,
BBAM AIRCRAFT HOLDINGS THREE, INC., ET AL. VS. CARNIVAL AIR LINES,
INC., AND PAN AM CORPORATION; Case No. 97-009090 (09) Consolidated
with Case Nos. 97-009095 (09) and 97-009098 (09). These matters
involve a dispute with the above parties as aircraft lessors
("Lessors") over Carnival Air Lines' termination of aircraft leases
relating to three A300B4 aircraft. Carnival Air Lines terminated the
aircraft leases due to the Lessors' default of their obligations
thereunder. The Lessors deny any default and claim Carnival Air Lines
has defaulted under the leases. Management believes the suit will be
resolved without a material adverse effect to Pan Am. However, the
potential for losses to Pan Am resulting from such litigation if
resolved in the Lessors' favor could have a material adverse effect
on Pan Am.
ITEM 2. CHANGES IN SECURITIES
On July 28, 1997 the Registrant sold 50,000 shares of Series B
Convertible Preferred Stock, par value $.0001 per share and stated
value of $100 per share. As additional consideration, the purchasers
of the Series B Preferred Stock received in the aggregate, warrants
to purchase 103,305 shares of Common Stock at an exercise price equal
to $9.23 with a term of three years.
On September 26, 1997, the Registrant sold 100,000 of Series A
Convertible Preferred Stock, par value $.0001 per share and stated
value of $100 per share. As additional consideration, the purchases
of the Series A Preferred Stock received in the aggregate, warrants
to purchase 267,380 shares of Common Stock at an exercise price equal
to $9.35 with a term of three years.
On September 26, 1997, Pan Am Corporation completed the acquisition
of Carnival Air Lines, Inc. pursuant to an Acquisition Agreement,
dated March 20, 1997, as amended, among Pan Am, CAL Acquisition
Corporation, a wholly-owned subsidiary of Pan Am, Air Holding Company
and Carnival Air Lines, Inc. All of the outstanding shares of Common
Stock , par value $0.0002105 per share, of Carnival Air Lines, Inc.
were converted into an aggregate of 9,523,810 shares of the Common
Stock, par value $0.0001 per share, of Pan Am.
In October 1997, 5,000 shares of the Series A Preferred Stock plus
accrued interest were converted into 122,262 shares of the Company's
Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Shareholders of the Company was held
on September 26, 1997.
-23-
<PAGE>
(b) Not applicable.
(c) At the Annual Meeting, shareholders voted:
1. To approve the issuance of shares of Common Stock
pursuant to the Acquisition Agreement.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
6,966,793 18,538 18,495
2. To elect six directors to serve until the next Annual
Meeting.
VOTES FOR WITHHELD
--------- --------
Charles E. Cobb, Jr. 9,502,744 362,725
Phillip Frost, M.D. 9,555,444 310,025
Richard C. Pfenniger, Jr. 9,806,144 59,325
John J. Sicilian 9,806,117 59,352
Martin R. Shugrue, Jr. 9,806,144 59,325
Hershel F. Smith, Jr. 9,556,044 309,425
3. To approve amendment of the Company's 1996 Stock Option Plan to
increase the number of shares of Common Stock issuable pursuant
to the Plan.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
6,849,370 91,937 62,519
4. To approve the issuance of shares of Common Stock upon the
conversion of shares of Series A and Series B Preferred Stock.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
6,853,094 70,155 80,577
5. To approve the issuance of shares of Common Stock in connection
with the purchase of the Doral Technology Center.
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
6,799,624 122,697 81,505
-24-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed with this report:
1. Financial Statements. The financial statements filed as a
part of this report are listed in Item 1, "Financial
Statements and Supplementary Data," herein.
2. Financial Statement Schedules. There are no financial
statement schedules filed as part of this report, since
the required information is included in the financial
statements, including notes thereto, or the circumstances
requiring inclusion of such schedules are not present.
3. Exhibits. The following exhibits are filed herewith or
incorporated by reference as indicated. Exhibit numbers
refer to Item 601 of Regulation S-K. As used in the list
of Exhibits below, "Registrant" refers to the Company.
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
-------- -----------------------
11A Computation of Earnings per Share for the three
months ended September 30, 1997
11B Computation of Earnings per Share for the nine
months ended September 30, 1997
27 Financial Data Schedule
(b) Current reports on Form 8-K:
On August 29, 1997, the Company filed a Current Report on Form
8-K, dated August 29, 1997, reporting the terms of the
acquisition agreement, as amended, and the discussions with
investment bankers with respect to conducting an offering of
up to $115,000,000 of Pan Am's securities pursuant to Rule
144A promulgated under the Securities Act of 1933, as amended.
The Form 8-K included Carnival Air Lines, Inc.'s, audited
financial statements for the year ended June 30, 1997. The
Form 8-K also included Pan Am's and Carnival Air's Pro Forma
Combined Condensed Balance Sheet and Statements of Operations
(unaudited).
On October 7, 1997, the Company filed a Current Report on Form
8-K, dated September 26, 1997, reporting the completion of the
acquisition of Carnival Air Lines, Inc., on September 26,
1997, pursuant to an Acquisition Agreement dated March 20,
1997, as amended. Included as Exhibits to the Form 8-K were:
(i) Registration Rights Agreement, dated as of March 20, 1997,
among Pan Am Corporation, The Micky Arison 1995 Air Holding
Trust, Reuven Wertheim and A. Daniel Ratti; (ii) Standstill
Agreement, dated as of March 20, 1997, among Pan Am
Corporation, Micky Arison and The Micky Arison 1995 Air
Holding Trust; and (iii) Credit Agreement, dated August 1,
1997, among Pan Am Corporation, Carnival Air Lines, Inc. and
NationsBank National Association.
-25-
<PAGE>
In accordance with the requirements of Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAN AM CORPORATION
Date: November 14, 1997 By: /s/ JOHN J. OGILBY, JR.
-------------------------------------
John J. Ogilby, Jr.,
Chief Financial Officer and General Counsel
(Principal Financial Officer)
-26-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
11A Computation of Earnings per Share for the three months ended
September 30, 1997
11B Computation of Earnings per Share for the nine months ended
September 30, 1997
27 Financial Data Schedule
EXHIBIT 11.A
<TABLE>
<CAPTION>
PAN AM CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------------- --------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding 11,826,689 11,826,689 7,823,615 7,823,615
Additional shares due to:
Series A preferred stock 0 0 0 0
Series B preferred stock 0 0 0 0
------------ ------------ ----------- -----------
Total equivalent shares 11,826,689 11,826,689 7,823,615 7,823,615
============ ============ =========== ===========
Earnings per share:
Net loss $(21,077,338) $(21,077,338) $(8,706,715) $(8,706,715)
Less: Preferred stock dividends (621,493) (621,493) 0 0
------------ ------------ ----------- -----------
Adjusted net loss $(21,698,832) $(21,698,832) $(8,706,715) $(8,706,715)
============ ============ =========== ===========
Earnings per common share $ (1.83) $ (1.83) $ (1.11) $ (1.11)
============ ============ =========== ===========
</TABLE>
EXHIBIT 11.B
<TABLE>
<CAPTION>
PAN AM CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
--------------------------- ----------------------------
FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding 11,373,928 11,373,928 5,787,976 5,787,976
Additional shares due to:
Series A preferred stock 0 0 0 0
Series B preferred stock 0 0 0 0
------------ ------------ ------------ ------------
Total equivalent shares 11,373,928 11,373,928 5,787,976 5,787,976
============ ============ ============ ============
Earnings per share:
Net loss $(52,690,348) $(52,690,348) $(12,817,191) $(12,817,191)
Less: Preferred stock dividends (1,040,733) (1,040,733) 0 0
------------ ------------ ------------ ------------
Adjusted net loss $(53,731,081) $(53,731,081) $(12,817,191) $(12,817,191)
============ ============ ============ ============
Earnings per common share $ (4.72) $ (4.72) $ (2.21) $ (2.21)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,513,805
<SECURITIES> 0
<RECEIVABLES> 18,209,482
<ALLOWANCES> 763,881
<INVENTORY> 1,050,368
<CURRENT-ASSETS> 39,556,123
<PP&E> 50,102,681
<DEPRECIATION> (16,123,932)
<TOTAL-ASSETS> 250,695,014
<CURRENT-LIABILITIES> 106,013,543
<BONDS> 0
0
43,500,000
<COMMON> 2,094
<OTHER-SE> 58,296,634
<TOTAL-LIABILITY-AND-EQUITY> 250,695,014
<SALES> 88,596,042
<TOTAL-REVENUES> 88,596,042
<CGS> 137,336,123
<TOTAL-COSTS> 137,336,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17,050)
<INCOME-PRETAX> (52,690,348)
<INCOME-TAX> 0
<INCOME-CONTINUING> (52,690,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,690,348)
<EPS-PRIMARY> (4.72)
<EPS-DILUTED> (4.72)
</TABLE>
