SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): AUGUST 29, 1997
PAN AM CORPORATION
9300 N.W. 36TH STREET, MIAMI, FLORIDA 33178
305-873-3000
<TABLE>
<S> <C> <C>
State of Incorporation Commission File Number I.R.S. Employer Identification Number
STATE OF FLORIDA 0-23444 65-0450311
</TABLE>
<PAGE>
ITEM 5. OTHER EVENTS
(a) As previously announced, on March 20, 1997, Pan Am Corporation (the
"Registrant") entered into an acquisition agreement (the "Merger Agreement"), as
amended, among the Registrant, CAL Acquisition Corporation, a Florida
corporation and wholly-owned subsidiary of the Registrant ("acquisition
subsidiary"), Air Holding Company, a Florida corporation ("AHC"), and Carnival
Air Lines, Inc. ("Carnival Air"), pursuant to which, among other things, (i)
acquisition subsidiary will be merged with and into Carnival Air, as a result of
which Carnival Air will become a wholly-owned subsidiary of the Registrant (the
"Merger"), and (ii) all outstanding shares of Carnival Air common stock will be
converted into an aggregate of 9,523,810 shares of the Registrant's common
stock, par value $.0001 per share (the "Common Stock"), which will constitute
approximately 46% of the then outstanding shares of Common Stock, without giving
effect to the issuance of (a) approximately 4,748,000 shares of Common Stock
upon the exercise of outstanding options and warrants to purchase Common Stock
and (b) the shares of Common Stock issuable upon the conversion of the
Registrant's outstanding shares of Series A Convertible Preferred Stock and
Series B Junior Convertible Preferred Stock. The consummation of the Merger is
subject to the satisfaction of a limited number of conditions, including the
approval by the Registrant's shareholders of the issuance of the shares of
Common Stock to be issued in connection with the Merger.
(b) The Registrant is currently engaged in discussions with one or more
investment banking firms with respect to conducting an offering of up to
$115,000,000 of its securities pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended (the "Act"). It is anticipated that such
securities will be a new series of convertible preferred stock. It is further
contemplated that all subscriptions for such securities would be received prior
to the consummation of the Merger and that the release of such funds and the
closing of such offering would be conditioned upon the consummation of the
Merger. It is currently anticipated that the proceeds from such offering will be
used to (i) repay Carnival Air's indebtedness, (ii) repay the Registrant's $5
million cash incentive "bridge loan" received from Metropolitan Dade County,
Florida, (iii) redeem the Company's Series A Convertible Preferred Stock for
approximately $22.5 million and (iv) for general working capital purposes. It is
further anticipated that upon closing of such offering, the Company will redeem
or convert all of the outstanding shares of the Series B Junior Convertible
Preferred Stock. If the Company proceeds with such offering the securities
offered thereby will not be registered under the Act and may not be offered or
sold in the United States absent registration or an applicable exemption from
registration requirements. There can be no assurances that any such offering
will ever be consummated.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Carnival Air Lines, Inc. and Report
of Independent Certified Public Accountants.
1. Report of Independent Certified Public Accountants
2. Balance Sheets at June 30, 1996 and 1997.
3. Statements of Operations for the years ended
June 30, 1995, 1996 and 1997.
4. Statements of Stockholders' Equity (Deficit)
5. Statements of Cash Flows
6. Notes to Financial Statements
(b) The Registrant and Carnival Air Lines, Inc. Pro Forma
Combined Condensed Balance Sheet and Statements of Operation (unaudited).
(c) Exhibits.
1. Consent of Price Waterhouse LLP.
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<PAGE>
ITEM 7(a)
INDEX TO FINANCIAL STATEMENTS
CARNIVAL AIR LINES, INC.
Report of Independent Certified Public Accountants ......................4
Balance Sheets at June 30, 1995, 1996 and 1997 ............................5
Statements of Operations for the years ended June 30, 1995, 1996 and 1997 .6
Statements of Stockholders' Equity ........................................7
Statements of Cash Flows .................................................8
Notes to Financial Statements ...........................................9
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<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Carnival Air Lines, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Carnival Air Lines, Inc. at
June 30, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered significant losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
August 15, 1997
-4-
<PAGE>
CARNIVAL AIR LINES, INC.
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1997 1996
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 674 $ 869
Deposits held in escrow ............................................. 1,057 1,842
Accounts receivable, net of allowance for doubtful accounts
of $616 and $430 ................................................... 10,390 16,748
Deposits, primarily securing leased aircraft ........................ 443 506
Prepaid expenses and other assets .................................... 6,222 7,745
Deferred income taxes ................................................ - 770
Parts and supplies inventories ....................................... 786 1,520
--------- --------
Total current assets ................................................ 19,572 30,000
Property and equipment, net .......................................... 16,507 34,237
Other assets, primarily long term deposits securing leased aircraft ... 2,061 3,976
Goodwill, net of accumulated amortization of $289 in 1996............... - 1,201
--------- --------
$ 38,140 $69,414
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit and note payable ....................................... $ 2,228 $ -
Accounts payable ...................................................... 24,316 11,093
Accrued expenses and other liabilities .............................. 30,617 17,563
Unearned transportation revenue ....................................... 24,019 22,384
--------- --------
Total current liabilities .......................................... 81,180 51,040
Line of credit ......................................................... 26,050 10,000
Deferred income taxes ................................................ - 2,168
--------- --------
Total Liabilities ................................................... 107,230 63,208
--------- --------
Commitments and contingencies (Note 6) ................................. - -
Stockholders' equity (deficit):
Common stock; $.0002105 par value, 20,000,000 shares
authorized, 3,166,667 shares issued and outstanding ............... 1 1
Additional paid-in-capital .......................................... 2,019 2,019
Retained earnings (deficit) .......................................... (71,110) 4,186
--------- --------
Total stockholders' equity (deficit) ................................. (69,090) 6,206
--------- --------
$ 38,140 $69,414
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
CARNIVAL AIR LINES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1997 1996 1995
------------- ---------- ------------
<S> <C> <C> <C>
Revenues ....................................... $ 260,826 $269,270 $199,622
Operating expenses:
Direct operating costs:
Aircraft fuel .............................. 51,824 44,749 31,722
Aircraft and traffic servicing ............... 41,990 38,163 29,586
Flying operations ........................... 66,137 56,336 44,557
Maintenance expenses ........................ 64,295 43,843 30,719
Passenger service expenses .................. 23,490 23,296 16,855
Selling, general and administrative ......... 54,062 55,028 37,803
Depreciation and amortization ............... 6,318 5,233 4,359
Costs associated with returned aircraft ...... 13,695 - -
Impairment loss .............................. 12,536 - -
Provision for bad debts ..................... 1,873 263 622
--------- -------- --------
Total operating expenses .................. 336,220 266,911 196,223
--------- -------- --------
Operating (loss) income ........................ (75,394) 2,359 3,399
--------- -------- --------
Other (expense) income:
Interest income .............................. 180 256 127
Interest expense .............................. (1,480) (91) (459)
--------- -------- --------
Total other (expense) income ............... (1,300) 165 (332)
(Loss) income before (benefit) provision for
income taxes ................................. (76,694) 2,524 3,067
(Benefit) provision for income taxes ......... (1,398) 1,693 565
--------- -------- --------
Net (loss) income .............................. $ (75,296) $ 831 $ 2,502
========= ======== ========
(Loss) earnings per share ..................... $ (23.78) $ 0.26 $ 0.79
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
CARNIVAL AIR LINES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
ADDITIONAL
PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS (DEFICIT) TOTAL
----------- ----------- ----------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 ...... 2,850,000 1 $1,349 $ 853 $ 2,203
Net income ..................... - - - 2,502 2,502
---------- -- ------- ---------- ---------
Balance at June 30, 1995 ...... 2,850,000 1 1,349 3,355 4,705
Net income ..................... - - - 831 831
Exercise of stock options ...... 316,667 - 670 - 670
---------- -- ------- ---------- ---------
Balance at June 30, 1996 ...... 3,166,667 1 2,019 4,186 6,206
Net loss ........................ - - - (75,296) (75,296)
---------- -- ------- ---------- ---------
Balance at June 30, 1997 ...... 3,166,667 1 $2,019 $ (71,110) $ (69,090)
========== == ======= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
CARNIVAL AIR LINES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................ $(75,296) $ 831 $ 2,502
Adjustments to reconcile net (loss) income to net
cash provided from operating activities:
Impairment loss ................................................ 12,536 - -
Costs associated with returned aircraft, net .................. 12,982 - -
Compensation expense related to option plans .................. - 570 -
Amortization of maintenance overhauls ........................... 13,659 4,530 3,795
Depreciation and amortization--other ........................... 6,318 5,233 4,359
Provision (benefit) for deferred income taxes .................. (1,398) 1,433 (395)
Provision for bad debts ....................................... 1,873 263 622
Loss on sale of aircraft ....................................... 241 - -
Changes in operating assets and liabilities:
(Increase) decrease in:
Deposits held in escrow ....................................... 785 (331) 442
Accounts receivable .......................................... 2,162 (7,747) (2,260)
Parts and supplies inventory ................................. 734 (1,274) (82)
Prepaid expenses and other assets .............................. (576) (5,350) 471
Deposits and other assets .................................... 1,715 (1,971) 158
(Decrease) increase in:
Accounts payable ............................................. 12,223 1,307 2,792
Accrued expenses and other liabilities ........................ 206 8,438 1,185
Unearned transportation revenue .............................. 1,634 6,613 1,759
Income taxes payable .......................................... - (660) 360
--------- --------- ---------
Net cash (used in) provided from operating activities ............ (10,202) 11,885 15,708
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment, net of reimbursements from
lessor for overhaul reserves .................................... (11,601) (21,690) (10,537)
Proceeds from sale of aircraft and equipment ..................... 5,000 - -
--------- --------- ---------
Net cash used in investing activities .............................. (6,601) (21,690) (10,537)
--------- --------- ---------
Cash flows from financing activities:
Exercise of options ............................................. - 100 -
Repayments on line of credit, net ................................. - - (4,400)
Advances on lines of credit ....................................... 18,050 10,000 -
Principal payments on notes payable, including down payment ...... (1,442) - -
Proceeds from employee stock purchase plan ........................ - - 70
Refunds from employee stock purchase plan ........................ - (295) (270)
--------- --------- ---------
Net cash provided from (used in) financing activities ............ 16,608 9,805 (4,600)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ............ (195) - 571
Cash and cash equivalents at beginning of year ..................... 869 869 298
--------- --------- ---------
Cash and cash equivalents at end of year ........................... $ 674 $ 869 $ 869
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid ................................................... $ 1,326 $ 16 $ 600
========= ========= =========
Income taxes paid ................................................ $ 20 $ 2,457 $ 830
========= ========= =========
Supplemental disclosure of noncash activities:
Issuance of note payable for purchase of aircraft ............... $ 1,670 $ - $ -
========= ========= =========
Accrued engine overhauls .......................................... $ 7,600 $ 1,680 $ -
========= ========= =========
</TABLE>
The accompanying notes are an integral part of financial statements.
-8-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Carnival Air Lines, Inc. ("Carnival Air Lines" or the "Company") was
formed in 1988 as a corporation organized under the laws of the State of
Florida. The Company is engaged in the airline business and is a United States
scheduled air carrier. The Company also performs repair services for its
aircraft and third parties. The Company is a majority owned subsidiary of Air
Holding Company (the "Parent"). The Company is headquartered in Fort
Lauderdale, Florida and its principal markets are the Northeast Corridor,
Florida and the Caribbean.
In March 1997, the Company entered into an agreement with Pan Am
Corporation, Inc. ("Pan Am") pursuant to which the Company will be acquired by
Pan Am. Following the proposed merger, the Company's shareholders will own
approximately 46% of Pan Am (See Note 12.)
2. BASIS OF PRESENTATION
The financial statements have been prepared on the basis that the Company
will continue as a going concern. However, as a result of changes in the
business environment, the Company has incurred significant operating losses and
negative cash flow through June 30, 1997. As noted in Note 6, the Company was
in default on 4 of its leases and certain of its other leases contain
cross-default provisions. These losses and negative cash flow have resulted in
high levels of debt, and a significant stockholders' deficit and working
capital deficit. The presence of such debt stockholders' deficit and working
capital deficit will adversely affect the Company's ability to obtain future
financing. The Company does not believe it has sufficient resources to fund the
next fiscal year's capital needs and will not generate sufficient cash flow to
adequately fund its current operations. Accordingly, the Company believes it
will be necessary to continue to defer certain payables and to raise additional
funds through various means, including the sale of certain aircraft or other
assets. If these measures are unsuccessful, the Company could be forced to seek
protection under bankruptcy laws. The Company and Pan Am have entered into a
merger agreement. Pan Am is a start-up that has limited operations which
commenced on September 26, 1996. Although Pan Am is a start-up airline and has
incurred significant losses, the Company believes the proposed merger with Pan
Am will provide additional means of financing through certain proposed
offerings. There can be no assurance that sources of funds will be available in
amounts sufficient for the Company to meet its obligations. In the event the
Company is unable to obtain financing, it may be required to adopt one or more
alternatives, such as reducing or delaying additional expenditures or otherwise
curtailing operations.
There can be no assurances that any of such alternatives will provide
sufficient cash to meet the Company's obligations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Passenger ticket sales are recorded as unearned transportation revenue and
are recognized as passenger revenue upon completion of the flight. Charter
revenue is recognized as earned revenue when transportation is provided.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all investments purchased with a
maturity of three months or less. Included in accounts payable at June 30, 1997
and 1996, respectively, is approximately $2,005,000 and $442,000 of book
overdrafts. Such overdrafts represent outstanding checks in excess of funds on
deposit at a particular institution.
-9-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
DEPOSITS HELD IN ESCROW
Deposits held in escrow consist of deposits for charter flights which are
required to be maintained in escrow until the charter flight is completed.
These amounts are primarily utilized within a short time period.
PARTS AND SUPPLIES INVENTORIES
Inventory consists of expendable parts, materials and supplies to be used
by the Company and is stated at cost (as determined on a first-in, first-out
(FIFO) basis).
PREPAID EXPENSES AND OTHER ASSETS
Included in prepaid expenses and other assets are estimated reserve
reimbursements of approximately $2,750,000 as of June 30, 1997 and tax
receivables of $2,800,000 as of June 30, 1996. Also included are prepaid
commissions of $1,682,000 and $1,820,000 as of June 30, 1997 and June 1996,
respectively.
GOODWILL AND LONG-LIVED ASSET, INCLUDING IMPAIRMENT
In 1988, the Company acquired all of the outstanding stock of Pacific
Interstate Airlines, Inc. for cash. The purchase price was allocated to the
acquired assets and liabilities based upon their estimated fair market value on
the date of acquisition with the remainder being allocated to goodwill.
Goodwill historically has been amortized using the straight-line method over 40
years. In accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
reviewed the recoverability of goodwill and other long-lived assets.
Based on this review, the Company recognized an impairment related to the
goodwill amounting to approximately $1.2 million in fiscal 1997, which is
included in impairment loss in the statement of operations. Additionally,
pursuant to the review of the Company's long-lived assets, the Company recorded
a charge of approximately $11.3 million. (See Property and Equipment and
Airframe and Engine Maintenance). The Company determined that the goodwill,
certain airframe and maintenance overhauls and other leasehold improvements
were impaired as a result of the significant losses incurred during fiscal 1997
and an analysis of the future recoverability and accordingly, the assets were
recorded at the lesser of cost or fair value. Fair value was determined based
upon appraisals in the case of owned assets and recoverable costs for leased
assets and other long-lived assets.
PROPERTY AND EQUIPMENT AND AIRFRAME AND ENGINE MAINTENANCE
Flight equipment is carried at cost. At June 30, 1997, the Company's fleet
consists of 2 owned aircraft and 23 aircraft under operating leases. In July
1997, pursuant to defaults which existed at June 30, 1997, 4 of these aircraft,
which were operated under operating leases, were repossessed resulting in
charges amounting to $13.7 million (see Note 6). Depreciation and amortization
of owned airframes, engines and engine overhauls are computed using the
straight-line method to estimated residual values over periods ranging from 8
to 10 years. Improvements to leased flight equipment are amortized over the
shorter of the term of the lease or the related asset life. As of June 30,
1997, remaining lease terms ranged between 1 month and 7 years.
-10-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company's aircraft fleet is regularly rotated through maintenance
overhaul procedures. Costs associated with maintenance overhauls are
capitalized and amortized to maintenance expense over the shorter of the period
until the next scheduled overhaul (based on operating cycles) or the remaining
lease term, as applicable and are included in the property and equipment
caption in the balance sheet. Monthly payments of maintenance lease reserves,
in accordance with lease contracts, are expensed as incurred. These monthly
payments are reimbursed by the lessor to the Company when certain overhauls are
completed. As a result of the addition of the A300's to the fleet during 1997
and 1996, the Company incurred higher than expected maintenance costs on the
A300's which were realized as the maintenance cycle became due. The overhauls
for the A300's were in excess of the reserves held by the lessors which
resulted in the Company capitalizing large amounts of overhaul costs during
fiscal 1997. As a result of the SFAS 121 analysis, the Company recorded a
charge of approximately $10.3 million on leased airframes and maintenance
overhauls and $1.0 million on owned airframes and engine overhauls representing
an adjustment to fair value.
Rotable and repairable equipment are depreciated on a group basis over
their estimated useful lives which range from 7 to 10 years. The cost of
routine maintenance is charged to expense as incurred.
Furniture and equipment are depreciated using the straight-line method
over useful lives ranging from 3 to 5 years.
INCOME TAXES
The Company is included in the Parent's consolidated federal tax return.
An intercorporate tax allocation agreement requires the Company to record
income tax expense on a separate company return basis with certain limitations.
The related income tax balance sheet accounts reflect benefits or liabilities
which are ultimately realized through the Parent. As of June 30, 1997 and 1996,
balances owed to affiliates amounted to approximately $500,000.
Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
"Accounting for Income Taxes," requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse (see Note 7).
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Included in accounts payable are passenger facility charges due to various
airports of approximately $333,000 and $340,000 as of June 30, 1997 and 1996,
respectively. Included in accrued expenses and other liabilities are accrued
fuel costs of approximately $2,265,000 and $3,087,000 and accrued engine
overhaul costs of $7,600,000 and $1,680,000 as of June 30, 1997 and 1996,
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of instruments
without extended maturities whose fair value approximates their carrying value.
-11-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Significant estimates include the long-lived asset
impairment, the estimated liability for returned aircraft, the valuation
allowance for income taxes and accruals for certain other litigation (including
the customs litigation). Actual results could differ from those estimates.
ADVERTISING EXPENSE
All advertising costs are expensed as incurred. Advertising expense
totalled $4,175,000, $5,380,000 and $4,289,000 in fiscal 1997, 1996 and 1995,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
(LOSS) EARNINGS PER SHARE
(Loss) earnings per share computations are based on the weighted average
number of shares of common stock and common stock equivalents oustanding during
each of the three years in the period ended June 30, 1997. Total weighted
average shares, including common stock equivalents, were 3,166,667 for all
three periods presented.
CHANGES IN ACCOUNTING
During the fourth quarter of 1996, the Company changed its policy of
accounting for auxiliary power units ("APU"). Effective April 1, 1996, the
Company began capitalizing the APU overhaul costs, similar to the policy for
engines and airframes. Previously, the Company had expensed these overhauls.
The change was made as a result of a change in the Company's fleet mix and the
scheduling of overhauls and was treated as a change in estimate. The impact of
the change increased the fiscal 1996 results of operations before tax by
approximately $390,000.
FOURTH QUARTER ADJUSTMENTS
The Company recorded fourth quarter adjustments amounting to approximately
$27.6 million, which consisted principally of the costs associated with the
return of the 4 leased aircraft of $13.7 million, a physical inventory
adjustment of $750,000, an adjustment for accrued ticket penalties of $655,000
and the $12.5 million impairment adjustment, which includes the writeoff of
goodwill of $1.2 million and a charge for long-lived asset impairments,
primarily aircraft improvements and maintenance overhauls of $11.3 million.
-12-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Flight equipment:
Airframes and improvements ........................... $ 7,397 $ 19,198
Engines ............................................. 2,738 4,463
Maintenance overhaul costs ........................... 2,662 11,478
--------- ---------
Total flight equipment ................................. 12,797 35,139
Rotable and repairable equipment ..................... 12,852 10,387
Furniture and other equipment ........................ 4,751 4,860
Work in process ....................................... 568 4,748
--------- ---------
Total property and equipment ........................... 30,968 55,134
Less - accumulated depreciation and amortization ...... (14,461) (20,897)
--------- ---------
$ 16,507 $ 34,237
========= =========
</TABLE>
During 1995, the Company entered into two engine swap transactions. In the
first transaction, the Company acquired two engines for approximately $774,000
in exchange for $423,000 in cash and $351,000 in similar equipment. In the
second transaction, the Company sold an engine with a net book value of
approximately $374,000 for $357,000 in cash and $17,000 in similar equipment.
During fiscal 1997, the Company recorded an impairment charge to property and
equipment of $11.3 million (see Note 3)
5. LINE OF CREDIT AND NOTE PAYABLE
In August 1995, the Company negotiated a revolving credit facility with a
financial institution which provided funds up to a maximum of $15,000,000 until
December 1997. The facility allowed the Company to draw funds at a rate of
either LIBOR plus .375% or at the prime rate. The lines required
collateralization from the principal shareholder of the parent ("principal
shareholder") in addition to being secured by the assets of the Company. At
June 30, 1996, there was approximately $10,000,000 outstanding on the line of
credit. Interest on the line was charged at LIBOR plus .375% (approximately
5.831% at June 30, 1996).
On October 2, 1996, the Company renegotiated its line of credit to a
maximum of $30 million ("Original Line of Credit") which matures in December
1999 and bears interest at LIBOR plus .375% (approximately 6.06% at June 30,
1997). The principal shareholder provided additional collateral and guaranteed
the debt as of October 2, 1996. As of June 30, 1997, the outstanding balance on
this portion of the line of credit was $26,050,000 and is classified as long
term based upon the December 1999 due date. Additionally, $3.9 million of the
available balance was reserved for outstanding letters of credit (see Note 6).
As of June 30, 1997, the Company triggered events of default under the
Original Line of Credit, however, a waiver was obtained from the Lender.
On June 16, 1997, the Company obtained additional financing under a $5
million line of credit ("Additional $5 million") subject to the same terms,
including the principal shareholder's guarantee,
-13-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT AND NOTE PAYABLE--(CONTINUED)
except that the Additional $5 million is payable on August 31, 1997. As of June
30, 1997, the Company had borrowed $2,000,000 under the Additional $5 million
which is classified as current in the balance sheet based upon the August 31,
1997 maturity date (see Note 13A).
Pursuant to the proposed merger agreement, with Pan Am the principal
shareholder will contribute $30 million to the merged company which will be
used to pay all or a portion of the Original Line of Credit. The principal
shareholder will then be released from his guarantee of the Original Line of
Credit (see Note 12).
In August 1997, additional financing from another financial institution
was obtained (see Note 13A). Certain of these proceeds were used to repay the
Additional $5 million financing.
On August 1, 1996, the Company entered into an agreement with PCI Engine
Trading Parts Purchase/Note Payable Ltd. to purchase certain A300 airframe
components. The purchase price was $1,670,000 of which there was a $300,000
cash down payment and the remaining $1,370,000 was financed by a note secured
by the airframe components with the seller. The note bears interest at 9% per
annum and matures in August 1997. As of June 30, 1997, the remaining two
principal payments totalling $228,000 are classified as current and are
included with the current portion of the line of credit and note payable in the
balance sheet.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
As of June 30, 1997, the Company leased 23 of the 25 airplanes in its
fleet under operating leases including the sale/leaseback of the aircraft sold
to Pan Am (see Note 9). Total rental expense for all operating leases for the
years ended June 30, 1997, 1996 and 1995 was approximately $47,778,000,
$35,245,000 and $26,966,000, respectively. Included within total rental expense
for the years ended June 30, 1997, 1996 and 1995 are aircraft rentals of
approximately $38,918,000, $32,177,000 and $25,083,000, respectively, of which
approximately $18,921,000, $19,524,000 and $13,429,000, respectively, represent
charges based on aircraft use, generally based on aircraft hours.
As of June 30, 1997, minimum annual rentals, which does not include
contingent future rentals based on aircraft use, for all operating leases, with
initial terms or remaining terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
---------
<S> <C>
1998 ............ $23,043
1999 ............ 16,042
2000 ............ 10,514
2001 ............ 5,539
2002 ............ 1,964
Thereafter ...... 2,028
--------
$59,130
========
</TABLE>
The future rentals for the 4 returned aircraft are not included in the
minimum future annual rentals because the future rental payments for these
aircrafts amounting to $3.7 million were accrued as of June 30, 1997.
-14-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
As of June 30, 1997, the Company has approximately $750,000 of letters of
credit outstanding as security deposits for certain of their aircraft operating
leases. During June 1997, letters of credit totalling $450,000 were exercised
by lessors for 3 out of the 4 aircraft returned to the lessors. Additionally,
the Company has approximately $3,172,000 of outstanding letters of credit as
security for various other contractual arrangements with suppliers, airport
facilities and insurance carriers. These letters of credit are included under
the available amount of the Company's line of credit (see Note 5).
RENT EXPENSE
As of June 30, 1997, the Company had the following minimum rental payments
for their office facilities:
<TABLE>
<S> <C>
1998 ............ $ 610
1999 ............ 494
2000 ............ 240
2001 ............ 240
Thereafter ...... --
-------
$1,584
=======
</TABLE>
The Company's principal airport facilities (including the hangar,
inventory storage and training facilities) at the Fort Lauderdale airport are
leased on a month to month basis. There is no assurance that the Company will
be able to continue to lease such facilities.
LITIGATION
During fiscal 1997, the Company became involved in disputes with two
aircraft lessors for 4 aircraft. The first was to recover excess maintenance
costs required to bring one aircraft up to standards and a difference in
interpretation as to the lease termination date. The second involved a dispute
over the lessor's failure to return funds paid to the lessor in reserves for
scheduled repairs to the leased aircraft. The Company filed court action and
ceased remitting rental and reserve payments. Neither dispute was settled and
the courts forced Carnival Air to return the aircraft in July 1997 pending
settlement of the disputes. As of June 30, 1997, the Company was in default on
the 4 aircraft leases and had been served with notices of termination of the
leases and notices to return the aircraft to the lessors. This resulted in a
charge of $13.7 million which is presented as a separate line item in the
statement of operations. The charge is comprised of a charge for assets related
to the 4 returned aircraft, primarily capitalized overhaul costs and
receivables from the lessors of $10.0 million, and certain reserves and
accruals, primarily future rent for which the Company may be held liable, of
$3.7 million.
In April 1997, the Company received notice of a U.S. customs service
penalty for $2.6 million for drugs seized on a Carnival Air Lines flight. Based
upon available information, management is unable to determine if a loss is
probable or a reasonable estimate of the loss and, therefore, no accrual has
been provided as of June 30, 1997.
In the ordinary course of business, the Company is involved in certain
other claims, regulatory compliance investigations, and other legal matters,
the outcome of which other than the lease disputes, management does not believe
will have a material adverse effect on the Company's operations.
-15-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
EVENTS OF DEFAULT
As of June 30, 1997, the Company was in default for failure to pay rents
and maintenance on 4 of its aircraft leases. Additionally, certain of its other
aircraft leases contain cross-default provisions. However, the Company has not
been notified of any defaults, other than the two lessors with the 4 aircrafts,
as previously described. The Company has renegotiated deferred rental terms
with the majority of its lessors. As a result of these defaults, however, 4 of
its aircraft were taken out of service and returned to lessors (see
Litigation).
FREQUENT FLYER PROGRAM
Under the terms of Carnival Air Lines' frequent flyer program, the Company
has incurred outstanding commitments to passengers meeting eligibility
requirements. In May 1997, the Company entered into an agreement with Pan Am to
become a participant in Pan Am's frequent flyer program. Pursuant to this
agreement, the Company's frequent flyer program was suspended and Pan Am will
honor the Company's prior administrative commitments under the program.
Management believes the liability associated with this program to be immaterial
to the Company's operations.
ADDITIONAL BOND REQUIREMENTS
On August 4, 1997, the Company was notified by the Airlines Reporting
Corporation ("ARC") that it had failed four financial tests based upon certain
quarterly reporting requirements. In accordance with established financial
standards for ARC carriers, the Company may be required to post an additional
bond or letter of credit amounting to approximately $3,341,000. This would
reduce available amounts under the new financing agreement (see Note 13A).
7. Income Taxes
The (benefit) provision for income taxes for the years ended June 30,
1997, 1996 and 1995 consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 YEAR ENDED JUNE 30, 1996 YEAR ENDED JUNE 30, 1995
--------------------------------------- ------------------------------ -------------------------------
FEDERAL STATE TOTAL FEDERAL STATE TOTAL FEDERAL STATE TOTAL
------------ ---------- ----------- --------- ------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current ...... $ 0 $ 0 $ 0 $ 48 $212 $ 260 $ 908 $52 $ 960
Deferred ...... (1,258) (140) (1,398) 1,197 236 1,433 (425) 30 (395)
-------- ------ -------- ------- ----- ------- ------ ---- ------
Total ......... $ (1,258) $ (140) $ (1,398) $1,245 $448 $1,693 $ 483 $82 $ 565
======== ====== ======== ======= ===== ======= ====== ==== ======
</TABLE>
-16-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
The difference between the statutory tax rates and the effective tax rates
result from permanent differences the establishment of valuation allowances and
the realization of a certain net operating loss in accordance with the tax
sharing agreement with the Parent and are computed as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1997 1996 1995
---------- ------ ------
<S> <C> <C> <C>
Taxes at federal statutory rate ........................... (34)% 34% 34%
State income taxes effected for federal tax rate ......... (5) 9 3
Goodwill amortization (including impairment in 1997) ...... 1 2 2
Establishment of valuation allowance ..................... 36 20 --
Release of valuation allowance ........................... -- -- (23)
Other ...................................................... -- 2 2
----- ---- ----
(2)% 67% 18%
----- ---- ----
</TABLE>
The tax effects of significant items comprising the Company's deferred tax
assets and liabilities as of June 30, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------
1997 1996
--------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................. $ 21,044 $ 479
Allowance for doubtful accounts ..................... 242 169
Inventory reserves/change in methods ............... 557 665
Property and equipment (including impairment) ...... 4,746 393
Franchise fee ....................................... 539 282
AMT credits ....................................... 948 948
Accrued bonus ....................................... -- 158
Other accruals .................................... 618 --
Other impairment .................................... 489 --
Other ............................................. 27 42
Compensation related to option plans ............... -- 224
---------- -------
29,210 3,360
Less - valuation allowance ........................... 28,692 500
---------- -------
Net deferred tax assets .............................. 518 2,860
Less - long-term deferred tax assets ............... 518 2,090
---------- -------
Net deferred tax assets - current .................. $ -- $ 770
========== =======
Deferred tax liabilities:
Depreciation and amortization ..................... $ 518 $4,190
Other ............................................. -- 68
---------- -------
$ 518 $4,258
========== =======
Net long-term liabilities ........................... 0 2,168
========== =======
</TABLE>
The current provision represents federal alternative minimum taxes and
state income taxes for fiscal 1996 and 1995.
-17-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES--(CONTINUED)
As of June 30, 1994, a valuation allowance was provided to reflect the
terms of the tax sharing agreement which limited the recognition of certain net
operating loss based on their ultimate utilization in the Parent's federal tax
return, for a certain portion of the net operating loss carryforward. This
valuation allowance was reversed in fiscal 1995 as certain net operating losses
were utilized. As of June 30, 1995, no valuation allowance had been provided
against the deferred tax asset because it was management's belief, based on the
weight of available evidence as prescribed in SFAS 109, that the deferred tax
assets as of June 30, 1995, were more likely than not to be realized. As of
June 30, 1996, a valuation allowance was provided for certain of the AMT
credits because it was management's belief based on the weight of available
evidence as prescribed in SFAS 109 that these credits may not be realized. As
of June 30, 1997, a valuation allowance was provided for $28,692,000 because it
was management's belief based on the weight of available evidence as prescribed
in SFAS 109 that the benefit of these assets may not be realized.
As of June 30, 1997, the Company had approximately $53,576,000 of tax net
operating loss carryforwards which expire, if unused, in fiscal 2011-2012. If a
change in ownership were to occur, the annual utilization of net operating
losses may be limited.
8. EMPLOYEE BENEFITS AND OPTIONS
In August 1993 the Company adopted an Employee Stock Purchase Plan (the
"Plan"). Under the terms of the Plan, no amounts subscribed could be exchanged
for shares until at least 90 days following an initial public offering ("IPO")
of the Company's common stock. If an IPO was not completed by November 1995,
all subscriptions received, plus interest, would be returned to employees.
Since an IPO was not completed by the specified date within the Plan, the Plan
expired and the subscriptions along with interest were returned to the
employees in November 1995.
On January 1, 1991, the Company established the Carnival Air Lines, Inc.
Employee Savings and Protection Plan (the 401(k) Plan) under section 401(k) of
the Internal Revenue Code. The 401(k) Plan is a defined contribution plan which
covers substantially all employees. Employer contributions are discretionary.
No employer contributions have been made since the Plan's inception.
In July 1990, the Company granted common stock options to certain key
executives to acquire up to 10% of the common stock of the Company for
$100,000. These options, which vested in July 1992, were exercised for 316,667
shares of common stock in March 1996. As a result of a change in the Plan, the
Plan's measurement date was altered and the Company recorded approximately
$570,000 in compensation expense upon the exercise of these options in fiscal
1996. In addition, a one-time special bonus was awarded by the Board of
Directors to the key executives to cover all personal income taxes associated
with the exercise of the stock options amounting to approximately $396,000 in
fiscal 1996. The Company has the right of first refusal to repurchase the
shares at book value which lapses upon a public offering.
9. RELATED PARTY TRANSACTIONS
In March 1989, Carnival Air Lines entered into an agreement with Carnival
Corporation for the use of the "Carnival" name and logo. The agreement was
amended in June 1993 to provide that the Company pays a fee equal to .25% of
total revenue plus 5% of net profit. The agreement was further amended in April
1996 to extend the terms of the agreement through June 2006. The agreement
-18-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS--(CONTINUED)
provides for early termination upon certain conditions. Pursuant to the
proposed merger agreement, subsequent to the merger, the Carnival name and logo
will not be used by the merged company to promote its ongoing business. The
expense for the years ended June 30, 1997, 1996 and 1995 was approximately
$655,000, $718,000 and $584,000, respectively. The balance due Carnival
Corporation at June 30, 1997 and 1996 was approximately $1,373,000 (including
the 1996 fees which are accruing interest at LIBOR) and $718,000, respectively.
The Company generates revenue from the sale of airline tickets for
Carnival Corporation's cruise line passengers. Revenues related to this
arrangement for the years ended June 30, 1997, 1996 and 1995 were $1,531,000,
$2,183,000 and $2,386,000, respectively.
During June 1994, the Company entered into a charter agreement with the
Miami Heat, a professional basketball team. The principal shareholder of the
Parent is the managing partner of the Miami Heat. The contract is for a three
year term starting with the 1995 season and will provide charter service
revenue of approximately $700,000 a year plus a variable amount based on block
hour usage. Revenues relating to this contract were $1,679,000 and $1,796,000
for the fiscal year ended June 30, 1997 and 1996, respectively. In addition,
the agreement requires certain aircraft specifications including configuration
of the interior, team name and logo and other items.
Carnival Corporation provides professional services to the Company and
bills such services on an hourly basis at prevailing rates. The aggregate
amounts paid by the Company to Carnival Corporation for these professional
services during fiscal 1997, 1996 and 1995 were approximately $167,000, $76,000
and $52,000, respectively.
The Company has an arrangement with Carnival Corporation pursuant to which
Company employees are entitled to take one complimentary 7-day cruise and one
3-4 day cruise annually on a space available basis on Carnival Corporation
cruise ships. Company employees may also receive confirmed reservations by
paying 50% of the regular fare for cabins and 65% of the regular fare for
suites. Similarly, Carnival Corporation employees are entitled to fly on the
Company's aircraft on a space available basis for $50 per one-way flight.
Management believes that the costs of these arrangements, which cannot be
determined with any degree of certainty, are insignificant to the Company.
These arrangements may be terminated by either the Company or Carnival
Corporation at any time.
PAN AM TRANSACTIONS
Subsequent to the signing of the acquisition agreement, Carnival Air Lines
and Pan Am commenced a relationship to cross utilize services where possible if
beneficial to both companies.
These activities were focused on obtaining better utilization of Carnival
Air Lines' existing fleet by providing subservice and wet leasing aircraft to
Pan Am and eliminating Pan Am's reliance on a third party for expansion. Pan Am
has furnished ground handling services for Carnival Air Lines at three
locations for a total cost of approximately $300,000 for the year ended June
30, 1997. Carnival Air lines performed service consisting of subservice and wet
lease services to Pan Am for a total cost of $5,010,000 for the year ended June
30, 1997. Pan Am purchased one aircraft from Carnival for $3,500,000 and
support inventory for $1,500,000. A loss of approximately $240,000 was
recognized on this transaction. Carnival subsequently leased the aircraft back
from Pan Am for $30,625 per month.
-19-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS--(CONTINUED)
Carnival also furnished Pan Am with miscellaneous services for $250,000.
10. OTHER MATTERS
Federal Aviation Association (FAA) regulations require all corporations
operating aircraft in the United States to comply with lower noise standards.
Aircraft meeting the lower noise standards are known as Stage III aircraft
while all other aircraft are considered Stage II. All aircraft must meet Stage
III requirements by December 31, 1999 with interim Stage III requirements of
55%, 65% and 75% by December 31, 1994, 1996, and 1998, respectively. The
Company was in compliance with Stage III requirements as of December 31, 1996
and, based on planned fleet rotation, is scheduled to be in compliance at
December 31, 1997.
11. UNIONIZATION
Through July 1997, flight deck crew members, flight attendants and
dispatchers voted to become members of their respective industry unions. The
Company has been notified by certain of the unions regarding initial collective
bargaining agreements. Negotiations have not commenced. These unionizations
could increase the Company's labor costs which could have a material adverse
effect on the Company.
12. PROPOSED MERGER
On March 20, 1997 (as amended on July 8 and July 9), the Company entered
into an acquisition agreement, as amended (the "Merger Agreement"), with Pan Am
pursuant to which the Company will be acquired by Pan Am. Upon consummation of
the Merger, the shareholders of the Company will receive 9,523,810 shares of
Pan Am Common Stock which will represent approximately 46% of the then
outstanding shares of common stock. The consummation of the Merger is subject
to the satisfaction of a limited number of conditions, including the approval
by Pan Am's shareholders of the issuance of the shares of Common Stock to be
issued in connection with the Merger. One of the requirements of the Merger is
that the Company's principal shareholder will contribute $30 million which will
be used to retire the Original Line of Credit and remove the guarantee on the
Original Line of Credit. The Merger Agreement provides for very limited
circumstances under which a party may terminate the Merger Agreement. It is
currently anticipated that the Merger will be consummated in September 1997.
13. SUBSEQUENT EVENT
A. Additional Financing
On August 1, 1997, Carnival Air, as borrower, Pan Am and the Company's
principal shareholder, as guarantors, and a Lender executed a Credit Agreement
(the "Credit Agreement"), under which the Lender will provide two revolving
credit bridge facilities (each a "Facility" and collectively, the "Facility")
of up to an aggregate of $25 million for use 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 permit Carnival
Air to borrow up to $12.5 million subject to certain conditions, with
borrowings under such Facilities maturing one year after the date of closing,
subject to certain repayment requirements. The Facilities will bear 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
-20-
<PAGE>
CARNIVAL AIR LINES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENT--(CONTINUED)
from 0% to 6% depending on the Facility and the period in which they are
outstanding. The Company is required to pay to the lender substantial fees
relating to this facility. Pan Am, Carnival Air, and the guarantor entered into
an agreement pursuant to which Carnival Air, prior to the merger, and Pan Am,
after consummation of the merger, will pay to the guarantor certain fees for
the guarantee. The credit agreement contains certain covenants and the
Company's obligations are secured by substantially all of its assets. The
Company immediately borrowed $4.5 million on this facility to repay the balance
outstanding on the additional $5 million line (see Note 5). As of August 15,
1997, the Company had borrowed $10 million on these facilities.
-21-
<PAGE>
ITEM 7(b)
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following pro forma combined condensed balance sheet data as of
June 30, 1997 and the pro forma combined condensed income statements for the six
months ended June 30, 1997 and for year ended December 31, 1996, give effect to
the merger of Pan Am and Carnival Air (the "Merger") accounted for using the
purchase method of accounting. The pro forma combined condensed balance sheet as
of June 30, 1997 is shown as further adjusted to give effect to the proposed
$100 million convertible preferred stock offering and the subsequent use of
proceeds therefrom. The pro forma financial data are provided for comparative
purposes only and do not purport to be indicative of the results which actually
would have been obtained if the Merger had been effected on the date indicated
or of those results which may be obtained in the future.
The pro forma combined condensed financial data assume the Merger had
occurred (i) January 1, 1996 for the purposes of pro forma combined condensed
income statements and (ii) as of June 30, 1997 for the purposes of the pro forma
combined condensed balance sheet data.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORIAL
------------------------------------------ PRO FORMA
PAN AM CARNIVAL AIR ADJUSTMENTS COMBINED
------------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues.............................$ 10,441 $ 261,657 $ 272,098
Operating costs and expenses......... 22,377 229,175 $ 7,960 (14) 259,512
Selling, general and administrative
expenses.......................... 16,404 52,589 (717)(10) 68,276
---------- ---------- ---------- -----------
Operating income (loss)........... (28,340) (20,107) (7,243) (55,690)
Other income (expense), net.......... 941 (488) 97 (10) 550
---------- ---------- ---------- -----------
Income (loss) before provision for
income taxes.................... (27,399) (20,595) (7,146) (55,140)
Provision for income taxes........... (155) (865) (1,020)(5)
---------- ---------- ---------- -----------
Net loss .........................$ (27,554) $ (21,460) $ (7,146) $ (56,160)
========== ========== ========== ===========
Net loss per share...................$ (3.89) $ (6.78) $ (3.38)(3)(15)
========== ========== ========== ===========
Weighted average shares
outstanding......................... 7,078,041 3,166,667 9,523,810 (1) 16,601,851 (3)(15)
========== ========== ========== ===========
</TABLE>
-22-
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
-------------------------------
PAN AM CARNIVAL AIR PRO FORMA
JUNE 30, 1997 JUNE 30, 1997 ADJUSTMENTS COMBINED
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues........................ $ 51,283 $ 140,048 $ (145)(11) $ 191,186
Operating costs and expenses.... 83,445 168,746 (364)(10) 255,662
3,980 (14)
(145)(11)
Costs associated with
returned aircraft............ 13,695 13,695
Impairment loss................. 12,536 12,536
---------- -------------- ----------- -----------
Operating income (loss)....... (32,162) (54,929) (3,616) (90,707)
Other income (expense), net..... 549 (763) 821 (10) 607
---------- -------------- ----------- -----------
Income (loss) before provision
for income taxes............. (31,613) (55,692) (2,795) (90,100)
Provision (benefit) for income
taxes........................ (1,398) (1,398)(5)
---------- -------------- ----------- -----------
Net loss .................... $ (31,613) $ (54,294) (2,795) $ (88,702)
========== ============== =========== ===========
Net loss per share.............. $ (2.87) $ (17.15) $ (4.29)(3)(15)
========== ============== =========== ===========
Weighted average shares
outstanding.................... 11,143,796 3,166,667 9,523,810 (1) 20,667,606 (3)(15)
=========== ============= =========== ===========
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
BALANCE SHEET
AS OF JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA
COMBINED
HISTORICAL PROPOSED AFTER
------------------- PRO FORMA OFFERING PROPOSED
PAN AM CARNIVAL AIR ADJUSTMENTS COMBINED (13) ADJUSTMENT OFFERING
------ ------------ ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $19,111 $ 674 $ 14,450 $ 34,235 $59,000 $ 93,235
Deposits held in escrow.............. 1,057 1,057 1,057
Trade accounts receivable............ 12,944 10,390 23,334 23,334
Expendable aircraft parts............ 262 786 1,048 1,048
Deposits............................. 443 443 443
Prepaid expenses and other assets.... 3,834 6,222 10,056 10,056
------- ------- -------- -------- ------- --------
Total current assets........ 36,151 19,572 14,450 70,173 59,000 129,173
PROPERTY - Net................................ 13,651 16,507 5,668 (13) 35,826 35,826
INTANGIBLE ASSETS............................. 104,851 (13) 104,851 104,851
OTHER ASSETS.................................. 10,254 2,061 12,315 12,315
------- ------- -------- -------- ------- --------
TOTAL ASSETS.................................. $60,056 $38,140 $124,969 $223,165 $59,000 $282,165
======= ======= ======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable and current portion
of long term debt.................. $13,206 $26,544 $ (2,000)(4) $ 37,750 $ 37,750
Air traffic liability................ 14,596 24,019 38,615 38,615
Other accrued expenses............... 3,269 30,617 33,886 33,886
------- ------- -------- -------- ------- --------
Total current liabilities... 31,071 81,180 (2,000) 110,251 110,251
------- ------- -------- -------- ------- --------
OTHER LIABILITIES
Long term debt....................... 9 26,050 (26,050)(4) 9 9
Long term debt, NationsBank.......... 7,500 (6) 7,500 (7,500)(8)
Dade County Bridge Loan.............. 5,000 5,000 (5,000)(8)
Other deferred liabilities........... 3,281 3,281 3,281
------- ------- -------- -------- ------- --------
Total other liabilities..... 8,290 26,050 (18,550) 15,790 (12,500) 3,290
------- ------- -------- -------- ------- --------
Stock subscription and warrants...... 10,978 (10,357)(7) 621 621
------- ------- -------- -------- ------- --------
SHAREHOLDERS' EQUITY:
Convertible preferred stock-Series A. 15,000 15,000 (15,000)(8)
Convertible preferred stock-Series B. 13,500 5,000 (9) 18,500 (18,500)(9)
Convertible preferred stock-proposed. 100,000 (6) 100,000
Common stock......................... 1 1 (2) 2 2
Capital in excess of par value....... 40,425 2,019 79,766 (4)(7)(13) 122,210 17,215 139,425
Accumulated deficit.................. (59,168) (71,110) 71,110 (13) (59,168) (12,215)(8)(9) (71,383)
Receivables from officers and
shareholders......................... (41) (41) (41)
------- ------- -------- -------- ------- --------
Total shareholders' equity
(deficit)........... 9,717 (69,090) 155,876 96,503 71,500 168,003
------- ------- -------- -------- ------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................... $60,056 $38,140 $124,969 $223,165 $59,000 $282,165
======= ======= ======== ======== ======= ========
</TABLE>
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<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
(1) The weighted average shares outstanding have been adjusted to reflect
the exchange of 9,523,810 shares of Common Stock for all outstanding
shares of Carnival Air Common Stock. No consideration has been given
to the pro forma effect of the issuance of the Convertible Preferred
Stock and related warrants on post-merger net loss per share as the
effect would be antidilutive.
(2) The Unaudited Pro Forma Combined Condensed Balance Sheet reflects the
issuance of 9,523,810 shares of Common Stock for all outstanding
shares of Carnival Air Common Stock as provided by the Merger
Agreement.
(3) Pro forma per share amounts are based on historical per share amounts,
as adjusted and after giving effect to the exchange of 9,523,810
shares of Common Stock for outstanding shares of Carnival Air Common
Stock.
(4) As contemplated in the Merger Agreement, an affiliate of the primary
shareholder of Carnival Air, is required to contribute $30.0 million
in cash to Carnival Air prior to closing in exchange for 1,900,000
shares of Carnival Air Common Stock. All or a portion of the
contribution will be utilized to discharge, pay in full and cancel the
Barnett Bank credit facility (bearing interest at 6.1% as of June 30,
1997) and to procure the release of his personal guarantee of the
Barnett Bank credit facility and the release of AHC's limited recourse
guaranty.
(5) Carnival Air is included in its parent's consolidated federal tax
return; however, income tax expense was recorded on a separate company
basis with certain limitations. Had income tax expense been recorded
on a separate company basis without limitation, the effect would have
been immaterial.
(6) Reflects the borrowings under a one year revolving credit bridge
facility which bears interest at various rates commencing at prime
plus 3%. Further, it is assumed the loan is repaid from the proceeds
of the proposed convertible preferred stock offering. (See Note 8).
(7) Concurrent with the Merger, it is anticipated that the Pan Am
shareholders will approve a certain transaction to purchase buildings
and real property for which the Company issued 1,294,625 warrants.
Upon approval, it is expected that such warrants will be converted
into an equal number of shares of Common Stock.
(8) Reflects the net proceeds from the proposed convertible preferred
stock offering, the extinguishment of certain debt totaling $12.5
million, redemption of the Series A Preferred Stock for $22.5 million
and the issuance of 1,764,706 warrants.
(9) Reflects the sale of $5.0 million of the Series B Preferred Stock and
subsequent conversion of the entire Series B Preferred Stock for
approximately 3,083,333 shares of Common Stock.
(10) To give effect to the elimination of the interest expense associated
with the Carnival Air debt retired as described above, and the
franchise fee charged by Carnival Corporation.
(11) To give effect to the elimination of the revenues and expenses
relating to the sublease of one B727 aircraft from Pan Am to Carnival
Air.
(12) Expenses related to the Merger, estimated to total $2.2 million, will
be capitalized.
(13) Represents the premium paid after the application of purchase
accounting to identifiable tangible and intangible assets and the
elimination of Carnival Air's equity. Intangible assets are comprised
of approximately $94.6 million of goodwill and approximately $10.3
million of asset value associated with aircraft leases containing
terms which are more favorable than those available in the current
market.
(14) To reflect amortization of additional tangible and intangible assets
generated by the Merger on a straight line basis over a period of 3 to
25 years.
(15) Net income (loss) per share and weighted average shares outstanding do
not give effect to the assumed redemption of the Series A Preferred
Stock, the conversion or redemption of Series B Preferred Stock and
the exercise of associated warrants, including the warrants issued to
NationsBank, as the effects would be antidilutive.
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<PAGE>
ITEM 7(c)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-29659) of
Pan Am Corporation of our report dated August 15, 1997 relating to the financial
statements of Carnival Air Lines, Inc., which appears in the Current Report on
Form 8-K of Pan Am Corporation dated August 29, 1997.
PRICE WATERHOUSE LLP
Fort Lauderdale, Florida
August 29, 1997
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PAN AM CORPORATION
By: /S/ JOHN J. OGILBY, JR.
---------------------------------
John J. Ogilby, Jr.
Chief Financial Officer and
General Counsel
Dated: August 29, 1997
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