ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. Pan Am Corporation (f.k.a. "Frost Hanna Mergers Group, Inc.") was formed in October 1993 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other similar business combination (a "Business Combination") with an operating business. On September 23, 1996, Pan Am Corporation completed a Business Combination (the "PAWA Merger") with PAWA Holdings, Inc. (f.k.a. "Pan American World Airways, Inc.") ("PAWA"), a Florida corporation, whose principal subsidiary is Pan American World Airways, Inc. (f.k.a. "Pan American Airways, Inc."), a Florida corporation. Pan American World Airways, Inc. was a development stage company incorporated in Florida in January 1996 established for the purpose of operating a commercial passenger and cargo airline. Pan Am Corporation together with its subsidiaries are herein referred to as "Pan Am" or the "Company".
Pan Am is an air carrier providing selected long-haul, point-to-point, low fare full service over a limited network of routes throughout the United States and Puerto Rico. From its inception until it commenced flight operations on September 26, 1996, the Company's activities were limited to start-up activities, including raising capital, recruiting key operating personnel, obtaining and implementing computerized passenger reservation and management information systems, negotiating airport gate and terminal facilities and aircraft leases, contracting ground handling and aircraft maintenance services, conducting pilot and flight attendant training and obtaining certification from the Department of Transportation ("DOT") and the Federal Aviation Administration ("FAA"). Pan Am began flight operations on September 26, 1996 providing daily round trip flights between New York's Kennedy International Airport and Miami, Florida and Los Angeles, California. The Company began daily round trip flights between San Juan, Puerto Rico and Miami, Florida on December 14, 1996, between New York's Kennedy International Airport and San Juan, Puerto Rico on January 5, 1997, and between Chicago's Midway Airport and Miami, Florida on March 1, 1997. An aggregate of 18 daily flights are currently provided by the Company. In addition, on or about April 6, 1997, Pan Am plans to implement nonstop service from New York's Kennedy International Airport to Santo Domingo, Dominican Republic.
As of March 31, 1997, Pan Am operated four Airbus A300-B4 ("A300") aircraft. Three of the A300 aircraft are operated under operating leases with ING Lease (Nederland) B.V. ("ING") and the fourth A300 aircraft is operated under an operating lease with First Security Bank, National Association, as trustee, with C-S Aviation Services, Inc., as Aircraft Manager ("C-S Aviation"). In addition, Pan Am has a wet-lease arrangement with Nations Air Express, Inc., a Delaware corporation ("Nations"), which is an unaffiliated third party, to operate three Boeing 727-200 ("B727") aircraft on Pan Am's behalf. Nations provides the aircraft, flying crew, maintenance, and insurance ("ACMI") and retains operational control of such aircraft. See Item 2
ITEM 2. DESCRIPTION OF PROPERTY
AIRCRAFT LEASES. As of March 31, 1997, Pan Am operated a total of four A300 aircraft under operating leases for terms of five years with annual lease payments totalling in the aggregate approximately $7.6 million. Under such leases, the Company pays monthly maintenance reserves to the lessor to cover all major engine and airframe overhauls on a flight hour usage basis. The ages of such A300 aircraft range from fourteen to nineteen years old, with the average age of such aircraft being 16.0 years. In addition, as of such date, Pan Am leased three B727 aircraft on a wet-lease (ACMI) basis from Nations, an unrelated third party airline operator, under short term lease commitments. The wet-lease agreements will expire on December 31, 1997; however, such agreements are cancelable within 30 days at the option of Pan Am.
For information regarding the Company's obligations under operating leases see Note 10 to the Consolidated and Combined Financial Statements. Also see Item 1 - "Description of Business -- General."
FACILITIES RENTALS. The Company has recently executed a sublease agreement with Trans World Airlines for the exclusive use of fourteen ticket counters and five gate positions at New York's Kennedy International Airport. The lease is cancelable upon 30 days notice and calls for a monthly rental of approximately $691,000.
At Miami, Florida, Los Angeles, California and San Juan, Puerto Rico, the Company leases space for its airport operations directly from the various airport authorities. These operating leases are cancelable upon 30 to 60 days notice and call for monthly rentals aggregating approximately $215,000 per month.
Facilities for the Company's airport operations at Chicago's Midway Airport are provided by another carrier in conjunction with the Company's ground and passenger servicing agreements.
TEMPORARY HEADQUARTERS, GROUND FACILITIES AND SERVICES. On March 1, 1996, Pan Am was granted the use of office space through the end of September 1996 by Eastern Air Lines, Inc. ("Eastern"), a major stockholder of Pan Am, at Eastern's Doral Technology Center (the "Doral Facility") in Miami, Florida, valued at
$300,110, in exchange for 85,017 shares of Common Stock. Since October 1, 1996, Pan Am has been leasing this space for $35,000 per month on a month to month basis. Pan Am has temporarily established its offices at this location and considers it to be adequate for its initial operations. On March 31, 1997, the Company closed on the purchase from Eastern of the Doral Facility which will temporarily serve as the primary place of Pan Am's business. The property consists of a leasehold interest in a certain building and real property and approximately 18 acres of land. The transaction, valued at $10.4 million, was completed through the issuance of 1,294,625 warrants which entitle Eastern to exchange such warrants for an equal number of shares of Common Stock of the Company upon the satisfaction of certain conditions, including, among others, the approval of the transaction by the shareholders of Pan Am.
As of March 31, 1997, most of the Company's airport operations relating to: (1) passenger ticketing and boarding gate check-in (passenger service), (2) baggage loading and (3) aircraft servicing are contracted to other air carriers or fixed base operators. All of these agreements can be canceled by either party by giving 30 to 60 days notice.
The Company has determined that providing passenger services is economically beneficial at certain airports and is in the process of converting from contracted services to in-house service. San Juan, Puerto Rico is currently being staffed with Pan Am employees for passenger service. New York, New York and Miami, Florida have converted the baggage service functions to in-house service and expect to convert the passenger service function to same by July, 1997.
The Company has outsourcing arrangements for its line maintenance at New York, New York, Los Angeles, California, San Juan, Puerto Rico and Chicago, Illinois. The Company has its own mechanic work force in Miami, Florida, which provides maintenance, including medium maintenance checks. A hangar facility has been leased at the Miami airport for this function which includes stockroom facilities for spare parts.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Other than the litigation concerning the Pan Am Intellectual Property described in Item 1 - "Description of Business -- Trademarks", Pan Am is not presently a party to any litigation, the outcome of which would have a material adverse effect on its business operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $.0001 par value per share, is traded on the American Stock Exchange ("AMEX") under the symbol "PAA." The Common Stock commenced trading on the AMEX on September 24, 1996. Prior to such time, the Common Stock traded in the over-the-counter market (commencing on March 21, 1994) under the symbol "FHMG." The following table shows the reported high and low sales prices of the Common Stock on the over-the-counter market and on the AMEX.
The Company has not paid or declared any dividends on its Common Stock since its inception and, by reason of its present financial status and its contemplated financial requirements, does not contemplate or anticipate paying any dividends on its Common Stock in the foreseeable future.
As of March 24, 1997, there were 310 holders of record of the Company's Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
THE FOLLOWING FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996 HAS BEEN DERIVED FROM THE COMPANY'S CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS. THIS INFORMATION SHOULD BE READ WITH THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, AND RELATED NOTES THERETO INCLUDED ELSEWHERE HEREIN.
(1) Does not include wet-lease aircraft operated by Nations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
As noted in Item I - "Description of Business -- General," Pan Am was formed in October 1993 to serve as a vehicle to effect a Business Combination with an operating business. On September 23, 1996, the Company completed the PAWA Merger. PAWA was a development stage company established for the purpose of operating a commercial passenger and cargo airline through its wholly owned subsidiary, Pan American World Airways, Inc.
From its inception until it commenced flight operations on September 26, 1996, the Company's activities were limited to start-up activities, including raising capital, recruiting key operating personnel, obtaining and implementing computerized passenger reservation and management information systems, negotiating airport gate and terminal facilities and aircraft leases, contracting ground handling and aircraft maintenance services, conducting pilot and flight attendant training and obtaining certification from the DOT and the FAA.
The Company began flight operations on September 26, 1996 with two leased A300 wide-body 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 of March 1, 1997, provides services to five destinations (including San Juan, Puerto Rico and Chicago, Illinois) with eighteen daily flights utilizing four leased A300 aircraft operated by Pan Am and three wet-leased (ACMI) B727 aircraft operated by Nations.
RESULTS OF OPERATIONS. As previously noted, Pan Am began commercial operations as a low fare, full service airline on September 26, 1996. From inception to the latter part of 1996, the Company considered itself a development stage company during which time it had hired all personnel required to commence airline operations and began making expenditures required to sustain an infrastructure; however, it was deriving no revenues as it awaited regulatory approval to commence airline operations. The Company believes that such regulatory approval took longer to procure than anticipated, based in part upon increased regulatory scrutiny focusing on start-up airlines after the ValuJet accident. As of December 31, 1996, the Company had emerged from a development stage company to that of a full service domestic airline. As a result, management does not believe that a comparison of the results for prior periods would be meaningful as it relates to the new operating entity. Consequently, the following is a summary of selected financial and operating data for the fourth
quarter ended December 31, 1996, and the year ended December 31, 1996, which management believes reflects the airline's performance for those periods of operations.
QUARTER ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1996 ----------------- ----------------- Operating Revenues $10,242,900 $10,441,500 Total Expenses $24,980,500 $37,996,300 Net Loss $14,737,600 $27,554,800
Revenue Passengers Carried 86,444 87,098 Revenue Passenger Miles (RPMs) 120,164,000 121,374,100
Yield Per RPM 8.3(cents) 8.3(cents) Load Factor 46.8% 45.8%
Management believes operating losses of approximately $14.7 million for the first quarter of airline operations resulted primarily from: (1) the expected losses associated with the start-up of flying operations with a limited fleet of aircraft and need to establish the Company's presence in the markets served, including the use of lower yielding promotional fares; (2) the inability of the Company to obtain exemption from the DOT to advance advertise and sell its seat inventory prior to certification from the DOT which prevented the Company from having additional lead time to market its product and routes prior to commencement of flying operations; (3) delinquent delivery of A300 aircraft which caused the Company to cover its pre-committed schedule with wet-leased aircraft from third party airline operators at operating costs greater than had the Company been able to operate such service on its own behalf; (4) higher than expected fuel costs; and (5) the airline's commencement of initial flying operations during the off-peak travel period of the fall season.
OPERATING REVENUES. Airline revenues are primarily a function of the number of passengers carried and fares charged by the airline. The Company believes that revenues will gradually increase as the Company adds additional service and gains market presence in the cities being served. During the three months ended December 31, 1996, the Company has increased the percentage of seats flown with revenue passengers while at the same time adding additional capacity to its scheduled service. The Company commenced service with four daily flights and expanded its schedule to 16 daily flights at year end. As the table below indicates, Pan Am increased its scheduled operations as measured in available seat miles ("ASMs") from October to December 1996 by 83% while increasing its load factor of revenue passenger miles ("RPMs") flown by 36.4 points during the same period:
RPMS (000) ASMS (000) LOAD FACTOR (%) ---------- ---------- ---------------- October 16,938 60,169 28.2 November 31,907 86,435 36.9 December 71,319 110,319 64.6
The Company's financial results are highly sensitive to changes in fare levels. Fare pricing policies have a significant impact on the Company's revenues. The Company's average one-way fare for the three months ended December 31, 1996 was $116, exclusive of tax. On March 7, 1997, the 10% excise tax on air transportation was reinstated. Pan Am, consistent with general airline industry practices, has passed-through to the customer the increase associated with the reestablishment of this excise tax in those markets where customer demand for Pan Am's services allowed for such action. The elasticity of passenger demand, increases in fares and associated taxes may result in a decrease in passenger demand. The Company cannot completely predict future fare levels, which depend to a substantial degree on actions of competitors. When sale prices or other price changes are made by competitors in the Company's markets, the Company believes that it must, in most cases, match these competitive fares in order to maintain its market share.
In addition to passenger revenues, the Company generated $252,500 in other revenues primarily from transporting general cargo and mail and selling in-flight services, such as liquor and movie headsets.
The Company anticipates that its business will follow the traditional seasonal trends of the domestic United States airline industry, with traffic and revenues typically higher during the winter, summer and late fall periods when business travel is supplemented by discretionary personal travel.
OPERATING EXPENSES. Operating expenses totaling $25,541,100 for the quarter ended December 31, 1996 consisted primarily of expenses incurred for salaries, wages and benefits, aircraft fuel and oil, aircraft leases, maintenance materials and repairs, agency commissions, other rentals, landing and ground handling fees, advertising, depreciation and amortization and other operating expenses.
Aircraft fuel expenses include the direct cost of fuel including taxes. Aircraft fuel costs of $3,906,800 for 4,681,684 gallons used resulted in an average fuel cost of 83.5(cent) and represented 15.3% of total operating expenses for the three months ended December 31, 1996. 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.
Wages, salaries and related costs totaling $4,257,000 represented 16.7% of total operating expenses for the three months ended December 31, 1996. All employees are salaried, including pilots and flight attendants. As crew utilization increases with the addition of A300 aircraft, the direct operating cost per block hour should decrease as a result of this salary structure.
Maintenance material and repairs totaling $3,276,100, representing 12.8% of total operating expenses for the three months ended December 31, 1996, is comprised substantially of airframe and engine overhaul reserves which are paid to the lessors of the A300 aircraft.
Advertising amounting to $2,264,600, or 8.9% of total operating expenses for the three months ended December 31, 1996, primarily relates to promoting the commencement of service and expansion into the four new markets.
Aircraft rentals totaling $2,195,700, or 8.6% of total operating expenses for the three months ended December 31, 1996, include lease payments relating to three A300 aircraft operated by the Company and the wet-leasing of two B727 aircraft operated by third parties. The wet-leasing arrangement was necessary as a result of the delayed delivery of the Company's planned additional A300 aircraft. The wet-leasing of aircraft results in higher expenses to the Company than operations of its own aircraft; accordingly, the financial results for the quarter have been negatively impacted by these increased operating costs. Due to the late delivery of leased aircraft to the Company, the Company anticipates the continued wet-leasing of a number of aircraft through the first half of 1997; however, the Company intends to negotiate a reduction in these rental rates.
Ground handling and landing fees amounting to $2,041,300, or 8.0% of total operating expenses for the three months ended December 31, 1996, primarily relates to passenger handling costs, including ticket counter, boarding gate and baggage loading. Landing fees are principally based upon the number of aircraft departures.
All other operating costs totaling $7,599,600 for the three months ended December 31, 1996, 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 and facilities rent.
LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1996, the Company had $15.0 million in cash and cash equivalents and a positive net working capital position of approximately $6.2 million. The Company's financial resources have been provided through financing activities totaling $39.0 million as follows: (i) the sale of equity securities to initial investors for $5.0 million in cash and $5.5 million in other property; (ii) two private placements of equity securities which yielded approximately $18.7 million in net cash proceeds; and (iii) approximately $9.8 million in net cash proceeds from the PAWA Merger.
Through December 31, 1996, the Company has utilized approximately $15.0 million in cash for operating activities, of which approximately $8.5 million related to pre-operating expenditures prior to commencement of operations on September 26, 1996.
Start-up losses for the airline operations during the quarter ended December 31, 1996 amounted to $14.7 million. Management believes the principal demand on the Company's resources from these losses resulted primarily from the following factors: (1) the expected losses associated with the start-up of flying operations with a limited fleet of aircraft and need to establish the Company's presence in the markets served, including the use of lower yielding promotional fares; (2) the inability of the Company to obtain an exemption from the DOT to advance advertise and sell its seat inventory prior to certification from the DOT restricted the Company's ability to advertise and market its service prior to commencement of flying operations, thus not being able to generate cash through advance ticket sales; (3) the delinquent delivery of A300 aircraft which caused the Company to cover its pre-committed schedule with wet-leased aircraft from third party airline operators at operating costs greater than had the Company been able to operate such service on its own behalf; (4) higher than expected fuel costs; and (5) the airline's commencement of initial flying operations during the off-peak travel period of the fall season. Aircraft deliveries continue to hamper operations, and the Company anticipates that it will be required to wet lease aircraft through the first half of 1997. The Company intends to negotiate more favorable lease rate arrangements.
Through the first quarter of 1997, the Company has continued to experience substantial operating losses which has caused a substantial reduction in its cash resources from December 31, 1996. Due to short-term liquidity requirements, the Company has arranged for additional sources of capital as follows: (i) on March 31, 1997, the Company reached an agreement in principle for the sale of convertible preferred stock for expected net cash proceeds of approximately $15 million; and (ii) in March 1997, the Company agreed with Dade County, Florida on an $8.5 million incentive package as an inducement to locate its corporate headquarters within the County. The Company anticipates receiving $5.0 million in cash from Dade County in April, 1997.
Management believes that the above referenced proceeds (and, if necessary, possible debt financing and additional equity offerings), if and when received, will provide the Company with sufficient working capital for the near term, although there can be no assurances that these funds will be sufficient or that any necessary financing will be available to the Company. Further, management has been and continues to take action that it believes will reduce its operating losses, including the following measures: (1) renegotiation of economic terms under its wet-lease agreements; (2) continued refinement of purchasing strategies to reduce the unit cost of its larger operating expenditures such as fuel, insurance, support services and passenger services; (3) additional refinement of the Company's yield management system to improve revenue; and (4) continued service expansion to provide added economies of scale to the Company's fixed operating expense base. Since the inception of the Company's flight operations on September 26, 1996, it has not generated sufficient liquidity from operations to sustain its working capital needs. The continuance of the Company's operations is dependent, among other things, upon obtaining sufficient additional financing to fulfill its cash flow requirements, growth in the Company's revenue base and, ultimately, the attainment of sustained profitable operations. Although management has undertaken action designed to meet these requirements as discussed above, no assurance can be made that such objectives will be met or achieved by the Company.
Pan Am does not anticipate any capital expenditures during the next twelve months that will require any significant outlay of existing capital. Pan Am's anticipated growth is expected to be achieved through the use of leased equipment which reduces the level of its capital expenditures. To the extent that any capital expenditures are incurred, it is anticipated that they would be funded through external financial sources. Further, management is currently evaluating the financial and economic benefits of purchasing aircraft through long-term financing arrangements. It would be anticipated that any capital outlay required to procure such financing would be funded from future equity or debt offerings. To the extent the Company incurs indebtedness, the Company will be subject to risks associated therewith, including the risks that interest rates may fluctuate and cash flows may be insufficient to pay principal and interest on any such indebtedness.
Pan Am has entered into definitive lease agreements with respect to five aircraft, four of which are currently in operation, with the remaining aircraft scheduled to be placed in operation by June, 1997. The sixth aircraft to be leased through ING is currently under a term sheet and the definitive lease is under negotiation. The ages of such aircraft range from 14 to 19 years and the average age of such aircraft is 16.0 years. The lease terms for these aircraft are generally five years. The leases generally require maintenance reserves to be paid monthly, based on usage. Future minimum rental payments under these five leases over the remaining terms, based on the estimated delivery dates, are approximately $27.5 million. Pan Am currently intends to lease additional aircraft as market or other conditions warrant in order to meet its growth strategy. However, there can be no assurance that suitable aircraft will be available for lease or purchase, in which case, the Company would be required to reduce or delay its growth strategy.
The Company's ability to increase revenues and achieve profitability is dependent in part upon its ability to attract a sufficient number of customers at economically viable fares and operate efficiently. There is no assurance, if or when, the Company will achieve profitability. The Company's prospects, therefore, must be evaluated in light of the risks and expenses normally encountered by a new entrant carrier with limited resources in the highly competitive airline industry.
Pan Am intends to expand its operations through internal growth as well as the acquisition of or merger with other airline operators, and has engaged and may continue to engage in preliminary discussions with certain companies with respect to various acquisitions which could result in material changes in Pan Am's financial condition and operating results. As consideration for any future acquisition, Pan Am may pay cash, incur indebtedness or issue debt or equity securities.
As discussed previously, the Company has entered into an agreement to acquire Carnival Air through the issuance of 9,530,810 shares of Common Stock. Carnival Air operates a fleet of 27 aircraft with approximately $270 million in annual revenue. For the past five years, Carnival Air has been consistently profitable. However, as with other smaller less recognized airlines, Carnival Air suffered financially from the recent ValuJet incident which occurred in May, 1996. In recent months, Carnival Air has incurred significant operating losses and has also experienced a liquidity deficiency. Pan Am's management believes that certain cost benefits, synergies and enhanced revenues, particularly branding the operations with the Pan Am name, will result from this merger and the combined companies' operating performance will improve.
As contemplated in the merger, the primary shareholder of Carnival Air is required to contribute $30.0 million in cash to Carnival Air, all or a portion of which may be utilized to pay off an existing line of credit which is secured by Carnival Air's assets and such primary shareholder's personal guaranty. Pan Am will seek to renegotiate or replace the credit facility with a view to making available additional proceeds for general operating purposes. Further, Pan Am is currently in negotiations with certain institutions to provide substantial financing for the combined companies to fund operations in the near term and to assist towards achieving profitable operations. However, at this juncture, no assurances can be given that any additional financing, if available, will be sufficient to cover the liquidity needs of the combined operations.
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 are based largely on the Company's expectations and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive and other factors affecting the Company's operations, markets, expansion strategies, available financing, and other factors discussed elsewhere in this report and the documents filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company's control. Actual results could differ materially from the forward-looking statements. 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of Deloitte & Touche LLP, Independent Auditors, listed in the accompanying Index to Consolidated Financial Statements included herein, commencing at page, are filed as part of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are not and have not been any disagreements between the Company and its accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
The information required in Item 10
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS. The financial statements listed in the accompanying Index to Consolidated Financial Statements on page are filed as part of this annual report.
2. FINANCIAL STATEMENT SCHEDULES. There are no financial statement schedules filed as part of this annual report, since the required information is included in the consolidated financial statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present.
3. EXHIBITS.
3.1 Amended and Restated Articles of Incorporation of Pan Am (incorporated by reference to Pan Am's Registration Statement on Form S-4 (File No. 333-4350)).
3.2 Bylaws of Pan Am.
4.1 Specimen certificate representing Common Stock of Pan Am (incorporated by reference to Pan Am's Registration Statement on Form S-4 (File No. 3333-4350)).
10.1 Pan Am Corporation 1996 Stock Option Plan (incorporated by reference to Pan Am's Registration Statement on Form S-4 (File No. 333-4350)).
10.2 Employment Agreement between Pan Am and Martin R. Shugrue, Jr., dated March 8, 1996 (incorporated by reference to Pan Am's Registration Statement on Form S-4 (File No. 333-4350)).
10.3 Lease Agreement relating to Aircraft A300-B4-203 #220 between EAL (DELAWARE) VIII Corp., a Lessor, and Pan American Airways, Inc., as Lessee (incorporated by reference to Pan Am's Registration Statement on Form S-4 (File No. 333-4350)).
10.4 Lease Agreement relating to Aircraft A300-B4-203 #216 between EAL (DELAWARE) VIII Corp., a Lessor, and Pan American Airways, Inc., as Lessee (incorporated by reference to Pan Am's Registration Statement on Form S-4 (File No. 333-4350)).
10.5 Lease Agreement relating to Aircraft A300-B4-203 #211 between EAL (DELAWARE) VIII Corp., a Lessor, and Pan American Airways, Inc., as Lessee.
10.6 Lease Agreement MSN053 dated as of September 27, 1996 between First Security Bank, National Association as Lessor and Pan American Airways, Inc. as Lessee (incorporated by reference to Pan Am's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.7 Lease Agreement MSN075 dated as of September 27, 1996 between First Security Bank, National Association as Lessor and Pan American Airways, Inc. as Lessee (incorporated by reference to Pan Am's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996).
10.8 Acquisition Agreement dated as of March 20, 1997 between Pan Am Corporation, CAL Acquisition Corporation, Air Holding Company and Carnival Air Lines, Inc.
21 Subsidiaries of Pan Am.
23.1 Consent of Independent Certified Public Accountants.
27 Financial Data Schedule.
99 Press Release of Pan Am and Carnival Air Lines, Inc., relating to the proposed transaction.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 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: March 28, 1997 By:/S/ MARTIN R. SHUGRUE, JR. --------------------------- Martin R. Shugrue, Jr., President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on March 28, 1997 on behalf of the registrant and in the capacities indicated.
/S/ MARTIN R. SHUGRUE, JR. ------------------------------------ Martin R. Shugrue, Jr., President, Chief Executive Officer and Director
/S/ JOHN J. OGILBY, JR. ------------------------------------ John J. Ogilby, Jr., Chief Financial Officer and General Counsel (Principal Financial Officer)
/S/ ROBERT C. COILE ------------------------------------ Robert C. Coile, Vice President, Finance and Accounting (Principal Accounting Officer)
/S/ CHARLES E. COBB, JR. ------------------------------------ Charles E. Cobb, Jr., Chairman of the Board
/S/ PHILLIP FROST ------------------------------------ Phillip Frost, M.D., Vice Chairman of the Board
/S/ RICHARD B. FROST ------------------------------------ Richard B. Frost, Director
/S/ MARK J. HANNA ------------------------------------ Mark J. Hanna, Director
/S/ RICHARD C. PFENNIGER, JR. ------------------------------------ Richard C. Pfenniger, Jr., Director
/S/ JOHN J. SICILIAN ------------------------------------ John J. Sicilian, Director
/S/ HERSHEL F. SMITH, JR. ------------------------------------ Hershel F. Smith, Jr., Director
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
PAGE NO.
Independent Auditors' Report on the Consolidated Financial Statements Independent Auditors' Report on the Combined Financial Statements Consolidated and Combined Balance Sheets Consolidated and Combined Statement of Operations Consolidated and Combined Statements of Stockholders' Equity Consolidated and Combined Statements of Cash Flows Notes to Consolidated and Combined Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Pan Am Corporation:
We have audited the accompanying consolidated balance sheet of Pan Am Corporation and subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles.
Management's plans concerning operating and financing matters are discussed in Note 1.
/s/ DELOITTE & TOUCHE LLP Miami, Florida March 31, 1997
INDEPENDENT AUDITORS' REPORT
Pan American World Airways, Inc. and Affiliate:
We have audited the accompanying combined balance sheet of Pan American World Airways, Inc. and Affiliate (collectively, the "Predecessor Company") (a development stage company) as of December 31, 1995 and the related combined statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1995 and for the period from Inception (see Note 1) to December 31, 1995 (not presented herein). These financial statements are the responsibility of the Predecessor Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures included in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Predecessor Company at December 31, 1995, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995, and for the period from Inception to December 31, 1995 (not presented herein), in conformity with generally accepted accounting principles.
The Predecessor Company is in the development stage at December 31, 1995. As discussed in Note 1 to the combined financial statements, the Predecessor Company has not yet commenced operations or verified the market acceptance and demand for the use of its service marks.
/s/ DELOITTE & TOUCHE LLP Miami, Florida April 24, 1996
See accompanying notes to consolidated and combined financial statements.
See accompanying notes to consolidated and combined financial statements.
See accompanying notes to consolidated and combined financial statements.
See accompanying notes to consolidated and combined financial statements.
PAN AM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1996
PAN AMERICAN WORLD AIRWAYS, INC. AND AFFILIATE ("PREDECESSOR COMPANY") NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
ORGANIZATION AND BASIS OF PRESENTATION - Pan Am Corporation (f/k/a Frost Hanna Mergers Group, Inc.) (the "Company") was formed to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other similar business combination with an operating business. On September 23, 1996, the Company completed a business combination (the "Merger") with PAWA Holdings, Inc. (f/k/a Pan American World Airways, Inc.), a Florida Corporation ("PAWA"). The Merger was treated for accounting purposes as a capital transaction equivalent to the issuance of stock by PAWA for the net monetary assets (which consisted principally of approximately $9.8 million of cash) of Frost Hanna Mergers Group, Inc. Because PAWA is the accounting acquirer in this "reverse acquisition," the financial statements of Pan Am Corporation are considered to be a continuation of PAWA.
PAWA was established on January 11, 1996 for the purpose of operating a commercial passenger and cargo airline. On March 8, 1996 (the "Contribution Date"), stockholders contributed various ownership interests in assets and liabilities (recorded at the lower of contributors cost or fair value) (the "Contribution") in return for stock and warrants of PAWA. Although PAWA was incorporated on January 11, 1996, the accompanying financial statements reflect operations as though it commenced on January 1, 1996. On September 19, 1996, final regulatory approvals were received and on September 26, 1996, operations as a scheduled passenger and cargo air carrier commenced.
The Company and its predecessor were in the development stage, however by December 31, 1996, the Company had emerged as a full service domestic airline providing service to New York, Miami, Los Angeles and San Juan, Puerto Rico.
The December 31, 1996 consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; Pan American World Airways, Inc. (f/k/a Pan American Airways, Inc.), a Florida corporation, Pan American World Airways, Inc., a Delaware corporation, Pan American Airbridge Holdings, Inc., a Florida corporation, and EAL Asset Company No. 1, Inc., a Florida corporation. All intercompany balances and transactions have been eliminated.
As required by instructions to Form 10-K, the combined financial statements of the Predecessor Company as of December 31, 1995 and for two years in the period then ended, have been included herein. The Predecessor Company consists of the combination of Pan American World Airways, Inc., a Delaware corporation, and Pan American Airbridge Holdings, Inc., a Florida corporation. The Predecessor Company had common ownership and management and its principal asset, service marks related to the Pan Am(R) trade name, was held for development. All intercompany balances and transactions have been eliminated.
CONTINUITY OF OPERATIONS - The Company has incurred substantial operating losses since inception, of which approximately $12.8 million relates to the period prior to commencement of airline operations,
and approximately $14.7 million subsequent thereto. Through the first quarter of 1997, the Company continues to experience operating losses.
The continuance of the Company is dependent, among other things, upon obtaining sufficient additional financing to fulfill cash flow requirements, growth in the Company's revenue base and, ultimately, the attainment of profitable operations.
Management believes that its liquidity problem is short-term in nature and requires bridge financing for an interim period. To this end, the Company has arranged for additional sources of capital as follows:
In March 1997, the Company completed the sale of a new series of convertible preferred stock for net cash proceeds of approximately $15.0 million.
The Company agreed with Dade County, Florida on an incentive package totaling approximately $8.5 million as an inducement to locate its headquarters within the County. The Company anticipates receiving approximately $5.0 million in cash relating to the award in April 1997.
With the financing described above, the Company expects to meet its short-term working capital needs.
Toward attaining profitable operations, the Company's operating plan provides for the following more significant items:
Expansion of the Company's aircraft fleet to not only grow the revenue base, but also to more widely distribute fixed infrastruture costs.
Convert the Company's higher cost short-term wet-lease agreements to Company operated aircraft.
No assurances can be given that the Company can achieve its operating plan or obtain additional sources of funds in the future.
The following is a summary of significant accounting policies of the Company:
RISKS AND UNCERTAINTIES - The airline industry is intensely competitive. Domestic certificated airlines are free to enter and exit domestic markets and to set fares without regulatory approval. Any significant fare reductions or introduction of directly competing routes by other airlines could have a material adverse effect on the Company's results of operations and financial condition.
The Company cannot predict the future cost and availability of fuel for flight operations. Substantial price increases or the unavailability of adequate suppliers could have a material adverse effect on the Company's financial position or results of operations.
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. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - For purposes of consolidated financial statements, the Company considers all highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.
EXPENDABLE AIRCRAFT PARTS - Expendable aircraft parts are carried at the lower of cost or market, with cost being determined on the first-in, first-out basis. An allowance is provided when, in the judgment of management, the realizable value of individual parts declines below the cost of such parts.
PROPERTY - Property is stated at the lower of cost or market. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the various assets. Property useful lives are as follows:
Spare rotables.....................................five years Software...........................................five years Technical library and training manuals.............five years Office equipment...................................five years Ground equipment...................................five years
AIRCRAFT MAINTENANCE AND REPAIRS - For aircraft under operating lease, maintenance overhaul reserves for engines and airframe are maintained by the lessor and are provided for by the Company on a monthly basis based upon a per flight hour charge for each aircraft. Such reserves are charged to expense when incurred.
INTANGIBLE ASSETS - Service marks related to the Pan Am trade name (stated at cost) are amortized on the straight-line method over forty years.
The Company evaluates its intangible assets in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS TO BE DISPOSED OF. This Statement requires assessment of impairment of long-lived assets whenever factors, events or changes in circumstances indicate the carrying amount of certain long-lived assets to be held and used may not be recoverable. Assessment of impairment is based on the expected undiscounted cash flows of the assets. If an asset is determined to be impaired, an impairment loss is recognized to the extent the carrying amount of the impaired asset exceeds fair value.
DEPOSITS - As is customary in the airline industry, the Company maintains performance deposits with respect to security on aircraft leases, landing fees, ground handling fees and credit card processing.
INVESTMENT IN AFFILIATE - The Company accounts for its investment in affiliate under the equity method.
DEFERRED COMPENSATION - Deferred compensation, a contra-equity account, is recorded for the difference between the fair value and the exercise price of shares of common stock subject to stock options. Deferred compensation was amortized on a straight-line method over the vesting period.
REVENUE RECOGNITION - Revenues are recognized when the transportation is provided. Customer flight deposits and unused passenger tickets sold are included in air traffic liability. As is customary within the industry, the Company performs periodic evaluations of this estimated liability, and any adjustments resulting therefrom, which can be significant, are included in the results of operations for the periods in which the evaluations are completed.
FREQUENT FLYER AWARDS - the Company accrues the estimated incremental cost of providing free travel awards earned under its frequent flyer program at the time of travel by participating passengers.
PASSENGER TRAFFIC COMMISSIONS - Passenger traffic commissions are recognized as expense when the transportation is provided and the related revenue is recognized. The amount of passenger traffic commissions paid but not yet recognized as expense is included in prepaid expenses and other assets in the accompanying consolidated balance sheet.
ADVERTISING - The cost of advertising is expensed as incurred.
DEFERRED INCOME TAXES - The Company provides for deferred taxes under the liability method. Under such method, deferred taxes are adjusted for tax rate changes as they occur. Deferred income tax assets and liabilities are computed for differences between the financial statement and the tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company expects to file consolidated income tax returns.
On the Contribution Date, one of the assets contributed to the Company was an S corporation for federal income tax purposes. Therefore, the income tax effects of the results of operations prior to such contribution accrue directly to the previous stockholders. However, on the Contribution Date, such subsidiary had a change in its tax status and, accordingly, the Company recognized a deferred tax liability of $155,421 with a corresponding charge to the provisions for income taxes during 1996.
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. Accordingly, compensation cost for stock options issued to employees are measured as the excess, if any, of the fair value of the Company's stock at the date of grant over the amount an employee must pay for the stock. SFAS No. 123 requires companies using the intrinsic-value method to make certain pro forma disclosures using the fair-value method (see Note 6).
2. LOSS PER SHARE
Net loss per common and common equivalent share is computed by dividing net loss by the weighted average number of common stock and common stock equivalent shares outstanding. During each of the three years in the period ended December 31, 1996, the Company's common stock equivalents, consisting of stock options and warrants outstanding, were anti-dilutive.
3. PROPERTY - NET
Property at December 31, 1996 consisted of the following:
Spare rotables..............................................$ 797,887 Software.................................................... 500,000 Technical library........................................... 250,000 Training manuals............................................ 50,000 Office equipment............................................ 734,990 Ground equipment............................................ 13,498 ---------- 2,346,375
Less: depreciation and amortization......................... 280,067 ---------- Total property - net........................................$2,066,308 ==========
4. INVESTMENT IN AFFILIATE
The Company's investment in affiliate, which is carried at its net realizable value, consists of a 30% interest in Chalks 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. As of December 31, 1996, the Company had loaned $50,000 to Flying Boat, Inc.
5. DEFERRED INCOME TAXES
Deferred income taxes at December 31, 1996 consisted of the deferred tax liability related to intangible asset amortization deductions taken for income tax purposes by a certain subsidiary, but not yet taken for financial statement purposes. As of December 31, 1996, there is no assurance that the Company will generate sufficient earnings to utilize its available tax assets (primarily a net operating loss carryforward of approximately $27 million) for carryforwards, therefore a valuation allowance has been established to offset such existing tax assets.
6. STOCKHOLDERS' EQUITY
STOCKHOLDERS' OPTIONS - The Company has granted certain Stockholders options to purchase the Company's common stock as follows:
Options granted to certain officers, as an employment inducement, to purchase 790,918 shares of the Company's stock for $1 per share which are exercisable on or after March 4, 1997 and expire on March 3, 2006. The Company has accounted for the difference between the fair value of the stock at the date of grant and the $1 exercise price as compensation expense during the year ended December 31, 1996.
In connection with the Merger, options were granted to purchase 276,821 shares of the Company's stock for $1 per share in payment of certain acquisition costs. The options were exercisable immediately upon consummation of the Merger and expire nine years from the date of the Merger. The Company has accounted for the difference between the fair value of the stock at the merger date and the $1 exercise price as an adjustment to capital surplus.
STOCKHOLDERS' WARRANTS - The Company has granted certain stockholders warrants to purchase the Company's common stock as follows:
Warrants, issued in connection with the Contribution, to purchase 80,000 shares of the Company's common stock were issued at an exercise price of (i) $5 per share if exercised during the period ended May 19, 1997 and (ii) $8.10 per share during the subsequent three-year period. The Company has accounted for the fair value of the warrants as an adjustment to capital surplus.
Warrants, issued in connection with the Initial Private Offering, to purchase an aggregate of 80,000 shares of the Company's common stock at an exercise price of (i) $5 per share if exercised during the period ended May 19, 1997 and (ii) $8.10 per share during the subsequent three-year period. The Company has accounted for the fair value of the warrants as an adjustment to capital surplus.
Warrants, issued in connection with the Initial Public Offering by Frost Hanna Mergers Group, Inc., to purchase an aggregate of 170,000 shares at an exercise price of $8.10 per share commencing March 19, 1995 for a period of four years. The Company has accounted for the fair value of the warrants as an adjustment to capital surplus.
RECEIVABLE FROM OFFICERS AND STOCKHOLDERS - As described below, the Company has issued common stock to certain Stockholders subject to payment upon the occurrence of future events. The amounts receivable from stockholders have been reflected as a reduction in stockholders' equity in the accompanying consolidated balance sheet.
In consideration for the issuance of 425,085 shares of the Company's stock, a certain Stockholder has agreed to contribute $1.5 million in cash or property upon the Company entering into a definitive lease agreement with an aircraft leasing firm for two specific A-300 aircraft. In July 1996, the Company finalized agreements for the leasing of these two specified aircraft. In December 1996, the Company agreed with the Stockholder to convert a
subsequent loan from the stockholder in the amount of $1.5 million in satisfaction of this obligation. (See Note 11.)
In consideration for the issuance of 85,017 shares of the Company's stock, a certain Stockholder has agreed to contribute, upon the Company's demand, a certain note receivable and a certain route authority which have a combined estimated value of approximately $300,000. Both the stockholder and the Board of Directors of the Company agreed that if the value of this property varied based upon anticipated future events, the parties would review the transaction with respect to making certain equitable adjustments.
The Company received notes totaling $41,478 from certain officers in exchange for 11,750 shares subscribed pursuant to the Initial Private Offering. The notes earn interest at 6% and are due upon demand.
STOCK OPTION PLAN - In April 1996, the Company's Board of Directors established, with subsequent stockholder approval, a stock option plan covering substantially all employees, officers, directors and others who provide services to the Company. Under the plan, an aggregate of 600,000 stock options for shares of common stock are available for issuance at an exercise price of not less than the fair market value of the Company's common stock on the date of grant. The Company's Compensation and Stock Option Committee determines the persons to whom grants are made and the vesting, timing, amounts and other terms of such grants. During 1996, the Company approved the grant of options to purchase 445,000 shares of common stock at a weighted average exercise price of $5.27 which generally vest in equal portions over three years. At December 31, 1996, 10,000 options with an exercise price of $5.00 were exercisable. The weighted average fair value of options granted during 1996 was $1.60. The following table summarizes information about stock options outstanding at December 31, 1996:
The Company applies APB No. 25 and related interpretations in measuring compensation for its stock option plan for employees as described in Note 1. Accordingly, no compensation expense has been recognized in 1996 related to the plans. Compensation costs would have been increased by $135,725 with a corresponding increase in the loss per share of $0.02 in 1996 had the fair values of stock options granted been recognized as compensation cost as prescribed by SFAS No. 123.
The fair value of options at grant date was estimated using the Black-Scholes multiple option model where each vesting increment is treated as a separate option with its own expected life and own fair value. The following weighted average assumptions were used:
Expected life 5 years Interest rate 6.30% Volatility None when the Company was private, 0.42438 when public thereafter. Dividend yield None
SUBSCRIPTIONS - The Company has granted certain pending stock issuances, recorded as other liabilities, as follows:
In October 1996, the Company reached an agreement with a certain vendor to issue 45,000 shares of stock based upon the then current per share market value in settlement of amounts outstanding totaling $324,500. The shares were issued on February 3, 1997.
In December 1996, the Company granted employees a stock bonus. Such grant amounted to 81,850 shares valued at $620,881 based upon the then current per share market value. The $620,881 was considered compensation expense during the year ended December 31, 1996. The Company plans to issue the shares in the second quarter of 1997.
7. STOCK OFFERINGS
On April 12, 1996, the Company completed a private offering (the "Initial Private Offering") pursuant to which it sold 2,991,623 shares of common stock at $3.53 per share. The Company received $10,560,429 in cash proceeds from the Initial Private Offering and used the proceeds thereof for working capital purposes.
On April 29, 1996, the Company completed a second private offering (the "Second Private Offering") pursuant to which it sold 1,736,500 shares of common stock at $5.00 per share. The Company received $8,182,500 in cash proceeds and $500,000 in other assets from the Second Private Offering. The Company used the proceeds of the Second Private Offering for working capital purposes.
8. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed statements of operations for the years ended December 31, 1996 and 1995 give effect to the Merger as if it had occurred at the beginning of each period presented. The pro forma financial data is 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 at the beginning of each period presented or of those results which may be obtained in the future.
The Merger has been accounted for as a capital transaction equivalent to the issuance of stock by PAWA for the Company's net monetary assets (a "reverse acquisition").
FOR THE YEARS ENDED DECEMBER 31, 1996 1995
Operating revenues $ 10,441,485 $ 37,050 ============ ======== Operating expenses $ 39,624,239 $619,049 ============ ======== Net loss $(27,978,255) $(87,987) ============ ======== Net loss per share $ (2.94) $ (0.03) ============ ========
9. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company has been involved in several non-cash investing and financing activities, most of which relate primarily to the Company's initial capitalization and equity offerings. Summarized below are
those transactions which occurred during the year ended December 31, 1996:
RECORDED ASSETS CONTRIBUTED VALUE
Facility rentals $ 300,110 Service marks 1,605,550 Aircraft parts and other property 1,810,224 Vendor payable settlement 324,500 Acquisition costs 534,265 Receivables from officers and stockholders 341,588 Employment services 2,001,023 ---------- Total $6,917,260 ==========
There was no cash paid for income taxes in any of the periods presented. Cash paid for interest for the year ended December 31, 1996 totaled $51,748. There was no cash paid for interest during 1995 or 1994.
10. LEASES
The Company leases its aircraft, space in airport terminals and other property and equipment under operating leases which expire in various years through 2001. The Company does not currently have any property under leasing arrangements which would qualify as a capital lease.
At December 31, 1996, the Company had aircraft leases on three Airbus A300-B4s. The initial lease term on each aircraft is 60 months expiring on different dates in 2001. The Company also has firm commitments to lease two additional A300-B4 aircraft. The Company is responsible for normal maintenance and repairs and makes monthly payments to the lessor for engine and airframe overhaul reserves. In addition, the Company also leases two B727 aircraft on a wet-lease basis from a third party airline operator under short-term lease commitments, cancelable within 30 days at the option of the Company.
Future minimum lease payments at December 31, 1996, for noncancelable operating leases with initial terms of more than one year, are as follows:
1997 $ 5,818,224 1998 5,818,224 1999 5,818,224 2000 5,818,224 2001 4,213,608 ----------- Total minimum lease payments $27,486,504 ===========
Rental expense for all operating leases in 1996 was $1,950,462 and maintenance overhaul reserve expense in 1996 totaled $2,043,317. There was no rental expense during 1995 or 1994.
11. TRANSACTIONS WITH RELATED PARTIES
In September 1996, the Company received a $1.5 million loan from a Stockholder. The note was to bear interest at 6% and was due upon demand. In December 1996, the Company agreed with the Stockholder to apply the note against the Stockholder's receivable as discussed in Note 6.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation involving the acquisition of the service marks. At the time of acquisition of such service marks and pursuant to an asset purchase agreement, the seller of the service marks agreed to sign such documents and take such steps as required for the Company to record assignments of the service marks in various countries in which the service marks were registered. Such recordings were to be effected by documents executed subsequent to the service mark assignment to the Company. The seller has failed to effect and execute all documents as requested by the Company. Accordingly, the Company filed suit for breach of contract, specific performance and injunctive relief to cause an authorized officer of the seller to execute all required documents. The seller has entered counterclaims and has attempted to void the asset purchase agreement. The Company believes that the matter will be resolved in the Company's favor and that the likelihood of an unfavorable outcome for the Company in this matter is remote. However, in the unlikely event that the Company does not prevail in this matter, the loss of the service marks would have a material adverse effect on the Company.
Additionally, the Company's legal counsel has advised the Company that although the Company is not a successor to the former Pan Am, certain foreign creditors of the former Pan Am might seek within their foreign jurisdictions to recover debts of the former Pan Am from the Company and the Company's property might be subject to attachment or seizure on a "successor liability" theory if the Company were to commence operations in certain foreign countries.
The Company also has been a party to various litigation in protecting the service marks, none of which would have a material adverse impact on the Company's financial statements.
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.
13. SUBSEQUENT EVENT
On March 20, 1997, the Company entered into a definitive agreement to merge with Carnival Air Lines, Inc. ("Carnival"), a passenger airline headquartered in Fort Lauderdale, Florida. The Company will exchange 9,530,810 shares of common stock for all outstanding common shares of Carnival. The merger is expected to be accounted for as a pooling-of-interests and close in the second quarter of 1997. For the twelve-month period ended December 31, 1996, Carnival had operating revenues of approximately $270 million.
In March 1997, the Company reached an agreement in principle for the sale of convertible preferred stock for expected net cash proceeds of approximately $15 million.
In March 1997, the Company purchased an office complex, which will temporarily act as its corporate headquarters, from a major stockholder. The property consists of the leasehold interest in certain buildings and real property and approximately 18.0 acres of land. The transaction, valued at $10.4 million, was completed through the issuance of 1,294,625 warrants which are exercisable for an equal number of shares of common stock of the Company.
* * * * *
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------------- -----------
3.2 Bylaws of Pan Am.
10.5 Lease Agreement relating to Aircraft A300-B4-203 #211 between EAL (DELAWARE) VIII Corp., a Lessor, and Pan American Airways, Inc., as Lessee.
10.8 Acquisition Agreement dated as of March 20, 1997 between Pan Am Corporation, CAL Acquisition Corporation, Air Holding Company and Carnival Air Lines, Inc.
21 Subsidiaries of Pan Am.
23.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule.
99 Press Release of Pan Am and Carnival Air Lines, Inc., relating to the proposed transaction.