EX-99.(E) 8 g90931exv99wxey.txt T3E A COPY OF THE JOINT DEBTORS SOLICITATION PACKAGE EXHIBIT T3E SOLICITATION PACKAGE (INCLUDING DISCLOSURE STATEMENT REGARDING THIRD MODIFIED AND RESTATED JOINT PLAN OF REORGANIZATION WITH ALL APPENDICES THERETO, WHICH INCLUDES THE THIRD MODIFIED AND RESTATED JOINT PLAN OF REORGANIZATION (THE "PLAN") AND ALL EXHIBITS THERETO, AS WELL AS COPIES OF ALL OTHER COMMUNICATIONS AND DOCUMENTS TO BE SENT TO CREDITORS IN CONNECTION WITH SOLICITING THEIR APPROVAL OF THE PLAN). UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK --------------------------------X X X In re X Chapter 11 X AEROVIAS NACIONALES DE X Case No.03-11678-ALG COLOMBIA S.A. AVIANCA, X and 03-11679-ALG F.E.I.N. 52-1439926 X X X Jointly Administered and X X AVIANCA, INC., X F.E.I.N. 13-1868573 X X Debtors. X X Judge Gropper X ---------------------------------- ORDER (i) APPROVING THE DISCLOSURE STATEMENT; (II) FIXING OF A RECORD DATE; (III) APPROVING THE NOTICE AND OBJECTION PROCEDURES IN RESPECT OF CONFIRMATION OF THE PLAN; (IV) APPROVING SOLICITATION PACKAGES AND PROCEDURES FOR DISTRIBUTION THEREOF; AND (v) APPROVING THE FORMS OF BALLOT AND ESTABLISHMENT OF PROCEDURES FOR VOTING ON THE PLAN OF REORGANIZATION --------------------------------------------------- Upon motions dated July 22, 2004 and August 13, 2004, (collectively the "Motion")(1), Aerovias Nacionales de Colombia S.A. Avianca and Avianca, Inc. (collectively the "Debtors"), moved this Court for entry of an order, pursuant to sections 105, 502, 1125, 1126 and 1128 of title 11 of the United States Code (the "Bankruptcy Code") and Rules 2002, 3003, 3017, 3018, and 3020 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), (a) approving the Debtors' Disclosure Statement for Third Modified and Restated Joint Plan of Reorganization (as amended, the "Disclosure Statement"); (b) setting a record date for voting purposes; (c) approving the Solicitation Packages and procedures for distribution thereof; (d) approving forms 1 of Ballots and establishing procedures for tabulation of the vote on the Debtors' Third Modified and Restated Plan of Reorganization (as amended, modified or supplemented, the "Plan"); and (e) scheduling a hearing and establishing notice and objection procedures in respect of confirmation of the Plan, all as more fully set forth in the Motion; and the Court having jurisdiction to consider the Motion and the relief requested therein being a core proceeding pursuant to 28 U.S.C. Sections 157 and 1334; and venue being proper before the Bankruptcy Court pursuant to 28 U.S.C. Sections 1408 and 1409; and a hearing having been held on August 24, 2004 (the "Hearing"), to consider the Motion; it appearing that no objections to the Motion having been filed; and based upon the representations of the parties at the Hearing and in the filed pleadings, it is ORDERED, ADJUDGED AND DECREED THAT: 1. The Disclosure Statement as modified as described at the Hearing and as attached hereto as Exhibit A contains "adequate information" within the meaning of section 1125 of the Bankruptcy Code. 2. The forms of the ballots (the "Ballots") attached to the Motion as Exhibit B, as modified as described at the Hearing and as attached hereto as Exhibit C, are sufficiently consistent with Official Form No. 14 and adequately address the particular needs of these chapter 11 cases and are appropriate for each class of claims entitled to vote to accept or reject the Plan. The Ballots contain sufficient information to assure that duplicate Ballots are not submitted and tabulated. 3. The form of the letter from the Official Committee of Unsecured Creditors (the "Committee"), attached hereto as Exhibit D, is hereby approved and is appropriate for inclusion in the Solicitation Package. ------------------------------------------------------------------------------- (1) Capitalized terms contained herein shall have the same meanings as defined in the 2 4. Ballots need not be provided to the holders of unimpaired claims in Classes 1, 2, 3, 4, 6, 9 and 13 because the Plan provides that such classes are unimpaired and, therefore, deemed to accept the Plan. 5. Ballots need not be provided to the holders of claims and interests in Classes 11 and 12 because the Plan provides that they will not receive or retain any property under the Plan in respect of such claims or interests and, therefore, are deemed to reject the Plan. 6. The period, set forth below, during which the Debtors may solicit acceptances or rejections of the Plan is a reasonable and adequate period of time for creditors to make an informed decision to accept or reject the Plan. 7. The procedures for the solicitation and tabulation of votes to accept or reject the Plan (as more fully set forth in the Motion and below) provide for a fair and equitable voting process and are consistent with section 1126 of the Bankruptcy Code. 8. The notice substantially in the form attached to the Motion as Exhibit A, as modified and attached hereto as Exhibit B (the "Confirmation Hearing Notice") and the procedures set forth below for providing such notice to all creditors and equity security holders of the time, date, and place of the hearing to consider confirmation of the Plan (the "Confirmation Hearing") and the contents of the Solicitation Packages (as defined below) comply with Bankruptcy Rules 2002 and 3017 and constitute sufficient notice to all interested parties. 9. The Debtors have the right to seek modifications or extensions of the matters governed by this Order. NOW, THEREFORE, IT IS ORDERED THAT: -------------------------------------------------------------------------------- Motion. 3 1. The Motion is GRANTED, as modified herein. 2. Pursuant to section 1125 of the Bankruptcy Code and Bankruptcy Rule 3017(b), the Disclosure Statement as it may have been or may be further modified to reflect changes made, agreed to by the Debtors or ordered on the record of the hearing is APPROVED. 3. September 16, 2004 will be the date established as the record date (the "Record Date") for purposes of this Order and determining which creditors are entitled to vote on the Plan. 4. All objections to the Disclosure Statement, other than those sustained or withdrawn on the record at the Disclosure Statement Hearing, are overruled. 5. The Debtors are directed to distribute or cause to be distributed solicitation packages (the "Solicitation Packages") on or before October 1, 2004 (or such later date approved by the Court, the "Solicitation Date") to, (a) record holders of scheduled claims, as of the Record Date, to the extent that such claims (i) are listed in the Debtors' Schedules in an amount greater than zero and are not identified as contingent, unliquidated or disputed, (ii) have not been superseded by a filed claim, and (iii) entitle the holder thereof to vote on the Plan; (b) record holders of filed claims, as of the Record Date, to the extent that such claims (i) are the subject of filed proofs of claim, (ii) have not been disallowed, expunged, disqualified or suspended prior to the Record Date, (iii) are not the subject of a pending objection, and (iv) entitle the holders thereof to vote on the Plan; provided, however, that the Debtors are not required to distribute the Plan and Disclosure Statement to any holder of a claim or interest in Classes 1, 2, 3, 4, 6, 9, 11, 12 and 13, unless such party makes a specific request in writing for the same. 6. The Solicitation Package shall contain: (i) the order approving the Disclosure Statement (the "Disclosure Statement Order") in both Spanish and English; 4 (ii) the confirmation hearing notice, substantially in the form attached hereto as Exhibit B (the "Confirmation Hearing Notice") in both Spanish and English; (iii) a ballot, including applicable voting instructions (each a "Ballot" and, collectively, the "Ballots"), substantially in the forms attached hereto as Exhibits C-l, C-2 and C-3, in both Spanish and English, and a preaddressed postage prepaid return envelope; (iv) the Committee letter, substantially in the form attached hereto as Exhibit D, in both Spanish and English; (v) (a) to claimants with addresses in South and Central America, a CD-ROM containing the English version of the Disclosure Statement (together with the Plan attached thereto) and a paper copy of the Spanish Version of the Disclosure Statement, and (b) to claimants with addresses outside South and Central America, a CD-ROM containing the English version of the Disclosure Statement and a paper copy of the English version of the Disclosure Statement. 7. All Spanish translations of documents included in the Solicitation Package shall be certified translations by a professional translator, and a copy of such certification shall be provided by the Debtors to any recipient of a Solicitation Package who requests same. 8. The Debtors are directed to distribute or cause to be distributed by the Solicitation Date, the Solicitation Package without a Ballot or return envelope to (a) the U.S. Trustee; (b) the attorneys for the Official Committee of Unsecured Creditors; (c) attorneys for the Debtors' postpetition lenders; (d) the Internal Revenue Service; and (e) all parties that the Debtors are required to serve pursuant to the Bankruptcy Court's Case Management Order. 9. Solicitatition Packages, which shall include Ballots, shall be distributed to holders, as of the Record Date, of claims in Classes 7, 8, and 10, which classes are designated under the Plan as entitled to vote to accept or reject the Plan. 10. Solicitation Packages, which shall exclude any Ballots but shall include notices of non-voting status, substantially in the forms attached to the Motion as Exhibit C and Exhibit D 5 (the "Notices of Non-Voting Status"), shall be distributed to (a) holders, as of the Record Date, of unimpaired claims in Classes 1, 2, 3, 4, 6, 9 and 13 (for whom the Solicitation Package may also exclude the Plan and Disclosure Statement); and (b) all holders, as of the Record Date, of claims or interests in Classes 11 and 12, as applicable, which classes are designated under the Plan as impaired and not entitled to vote to accept or reject the Plan. Any identical claims in these classes that are filed multiple times by the same creditor against the same Debtor will receive one Notice of Non-Voting Status on account of such claims. 11. Any creditor entitled to vote in a given class who has filed duplicate claims (meaning the claims are in the same amount, with the same classification and asserting the same basis of claim) to be voted in such class shall be provided, to the extent possible, with only one Solicitation Package and one Ballot for voting a single claim in such class. 12. The Debtors are not required to distribute Solicitation Packages to creditors who have timely filed proofs of claim for amounts less than or equal to the amounts scheduled if the claims have already been paid in the full scheduled or filed amount prior to the Solicitation Date pursuant to an order by the Bankruptcy Court. 13. The Debtors are not required to distribute Solicitation Packages to a party to an executory contract who does not hold either a filed or a scheduled claim, unless such party makes a specific request in writing for the same (so long as such scheduled claim is not listed as contingent, unliquidated, or disputed). 14. As the Debtors anticipate that some of the notices of the Disclosure Statement Hearing (the "Disclosure Statement Hearing Notices") may be returned as undeliverable, the Debtors are excused from distributing Solicitation Packages to those entities listed at such addresses unless the Debtors receive written notice of accurate addresses for such entities, or 6 accurate forwarding addresses, before the Solicitation Date and the failure to distribute Solicitation Packages to such entities will not constitute inadequate notice of the Confirmation Hearing, the Voting Deadline (as defined below), or violation of Bankruptcy Rule 3017(d). 15. All Ballots must be properly executed, completed, and the original thereof shall be delivered to the Solicitation Agents so as to be actually received by Debtors' solicitation and tabulation agents by no later than the following deadline (the "Voting Deadline"): -- By 5:00 P.M. (PREVAILING EASTERN TIME) ON NOVEMBER 4, 2004, to Smith, Gambrell & Russell, LLP, Attention: Ginny Smithson, located at Suite 3100, 1230 Peachtree Street, Atlanta, Georgia 30309-3592 (Phone: 404-815-3506) (the "U.S. Balloting Agent"); or -- BY 5:00 P.M. (PREVAILING BOGOTA TIME) ON NOVEMBER 4, 2004, to Angela Maria Calvijo, located at Aerovias Nacionales de Colombia S.A. Avianca, Centro Administrativo, Avenida Eldorado N. 92-30, Bogota, Colombian (the "Colombian Balloting Agent"; the U.S. Balloting Agent and the Colombian Balloting Agent, each a "Balloting Agent"). Creditors with addresses in the Republic of Colombia shall deliver their Ballots to the Colombian Balloting Agent by the Voting Deadline and such Ballots will then be promptly delivered to the U.S. Balloting Agent. 16. Solely for purposes of voting to accept or reject the Plan and not for the purpose of the allowance of, or distribution on account of, a claim and without prejudice to the rights of the Debtors in any other context, each claim entitled to vote to accept or reject the Plan shall be entitled to vote the amount of such claim as set forth in the Schedules, unless such holder has timely filed a proof of claim, in which event such holder shall be entitled to vote the amount of such claim as set forth in such proof of claim. The exchange rate for valuing claims of Colombian creditors shall be $2954.62 Colombian Pesos to $1 U.S. Dollar, based on the exchange rate as of the March 21, 2003 petition date. 7 17. Creditors who have timely filed a proof of claim and disagree with the Debtors' classification of, or objection to, its claim and believe that the Creditor should be entitled to vote on the Plan, must serve on the Debtors and file with the Court a motion for an order pursuant to Rule 3018(a) of the Federal Rules of Bankruptcy Procedure (a "Rule 3018(a) Motion") temporarily allowing such claim in a different amount or in a different class for purposes of voting to accept or reject the Plan. ALL RULE 3018(a) MOTIONS MUST BE FILED ON OR BEFORE OCTOBER 21, 2004. In accordance with Bankruptcy Rule 3018, as to any creditor filing a Rule 3018(a) Motion, such creditor's Ballot will not be counted unless temporarily allowed by the Court for voting purposes, after notice and a hearing. Creditors may contact Debtors' counsel as set forth below to receive a Ballot for any claim for which a proof of claim and a Rule 3018(a) Motion have been timely filed. Rule 3018(a) Motions that are not timely filed and served in the manner as set forth above shall not be considered. A hearing on all Rule 3018 Motions shall be held at 10:00 A.M. (PREVAILING EASTERN TIME) ON NOVEMBER 9, 2004. 18. In order to facilitate tabulation of the votes on the Plan, the following tabulation procedures are hereby approved: (1) a vote shall be disregarded if the Bankruptcy Court determines, after notice and a hearing, that a vote was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code; (2) any Ballot that is returned to the Voting Agent, but which is unsigned, shall not be counted; (3) all votes to accept or reject the Plan must be cast by using the appropriate Ballot and in accordance with the voting instructions set forth on the Ballot (as may be applicable) and votes that are cast in any other manner shall not be counted; 8 (4) a holder of claims in more than one (1) class must use separate Ballots for each class of claims; (5) a holder of claims shall be deemed to have voted the full amount of its claim in each class and shall not be entitled to split its vote within a particular class; (6) any Ballot that partially accepts and partially rejects the Plan shall not be counted; (7) if a holder of claims casts more than one (1) Ballot voting the same claim prior to the Voting Deadline, only the last Ballot timely received by the Voting Agent shall be counted; (8) if a holder of claims casts Ballots received by the Voting Agent on the same day, but which are voted inconsistently, such Ballots shall not be counted; (9) any executed Ballot received by the Voting Agent that indicates both acceptance and rejection of the Plan shall be counted as an acceptance of the Plan; (10) any entity entitled to vote to accept or reject the Plan may change its vote before the Voting Deadline by casting a superseding Ballot so that it is received on or before such deadline; and (11) if a Claim has been paid, released or otherwise withdrawn prior to the Confirmation Hearing, the Claim will not be eligible for voting on the Plan. 19. The Confirmation Hearing Notice is approved. 20. The Confirmation Hearing and a hearing on the Debtors' Motion for Substantive Consolidation (attached as Appendix E to the Disclosure Statement) will be held at 10:00 A.M. (PREVAILING EASTERN TIME) ON NOVEMBER 16, 2004; provided, however, that such hearing may be adjourned from time to time by the Court or the Debtors without further notice to parties other than an 9 announcement in Court at such hearing or any adjourned subsequent hearing and the Plan may be modified pursuant to the requirements of section 1127 of the Bankruptcy Code. A pre-trial conference on the Motion for Substantive Consolidation and such other matters as the Court may wish to address will be held before the Court at 10:00 A.M. (PREVAILING EASTERN TIME) ON NOVEMBER 9, 2004. 21. The Debtors shall publish the Confirmation Hearing Notice no later than OCTOBER 13, 2004 in the Global and Americas editions of The Wall Street Journal (which shall include publication in El Tiempo, the largest newspaper in the Republic of Colombia). 22. Objections to confirmation of the Plan, if any, must (a) be in writing; (b) be in the English language; (c) state the name and address of the objecting party and the amount and nature of the claim or interest of such party; (d) state with particularity the basis and nature of any objection; and (e) be filed, together with proof of service, with the Court and served so that they are actually received no later than 5:00 P.M. (PREVAILING EASTERN TIME) ON NOVEMBER 4, 2004 (the "Objection Deadline") by each of the parties identified in the Confirmation Hearing Notice at the respective addresses set forth therein. The Debtors, the Committee, Oceanair, FNC and VB may serve replies to such objections and proposed modifications no later than November 12, 2004. 23. Objections to confirmation of the Plan not timely filed and served in the manner set forth above shall not be considered and shall be overruled. 24. The Plan Documents (as defined in the Plan), to the extent not included in the Disclosure Statement included in the Solicitation Package, shall be filed with the Court and served on: (a) the U.S. Trustee; (b) the attorneys for the Official Committee of Unsecured Creditors; (c) attorneys for the Debtors' postpetition lenders; (d) the Internal Revenue Service; and (e) all parties that the Debtors are required to serve pursuant to the Bankruptcy Court's Case Management Order, no later than OCTOBER 21, 2004; provided that (i) the Plan Documents may be amended subsequent to such date to properly 10 reflect the transactions in the Plan, and any such amendments shall be filed with the Court and served on the above parties, and (ii) the information required by Section 1129(a)(5) of the Bankruptcy Court shall be filed with the Court and served on the above parties on or before OCTOBER 31, 2004, or such later date as may be approved by the Court prior to the Confirmation Hearing. 25. The Debtors are authorized to take or refrain from taking any action necessary or appropriate to implement the terms of and the relief granted in this Order without seeking further order of the Court. 26. The Debtors are authorized to make non-substantive changes to the Disclosure Statement, Plan, Ballots, Confirmation Hearing Notice, and related documents, with consent from the Creditors' Committee, without further order of the Court, including, without limitation, changes to correct typographical and grammatical errors and to make conforming changes among the Disclosure Statement, the Plan, and any other materials in the Solicitation Package prior to their distribution and to make changes as required to assure that the respective provisions of the official English version have substantially the same meanings as the respective provisions of the official Spanish version thereof. 27. The requirement under Rule 9013-l(b) of the Local Bankruptcy Rules for the Southern District of New York for the filing of a memorandum of law is waived. Dated: New York, New York. September 27, 2004. /s/Allan L. Gropper ---------------------------------------- ALLAN L. GROPPER UNITED STATES BANKRUPTCY JUDGE SUBMITTED BY: 11 SMITH, GAMBRELL & RUSSELL, LLP By: /s/Ronald E. Barab ------------------------------------ Ronald E. Barab (RB4876) Suite 3100, Promenade II 1230 Peachtree Street Atlanta, GA 30309-3592 Tel: (404) 815-3500 Attorneys for the Debtors NO OBJECTION: GREENBERG TRAURIG, LLP By: /s/ Richard S. Miller --------------------------------- Richard S. Miller (RM-2428) Robert Honeywell (RH-7684) 200 Park Avenue New York, New York 10166 (212) 801-9200 Attorneys for the Official Committee of Unsecured Creditors 12 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------- In re AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA F.E.I.N. 52-1439926, Chapter 11 and Case No. 03-11678(ALG) and 03-11679(ALG) AVIANCA, INC. F.E.I.N. 13-1868573, Jointly Administered Debtors. ------------------------------------- NOTICE OF (I) ESTABLISHMENT OF RECORD DATE; (II) HEARING FOR CONFIRMATION OF THE PLAN AND PROCEDURES FOR OBJECTING TO CONFIRMATION OF THE PLAN; AND (III) PROCEDURES AND DEADLINE FOR VOTING ON THE PLAN ---------------------------------------------------- PLEASE TAKE NOTICE that: 1. CONFIRMATION AND SUBSTANTIVE CONSOLIDATION HEARING. A hearing (the "Confirmation Hearing") to consider the confirmation of the Third Modified and Restated Joint Plan of Reorganization, dated September 28, 2004 filed by Aerovias Nacionales de Colombia S.A. Avianca and Avianca, Inc., as debtors and debtors in possession (collectively, the "Debtors") will be held at 10:00 A.M. PREVAILING EASTERN TIME, ON NOVEMBER 16, 2004, before the Honorable Allan L. Gropper, United States Bankruptcy Judge, in Room 617 of the United States Bankruptcy Court for the Southern District of New York, One Bowling Green, New York, New York 10004-1408 (the "Court"). The Confirmation Hearing may be continued from time to time without further notice other than the announcement by the Debtors of the adjourned date(s) at the Confirmation Hearing or any continued hearing, and the Plan may be modified, if necessary, prior to, during, or as a result of the Confirmation Hearing, without further notice to interested parties. The Debtors' motion for substantive consolidation (the "Substantive Consolidation Motion") will also be heard at the same time and date as the Confirmation Hearing, and a pre-trial conference on the Substantive Consolidation Motion and such other matters as the Court may wish to address will be held before the Court at 10:00 A.M. PREVAILING EASTERN TIME ON NOVEMBER 9, 2004. 2. RECORD DATE FOR VOTING PURPOSES. Only creditors who hold claims on September 16, 2004 are entitled to vote on the Plan unless otherwise provided by Court order. 3. VOTING DEADLINE. All votes to accept or reject the Plan must be received by 5:00 P.M. PREVAILING EASTERN TIME ON NOVEMBER 4, 2004 (FOR CLASS 7 AND 10 BALLOTS), AND 5:00 P.M. PREVAILING LOCAL BOGOTA TIME ON NOVEMBER 4, 2004 (FOR CLASS 8 BALLOTS). Any failure to follow the voting instructions included with the Ballot may disqualify your Ballot and your vote. 1 4. PARTIES IN INTEREST NOT ENTITLED TO VOTE. The following creditors and shareholders are not entitled to vote on the Plan: (i) holders of unimpaired claims, (ii) holders of claims or interests who will receive no distribution at all under the Plan, and (iii) holders of claims that are the subject of filed objections. Such holders will receive a Notice of Non-Voting Status rather than a Ballot in their Solicitation Packages. If you have timely filed a proof of claim and disagree with the Debtors' classification of, or objection to, your claim and believe that you should be entitled to vote on the Plan, then you must serve on the Debtors and file with the Court a motion for an order pursuant to Rule 3018(a) of the Federal Rules of Bankruptcy Procedure (a "Rule 3018(a) Motion") temporarily allowing such claim in a different amount or in a different class for purposes of voting to accept or reject the Plan. ALL RULE 3018(a) MOTIONS MUST BE FILED ON OR BEFORE OCTOBER 21, 2004. In accordance with Bankruptcy Rule 3018, as to any creditor filing a Rule 3018(a) Motion, such creditor's Ballot will not be counted unless temporarily allowed by the Court for voting purposes, after notice and a hearing. Creditors may contact Debtors' counsel as set forth below to receive a Ballot for any claim for which a proof of claim and a Rule 3018(a) Motion have been timely filed. Rule 3018(a) Motions that are not timely filed and served in the manner as set forth above shall not be considered. A HEARING ON ALL RULE 3018(a) MOTIONS SHALL BE HELD ON NOVEMBER 9, 2004 AT 10:00 A.M. 5. OBJECTIONS TO CONFIRMATION. Objections, if any, to the confirmation of the Plan must be in writing, conform to the requirements of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the Local Bankruptcy Rules for the Southern District of New York and be filed (a)(i) through the Bankruptcy Court's electronic filing system (in accordance with General Order M-242), which may be accessed (with a password which is available by contacting the Bankruptcy Court's technical assistance at (212) 668-2870, ext. 3522, Monday through Friday, 8:30 a.m. to 5:00 p.m.) through the Internet at the Bankruptcy Court's website at: www.nysb.uscourts.gov, using Netscape Navigator software version 3.0 or higher, and (ii) in portable document format (PDF) using Adobe Exchange software for conversion; or (b) if a party is unable to file electronically, such party shall submit the objection in PDF format on a diskette in an envelope with the case name, case number, type and title of document, document number of the document to which the objection refers, and the file name on the outside of the envelope; or (c) if a party is unable to file electronically or use PDF format, such party shall submit the objection on diskette in either Word, WordPerfect, or DOS text (ASCII) format. An objection filed by a party with no legal representation shall comply with section (b) or (c) as set forth in this paragraph. A hard copy of the objection, marked "Chamber's Copy," whether filed pursuant to section (a), (b) or (c) as set forth in this paragraph, shall be delivered in an unsealed envelope to the Clerk's Office located at Alexander Hamilton Custom House, One Bowling Green, New York, NY 10004-1408, attention: Kathleen Farrell-Willoughby, Clerk of Court, on the same day the objection is filed with the Clerk or, if filed electronically, not later than the next business day after the objection is filed, in either case so AS TO BE RECEIVED NO LATER THAN 5:00 P.M. ON NOVEMBER 4, 2004 prevailing Eastern time (the "Objection Deadline"). The objection shall be served in accordance with General Order M-242 so as to be received no later than the Objection Deadline, upon the following parties: (i) Smith Gambrell & Russell, LLP, 1230 Peachtree Street NE, Suite 3100 Promenade II, Atlanta, Georgia 30309-3592, Attn: Brian P. Hall, Esq.; (ii) Greenberg Traurig, LLP, 200 Park Avenue, Metlife Building, New York, New York 10166, Attn: Richard S. Miller, Esq., counsel for the Committee; (iii) Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019, Attn: Scott K. Charles, counsel for Oceanair Linhas Aereas Ltda ("Oceanair"); and (iv) Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, Attn: Michael P. Kessler, Esq., counsel. for Federacion National de Cafeteros de Colombia ("FNC") and Valores Bavaria, S.A. ("VB"). The Debtors, the Official Committee of Unsecured Creditors, Oceanair, FNC and VB shall file any replies to such objections so as to be received by no later than 5:00 p.m. on November 12, 2004. 2 6. PARTIES WHO WILL NOT BE TREATED AS CREDITORS. Any holder of a claim that (i) is scheduled in the Debtors' schedules of assets and liabilities, statements of financial affairs and schedules of executory contracts and unexpired leases at zero, or in an unknown amount, or as disputed, contingent, or unliquidated, and is not the subject of a timely filed proof of claim or a proof of claim deemed timely filed with the Court pursuant to either the Bankruptcy Code or any order of the Bankruptcy Court or otherwise deemed timely filed under applicable law, or (ii) is not scheduled and is not the subject of a timely filed proof of claim or a proof of claim deemed timely filed with the Court pursuant to either the Bankruptcy Code or any order of the Court or otherwise deemed timely filed under applicable law, shall not be treated as a creditor with respect to such claim for purposes of (a) receiving notices regarding, or distributions under, the Plan, or (b) voting on the Plan. 7. ADDITIONAL INFORMATION. Any party in interest wishing to obtain (i) information about the solicitation procedures or (ii) copies of the Disclosure Statement or the Plan, may view such documents by accessing the Court's Electronic Case Filing System which can be found at www.nysb.uscourts.gov, the official website for the Bankruptcy Court, or may contact the Debtors at the addresses set forth below: CREDITORS LOCATED CREDITORS LOCATED IN OUTSIDE THE REPUBLIC OF COLOMBIA: THE REPUBLIC OF COLOMBIA Smith Gambrell & Russell, LLP, AEROVIAS NACIONALES DE 1230 Peachtree Street NE COLOMBIA S.A. AVIANCA, Suite 3100 Promenade II Avenida Calle 26, No. 92-30, Atlanta, Georgia 30309-3592 Bogota, Colombia, Attn: Virginia Smithson Attn: Angela Maria Clavijo Ph: (404) 815-3500 Ph: 57-1-457-8662 ext. 2412/2727 Dated: New York, New York September 28, 2004 SMITH, GAMBRELL & RUSSELL, LLP Suite 3100, Promenade II 1230 Peachtree Street, N.E. Atlanta, Georgia 30309 (404) 815-3500 and ANDERSON, KILL & OLICK, P.C. 1251 Avenue of the Americas New York, New York 10020 (212) 278-1000 Attorneys for the Debtors 3 GREENBERG TRAURIG September 30, 2004 TO: ALL GENERAL UNSECURED CREDITORS OF AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA, AND AVIANCA, INC. FROM: THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA, AND AVIANCA, INC. We are counsel to the Official Committee of Unsecured Creditors (the "Committee") of Aerovias Nacionales De Colombia S.A. Avianca, and Avianca, Inc. (the "Debtors"), and issue this letter on its behalf to encourage your vote in support of the Joint Plan of Reorganization (the "Plan") filed by the Debtors and attached as Appendix F to the enclosed Disclosure Statement (the "Disclosure Statement"). Enclosed with this letter you have received copies of the Plan, the Disclosure Statement regarding the Plan and a ballot ("Ballot"). The Committee urges each creditor to read the Plan and Disclosure Statement carefully, particularly the sections which describe the proposed treatment of unsecured claims in Classes 7 and 8 of the Plan, the effects of the proposed novation agreement on Colombian unsecured claims (Class 8), and the option for certain unsecured claims to be converted into "convenience" claims in Class 9. THE COMMITTEE HAS VOTED TO SUPPORT CONFIRMATION OF THE PLAN AND RECOMMENDS THAT UNSECURED CREDITORS VOTE THE ENCLOSED BALLOT TO ACCEPT THE PLAN. THE COMMITTEE ALSO URGES ALL COLOMBIAN GENERAL UNSECURED CREDITORS (CLASS 8) TO INDICATE THEIR AGREEMENT TO THE PLAN BY EXECUTING THE NOVATION AGREEMENT CONTAINED IN THE BALLOT. The enclosed Ballot should be completed by you indicating your vote on the Plan and, if you are in Class 8, your acceptance of the Novation Agreement. Please complete and return the Ballot following the procedure described in the ballot instruction sheet and in the Disclosure Statement. If you have any questions, please review the Disclosure Statement and consult your counsel. The Committee has endorsed the Plan as the best available means of maximizing the recovery available to unsecured creditors and encourages you to vote to accept the Plan. Very truly yours, GREENBERG TRAURIG, LLP By: Richard Miller Robert Honeywell Counsel to the Committee Greenberg Traurig, LLP | Attorneys at Law | MetLife Building | 200 Park Avenue | New York | NY 10166 MUST BE ACTUALLY RECEIVED BY 5:00 P.M. (PREVAILING EASTERN TIME) ON NOVEMBER 4, 2004. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------- In re ) ) AEROVIAS NACIONALES DE COLOMBIA S.A. ) CASE NOS.: 03-11678(ALG) AND AVIANCA ) 03-11679(ALG) F.E.I.N. 52-1439926, ) ) JOINTLY ADMINISTERED ) And ) CHAPTER 11 ) AVIANCA, INC. ) F.E.I.N. 13-1868573, ) ) Debtors. ) -----------------------------------------------) CLASS 7 CLAIMS (NON-COLOMBIAN-HELD GENERAL UNSECURED CLAIMS IN EXCESS OF $15,000) NAME AND ADDRESS OF HOLDER: VOTING AMOUNT: $__________ -------------------------- -------------------------- -------------------------- BALLOT FOR (1) ACCEPTING OR REJECTING THE THIRD MODIFIED AND RESTATED JOINT PLAN OF REORGANIZATION (AS HEREAFTER AMENDED, MODIFIED, OR SUPPLEMENTED, THE "PLAN") OF AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA AND ITS SUBSIDIARY, AVIANCA, INC. (INDIVIDUALLY AND COLLECTIVELY "AVIANCA" OR THE "DEBTOR") OR (2) ELECTING TO CONVERT AND REDUCE A CLASS 7 CLAIM TO A CLASS 9 (CONVENIENCE CLASS) CLAIM IN THE AMOUNT OF $15,000, PROVIDED, A HOLDER OF A CLASS 7 CLAIM IN EXCESS OF $50,000 MAY NOT ELECT TO REDUCE SUCH CLASS 7 CLAIM TO A CLASS 9 CLAIM 1. VOTE ON PLAN OR ELECTION TO CONVERT TO CLASS 9. THE UNDERSIGNED HOLDER OF A CLASS 7 CLAIM HEREBY VOTES AS FOLLOWS WITH RESPECT TO THE PLAN OR HEREBY MAKES THE FOLLOWING ELECTION: Please check only one box: ELECTS TO CONVERT TO CLASS 9 ACCEPTS PLAN REJECTS PLAN AND REDUCE CLAIM TO $15,000 ------------ ------------ --------------------------- [ ] [ ] [ ] 23 If you elect to convert your Class 7 Claim to a Class 9 Claim, the Plan leaves unaltered the legal, equitable, and contractual rights to which your Claim, as reduced to $15,000, entitles you. THAT IS, IF YOUR CLAIM IS PAYABLE IN CASH AND IS DUE OR PAST DUE ON THE DISTRIBUTION DATE FOR CLASS 9 CLAIMS, YOU WILL BE ENTITLED TO RECEIVE PAYMENT IN CASH ON THE DISTRIBUTION DATE FOR CLASS 9 CLAIMS OF THE FULL AMOUNT TO WHICH YOU WOULD BE ENTITLED AS THE HOLDER OF A CLAIM IN THE AMOUNT OF $15,000 AGAINST AVIANCA IN THE ABSENCE OF AVIANCA'S CHAPTER 11 CASE. 2. TAX INFORMATION. Under penalty of perjury, Creditor certifies that: A. Creditor's correct U.S. taxpayer identification number is: ( Social Security Number) _________ - __________-__________, (or Employer Identification Number) _______- __________; and B. Please check the appropriate box(es), if any: Creditor is not subject to backup withholding because: [ ] (a) Creditor is exempt from backup withholding; [ ] (b) Creditor has not been notified by the Internal Revenue Service ("IRS") that Creditor is subject to backup withholding as a result of a failure to report all interest or dividends; or [ [ (c) The IRS has notified Claimant that Creditor is no longer subject to backup withholding. 3. CERTIFICATION. By signing this Ballot the undersigned certifies that he/she/it either is (i) a Creditor with a Claim to which this Ballot pertains that is designated in the above referenced Class of Claims pursuant to the Plan or (ii) an authorized signatory of such a Creditor, and has full power and authority: (a) to vote to accept or reject the Plan, if applicable, or (b) to convert and reduce the Creditor's Claim to Class 9 (Convenience Class Claims) in the amount of $15,000 and payable in full, in Cash, on the Distribution Date, if applicable. The undersigned also acknowledges that such vote or conversion and reduction is subject to all the terms and conditions set forth in the Disclosure Statement and in the Plan. A BALLOT THAT IS NOT SIGNED WILL NOT COUNT. Name (Print) ----------------------------- Signature: ----------------------------- Title: ----------------------------- Date Completed: ----------------------------- PLEASE MAKE SURE YOU HAVE PROVIDED ALL INFORMATION REQUESTED ON THIS BALLOT. PLEASE READ AND FOLLOW THE INSTRUCTIONS ATTACHED TO OF THIS BALLOT CAREFULLY. INSTRUCTIONS FOR COMPLETING THE BALLOT The Debtors are soliciting your vote on the Debtors' Third Modified and Restated Joint Plan of Reorganization, dated September 22, 2004 (as hereafter amended, modified, or supplemented, the "Plan") referred to in, and annexed as APPENDIX F to, the Disclosure Statement for Debtors' Third Modified and Restated Joint Plan of Reorganization, dated September 22, 2004 (as hereafter amended, modified, or supplemented, the "Disclosure Statement"). The capitalized terms used but not defined in this Ballot shall have the meanings ascribed to them in the Plan. TO HAVE YOUR VOTE COUNT OR TO MAKE A VALID AND EFFECTIVE ELECTION TO CONVERT YOUR CLASS 7 CLAIM TO A CLASS 9 CLAIM, YOU MUST INDICATE EITHER (1) YOUR ACCEPTANCE OR REJECTION OF THE PLAN OR (2) YOUR ELECTION TO CONVERT AND REDUCE YOUR CLASS 7 CLAIM TO A CLASS 9 CLAIM, AND IN EITHER CASE, YOU MUST SIGN AND RETURN THIS BALLOT IN THE ENCLOSED ENVELOPE (I) BY REGULAR MAIL TO, OR (II) BY HAND DELIVERY, FEDERAL EXPRESS, UPS, OR OTHER COURIER SERVICE TO : AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA, C/O SMITH, GAMBRELL & RUSSELL, LLP, SUITE 3100, 1230 PEACHTREE STREET, ATLANTA, GEORGIA 30309-3592, ATTENTION: GINNY SMITHSON (PHONE: 404-815-3506) (THE "U.S. BALLOTING AGENT"). ANY RETURNED BALLOT THAT IS SIGNED, BUT THAT DOES NOT INDICATE AN ACCEPTANCE OF THE PLAN, A REJECTION OF THE PLAN, OR AN ELECTION TO CONVERT AND REDUCE A CLASS 7 CLAIM TO A CLASS 9 CLAIM WILL BE DEEMED AN ACCEPTANCE OF THE PLAN. BALLOTS MUST BE RECEIVED BY THE U.S. BALLOTING AGENT NOT LATER THEN 5:00 P.M. (PREVAILING EASTERN TIME), ON NOVEMBER 4, 2004 (THE "VOTING DEADLINE"). IF A BALLOT IS RECEIVED AFTER SUCH TIME, IT MAY NOT BE CONSIDERED. BALLOTS BY FACSIMILE, E-MAIL, OR ANY OTHER ELECTRONIC MEANS WILL NOT BE COUNTED. ONLY ORIGINAL BALLOTS WITH ORIGINAL SIGNATURES WILL BE CONSIDERED. It is important that you either vote or make an election to convert and reduce your Class 7 Claim to a Class 9 Claim. The Plan can be confirmed by the Bankruptcy Court and thereby made binding on you if it is accepted by the Holders of at least 2/3 in amount and more than 1/2 in number of Claims actually voting in each voting Class of Claims. The votes of the Claims actually voted in your Class will bind those who do not vote. In the event that the requisite acceptances are not obtained, the Bankruptcy Court may nevertheless confirm the Plan if at least one impaired Class of Claims or Interests has accepted the Plan and the Bankruptcy Court finds that it accords fair and equitable treatment to, and does not discriminate unfairly against, the Classes rejecting it and otherwise satisfies the requirements of Section 1129(b) of Title 11 of the United States Code (the "Bankruptcy Code"). WITH RESPECT TO ALL OF THEIR CLAIMS UNDER THE PLAN, WHETHER OR NOT SUCH CLAIMS ARE ASSERTED AGAINST EITHER OR BOTH DEBTORS, CREDITORS MUST ELECT EITHER (1) TO ACCEPT OR REJECT THE PLAN OR (2) TO CONVERT AND REDUCE THEIR CLASS 7 CLAIMS TO CLASS 9 CLAIMS; CREDITORS MAY ONLY SELECT ONE OF THESE CHOICES; AND CREDITORS MAY NOT SPLIT THEIR VOTE OR SELECTION AMONG SUCH CHOICES. THUS, A BALLOT THAT PARTIALLY ACCEPTS AND PARTIALLY REJECTS THE PLAN IN PRESCRIBED AMOUNTS OR PARTIALLY ELECTS TO CONVERT AND REDUCE CLASS 7 CLAIMS TO CLASS 9 CLAIMS WILL NOT BE CONSIDERED. Your signature is required in order for your Ballot to be considered. If a Claim is held by a partnership, the Ballot should be executed in the name of the partnership by a general partner. If a Claim is held by a corporation, the Ballot should be executed by an authorized officer. If you are signing in a representative capacity, also indicate your title after your signature. If you have any questions, please contact the U.S. Balloting Agent at 404-815-3506. Ballots are being sent to all Holders of allowed impaired Claims entitled to vote on the Plan as of the applicable voting record date. Pursuant to Section 502 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 3018, the Bankruptcy Court may estimate and temporarily allow a Claim for purpose of voting on the Plan upon motion by such Creditor. The Debtors also may seek an order of the Bankruptcy Court, temporarily allowing, for voting purposes only, certain disputed Claims. If a Creditor holding such a Claim or the Debtors avail themselves of this right, allowance for voting purposes does not constitute allowance for purpose of distributions under the Plan. THIS BALLOT IS FOR VOTING PURPOSES ONLY; AND IT DOES NOT CONSTITUTE AND WILL NOT BE DEEMED A PROOF OF CLAIM OR AN ADMISSION BY THE DEBTORS OF THE VALIDITY OF A CLAIM. If your Ballot is damaged or lost you may request a replacement by addressing a written request to the U.S. Balloting Agent at the address listed above or by calling 404-815-3506. Holders submitting multiple Ballots with respect to the same Claim will be deemed to have voted or elected to reduce and convert in the manner indicated on the last Ballot received. IF A CLAIM IS DISPUTED AS OF THE VOTING DEADLINE, THE BALLOT SUBMITTED WITH RESPECT TO SUCH CLAIM WILL NOT BE COUNTED, EXCEPT TO THE EXTENT THE DEBTORS' OBJECTION TO SUCH CLAIM STATES OTHERWISE OR THE BANKRUPTCY COURT ORDERS OTHERWISE UPON THE TIMELY APPLICATION OF THE HOLDER OF SUCH CLAIM IN ACCORDANCE WITH THE BANKRUPTCY COURT'S ORDER ESTABLISHING VOTING PROCEDURES INCLUDED WITH THIS BALLOT. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re } } AEROVIAS NACIONALES DE COLOMBIA S.A. } CASE NOS. 03-11678(ALG} AND 03-11679(ALG} AVIANCA } F.E.I.N. 52-1439926, } } JOINTLY ADMINISTERED } and } } CHAPTER 11 } AVIANCA, INC. } JUDGE ALLAN L. GROPPER F.E.I.N. 13-1868573, } } Debtors. } DISCLOSURE STATEMENT REGARDING THIRD } MODIFIED AND RESTATED JOINT PLAN OF } REORGANIZATION Ronald E. Barab Brian P. Hall SMITH, GAMBRELL & RUSSELL, LLP Suite 3100, Promenade II 1230 Peachtree Street, N.E. Atlanta, Georgia 30309 (404} 815-3500 Howard D. Ressler ANDERSON, KILL & OLICK, P.C. 1251 Avenue of the Americas New York, New York 10020 (212} 278-1000 Attorneys for Aerovias Nacionales de Colombia S.A. Avianca and Avianca, Inc., Debtors and Debtors in Possession September 22, 2004 Atlanta, Georgia GUIDE TO THIS DISCLOSURE STATEMENT AND OTHER SOLICITATION MATERIALS You have received this Disclosure Statement and other Solicitation Materials because Aerovias Nacionales de Colombia S.A. Avianca ("Avianca S.A.") or Avianca, Inc. has identified you as a Creditor of Avianca S.A. or Avianca, Inc. (referred to in this Guide, collectively, as "Avianca," the "Company," or the "Proponents"), or you have filed a proof of claim in the Chapter 11 case of Avianca S.A. or Avianca, Inc. (referred to in this Guide collectively as the "Case") stating that you are a Creditor of the Company and that you are entitled to vote on Avianca's joint plan of reorganization (referred to in this Guide as the "Plan"). The Solicitation Materials included in this package consist of (1) this Disclosure Statement, (2) the Plan (which is annexed as APPENDIX F to this Disclosure Statement), (3) a Ballot, (4) Voting Instructions, which are included on the Ballot, (5) a Bankruptcy Court Notice, and (6) a Letter from the Official Committee of Unsecured Creditors appointed in the Case (referred to in this Guide as the "Committee"). Each of the foregoing is described in more detail below. DISCLOSURE STATEMENT. The Disclosure Statement begins with a Summary, which includes an overview of the Plan, recommendations in favor of the Plan by the Company and the Committee, a general description of the investment transaction on which the Plan is based, and a description of the various classes of claims in the Case and the treatment of Claimholders (i.e., cash, notes or certificates, and other rights to be granted to Claimholders) provided by the Plan. Immediately following the Summary is a Table of Contents for the Disclosure Statement. The Disclosure Statement includes a description of voting procedures, a description of the procedure for obtaining Confirmation of the Plan, a description of the Company, a history of the Case, a summary of the Plan (a full and complete copy of which is annexed as APPENDIX F hereto), a statement of risk factors that you should consider in deciding how to vote on the Plan, a discussion of the transferability of any notes or trust certificates you may receive on account of your Claim, a general discussion of tax consequences of the Plan, the criteria for Confirmation of the Plan, the alternatives to the Plan, and the required acceptance of the Plan by impaired Classes of Claims for Confirmation of the Plan. BALLOT. In order for you to vote to accept or reject the Plan, you must complete and sign the Ballot included in this package. If you are the Holder of a Claim in Class 7 (Non-Colombian-held General Unsecured Claims) or Class 8 (Colombian-held General Unsecured Claims), you may vote to accept or reject the Plan, or, if your Claim is in an amount which exceeds $(USD)15,000 or $(COL)44,319,300, but does not exceed $(USD)50,000 or $(COL)147,730,800, you may elect, by reducing the amount of your Claim to $(USD)15,000 or $(COL)44,319,300, to be treated as the Holder of a Claim in Class 9, whereupon you will, if your Claim entitles you to immediate payment in cash, be entitled to payment in full of your Claim, as so reduced, on the Effective Date or as soon thereafter as reasonably practicable. (The above amounts are based upon the exchange rate in effect on March 21, 2003, the Chapter 11 petition date.) If you are the Holder of a Claim in Class 8, Avianca requests that you also sign the Novation Agreement included on the Ballot and agree to become contractually bound to the provisions of the Plan. ii VOTING INSTRUCTIONS. Detailed instructions for the proper completion and signing of your Ballot and the Novation Agreement included in the Ballot are contained in your Ballot. If you have any questions or need any assistance in completing your Ballot, please contact the Balloting Agent identified on your Ballot. BANKRUPTCY COURT NOTICE. The Notice included in this package sets forth important information, including the following dates: - Date and time of the Confirmation Hearing; - Record date for voting purposes; - Deadline for returning your Ballot; - Deadline for filing a motion with the Bankruptcy Court seeking permission to vote in an estimated amount, if your Claim is disputed or unliquidated; and - Deadline for filing objection to confirmation of the Plan. COMMITTEE LETTER. The letter from Counsel to the Committee included in this package explains the Committee's position in favor of confirmation of the Plan. MOTION FOR SUBSTANTIVE CONSOLIDATION. The Motion for Substantive Consolidation included in this package is Avianca's request to the Bankruptcy Court for an Order providing for the substantive consolidation of the estates of Avianca S.A. and Avianca, Inc. The entry of such an Order is a condition to the Confirmation of the Plan. An explanation of the Company's grounds for, and the effect of, substantive consolidation is set forth in detail in the Motion. HYPOTHETICAL EXAMPLES. Hypothetical examples of payouts to Holders of Class 7 and Class 8 Creditors under the Plan will be included. iii DISCLAIMER THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT AND THE APPENDICES HERETO RELATES TO THE THIRD MODIFIED AND RESTATED JOINT PLAN OF REORGANIZATION DATED SEPTEMBER 22, 2004 (THE "PLAN") OF AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA ("AVIANCA S.A.") AND ITS WHOLLY OWNED, DEBTOR SUBSIDIARY AVIANCA, INC. ("AVIANCA, INC.") (AVIANCA S.A. AND AVIANCA, INC., JOINTLY, ARE THE "PROPONENTS" OF THE PLAN). SUCH INFORMATION IS INCLUDED HEREIN FOR PURPOSES OF SOLICITING ACCEPTANCES OF THE PLAN AND MAY NOT BE RELIED UPON FOR ANY PURPOSE OTHER THAN TO DETERMINE HOW TO VOTE ON THE PLAN. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS CONCERNING AVIANCA S.A., AVIANCA, INC., OR THE SOLICITATION OF ACCEPTANCES OF THE PLAN, OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DISCLOSURE STATEMENT. ALL CREDITORS ARE ADVISED AND ENCOURAGED TO CAREFULLY READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. PLAN SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN (A COPY OF WHICH IS ANNEXED HERETO AS APPENDIX F) AND TO ALL EXHIBITS AND SCHEDULES ANNEXED OR REFERRED TO IN THE PLAN AND/OR IN THIS DISCLOSURE STATEMENT. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT ARE MADE ONLY AS OF THE DATE HEREOF, AND THERE IS NO ASSURANCE THAT THE STATEMENTS CONTAINED HEREIN WILL BE CORRECT AT ANY TIME AFTER THE DATE HEREOF. THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND RULE 3016(c) OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE AND NOT NECESSARILY IN ACCORDANCE WITH FEDERAL OR STATE SECURITIES LAWS, FOREIGN SECURITIES LAWS, OR OTHER LAWS GOVERNING DISCLOSURE OUTSIDE THE CONTEXT OF CHAPTER 11 OF THE BANKRUPTCY CODE. THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE FEDERAL SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR BY ANY STATE SECURITIES AGENCIES, AND NEITHER THE SEC NOR ANY STATE SECURITIES AGENCIES HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREIN. AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT AND THE APPENDICES HERETO ARE NOT INTENDED TO CONSTITUTE OR BE CONSTRUED AS AN ADMISSION OF ANY FACT OR LIABILITY, STIPULATION OR WAIVER, BUT RATHER ARE INTENDED AS STATEMENTS MADE IN SETTLEMENT NEGOTIATIONS. THIS DISCLOSURE STATEMENT IS NOT INTENDED TO BE CONSTRUED TO CONSTITUTE ANY LEGAL ADVICE OR LEGAL OPINION ON THE TAX, SECURITIES, OR OTHER LEGAL EFFECTS OF THE REORGANIZATION AS TO HOLDERS OF CLAIMS AGAINST OR INTERESTS IN AVIANCA S.A AND/OR AVIANCA, INC. iv SUMMARY OF PLAN The following introduction and summary is a general overview only, which is qualified in its entirety by, and should be read in conjunction with, the more detailed discussions, information, and financial statements and notes thereto appearing elsewhere in this Disclosure Statement and in the Plan. All capitalized terms not defined in this Disclosure Statement have the same respective meanings ascribed to such terms in the Plan, a complete and accurate copy of which is annexed hereto as APPENDIX F. All references in this Disclosure Statement to monetary figures not expressly indicating that they are either to United States dollars ["$(USD)"] or to Colombian pesos ["$(COL)"] refer to United States dollars. All appendices, exhibits, and schedules to this Disclosure Statement and/or to the Plan are incorporated herein by reference as fully as if set forth in the text of this Disclosure Statement. A. OVERVIEW AND RECOMMENDATION. After having carefully reviewed the current business operations of Aerovias Nacionales de Colombia S.A. Avianca ("Avianca S.A.") and its subsidiary Avianca, Inc. (collectively, herein sometimes referred to as the "Proponents," the "Debtor," the "Company," or "Avianca"), estimated recoveries in various liquidation scenarios, and prospects as ongoing businesses, each of the Proponents has concluded that the recovery to its stakeholders will be maximized by each of them continuing its operations as a going concern. Each believes that its businesses and assets have significant value that would not be realized in a liquidation, either in whole or in substantial part. According to the liquidation and other analyses prepared by the Proponents with the assistance of their financial advisors, the value of the their combined Estate is considerably greater as going concerns than in a liquidation. Accordingly, the Proponents believe that the Plan: (i) provides the best recoveries possible for the Holders of Claims or Interests, (ii) provides early distributions to Creditors, (iii) preserves the value of the Proponents' business as a going concern, and (iv) preserves the jobs of the Proponents' employees. The Proponents also believe that any alternative to Confirmation of the Plan, such as liquidation or attempts by another party in interest to file a plan, could result in significant delays, litigation and costs, as well as the loss of jobs by the Proponents' employees. Moreover, the Proponents believe that the Creditors will receive greater and earlier recoveries under the Plan than those that would be achieved in liquidation or under an alternative plan. SPECIFICALLY, THE PLAN PROVIDES FOR DISTRIBUTIONS TO THE HOLDERS OF CLAIMS IN ITS TWO CLASSES OF GENERAL UNSECURED CLAIMS - I.E., CLASS 7 (NON-COLOMBIAN-HELD GENERAL UNSECURED CLAIMS) AND CLASS 8 (COLOMBIAN-HELD GENERAL UNSECUERD CLAIMS) - WHICH THE PROPONENTS ESTIMATE WILL HAVE A VALUE OF THIRTY-FIVE AND SEVEN-TENTHS (35 7/10THS ) CENTS [$(USD)0.357] FOR EACH U.S. DOLLAR [$(USD)1.00] OF THEIR ALLOWED CLAIMS, PLUS ADDITIONAL AMOUNTS DEPENDING ON (I) THE AMOUNT, IF ANY, BY WHICH THE COMPANY'S EFFECTIVE DATE CASH BALANCE (AS DEFINED IN THE PLAN) EXCEEDS $(USD)45,000,000 AND (II) THE FINANCIAL PERFORMANCE OF THE COMPANY FOR CALENDAR YEARS 2005 THROUGH 2010. BY CONTRAST, THE PROPONENTS ESTIMATE THAT THE HOLDERS OF CLAIMS IN CLASS 7 AND CLASS 8 WOULD NOT RECEIVE ANY DISTRIBUTION WERE THE COMPANY TO BE LIQUIDATED AND NOT REORGANIZED. v FOR THESE REASONS, THE PROPONENTS STRONGLY RECOMMEND THAT, IF YOU ARE ENTITLED TO VOTE, YOU TIMELY RETURN YOUR BALLOT VOTING TO ACCEPT THE PLAN. The Official Committee of Unsecured Creditors appointed in the Case (the "Committee") supports the Plan and recommends that, if you are entitled to vote, you vote to accept the Plan. Accordingly, the Committee has asked that the Proponents include with this Disclosure Statement the letter from Counsel to the Committee that is included in this package. Neither CAXDAC nor ACDAC currently supports the Plan. B. INVESTMENTS BY EQUITY SPONSORS. 1. Generally. For the Reorganized Debtors to have adequate capital for future operations and to ensure the feasibility of the Plan, the Equity Sponsors have committed to invest the minimum aggregate sum of $63.0 Million in Reorganized Avianca S.A., with the possibility of investing an additional $1.0 Million. The terms of these investments are set forth in Sections 7.4.1 - 7.4.7 of the Plan. See Section III.I hereof - "The Company - The Equity Sponsors." 2. Equity Sponsors. The Equity Sponsors are (i) the Federacion Nacional de Cafeteros de Colombia (the National Coffee Growers Federation of Colombia) ("FNC," the "Coffee Federation," or the "Federation"), a private non-profit legal entity organized under the laws of the Republic of Colombia and (ii) Oceanair Linhas Aereas Ltda. ("Oceanair"), a sociedad limitada (similar to a limited liability company) organized under the laws of Brazil, which is an Affiliate of Synergy Group Corp. ("Synergy"), a corporation organized under the laws of Niue. The Coffee Federation is one of the largest rural non-governmental organizations in the world, representing approximately 560,000 coffee growers in Colombia. It has been an indirect, beneficial shareholder of Avianca since February, 2002. Separately, the Federation is also one of the DIP Lenders under the DIP Financing Facility. Oceanair has been engaged in the airline industry as a regional carrier in Brazil since 2001. With 14 aircraft, Oceanair now serves 32 cities across Brazil with daily flights. Synergy is a well-diversified conglomerate with interests primarily in the oil and gas industry in Brazil, Ecuador, and Colombia, as well as in air carrier operations in Brazil through Oceanair and in Ecuador through VIP S.A. In addition, Synergy has aircraft maintenance operations in Brazil. vi 3. Investments. The Plan provides that the Equity Sponsors, for and on account of two special purpose vehicles (the "SPVs") to be organized by the Equity Sponsors under the laws of the Republic of Colombia, shall make equity and/or Subordinated Debt investments in Avianca in a minimum aggregate amount of $63.0 Million, with the possibility of investing an additional $1.0 Million. The beneficial interests in the SPVs will be owned 25% by the Coffee Federation and 75% by Oceanair; and the SPVs, in turn, will own almost 100% of the equity of Avianca S.A. Such investments will be made in a series of transactions over a variable period of time commencing as of the Effective Date pursuant to the provisions of the Investment Agreement annexed to the Plan as an Exhibit. The length of this time period and what portions of such investments are to be made in the form of equity or Subordinated Debt are both dependant upon the monthly cash requirements of the Company from time to time. See Section V.E.4 below - "Investments." (a) Coffee Federation Contributions. (i) Acquisition and Capitalization of DIP Financing Facility. On the Effective Date, the Coffee Federation will purchase all of the rights and interests of Valores Bavaria S.A. ("Valores Bavaria" or "VB"), a sociedad anonima (similar to a corporation) organized under the laws of the Republic of Colombia, in the DIP Financing Facility for an aggregate purchase amount of $6,500,000; and, as a result thereof, the Federation will be the sole owner and holder of the full $18,500,000 principal amount of the DIP Financing Facility. Contemporaneously therewith, the Coffee Federation shall capitalize the full $18,500,000 in exchange for shares of Ordinary Stock of Avianca S.A. to be issued to the SPVs. The shares of Ordinary Stock will be issued to the SPVs at a price of subscribed, paid-in capital of $(COL)0.01 per share plus a premium capital surplus of $(COL)0.99 per share. (ii) Conversion of Preferred Stock into Ordinary Stock and Transfer of All Outstanding Shares to SPVs. Valores Bavaria and the Coffee Federation are the beneficiaries of two trusts that own the vast majority of the outstanding shares of the Ordinary Stock of Avianca S.A. (both of such trusts, collectively, are herein sometimes called the "Trusts"). See Section III.B.2 below - "Alianza Summa and Liquidation of Aces." All of the issued and outstanding shares of Preferred Stock of Avianca are owned by a Subsidiary of Valores Bavaria, which Valores Bavaria has agreed to cause to convert into shares of Ordinary Stock and to transfer to the SPVs for nominal consideration. See Section III.C.1 below - "Pre-Effective Date Capital Structure - Avianca S.A." Moreover, Valores Bavaria and the Coffee Federation have also agreed to cause the Trusts to vote in favor of such conversion of all of the issued and outstanding shares of Preferred Stock of Avianca S.A. into shares of Ordinary Stock. On the Effective Date, Valores Bavaria and its Affiliates shall transfer to the SPVs all their respective equity interests in Avianca S.A. to the SPVs for nominal consideration. In addition, Valores Bavaria and the Federation have agreed to vii cause the Trusts to transfer to the SPVs all of their respective equity interests in Avianca S.A. to the SPVs for nominal consideration. (b) Oceanair Transactions. (i) Equity Contributions and Subordinated Debt. Pursuant to the terms of the Investment Agreement, Oceanair has committed that it (or one of its Affiliates) will, indirectly through the SPVs, provide $44,500,000 to Avianca S.A. in the form of either equity capital in exchange for shares of Ordinary Stock to be issued to the SPVs or in the form of Subordinated Debt to be evidenced by subordinated promissory notes of Avianca S.A. to be issued to the SPVs. All of such shares of Ordinary Stock that Avianca issues to the SPVs will be issued at a price of subscribed, paid-in capital of $(COL)0.01 per share plus a premium capital surplus of $(COL)0.99 per share. All Subordinated Debt of Avianca, if any, that is issued to the SPVs will be subordinated to the payment in full of all amounts due under the Dollar Notes, Peso Notes, Contingent Payment Rights, and Single Payment Rights. Oceanair's investments will be made over a minimum period of eight (8) months and a maximum period of twenty-two (22) months after the Effective Date. The actual timeframe is dependent upon whether the specified Minimum Cash Balance (as defined in the Investment Agreement) - i.e., in general, $(USD)35 million, converted into Colombian pesos at the time of each calculation - for the Company exceeds the Company's Actual Cash Balance on the last Business Day of the month immediately preceding the month in which each monthly investment is required to be made (herein referred to as the "Minimum Cash Balance Test"). During the period commencing on the Effective Date and ending thirteen (13) months thereafter, Oceanair has committed to make a minimum equity investment in Avianca of $33,500,000 in exchange for shares of Ordinary Stock issued to the SPVs as follows: (i) $9,821,429 on the Effective Date and (ii) the balance in thirteen (13) consecutive, monthly installments of approximately $1,821,429 each. Thereafter, Oceanair has committed to make a minimum monthly investment of at least $1,500,000 until the full $44,500,000 committed investment has been made. Moreover, in addition to the minimum monthly investments, during the entire maximum 22-month investment period, to the extent that the specified Minimum Cash Balance for the Company exceeds the Company's Actual Cash Balance as of the end of the previous month (calculated after giving effect to the minimum monthly investment), Oceanair has committed to invest the difference up to a maximum amount of $4,500,000 per month until the full $44,500,000 committed investment has been made. Oeanair has also stipulated that all of the investments it has committed to make during the first 13-month period after the Effective Date (including all amounts exceeding $33,500,000 minimum commitment for such period) will be in the form of equity capital in exchange for shares of Ordinary Stock to be issued to the SPVs. After the end of such 13-month period, the balance, if any, of Oceanair's committed minimum investment will be in the form of equity or Subordinated Debt, depending upon the results of the Minimum Cash Balance Test. If the Company's Actual Cash Balance as of the end of the previous month equals or exceeds the viii specified Minimum Cash Balance for the Company, then the investment will be in the form of Subordinated Debt. If the specified Minimum Cash Balance for the Company exceeds the Company's Actual Cash Balance as of the end of the previous month, then such investment will be in the form of equity in exchange for shares of Ordinary Stock, to the extent of such difference, and the balance, if any, will be in the form of Subordinated Debt. In addition to the amounts specified above, Oceanair shall, on December 31, 2007, invest in Reorganized Avianca S.A., for its own account, an amount equal to the lesser of $(USD)1,000,000 or one-half (1/2) of any Incremental Compliance Costs (as defined in the Plan) as of such date. The IncrementaL Compliance Costs relate to the costs of implementing the Security Advisor Stipulation (as defined in the Plan) that are in excess of currently budgeted costs for security of access to aircraft. The Security Advisor Stipulation is an agreement that the Company is currently negotiating with the U.S. Department of Justice concerning improving the Company's security of access to its aircraft. See Section VI.W below - "CERTAIN RISK FACTORS TO BE CONSIDERED - Aircraft Access." In exchange therefor, Reorganized Avianca S.A. shall promptly issue to Oceanair a debt instrument in the principal amount of such investment made that is payable (on a junior or pro rata basis, as applicable, with certain, potential deferred debt payments to Class 7 and Class 8 creditors described in Section C(2)(i) below) out of 85% of Avianca's EBITDA (as defined in the Plan) in excess of 110% of Avianca's forecasted EBITDA, or, if insufficient excess EBITDA exists to cover such debt, then on April 30, 2011, such debt will be cancelled. (ii) Letter of Credit. To secure a large majority of Oceanair's obligations timely and fully to make the investments in the Company described in the immediately preceding Section hereof, Oceanair is required, under the terms of the Plan, to furnish to the Company on the Effective Date an irrevocable stand-by letter of credit for the benefit of Reorganized Avianca S.A., in form and substance reasonably acceptable to Avianca and the Committee, issued by Safra Bank or any other bank reasonably acceptable to Avianca and the Committee, in the outstanding amount as of the Effective Date of $(USD)30,500,000, but subject to reduction by the amount of each contribution that the SPVs make to Reorganized Avianca S.A. in accordance with the provisions of Section 7.4.7 b. & c. of the Plan, which letter of credit must provide that drafts may be drawn thereunder, on behalf of Reorganized Avianca S.A., by Reorganized Avianca S.A., by Reorganized Avianca, Inc., by the Coffee Federation, or by the Creditors Representative (the "Letter of Credit"). The Plan defines the "Creditors Representative" as being: (i) prior to the Effective Date, the Committee and (ii) after the Effective Date, the Class 8 Trustee or such other Entity designated on or before the Effective Date by the Committee and reasonably acceptable to the Equity Sponsors and the Debtors or the Reorganized Debtors which is willing, on terms and conditions acceptable to the Committee and the Debtor or the Reorganized Debtor, to be available to make draws, on behalf of Reorganized Avianca S.A., under the Letter of Credit, to review and approve the calculation of the Effective Date Cash Balance and annual EBITDA, and to fulfill for the benefit of Creditors in Class 7 and Class 8 the other specific duties and responsibilities of a Creditors Representative set forth in the Plan Documents and the Investment Agreement. ix (iii) Payment to the Coffee Federation. In recognition of the Coffee Federation's efforts, costs, and expenses in negotiating and structuring the Plan, as well as the strategic importance of maintaining the Coffee Federation as a local Colombian shareholder of Reorganized Avianca S.A., Oceanair will issue to the Coffee Federation a $5,000,000 promissory note that becomes due and payable on the second anniversary of the Effective Date. Such promissory note does not bear interest except if a default occurs in the payment of the principal amount thereof, in which event, interest will be payable from the date of such default at the highest default interest rate permitted under the laws of Colombia until such note is paid in full. (iv) Put-Call. The Coffee Federation has the right to put all of its interests in the SPVs to Oceanair for an aggregate purchase price equal to $23,000,000 adjusted for inflation (as measured by the National Consumer Index of the U.S. Bureau of Labor Statistics) from the Effective Date and as may be further adjusted as described below (the "Minimum Price"); and if the Coffee Federation timely exercises its put right, Oceanair will be obligated to purchase all of the Coffee Federation's interests for the Minimum Price. The put rights of the Coffee Federation are exercisable over time as follows: 65.22% of its interests (the "First Option Interests") may be put to Oceanair during the six-month period commencing on the third anniversary of the Effective Date (the "First Option Period"); an additional 10% of its interests (the "Second Option Interests") may be put to Oceanair during the six-month period commencing on the fifth anniversary of the Effective Date (the "Second Option Period"); and 24.78% of its interests (the "Third Option Interests") may be put to Oceanair during the six-month period commencing on the sixth anniversary of the Effective Date (the "Third Option Period"). Likewise, Oceanair has the right to call all of the interests of the Coffee Federation in the SPVs for the Minimum Price; and if Oceanair timely exercises its call right, the Coffee Federation will be obligated to sell all of its interests for the Minimum Price. The call rights of Oceanair are exercisable over time as follows: the First Option Interests during the First Option Period; the Second Option Interests during the Second Option Period; and the Third Option Interests during the Third Option Period. In the event that Oceanair is required to make an investment in Avianca as described in the last paragraph of Section (B)(3)(b)(i) above, the Minimum Price shall be reduced (and, if already paid, refunded) by the amount of such investment; provided, that the Minimum Price shall subsequently be raised (and, if already paid, supplemented), upon and by the amount of repayment of the debt obligation issued to Oceanair in exchange for such investment which Oceanair is entitled to receive. Any adjustment to the Minimum Price shall be applied to the price of the First Option Interests, the Second Option Interests, and the Third Option Interests in the order in which the options with respect to such interests are actually exercised. C. TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN. 1. Generally. The Plan provides for the substantive consolidation of the Estate of Avianca S.A. and the Estate of Avianca, Inc. See Section V.B below - "The Effects and Appropriateness of x Substantive Consolidation." Under the Plan, Claims against and Interests in the Debtor are divided into Classes. Certain unclassified Claims, including Administrative Claims and Priority Tax Claims, will receive payment in Cash equal to the amount of such Allowed Claim or in installments over time (as permitted by the Bankruptcy Code); provided that Allowed Administrative Claims representing obligations incurred by Avianca in the ordinary course of business or otherwise assumed by Avianca pursuant to the Plan will be paid or performed by Avianca in accordance with the terms and conditions of each agreement relating thereto either (1) on the later of the Effective Date or as soon as practicable after such Claims are Allowed or (2) as agreed with the Holders of such Claims. Holders of Retiree Administrative Claims will continue to receive benefits provided for by the terms and conditions of the Retiree Benefit Plans. The DIP Financing Facility Claims are included as Administrative Claims; and, as agreed by the DIP Lenders, Valores Bavaria and PrimeOther (successor to Inversiones Fenicia) shall transfer to the Coffee Federation, pursuant to Section 7.4.3 of the Plan, their respective interests in the Claim arising from the indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility. On account of and in full satisfaction of the Allowed Claim arising from the principal amount of the indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility, shares of Ordinary Stock of Reorganized Avianca S.A. will be issued to the SPVs as set forth in Section 7.4.6 of the Plan. Unpaid, accrued interest under the DIP Financing Facility will be paid to the Coffee Federation on the Distribution Date. The status of all Allowed Administrative Claims will be in jeopardy in the event that Avianca becomes subject to either a Law 222 proceeding or a Law 550 proceeding in Colombia. See Section VI.T below - "Certain Risk Factors To Be Considered - Liquidation and Reorganization under Colombian Law." All Administrative Claims of Professional Persons incurred after the Confirmation Date will be paid as provided in Section 13.4 of the Plan. All other Claims and Interests are classified separately in various Classes in the Debtor's Chapter 11 Case and will receive the distributions and recoveries described herein. The following table summarizes the classification and treatment of the principal pre-petition Claims and Interests under the Plan and in each case reflects the amount and form of consideration that will be distributed in exchange for and in full satisfaction, settlement, release, and discharge of such Claims and Interests. See Section V.C of this Disclosure Statement - "Classification and Treatment of Claims and Interests."
CLASS DESCRIPTION TREATMENT UNDER THE PLAN ----------------- ------------------------ Class 1 Claims (Priority Claims) Class 1 Claims are Unimpaired. Unless otherwise agreed between the Holder of an Allowed Priority Claim and Avianca, each Holder of an Allowed Priority Claim under Sections 507(a)(3), (4), (5), (6), or (7) of the Bankruptcy Code will receive on the Distribution Date, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, Cash in the full amount of such Allowed Priority Claim
xi Class 2 Claims (CAXDAC Claims) Class 2 Claims are Unimpaired. The Holder of the Class 2 Claims will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 2 Claims entitle the Holder thereof. Class 4 Claims (Aerocivil Claims) Class 4 Claims are Unimpaired. The Holder of the Aerocivil Claims will receive, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, deferred payments of Cash in the full amount of such Claims in accordance with the terms and conditions of the Aerocivil Agreement, the payment of which deferred payments are secured in accordance with the terms and conditions set forth in EXHIBIT 5.1.4 to the Plan. Class 5 has been intentionally omitted. Class 6 Claims (Other Secured Claims) Class 6 Claims are Unimpaired. At Avianca's option, each Holder of an Allowed Class 6 Claim will either (a) retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 6 Claim entitles the Holder thereof or (b) be treated in accordance with Section 1124(2) of the Bankruptcy Code. Class 7 Claims (Non-Colombian-held General Unsecured Claims In Excess of $15,000) Class 7 Claims are Impaired. Each Holder of an Allowed Class 7 Claim will receive, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, on the Distribution Date, (i) its Pro Rata share of the Initial Fixed Payment in the amount of $10,000,000 and (ii) Dollar Notes in a
xii fixed Principal amount equal to its Pro Rata Share of $35,559,000, which notes will also evidence both (a) the Holder's Contingent Payment Right to receive, on each Contingent Payment Date, additional Contingent Principal Amounts, under certain circumstances (as hereinafter described), and (b) the Holder's right to receive, on the Excess Cash Payment Date, its Pro Rata share of the aggregate Excess Cash Payment, if any, provided that such share of the amount by which the aggregate Excess Cash Payment exceeds $1,000,000 will be applied as a prepayment of installments of interest payable under the Dollar Notes in direct order of maturity. Moreover, each Holder of an Allowed Class 7 Claim will receive, on the dates set in accordance with Section 6.3 of the Plan, the property provided for in such Section 6.3 on account of the disallowance or reduction of Disputed Claims. Each of the Dollar Notes requires payment of (I) minimum fixed Principal amounts, together with accrued interest on the unpaid balance thereof from time to time outstanding at the rate of 10% per annum, plus (II) under certain circumstances, depending upon the consolidated, financial performance of Avianca-SAM, additional Contingent Principal Amounts. Pursuant to the terms of Plan, whether or not Avianca will be required to make the Excess Cash Payments depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. Class 8 Claims (Colombian-held General Unsecured Claims In Excess of $(COL)44,319,300 Class 8 Claims are Impaired. Each Holder of an Allowed Class 8 Claim (except for the Holders of the VB Designated Claims) may elect to receive, on account of and in
xiii full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, either (I) (a) on the Distribution Date, its Pro Rata share of the Initial Fixed Payment in the amount of $10,000,000, but payable in Colombian pesos based upon the exchange rate in effect on the Business Day immediately preceding the Effective Date; (b) Class 8 Trust Certificates (or book entries) for a fixed Principal amount equal to its Pro Rata share of $35,559,000, but also payable in Colombian pesos based upon the exchange rate in effect on the Business Day immediately preceding the Effective Date, which certificates/ book entries will also evidence both (i) the Holder's Contingent Payment Right to receive, on each Contingent Payment Date, additional Contingent Principal Amounts, under certain circumstances (as hereinafter described), and (ii) the Holder's right to receive, on the Excess Cash Payment Date, its Pro Rata share of the aggregate Excess Cash Payment, if any, provided that such share of the amount by which the aggregate Excess Cash Payment exceeds $1,000,000 will be applied as a prepayment of installments of interest payable under the Peso Notes in direct order of maturity; and (c) on the dates set in accordance with Section 6.3 of the Plan, the property provided for in such Section 6.3 on account of the disallowance or reduction of Disputed Claims; or (II) a Single Payment Right to receive Colombian pesos in an amount equal to 100% of its Allowed Class 8 Claim, payable on the date that is eight (8) years and six (6) months after the Effective Date. Each of the Peso Notes requires payment of (A) minimum fixed Principal amounts, together with accrued interest on the unpaid balance thereof from time to time outstanding at the rate of 14% per annum, plus (B) under certain circumstances, depending upon the consolidated, financial performance of
xiv Avianca-SAM, additional Contingent Principal Amounts. Pursuant to the terms of Plan, whether or not Avianca will be required to make the Excess Cash Payments depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. As agreed by the Holders of the VB Designated Claims, the Holders of such Claims will not receive or retain any property under the Plan (except for the releases provided pursuant to Sections 11.4 and 11.6 of the Plan) on account of or in exchange for the VB Designated Claims, which will be deemed cancelled and discharged as of the Effective Date. Class 9 Claims (Convenience Class Claims Not Exceeding $(USD)15,000 or $(COL)44,319,300) Class 9 Claims are Unimpaired. Each Holder of an Allowed Class 9 Claim will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 9 Claim entitles the Holder. In the case of each Allowed Class 9 Claim which entitles the Holder thereof to payment of Cash on or before the Effective Date, the Holder of such Allowed Class 9 Claim will receive on the Distribution Date, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Allowed Class 9 Claim, Cash in the full amount to which such Allowed Class 9 Claim entitles the Holder thereof. Class 10 Claims (Intercompany Claims by a Debtor or SAM Against Either Debtor) Class 10 Claims are Impaired. On the Effective Date, at the option of Avianca or the Reorganized Debtor, in connection with the transactions contemplated by the Plan, the Holder of each Allowed Intercompany Claim either (a) will retain unaltered the legal, equitable, and contractual rights to which such Allowed
xv Class 10 Claim, in whole or in part, entitles the Holder thereof, or (b) will not receive or retain under the Plan any property or interest in property on account of such Allowed Class 10 Claim, in whole or in part, in which case the portion of such Allowed Class 10 Claim which is being treated in accordance with this clause (b) will be cancelled and discharged. As agreed by SAM, any Intercompany Claims held by SAM shall be Allowed and treated in accordance with the foregoing clause (a), and payment of such Allowed Class 10 Claim will be subordinated, pursuant to the provisions of the SAM Subordination Agreement, to the payment in full of all Dollar Notes, all Peso Notes and all Single Payment Rights issued pursuant to the provisions of the Plan, and SAM shall authorize the Creditor Representative to exercise any and all rights of SAM in a subsequent Colombian insolvency proceeding of Avianca S.A., pursuant to the provisions of the SAM Power of Attorney. Class 11 Interests (Preferred Stock Interests) Class 11 Interests are Impaired. The Holder of record of the Allowed Class 11 Interests on the Distribution Record Date (as reflected on the register maintained by the Preferred Stock Registrar) will not receive or retain any property under the Plan on account of or in exchange for the shares of its Preferred Stock, which shares, pursuant to the provisions of Section 7.4 of the Plan, will be converted into shares of Ordinary Stock and transferred to the SPVs, and, in consideration of the investment being made by the Equity Sponsors, retained by the SPVs. Class 12 Interests (Ordinary Stock Interests) Class 12 Interests are Impaired. The Holders of record of Allowed Class 12 Interests on the Distribution Record Date (as reflected on the register maintained by the Ordinary Stock Registrar) will not
xvi receive or retain any property under the Plan on account of or in exchange for their shares of Ordinary Stock, which shares will be transferred to the SPVs (except for an insignificant minority thereof) and, in consideration of the investments being made by the Equity Sponsors, retained by the SPVs (or, in the case of the insignificant minority of such shares, by the Holders thereof). In this connection, all of the prepetition Minority Shareholders of Class 12 Interests - i.e., all Holders thereof other than Trust 1, Trust 2, VB, and VB's Affiliates - should be aware that the Equity Sponsors have affirmatively designated that each such Minority Holder will retain the same number of Class 12 Interests as such Minority Holder owns as of the Confirmation Date. However, as a result of the issuance of all of the new shares of Ordinary Stock to be issued to the SPVs in exchange for the equity investments to be made in Avianca S.A. by the Equity Sponsors, the aggregate percentage interest in the equity of Avianca S.A. represented by all of the shares of Ordinary Stock held by such Minority Shareholders will be diluted to approximately one-one hundredth of a percent (0.01%). Class 13 Interests (Avianca, Inc. Stock Interests) Class 13 Interests are Unimpaired. Avianca S.A., the Holder of record of the Allowed Class 13 Interests on the Distribution Record Date, will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 13 Interests entitles the Holder thereof.
2. Class 9 (Convenience Class) Claims. Class 9 consists of each General Unsecured Claim that, but for its placement in Class 9, would be in Class 7 or Class 8, and is either (a) Allowed in an amount that does not exceed $(USD)15,000 or $(COL)44,319,300, (b) a proof of claim for which has been filed, within the xvii applicable period of limitation fixed by the Bankruptcy Court in accordance with Bankruptcy Rule 3003(c)(3) or fixed pursuant to Section 9.2 of the Plan, in an amount which exceeds $(USD)15,000 or $(COL)44,319,300, but does not exceed $(USD)50,000 or $(COL)147,730,800, or (c) a Claim which has been listed in an amount which exceeds $(USD)15,000 or $(COL)44,319,300, but does not exceed $(USD)50,000 or $(COL)147,730,800, by Avianca in its Chapter 11 schedules, as such schedules may be amended from time to time in accordance with Bankruptcy Rule 1009, as liquidated in amount and not disputed or contingent and which, in either case, has been reduced by the Holder thereof to $(USD)15,000 or $(COL)44,319,300. The above U.S. dollar and Colombian peso amounts are based upon the exchange rate in effect on the Petition Date. 3. Distributions to Holders of Allowed Class 7 Claims and of Allowed Class 8 Claims (Except for the Holders of the Designated VB Claims). (a) Initial Fixed Payment, Dollar Notes, Peso Notes, and Class 8 Trust Certificates. (i) Principal Amount, Denomination, Interest, and Payments. Under the terms of the Plan, Holders of Allowed Class 8 Claims may elect to receive Single Payment Rights, which are more fully described below. All other Holders of Allowed Class 7 and Class 8 Claims (except for the Holders of the Designated VB Claims) will receive their respective Pro Rata share of (i) the Initial Fixed Payment in the amount of $(USD)10,000,000 and (ii) either Dollar Notes, in the case of Holders of Allowed Class 7 Claims, issued through the Dollar Notes Indenture Trustee or Class 8 Trust Certificates (or book entries thereof), in the case of Holders of Allowed Class 8 Claims, issued (or made) by the Class 8 Trustee evidencing beneficial interests in the Class 8 Trust that will hold the Peso Note issued for all Allowed Class 8 Claims as of the Distribution Date and also have the right to receive all payments in respect of the Peso Note placed in the applicable Disputed Claims Reserve, in the case of Holders of Allowed Class 8 Claims, in a specified minimum fixed Principal amount equal to the Holder's Pro Rata share of $(USD)35,559,000. The Dollar Notes will be issued only in denominations of $(USD)1,000 or an integral multiple thereof. The specified amount of the Initial Fixed Payment and the specified fixed Principal amount of the Class 8 Trust Certificates (or book entries) that Holders of Allowed Class 8 Claims will receive will be based upon the exchange rate in effect on the Business Day immediately preceding the Effective Date. Both the Dollar Notes and the Peso Notes will be guarantied by Reorganized Avianca, Inc. The specified minimum fixed Principal amount of Dollar Notes will bear interest at the rate of 10% per annum, and the specified minimum fixed Principal amount of the Peso Notes will bear interest at the rate of 14% per annum. This differential in interest rates is necessary so that the Dollar Notes and the Class 8 Trust Certificates will, as nearly as practical, have the same net present value. Based upon projections by the Central Bank of Colombia and private studies, the Colombian peso is forecasted to continue to devaluate, on average, at a rate of 4.0% per annum against the United States Dollar over the foreseeable future. The specified minimum fixed Principal amount of the Dollar Notes and of the Peso Notes will be paid in eight (8) semi-annual installments, together with interest on the xvii outstanding and unpaid principal amount thereof from time to time outstanding, in accordance with the following schedule:
FIXED AMOUNT PERCENTAGE OF SPECIFIED FIXED PAYMENT DATE PRINCIPAL AMOUNT ------------ ---------------- June 30, 2005 6.7% December 31, 2005 9.5% June 30, 2006 10.0% December 31, 2006 17.5% June 30, 2007 11.3% December 31, 2007 18.8% June 30, 2008 12.8% December 31, 2008 13.4% ---- 100%
provided, that (a) Principal and interest otherwise due on December 31, 2007 shall be deferred in an amount equal to the lesser of (i) $1,000,000.000, and (ii) one half of any Incremental Compliance Costs (as defined in the Plan) as of such date (such lesser amount, the "First Compliance Contribution"), and (b) Principal and interest otherwise due on December 31, 2008 shall be deferred in an amount equal to the amount, if any, by which the lesser of $2,000,000.000 or one half of any Incremental Compliance Costs as of such date exceeds the First Compliance Contribution (such lesser amount, the "Second Compliance Contribution"). The Incremental Compliance Costs relate to the costs of implementing the Security Advisor Stipulation (as defined in the Plan) that are in excess of currently budgeted costs for security of access to aircraft. The Security Advisor Stipulation is an agreement that the Company is currently negotiating with the U.S. Department of Justice concerning improving the Company's security of access to its aircraft. See Section VI.W below - "CERTAIN RISK FACTORS TO BE CONSIDERED - Aircraft Access." The amounts so deferred will not accrue interest or will bear interest at the legally required minimum, will in no manner affect the fixed Principal and interest payments otherwise due on subsequent dates, and will be subsequently payable up to the amounts deferred in accordance with the following schedule: April 30, 2008 - an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $71,602,255 (i.e. 110% of the forecasted EBITDA); April 30, 2009 - (A) first, an amount equal to 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $68,475,255 (i.e. 110% of the forecasted EBITDA), to the extent of the Second Compliance Contribution, and (B) second, an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $68,475,255 (i.e. 110% of the forecasted EBITDA), to the extent such excess EBITDA is not applied in accordance with the foregoing clause (A); April 30, 2010 - (A) first, an amount equal to 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $65,241,127 (i.e. 110% of the forecasted EBITDA), to the extent of the unpaid portion of the Second Compliance Contribution, and (B) second, an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $65,241,127 xix (i.e. 110% of the forecasted EBITDA), to the extent such excess EBITDA is not applied in accordance with the foregoing clause (A); and April 30, 2011 - (A) first, an amount equal to 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $61,896,616 (i.e. 110% of the forecasted EBITDA), to the extent of the unpaid portion of the Second Compliance Contribution, and (B) second, an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $61,896,616 (i.e. 110% of the forecasted EBITDA), to the extent such excess EBITDA is not applied in accordance with the foregoing clause (A); provided, that in the event that the amounts specified in such schedule are inadequate to repay the deferred amounts, Avianca's obligation on the unpaid balance of the deferred amounts shall be cancelled on April 30, 2011. Based upon Avianca's best estimate of the aggregate amount of all Allowed Class 7 Claims and all Allowed Class 8 Claims, the net present value of the Initial Fixed Payment, the Dollar Notes and the Peso Notes (exclusive of any Excess Cash Payment and of any Contingent Principal Amount) is approximately 35.7% of the aggregate amount of such Allowed Claims. (ii) Excess Cash Payment. The Dollar Notes and Peso Notes also evidence the right of the Holder thereof to receive, on the Excess Cash Payment Date, its Pro Rata share of the aggregate Excess Cash Payment, if any, provided that such share of the amount by which the aggregate Excess Cash Payment exceeds $1,000,000 will be applied as a prepayment of the installments of interest due and payable under the Dollar Notes and the Peso Notes in the direct order of their maturity. Whether or not Avianca will be required to make the Excess Cash Payments depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. (iii) Contingent Payment Rights. In addition, the Dollar Notes and the Peso Notes evidence the Contingent Payment Right of the Holder thereof to receive, on each Contingent Payment Date, additional Contingent Principal Amounts, under certain circumstances. Whether or not Avianca must pay the additional Contingent Principal Amounts is linked to the annual consolidated financial results of operations of Avianca-SAM for each fiscal year ending December 31, 2005 through December 31, 2010. The aggregate Contingent Principal Amounts, if any, to be distributed, on a Pro Rata basis, to all Holders of all Allowed Class 7 and Class 8 Claims on each of the Contingent Payment Dates is the amount, if any, by which 15% of the consolidated "EBITDA" (as defined in the Plan) of the Reorganized Debtors and SAM for the calendar year ending on December 31 immediately prior to each of the Contingent Payment Dates exceeds the total specified "Fixed Payment Amount" for such prior year ended as of such December 31 set forth in the schedule below. The Contingent Payment Dates are April 30 of 2006 - 2011. xx
CALENDAR YEAR SPECIFIED TOTAL ENDED DECEMBER 31 FIXED PAYMENT AMOUNT ------------------ -------------------- 2005 $10,000,000 2006 $12,500,000 2007 $12,500,000 2008 $10,000,000 2009 $ 0 2110 $ 0
(b) Single Payment Rights. Under the Plan, any Holder of an Allowed Class 8 Claim [Colombian-held General Unsecured Claims In Excess of $(COL)44,319,300] may elect to receive a "Single Payment Right" instead of both its Pro Rata share of the Initial Fixed Payment in the amount of $10,000,000 and a Class 8 Trust Certificate (or book entry thereof) evidencing its beneficial ownership of Peso Notes in a fixed Principal amount equal to its Pro Rata share of $35,559,000, as well as evidencing its right to a Pro Rata share of the Excess Cash Payment, if any, and its Contingent Payment Right to receive additional Contingent Principal Amounts under certain circumstances. The Plan defines "Single Payment Rights" as the right to receive from Avianca S.A. Colombian pesos in an amount equal to 100% of its Allowed Class 8 Claim, payable on the date that is eight (8) years and six (6) months after the Effective Date. Holders of Allowed Class 8 Claims who fail to make an effective election to receive Single Payment Rights will receive Peso Notes and Contingent Payment Rights. The Single Payment Rights have been financially designed, taking into account forecasted inflation and currency devaluations, to have, as nearly as possible, the same current net present value as the sum of (i) a Pro Rata share of the Initial Fixed Payment and (ii) the net present value of either a Dollar Note or a Peso Note in a Principal Amount equal to a Pro Rata share of $35,559,000 (exclusive of any Excess Cash Payment and of any Contingent Principal Amount). However, no assurance can be given that the actual amounts of future inflation and/or future currency devaluations will coincide with such forecasts. 4. Enforcement of the Plan against Holders of Claims outside the United States. Avianca intends that the Reorganized Debtor will, if the Plan is confirmed and becomes effective, treat all of its Creditors, whether located inside or outside the United States, in accordance with the provisions of the Plan, as summarized above, and to enforce the provisions of the Plan in accordance with the terms thereof and of the Confirmation Order. Nevertheless, Avianca is unaware of any precedent for a Colombian company reorganizing solely under the U.S. Bankruptcy Code and recognizes that there can be no certainty respecting the legal effect of the Plan or the Confirmation Order on Creditors located outside the United States, although Avianca is confident that the Plan will be enforceable against Creditors in Colombia who sign Novation Agreements as discussed below in Section VI.E below -- "CERTAIN RISK FACTORS TO BE CONSIDERED, Class 8 Claims and Laws 550 of 1999 and 222 of 1995." xxi D. CLAIMS ESTIMATES. On August 14, 2003, the Bankruptcy Court entered the Bar Date Order (Docket No. 369) approving the form and manner of the bar date notice, which was attached as an exhibit to the Bar Date Order (the "Bar Date Notice"). Pursuant to the Bar Date Order and the Bar Date Notice, the general Bar Date for filing proofs of claim in these bankruptcy Cases was October 15, 2003. In addition to serving copies of the Bar Date Notice on all scheduled creditors, employees, and other potential creditors, the Debtor published the Bar Date Notice in The Wall Street Journal (national, Latin American, European and Asian editions). Donlin, Recano & Company, Inc., Avianca's claims agent (the "Claims Agent") received 890 timely filed proofs of claim totaling approximately $973.8 Million and 43 proofs of claim filed after the Bar Date totaling approximately $5.7 Million. The Proponents believe that many of the timely filed proofs of claim are invalid, duplicative, or otherwise grossly overstated in amount, and are in the process of pursuing objections to many of the proofs of claim. Pursuant to the Bar Date Notice and the Bar Date Order, and consistent with 11 U.S.C. Section 502 (b) (9), any proofs of claim filed after the Bar Date are disallowed as untimely unless and until such proofs of claim are deemed timely filed by the Bankruptcy Court after notice and hearing. In addition to the proofs of claim that have been timely filed, a proof of claim is deemed, pursuant to section 1111(a) of the Bankruptcy Code, filed for any Claim that appears in the schedules filed by Avianca under section 521(1) of the Bankruptcy Code, except a Claim that is scheduled as disputed, contingent, or unliquidated. Such deemed filed Claims, excluding those as to which a proof of claim was also filed by a Creditor, totaled approximately $416,550,972. Moreover, numerous Claims were asserted by various alleged creditors in unliquidated amounts, and other Claims are held by parties to unexpired leases and "Executory Contracts" (as hereinafter defined) for which the time to file proofs of claims has not yet expired. As used herein, "Executory Contract" means a contract under which the obligations of both the debtor and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other. The Proponents believe that certain claims that have been asserted are without merit and intend to object to all such Claims. On August 26, 2004, Avianca filed its First Omnibus Objection to Certain Duplicative Claims (the "First Omnibus Objection") (Docket No. 887). There can be no assurance that the Debtor will be successful in contesting any of such Claims. The Proponents estimate that at the conclusion of the Claims resolution process the aggregate amount of Allowed Class 1 Claims (Priority Claims) will total approximately $3.0 Million. The United States of America (the "Government") and its agencies, including but not limited to the United States Customs Service, the United States Department of Agriculture, and the Department of Homeland Security (formerly, the Department of Justice - Immigration and Naturalization Service), assert that the Debtors currently hold funds in the amount of $582,944.00 that belong to the Government and are not property of the Debtors' Estate available for distribution to Creditors. The Debtors dispute the Government's allegations as to whether the funds are property of the Debtors' Estate and have or may assert objections to the amount of the Government's Claims. The Debtors expect to resolve the issue of whether the funds are property of the Estate prior to the hearing on Confirmation of the Debtors' Plan of Reorganization. xxii On August 23, 2004, Avianca received a copy of a letter from the Minister of Social Protection in Colombia addressed to the Bankruptcy Court regarding Claims by the Instituto de Seguros Sociales (the "ISS"), which is similar to the U.S. Social Security Administration, in the amount of $(USD)20,000,000 related to pension obligations for current and former employees. In this letter, the ISS requests that Avianca either (i) establish an escrow, (ii) guaranty the Claims through an "endorsement by a bank," or (iii) procure a performance bond issued by a Colombian insurance company. ISS further states that failure to provide one of the foregoing will result in the ISS demanding payment in full of its asserted $(USD)20,000,000 in Claims. Avianca believes that the Claims referred to in the ISS letter are provided for in the Plan as the "VB Liabilities" and, therefore, the pensions comprising the Claims asserted by the ISS in this letter are adequately provided for in the Plan. In addition, the Proponents estimate that at the conclusion of the Claims resolution process, the aggregate amount of Allowed Class 2 Claims (CAXDAC Claims) will total approximately $144.8 Million, the aggregate amount of Allowed Class 3 Claims (General Pension Claims) will total approximately $21.5 Million, and the aggregate amount of Allowed Class 4 Claims (Aerocivil Claims) will total approximately $3.8 Million. The Proponents also believe that the prepetition debt owed on account of the indebtedness evidenced by the Master Trust Notes in the aggregate amount of approximately $20.5 Million will be discharged and eliminated as the result of the settlement described in Section IV.D.16 below, the consummation of which is a condition to the confirmation of the Plan. See Section IV.D.16 below -- "THE CHAPTER 11 CASE, Significant Proceedings in the Bankruptcy Case, The Master Trust Notes Litigation with BNY," and Section V.G below --"SUMMARY OF THE REORGANIZATION PLAN, Conditions Precedent to Confirmation and Effective Date." Moreover, the Proponents estimate that at the conclusion of the Claims resolution process, the aggregate amount of Allowed Class 6 Claims (Other Secured Claims) will total approximately $101.3 Million, the aggregate amount of Allowed Class 7 Claims (Non-Colombian-held General Unsecured Claims) will total approximately $102.5 Million, and the aggregate amount of Allowed Class 8 Claims (Colombian-held General Unsecured Claims) will total approximately $38.5 Million. As conditions precedent to the confirmation of the Plan, unless waived by the Proponents, the Confirmation Order must include the following findings with respect to the Debtor's estimates of the amount of (i) Administrative Claims, (ii) Allowed Priority Claims, and (iii) Allowed Class 9 (Convenience Class) Claims: 1. Administrative Claims. The Confirmation Order must include a finding that the Debtor's estimate of the aggregate amount of Administrative Claims, excluding Claims the Holders of which have then agreed to accept treatment other than payment in Cash in full on the Distribution Date and excluding such Claims representing obligations incurred by Avianca in the ordinary course of business, is reasonable and is not in excess of $(USD)12,800,000. Avianca's current best estimate of the aggregate amount of these Claims is approximately $(USD)12,500,000. xxiii 2. Allowed Priority Claims. The Confirmation Order must include a finding that the Debtor's estimate of the aggregate amount of Allowed Priority Claims is reasonable and is not in excess of $(USD)4,000,000. Avianca's current best estimate of the aggregate amount of these Claims is approximately $(USD)3,000,000. 3. Allowed Class 9 (Convenience Class) Claims. The Confirmation Order must include a finding that the Debtor's estimate of the aggregate amount of Allowed Class 9 Claims is reasonable and is not in excess of $(USD)4,500,000. Avianca's current best estimate of the aggregate amount of these Claims is approximately $(USD)2,500,000. There can be no assurance that the Proponents will be able to achieve the significant reductions in Claims set forth above. Moreover, additional Claims may be filed or identified during the Claims resolution process that may materially affect the foregoing Claims estimates. THE PROPONENTS BELIEVE THAT THE PLAN PROVIDES THE BEST RECOVERIES POSSIBLE FOR THE HOLDERS OF CLAIMS AGAINST AND INTERESTS IN EACH OF THEM AND, THUS, STRONGLY RECOMMEND THAT YOU VOTE TO ACCEPT THE PLAN. xxiv TABLE OF CONTENTS
PAGE I. INTRODUCTION ................................................................................ 1 II. THE BANKRUPTCY PLAN VOTING INSTRUCTIONS AND PROCEDURES ..................................... 2 A. Definitions and Appendices ........................................................... 2 B. Notice to Holders of Claims and Interests ............................................. 2 C. Solicitation Package .................................................................. 3 D. General Voting Procedures, Ballots and Voting Deadline ................................ 3 E. Questions About Voting Procedures ..................................................... 4 F. Confirmation Hearing and Deadline for Objections to Confirmation ...................... 5 III. THE COMPANY ............................................................................... 6 A. Introduction .......................................................................... 6 B. Description of Airline Industry/ Avianca's Position in the Marketplace ................ 7 C. Pre-Effective Date Capital Structure .................................................. 8 D. Pre-Effective Date Management ......................................................... 9 E. Operations ............................................................................ 13 F. Litigation Matters .................................................................... 24 G. Recent Financial Results .............................................................. 30 H. Efforts To Identify Potential Investors And To Attract Equity Sponsors ................ 30 I. The Equity Sponsors ................................................................... 31 J. Post-Effective Date Management of Reorganized Debtors ................................. 33 IV. THE CHAPTER 11 CASE ........................................................................ 34 A. Events Leading Up to the Chapter 11 Case .............................................. 34 B. Determination To Seek Relief Under Chapter 11 ......................................... 36 C. Continuation of Business and Stay of Litigation and Other Collection Actions .......... 37 D. Significant Proceedings in the Bankruptcy Case ........................................ 38 E. Significant Actions by Avianca During the Bankruptcy Case ............................. 49 V. SUMMARY OF THE REORGANIZATION PLAN .......................................................... 52 A. Overall Structure of the Plan ......................................................... 52 B. Effects And Appropriateness of Substantive Consolidation .............................. 53 C. Classification and Treatment of Claims and Interests .................................. 55 D. Procedures For Resolving Disputed Claims .............................................. 74 E. Means of Plan Implementation .......................................................... 78 F. Executory Contacts and Unexpired Leases ............................................... 90 G. Conditions Precedent to Confirmation and Effective Date ............................... 91 H. Effects of Confirmation and Effectiveness of the Plan ................................ 94 I. Retention of Jurisdiction ............................................................. 97 J. Miscellaneous Matters ................................................................. 98
xxv VI. CERTAIN RISK FACTORS TO BE CONSIDERED ...................................................... 101 A. General Considerations ................................................................ 101 B. Certain Bankruptcy Considerations ..................................................... 101 C. Inherent Uncertainty of Financial Projections ......................................... 101 D. Competition Risks ..................................................................... 102 E. Class 8 Claims and Laws 550 of 1999 and 222 of 1995 ................................... 104 F. Impact of Interest Rates .............................................................. 104 G. Access to Financing ................................................................... 105 H. Claims Estimations .................................................................... 105 I. Airline Industry ...................................................................... 105 J. Oil Prices ............................................................................ 105 K. Change of Control and Colombian and International Regulation of Airline Industry ...... 106 L. Price Discounting ..................................................................... 108 M. Labor Disputes ........................................................................ 108 N. Preservation of Market Position ....................................................... 109 O. High Leverage ......................................................................... 109 P. SAM's Operations ...................................................................... 109 Q. Liquidation of Aces ................................................................... 109 R. Lack of Market for Plan Securities .................................................... 110 S. Tax Planning .......................................................................... 110 T. Reorganization and Liquidation in Bankruptcy under Colombian Law ...................... 110 U. Enforceability of Foreign Judgments in Colombia ....................................... 116 V. Dilution Resulting From Investments To Be Made by Equity Sponsors ..................... 117 W. Aircraft Access ....................................................................... 118 VII. RESALE OF SECURITIES RECEIVED UNDER THE PLAN .............................................. 119 A. Registration of Plan Securities in the United States .................................. 119 B. Subsequent Transfers of Plan Securities in the United States ......................... 119 C. Registration of Plan Securities in the Republic of Colombia ........................... 120 D. Subsequent Transfers of Plan Securities in the Republic of Colombia ................... 120 E. Exemption From Stamp Taxes ............................................................ 121 VIII. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES .................................... 121 A. United States Federal Income Tax Consequences to Avianca, Inc. and Avianca S.A ........ 122 B. United States Federal Income Tax Consequences to Holders of Claims or Interests ...... 125 C. Non-United States Holders ............................................................. 132 D. Importance of Obtaining Professional Tax Assistance ................................... 132 IX. SOME TAX CONSEQUENCES IN COLOMBIA ......................................................... 132 A. Nature of the Reorganization Plan ..................................................... 132 B. Juridical Effects of the Agreement With Respect to Restructured Debt .................. 133
xxvi C. Tax Effects for the Agreement ......................................................... 133 D. Importance of Obtaining Professional Tax Assistance ................................... 138 X. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS TEST ......................................... 139 A. Feasibility of the Plan ............................................................... 139 B. Acceptance of the Plan ................................................................ 140 C. Best Interests Test ................................................................... 140 D. Application of the Best Interests Test to the Liquidation Analysis and the Valuation of the Reorganized Debtors ............................................................ 141 XI. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN .................................. 143 A. Continuation of the Bankruptcy Case ................................................... 143 B. Alternative Plans of Reorganization ................................................... 144 C. Liquidation Under Chapter 7 or Chapter 11 ............................................. 145 D. Liquidation in Bankruptcy Proceedings Under Colombian Law ............................. 146 XII. VOTING REQUIREMENTS ....................................................................... 148 A. Generally ............................................................................. 148 B. Parties in Interest Entitled to Vote .................................................. 149 C. Acceptance or Rejection of the Plan ................................................... 150 XIII. CONCLUSION ............................................................................... 155 A. Hearing on and Objections to Confirmation ............................................. 155 B. Recommendation ........................................................................ 155
APPENDICES: APPENDIX A - Liquidation Analysis APPENDIX B - Business Plan and Pro Forma Financial Projections APPENDIX C - Recent Financial Results APPENDIX D - Historical Financial Statements APPENDIX E - Motion for Substantive Consolidation APPENDIX F - Third Modified and Restated Joint Plan of Reorganization of Aerovias Nacionales De Colombia S.A. Avianca And Its Affiliated Debtor And Debtor-In-Possession, Avianca, Inc. xxvii DISCLOSURE STATEMENT REGARDING THIRD MODIFIED AND RESTATED JOINT PLAN OF REORGANIZATION OF AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA AND ITS SUBSIDIARY, AVIANCA, INC. I. INTRODUCTION. Aerovias Nacionales de Colombia S.A. Avianca ("Avianca S.A.") and Avianca, Inc. ("Avianca, Inc.") (Avianca S.A. and Avianca, Inc., collectively, the "Debtor," "Avianca," or the "Proponents") submit this disclosure statement (the "Disclosure Statement") pursuant to section 1125 of the United States Bankruptcy Code (the "Bankruptcy Code"), for use in the solicitation of votes on their Third Modified and Restated Joint Plan of Reorganization dated September 22, 2004 (the "Plan"), which was filed with the United States Bankruptcy Court for the Southern District of New York (the "Court" or the "Bankruptcy Court") in Chapter 11 case numbers 03-11678 and 03-11679, commenced on March 21, 2003 (the "Petition Date") by Avianca, S.A. and Avianca, Inc., respectively, which cases are being jointly administered under case number 03-11678 (the jointly administered cases, collectively, the "Case"). A complete and accurate copy of the Plan is attached hereto as APPENDIX F. The Plan provides for the substantive consolidation of the Estate of Avianca S.A. and the Estate of Avianca, Inc. See Section V.B below - "The Effects and Appropriateness of Substantive Consolidation." This Disclosure Statement sets forth certain information regarding the Debtor's pre-petition history, significant events that have occurred during the Chapter 11 Case, and the anticipated organization, operations, and financing of Reorganized Avianca S.A. and Reorganized Avianca, Inc. (collectively, some times referred to herein as the "Reorganized Debtors"). This Disclosure Statement also describes the terms and provisions of the Plan, including certain alternatives to the Plan, certain effects of confirmation of the Plan, certain risk factors associated with securities to be issued under the Plan, and the manner in which distributions will be made under the Plan. In addition, this Disclosure Statement discusses the confirmation process and the voting procedures that Holders of Claims and Interests must follow for their votes to be counted. FOR A DESCRIPTION OF THE PLAN AND VARIOUS RISK AND OTHER FACTORS PERTAINING TO THE PLAN AS IT RELATES TO HOLDERS OF CLAIMS AGAINST AND INTERESTS IN AVIANCA S.A. OR AVIANCA, INC., SEE ARTICLE V HEREOF - "SUMMARY OF THE REORGANIZATION PLAN" AND ARTICLE VI HEREOF - "CERTAIN RISK FACTORS TO BE CONSIDERED." THIS DISCLOSURE STATEMENT CONTAINS SUMMARIES OF CERTAIN PROVISIONS OF THE PLAN, CERTAIN PERTINENT STATUTORY PROVISIONS, CERTAIN DOCUMENTS RELATED TO THE PLAN, CERTAIN EVENTS IN THE CHAPTER 11 CASE, AND CERTAIN FINANCIAL INFORMATION. ALTHOUGH THE PROPONENTS BELIEVE THAT SUCH SUMMARIES ARE FAIR AND ACCURATE, SUCH SUMMARIES ARE QUALIFIED TO THE EXTENT THAT THEY DO NOT SET FORTH THE ENTIRE TEXT OF SUCH DOCUMENTS OR STATUTORY PROVISIONS. EXCEPT WHERE OTHERWISE SPECIFICALLY NOTED HEREIN, FACTUAL INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN PROVIDED BY THE PROPONENTS' MANAGEMENT AND IS ACCURATE TO THE BEST OF ITS KNOWLEDGE. 1 II. PLAN VOTING INSTRUCTIONS AND PROCEDURES. A. DEFINITIONS AND APPENDICES. Except as otherwise provided herein, capitalized terms not defined in this Disclosure Statement have the same respective meanings ascribed to them in the Plan. In addition, all references in this Disclosure Statement to monetary figures not expressly indicating that they are to either United States dollars ["(USD)$"] or Colombian pesos ["(COL)$"] refer to United States dollars. All appendices, exhibits, and schedules to this Disclosure Statement and/or to the Plan are incorporated herein by reference as fully as if set forth in the text of this Disclosure Statement. B. NOTICE TO HOLDERS OF CLAIMS AND INTERESTS. This Disclosure Statement is being transmitted to certain Holders for the purpose of soliciting votes on the Plan and to others for informational purposes. The purpose of this Disclosure Statement is to provide adequate information to enable the Holders of Claims against and Interests in Avianca S.A. or Avianca, Inc. to make a reasonably informed decision with respect to the Plan prior to exercising the right to vote to accept or reject the Plan. By order entered on September 28, 2004, the Bankruptcy Court approved this Disclosure Statement as containing information of a kind and in sufficient and adequate detail to enable Holders that are entitled to vote on the Plan to make an informed judgment with respect to acceptance or rejection of the Plan. THE BANKRUPTCY COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN OR AN ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT. ALL HOLDERS ARE ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE APPENDICES HERETO CAREFULLY AND IN THEIR ENTIRETY BEFORE DECIDING TO VOTE EITHER TO ACCEPT OR TO REJECT THE PLAN. THIS DISCLOSURE STATEMENT CONTAINS IMPORTANT INFORMATION ABOUT THE PLAN, CONSIDERATIONS PERTINENT TO ACCEPTANCE OR REJECTION OF THE PLAN, AND DEVELOPMENTS CONCERNING THE CHAPTER 11 CASE. THIS DISCLOSURE STATEMENT AND THE OTHER MATERIALS INCLUDED IN THE SOLICITATION PACKAGE ARE THE ONLY DOCUMENTS AUTHORIZED BY THE BANKRUPTCY COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ON THE PLAN. NO SOLICITATION OF VOTES MAY BE MADE EXCEPT AFTER DISTRIBUTION OF THIS DISCLOSURE STATEMENT, AND NO PERSON HAS BEEN AUTHORIZED TO DISTRIBUTE ANY INFORMATION CONCERNING AVIANCA S.A., AVIANCA, INC., OR THE PLAN OTHER THAN THE INFORMATION CONTAINED HEREIN. CERTAIN OF THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT IS BY ITS NATURE FORWARD-LOOKING AND CONTAINS ESTIMATES, ASSUMPTIONS, AND PROJECTIONS THAT MAY BE MATERIALLY DIFFERENT FROM ACTUAL, FUTURE RESULTS. Except with respect to the projections set forth in APPENDIX B 2 attached hereto (the "Projections") and except as otherwise specifically and expressly stated herein, this Disclosure Statement does not reflect any events that may occur subsequent to the date hereof and that may have a material impact on the information contained in this Disclosure Statement. None of Avianca S.A., Avianca, Inc., Reorganized Avianca S.A., or Reorganized Avianca, Inc. intends to update the Projections for the purposes hereof; thus, the Projections will not reflect the impact of any subsequent events not already accounted for in the assumptions underlying the Projections. Further, the Proponents do not anticipate that any amendments or supplements to this Disclosure Statement will be distributed to reflect such occurrences. ACCORDINGLY, THE DELIVERY OF THIS DISCLOSURE STATEMENT DOES NOT UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION HEREIN IS CORRECT OR COMPLETE AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. EXCEPT WHERE SPECIFICALLY NOTED, THE FINANCIAL INFORMATION CONTAINED HEREIN HAS NOT BEEN AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT AND HAS NOT BEEN PREPARED IN ACCORDANCE WITH UNITED STATES OR COLOMBIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. C. SOLICITATION PACKAGE. Accompanying this Disclosure Statement are, among other things, copies of (1) the Plan (APPENDIX F hereto); (2) the notice of, among other things, the time for submitting Ballots to accept or reject the Plan, the date, time, and place of the hearing to consider the confirmation of the Plan and related matters, as well as the time for filing objections to the confirmation of the Plan (the "Confirmation Hearing Notice"); and (3) if you are entitled to vote, one or more Ballots (and return envelopes) to be used by you in voting to accept or to reject the Plan. D. GENERAL VOTING PROCEDURES, BALLOTS AND VOTING DEADLINE. After carefully reviewing the Plan, this Disclosure Statement, and the detailed instructions accompanying your Ballot, please indicate your acceptance or rejection of the Plan by checking the appropriate box on the enclosed Ballot. Please complete and sign your original Ballot and return it in the envelope provided. YOU MUST PROVIDE ALL OF THE INFORMATION REQUESTED BY THE APPROPRIATE BALLOT(S). FAILURE TO DO SO MAY RESULT IN THE DISQUALIFICATION OF YOUR VOTE ON SUCH BALLOT(S). Each Ballot has been coded to reflect the Class of Claims or Interests it represents. Accordingly, in voting to accept or reject the Plan, you must use only the coded Ballot or Ballots sent to you with this Disclosure Statement. IN ORDER FOR YOUR VOTE TO BE CONSIDERED, YOUR BALLOT MUST BE PROPERLY COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE VOTING INSTRUCTIONS ON YOUR BALLOT, AND IT MUST ACTUALLY BE RECEIVED NO LATER THAN THE FOLLOWING DEADLINE (THE "VOTING DEADLINE"): - BY 5:00 P.M. (PREVAILING EASTERN TIME) ON NOVEMBER 4, 2004, TO SMITH, GAMBRELL & RUSSELL, LLP, ATTENTION GINNY SMITHSON, LOCATED AT SUITE 3100, 1230 PEACHTREE STREET, ATLANTA, GEORGIA 30309-3592 (PHONE: 404-815-3506) (the "U.S. BALLOTING AGENT"); OR 3 - BY 5:00 P.M. (PREVAILING BOGOTA TIME) ON NOVEMBER 4, 2004, TO ANGELA MARIA CLAVIJO, LOCATED AT AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA, CENTRO ADMINSTRATIVO, AVENIDA CALLE 26 NO. 92-30, BOGOTA O.C., COLOMBIA (THE "COLOMBIAN BALLOTING AGENT"; THE U.S. BALLOTING AGENT AND THE COLOMBIAN BALLOTING AGENT, EACH, A "BALLOTING AGENT"). BALLOTS RECEIVED AFTER SUCH VOTING DEADLINE WILL NOT BE CONSIDERED. BALLOTS SHOULD NOT BE DELIVERED DIRECTLY TO EITHER OF THE PROPONENTS, TO EITHER OF THE EQUITY SPONSORS, THE COURT, THE COMMITTEE, COUNSEL TO THE PROPONENTS, OR COUNSEL TO THE COMMITTEE. SPECIAL NOTE TO HOLDERS OF CLAIMS IN CLASS 8: Section 10.1.5 of the Plan provides that it is a condition to Confirmation of the Plan that at least 80% in amount of Allowed Claims in Class 8 must have agreed in writing to be bound by the provisions of the Plan. If this condition is not satisfied, there is a risk that Avianca S.A. would either be reorganized pursuant to Law 550 of 1999 of the Republic of Colombia or be liquidated pursuant to Law 222 of 1995 of the Republic of Colombia. See Section V.G below - "Conditions Precedent To Confirmation And Effective Date" and Section VI.E below - "Class 8 Claims and Laws 550 of 1999 and 222 of 1995." If you are a Holder of a Class 8 Claim and desire that the Plan be confirmed by the Bankruptcy Court, the Proponents urge you to vote to accept the Plan and to indicate your agreement to be bound by the provisions of the Plan by indicating your agreement to the Novation set forth in the Class 8 Ballot by checking the acceptance box on your ballot, thereby agreeing to be bound by the provisions of the Plan. In addition, the Holder may indicate its election, subject to the condition that the Plan is confirmed and becomes effective, to accept in exchange for, and in full satisfaction of, such Claim, a Single Payment Right, payable eight (8) years and six (6) months after the Effective Date, in the amount of its Allowed Class 8 Claim, instead of the right to receive (i) on the Distribution Date, a Pro Rata share of the Initial Payment Amount, (ii) on the Distribution Date, an interest bearing Peso Note in a specified principal amount and evidencing the Holder's Contingent Payment Right to receive, on each Contingent Payment Date, a Pro Rata share of an aggregate Contingent Principal Amount, if any, and (iii) on the Excess Payment Date, a Pro Rata share of the Excess Payment Amount, if any. A Holder of an Allowed Class 8 Claim may make this election, regardless of whether the Holder votes to accept or to reject the Plan. E. QUESTIONS ABOUT VOTING PROCEDURES. If (1) you have any questions about (a) the procedure for voting your Claim, (b) the packet of materials that you have received, or (c) the amount of your Claim or (2) you wish to obtain, at your own expense, unless otherwise specifically required by Federal Rule of Bankruptcy Procedure 3017(d), an additional copy of the Plan, this Disclosure Statement, or any appendices, exhibits or schedules to such documents, please contact either Balloting Agent at its address set forth in the preceding Section hereof. 4 FOR FURTHER INFORMATION AND INSTRUCTIONS ON VOTING TO ACCEPT OR REJECT THE PLAN, OR, IF YOU HOLD A CLAIM IN CLASS 8, ON INDICATING YOUR AGREEMENT TO BE BOUND BY THE PROVISIONS OF THE PLAN OR ON ELECTING EITHER TO RECEIVE SINGLE PAYMENT RIGHTS OR TO CONVERT TO CLASS 9 (CONVENIENCE CLASS CLAIMS), SEE ARTICLE XI HEREOF - "VOTING REQUIREMENTS." F. CONFIRMATION HEARING AND DEADLINE FOR OBJECTIONS TO CONFIRMATION. Pursuant to section 1128 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 3017(c), the Court has scheduled the Confirmation Hearing for November 16, 2004, at 10:00 a.m. (prevailing Eastern time) before the Honorable Allan L. Gropper, United States Bankruptcy Judge, in Room 617 of the United States Bankruptcy Court for the Southern District of New York, One Bowling Green, New York, New York 10004-1408. The hearing may be adjourned from time to time by the Court without further notice, except for the announcement of the adjournment date made at the hearing or at any subsequently adjourned hearing. The Court has directed that objections, if any, to Confirmation of the Plan must be filed with the Clerk of the Court and served so that they are RECEIVED no later than 5:00 p.m. (prevailing Eastern time) on November 4, 2004, by each of the following: COUNSEL TO THE PROPONENTS: SMITH, GAMBRELL & RUSSELL, LLP Suite 3100, 1230 Peachtree Street, N.E. Atlanta, Georgia 30309 Attention: Ronald E. Barab, Esq. and ANDERSON, KILL & OLICK, P.C. 1251 Avenue of the Americas New York, New York 10020 Attention: Howard D. Ressler, Esq. UNITED STATES TRUSTEE: Office of the United States Trustee 33 Whitehall Street, 21st Floor New York, New York 10004 Attention: Lauren S. Landsbaum, Esq. COUNSEL TO THE COMMITTEE: GREENBERG TRAURIG LLP MetLife Building 200 Park Avenue New York, New York 10166 Attention: Richard S. Miller, Esq. Robert T. Honeywell, Esq. 5 COUNSEL TO OCEANAIR: WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 Attention: Scott K. Charles, Esq. COUNSEL TO FNC AND VB: WEIL, GOTSHAL & MANGES LLP 767 Fifth Avenue New York, New York 10153 Attention: Michael P.Kessler, Esq. III. THE COMPANY. A. INTRODUCTION. Avianca S.A., known as the "Airline of Colombia" and the "First Airline in America," was organized in 1919 under the laws of the Republic of Colombia as a sociedad anonima (similar to a corporation). Its main administrative office is located at Centro Administrativo, Avenida Calle 26 No. 92-30, Bogota, Colombia, and its legal domicile is located in Barranquilla, Colombia. Its principal place of business in the United States is located at 720 5th Avenue, 5th Floor, New York, New York 10019-4107. Avianca S.A. is the oldest airline in the Western Hemisphere and operates a domestic (Colombian) and international airline passenger business, but it also carries cargo (mail and freight) on its domestic and international routes. Avianca S.A.'s wholly-owned subsidiary, Avianca, Inc., is a corporation organized under the laws of the State of New York and has its principal place of business located at 8125 Northeast 53rd Street, Suite 1111, Miami, Florida 33166. Avianca, Inc. acts as Avianca S.A.'s general agent in connection with its activities in the United States. Pursuant to a general agency agreement, Avianca, Inc. markets and sells tickets for air travel, collects accounts, purchases parts, and provides other services in connection with Avianca S.A.'s international commercial airline operations in the United States. Avianca S.A. also owns a controlling (94.9%) interest in Sociedad Aeronautica de Medellin Consolidada S.A. ("SAM"), a sociedad anonima (similar to a corporation) organized under the laws of the Republic of Colombia, whose main administrative office is located at Centro Administrativo, Avenida Calle 26 No. 92-30, Bogota, Colombia. SAM's legal domicile is located in Medellin, Colombia. SAM operates a domestic (primarily turbo prop) airline operation in Colombia. SAM is not a debtor in the Case. At December 31, 2003, SAM suffered a cause for its dissolution under Colombian law by reason of its year-end balance sheet showing a negative net worth. SAM has until September 30, 2004, to implement measures to rectify the cause of dissolution. The Company believes that SAM has a reasonable likelihood of adopting and implementing measures that will permit it to avoid the need for dissolution. Nevertheless, if SAM fails timely to do so, it could face a liquidation process in Colombia under which Avianca might eventually be held secondarily responsible for some or all of SAM's liabilities. See Section VI.P hereof - "CERTAIN RISK FACTORS TO BE CONSIDERED - SAM's Operations." 6 B. DESCRIPTION OF THE AIRLINE INDUSTRY/AVIANCA'S POSITION IN THE MARKETPLACE. 1. Introduction. During the past three years there have been several crises in the airline industry. These crises have negatively impacted Avianca's performance and both its market share and financial results have suffered significantly. However, the turnaround process implemented by Avianca's management beginning in June of 2003 has produced positive results. In 2000 Avianca's share of the airline market in Colombia was 38% of passengers flying internationally and 32% of passengers flying domestically. The Company, however, foresaw difficult times ahead because it was rapidly losing its competitive advantages over other growing domestic and international carriers. As a result of the fallout from the September 11, 2001 terrorist attacks, Avianca determined that it was in its best interest to undertake negotiations with the second largest airline in Colombia, Aerolineas Centrales de Colombia ("Aces"), for a joint operation which would enable both carriers to better confront the difficulties that the industry was then facing. 2. Alianza Summa and Liquidation of Aces. In December 2001, the Colombian government approved the operational integration of Avianca, SAM, and Aces under the trade name and service mark commercially known as ALIANZA SUMMA ("Alianza Summa"). Although each of the participants in this strategic alliance remained a separate legal entity, they were permitted to conduct joint operations and joint marketing. Thus, from the perspective of the consuming public, Alianza Summa became one of the largest airlines in Latin America. To effectuate this operational integration and as a condition precedent to the formation of Alianza Summa, two trusts were created under the laws of the Republic of Colombia: Fiedeicomiso Avianca/Aces Lloyds 1 ("Trust 1") and Fiedeicomiso Avianca/Aces Lloyds 2 ("Trust 2") (Trusts 1 and Trust 2, collectively, are herein called the "Trusts"). The equal beneficiaries of each trust are Valores Bavaria S.A. ("Valores Bavaria" or "VB"), a sociedad anonima organized under the laws of the Republic of Colombia, and the Federacion Nacional de Cafeteros de Colombia (the National Coffee Growers Federation of Colombia) ("FNC," the "Coffee Federation," or the "Federation"), a private, non-profit association organized under the laws of the Republic of Colombia. Each trust has an equal ownership in Avianca, Aces, and SAM. The joint ownership of the trusts accounts for approximately 98% of the outstanding Ordinary Stock of Avianca and of Aces (49% of each being owned by each trust), and they jointly own 5.1% of SAM (2.55% being owned by each trust). Another 94.9% of SAM is owned by Avianca S.A., and unrelated Minority Shareholders own the remaining 0.006% of the issued and outstanding shares of the Ordinary Stock of SAM. As to the balance of the issued and outstanding shares of Ordinary Stock of Avianca S.A., Valores Bavaria and its affiliates directly own outside the Trusts approximately 1.88% of the issued and outstanding shares of the Ordinary Stock and all of the Preferred Stock of Avianca, and the remaining 0.02% of the issued and outstanding shares of the Ordinary Stock of Avianca are held in small amounts by various persons and entities unrelated to Trust 1 or Trust 2 and unrelated to Valores Bavaria or the Coffee Federation (collectively, the "Minority Shareholders"). 7 Avianca, SAM, and Aces began joint operations on May 20, 2002. From January 2002 to March 2003, Alianza Summa transported 5,944,431 domestic passengers within Colombia and 1,786,567 international passengers to or from overseas, which represented 62% and 51% of the domestic and international markets, respectively. Taken alone, Avianca-SAM transported 43% and 39% of the respective markets during the same period. Notwithstanding the benefits and synergies that the participants in Alianza Summa enjoyed, new adverse economic circumstances in the airline industry worldwide, in Latin America, and within Colombia exacerbated the weak financial position of Aces. As a result of continuing losses and the absence of realistic prospects of recovery, on or about August 20, 2003, Aces ceased operations and announced that it was seeking liquidation. Aces is now under a liquidation process in Colombia. Since Aces' cessation of business, Avianca and SAM have continued to conduct joint operations and joint marketing under the Alianza Summa umbrella and the corresponding trade marks associated with the increasing preeminence of the "AVIANCA" brand and will continue to do so, unless Unidad Administrativa Especial de Aeronautica Civil ("Aerocivil"), the Colombian Civil Aviation Authority, demands otherwise or if future commercial conditions dictate that the use of a single or different trade mark is better. Under a Memorandum of Understanding among Avianca, Aces and SAM, Avianca-SAM and Aces agreed to maintain the economic balance in their respective operating results of each of Avianca-SAM and Aces. However, in its consolidated Financial Statements, attached hereto as APPENDIX D, Avianca neither estimated nor recorded any reserves or adjustments for this concept. In June 2003, Aces sent Avianca-SAM invoices aggregating approximately $(USD)5.8 million, which Avianca-SAM dispute. Aces has not filed a proof of claim in the chapter 11 Case with respect to this matter. See Section VI.P of this Disclosure Statement - "Risk Factors - Aces Liquidation." C. PRE-EFFECTIVE DATE CAPITAL STRUCTURE. 1. Avianca S.A. Avianca S.A. has an aggregate 1,000,000,000,000 shares of its capital stock [nominal value $(Col.) 0.01 per share] authorized, of which 641,959,909,205 shares of Ordinary Stock and 101,746,321,334 shares of Preferred Stock are issued and outstanding and of which 2,407,836 shares of Ordinary Stock are held in treasury. The subscribed and paid-in capital of the Company is $(COL) 7,437,086,383 equivalent to 743,708,638,375 shares with a nominal value of $(COL)0.01 each. There are a total of 7,806 registered Holders of Avianca S.A.'s capital stock as of May 31, 2004, none of whom are officers or directors. Trust 1 and Trust 2 each owns 314,635,753,760 shares of the Ordinary Stock (constituting 49.0117% each of the issued and outstanding shares of Ordinary Stock); and the remaining 12,685,993,849 shares of Ordinary Stock outstanding are owned by 7,802 registered holders. Prime Air Ltda ("Prime Air"), a sociedad limitada (similar to a limited liability company) organized under the laws of the Republic of Colombia and a Subsidiary of Valores Bavaria, owns all of the issued and outstanding shares of Preferred Stock, which have preferred dividends, but no voting rights. 8 2. Avianca, Inc. Avianca, Inc. has a total of 200 shares of no par value Common, voting stock authorized, of which 150 shares are issued and outstanding and of which 50 are held in treasury. Avianca S.A. owns all of the issued and outstanding shares of Avianca, Inc.'s Common, voting stock. D. PRE-EFFECTIVE DATE MANAGEMENT. The current management team of each of Avianca-SAM and of Avianca, Inc. is composed of highly capable and seasoned professionals, many of whom have extensive experience in the airline industry. Set forth below are the names and positions of the Debtors' management team as of March 31, 2004. Following this list is a brief biography of each describing their respective backgrounds. 1. Board of Directors and Senior Officers of Avianca S.A. In or about April 2004, the Board of Directors determined that as a result of the relationship between one or more Board members and the Coffee Federation or Valores Bavaria, one or more of such Board members might have a potential conflict of interest in considering alternative proposals for restructuring the Company. Accordingly, the Board called a shareholders meeting to invoke certain procedures available under Colombian law applicable to the composition of the Board in connection with the consideration of transactions in which a board member may have an interest. In May 2004, upon due notice to shareholders, the shareholders meeting was conducted. As a result of actions taken at the shareholders meeting, the Board was reconstituted by the election of all new principal members and the retention as alternate members of certain existing members. Among other actions, the new principal members of the Board immediately undertook a deliberative process of evaluating competing proposals for investments in Avianca, so that the airline could be reorganized under Chapter 11. The principal members of the Board are identified below. (a) Principal Members of Board of Directors. Alvaro Jaramillo Buitrago Fabio Villegas Ramirez Luis Fernando Ramirez Acuna Juan Carlos Gomez Jaramillo Miguel Cortes Kotal Mauricio Jaramillo BIOGRAPHIES: ALVARO JARAMILLO BUITRAGO: Mr. Jaramillo obtained a Degree in Business Administration from Universidad del Norte in Barranquilla Colombia and took courses in Finance and Administration from the University of Pennsylvania in Philadelphia and in Economics and 9 Planning from the Drexel Institute, also in Philadelphia. His previous experience includes the Presidency of Avianca S.A. and of several financial institutions in Colombia. Currently, he works as General Manager of IQ Outsourcing S.A., a consulting company for data processing and documentation mainly for the financial sector. FABIO VILLEGAS RAMIREZ: Mr. Villegas has a Degree in Economics from Universidad Jorge Tadeo Lozano in Bogota, a Diploma in Development Planning from London University, and a Master in Science from the London School of Economics. His experience includes working as President of ANIF, the Colombian National Association of Financial Institutions, a position which he has held since August 2003. He also has held several positions in the public and private sector, including Managing Director for both Deutsche Bank and the Rothschild Group in Bogota, Advisor for Organizacion Luis Carlos Sarmiento Angulo, Colombian Ambassador before the Organization of American States, Colombian Minister of State, and Secretary General of the Colombian Presidency. LUIS FERNANDO RAMIREZ ACUNA: Mr. Ramirez received his Accounting Degree from Universidad Jorge Tadeo Lozano in Bogota and was a Fellow of the Center for International Affairs at Harvard University. He has held several positions in the Colombian Government: from June 1999 to June 2001, Minister of Defense; from July 1992 to March 1994, Minister of Work and Social Affairs; and from March 1991 to July 1992, Vice Minister of Treasury. Moreover, he has held several positions in the Colombian Tax Agency. He also has acted as a member of the board of directors of several important companies in both the public and private sector. Currently, he is a partner of Sumatoria S.A., a leading investment banking company. JUAN CARLOS GOMEZ JARAMILLO: Mr. Gomez received his Law Degree from Universidad Pontificia Javeriana in Bogota and a specialization degree in Taxation Law from Colegio Mayor de Nuestra Senora del Rosario. His experience includes a position in Inravision as Director of the Legal Office and acting Secretary General. Currently, he works as an independent legal advisor; and from this position, he has rendered legal advice for a number of special projects, such as the regulatory framework for open market competition in Colombian local and long distance telephone services, at Booz Allen & Hamilton's request, as well as the regulatory framework for different activities in the telecommunications field at the request of the Colombian Ministry of Communications. He is also a Professor of different legal subjects at several universities in Bogota. MIGUEL CORTES KOTAL: Mr. Cortes received a degree in Economics from Stanford University and a MBA from Harvard Business School. Currently, he is a Certified Public Accountant in San Francisco, California. He has served as the lead negotiator for several restructurings for different companies in the financial and industrial sectors in Colombia. He also has extensive mergers and acquisitions experience in the following industries, among others: banking, insurance, construction, equipment leasing, and stock exchange brokerage business. MAURICIO JARAMILLO: Mr. Jaramillo received his Degree in Industrial Engineering from Universidad de los Andes, Bogota and an MBA from Thunderbird - The American Graduate School of International Management. Currently, he works as an independent consultant in the areas of Strategic Planning and Operations for a number of public and private companies in Colombia, the United States, and throughout Latin America. 10 (b) Senior Officers.
NAME POSITION ---- -------- Juan Emilio Posada President & CEO Gerardo Grajales CFO Roberto Junguit- CRO and COO
BIOGRAPHIES: JUAN EMILIO POSADA - PRESIDENT & CEO: Mr. Posada has served as the President & CEO of Avianca S.A. since October 8, 2003. He received a BA in Business from EAFIT University, in Medellin, Colombia and an MBA in International Business and Finance from Pace University in New York City, where he was honored with the Academic Excellence Award. Afterwards, he took a sabbatical year in International Financial Law at the London School of Economics. Past responsibilities include: President of Alianza Summa (Avianca, Sam & Aces Airlines) for 1.5 years, President of Aces for the previous 9 years, Manager of Precious Metals of Billiton Marketing and Trading B.V., (then part of the Royal Dutch/Shell Group) in the Netherlands, and different positions, including that of International Vice President at Banco Cafetero in New York, Miami and Bogota (then responsible for affiliates and investments in Panama, Cayman Islands, The Bahamas, Venezuela, Ecuador, and Peru). Since November 2000, Mr. Posada has been the President of Asociacion Internacional de Transporte Aereo Latinoamericano, AITAL. Current and past directorships include: International Air Transport Association, IATA; Asociacion de Transporte Aereo de Colombia, ATAC; Colombian Government's Private Sector Committee on the Free Trade Area of the Americas; Colombia's TELECOM; Casa Editorial El Tiempo (Colombia's main newspaper and publishing company); Banco Exterior de los Andes y de Espana, Extebandes (Caracas); Banco de Caldas; Compania Agricola de Seguros; Corporacion Calidad; Asociacion Nacional de Industriales, ANDI (Antioquia and Bogota); Colombian American Chamber of Commerce (Greater Miami and Bogota); Universidad EAFIT; Colegio Benedictino Alumni Association, and the Editorial Board of Dinero Magazine. Mr. Posada belongs to Young Presidents<180> Organization and the Group of 50 (affiliated to the Inter American Dialogue). Mr. Posada is a frequent speaker at industry gatherings and is a renowned lecturer on customer service strategies. GERARDO GRAJALES - CFO: Mr. Grajales has a B.S. in Business Administration with a M.S. in finance from Baltimore University. He started his professional career as Treasurer for Gillette de Colombia in 1992 and joined Baxter Pharmaceutical as CFO in 1995 and acted also as a marketing director for the Andean region. In 1998 he joined a joint venture between Houston Power and Light and Electricidad de Caracas as a Shared Services vice-president for their investments in the power distribution businesses in Colombia. As a result of a hostile takeover by AES Corp. of Electricidad de Caracas, Mr. Grajales served as CFO for AES Colombia and CEO for the thermal power plants located in Cartagena, Colombia. During those four years Mr Grajales actively participated in a successful bond issuance process for $150 million at EPSA. He also led the acquisition of an electrical distribution company in the Valle del Cauca area, actively participated in the sale of all distribution companies to a Spanish group and participated in the restructuring of a $300 million debt at the power facilities. He joined Avianca as CFO on May 20, 2002. 11 ROBERTO JUNGUITO - CHIEF RESTRUCTURING OFFICER AND CHIEF OPERATING OFFICER: Mr. Junguito is an Industrial Engineer with an MBA from the Wharton School of Business and an MA in International Affairs from the University of Pennsylvania. He started his career as a management consultant at McKinsey & Company, where he was the first consultant hired by the Firm in Colombia. During his four years at McKinsey, he coordinated a $350 Million project to create an urban public transportation system (Transmilenio), negotiated and managed mergers in the financial sector, and developed strategy, restructuring and operations projects for consumer goods and cable and wire companies. During his summer internship he worked at Chase Securities in the Latin American Corporate Finance Group where he developed a bid for the privatization of a major electric utility in northern Brazil. Later he joined Valores Bavaria, a Colombian conglomerate of more than 100 companies controlled by the Santo Domingo family, as Vice-president of Portfolio Investments. At Valores Bavaria he led the portfolio strategy and was responsible for hiring the new management team. He also negotiated the integration of Aces and Avianca and participated in several boards of directors including Avianca, Carrefour and Caracol Radio among others. Mr. Junguito has lived in Belgium, France, Brazil, Egypt and Colombia and is fluent in Spanish, English, French and Portuguese. He joined Avianca as Chief Restructuring Officer and Chief Operating Officer. 2. Board of Directors and Senior Officers of Avianca, Inc. (a) Board of Directors. Juan Arbelaez Gerardo Grajales Francisco Mendez BIOGRAPHIES: JUAN ARBELAEZ: General Manager Avianca Inc. He has a major in Communications from The American University in Washington, D.C. Mr. Arbelaez started his career in 1981 with Eastern Airlines as the General Manager in Barranquilla, Colombia. In 1984 he was relocated to Bogota as Airport Manager. He joined Hertz Corporation in 1984 as General Manager in Buenos Aires, Argentina. Mr. Arbelaez moved back to Colombia in 1987 and took the position of GSA for Pan Am and Cathay Pacific. He became the General Manager for Continental Airlines in 1993. In 1998 he was transferred to Mexico as Regional Director. Mr. Arbelaez moved on to Aeromexico in the year 2000 as the International Vice President in which he handled Latin America and Europe. Mr. Arbelaez joined Avianca in 2001 as the Sales and Marketing Vice President. Since 2002 he has performed as the Regional Director N.A./Mexico for Avianca Inc. GERARDO GRAJALES: See Section III.D.1(b) above - "The Company - Pre-Confirmation Management - Board of Directors and Officers of Avianca S.A. - Officers." FRANCISCO MENDEZ: FRANCISCO MENDEZ - VICE PRESIDENT-AVIANCA S.A. BUSINESS Development: Mr. Mendez graduated from Embry-Riddle Aeronautical University in 1988 with a B.S. in Aeronautical Engineering. He joined Avianca S.A. in 1989 as an engineer within the Engineering Division. Since then, he has mastered different positions in the Company, 12 such as Hydraulic Shop Manager, Flight Operations Engineering Manager, Director of Flight Operations Engineering, Vice President Flight Operations, Vice President Technical and Flight Operations, Vice President Technical and General Director of SAM, Vice President Technical and General Director of Helicol, and most recently Vice President of Business Development. During his fourteen years with Avianca, he has participated in different projects such as the introduction and development of the ETOPS procedures for the Company's European operation, the introduction of SGML technology for use in all documents in the Operational and Technical areas, the redesign of the Operational Control Center, the JAR-145 certification, and the ISO 9000-2000 certification among others. Currently, he is restructuring the Deprisa Cargo and Courier business unit. (b) Senior Officers.
NAME POSITION ---- -------- Juan Arbelaez General Manager Juan Carlos Sarabia CFO Elisa Murgas Secretary
BIOGRAPHIES: JUAN ARBELAEZ - GENERAL MANAGER: See Section III.D.2(a) above - "The Company - Pre-Confirmation Management - Board of Directors and Officers of Avianca, Inc.. - Directors." JUAN CARLOS SARABIA - CFO: Mr. Sarabia has a Business Administration degree from the University of La Sabana in Bogota, Colombia and also a Finance Specialization from the University of Los Andes in Bogota, Colombia. Mr. Sarabia began his career in 1990 as the Credit Risk Management Officer for the LatinCorp Bank. He has held since November 1990 the positions of Budget Analyst, Chief of National Treasury and International Treasurer of Avianca Airlines in Bogota, Colombia. On May 2002 he was positioned as International Treasurer of Alianza Summa. He was transferred on September 30, 2002 to the United States as Finance Manager N.A. for Avianca, Inc. ELISA MURGAS - SECRETARY: Ms. Murgas joined Avianca S.A. as a lawyer at the Legal Division and moved to the position of Director of the Legal Division and from there to the position of Secretary General. She obtained her law degree from the University of Santo Tomas. E. OPERATIONS. 1. Fleet. (a) Avianca's Fleet. Avianca has a mixed fleet, from turboprops to wide-bodies. Although the financial projections contained in the Company's June 13, 2004 Business Plan, attached hereto as APPENDIX B (the "Business Plan"), assumes a constant fleet of 35 aircraft, new jet airplanes are 13 likely to be required in the short term to maintain the Company's competitive position in the market place. Current leasing contracts expire as follows:
Fleet End Of ---------------------------- Current 2004 2005 2006 2007 2008 ------- ---- ---- ---- ---- ---- Boeing 767 5 5 4 4 0 0 Boeing 757 5 5 3 0 0 0 MD 83 15 15 15 13 9 0 Fokker 50 10 10 10 10 0 0 ------------------------------------------------- Total 35 35 32 27 9 0 -------------------------------------------------
LESSORS -------------------------------------- Gecas Pegasus Ansett debis CIT Total ----- ------- ------ ----- --- ----- Boeing 767 1 3 1 0 0 5 Boeing 757 1 0 2 1 1 5 MD 83 11 0 3 0 1 15 Fokker 50 0 0 0 10 0 10 ----------------------------------------------------------- Total 13 3 6 11 2 35 -----------------------------------------------------------
(b) Fleet Status. The average age of Avianca's fleet of aircraft is approximately 12 years as follows:
Fleet Avg Age ------ ------- Boeing 767 5 13.63 Boeing 757 5 13.79 MD 83 15 12.01 Fokker 50 10 10.40 ---------------------------- Total 35 12.04 ----------------------------
(c) Network. During 2003, network restructuring was completed taking into account route profitability, market share, connectivity, revenue, contribution to the network, load factors, and strategic impact for each of the routes and frequencies of the complete network. As a result, a new route/frequency structure was designed to have the best network impact, thus maximizing the profitability of the whole network. Fleet consolidation and renegotiation of fleet leasing contracts in 2003 produced significant cost reductions, as well as simplification of maintenance and crew requirements. See Section IV.E hereof - "Significant Actions by Avianca During the Bankruptcy Case." 14 Currently, the Company offers a total of 181,195 weekly seats that produce 181 million weekly available seat kilometers ("ASKs"), 61 Million in the Colombian domestic market and 120 Million in the Colombian international market. With this available capacity, Avianca captured 48.4% of the domestic market and 45.4% of the international market during the first quarter of 2004, and it had load factors of 61% and 67% respectively. Today's network not only connects Colombia with the Andean Pact, deep South America, North America, Central America, the Caribbean, and Europe, but is also a hub for the traffic between South America and the rest of these regions. Avianca serves these markets through 21 domestic and 20 international routes, which include 9 routes to North America, 3 routes to each of Deep South America, the Caribbean and the Andean Pact regions, 1 route to Central America, and 1 route to Europe. 3. Overview of Avianca's Commercial Operations. With 23 domestic and 22 international destinations, and over 215 daily flights, Avianca has consolidated as the market leader in Colombia and one of the leaders in the Latin American region. With respect to international flights originating in Colombia, Avianca has a market share of 48%. Within Colombia, Avianca carries 47% of the total domestic passenger traffic and 62% of the combined passenger traffic on the specific routes where Avianca operates. (a) Historical Changes in the Marketplace. The marketplace has had significant changes over the years. During the last decade, the Colombian air transportation market has dramatically evolved. Between 1993 and 1996 the domestic market grew 25% in the aggregate, followed by a decline of approximately 8% between 1997 and 2000, but by 2003 was back at 1996 levels. In the last ten years, Avianca' s total passenger miles has grown in the aggregate by approximately 23.5% -- by approximately 63.4% domestically and by approximately 12.7% internationally. Between 2002 and 2003, the domestic market shrank by 4% while the international market grew by 2%. During the first quarter of 2004, the domestic market has been further reduced by 1%, and the international market originating and departing from Colombia has grown by 12%. The contraction of the market during 2003 had a disproportionately adverse effect on Avianca's market share, particularly on the domestic front, where Avianca cut almost 25% available seat kilometers ("ASKs"), resulting in almost a 15% drop in market share. Domestically, the most affected routes for Avianca were the two largest markets in Colombia - Bogota-Cali and Bogota-Medellin, where the airline cut five frequencies each day, with profitability and market presence in mind. Other affected routes that also influence the loss of market share are Bogota-Bucaramanga, Bogota-Barranquilla, Bogota-Cartagena, and Bogota-Pereira. Internationally, the capacity was not rationalized to the same extent, and the loss of market share was almost 6%, which was concentrated in the U.S. market, where the Company dropped almost 10%, mainly due to the cuts on the Bogota - Miami route, where two of the three flights were unprofitable and were discontinued. 15 During the first quarter of 2004, Avianca successfully maintained both its international and domestic market positions after its network restructuring and even gained one percentage point between January and March. All this has been achieved due to a systematic revenue management practice, increasingly aggressive commercial strategies, and a continuous improvement in the consistency and reliability of its flights. (b) Main International Markets. (i) USA. The main international market for Avianca is the USA, with 7 daily flights. In this market, Avianca has 48% of the total market share, followed by American Airlines with 22% (Delta and Continental each have less than 10% of the market share). (ii) Spain (Madrid). Avianca shares the leadership of this market with Iberia, with a market share ranging between 38% and 48% during the last twelve months. (iii) Andean Community Countries. In these markets, Avianca has maintained a clear leadership position. With three daily frequencies to Quito and one to Guayaquil, Avianca dominates the Ecuador market with an 84% market share. In the Colombia-Peru market, Avianca has been able to maintain its leadership position with a 59% market share despite Taca's entrance with three weekly frequencies in December 2003. In May 2004, Taca increased its operation to six weekly frequencies. The Colombia-Venezuela market is also dominated by Avianca with an 87% market share. (iv) Argentina. As the only air carrier with direct flights from Colombia to Argentina, Avianca has become the clear leader in this market with a 79% market share. Lan Chile with 5% and Taca with an 8.5% market share are the closest competitors in this market. Currently, Avianca's service to Argentina is a daily operation combined with Chile, in which Avianca is also the leader with a 54% market share, closely followed by Lan Chile with 34%. Because Aerolineas Argentinas has begun to serve this market (four weekly flights), Avianca split its service to Argentina and Chile in July 2004, flying four days a week to Buenos Aires and three days a week to Santiago. Aerolineas Argentinas will combine its operation to Bogota with Caracas. (v) Brazil. In the Colombia-Brazil market, Avianca has a 46% market share, followed by Varig with a 40% market share and Copa with an 8% market share. Avianca serves both Sao Paulo and Rio de Janeiro with four weekly flights. 16 (b) Main Domestic Markets. With 6.1 million passengers a year, Colombia is the third largest domestic market in Latin America after Brazil and Mexico; it is also more than two times the Argentinean domestic market which is the fourth largest domestic market in the Latin American region. Avianca has 47% of the total Colombian domestic market and 62% in the specific markets where it operates. In the total domestic market, Avianca is followed by Aerorepublica, which has a 26% market share. Satena, a Colombian State owned airline, is next with a 9.2% market share. After a drastic domestic capacity reduction of 14% during 2003 and its consequent market share reduction, Avianca has experienced a steady recovery in 2004 without adding capacity. (i) Bogota - Medellin. This is the largest domestic market in Colombia in terms of passengers. Avianca has a leading position with a 51% market share followed by Aerorepublica with 27%. After a severe capacity reduction of 15.4% in 2003, Avianca's passenger traffic decreased by the same percentage. West Caribbean and Satena participate with a 10% and a 12% market share, respectively. (ii) Bogota - Cali. This is the second largest domestic market in Colombia in terms of passengers. Avianca's market share is 55%, followed by Aerorepublica with a 38% market share. Despite a 12% capacity reduction in this market during 2003, Avianca's traffic reduction was only 7%. Moreover, the total market for this route for all airlines experienced a reduction of 1.8% in 2003. (iii) Bogota - Cartagena. This is the main tourist destination in Colombia. Avianca has maintained its market share at approximately 67%, followed by Aerorepublica at 33%. (iv) Bogota - Barranquilla. Barranquilla is Avianca's hometown. Avianca has successfully kept its market share of 69%. Indeed, despite a capacity reduction of 11%, its traffic decreased only 3%. 4. Strategies to Increase Market Share. In 2004, Avianca implemented strategies on two fronts to increase its market share: (1) enhancing its relationships with indirect sales channels and (2) developing different marketing campaigns to encourage customers to prefer Avianca over other competitors. Avianca also started to reposition its brand, going from Alianza Summa to the traditional Avianca logo that is one of the most recognized names in Colombia (fourth most recognized brand in the country, according to Dinero Magazine, March 2004). Additionally, an advertising campaign was put in place in the spring of 2004 to communicate the Company's latest achievements and to change customers' perceptions. This campaign is aimed at positioning the Company as a dynamic, technologically 17 advanced, and service oriented organization. This has resulted in a new spirit inside the organization and has clearly produced a new language of leadership in comparison to other Colombian airlines. The Company's Sales and Marketing Division also has been restructured in such a way that more than 85% of its personnel now work in sales in comparison to only 50% during 2003. In addition, Avianca has implemented different new sales channels to lower its costs and to make the purchasing process more prompt and efficient for its customers. These new channels are Call Center and Internet. Moreover, the company's implementation of electronic-ticketing (paperless ticket) places Avianca in the technological forefront of the Colombian market. 5. Code Sharing. Avianca's strategy has been to selectively enhance its network by tactically partnering with other airlines. The aim is to mutually benefit customers by improving product offerings in a cost efficient manner. As of March 30, 2003, Avianca-SAM had a code-sharing agreement with Mexicana de Aviacion, which is still in effect. On November 21, 2002, Avianca formally signed a new code-share agreement with Delta Airlines to be implemented in two phases. Under Phase I, which went into effect on June 16, 2003, Avianca and Delta code share on flights to and from Bogota and the following United States destinations: Washington, Boston, Dallas, Chicago, Los Angeles, and Atlanta. Under Phase II , which went into effect as of September 16, 2003, Delta began offering its customers code share flights via Avianca to the following Colombian destinations: Medellin, Cali, Barranquilla, Cartagena and Pereira, as well as Avianca's trunk routes between Colombia and the U.S. In December of 2003, Avianca and Delta passengers became eligible to earn and redeem miles on one another's frequent flier programs. In addition, Avianca is negotiating two new code share agreements with Taca and Iberia to enhance its competitive position in the Central American and European markets. 6. Operational Safety. To ensure that the Company's operational safety levels comply with international security standards, Avianca's Operational Safety Division (the "OSD") carries out the following prevention activities: (i) investigations of all risk factors, events, and accidents with a safety reporting, statistical, and benchmarking software (Operational Security Reports) called BASIS developed by British Airways; and all such events are investigated implementing corrective actions to avoid any recurrence; (ii) audits of all the operating areas of Avianca following international standards of the International Air Transport Association ("IATA"): the IATA Operational Safety Audit IOSA, using a quality assurance program; (iii) flight monitoring of the parameters of aircraft flights to evaluate events that go beyond the operational limitations published by the manufacturers of the airplanes; (iv) continuous training to promote improvement of the safety culture by distributing information for the prevention of accidents and conducting special training courses for crew members and other operating personnel; (v) participation in Technical Initiatives of the airline industry, such as the Safety Advisory Committee ("SAC") and the Regional Coordinating Group ("RCG") of IATA for Latin America and the Caribbean; (vi) compliance with the U.S. Department of Transportation's demanding requirements to minimize the impact of emergency 18 events or accidents upon the operations, victims, and their families through a program called Emergencies' Attention Plan; and (vii) monitors the maintenance of Avianca's aircraft in accordance with all applicable Governmental standards and procedures to ensure the continued safety of its passengers and employees. 7. Security. Avianca's Security Division (the "SD") is charged with the security of flight operations and of all premises. The SD works closely with both Colombian and foreign legal authorities, as well as with the Company's OSD. Both Divisions utilize similar techniques, but the SD focuses on preventing terrorist acts that would affect all persons and goods, as well as on preventing the use of Avianca-SAM in the transportation of illegal substances, whereas the OSD focuses on the other aspects of operational safety. See Section VI.W below - "CERTAIN RISK FACTORS TO BE CONSIDERED - Aircraft Access." 8. "Assistance." The Company has formed a business unit, known as "ASSISTANCE," to provide engineering and maintenance, ground handling, and training solutions to other air carriers in the Americas and the Caribbean. ASSISTANCE has the necessary trained and highly qualified personnel, as well as the commercial, financial, technical, and logistical capabilities to provide its customers with effective support and superior quality services. Today, ASSISTANCE has a broad group of customers, from Europe, North America, Latin America, and the Caribbean, including the following: (a) Europe: British Airways, ATR, British Petroleum, Iberia, and Icelandair. (b) North America: FedEx, Ansett, Continental Airlines, Gecas, American Airlines, Pegasus, Drummond, DHL, Florida West International, Canada RAF, Transmeridian Airways, and Delta Airlines. (c) Latin America and the Caribbean: Taca Group, Aerogaviota, Varig, Santa Barbara, West Caribbean, Lloyd Aereo Boliviano, Mexicana, Lanchile, TAP, Aeropostal, Aerorepublica, Tame, ABSA, Air Aruba, Cerrejon, Laer, Copa, Tampa, Aerocaribbean, and Aires. 9. "Deprisa." Another Avianca business unit, known as "Deprisa," is dedicated to international and domestic transportation of documents, packages, and cargo. It uses Avianca's network, complemented by those of other airlines, an outsourced surface network composed of more than 80 trucks, and a team of more than 1,600 people, as well as alliances with worldwide transportation leaders, such as TNT, Fedex, and Spring. Deprisa's broad portfolio of services allows it to differentiate by delivery times and added values that give customers plenty of alternatives. It is the only cargo, mail, and courier supplier in Colombia that fully covers customers' needs, offering 13 different service alternatives. 19 Through its Bogota hub, Deprisa's courier products are delivered to more than 170 municipalities in Colombia and 213 countries worldwide. Deprisa's revenues of more than $50 Million per year are achieved with a commercial network of more than 330 sales points and 680 employees. More than 80% of Deprisa's cost structure is variable, making it very flexible and capable of rapidly adjusting to market changes. 10. Employee and Labor Matters. As of March 22, 2004, Avianca directly employed approximately 2,600 employees in Colombia, 34 in the United States, and 146 outside Colombia and the United States. As of March 22, 2004, the Company also had contracts with third party providers for outsourced services in which some 3,010 full-time employee equivalents are employed. Avianca S.A. has collective bargaining agreements ("CBAs") with the following three groups of employees: (a) the pilots association ("ACDAC"), (b) the flight attendants association ("ACAV"), and (c) the ground personnel association ("SINTRAVA"). Under Colombian law, a CBA is automatically extended for a period of six months unless a company or trade union gives the other written notice at least 60 days prior to the stated expiration date of an existing CBA of its intentions to renegotiate such existing CBA (or, if automatically renewed, such notice must be given 60 days prior to the expiration of such renewal term). Although differences between the Company and its pilots resulted in a temporary slow down of operations commencing July 9, 2004, the slow down was terminated on or about August 9, 2004, upon the Company's and ACDAC's reaching an agreement in principle for a modification and extension through March 31, 2006, of their CBA, which otherwise was scheduled to be automatically renewed on September 30, 2004, for a period expiring March 30, 2005. The agreement is subject to ratification by the union membership and approval by the Bankruptcy Court. The Company believes that it is likely that these two conditions will be satisfied and that the agreement will become effective before the Plan becomes effective. In summary, the more important modifications to the CBA with ACDAC include the following: - To allow the Company's Flight Instructors and Route Inspectors to act, with no restriction whatsoever, as delegate inspectors of Aerocivil, the Colombian Civil Aviation Authority. - To allow the Company to schedule assignments for aircrew members within the following limitations: up to a maximum of five (5) consecutive days of duty, 85 flight hours per month, and 240 flight hours per quarter. Such restrictions, however, will not apply in the event of national calamity or force majeure." - To adopt a remuneration system for the Company's pilots, first officers, and copilots that includes a basic monthly salary for a guaranteed 70 20 flight hours per month (which is payable regardless of whether or not they actually fly), plus compensation per flight hour over the guaranteed minimum hours per month, plus various bonuses or premiums for equipment, dead head hours, night flying, and Sunday and Holiday work, plus meal coupons. - To establish transport compensation for all aircrew members using their own vehicles for transportation to-and-from the airport. - To establish an option for vacations of either (i) 21 days vacation with a vacation bonus equivalent to 25 days of salary or (ii) 30 days vacation with a vacation bonus equivalent to 18 days of salary. - To establish an inflation adjustment, effective April 1, 2005, to the basic salary, bonuses, and premiums, as well as to every economic right provided in clauses referring to Colombian pesos, on the basis of I.P.C. (Consumer Price Index) for the last twelve (12) months, from April 1, 2004, through March 31, 2005. Additionally, outside the terms of the CBA, the Company and ACDAC also agreed: - On a temporary stability clause, for a two-year term, beginning as of January 1, 2005, in consideration for the greater productivity by the pilots as a result of the modifications to the monthly flight-hours and number of continued assignments, whereby in the event of a proven excess in the number of pilots as a consequence of a reduction in the number of aircraft or the Company's volume of operations, the computation of such excess will be made on the basis of ceilings to flight-hours formerly provided (70 hours per month and 4 consecutive days of assignments). - One-time loans by the Company to the respective workers affiliated with ACDAC and beneficiaries of the new CBA for individual amounts according to their position and seniority. These loans will be deemed fully satisfied if the aviation operations are developed under best practices during the period between execution of the new CBA and January 15, 2005, with no disruptions attributable to ACDAC and/or its members. They will also be deemed discharged in the event of the pilot's retirement or in the event of the Company's liquidation, provided that no collective operational disruptions has occurred in the latter case. Otherwise, the workers shall repay their debt through payroll deductions in 6 equal installments, with no interest, as from the pay-date following disruptions of the operations as above-stated. - A governmental commission would be established for the purpose of developing recommendations for such measures, if any, as the commission may find appropriate in order to assure the adequacy of the 21 fund managed by CAXDAC for the benefit of the pilots and former pilots who are or may become entitled to pensions payable from such fund. (The commission has now been established and has begun its work). The CBAs with both ACAV and SINTRAVA had stated expiration dates of June 30, 2004. Thus, both of them had until May 1, 2004, to notify the Company of their intentions to renegotiate. Neither of them did, nor did the Company. To the contrary, in prior meetings with the Company, both unions and the Company indicated their intentions that, upon the expiration of their CBAs, their respective CBAs would be automatically renewed for an additional six month period, through December 31, 2004. (c) Agreements with Valores Bavaria regarding Funding of Land Pensions. (i) Secured Loan Agreement. To fulfil certain conditions precedent that Valores Bavaria and the Coffee Federation specified in their Memorandum of Understanding in relation to the possible integration of Avianca S.A. and Aces S.A., Valores Bavaria agreed in December, 2001, to fund the payment of all the land pension obligations of Avianca S.A. and of its subsidiary, SAM, as such pensions were known on that date. Pursuant to such agreement, Avianca S.A. was capitalized by Valores Bavaria in the total amount of $(COL)350,000,000,000 [approximately $(USD)140,000,000]. Then, immediately after this capital infusion, Avianca S.A., as lender and secured party, made a secured loan back to Valores Bavaria, as borrower, in the exact same principal amount as such equity infusion under the condition that this secured loan would be repaid by Valores Bavaria by its paying the amounts due for those land pension obligations of Avianca S.A and SAM included as an attachment to the Pension Pledge Agreement (as hereinafter defined) and based on the actuarial calculation determined as of December 31, 2001 and its subsequent adjustments. The loan agreement was guaranteed by Bavaria, S.A., and it was secured by a pledge agreement of the shares of Inversiones Fenicia S.A., (as such pledge was replaced with shares of PrimeOther Ltda.) (the "Contrato de Prenda Abierta con Tenencia de Accione"s or the "Pension Pledge Agreement"). The land pension obligations covered by this secured loan comprise most of the Class 6 Claims (Other Secured Claims), which will be paid with the proceeds from Valores Bavaria's repayment of the above-mentioned loan in accordance with the terms of both the secured loan agreement between Avianca S.A., as lender, Valores Bavaria, as borrower, Bavaria, S.A., as guarantor, and also the Pension Pledge Agreement. A Trust structure was established with Fiduciaria La Previsora S.A., as a mechanism to guarantee the use of the proceeds coming from Valores Bavaria in repayment of the loan for the purpose of paying the land pension obligations. (ii) Other Land Pension Obligations Since December 2003, Avianca has discovered that pension obligations for 654 former workers of Avianca and/or of SAM., who had worked for the companies at some time during the period between 1967 and 1994 (the "New Pensioners"), estimated by Avianca in an amount of $(COL)45,000,000,000 [approximately $(USD)18,000.000] as of April 2004, had not been included within the mechanism to fund the land pension obligations described in the immediately preceding Section and as evidenced by the Pension Pledge Agreement. 22 The Coffee Federation and Valores Bavaria agreed in a settlement regarding the obligations related to certain indemnity obligations of Valores Bavaria contained in the Master Integration Agreement between Valores Bavaria and the Coffee Federation that Valores Bavaria would fund the amounts required for payment of all pension obligations of the New Pensioners, but limited to those of the specifically identified 654 New Pensioners (collectively, the "VB Assumed Pension Claims"), regardless of its amount, calculated according to applicable laws, and as provided for in an agreement executed by and between them, with Avianca's and Oceanair's acknowledgment, named "Convenio de Cesion de Intereses de Avianca y de Terminacion de Otros Acuerdos" (the "Interest Transfer Agreement"). The amount of the actuarial calculation of the VB Assumed Pension Claims, will be adjusted when it comes due, by a pension yield (the "DTF Pensional") equal to the inflation as certified by the Colombian authorities plus a spread, defined by applicable regulations. Valores Bavaria will pay the amounts resulting from the actuarial adjustment as and when it becomes due in full compliance with applicable Colombian labor and pension laws. Valores Bavaria shall fund the amount of the VB Assumed Pension Claims on the dates and up to the limited amounts that Avianca S.A. and SAM are required to pay for such obligations. This funding obligation includes any VB Assumed Pension Claims that Avianca or Reorganized Avianca pays before or after the Effective Date. It is understood that Valores Bavaria will have the right to negotiate agreements with the New Pensioners and with the pension fund entities such as the ISS, in order to finance, postpone, guarantee, or settle, in its own name for and on behalf of Avianca S.A. and/or SAM, the payment of the VB Assumed Pension Claims, under such terms and conditions as are permitted under applicable Colombian laws. (d) Incentive Compensation Plan. The Debtors' ability to reorganize and emerge from bankruptcy is contingent upon having and retaining a management team whose compensation structure is linked to Avianca's achieving optimal operating results. With the assistance of its financial advisers in 2003, Avianca implemented a "pay for performance" culture by instituting a bonus incentive compensation plan (the "Incentive Plan") for its management executives (collectively, the "Executives") that is based upon the Company's Board of Directors (the "Board") first establishing, and the Company's then meeting or exceeding, aggressive "key performance indicators" ("KPIs") for Avianca as a whole. The Incentive Plan covers all of Avianca's Executives, except the President and CEO, whose compensation already was, and remains, tied to Avianca's financial performance under the terms of his employment contract. In addition to the overall corporate indicator targets fixed by the Board for the Company as a whole under the Incentive Plan, Avianca's President and CEO established or approved specified, individual indicator targets tailored for each of the respective Executives. These targets were established by reviewing past performance benchmarks and various factors in the marketplace and have been fixed well above what has been budgeted for the Company and for the respective, individual Executives to accomplish. The established targets have varying levels which, if met, result in a sliding scale of bonus payments based upon the level achieved. Results are calculated and are payable on a quarterly basis. 23 The Debtors' financial results have exceeded expectations owing in large measure, the Debtors believe, to the incentives created under the Incentive Plan. Although KPIs have been achieved entitling the Executives to payments under the Incentive Plan, Avianca has withheld payment of almost all of such earned bonuses in order to conserve cash. The Plan provides for the implementation of the Incentive Plan and the resulting payment, subject to Oceanair's approval, of the accrued amount of approximately $740,000 on or before the Effective Date. F. LITIGATION MATTERS. 1. Master Trust Notes Litigation with BNY in the Bankruptcy Court. The Master Trust Notes Litigation is described in detail in Section IV.D below. See Section IV.D.12 hereof - "The Chapter 11 Case - Significant Proceedings in the Bankruptcy Case - Master Trust Litigation with BNY." 2. Civil Legal Proceedings in Other Courts. Avianca-SAM is subject to numerous lawsuits arising in the ordinary course of businesses. The following discussion identifies only those civil legal proceedings that, if adversely determined, Avianca-SAM believes might be material to its financial condition and/or its continuing operations. (a) Aircraft Maintenance Service Corporation v. Avianca S.A. (Bogota, 6th Circuit Civil Court). Claim: Declaration of Avianca's nonfulfillment of a contract, originating from an offer to sell some facilities (a real property used as maintenance facilities formerly owned by Avianca) . Defense: There was no timely and unconditional acceptance of the offer by the plaintiff and therefore the contract was never formalized. Amount of the claim: (USD)$12,374,540. (b) Jaramillo Estrada y Cia Ltda v. Avianca S.A (Bogota, 5th Circuit Civil Court). Claim: Civil contractual liability action for nonfulfillment of contract for transportation of goods, since the goods shipped by Avianca were seized by Colombian customs authorities for not having the legally required travel documents Defense: Seizure was an arbitrary action by the customs authority that made it impossible to deliver the goods on time. Amount of the Claim: (USD)$1,600,000 (payable in Colombian pesos). 24 (c) Marcelo Porcheto v. Avianca S.A (Buenos Aires, Argentina). Claim: Payment of compensation for the assistance services rendered to an Avianca flight in an emergency situation, based on analogy to principles of maritime law. Defenses: There was no need to provide any compensation because the only assistance provided was information and not any physical services of any personnel. The Aeronautical Code only refers to compensation and indemnity for direct damages. The maritime law is not applicable to the case. Amount of the claim: (USD)$3,000,000. Avianca was ordered to pay USD$80,000. This decision has been appealed by Avianca. (d) Legal Action of Aces vs. Avianca, SAM and COPA in Panama. Claim: On February 5, 1999, ACES filed a claim before the Comision de Libre Competencia y Asuntos del Consumidor (Free Competition and Consumer Affairs Commission) ("CLICAC") against Avianca, SAM and COPA, on the grounds of absolute antitrust practices ("PMA") and relative antitrust practices ("PMR") due to the code share agreement they entered into (Acuerdo de Codigo Compartido (the "ACC" ), which led to the closing of operations in the route covering Colombia-Panama-Colombia. Based upon an initial finding by CLICAC of the existence of PMR, Aces filed an additional lawsuit in the same jurisdiction, therein requesting the court (i) to declare that the purpose of the Agreement was a PMA throughout its term, (ii) to declare that the purpose of the Agreement was a PMR throughout its term, (iii) to declare that Avianca, SAM and COPA are jointly and severally liable to Aces for the repair of damages caused, (iv) to declare that ACES was directly affected by the ACC, (v) to declare that Avianca, SAM and COPA are jointly and severally liable for the damages assessed as of September 30, 2000 in the amount of USD$3,750,000.00, plus damages caused throughout the proceedings, as well as legal costs and expenses, and (vi) to require Avianca, SAM, and COPA to pay triple damages. Defense: Avianca's and SAM's defenses are that the ACC does not comprise the elements of a PMR or of a PMA. Because the proceedings are in their early stages, it is impossible to give a precise estimate of the risk of an unfavorable decision. Avianca-SAM believe that there are grounds to believe that the final decision, with respect to the ACES claim, will be in favor of the defendants. Amount of Claim: (USD)$3,750,000.00, plus damages caused throughout the proceedings, as well as legal costs and expenses against each defendant. (e) Colombian Judicial Proceedings Related to Pension Liabilities. (i) Generally. As of July 14, 2004, 175 lawsuits related to Avianca's pension liabilities were pending in Colombia. Under these lawsuits, the plaintiffs have demanded a decision concerning the obligations of Avianca S.A. to either (i) recognize and pay pensions to former employees (or to the respective legal representatives of deceased, former employees) of the 25 Company or of its subsidiary, SAM, or (ii) to adjust the amount of the pensions already recognized and refund the amounts that were effectively subtracted or discounted from the monthly payments that should have been made in respect of the pensions already recognized by the Company. In the event of an adverse decision in all the pending cases, the Company would have to pay both (I) the accrued amount as of the date of the judicial decision, which is estimated by the Company in Colombian Pesos to be approximately $(COL)6,086,600,000 [equivalent to approximately $(USD)2,060,028 at the exchange rate of $(COL)2,954,62 per $(USD)1.00] and also (II) the amount of the actuarial calculation for future payments of the such pensions. Because no final judicial decisions have yet been issued, it is not possible to determine the bases for the actuarial calculation. Some of these plaintiffs are included under the groups of pensioners already covered by the agreements with Valores Bavaria wherein Valores Bavaria assumed the obligation to pay all pension obligations of certain specified former employees of Avianca-SAM. The Company believes that there are no legal grounds for a number of these claims. (ii) The Tutela Action. Claim: On July 27, 2004, Avianca was served notice of a lawsuit (the "Tutela Action") brought before the Municipal Criminal Court of Bogota, Colombia (the "Municipal Criminal Court") by the Asociacion Colombiana de Aviadores Jubilados de Caxdac - AJUCAX (the Colombian Association of Pensioned Aviators of Caxdac - AJUCAX), together with certain individuals identified as Avianca's pensioners (the "Tutela Plaintiffs"). On August 6, 2004, CAXDAC, in response to a request made by the Municipal Criminal Court, filed pleadings in the Tutela Action joining the factual and legal arguments of the Tutela Plaintiffs. The Tutela Plaintiffs characterized the Equity Sponsors' proposed investments in Avianca pursuant to the Investment Agreement as an intended "sale" of the Company to a foreign investor, and they allege that the "sale" threatens their constitutional rights to social security and well being. In particular, they claimed that their constitutional rights were in jeopardy because the timely payment of retirement pensions, including those retired persons affiliated with CAXDAC, were in jeopardy owing to the uncertainty and risk that the "sale" would create, given that: (i) the "sale" does not include any guarantees of Avianca's payment of its contributions to the pensions fund held by CAXDAC, which Avianca is required to make annually with respect to the actuarial calculation within the terms set forth by Colombian Law 860 of 2003; (ii) the "sale" will be governed by foreign laws and subject to foreign jurisdiction; and (iii) the Plan provides for a full release of present officers and shareholders of Avianca. The Tutela Plaintiffs also contended that the "sale" gave rise to a violation of their constitutional right to equality, based on the fact that a certain commercial trust agreement was entered into by Avianca, by virtue of which, according to the Tutela Plaintiffs, payment of certain of Avianca's land workers' pensions are guaranteed, and the fact that the payment of the pensions of an additional 654 land workers have recently been assured by a third- party undertaking, while the Company's contributions to the CAXDAC pension fund are not guaranteed. The Tutela Plaintiffs sought an injunction prohibiting Avianca and its beneficial, majority shareholders, VB and FNC, from consummating the alleged "sale" of Avianca to any foreign investor, unless and until VB and FNC "provide to CAXDAC those guarantees 26 required for `assurance' of one hundred percent of the actuarial calculation for the timely payment of pensions." Defense: (i) The Tutela Plaintiffs lacked standing to bring the Tutela Action; (ii) the Equity Sponsors' proposed investments in Avianca do not threaten or violate any fundamental, constitutional rights of the Tutela Plaintiffs; (iii) neither the Equity Sponsors' proposed investments in Avianca nor Avianca's Plan of Reorganization threatened or violated any the Tutela Plaintiffs' constitutional right to equality; (iv) there was no basis under Colombian law for the extraordinary, injunctive relief sought; and (v) although a trust was created to fund the payment of Avianca's land pension obligations, it was formed several years ago and had no relationship to either the Equity Sponsors' proposed investments in Avianca or the current reorganization proceedings pending before Bankruptcy Court. Avianca S.A., as any other employer in Colombia, is obliged to make contributions to the social security system concerning pensions, of which CAXDAC is a part. Avianca has an obligation to contribute to the CAXDAC pension fund on behalf of Avianca's pilots and former pilots. On its part, CAXDAC, as a pension fund manager and social security entity, is the only entity obligated to pay retirement pensions to those pensioners legally affiliated with CAXDAC. The pensioners affiliated with CAXDAC not only include Avianca's pilots and former pilots, but also pilots of all other Colombian airlines employing pilots affiliated with CAXDAC. Accordingly, such pensioners only have a legal relationship with CAXDAC, and not with Avianca S.A., or much less with its beneficial, indirect majority shareholders. In its Answer to the Tutela Action, Avianca S.A. emphasized that the Plan's essential objective is to improve Avianca S.A.'s financial condition to enable it to timely satisfy its obligations, as provided therein, including the payment in full of its obligations to CAXDAC in accordance with the legally required actuarial calculation, and hence that the Plan in no manner threatens or violates those rights that Tutela Plaintiffs allege are at risk. Both the rights arising in favor of CAXDAC from Avianca's obligation to make contributions to pension-related social security entities and the rights in favor of affiliated pensioners arising from CAXDAC's obligations to pay their pensions are ruled by Colombian laws. These rights cannot be affected by private agreements - apart from the facts that both of these rights are being duly acknowledged in the Plan, as CAXDAC Claims are unimpaired and are contemplated to be fully and timely paid. As to the transactions contained in the Investment Agreement regarding the transfer of shares of and the investments to be made in Avianca, both will be ruled by Colombian laws and regulations. As to the release of Avianca's officers, directors, and shareholders regarding obligations undertaken before the effective date of the Plan, Avianca stressed that the releases are not unrestricted. To the contrary, as expressly provided in Clause 11.6: "The releases described in this Section 11.6 shall have the effect of res judicata (a matter adjudged), to the fullest extent permissible under applicable laws of the Republic of Colombia." (Emphasis added.) Furthermore, under applicable Colombian law, there are limitations on the res judicata effect of releases or other arrangements made by private agreements that are contrary to public policy. In addition, Avianca S.A.'s officers, directors, and shareholders covered by the Plan's release have never had any contractual relationships with CAXDAC. 27 Regarding Avianca S.A.'s alleged violation of the Tutela Plaintiffs' constitutional right of equality, Avianca contended that the hypothesis for this claim is legally insufficient because the circumstances of the Tutela Plaintiffs and those of Avianca's land pensioners are completely distinct from one another. Avianca's land pensioners are direct Creditors of the Company, while the Tutela individual Plaintiffs are direct creditors of CAXDC and, through CAXDAC, indirect, secondary beneficiaries of the obligations Avianca S.A. owes to CAXDAC. Additionally, the claims and rights of the land pensioners arise under their labor contracts with Avianca, whereas the claims and rights of the Tutela Plaintiffs arise under Colombian pension laws. Judgment of Municipal Criminal Court: On August 11, 2004, the Municipal Criminal Court denied the Tutela Plaintiffs' request for an injunction. In denying such relief, the Court made the following observations: - Avianca is in a restructuring process under the U.S. Bankruptcy Code and as a part of this process has entered into an investment agreement with Oceanair and the Coffee Federation, which if approved, will place resources in the Company in the amount of at least (USD)$63 Million. - The restructuring process of Avianca before the U.S. Bankruptcy Court is a legal and valid way to pursue the salvation of the Company in order to prevent major damages that would affect not only pensioners, but also employees of the Company. - CAXDAC is a member of the Creditors Committee and acts as President of the Committee. - According to Colombian Law, CAXDAC, as pension fund manager, assumed the pension obligations of airline companies in exchange for the companies obligation to contribute their payroll taxes. - Colombian Law 860 of 2003 and other applicable regulations have established a term for the airlines to pay the actuarial calculation to the pension fund managers through 2023. - Avianca does not have a direct relationship with the pensioners, as CAXDAC has the obligation to pay their monthly allowances. - By virtue of Colombian law, CAXDAC is the entity in charge of paying pensions to the pensioners; and, in the Municipal Criminal Court's view, it may exercise its rights in the Chapter 11 proceedings. 28 - According to the Plan, CAXDAC's Claims, classified as Class 2 Claims, are unimpaired, and hence CAXDAC's rights will remain unaltered. Therefore, the Court reasoned that the intention of the Plan is to protect such rights and that CAXDAC is in a position to support the Plan to the extent it does not affects it rights and the rights of its affiliates. - There are no legal grounds to demand that the Company secure a guaranty to assure future payment of its pension obligations. - There is no actual threat to the fundamental rights of the Plaintiffs. Avianca, Oceanair, and FNC cannot implement the Reorganization Plan without the approval of the Bankruptcy Court, which has not yet been obtained. Additionally, any number of factors could arise that might jeopardize the implementation of the Plan, which was the near result of the recently averted threatened strike by the pilots. Outcome of Claim: Although Avianca S.A. believes that there are no legal and/or factual grounds ultimately to support the Tutela Plaintiffs' position and hence firmly believes that final outcome of the action should be the complete denial of their demands, no assurance can be given respecting the actual outcome, which remains uncertain. Although the judgment of the Municipal Criminal Court was affirmed on the first appeal by the Tutela Plaintiffs to the Fourth Criminal Court for the Circuit of Bogota, such appellate decision is subject to further appeal to the Colombian Superior Tribunal and also possibly to the Colombian Constitutional Court. 3. Colombian Labor Proceedings. The following discussion identifies only those labor proceedings that the management of Avianca-SAM, in their reasonable judgment, consider to be material in nature. (a) Reinstatement Actions for Alleged Unfair Dismissal. There are 158 labor claims in which former employees seek reinstatement plus payment of unpaid salaries and fringe benefits, based on alleged unfair dismissal. All the claims together have an estimated value of approximately USD$ 4,350,000, which in case of an unfavorable decision must be paid in Colombian pesos at the time of final judgment. (b) Reinstatement Actions for Alleged Dismissals Without Cause. There are 109 labor actions in which the former employees claim for reinstatement due to unfair dismissal when they have more than 8 or 10 years of service; they also claim for payment of salaries and benefits. The Company bases its defenses on the fact that in several of those cases there are grounds for the dismissal because of a serious violation of the employee duties and in 29 other cases, because the labor agreement was terminated by accepting the resignation of the employee. The company expects to be successful in the final result of these cases. In case of an unfavorable decision, the total amount of the claims is estimated to be approximately USD$2,800,000, payable in Colombian Pesos. G. RECENT AND HISTORICAL FINANCIAL RESULTS. Set forth in APPENDIX C hereto are the following selected financial data for Avianca S.A. and for Avianca, Inc.: - Avianca-SAM domestic market share month by month for July 2003 to May 2004. - Avianca-SAM international market share month by month for July 2003 to May 2004. - Avianca-SAM operating results (actual/budget) for the period of January - May l 2004. - Avianca-SAM performance indicators for the period of January - May 2004. - Avianca-SAM costs and expenses discussion. - Non-operating income and expenses discussion. - Cash flow for the period of January - May 2004. Set forth in APPENDIX D hereto are copies of the audited, consolidated financial statements for Avianca S.A. for the fiscal year 2003 and the six months ended June 30, 2004. H. EFFORTS TO IDENTIFY POTENTIAL INVESTORS AND TO ATTRACT EQUITY SPONSORS. On October 17, 2003, Avianca's majority, beneficial owners, VB and FNC, entered into an agreement with Avianca in which VB and FNC committed, on behalf of the Company, to undertake the necessary efforts to search for an equity sponsor for Avianca. This agreement did not preclude Avianca or any other interested party from searching for, of suggesting prospective candidates for, equity sponsors for the Company. For their part, VB and FNC retained as investment banker VMS Associates LLC (formerly Violy, Byorum and Partners) to solicit and search for a strategic or financial investor who could be interested in the Avianca restructuring process. From mid 2003 until March 2004, VB and FNC, together with its advisor, solicited and searched among several Latin American airlines as well as within the financial community for a potential equity sponsor who could provide an investment proposal for Avianca. Before the Chapter 11 filing and during this period, VB and FNC committed important 30 economic resources and their representatives devoted significant amounts of time in an effort to successfully accomplish the reorganization of Avianca. Among these efforts, VB and FNC deployed qualified personnel and external advisors to carry out a solicitation process proportionate to the magnitude of the transaction. The team formed to undertake this task spent months searching for an appropriate equity sponsor and traveled to different countries to meet with all potential sponsors. Furthermore, they used their local presence in Colombia to facilitate the attainment of Governmental cooperation to prevent any disruption in the process, which could adversely affect the Company. Ensuring that Avianca fully complies with all laws and regulations applicable to the Company under both Colombian and U.S. laws has been a paramount goal of Avianca's beneficial owners. As a result of these efforts, two different companies made serious proposals for investments in the Company, which were (i) a firm proposal from Oceanair Linhas Aereas Ltda. ("Oceanair"), with the participation of the Coffee Federation, that is the basis for the Plan and (ii) a non-binding, conditional proposal from Copa Airlines, supported by its affiliate Continental Airlines. The Company's Board carefully considered both proposals, as well as other restructuring options, including a standalone plan of reorganization in which no new investment would be made in the Company. After weeks of negotiations and discussions concerning these alternatives, the Board determined that Oceanair's proposal was the highest and best offer for the Company and its Creditors. I. THE EQUITY SPONSORS. 1. The Coffee Federation. The Coffee Federation is a private, non-profit organization, founded on June 27, 1927, that brings together all of the approximately 560,000 families of coffee growers of Colombia in a democratic and participative organization. Its main object is to procure the well being of coffee producers and the protection of their incomes through the Fondo Nacional de Cafe (the National Coffee Fund). Today, the Federation is one of the largest rural non-governmental organizations ("NGOs") in the world, with a major income distribution impact in the Colombian rural area. FNC has been internationally recognized for its capacity of creating successful institutional arrangements that permit agricultural producers to profit from the benefits of their collective action. FNC has been an indirect, beneficial owner of Avianca since February 25, 2002. Separately, FNC is also one of the DIP Lenders under the DIP Financing Facility. The FNC administers the National Coffee Fund through a contract with the Colombian Government. The programs executed by the FNC try to maximize, stabilize, and transfer most of the income from the sale and exportation of coffee to the coffee growers. Its main political programs are the guarantee of purchase and quality, institutional commercialization, promotion and publicity, stabilization, regulation, investigation, and furnishing technical services to the coffee growers. These public goods and institutional services, which are furnished to the coffee growers free of charge, simultaneously seek to obtain an efficient, sustainable, and competitive coffee culture. Additionally, the FNC has been characterized as being a great and efficient executor of investment in social services and construction of public works for the development of agricultural regions in alliance with Government agencies (national and regional), as well as, national and 31 international NGOs. The Federation has invested through the years in social programs such as healthcare, education, electrification, waterworks, and transportation. The Federation's main objective is to buy coffee from the producers at the best price possible taking into account the international market price and a minimum level of margin to guarantee long term sustainability. The FNC buys coffee locally through coffee growers' cooperatives and sells it to the external market. The FNC sells abroad approximately 30 percent of the total national coffee exports, and is the largest coffee exporter in the world. In addition, it supplies the Colombian domestic market and is responsible for managing coffee inventories and controlling quality. 2. Oceanair. Oceanair is a sociedad limitada (similar to a limited liability company) organized under the laws of Brazil, and it is an Affiliate of Synergy Group Corp. ("Synergy"), a corporation organized under the laws of Niue. In 2001, at the height of the airline industry crisis, Oceanair expanded its air taxi operations in Brazil to serve the country's regional market. Oceanair's strategy is to create a Latin America regional airline. With 14 aircraft, Oceanair is today the leading and fastest growing regional carrier in Brazil with daily flights to and from 32 cities across the country. Figures year to date indicate Oceanair flies an average of 20,000 passengers per month, up 90% from its 2003 average. Oceanair has already begun expanding into the regional market beyond the Brazilian borders and expects to begin operating its first international route in 2004 (Sao Paulo to Santa Cruz de la Sierra, Bolivia). 3. Synergy. Synergy is a well-diversified conglomerate with interests primarily in the oil and gas industry in Brazil, Ecuador, and Colombia, as well as in the airline industry in Brazil and Ecuador. Synergy offers a comprehensive range of supporting and complementary offerings, including: industrial and non-destructive material testing, medical equipment distribution, engineering and construction of offshore oil and gas platforms (first in its sector in Brazil), onshore oil and gas exploration and production (second largest holder of onshore exploration blocks in Brazil), shipbuilding, offshore construction, power generation and distribution, aerospace, telecom, and airlines. In addition to the airline operations of Oceanair, Synergy also operates a regional airline in Ecuador, VIP S.A. Synergy also has maintenance facilities in the State of Rio de Janeiro with the capability of providing engine services on certain aircraft engines. Synergy's mission is to continue to grow with a broad international focus across its core businesses. In Colombia, Synergy has been one of the few foreign companies to invest new capital in the country's oil sector in the past 5 years. In less than 12 months, Synergy was able to turn a loss generating oil field into one that produces over 10,000 barrels per day. To further enhance the company's oil and gas production in Colombia, Synergy and its partners plan to invest up to $350 Million in the next three years in the construction of a new oil pipeline. 32 Synergy's success in turning around its oil field operations in Colombia from an under-managed business into a sustainable on-going concern is not unique. In the past 36 months alone, Synergy has invested $100 Million in under-performing assets in Brazil, Colombia, and Ecuador. In 2003, Synergy generated approximately $19 Million in consolidated EBITDA on consolidated revenues of approximately $220 Million. As a result of its recent investments, Synergy expects in 2004 to generate approximately $67 Million in consolidated EBITDA on consolidated revenues of approximately $340 Million. Synergy has offices in Rio de Janeiro, Sao Paulo, Bogota, Quito, Guayaquil, Houston, and Rotterdam. 4. Lack of Public Financial Information. Neither Oceanair nor Synergy is a public company or is otherwise required to make public its financial statements or other information concerning its financial condition, and no such information is being made available in this Disclosure Statement. However, neither Oceanair nor Synergy has guaranteed or otherwise undertaken any financial or other obligation in connection with the Reorganized Debtor's performance of its commitments under the Plan, and Oceanair's sole obligation as it relates to the financial ability of the Reorganized Debtor to perform its obligations under the Plan is its obligation to make equity and/or Subordinated Debt investments in the Reorganized Debtor, substantially all of which are secured by a letter of credit. As a result, financial information respecting Oceanair and Synergy would not, in Avianca's view, be helpful in assisting Claimholders to make an informed judgment concerning the Plan. See Section B.3(b)(ii) above - "SUMMARY OF PLAN - Letter of Credit." J. POST-EFFECTIVE DATE MANAGEMENT OF REORGANIZED DEBTORS. The Equity Sponsors, through the SPVs, will control the selection of the directors and officers of the Reorganized Debtors after Confirmation of the Plan. To date, the Equity Sponsors have not identified who those individuals will be. Prior to the Confirmation Hearing, the Proponents will disclose the identity and affiliations of all individuals proposed by the Equity Sponsors to serve, after Confirmation of the Plan, as a director or officer of Reorganized Avianca S.A. and of Reorganized Avianca, Inc., as well as the identity of any "Insider" (which as used herein means (i) any director of the Debtor, (ii) any officer of the Debtor, (iii) any person in control of the Debtor, or (iv) any partnership in which the Debtor is a general partner) that will be employed or retained by either Reorganized Debtor, the nature of any compensation for such Insider, and such other information as is required by Section 1129 of the Bankruptcy Code. 1. Board of Directors of Reorganized Avianca S.A. On and after the Effective Date, the number of directors comprising the Board of Directors of Reorganized Avianca S.A. will be three (3). The initial Board of Directors of Reorganized Avianca will consist of one (1) director nominated by the Coffee Federation and two (2) directors nominated by Oceanair. If a vacancy among the initial members of the Board of Directors of Reorganized Avianca S.A. arises, such vacancy will be filled in accordance with the Settlors Agreement (as defined in the Investment Agreement) and the Avianca S.A. Restated Bylaws. 33 2. Officers of Reorganized Avianca S.A. The corporate officers of Avianca S.A. will serve as the initial officers of Reorganized Avianca S.A. as of the Effective Date. The selection of officers of Reorganized Avianca S.A. from and after the Effective Date will be as provided in the Restated Avianca S.A. Bylaws. 3. Board of Directors of Reorganized Avianca, Inc. On and after the Effective Date, the number of directors comprising the Board of Directors of Avianca, Inc. shall remain at 3 members. The initial Board of Directors of Avianca, Inc. will consist of the Board of Directors of Avianca, Inc. on the day immediately prior to the Effective Date. If a vacancy among the initial members of the Board of Directors of Avianca, Inc. arises, such vacancy shall be filled in accordance with the Avianca, Inc. Restated Certificate of Incorporation and the Avianca, Inc. Bylaws. 4. Officers of Reorganized Avianca, Inc. The corporate officers of Avianca, Inc. will continue to serve as the initial officers of Reorganized Avianca, Inc. as of the Effective Date. The selection of officers of Avianca, Inc. from and after the Effective Date shall be as provided in Avianca, Inc.'s Restated Certificate of Incorporation and the Avianca, Inc. Bylaws. IV. THE CHAPTER 11 CASE. A. EVENTS LEADING UP TO THE CHAPTER 11 CASE. In December 1999, Avianca S.A., like virtually all other commercial airlines operating in Colombia, was confronting serious financial and operational difficulties: fuel prices increased 150% between 1999 and 2001; and Colombia experienced a dramatic currency devaluation as against the U.S. dollar of 22% in 1999, followed by an additional devaluation of 14% in 2000. These devaluations had a particularly adverse impact on Avianca because only 40% of its revenues, but 60% of its costs were U.S. dollar denominated. Additionally, Avianca-SAM lost nine planes it had been leasing from British Aerospace in the fourth quarter of 1999, which reduced Avianca-SAM's domestic market share from 52.6% in October of 1999 to 45.5% in December of 1999. In response to these circumstances, Avianca, with the assistance of its legal and financial advisors, commenced negotiations with its principal aircraft lessors and lenders. Interim accommodation agreements were concluded in September of 2000. However, even with the voluntary concessions given by its principal aircraft lessors and lenders, Avianca still found that its revenues were not sufficient to support its cost structure. Avianca's management concluded that the Company needed to further restructure its outstanding financial obligations and also to address various operational issues if it was going to achieve profitable operations. As a result, Avianca initiated a number of measures designed to cut costs and to enhance revenues. 34 In the first part of 2001, Avianca entered into formal restructurings of its relationships with its principal lessors and lenders, with the important exception of the holders (the "Noteholders") of notes (the "Notes") issued through The Bank of New York, as trustee ("BNY"), under the Master Trust Agreement, dated December 23, 1997 (the "Master Trust Agreement"), between BNY and Avianca. These Notes were secured by all of Avianca's U.S. receivables arising out of payments made in U.S. dollars on credit cards and through a clearinghouse (Airlines Reporting Corporation) on account of tickets for travel to and from the United States (the "U.S. Receivables"), which are paid directly to BNY under the terms of the Master Trust Agreement. On December 19, 2001, in an effort to address its operational difficulties, the principal, beneficial shareholders of Avianca entered into an "integration" with shareholders of Aces, another Colombian commercial airline, forming Alianza Summa. See Section III.B.2 above --"The Company - Description of the Airline Industry / Avianca's Position in the Marketplace - Alianza Summa and Liquidation of Aces." During the period from 2000 to 2002, Valores Bavaria made additional capital contributions and other equity investments in Avianca aggregating over $259,268,000, of which approximately $140,000,000 was, in turn, used by Avianca to make a loan back to Valores Bavaria S.A. in exchange for an instrument that was placed in trust for the satisfaction of Avianca's and SAM's pension obligations to their respective non-flight crew employees and former employees. Nevertheless, these additional capital infusions were insufficient to overcome the difficulties that continued to confront Avianca. The terrorist attacks on the United States, which took place on September 11, 2001, devastated the airline industry. Passenger traffic in the aggregate international market decreased between 20 to 30% and insurance costs increased by a staggering 450%. Avianca's revenues suffered severely following that day, and it found itself unable to meet its financial obligations, even as restructured over the preceding several years. This situation was aggravated by the Venezuelan instability, exchange controls imposed by the Venezuelan Government, and deeper market reductions in the first quarter of 2003 as a consequence of the war threats among other factors. A 31% Colombian peso devaluation between April 2002 and March 2003, unprecedented high oil prices (making aviation fuel costs in U.S. dollars 80% greater in March of 2003 than in March of 2002), new visa requirements for Colombian citizens, and high aircraft leasing rates in Colombia, compared to the rest of the global market, generated additional significant jeopardy to Avianca's continued viability. With respect to Avianca's obligations to the Noteholders pursuant to the Master Trust Agreement, under which Avianca has been in default since the fall of 2000 by reason of its non-compliance with the financial covenants, Avianca was able to obtain only intermittent temporary waivers of the default. The Noteholders had been, since the fall of 2000, from time to time exercising their right, on account of the default that had existed since 2000, to direct BNY to withhold from Avianca all payments made on Avianca's U.S. Receivables paid or to be paid, notwithstanding the following facts: Avianca had never missed a payment on the Notes; the payment on the Notes scheduled for March 21, 2003, had been prepaid; Avianca had at that time prepaid the Notes by the aggregate amount of approximately $17,000,000 (leaving a balance remaining of approximately $20,500,000 out of an original principal amount of $75,000,000); and 35 Avianca's U.S. Receivables were at that time projected to remain, for each quarter through the maturity of the Notes, at a level at least three times the amount of the quarterly payment that next comes due on the Notes. In March 2003, in addition to its default under the Master Trust Agreement, Avianca was also in default under every one of its aircraft leases, and Avianca had begun receiving from lessors notices of default and demands for possession of aircraft, which Avianca had no realistic out-of-court prospects to resist. As a result, Avianca determined that while it had exhausted its opportunities to achieve a successful restructuring outside the protection of an appropriate judicial or administrative proceeding, it had a reasonably good likelihood of achieving a successful restructuring under the Bankruptcy Code, which would produce better results for its creditors than would a liquidation of its assets. B. DETERMINATION TO SEEK RELIEF UNDER CHAPTER 11. In and for many years before March 2003, Avianca had assets located in the United States and had an office on Fifth Avenue in New York City. At that time the Noteholders, BNY and Avianca's principal lessors were located in, or were subject to the jurisdiction of, the United States. Most of Avianca's lease agreements and the Master Trust Agreement and the other documents related thereto were governed by the laws of the State of New York (except that the nature and extent of Avianca's and BNY's interest in the U.S. Receivables are governed by the laws of the Republic of Colombia) and were negotiated and were in many cases performed in the United States. The provisions of several of Avianca's leases and contracts, including the Master Trust Agreement, required that Avianca submit to the jurisdiction of the state and federal courts located in New York. While Avianca was, and continues to be, eligible to be a debtor under Colombian Law 550 (a law in some ways similar to chapter 11 of the Bankruptcy Code), it was not certain whether a filing under that law would adequately protect Avianca from legal action in the United States against it by its U.S. lessors and creditors. It was likewise not certain whether an ancillary proceeding under the Bankruptcy Code, in conjunction with a proceeding under Law 550, would necessarily provide the protection of chapter 11 which was determined by Avianca's management to be needed for Avianca to have a reasonable likelihood of achieving an effective reorganization, owing to procedural and substantive differences between chapter 11 and Law 550. By contrast, Avianca, Inc., by virtue of its being a New York corporation and having assets and a place of business in the United States, and Avianca S.A., by virtue of its having assets and a place of business in the United States, were eligible to be debtors under the Bankruptcy Code and believed that their efforts to reorganize would be enhanced by a variety of procedural and substantive features of the Bankruptcy Code. Among those features were the automatic stay of collection and repossession actions by all aircraft lessors (not only those with significant contacts to Colombia), a moratorium on aircraft lease payments for a 60 day period commencing on the date of the petition commencing the Case, the right to reject any burdensome lease (unless the lessor were willing to negotiate new terms acceptable to the Debtors), and the potential of avoiding the postpetition effect of its transfer to BNY for the benefit of the Noteholders of its interest in the U.S. Receivables. 36 Recognizing that Avianca S.A. could expect to confront resistance to the jurisdiction of the United States Bankruptcy Court by certain creditors located in Colombia (just as U.S. domestic airlines and other chapter 11 debtors confront resistance from foreign creditors), Avianca had reason to believe that it would be able to manage its Colombian creditors largely in a manner consistent with its obligations under the Bankruptcy Code, but otherwise, under special circumstances, would be required to seek extraordinary relief from the Court (in the manner that U.S. domestic airlines and other chapter 11 debtors seek relief in order to accommodate foreign creditors not subject to U.S. jurisdiction). Avianca S.A. also reserved the right, should it at a later date require protection from its Colombian creditors, to take advantage of the benefits of Law 550. As a result of the foregoing, the boards of directors of Avianca S.A. and Avianca, Inc. authorized the Debtors to commence the Case under chapter 11 of the Bankruptcy Code, and the Debtors filed petitions commencing the Case on March 21, 2003, in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). C. CONTINUATION OF BUSINESS AND STAY OF LITIGATION AND OTHER COLLECTION ACTIONS. In accordance with the provisions of the Bankruptcy Code, upon the filing on the Petition Date of the petitions commencing the Case, the Debtors became debtors in possession in their chapter 11 Case and remained in possession of their business and assets. As such, Avianca continued following the Petition Date and continues at the present time to operate its business in the ordinary course. As authorized by the Bankruptcy Code, the Debtors have since the Petition Date used, sold and leased their property and assets and have engaged in transactions, without seeking the approval of the Bankruptcy Court, in the ordinary course of business, and, in certain circumstances, they have sought and obtained the approval of the Bankruptcy Court to engage in transactions which were, or may have been, outside the ordinary course of its business. See Section IV.D. below - "The Chapter 11 Case-Significant Proceedings in the Bankruptcy Case." The filing of the petitions operated, pursuant to the provisions of the Bankruptcy Code, as a stay, in general, of, among other actions, (a) the commencement or continuation of any judicial, administrative or other legal proceeding against either Debtor to recover a claim against the Debtor that arose before the commencement of the Case, (b) the enforcement against either Debtor or the property of either Debtor of a judgment obtained before the commencement of the Case, (c) any act to obtain possession of property, including aircraft, engines or other equipment, from either Debtor, (d) any act to create, perfect or enforce against the property of either Debtor of any lien, (e) any act to collect, assess or recover a claim against either Debtor that arose before the commencement of the Case; or (f) the setoff of any debt owing to a Debtor that arose before the commencement of the Case against any claim against the Debtor. Avianca has been able to operate its business in the ordinary course since the Petition Date, in part owing to the imposition of the automatic stay discussed above. For example, notwithstanding the defaults that existed immediately before the Petition Date under each of Avianca S.A.'s aircraft leases, no aircraft lessor took action or attempted to take action to repossess a leased aircraft. Rather, except with respect to aircraft that Avianca leased pursuant to a lease that Avianca rejected pursuant to the provisions of the Bankruptcy Code, each lessor of aircraft to Avianca reached a mutually acceptable agreement with Avianca providing for Avianca to retain the aircraft during the Case, in each case at a rental rate equal to or lower than the rate in effect on the 37 Petition Date. See Section IV.D.10 below - "The Chapter 11 Case-Significant Proceedings In The Bankruptcy Case - The Approval Of Renegotiated Aircraft Leases." Notwithstanding the provisions of the Bankruptcy Code, however, Avianca recognized that its ability to effect compliance with the automatic stay by creditors outside the jurisdiction of the United States, particularly creditors located in Colombia, could depend largely on Avianca's ability to persuade such creditors that compliance, even voluntarily, with the constraints imposed by the automatic stay would produce the best chance for Avianca to achieve a successful reorganization and, consequently, the optimal recovery on the part of all creditors, including those located outside the jurisdiction of the United States. Avianca's success in achieving compliance by private creditors located in Colombia has been largely, but not entirely, successful. As of February, 2004, creditors located in Colombia had, notwithstanding the automatic stay and Avianca's efforts to encourage voluntary forbearance, been successful in attaching assets of Avianca S.A., specifically bank accounts, having balances totaling no more than approximately $915,923. Avianca estimates that after February, 2004, and on or before the Effective Date of the Plan, if the Plan is confirmed, no more than an additional $70,000 in assets of Avianca S.A. are in jeopardy of being attached or otherwise seized to satisfy prepetition claims against the Debtors. D. SIGNIFICANT PROCEEDINGS IN THE BANKRUPTCY CASE. 1. First Day Orders. On the Petition Date, Avianca filed several "first day" motions seeking Bankruptcy Court authorization to pay certain essential prepetition obligations, including obligations to pay outside mechanics and repairmen, foreign vendors (excluding, with limited exceptions, vendors located in Colombia), wages, salaries, employee benefit contributions and employee deductions owing to or for the benefit of employees, other airlines with which the Debtors had interline relationships, travel agents, clearinghouses, tour service providers, other parties to commercial agreements with the Company, fuel suppliers, in-to plane service companies, bank charges owing to banks and other essential suppliers. Avianca also filed "first day" motions seeking authority to honor its obligations to prepetition ticket holders and other parties with which Avianca had barter arrangements. The Bankruptcy Court granted interim relief from time to time and ultimately final relief granting the Company's "first day" motions to the extent necessary to enable the Company to continue its operations without interruption, to maintain the loyalty and confidence of its employees, vendors and the traveling public, and to prevent the adverse effects to Avianca's ability to reorganize that could otherwise have resulted from actions against the Company by creditors beyond the jurisdiction of the Bankruptcy Court. 2. Appointment of Professionals to Represent or Assist the Debtors. During the course of the Case, Avianca requested and received Bankruptcy Court authority pursuant to section 327 of the Bankruptcy Code to employ certain professionals. Those professionals and the general scope of their employment is as follows: 38 (a) SMITH, GAMBRELL & RUSSELL, LLP - U.S. Bankruptcy counsel for Avianca, performing legal services necessary to the Debtors' reorganization, including, but not limited to, institution and prosecution of legal proceedings, advice regarding debt restructuring and general legal advice and assistance related to the Debtors' chapter 11 cases, all of which are necessary to the proper preservation and administration of their bankruptcy estates; employment approved by interim order entered on March 26, 2003 and by final order entered on April 25, 2003; (b) ANDERSON KILL & OLICK, P.C. - Local bankruptcy co-counsel for Avianca, performing as local counsel legal services necessary to the Debtors' reorganization, including, but not limited to, institution and prosecution of legal proceedings, advice regarding debt restructuring and general legal advice and assistance related to the Debtors' chapter 11 cases, all of which are necessary to the proper preservation and administration of their bankruptcy estates; employment approved by interim order entered on March 26, 2003 and by final order entered on April 25, 2003; (c) BAIN & COMPANY - Restructuring financial advisors to Avianca. Bain & Company provided ongoing advice and consulting regarding fleet and network redesign, identification and prioritization of operational improvement opportunities, detailed turnaround budgeting and planning, competitive strategy and organizational effectiveness, overhead cost reduction, and distribution strategy and cost reduction related thereto; employment approved by order entered on September 4, 2003; (d) SEABURY TRANSPORTATION ADVISORS, LLC AND SEABURY ADVISORS, LLC - Restructuring financial advisors to Avianca. Seabury Transportation Advisors, LLC and Seabury Advisors, LLC provided ongoing assistance in the development of a plan for the restructuring of debts, including restructuring lease obligations and existing debt obligations to lessors, reviewed and provided recommendations regarding development and implementation of a business plan and capital structure, assisted with debt and/or equity raising, provided advice on short-term cash management and liquidity issues, assisted with the financial restructuring plan, and provided other financial advisory and investment banking services in connection with the contemplated financial restructuring of Avianca; engagement approved by order entered on June 19, 2003; (e) DONLIN, RECANO & CO, INC. - Official Claims and Noticing Agent, engaged to assist Avianca by providing notices to parties in title 11 cases and receiving, docketing, recording, maintaining, photocopying, transmitting, and otherwise administering proofs of claim filed in the cases; employment approved by order entered on May 15, 2003; (e) ORDINARY COURSE PROFESSIONALS - Avianca sought and obtained permission to retain certain professionals that Avianca utilized in the ordinary course of their businesses. The order, entered on July 25, 2003 and amended on July 16, 2004, approving the retention of ordinary course professionals 39 required that prior to payment being made to any of the ordinary course professionals, Avianca must provide to the Committee certain information regarding matters upon which each professional is to be employed and obtain Committee approval regarding each ordinary course professional. The services provided by ordinary course professionals retained in this Case generally consisted of (i) legal services and advice related to labor law, civil litigation, criminal law, tax law, human resources law, customs law, environmental law, acquisition of permits and aircraft acquisition/leasing and (ii) consulting services related to cost reduction initiatives, actuarial services and accounting services; and (f) SUESCUN & DE BRIGARD - Colombian counsel for Avianca, performing legal services necessary to the Debtors' reorganization, including, but not limited to, institution and prosecution of Colombian legal proceedings, advice regarding debt restructuring and general legal advice and assistance related to this Case, all of which are necessary to the proper preservation and administration of Avianca's bankruptcy estates; employment approved by final order entered in June, 2004. 3. The DIP Financing Facility. On March 26, 2003, the Bankruptcy Court authorized Avianca on an interim basis to borrow up to $18.5 Million in the form of a revolving line of credit, evidenced by that certain Debtor in Possession Financing Agreement dated March 26, 2003 (the "DIP Financing Facility"). The lenders that provided the DIP Financing Facility were Valores Bavaria, PrimeOther Ltda., a company organized under the laws of the Republic of Colombia, an Affiliate of Valores Bavaria and successor to Inversiones Fenicia S.A. (collectively, "Bavaria"), and the Coffee Federation (Bavaria and the Coffee Federation, collectively, are herein called the "DIP Lenders"). The DIP Financing Facility was fully funded by the DIP Lenders with Valores Bavaria providing $13.5 Million and the Coffee Federation providing $5.0 Million. A final order authorizing the DIP Financing Facility was entered on June 13, 2003. The maturity date of the DIP Financing has been extended several times. Currently the maturity date is January 31, 2005, subject, however, to earlier maturity under the following circumstances: the earlier to occur of (i) thirty (30) calendar days after Avianca files any amendment to the Plan it filed with the Bankruptcy Court on July 16, 2004, which conformed to the terms set forth in the Investment Agreement (a "Conforming Plan") if the amendment results in the Plan becoming a non-Conforming Plan, (ii) thirty (30) calendar days after Avianca files any other Plan of Reorganization that is not a Conforming Plan, (iii) thirty (30) calendar days after withdrawal of a Conforming Plan, (iv) thirty (30) calendar days after Avianca files any amendment to a Conforming Plan that does not comply with the terms set forth in the Investment Agreement, or (v) the denial of Confirmation of the Conforming Plan by the Bankruptcy Court. The DIP Financing Facility is secured by a partial assignment of the proceeds of the letter of credit securing Oceanair's obligations to perform under the Investment Agreement. In addition, all obligations under the DIP Financing Facility have administrative expense priority pursuant to Section 364(c)(1) of the Bankruptcy Code over any and all administrative expenses of Avianca of the kinds specified in Sections 503(b) and 507(b) of the Bankruptcy Code. The entire principal amount of the DIP Financing Facility is payable at maturity and interest is payable 40 monthly at a floating rate equal to the LIBOR Index Rate (defined as, the rate of interest reported in the "Money Rates" section of The Wall Street Journal on such day as the six month "London Interbank Offered Rate (LIBOR)", or, if such information is not published on such day, then the immediately preceding date of publication) plus seven percent (7.0%) per annum. The Claims of the DIP Lenders pursuant to the DIP Financing Facility are subject to a carve out in an aggregate amount not to exceed $350,000 for fees and expenses of professionals retained in these cases by Avianca, and reasonable fees and expenses of a trustee under section 726(b) of the Bankruptcy Code. In addition, all claims for the unpaid fees of the United States Trustee or the Clerk of the Court payable pursuant to 28 U.S.C. Section 1930(a) shall have priority over the Claims of the DIP Lenders under the DIP Financing Facility. Under the Plan of Reorganization, the Coffee Federation will acquire all VB's rights in the DIP Financing Facility for the sum of $(USD)6,500,000 and will convert the entire principal amount of the Debtors' DIP Financing Facility, i.e., $(USD)18,500,000, into approximately 25% of the beneficial ownership of the stock of Reorganized Avianca S.A. 4. Appointment of Creditors' Committee. On March 28, 2003, the United States Trustee appointed an Official Committee of Unsecured Creditors (the "Committee"). With the approval of the Bankruptcy Court, the Committee engaged the law firm of Greenberg Traurig LLP to represent it in the Case and the firms of Ernst & Young LLP and Ernst & Young Corporate Finance to represent and perform services for the Committee and the law firm of Zueleta Suarez Araque & Jaramillo as Colombian special counsel to the Committee (all of such firms, collectively, the "Committee's Advisors"). The Committee is composed of the following seven members: Caja de Auxilios y Prestaciones de la Asociacion Colombiana de Aviadores Civiles ("CAXDAC"), the Asociacion Colombiana de Aviadores Civiles ("ACDAC" or the "Pilots' Union"), debis AirFinance B.V., Pegasus Aviation Inc., Banco de Bogota-Colombia, United Aerospace Corporation, Inc. and Monumental Life Insurance Company, a Noteholder. From its inception, the representative of CAXDAC has served as the Committee's chairman. Since its appointment and the engagement of the Committee's Advisors, the Committee and its Advisors have been active in the Case. In performing its duties and responsibilities under the Bankruptcy Code, the Committee has met regularly to conduct its business, has directed its Advisors to conduct such investigations as it has deemed appropriate, has considered each motion presented by the Debtors for consideration by the Bankruptcy Court and taken such positions with respect to the motions as it has deemed appropriate and has appeared, through its attorneys, at the hearing on each motion to advocate the position of the Committee. In many cases, the Debtors took the Committee's concerns and positions into account either before or after filing their motions and modified the relief being requested to accommodate the Committee's concerns. Selected members of Avianca's management and its Advisors met or spoke periodically with the Committee, Avianca's Advisors met or spoke frequently with the Committee's Advisors, and the Committee's Advisors from time to time met with individual representatives and employees of the Debtors in order better to understand Avianca's business, intentions, and prospects. 41 5. The Motion to Dismiss. On April 11, 2003 Pegasus Aviation, Inc. filed an Emergency Motion to Dismiss the Debtors' Chapter 11 cases and a few days later Ansett Worldwide filed a similar motion These motions to dismiss were joined by United Aerospace, Inc. and a few other smaller creditors. The Bankruptcy Court held an evidentiary hearing on May 8, 2003 to consider the issues raised in the motions to dismiss. In addition to the Debtors, the Committee, Dresdner Kleinwort Wasserstein Limited and debis AirFinance, B.V. filed papers opposing the motions and appeared at the hearing to argue against the dismissal of the cases. Both Ansett and Pegasus alleged, inter alia, that the Debtors' bankruptcy cases should be dismissed because the Debtors engaged in forum shopping in order to prejudice U.S. creditors and that the cases were filed in bad faith. The movants also alleged that a plan of reorganization could not be effected in the bankruptcy cases and that the proper forum for the Debtors' reorganization is Colombia. The Debtors and other opposing parties argued that the Debtors could not effectively reorganize under Colombian law and that the majority of the Debtors' largest creditors are subject to the Bankruptcy Court's jurisdiction. After the hearing and prior to the Bankruptcy Court's decision on the motions to dismiss, both Pegasus and Ansett withdrew their motions. However, the creditors that joined the motions, including United Aerospace, declined to withdraw their joinders to the motions, and on December 23, 2003, United States Bankruptcy Judge Allan L. Gropper entered his order denying the motions to dismiss. In re Aerovias Nacionales de Colombia S.A. Avianca and Avianca, Inc., 303 B.R. 1 (Bankr. S.D. N.Y. 2003). 6. The DIAN Motions. On June 19, 2003, the Bankruptcy Court approved an agreement between the Colombian National Tax and Customs Agency ("DIAN") and the Debtors authorizing the payment of certain tax obligations of the Debtors to DIAN (the "DIAN Motion"). As of the Petition Date, the total outstanding indebtedness of Avianca S.A. owing to DIAN was in the total amount of approximately $8,082,918.00. Under the agreement approved by the Court, all such indebtedness to DIAN was secured by liens on certain real property. The Company subsequently satisfied in full all such indebtedness to DIAN, and DIAN has agreed to release its liens on the real property collateral. 7. The CAXDAC Motion. On June 19, 2003, the Bankruptcy Court approved an agreement between CAXDAC and the Debtors. CAXDAC is a private-sector welfare institution organized under Colombian law as a Pension Fund Manager operating in the Mutual Assistance Regime with Medium Premium and Defined Benefit in relation to the Colombian Civil Aviators' Pension Regime. As an airline company that employs civil aviators who benefit under the Special Transitional Regime, Avianca S.A. is required to contribute to a common fund managed by CAXDAC from which CAXDAC draws the money to make monthly pension payments to eligible civil aviators (the "Common Fund"). The amount and timing of payments which Avianca S.A. and other Colombian airlines are required to contribute to the Common Fund each year are currently prescribed in Colombian law. 42 Under the agreement approved by the Court, Avianca agreed to pay its required contribution, with interest on the unpaid balance thereof at the rate legally prescribed by Colombian law (which is a variable interest rate, and as of May 15, 2003, was 26.58% per annum), in eight (8) equal monthly installments, each in the approximate amount of 3,100,000,000 Colombian pesos, with the first installment being due and payable upon approval of the settlement by the Court, and succeeding installments being due and payable on June 30, 2003, and the 30th day of each month thereafter through and including December 30, 2003. Avianca has made the payments to CAXDAC as required by the agreement approved by the Court. On March 9, 2004, the Court entered an order authorizing but not requiring the Debtors to make certain monthly contributions to the Common Fund for 2004, subject to adjustment and subject to the right of the Committee to contest the calculation of amounts owed. 8. The ExxonMobil Motion. ExxonMobil is the exclusive jet fuel supplier to Avianca at the following locations: Bogota; Cali; Cartagena; and Barranquilla, and the only entity in Colombia that can supply Avianca with one hundred percent (100%) of its aviation jet fuel requirements. As of the Petition Date, Avianca owed ExxonMobil $5,580,958.62 for fuel and other services delivered prior to the Petition Date and not yet paid for. In order to avoid the adverse circumstance of not having available sufficient jet fuel to continue its operations in the ordinary course, Avianca, with the support of the Committee, negotiated an assumption of its contract with ExxonMobil which provided for the cure of existing pre-petition monetary defaults by payment of an administrative claim equal to $4,900,000.00 of the $5,580,958.62 owed prior the Petition Date, payable over a 20 month period. In addition to the reduction of the claim, ExxonMobil committed to meet Avianca's needs for a three year period at discounted prices and agreed to waive any reclamation claims it may have had against Avianca. The Bankruptcy Court approved the settlement pursuant to its order dated September 9, 2003. 9. The Aerocivil Motion. On October 10, 2003, the Bankruptcy Court approved a settlement agreement between Unidad Administrativa Especial de Aeronautica Civil ("Aerocivil") and the Debtors. Aerocivil is responsible for administration of most of the Colombian airports and regulating the operations of domestic and international air carriers, including Avianca S.A., which operate in the Republic of Colombia. Among other duties, Aerocivil is responsible for approval of flight plans, schedule changes, collection from airlines of landing fees, gate rents and other airport facility rents and collection from airlines of stamp taxes on international travelers and other passenger fees collected on Aerocivil's behalf by airlines. Aerocivil is not permitted by Colombian law to approve changes in flight schedules when the airline in question is in default in payment or turnover of fees. On the Petition Date, Avianca S.A. owed Aerocivil on account of fees, rents, stamp taxes, passenger fees, and other taxes and charges, including interest thereon, a total amount equivalent in U.S. dollars to approximately $4,193,089.00. Under the settlement approved by the Court, Avianca paid a deposit to Aerocivil of a sum equivalent to $1,052,066, which sum is to be applied to the trust fund obligations arising out of the Debtors' collection of fees payable to Aerocivil. Remaining payments of principal and interest are to be paid in monthly installments 43 commencing on September 1, 2004. Avianca's obligation to repay the Aerocivil Claim is further secured by granting Aerocivil a security interest, valid under Colombian law, in certain aviation materials, components and aircraft spare parts. 10. The Small Creditor Motion. On June 4, 2003, the Bankruptcy Court entered its order authorizing, but not directing, Avianca to pay prepetition claims to certain creditors holding unsecured claims in amounts not exceeding (USD)$7,000 (the "Nominal Creditors"). As of the Petition Date, the Nominal Creditors totaled one thousand and seventy-five (1,075) holding claims ranging in amount from $1.00 to $6,892.00, with aggregate claims of $1,214,174.00. The majority of the Nominal Creditors held claims of less than $1,000 each and many were essential to Avianca's operations. Moreover, administering such claims through the plan confirmation process would have required the estate to incur unnecessary costs and expenses that would have been disproportionately large in relation to the amount of the claims asserted. As of July 15, 2004, Avianca had paid a total of $1,126,944 to the Nominal Creditors. 11. Ecopetrol Financing Motion. On March 19, 2004, Avianca S.A. filed its Motion for an Order Authorizing Avianca S.A. to Incur Post-Petition Secured Indebtedness and to Modify the Automatic Stay and Request for Interim Relief seeking Court authorization for Avianca S.A. to obtain credit on a collateralized basis from Ecopetrol S.A., a state owned company organized under the laws of the Republic of Colombia ("Ecopetrol"). Ecopetrol sells fuel to wholesalers who, in turn, sell to the airlines. Ecopetrol was directed by the Colombian Government pursuant to the CONPES Document 3232 dated July 21, 2003 to provide sixty (60) day financing terms for the purchase of fuel to the Colombian Airlines. Ecopetrol has agreed with Avianca S.A. to grant a financing facility for the purchase of jet fuel in Colombia for use on international flights. The agreement contemplates that Ecopetrol will provide a financing facility in an initial aggregate amount of up to (COL)$6,200,000,000 which is equivalent to (USD)$2,339,580 (the "Initial Loan Amount") based on an exchange rate of (USD)$1.00 = $2,650.00 Colombian Pesos (the financing is in Colombian Pesos and the figure expressed herein is subject to change depending on the fluctuation in the exchange rate). Avianca S.A. and Ecopetrol contemplate that the Initial Loan Amount may increase to finance additional fuel purchases required by Avianca S.A. and that in conjunction therewith Avianca S.A. may, with the consent of the Committee, provide additional collateral. The collateral for the Initial Loan Amount consists of certain credit card receivables and cargo credits. The term of the loan is for one year after which time Avianca S.A. will retire the principal indebtedness over a two month period. A hearing on the Ecopetrol Motion was held on March 31, 2004 and Avianca S.A. obtained authorization to go forward with the financing on an interim basis at that time. A final hearing on the Ecopetrol Motion has not yet been set. 12. Severance Motion. As a result of the Debtors' operational restructuring, optimization of administrative and operational processes, reduction in the fleet and modification in their network systems, the Debtors required a reduction in personnel to reduce its infrastructure size to one comparable to its industry peers, increase productivity levels and achieve an overall competitive cost structure. On 44 April 16, 2004, the Debtors' filed a motion (the "Severance Motion"), which sought the authority to implement the first phase of the reduction in personnel that included the reduction of 202 employees (the "Terminated Employees"). Colombian law requires that employees who are terminated receive payment of a minimum severance. In the Severance Motion, the Debtors requested that the Bankruptcy Court approve the implementation of the first phase of the severance plan allowing the Debtors to pay no more than $3,330,685.58 in benefits to the Terminated Employees which will result in a reduction of 202 employees. The matter came on for hearing on April 27, 2004, at which time the Bankruptcy Court approved the relief sought in the Severance Motion. 13. Cash Management Order. On March 21, 2004, the Bankruptcy Court entered the First Interim Order Authorizing Maintenance of Cash Management Systems, Continued Use of Certain Existing Bank Accounts and Use of Certain Business Forms, which authorized the Debtors to maintain their existing cash management systems and prohibited the financial institutions from exercising setoff or otherwise exercising control over funds of the Debtors. Multiple additional interim orders were entered and after final a hearing held on June 4, 2003, the Bankruptcy Court entered a Final Order. Pursuant to multiple Bankruptcy Court orders, the Debtors' authority to maintain their Cash Management Systems and to Use Certain Existing Bank Accounts and Business forms has been extended through September 30, 2004. 14. Insurance. On October 30, 2003, the Bankruptcy Court entered an order (the "Insurance Order") authorizing the Debtors to pay certain prepetition obligations to American Insurance Group as lead reinsurer, La Previsora S.A. Compania de Seguros as lead insurer ("Previsora"), AON as reinsurance broker ("AON"), and various other insurance companies (collectively with AIG, Previsora and AON, the "Insurers") providing insurance under an Airline Hull (including Spares and Equipment) Liability and Personal Accident Insurance policy dated November 18, 2002 to November 17, 2003 and the Employer Legal Liability Policy (collectively, the "Insurance Policy"). The Insurance Policy provided the Debtors and certain other affiliated companies insurance coverage against damage to the Debtors' aircraft and against liability for injuries occurring in the operation of the aircraft. The premium that was due under the Insurance Policy is known in the insurance market as a "Deposit Premium" which means that at the end of the policy period the premium is adjusted based on the actual usage of the aircraft and passengers flown during the policy period. The total amount due to the Insurers was $1,736,418 for insurance provided from November 2001 through 2002 based on the adjustments made pursuant to the terms of the insurance policy in place for that time period. The Bankruptcy Court conditioned its authorization to make such payments to the Insurers upon their rescission of a notice of cancellation that they had previously issued and also upon the Debtors and the Insurers reaching agreement on satisfactory post-petition insurance coverage. The Insurers met each condition and the payment was made. 45 15. Proceedings Related to Aircraft Leases. Since the Petition Date, the Debtor has entered into various stipulations and agreements with each of their major aircraft and aircraft engine lessors. The Bankruptcy Court entered orders approving stipulations with (i) GE Capital Aviation Services, Inc. on April 14, 2003 as modified by order dated February 23, 2004; (ii) debis Airfinance, Inc. on May 23, 2003; Ansett World on June 2, 2003; (iii) Pegasus Aviation, Inc. on May 30, 2003 and September 18, 2003 respectively; and (iv) CIT Aerospace through C.I.T. Leasing Corporation on September 16, 2003. In most instances, the Debtor successfully restructured its aircraft and engine obligations with the various lessors. The Debtor's restructured aircraft and engine obligations substantially reduced the financing costs of their current fleet and brought such costs in line with current market rates for the aircraft and engines in their fleet. The Debtor continues to negotiate agreements with its aircraft and engine lessors over the future disposition or use of such aircraft and engines, and the appropriate economic terms of such disposition or use. The Debtor anticipates further reduction in the financing costs of its fleet based upon current proposals from its lessors. In addition to the restructuring of the Debtor's aircraft and engine obligations, the Debtor rejected certain aircraft and engine leases that, in the Debtor's reasoned business judgment, were not necessary to the Debtor's effective reorganization or that were not otherwise in line with the current market rates. 16. The Master Trust Notes Litigation with BNY. The Master Trust Agreement between Avianca and BNY (see Section IV.A. above--"THE CHAPTER 11 CASE, Events Leading Up To The Chapter 11 Case") and various other agreements, instruments and documents evidencing, securing or otherwise relating to the Notes (the "Transaction Documents"), provided for the conveyance by Avianca of its U.S. credit card receivables, i.e., accounts receivable arising from the use of credit cards which are settled in U.S. dollars ("US Receivables"), to the Trust created under the Master Trust Agreement and for BNY to reconvey to Avianca the US Receivables upon the payment in full of the Notes. The Transaction Documents further provided that until the reconveyance of the US Receivables to Avianca, all payments on US Receivables were to be made directly to BNY and BNY was to use a portion of the Trust's collections on the US Receivables to make the payments on the Notes. In order to preserve the post-petition US Receivables for the benefit of the estate and, on an immediate basis, to prevent BNY from transferring any of the collections on the US Receivables to the Noteholders for application to the Notes, Avianca commenced an adversary proceeding against BNY on the Petition Date (and later added the Noteholders as parties thereto), seeking a declaration that the US Receivables were property of the estate and requesting injunctive relief prohibiting BNY from transferring any of the collections on the US Receivables to the Noteholders without further order of the Bankruptcy Court. Avianca simultaneously filed a motion to approve its rejection, effective on the Petition Date, of the Transaction Documents as an "Executory Contract" (as defined herein) As used herein, "Executory Contract" means a contract under which the obligations of both the Debtor and the other party to the contract are so far 46 unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other. On the Petition Date the Bankruptcy Court issued a temporary restraining order prohibiting BNY from transferring collections on the US Receivables to the Noteholders. Subsequently, Avianca added claims related to the original claims and also added preference claims against BNY and the Noteholders, and the Committee intervened as a party to the litigation and aligned itself with the positions of Avianca. Following the Petition Date, by stipulation between Avianca and BNY, BNY was authorized to disburse funds to the Noteholders to pay prepetition interest, to hold the remaining $(USD)500,000 in the Trust, and to divide all future collections received by the Trust, pending further order of the Court, by retaining in the Trust ten percent (10%) of the collections and disbursing to Avianca the remaining 90% of the collections. The terms of the stipulation were continued in effect from time to time, without interruption, and the current stipulation will remain in effect until either a final resolution of the litigation by agreement or until further order of the Bankruptcy Court. In the litigation Avianca and the Committee contend that the transaction should either be characterized as a secured transaction, in which the secured party's (BNY's) security interest does not, in accordance with the provisions of the Bankruptcy Code, attach to property acquired by the estate after the petition (the US Receivables created postpetition), or as a true sale, in which the purchaser (BNY) has merely an unsecured claim and Avianca has no duty or authority to perform. By contrast, BNY and the Noteholders take the position that the characterization of the transaction is governed by Colombian law, under which a present sale of future receivables is recognized. BNY further claims "ownership" of all present and future receivables and that BNY should be permitted to collect 100% of US Receivables until the Notes are paid in full. Alternatively, BNY and the Noteholders argued that the US Receivables, including post-petition U.S. Receivables, constitutes the collateral for the indebtedness evidenced by the Notes. With the assistance of Bankruptcy Court-designated mediator Allan Kornberg, Esq., Avianca, BNY and the Noteholders have reached, subject to the approval of the Bankruptcy Court, a settlement resolving all issues raised in the adversary proceeding and the motion to reject the Transaction Documents as an Executory Contract. The result of the settlement will be a division of the funds held in the Trust in a manner acceptable to Avianca, BNY and the Noteholders, mutual releases, the elimination of the Noteholders' claims in their entirety, the termination of the Master Trust Agreement and the associated reconveyance of the US Receivables to Avianca and the release to Avianca of all future collections on the US Receivables. The parties worked together to prepare the necessary papers to seek approval of the settlement by the Bankruptcy Court and an appropriate motion for such approval was filed and heard by the Bankruptcy Court, after due notice to parties entitled thereto, on September 14, 2004, without objection. The Bankruptcy Court approved the settlement pursuant to its order entered on September 15, 2004, and the Debtors anticipate that the settlement will be implemented before September 30, 2004. One of the conditions precedent to Confirmation of the Plan is that the settlement is approved by the Bankruptcy Court and consummated. The Debtors expect the settlement to be 47 consummated prior to September 30, 2004. See Section V.G. below -- "SUMMARY OF THE REORGANIZATION PLAN, Conditions Precedent to Confirmation and Effective Date." 17. Exclusivity. The Debtors have sought and obtained multiple extensions of the initial 120 day exclusive period created by operation of section 1121(b) of the Bankruptcy Code during which only the Debtors may file a Chapter 11 plan. Pursuant to Order entered on June 30, 2004, the Debtors' exclusive periods for filing of a plan and soliciting acceptances thereof was to expire on July 16, 2004 and August 31, 2004, respectively. On July 1, 2004, the Debtors filed timely their Joint Plan of Reorganization and on July 16, 2004, the Debtors filed their First Modified and Restated Joint Plan of Reorganization. The exclusive period for soliciting acceptances has now been extended through October 31, 2004. 18. Summary of Claims Process, Bar Date, and Claims Filed. On August 14, 2003, the Court established October 15, 2003, as the deadline and Bar Date for filing proofs of claim in the Debtors' cases. As of February 15, 2004, 890 proofs of claim had been timely filed, in the total amount of approximately $973.8 Million, and 43 proofs of claim, in the total amount of approximately $5.7 Million, had been filed after the Bar Date. The Debtors are in the process of reviewing and reconciling the more than 900 claims filed in the Debtors' Case. It appears that many of the claims are duplicate claims that were filed in both Debtors' cases, or by individual claimants who are represented by trustees or other fiduciaries with authority to file claims on behalf of the group, or are otherwise overstated or incorrect. The Debtors have prepared and filed certain objections to claims and expect to resolve the majority of the claims objections prior to confirmation of the plan. 19. Employee Matters. The Debtors are subject to a number of lawsuits by former employees asserting claims arising out of termination of their employment with the Debtors. In accordance with Colombian labor laws, these claims are unaffected by the Debtors' U.S. bankruptcy cases and any judgments arising from the claims in Colombian courts will be enforceable against the Debtors' assets in Colombia. The Debtors are making diligent efforts to resolve these matters without litigation and to liquidate these claims in an effort to determine the total amount of potential liability of the Debtors on account of these claims. 20. Pension Plan Issues. In accordance with Colombian law, the Debtors face significant liability for pension payments to its retired and future retired employees. In addition, the Debtors are responsible for certain other pension plan funding requirements for non-pilot employees, in accordance with Colombian law. The Debtors are actively negotiating with representatives of the various pension plans in an effort to resolve funding issues and provide for payment of such obligations either pursuant to the plan or by separate motion to the Bankruptcy Court. 48 21. Committee Investigation. In or about August 2003 the Colombian press reported that a representative of ACDAC, a member of the Committee, had stated publicly that the Company had improperly suggested that one or more members of the Union might be entitled to benefits under an incentive compensation plan under consideration by Avianca's management, in exchange for support from the Union in its capacity as a member of the Committee for the Company's restructuring plan. The press further reported that the Union representative claimed to have a tape recording supporting his statements. ACDAC subsequently brought this matter to the attention of the Committee, and the Committee instructed its counsel to conduct an investigation into the matter and report to the Committee its conclusions with respect to whether the Company or any of its representatives had acted improperly and, if so, what, if any action would be available to the Committee on account of such conduct. Counsel for the Committee conducted the investigation, as directed by the Committee, in due course. In connection with Committee counsel's investigation, counsel conducted examinations under Bankruptcy Rule 2002 of four senior officers of Avianca and interviewed other potential witnesses to the alleged impropriety. The tape recording referred to above was also made available to Committee counsel, as well as to the Company's counsel and its management. The Company emphatically denied that Avianca or any of its officers or other representatives were involved in any improper conduct or activities in connection with the Case. Upon the winding up of the investigation in early 2004, Committee counsel made its report to the Committee, and the Committee concluded that it would take no further action regarding its investigation. E. SIGNIFICANT ACTIONS BY AVIANCA DURING THE BANKRUPTCY CASE. 1. Network Redesign. In an effort to streamline its operations, Avianca took several measures regarding the network redesign during the Case and before Aces made its decision to liquidate. The network redesign enabled Avianca-SAM to focus on the core flights that are profitable and adjusted frequencies in markets that had too much capacity. A snapshot of the profitability of every round trip flight was estimated using available accounting information on revenues (both passenger and cargo) and costs (all direct and semi-variable costs, but not overhead) and using a detailed cost allocation methodology. Management and its advisors analyzed route profitability, assessed route future potential (given expected reductions in cost and increases in revenue), and subsequently redesigned the network to focus on the most attractive routes and eliminate unattractive routes in order to maximize the network's full potential. Particular emphasis was placed on the unprofitable shuttle operation that was suffering from over-capacity, the Madrid route that demanded a specific fleet family (767s), and on many turboprop flights that were losing money. Overall, the network was reduced by approximately 33% in terms of number of flights, although only 15% in terms of passengers lost (owing to the fact that many of the flights were flown by smaller turbo-props and the fact that, in markets previously served by several flights, the Company was able to recapture on 49 one of the remaining flights many of the passengers who otherwise would have booked a flight that was eliminated). With the assistance of Bain & Company, the Company's management conducted a strict profitability analysis of the Company to ascertain contributing routes, make changes to "fixable" routes, drop all "bleeders," match capacity with demand, revise schedules to maximize profitable use of each aircraft, rationalize frequencies to maximize profitability, maintain strong competitive positions on key routes, maintain key feeder routes and adjust remaining schedules to minimize windows for competitor slots - all of this in order to ensure profitable operations. On June 8, 2003, the Company began to implement the conclusions derived from the strict profitability analysis. By August 1, 2003, the conclusions were fully implemented. During 2003, network restructuring was completed taking into account profitability, market share, connectivity, revenue, contribution to the network, load factors, and strategic impact for each of the routes and frequencies of the complete network. As a result, a new route/frequency structure was designed by canceling those flights with negative performance and reallocating them so as to have the best network impact, thus maximizing the profitability of the whole network. Fleet consolidation and renegotiation of fleet leasing contracts in 2003 produced significant cost reductions, as well as simplification of maintenance and crew requirements. Today, the fleet is divided into four aircraft types (MD, 757, 767, F50) for a total number of 35 aircraft - a 35% reduction compared to the beginning of 2003. As a result, the number of frequencies was reduced 35% from 2,366 per week to 1,528 per week, 16 routes were cancelled, the fleet utilization increased by 13.5% from March 2003 to March 2004, the load factor improved 9% between 1st quarter 2003 (56%) and 1st quarter 2004 (65%), while the Revenues per Available-Seat Kilometer ("RASK") increased from $5.02 to $5.98. Consequently, the Company's gross operating margin (revenues less direct operating costs) increased from a negative -$2.39 Million) to a positive +$20.53 Million As of March 2004,the Company offered a total of 181,195 weekly seats that produce 181 million weekly Available-Seat Kilometers ("ASKs"), 61 Million in the Colombian domestic market and 120 Million in the Colombian international market. With this available capacity, Avianca captured 48.4% of the domestic market and 45.4% of the international market during the first quarter of 2004, and it had load factors of 61% and 67% respectively. As of March 2004, Avianca's network not only connected Colombia with the Andean Pact, Deep South America, North America, Central America, the Caribbean, and Europe, but was also a hub for the traffic between South America and the rest of the regions. Avianca serves these markets through 21 domestic and 20 international routes, which include 9 routes to North America, 3 routes to each of Deep South America, the Caribbean and the Andean Pact regions, 1 route to Central America, and 1 route to Europe. 2. Fleet Reduction. The fleet redesign focused on reducing complexity and right-sizing the fleet size to the requirements of the redesigned network. The fleet was defined for the next two years, 50 recognizing that in the long-term, other modifications or evolution in the fleet are likely to be needed. In order to select the preferred fleet families, a detailed analysis was conducted of the operating costs for the segments that each aircraft would fly, including fuel, crews, maintenance, leases and navigation, landing and parking costs. Weight restrictions due to the elevation of the Bogota airport were also considered to determine the number of effective seats available. The best alternatives were deemed to be the Fokker 50s, MD-80s, 757s and 767s. Since August 1, 2003, Avianca-SAM has operated 10 Fokker-50, 15 McDonnell Douglas 83, 5 B-757-200 and 4 B-767-200 and 1 B-B767-300 aircraft. 3. Cost Cutting. A "full potential" diagnostic identified and prioritized areas of improvement in all operating and overhead areas. As a starting point, management and its advisors identified and detailed the accounting for all of the company's current cost centers, in several cases adjusting the account mapping to truly reflect the drivers of the costs. Specific opportunities were then identified and quantified based on industry benchmarks, as well as careful evaluation of the particular opportunities presented by the operating characteristics of Avianca. These opportunities were validated with the operating personnel in each area, who in turn have developed detailed action plans to achieve the improvements over time. Many of these improvements have capital expenditure requirements that were identified and prioritized, in several cases influencing the implementation timing based on the payout requirements. These performance targets were integrated into an overall turnaround plan, and documented for internal and external communication. The plan included, among others, the following: (i) Renegotiation of aircraft leases with significant lease rate reduction In some cases this represented decreases of over 50% of the former rates. (ii) Savings achieved in flight operations include meals service level reductions to match flight durations and time of day, flight crew and flight attendant productivity improvements, and crew travel cost reductions. (iii) Distribution savings achieved include a significant transition to direct channels (particularly the call center) that generate savings in both GDS (reservation) and commission costs, sales force reductions, overall agency commission reductions, GDS reductions due to fee negotiations and migration of low yield flights off the system, and reductions in the cost and increase in functionality of the internal reservation host system. (iv) Overhead Cost reductions (not headcount related) include significant reductions in on-going (non-Chapter 11) professional fees, advertising, employee benefits that are not legally required, information technology, insurance, telecommunications and others. 4. Revenue Enhancement. Although the competitive environment is increasingly demanding, Avianca's management team intends to pursue additional revenue enhancement opportunities. Due to the external factors that make such improvements uncertain, these have not been included in the Debtors' budgets and financial forecasts. The objectives of the revenue management and sales 51 departments include the following: Fare Pricing; Active Yield Management; Improvement of Revenue Forecasting Techniques; and Renegotiation of Interline Agreements with other airlines. Additionally, Avianca-SAM is actively developing a competitive strategy to protect and strengthen its competitive position. This includes evaluating relative cost and revenue positions vs. the principal domestic and international competitors, defining the rules of the game needed in the industry, and defining mechanisms to enforce market discipline. 5. Avianca S.A. Organizational Changes To Enable The Turnaround. Several refinements have been made to the organization to improve its accountability and agility, including the following: (a) the selection of a new Chief Restructuring Officer/ COO; (b) the implementation of a variable compensation plan for executives and managers, linked to budget targets as described above (see Section III.H.9(d) hereof - "Incentive Compensation Plan"), and (c) the institution of aggressive management performance criteria for the executive team, with new individuals brought in where capability gaps have been identified. V. SUMMARY OF THE REORGANIZATION PLAN. THIS SECTION CONTAINS A SUMMARY OF THE STRUCTURE OF THE PLAN, THE CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN, AND THE IMPLEMENTATION OF THE PLAN. THIS SECTION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PLAN, WHICH IS ATTACHED TO THIS DISCLOSURE STATEMENT AS APPENDIX F, AND TO THE EXHIBITS AND SCHEDULES ATTACHED THERETO OR REFERRED TO THEREIN. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT INCLUDE SUMMARIES OF THE PROVISIONS CONTAINED IN THE PLAN AND IN DOCUMENTS REFERRED TO THEREIN. THE STATEMENTS CONTAINED IN THIS DISCLOSURE STATEMENT DO NOT PURPORT TO BE PRECISE OR COMPLETE STATEMENTS OF ALL THE TERMS AND PROVISIONS OF THE PLAN OR DOCUMENTS REFERRED TO THEREIN, AND REFERENCE MUST BE MADE TO THE PLAN AND TO SUCH DOCUMENTS FOR THE FULL AND COMPLETE STATEMENTS OF SUCH TERMS AND PROVISIONS. THE PLAN ITSELF AND THE DOCUMENTS REFERRED TO THEREIN, WHICH HAVE BEEN FILED WITH THE COURT, WILL CONTROL THE TREATMENT OF CREDITORS AND EQUITY SECURITY HOLDERS UNDER THE PLAN AND WILL, UPON THE EFFECTIVE DATE OF THE PLAN, BE BINDING UPON HOLDERS OF CLAIMS AGAINST OR INTERESTS IN AVIANCA S.A. AND/OR AVIANCA, INC. AND OTHER PARTIES IN INTEREST, REGARDLESS OF WHETHER OR HOW THEY HAVE VOTED ON THE PLAN. A. OVERALL STRUCTURE OF THE PLAN. Prior to filing for Chapter 11 relief, each of the Proponents focused on formulating a plan of reorganization that would enable it to emerge quickly from Chapter 11 and preserve the value of its business as a going concern. Each of them recognizes that in the competitive industry in which it 52 operates, a lengthy and uncertain Chapter 11 Case would adversely affect the confidence of its vendors and customers, further impair its financial condition, and dim the prospects for a successful reorganization. The Plan constitutes a consolidated plan of reorganization for Avianca S.A. and Avianca, Inc., jointly together. Substantive consolidation of the Estate of Avianca S.A. and of the Estate of Avianca, Inc. is a condition precedent to the Effective Date of the Plan, and the Proponents believe that substantive consolidation in this Case is warranted and appropriate. See Section V.B below - "The Effects and Appropriateness of Substantive Consolidation." Under the Plan, Claims against, and Interests in, such combined Estate are divided into Classes according to their relative seniority and other criteria. If the Plan is confirmed by the Bankruptcy Court and consummated, Classes of Claims against and Interests in Avianca S.A and Avianca, Inc., respectively, will receive the treatments described in this Disclosure Statement. A description of the debt Claims and equity Interests included in each Class of Claims and Interests, the treatment of those Classes under the Plan, and the Plan Securities and other property (if any) to be distributed to Holders of Claims or Interests in those Classes under the Plan are described in Section V.C below - "Classification and Treatment of Claims and Interests." The amounts and forms (e.g., Cash, Dollar Notes, Peso Notes, Contingent Payment Rights, Single Payment Rights, or newly issued shares of Ordinary Stock) of distributions under the Plan are based upon, among other things, the requirements of applicable law and the assessment by each of the Proponents of its ability to achieve the goals set forth in its business plan. Following consummation of the Plan, the Reorganized Debtors will operate their respective businesses with a reduced level of indebtedness and operating expenses. There can be no assurance, however, that either or both of them will actually achieve the goals set forth in their business plan. B. THE EFFECTS AND APPROPRIATENESS OF SUBSTANTIVE CONSOLIDATION. The Plan contemplates the substantive consolidation of the Estates of both Avianca S.A. and Avianca, Inc. and the respective individual Chapter 11 Case of each of them. Substantive consolidation is a condition precedent to the Effective Date of the Plan. The effect of substantive consolidation is to combine both the assets and liabilities of Avianca S.A. and of Avianca, Inc. and to treat them as if they were held and incurred by a single entity. The consolidated assets create a single pool from which all Allowed Claims against the consolidated Estate are satisfied. There is no statutory authority specifically authorizing substantive consolidation. The authority of a bankruptcy court to order substantive consolidation is derived from its general equitable powers under section 105(a) of the Bankruptcy Code. There also are no statutorily prescribed standards for substantive consolidation. Instead, judicially developed standards control whether substantive consolidation should be granted in any given case. 53 The Proponents believe that, consistent with applicable bankruptcy law, substantive consolidation of the Estate of Avianca S.A. and the Estate of Avianca, Inc. is warranted and appropriate for the following reasons: Avianca, Inc.'s business, both before and since the Petition Date, has consisted almost entirely of acting as Avianca S.A.'s general agent in connection with its activities in the United States pursuant to a general agency agreement which provides for Avianca, Inc., in its capacity as general agent for Avianca S.A., to market and sell tickets for air travel, to lease facilities for its operations in the United States, to procure supplies, to collect accounts, to purchase parts, and to provide other services in connection with the business of operating an international commercial airline in the United States. While certain Creditors may have invoiced Avianca, Inc., in its capacity as agent for Avianca S.A., others invoiced Avianca, Inc. without reference to its capacity as agent for Avianca S.A. Nevertheless, Creditors were generally aware that Avianca, Inc. was dealing in the United States largely as general agent for Avianca S.A. Notwithstanding the fact that Avianca, Inc. was generally acting in the United States on behalf of Avianca S.A., Avianca, Inc. did maintain its own books and records and routinely recorded as its own assets such items as revenues from ticket sales, despite the circumstance that the revenues constituted the property of Avianca S.A. (subject only to Avianca, Inc.'s right to deduct a commission), and recorded as its own liabilities payables arising from purchases of merchandise on behalf of Avianca S.A. As a result, Avianca, Inc.'s books and records are not a reliable source of information for determining the proper obligor on liabilities or the proper owner of assets reflected therein. At the same time, the Company believes that treating Avianca S.A. and Avianca, Inc. as a single consolidated entity under the Plan is not only fair and equitable under the facts and circumstances, but that the Creditors of neither Avianca S.A. nor Avianca, Inc. will suffer material prejudice by reason of the substantive consolidation required as a condition for confirmation of the Plan. The Company believes that if Avianca, Inc. were treated as a distinct debtor in a separate bankruptcy proceeding, its only material asset would consist of its intercompany receivables owing by Avianca S.A. At the same time, the Company believes that substantially all Creditors who have asserted Claims against Avianca, Inc. were actually Creditors of Avianca S.A., having dealt with Avianca, Inc. as Avianca S.A.'s agent. As a result, treating the two companies as separate and distinct debtors would, in the Company's view, result in unnecessary legal and administrative expenses, which would deplete the assets of Avianca, Inc., while not materially increasing the assets available to the Creditors of either Debtor. On the basis of the foregoing, the Proponents believe that substantive consolidation will be more beneficial to all Creditors of both Avianca, Inc. and Avianca S.A. than would be attempting to identify those Creditors, if any, whose Claims could properly be characterized as being Claims against Avianca, Inc. rather than against Avianca S.A. and satisfying those Claims solely out of the assets of Avianca, Inc. In light of the foregoing, the Proponents will seek, by motion on appropriate notice, to be heard at the time of the hearing on confirmation of the Plan, substantive consolidation of the Estate of Avianca S.A. and of the Estate of Avianca, Inc. If granted, substantive consolidation will result in the following, as contemplated by Section 7.5 of the Plan: (i) all Intercompany Claims between 54 Avianca S.A. and Avianca, Inc. will, at the option of Avianca, be unimpaired and will remain on the respective books of Avianca S.A. and of Avianca, Inc., as the case might be, or will be cancelled and discharged; (ii) all obligations of either Avianca S.A. or of Avianca, Inc. and all guarantees thereof will be deemed, for purposes of the Plan (but not otherwise), to be one, single obligation against the consolidated Debtor; (iii) all Claims filed or to be filed in connection with any of such obligations or guarantees will be deemed to be Claim against the consolidated Debtor; (iv) each and every Claim filed in the individual bankruptcy case of either Avianca S.A. or of Avianca, Inc. will be deemed filed against the consolidated Debtor in the consolidated bankruptcy case; and (v) for the purposes of determining the availability of the right of set-off under section 553 of the Bankruptcy Code, Avianca S.A. and Avianca, Inc. will be treated as one, single entity so that, subject to the provisions of section 553 of the Bankruptcy Code, debts due to either of them from any creditor may be offset against debts owing from either of them to such creditor. For additional details respecting the facts and circumstances and legal authority for the Proponents' claim that substantive consolidation is justified, see a copy of the Debtors' Motion for Substantive Consolidation, a copy of which is annexed to this Disclosure Statement as APPENDIX E hereto. C. CLASSIFICATION AND TREATMENT OF CLAIMS AND INTERESTS. Section 1122 of the Bankruptcy Code requires that a plan of reorganization classify the claims of a debtor's creditors and the interests of its equity holders. The Bankruptcy Code also provides that, except for certain claims classified for administrative convenience, a plan of reorganization may place a claim of a creditor or an interest of an equity holder in a particular class only if such claim or interest is substantially similar to the other claims or interests in such class. The Bankruptcy Code also requires that a plan of reorganization provide the same treatment for each claim or interest of a particular class unless the holder of a particular claim or interest agrees to a less favorable treatment of its claim or interest. The Proponents believe that they have classified all Claims and Interests in compliance with the requirements of section 1122 of the Bankruptcy Code. If a Holder of a Claim or Interest challenges the classification of Claims or Interests, and the Court finds that a different classification is required, the Proponents, to the extent permitted by the Court, intend to make such modifications to the classifications of Claims or Interests under the Plan to provide for the classification that shall be required by the Court. UNLESS SUCH MODIFICATION TO CLASSIFICATION ADVERSELY AFFECTS THE TREATMENT OF A HOLDER OF A CLAIM OR INTEREST, ACCEPTANCE OF THE PLAN BY ANY HOLDER OF A CLAIM OR INTEREST PURSUANT TO THIS SOLICITATION WILL BE DEEMED TO BE AN ACCEPTANCE OF THE PLAN, AS SO MODIFIED, AND SHALL BE COUNTED AS A VOTE IN THE CLASS IN WHICH SUCH CLAIM IS PLACED BY THE PLAN, AS SO MODIFIED. All Claims and Interests, except Administrative Claims and Priority Tax Claims, have been placed in the Classes set forth below. In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and Priority Tax Claims of the kinds specified in sections 507(a)(1) and 507(a)(8) of the Bankruptcy Code have not been classified, and their treatment is set forth in Article IV of the Plan. See Section V.C.1 below - "Treatment of Unclassified Claims." 55 A Claim or Interest has been placed in a particular Class only to the extent that the Claim or Interest falls within the description of that Class. A Claim or Interest is also placed in a particular Class only for the purpose of voting on, and receiving distributions pursuant to, the Plan only to the extent that such Claim or Interest is an Allowed Claim or an Allowed Interest in that Class. If a Claim has been paid, released or otherwise withdrawn prior to the Confirmation Hearing, the Claim will not be eligible for voting on the Plan, and if paid, released or otherwise withdrawn prior to the Effective Date will not receive any distributions pursuant to the Plan. The Plan classifies the following Claims into the following separate Classes: CLASS 1 CLAIMS. Class 1 consists of all Priority Claims, which are defined by the Plan as meaning any Claim entitled to priority treatment under Sections 507(a)(3), (4), (5), (6), (7) or (9) of the Bankruptcy Code, excluding the CAXDAC Claims, to the extent, if any, so entitled. The Proponents estimate that at the conclusion of the Claims resolution process the aggregate amount of Allowed Class 1 Claims (Priority Claims) will total approximately $3.0 Million. The United States of America (the "Government") and its agencies, including but not limited to the United States Customs Service, the United States Department of Agriculture, and the Department of Homeland Security (formerly, the Department of Justice - Immigration and Naturalization Service), assert that the Debtors currently hold funds in the amount of $582,944.00 that belong to the Government and are not property of the Debtors' Estate available for distribution to Creditors. The Debtors dispute the Government's allegations as to whether the funds are property of the Debtors' Estate and have or may assert objections to the amount of the Government's Claims. The Debtors expect to resolve the issue of whether the funds are property of the Estate prior to the hearing on Confirmation of the Debtors' Plan of Reorganization. CLASS 2 CLAIMS. Class 2 consists of the CAXDAC Claims, which are defined by the Plan as meaning the Claims arising from the indebtedness of Avianca S.A. to Caja de Auxilios y Prestaciones de la Asociacion Colombiana de Aviadores Civiles ACDAC ("CAXDAC") on account of Avianca S.A.'s legal obligation, including interest on the unpaid principal amount thereof, to contribute to the common fund established to fund the Special Transitional Regime prescribed in Colombian Decrees 1282, 1283 and 1302 of 1994, as amended by Colombian Law 860 of 2003, and Banking Superintendence External Circular No. 088 of 1995. 56 While Avianca takes the position that the CAXDAC Claims are owing by Avianca S.A. solely to CAXDAC, the Debtor is aware that CAXDAC and certain individual beneficiaries of the common fund referred to above - i.e., individuals who are entitled to a pension payable from the common fund managed by CAXDAC - have stated that their understanding is that the individual beneficiaries of the common fund are entitled to assert claims for their pension benefits directly against Avianca. No such individual has appeared and asserted in the Case an independent right to participate in the Case. If such an individual or individuals were to appear in the Case, Avianca would take the position that their Claims should be treated as duplicative of the CAXDAC Claims and, in any event, are Unimpaired, but no assurance can be given with respect to the effect such an action by an individual or individuals might have, should such an individual or individuals seek to participate in the Case. See Section VI.U. below--CERTAIN RISK FACTORS TO BE CONSIDERED - Enforceability of Foreign Judgments in Colombia, for a discussion of the enforceability of the provisions of the Plan against the Holders of Class 8 Claims, which may be applicable to the enforceability of the Plan against such individuals. CLASS 3 CLAIMS. Class 3 consists of all General Pension Claims, which are defined by the Plan as meaning the Claims arising from the indebtedness of Avianca S.A. to (a) the Instituto de Seguro Social (the "ISS"), the agency of the government of the Republic of Colombia whose administrative authority is functionally similar to that of the United States Social Security Administration, (b) a private pension fund approved in accordance with Colombian law to hold and manage pension funds, or (c) directly to former employees of Avianca S.A. or SAM on account of Avianca S.A.'s legal obligation to provide for the payment of pension benefits to which employees or former employees of Avianca S.A. or SAM are entitled as a result of their employment by Avianca S.A. or SAM, as the case might be, including the VB Assumed Pension Claims (as defined in the Plan), but excluding (a) Secured Claims arising from such indebtedness which are secured, in whole or in part, by the collateral assignment of instruments or other evidences of indebtedness on which Valores Bavaria is an obligor and (b) the CAXDAC Claims. CAXDAC has advised the Debtor that the treatment of the Class 3 Claims differently from, and, in CAXDAC's view, more favorably than, the Class 2 (CAXDAC) Claims, results 57 in unfair discrimination against the CAXDAC Claims and in a violation of Colombian law. For a more detailed discussion of CAXDAC's position on the issue and Avianca's contrary position - i.e., that no such unfair discrimination or violation results from the separate classification and treatment of the CAXDAC Claims and the General Pension Claims, see Section XII.C.3 (a) below--VOTING REQUIREMENTS - "Acceptance or Rejection of the Plan - Cramdown." On August 23, 2004, Avianca received a copy of a letter from the Minister of Social Protection in Colombia addressed to the Bankruptcy Court regarding Claims in the amount of $(USD)20,000,000 related to pension obligations for current and former employees. In this letter, the ISS requests that Avianca either (i) establish an escrow, (ii) guaranty the Claims through an "endorsement by a bank," or (iii) procure a performance bond issued by a Colombian insurance company. ISS further states that failure to provide one of the foregoing will result in the ISS demanding payment in full of its asserted $(USD)20,000,000 Claims. Avianca believes that the Claims referred to in the ISS letter are included in Class 3 (General Pension Claims) under the Plan and, in addition, constitute the "VB Assumed Pension Claims," as defined in the Plan. As VB Assumed Pension Claims included in the "VB Liabilities," as defined in the Plan, Avianca believes that such obligations are adequately provided for in the Plan as the result of the Effective Date transaction required by Section 7.1.2f of the Plan, which provides for Valores Bavaria to assume the VB Assumed Pension Claims. CLASS 4 CLAIMS. Class 4 consists of the Aerocivil Claims, which are defined in the Plan as meaning the Claims arising from the indebtedness of Avianca S.A. to Aerocivil for landing fees, for communications fees, for access fees, for aircraft parking fees, for rent for leases of airport facilities, for value added taxes, and for interest on the foregoing, all as reflected in the Aerocivil Agreement. CLASS 5 IS INTENTIONALLY OMITTED. CLASS 6 CLAIMS. Class 6 consists of all Other Secured Claims, which are defined by the Plan as being all Secured Claims other than the Aerocivil Claims. For purposes of the Plan, all Other Secured Claims held by a single Holder are designated as a separate subclass. 58 CLASS 7 CLAIMS. Class 7 consists of all General Unsecured Claims, other than the General Unsecured Claims in Class 8 or Class 9. CLASS 8 CLAIMS. Class 8 consists of all General Unsecured Claims, other than the General Unsecured Claims in Class 9, held by any Entity who shall have filed proof of a Claim in the Case whose mailing address, as set forth in said proof of Claim, as in effect on the Bar Date applicable to the Holder of such Claim, is located in the Republic of Colombia or by any Entity who shall not have filed proof of a Claim in the Case whose mailing address, as set forth in the Debtor's schedule of liabilities filed with the Bankruptcy Court pursuant to Bankruptcy Rule 1007(b), as amended from time to time, is located in the Republic of Colombia. (For a discussion of the enforceability of the provisions of the Plan against the Holders of Class 8 Claims, see Section VI.U. below--CERTAIN RISK FACTORS TO BE CONSIDERED - Enforceability of Foreign Judgments in Colombia.) CLASS 9 CLAIMS. Class 9 consists of each General Unsecured Claim that, but for its placement in Class 9, would be in Class 7 or Class 8, and is either (a) Allowed in an amount that does not exceed $(USD)15,000 or $(COL)44,319,300 (based upon the exchange rate in effect on the Petition Date), or (b) a Claim proof of which has been filed, within the applicable period of limitation fixed by the Bankruptcy Court in accordance with Bankruptcy Rule 3003(c)(3) or fixed pursuant to Section 9.2 of the Plan, in an amount which exceeds $(USD)15,000 or $(COL)44,319,300 (based upon the exchange rate in effect on the Petition Date), but does not exceed $(USD)50,000 or $(COL)147,730,800 (based upon the exchange rate in effect on the Petition Date) or a Claim which has been listed in an amount which exceeds $(USD)15,000 or $(COL)44,319,300 (based upon the exchange rate in effect on the Petition Date) but does not exceed $(USD)50,000 or $(COL)147,730,800 (based upon the exchange rate in effect on the Petition Date) by Avianca in its Chapter 11 schedules, as such schedules may be amended from time to time in accordance with Bankruptcy Rule 1009, as liquidated in amount and not disputed or contingent and which, in either case, has been reduced by the Holder thereof to $(USD)15,000 or $(COL)44,319,300 (based upon the exchange rate in effect on the Petition Date). CLASS 10 CLAIMS Class 10 consists of all Intercompany Claims by a Debtor or SAM against Avianca S.A or Avianca, Inc. 59 CLASS 11 INTERESTS. Class 11 consists of all Interests constituting Preferred Stock. CLASS 12 INTERESTS. Class 12 consists of all Interests constituting Ordinary Stock. CLASS 13 INTERESTS. Class 13 consists of all Interests constituting Avianca, Inc. Common Stock. 1. Treatment of Unclassified Claims. (a) Payment of Administrative Claims Generally. Administrative Claims consist primarily of the costs and expenses of administration of the Chapter 11 Case. They include, but are not limited to, (a) any actual and necessary costs and expenses incurred on or after the Petition Date of preserving the Estate and operating Avianca's business, (b) the fees and expenses of Professional Persons in such amounts as are allowed by Final Order of the Bankruptcy Court under Section 330 of the Bankruptcy Code, (c) to the extent applications for allowance thereof as Administrative Claims are made pursuant to Sections 503(b)(1), (3), (4) or (5) of the Bankruptcy Code, in such amounts as are determined and allowed by Final Order of the Bankruptcy Court, (d) any fees or charges assessed against the Estate under Section 1930 of Title 28 of the United States Code, and (e) the outstanding principal amount, interest thereon and other fees and charges, if any, owing on account of any loans made to or other credit accommodations extended to Avianca on or after the Petition Date and authorized by the Bankruptcy Court pursuant to the provisions of Sections 364 (b), (c) or (d) of the Bankruptcy Court. Subject to the provisions of sections 330 and 331 of the Bankruptcy Code, each Holder of an Allowed Administrative Claim shall receive on the Distribution Date, in full satisfaction, settlement, release, and discharge of, and in exchange for, such Allowed Administrative Claim, Cash equal to the amount of such Allowed Claim, unless such Holder shall have agreed to different treatment of such Claim; provided that Allowed Administrative Claims representing obligations incurred by Avianca in the ordinary course of business or otherwise assumed by Avianca pursuant to the Plan will be paid or performed by Avianca in accordance with the terms and conditions of each agreement relating thereto. All Administrative Claims of Professionals incurred after the Confirmation Date will be paid as provided in Section 13.4 of the Plan. See Section V.C.1(b)(iii) below - "Post Confirmation Date Fees and Expenses of Professional Persons." Assuming the Plan is consummated on or before December 31, 2004, the Proponents believe that the cash flow of Avianca will be sufficient to enable it to pay any professional fees that remain unpaid as of the Effective Date. The Proponents also believe that the aggregate amount of Administrative Claims will not exceed the ability of the Reorganized Debtors to pay such Claims when they are Allowed or otherwise come due. 60 (b) Allowance of Certain Claims. (i) Retiree Administrative Claims. Holders of Retiree Administrative Claims will continue to receive benefits provided for by the terms and conditions of the Retiree Benefit Plans. (ii) DIP Financing Facility Claims. The DIP Lenders will receive on the Distribution Date, in full satisfaction of their Claim for accrued and unpaid interest on the principal indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility, Cash equal to the amount of such Claim for accrued and unpaid interest. As agreed by the DIP Lenders, Valores Bavaria and PrimeOther will transfer to the Coffee Federation, pursuant to Section 7.4.3 of the Plan and Section 2.1 of the Investment Agreement, their respective interests in the Claim arising from the principal indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility, and the Coffee Federation will receive, on account of and in full satisfaction, settlement, release, and discharge of, and in exchange for, the Allowed Claim arising from the principal indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility, the consideration set forth in Section 7.4.6 of the Plan. (iii) Post Confirmation Date Fees and Expenses of Professional Persons. After the Confirmation Date, Avianca, and after the Effective Date, Reorganized Avianca S.A. and Reorganized Avianca, Inc. shall, in the ordinary course of business and without the necessity for any approval by the Bankruptcy Court (except as may be required by Section 1129(a)(4) of the Bankruptcy Code), pay the reasonable fees and reasonable expenses of the Professional Persons related to implementation and consummation of the Plan; provided that no such fees and expenses shall be paid except upon receipt by Avianca, Reorganized Avianca S.A. or Reorganized Avianca, Inc., as may be applicable, of a detailed written invoice from the Professional Person seeking compensation and expense reimbursement and provided further, that any such party may, within ten (10) days after receipt of an invoice for fees and expenses, request that the Bankruptcy Court determine the reasonableness of such fees and expenses. (c) Payment of Priority Tax Claims. Unless otherwise agreed between the Holder of a Priority Tax Claim and Avianca, in accordance with Section 1129(a)(9)(C) of the Bankruptcy Code, each Holder of such an Allowed Priority Tax Claim will receive, on account of and in full satisfaction, settlement, release, and discharge of, and in exchange for, at Avianca's option, either (a) Cash, in the full amount of such Allowed Priority Tax Claim, on the Distribution Date or (b) deferred payments of Cash in the full amount of such Allowed Priority Tax Claim, payable in equal annual principal installments beginning the first anniversary of the Effective Date and ending on the earlier of the sixth (6th) anniversary of the Effective Date or the sixth (6th) anniversary of the date of the assessment of such Claim, together with interest (payable quarterly in arrears) on the unpaid balance of such Allowed Priority Tax Claim at an annual rate equal to the Treasury Yield or such other rate as may be set by 61 the Bankruptcy Court at the Confirmation Hearing, provided that Avianca will have the right to prepay any such Priority Tax Claim, or any remaining balance of such Claim, in whole or in part, at any time or from time to time after the Effective Date, without premium or penalty. 2. Unimpaired Classes of Claims and Interests. The Classes listed below are designated as Unimpaired by the Plan: CLASS 1 CLAIMS (PRIORITY CLAIMS); CLASS 2 CLAIMS (CAXDAC CLAIMS); CLASS 3 CLAIMS (GENERAL PENSION CLAIMS); CLASS 4 CLAIMS (AEROCIVIL CLAIMS); CLASS 6 CLAIMS (OTHER SECURED CLAIMS); CLASS 9 CLAIMS (CONVENIENCE CLASS CLAIMS); and CLASS 13 INTERESTS (AVIANCA, INC. STOCK INTERESTS). 3. Impaired Classes of Claims and Interests. The Classes listed below are designated as Impaired by the Plan: CLASS 7 CLAIMS (NON-COLOMBIAN-HELD GENERAL UNSECURED CLAIMS IN EXCESS OF $15,000); CLASS 8 CLAIMS (COLOMBIAN-HELD GENERAL UNSECURED CLAIMS IN EXCESS OF $(COL)44,319,300); CLASS 10 CLAIMS (INTERCOMPANY CLAIMS BY A DEBTOR OR SAM AGAINST EITHER DEBTOR); CLASS 11 INTERESTS (PREFERRED STOCK INTERESTS); AND CLASS 12 INTERESTS (ORDINARY STOCK INTERESTS). 4. Treatment of Classified Claims and Interests Set forth below is a summary of how all classified Claims against and Interests in Avianca are treated under the Plan, other than Claims that are paid or satisfied by performance prior to the Effective Date. 62 (a) Unimpaired Classes of Claims And Interests. (i) Class 1 Claims (Priority Claims). Class 1 Claims are Unimpaired. Unless otherwise agreed between the Holder of an Allowed Priority Claim and Avianca, each Holder of an Allowed Priority Claim under Sections 507(a)(3), (4), (5), (6), or (7) of the Bankruptcy Code will receive on the Distribution Date, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, Cash in the full amount of such Allowed Priority Claim. (ii) Class 2 Claims (CAXDAC Claims). Class 2 Claims are Unimpaired. The Holder of the Class 2 Claims will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 2 Claims entitle the Holder thereof. Although the Plan designates Class 2 (CAXDAC Claims) as an Unimpaired Class, CAXDAC has advised the Debtor that CAXDAC asserts that, owing to various provisions of the Plan, including the provisions of Article XI of the Plan, the CAXDAC Claims are s Impaired under the Plan, as the Plan does not, in CAXDAC's view, leave CAXDAC's rights unaltered. CAXDAC's position, as it has been explained to the Debtor, is that provisions of the Plan that purport to release or exculpate Avianca's shareholders and other fiduciaries in fact do purport to affect CAXDAC's rights and therefore act to impair its Claim, and also violate fundamental principles of Colombian law, including Article 200 of the Colombian Commercial Code and Article 69 of the Colombian Labor Code, and that the Plan's failure to provide "guarantees" that are required by the Article 48 of the Colombian Constitution, Article 2374 of the Colombian Civil Code, Article 873 of the Colombian Commercial Code and Article 27 of Colombian Law 100 of 1993 likewise results in Class 2 being an Impaired Class, notwithstanding its designation under the Plan. CAXDAC has also advised the Debtor that it further asserts that its Claim is Impaired by reason of the transfer of value to indirect shareholders of Avianca S.A. pursuant to the Plan, which CAXDAC asserts constitutes consideration for their shareholder status and for negotiating the Investment Agreement, which CAXDAC submits was at the expense of creditors and will have the effect of weakening the Debtor economically and, therefore, will have the potentially adverse impact on the Reorganized Debtor's ability to pay its obligations to CAXDAC. (CAXDAC has also stated that it believes that the payments to be made to indirect shareholders of Avianca S.A. are subject to approval under Section 1129(a)(4) of the Bankruptcy Code.) Avianca believes that the liability imposed pursuant to Article 200 of the Commercial Code relates solely to a company's "administrators," not its shareholders, and in any event relates only to liability for willful misconduct or negligence which is prejudicial to the company, its shareholders or third parties. As a result, the Debtor believes that, to the extent any such liability is technically released pursuant to the provisions of the Plan, such release does not alter any legal, equitable or contractual right to which the CAXDAC Claims entitle the Holder thereof. Avianca also differs from CAXDAC in its interpretation of Article 69 of the Colombian Labor Code. While CAXDAC contends that Article 69 entitles CAXDAC to rights against third parties who are released pursuant to various provisions of the Plan, Avianca believes that Article 69 63 imposes liability only in the event that one employer is substituted for another employer. As the Plan provides for no change in the identity of its workers' or pensioners' employer, Avianca believes that Article 69 if inapplicable to the investment transaction to be carried out pursuant to the Plan. Furthermore, Section 11.6 of the Plan concludes with the following sentence: "The releases described in this Section 11.6 shall, on the Effective Date, have the effect of res judicata (a matter adjudged), to the fullest extent permissible under applicable laws of the Republic of Colombia." The Debtor believes that, to the extent, if any, that the releases and exculpations could otherwise be interpreted as altering any right that the Holder of the CAXDAC Claims would otherwise retain under Colombian law, the releases and exculpations would not be effective in Colombia as a matter of public policy, and the CAXDAC Claim would nevertheless be Unimpaired. Notwithstanding the foregoing quoted language, CAXDAC has advised the Debtor that it does not believe that the quoted language adequately preserves its rights without alteration. With regard to CAXDAC's position that its Claims are Impaired by reason of the Plan's failure to provide for "guarantees' of the CAXDAC Claims, Avianca likewise believes that lack of a provision in the Plan for such "guarantees" does not have the effect of altering any legal, equitable or contractual right to which the CAXDAC Claims entitle the Holder thereof. First, if Colombian law does indeed require certain "guarantees" (which Avianca disputes), the Plan does not deprive CAXDAC of the right to seek such "guarantees." To the contrary, it is Avianca's belief that the Plan leaves CAXDAC's right to "guarantees," if any, expressly unaltered. Second, CAXDAC has advised Avianca that in support of its claim of entitlement to "guarantees" of the CAXDAC Claims, it relies upon, among other things, Article 873 of the Colombian Commercial Code, Articles 65, 1553, 2374 and 2488 of the Colombian Civil Code, Article 48 of the Colombian Constitution, Article 27 of Colombian Law 100 of 1993, and Article 13 of Colombian Law 171 of 1961, none of which Avianca believes entitles CAXDAC to the "guarantees' it claims. CAXDAC has further advised Avianca that the "guarantees" to which it is entitled include a resource to be used in case of Avianca's failure to make a payment owing to CAXDAC, the pledge of collateral to secure the CAXDAC Claim, such as a mortgage on real or personal property, or a guaranty or suretyship agreement from a third party. CAXDAC also asserts that, regardless of whether its Claim is properly or improperly designated as Unimpaired, its claimed right to a "guarantee" is relevant to Avianca's ability to satisfy the feasibility requirement of Section 1129(a) of the Bankruptcy Code, i.e., that if Avianca has the obligation to furnish a "guarantee" and is unable to do so, Avianca will be likely to have a need for further reorganization or liquidation. Avianca believes that Article 873 of the Colombian Commercial Code may permit a creditor to request a "guarantee," but only when his debtor finds himself in a "state of notorious insolvency" which is not being remedied within the time permitted by law. Avianca believes that if its insolvency could be considered "notorious," Avianca has nonetheless implemented all measures necessary or appropriate, including most importantly its seeking a reorganization under chapter 11 of the Bankruptcy Code, to remedy its insolvency within the time period stipulated in Article 873. With regard to Article 2374 of the Civil Code, Avianca believes that the statute is generally inapplicable to corporate entities such as Avianca, but rather that the statute refers only to individuals. Moreover, Avianca believes that neither Article 48 of the Colombian Constitution, nor Article 53 of the Colombian Constitution, nor Article 27 of Law 100 64 of 1993, nor Articles 65, 1553, 2374 or 2488 of the Colombian Civil Code, nor Article 13 of Colombian Law 171 of 1961, entitles CAXDAC to a "guarantee" by the terms thereof. In any case, neither Avianca nor its shareholders has provided or agreed to provide any guaranty for the obligations owed by Avianca to CAXDAC. With regard to CAXDAC's assertion that its Claim is Impaired by reason of consideration flowing to the indirect shareholders of the Debtor, Avianca's position is that the consideration that is granted to the indirect shareholders of the Debtor is not on account of their indirect ownership of stock in Avianca but rather is in exchange for, in the case of Valores Bavaria, the transfer of its interest in the DIP Loan to the Coffee Federation and, in the case of the Coffee Federation, its agreement to convert the entire principal amount of the DIP Loan to equity in Reorganized Avianca S.A. Avianca further believes that the ability of the Debtor to perform its obligations to CAXDAC, far from being weakened as a result of the transactions being consummated pursuant to the Investment Agreement, is being materially enhanced, and that, in any event, the ability of a debtor to perform its obligations to the holder of an unimpaired claim, while relevant to feasibility of a plan of reorganization, is not relevant to the status of the claim as impaired or unimpaired. Notwithstanding the Debtor's positions as set forth above, the Debtor can give no assurance that its positions will be sustained, if CAXDAC objects to the classification of the CAXDAC Claims as Unimpaired. Should the Bankruptcy Court, notwithstanding the Debtor's arguments, determine that the CAXDAC Claims are properly classified as Impaired, then the Debtor believes that Class 2 can be deemed an Impaired Class and Class 2 will be deemed not to have accepted the Plan. In that case, Avianca will seek confirmation of the Plan under Section 1129(b) of the Bankruptcy Code and believes that it will be able to satisfy the requirements of that section for confirmation. See Section XII.D.3 below--"VOTING REQUIREMENTS - Acceptance or Rejection of the Plan - Cramdown." (iii) Class 3 Claims (General Pension Claims). Class 3 Claims are Unimpaired. The Holder of the Class 3 Claims will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 3 Claim entitles the Holder thereof. (iv) Class 4 Claims (Aerocivil Claims). Class 4 Claims are Unimpaired. The Holder of the Aerocivil Claims will receive, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, deferred payments of Cash in the full amount of such Claims in accordance with the terms and conditions of the Aerocivil Agreement, the payment of which deferred payments are secured in accordance with the terms and conditions set forth in EXHIBIT 5.1.4 to the Plan. (v) Class 6 Claims (Other Secured Claims). Class 6 Claims are Unimpaired. At Avianca's option, each Holder of an Allowed Class 6 Claim will either (a) retain unaltered the legal, equitable, and contractual 65 rights to which such Allowed Class 6 Claim entitles the Holder thereof or (b) be treated in accordance with Section 1124(2) of the Bankruptcy Code. (vi) Class 9 Claims (Convenience Class Claims). Class 9 Claims are Unimpaired. Each Holder of an Allowed Class 9 Claim will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 9 Claim entitles the Holder thereof. The Holder of a Class 9 Claim which entitles the Holder to something other than the immediate payment of money, for example, a Class 9 Claim held by an employee of Avianca and consisting of the right to one or more vacation days or the right to a payment in the future, shall retain the right, on and after the Effective Date of the Plan, to the vacation day or days, the future payment or other thing of value, as the case may be. In the case of the Holder of each Allowed Class 9 Claim which entitles the Holder thereof to the immediate payment of Cash, the Holder shall be entitled, on the Distribution Date, to payment in full in cash of the Allowed Class 9 Claim. (vii) Class 13 Interests (Avianca, Inc. Stock Interests). Class 13 Interests are Unimpaired. Avianca S.A., the Holder of record of the Allowed Class 13 Interests on the Distribution Record Date, will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 13 Interests entitles the Holder thereof. (b) Impaired Classes of Claims and Interests. The following Classes of Claims and Interests are impaired. The treatment of, and consideration to be received by Holders of such impaired Allowed Claims and Interests, will be in full satisfaction, release, and discharge of, and in exchange for, their respective Claims against or Interests in Avianca. (i) This Section is intentionally omitted. (ii) Class 7 Claims (Non-Colombian-held General Unsecured Claims in Excess of $15,000). Class 7 Claims are Impaired. Each Holder of an Allowed Class 7 Claim will receive, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, on the Distribution Date, (i) its Pro Rata share of the Initial Fixed Payment in the amount of $10,000,000 and (ii) Dollar Notes in a fixed Principal amount equal to its Pro Rata Share of $35,559,000, which notes will also evidence both (a) the Holder's Contingent Payment Right to receive, on each Contingent Payment Date, additional Contingent Principal Amounts, under certain circumstances (as hereinafter described), and (b) the Holder's right to receive, on the Excess Cash Payment Date, its Pro Rata share of the aggregate Excess Cash Payment, if any, provided that such share of the amount by which the aggregate Excess Cash Payment exceeds $1,000,000 will be applied as a prepayment of installments of interest payable under the Dollar Notes in direct order of maturity. Moreover, each Holder of an Allowed Class 7 Claim will receive, on the dates set in accordance with Section 6.3 of the Plan, the property 66 provided for in such Section 6.3 on account of the disallowance or reduction of Disputed Claims. Each of the Dollar Notes require payment of (I) minimum fixed Principal amounts, together with accrued interest on the unpaid balance thereof from time to time outstanding at the rate of 10% per annum, plus (II) under certain circumstances, depending upon the consolidated, financial performance of Avianca-SAM, additional Contingent Principal Amounts. Pursuant to the terms of Plan, whether or not Avianca will be required to make the Excess Cash Payments depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. Pursuant to the terms of Plan, whether or not there is an Excess Cash Payment to be distributed depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. The Plan defines the "Excess Cash Payment" as "twenty-five percent (25%) of the amount, if any, by which the Effective Date Cash Balance exceeds $(USD)45,000,000," and defines "Effective Date Cash Balance" as "all unrestricted Cash held by the Debtors and SAM immediately after the Effective Date," after giving effect to the investment to be made, directly or indirectly, by the Equity Sponsors on the Effective Date, after giving effect to various payments required to be made (or reserves for any such payments) by the Debtors on or within thirty (30) days after the Effective Date, and after making various other adjustments as described with particularity in the definition set forth in Section 1.1.63 of the Plan. No assurance can be given respecting the amount, if any, of the Effective Date Cash Balance or the resulting amount, if any, of the Excess Cash Payment. (iii) Class 8 Claims (Colombian-held General Unsecured Claims in Excess of $(COL) 44,319,300). Class 8 Claims are Impaired. Each Holder of an Allowed Class 8 Claim (except for the Holders of the VB Designated Claims) may elect to receive, on account of and in full satisfaction, settlement, release and discharge of, and in exchange for, such Claims, either (I) (a) on the Distribution Date, its Pro Rata share of the Initial Fixed Payment in the amount of $10,000,000, but payable in Colombian pesos based upon the exchange rate in effect on the Business Day immediately preceding the Effective Date; (b) Class 8 Trust Certificates (or book entries) for a fixed Principal amount equal to its Pro Rata share of $35,559,000, but also payable in Colombian pesos based upon the exchange rate in effect on the Business Day immediately preceding the Effective Date, which certificates/ book entries will also evidence both (i) the Holder's Contingent Payment Right to receive, on each Contingent Payment Date, additional Contingent Principal Amounts, under certain circumstances (as hereinafter described), and (ii) the Holder's right to receive, on the Excess Cash Payment Date, its Pro Rata share of the aggregate Excess Cash Payment, if any, provided that such share of the amount by which the aggregate Excess Cash Payment exceeds $1,000,000 will be applied as a prepayment of installments of interest payable under the Peso Notes in direct order of maturity; and (c) on the dates set in accordance with Section 6.3 of the Plan, the property provided for in such Section 6.3 on account of the disallowance or reduction of Disputed Claims; or (II) a Single Payment Right to receive Colombian pesos in an amount equal to 100% of its Allowed Class 8 Claim, payable on the date that is eight (8) years and six (6) months after the Effective Date. Each of the Peso Notes requires payment of (A) minimum fixed Principal amounts, together with accrued interest on the unpaid balance thereof from time to time outstanding at the rate of 14% per annum, plus (B) under certain 67 circumstances, depending upon the consolidated, financial performance of Avianca-SAM, additional Contingent Principal Amounts. As explained in the last paragraph of the preceding Section, pursuant to the terms of Plan, whether or not Avianca will be required to make the Excess Cash Payments depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. No assurance can be given respecting the amount, if any, of the Effective Date Cash Balance or the resulting amount, if any, of the Excess Cash Payment. As agreed by the Holders of the VB Designated Claims, the Holders of such Claims will not receive or retain any property under the Plan (except for the releases provided pursuant to Sections 11.4 and 11.6 of the Plan) on account of or in exchange for the VB Designated Claims, which will be deemed cancelled and discharged as of the Effective Date. (iv) Class 10 Claims (Intercompany Claims by a Debtor or SAM Against Either Debtor). Class 10 Claims are Impaired. On the Effective Date, at the option of Avianca or the Reorganized Debtor, in connection with the transactions contemplated by the Plan, the Holder of each Allowed Intercompany Claim either (a) will retain unaltered the legal, equitable, and contractual rights to which such Allowed Class 10 Claim, in whole or in part, entitles the Holder thereof, or (b) will not receive or retain under the Plan any property or interest in property on account of such Allowed Class 10 Claim, in whole or in part, in which case the portion of such Allowed Class 10 Claim which is being treated in accordance with this clause (b) will be cancelled and discharged. As agreed by SAM, any Intercompany Claims held by SAM will be Allowed and treated in accordance with the foregoing clause (a), and payment of such Allowed Class 10 Claim will be subordinated, pursuant to the provisions of the SAM Subordination Agreement, to the payment in full of all Dollar Notes, all Peso Notes and all Single Payment Rights issued pursuant to the provisions of the Plan, and SAM shall authorize the Creditor Representative to exercise any and all rights of SAM in a subsequent Colombian insolvency proceeding of Avianca S.A., pursuant to the provisions of the SAM Power of Attorney. (v) Class 11 Interests (Preferred Stock Interests). Class 11 Interests are Impaired. The Holder of record of the Allowed Class 11 Interest on the Distribution Record Date (as reflected on the register maintained by the Preferred Stock Registrar) will not receive or retain any property under the Plan on account of or in exchange for the shares of its Preferred Stock, which shares, pursuant to the provisions of Section 7.4 of the Plan, will be converted into shares of Ordinary Stock, transferred to the SPVs, and, in consideration of the investment being made by the Equity Sponsors, retained by the SPVs. (vi) Class 12 Interests (Ordinary Stock Interests). Class 12 Interests are Impaired. The Holders of record of Allowed Class 12 Interests on the Distribution Record Date (as reflected on the register maintained by the Ordinary Stock Registrar) will not receive or retain any property under the Plan on account of or in exchange for their shares of Ordinary Stock, which shares will be transferred to the SPVs (except 68 for an insignificant minority thereof) and, in consideration of the investments being made by the Equity Sponsors, retained by the SPVs (or, in the case of the insignificant minority of such shares, by the Holders thereof). In this connection, all of the prepetition Minority Shareholders of Class 12 Interests - i.e., all Holders thereof other than Trust 1, Trust 2, VB, and VB's Affiliates - should be aware that the Equity Sponsors have affirmatively designated that each such Minority Holder will retain the same number of Class 12 Interests as such Minority Holder owns as of the Confirmation Date. However, as a result of the issuance of all of the new shares of Ordinary Stock to be issued to the SPVs in exchange for the equity investments to be made in Avianca S.A. by the Equity Sponsors, the aggregate percentage interest in the equity of Avianca S.A. represented by all of the shares of Ordinary Stock held by such Minority Shareholders will be diluted to approximately one-one hundredth of a percent (0.01%). 5. Distributions to Holders of Allowed Class 7 Claims and of Allowed Class 8 Claims (Except for the Holders of the Designated VB Claims). (a) Initial Fixed Payment, Dollar Notes, Peso Notes, and Class 8 Trust Certificates. (i) Principal Amount, Denomination, Interest, and Payments. Under the terms of the Plan, Holders of Allowed Class 8 Claims may elect to receive Single Payment Rights, which are more fully described below. All other Holders of Allowed Class 7 and Class 8 Claims (except for the Holders of the Designated VB Claims) will receive their respective Pro Rata share of (i) the Initial Fixed Payment in the amount of $(USD)10,000,000 and (ii) either Dollar Notes, in the case of Holders of Allowed Class 7 Claims, issued through the Dollar Notes Indenture Trustee or Class 8 Trust Certificates (or book entries thereof), in the case of Holders of Allowed Class 8 Claims, issued (or made) by the Class 8 Trustee evidencing beneficial interests in the Class 8 Trust that will hold the Peso Note issued for all Allowed Class 8 Claims as of the Distribution Date and also have the right to receive all payments in respect of the Peso Note placed in the applicable Disputed Claims Reserve, in the case of Holders of Allowed Class 8 Claims, in a specified minimum fixed Principal amount equal to the Holder's Pro Rata share of $(USD)35,559,000. The Dollar Notes will be issued only in denominations of $(USD)1,000 or an integral multiple thereof. The specified amount of the Initial Fixed Payment and the specified principal amount of the Class 8 Trust Certificates (or book entries) that Holders of Allowed Class 8 Claims will receive will be based upon the exchange rate in effect on the Business Day immediately preceding the Effective Date. Both the Dollar Notes and the Peso Notes will be guarantied by Reorganized Avianca, Inc. The specified minimum fixed Principal amount of Dollar Notes will bear interest at the rate of 10% per annum, and the specified minimum fixed Principal amount of the Peso Notes will bear interest at the rate of 14% per annum. This differential in interest rates is necessary so that the Dollar Notes and the Class 8 Trust Certificates will, as nearly as practical, have the same net present value. Based upon projections by the Central Bank of Colombia and private studies, the Colombian peso is forecasted to continue to devaluate, on average, at a rate of [4.0%] per annum against the United States Dollar over the foreseeable future. The specified minimum fixed Principal amount of the Dollar Notes and of the Peso Notes will be paid in eight (8) semi-annual installments, together with interest on 69 the outstanding and unpaid Principal amount thereof from time to time outstanding, in accordance with the following schedule:
FIXED AMOUNT PERCENTAGE OF SPECIFIED FIXED PAYMENT DATE PRINCIPAL AMOUNT ------------ ---------------- June 30, 2005 6.7% December 31, 2005 9.5% June 30, 2006 10.0% December 31, 2006 17.5% June 30, 2007 11.3% December 31, 2007 18.8% June 30, 2008 12.8% December 31, 2008 13.4% ---- 100%
provided, that (a) principal and interest otherwise due on December 31, 2007 shall be deferred in an amount equal to the lesser of (i) $1,000,000.000, and (ii) one half of any Incremental Compliance Costs (as defined in the Plan) as of such date (such lesser amount, the "First Compliance Contribution"), and (b) principal and interest otherwise due on December 31, 2008 shall be deferred in an amount equal to the amount, if any, by which the lesser of $2,000,000.000 or one half of any Incremental Compliance Costs as of such date exceeds the First Compliance Contribution (such lesser amount, the "Second Compliance Contribution"). The Incremental Compliance Costs relate to the costs of implementing the Security Advisor Stipulation (as defined in the Plan) that are in excess of currently budgeted costs for security of access to aircraft. The Security Advisor Stipulation is an agreement that the Company is currently negotiating with the U.S. Department of Justice concerning improving the Company's security of access to its aircraft. See Section VI.W below - "CERTAIN RISK FACTORS TO BE CONSIDERED - Aircraft Access." The amounts so deferred will not accrue interest or will bear interest at the legally required minimum, will in no manner affect the fixed principal and interest payments otherwise due on subsequent dates, and will be subsequently payable up to the amounts deferred in accordance with the following schedule: April 30, 2008 - an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $71,602,255 (i.e. 110% of the forecasted EBITDA); April 30, 2009 - (A) first, an amount equal to 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $68,475,255 (i.e. 110% of the forecasted EBITDA), to the extent of the Second Compliance Contribution, and (B) second, an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $68,475,255 (i.e. 110% of the forecasted EBITDA), to the extent such excess EBITDA is not applied in accordance with the foregoing clause (A); April 30, 2010 - (A) first, an amount equal to 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $65,241,127 (i.e. 110% of the forecasted EBITDA), to the extent of the unpaid portion of the Second Compliance Contribution, and (B) second, an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $65,241,127 70 (i.e. 110% of the forecasted EBITDA), to the extent such excess EBITDA is not applied in accordance with the foregoing clause (A); and April 30, 2011 - (A) first, an amount equal to 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $61,896,616 (i.e. 110% of the forecasted EBITDA), to the extent of the unpaid portion of the Second Compliance Contribution, and (B) second, an amount equal to one half of 85% of the excess of Avianca's EBITDA for the immediately preceding fiscal year over $61,896,616 (i.e. 110% of the forecasted EBITDA), to the extent such excess EBITDA is not applied in accordance with the foregoing clause (A); provided, that in the event that the amounts specified in such schedule are inadequate to repay the deferred amounts, Avianca's obligation on the unpaid balance of the deferred amounts will be cancelled on April 30, 2011. Based upon Avianca's best estimate of the aggregate amount of all Allowed Class 7 Claims and all Allowed Class 8 Claims, the net present value of the Initial Fixed Payment, the Dollar Notes, and the Peso Notes (exclusive of any Excess Cash Payment and of any Contingent Principal Amount) is approximately 35.7% of the aggregate amount of such Allowed Claims. The Dollar Note and the Peso Notes (and the Class 8 Trust Certificates evidencing a beneficial interest in the Class 8 Trust, which will hold Peso Notes and collections thereon), and the Dollar Notes Indenture and the Class 8 Trust Agreement have been designed so that the Dollar Notes distributed to the Holder of a Class 7 Claim will have the same value on the Effective Date as the value of the Class 8 Trust Certificate distributed to the Holder of a Class 8 Claim in the same amount as the Class 7 Claim, and so that the rights held by the Holder of the Class 7 Claim on account of said Dollar Notes will be equivalent to the rights held by the Holder of the Class 8 Claim on account of said Class 8 Trust Certificate. (ii) Excess Cash Payment. The Dollar Notes and Peso Notes also evidence the right of the Holder thereof to receive, on the Excess Cash Payment Date, its Pro Rata share of the aggregate Excess Cash Payment, if any, provided that such share of the amount by which the aggregate Excess Cash Payment exceeds $1,000,000 will be applied as a prepayment of the installments of interest due and payable under the Dollar Notes and the Peso Notes in the direct order of their maturity. Whether or not Avianca will be required to make the Excess Cash Payments depends upon the amount of the Cash balance of Avianca S.A. actually on hand on the Effective Date. The Excess Cash Payment Date will be no later than 30 days after the Effective Date. (iii) Contingent Payment Rights. In addition, the Dollar Notes and the Peso Notes evidence the Contingent Payment Right of the Holder thereof to receive, on each Contingent Payment Date, additional Contingent Principal Amounts, under certain circumstances. Whether or not Avianca must pay the additional Contingent Principal Amounts is linked to the annual consolidated financial results of operations of Avianca-SAM for each fiscal year ending December 31, 2005 through December 31, 2010. The aggregate Contingent Payment Amounts, if any, to be distributed, on a 71 Pro Rata basis, to all Holders of all Allowed Class 7 and Class 8 Claims on each of the Contingent Payment Dates is the amount, if any, by which 15% of the consolidated "EBITDA" (as defined in the Plan) of the Reorganized Debtors and SAM for the calendar year ending on December 31 immediately prior to each of the Contingent Payment Dates exceeds the total specified "Fixed Payment Amount" for such prior year ended as of such December 31 set forth in the schedule below. The Contingent Payment Dates are April 30 of 2006 - 2011.
CALENDAR YEAR SPECIFIED TOTAL ENDED DECEMBER 31 FIXED PAYMENT AMOUNT ----------------- -------------------- 2005 $10,000,000 2006 $12,500,000 2007 $12,500,000 2008 $10,000,000 2009 $ 0 2010 $ 0
(iv) Dollar Notes Issued to Holders of Allowed Class 7 Claims Who Originally Were Putative Creditors of Avianca, Inc. As discussed in detail in Section V.B above - "The Effects and Appropriateness of Substantive Consolidation," it is difficult to accurately segregate the assets and liabilities of Avianca, Inc. from the assets and liabilities of Avianca S.A. Nevertheless, because Avianca, Inc. did maintain its own books and records and routinely recorded revenues and liabilities as its own even though it was acting in its capacity as agent on behalf of Avianca S.A., it is important that a Colombian foreign exchange channel is available in order for Avianca S.A. to be able to make payments under the Dollar Notes that are issued to Creditors who originally were putative Creditors of Avianca, Inc., and not Avianca S.A. In order to ensure that a Colombian foreign exchange channel is available to Avianca S.A. for the purpose of making these payments, Avianca S.A. is capitalizing each of such payments as equity investments in Avianca, Inc. As payments are made under the Dollar Notes by the Dollar Notes Indenture Trustee, or other Paying Agent, payments made to Creditors who were originally putative Creditors of Avianca Inc. will be treated, as between Avianca S.A. and Avianca, Inc., as if such payments were being made directly on behalf of Avianca, Inc. out of the proceeds of the equity investments Avianca S.A. is deemed to have made in Avianca, Inc. (b) Single Payment Rights. Under the Plan, any Holder of an Allowed Class 8 Claim [Colombian-held General Unsecured Claims In Excess of $(COL)44,319,300] may elect to receive a "Single Payment Right" instead of both its Pro Rata share of the Initial Fixed Payment in the amount of $10,000,000 and a Class 8 Trust Certificate (or book entry thereof) evidencing its beneficial ownership of Peso Notes in a fixed Principal amount equal to its Pro Rata share of $35,559,000, as well as evidencing its right to a Pro Rata share of the Excess Cash Payment, if any, and its Contingent Payment Right to receive additional Contingent Principal Amounts under certain circumstances. The Plan defines "Single Payment Rights" as the right to receive from Avianca S.A. Colombian pesos in an amount equal to 100% of its Allowed Class 8 Claim, payable on the date that is eight (8) years and six (6) months after the Effective Date. Holders of Allowed Class 8 72 Claims who fail to make an effective election to receive Single Payment Rights will receive Peso Notes and Contingent Payment Rights. The Single Payment Rights have been financially designed, taking into account forecasted inflation and currency devaluations, to have, as nearly as possible, the same current net present value as the sum of (i) a Pro Rata share of the Initial Fixed Payment and (ii) the net present value of either a Dollar Note or a Peso Note in a Principal Amount equal to a Pro Rata share of $35,559,000 (exclusive of any Excess Cash Payment and of any Contingent Principal Amount). However, no assurance can be given that the actual amounts of future inflation and/or future currency devaluations will coincide with such forecasts. (c) The Dollar Notes Indenture Trustee and Class 8 Trustee. The "Dollar Notes Indenture Trustee" will be an Entity selected by the Committee and approved, after notice and a hearing, by the Bankruptcy Court on or before the Effective Date, that is willing to serve as the trustee under the Class 8 Trust, as trustee under the Dollar Notes Indenture. Likewise, the "Class 8 Trustee" will be an Entity selected by the Committee and approved, after notice and a hearing, by the Bankruptcy Court on or before the Effective Date, that is willing to serve as the trustee under the Class 8 Trust, as trustee under the Class 8 Trust Agreement. (d) Dollar Notes Indenture and the Class 8 Trust Agreement. The "Dollar Notes Indenture" is the trust indenture between Avianca S.A., as issuer, and the Dollar Notes Indenture Trustee, as trustee, pursuant to which the Dollar Notes will be issued. The Dollar Notes Indenture will be qualified under the U.S. federal Trust Indenture Act of 1939. The Dollar Notes Indenture will substantially follow the American Bar Foundation's Revised Model Simplified Indenture. The "Class 8 Trust Agreement" is the Contrato de Fiducia Mercantil (Trust Agreement) between Avianca S.A., as settlor, and the Class 8 Trustee, as trustee, pursuant to which the Class 8 Trust Certificates (or book entries) will be issued (or made) and which will hold the Peso Note issued on the Distribution Date in respect of all Allowed Class 8 Claims and will have the right to receive all payments in respect of the Peso Note placed in the applicable Disputed Claims Reserve. The Class 8 Trust Agreement will be substantially similar in form and substance to the Dollar Notes Indenture. Both the Dollar Notes Indenture and the Class 8 Trust Agreement will contain customary representations, warranties, indemnifications, conditions, covenants, and other provisions typical for transaction of similar size and complexity as are mutually agreed upon by the parties thereto. Among other provisions, they will contain financial covenants by Reorganized Avianca S.A. covering the following matters: (i) limitations on indebtedness for borrowed money; (ii) limitations on liens; (iii) limitations on shareholder loans and transactions with affiliates; (iv) limitations on the payment of dividends and other restricted payments; and (v) acceleration of the payment of the indebtedness owing under the Dollar Notes, Peso Notes, and Single Payment Rights upon a change in control of Reorganized Avianca S.A. In addition, the Dollar Notes Indenture will provide that all Holders of Dollar Notes will be entitled to receive in full the specified minimum fixed Principal amount thereof and all accrued, unpaid interest thereon, and if the Company is legally, equitably, administratively or otherwise required to make any reductions thereof or 73 deductions therefrom, then the Company shall immediately tender to the Disbursing Agent for the Dollar Notes the amount of any such reduction or deduction (and any additional reductions or deductions on such payments) to ensure that the net amount received on the Dollar Notes is not less than the full amount of principal and interest due under the notes and the Plan. D. PROCEDURES FOR RESOLVING DISPUTED CLAIMS. 1. Prosecution Of Objections To Claims. (a) Objections to Claims. Unless another date is established by the Bankruptcy Court or in the case of any Claims such date is extended by the Bankruptcy Court, all objections to Claims must be filed with the Bankruptcy Court and served on the Holders of such Claims by the later of: (a) 90 days after the Effective Date and (b) 180 days after a particular proof of Claim has been filed. If an objection has not been filed to a proof of Claim or a scheduled Claim by the general objection Bar Date established in Section 6.1 of the Plan, the Claim to which the proof of Claim or scheduled Claim relates will be treated as an Allowed Claim if such Claim has not been disallowed earlier. (b) Authority to Prosecute Objections. After the Effective Date, only Reorganized Avianca S.A. and Reorganized Avianca, Inc. will have the authority to file objections with the Bankruptcy Court or to settle, compromise, withdraw or litigate to judgment objections to Claims. From and after the Confirmation Date, Reorganized Avianca S.A. and Reorganized Avianca, Inc. may settle or compromise any Disputed Claim with approval of the Bankruptcy Court, after ten (10) days' notice to the Creditors Representative and a hearing, or, if the Reorganized Debtor receives no written objection from the Creditors Representative within ten (10) days after written notice of a settlement or compromise shall have been given to the Creditor Representative, without approval of the Bankruptcy Court, by filing with the Bankruptcy Court a written stipulation resolving such Claim. 2. Treatment Of Disputed Claims. (a) No Payments on Account of Disputed Claims; Reserves Established in Lieu of Distributions for Certain Disputed Claims. Notwithstanding any other provisions of the Plan, no payments or distributions will be made on account of a Disputed Claim until such Claim becomes an Allowed Claim. For purposes of receiving distributions pursuant to the Plan, each creditor that has filed with the Bankruptcy Court one or more proofs of Claim will be deemed to hold one Claim, which Claim shall be deemed a Disputed Claim unless and until each account (as defined in Section 9-102(a)(2) of the Uniform Commercial Code of New York) that is a portion of the creditor's Claim becomes an Allowed Claim. In lieu of distributions under the Plan to Holders of Disputed Claims that would be in a Reserve Class if allowed, on the Effective Date, the Reorganized Debtors shall establish Disputed Claims Reserves for Classes 7 and 8, respectively. Reorganized Avianca, Inc. and Reorganized Avianca S.A. shall fund the Disputed Claims Reserves with Dollar Notes and Cash in accordance with the procedures set forth in Section 6.2.2 of the Plan. 74 (b) Funding of Disputed Claims Reserves. (i) Disputed Class 7 Claims. On the Effective Date, Reorganized Avianca Inc. shall direct the Dollar Notes Indenture Trustee to deliver to the Disbursing Agent for Class 7 for placement in the Disputed Claims Reserve established on account of Claims in Class 7, the amount of Dollar Notes to be distributed pursuant to Article V of the Plan to the Holders of Allowed Claims in Class 7 (assuming none of the Class 7 Claims were Disputed Claims), less the amount of such securities actually distributed pursuant to Section 7.1.2 of the Plan to the Holders of Claims in Class 7 that were Allowed Claims as of the Effective Date. In addition, on the Distribution Date, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 7, for placement in the Disputed Claims Reserve established on account of Claims in Class 7, the amount of Cash that would be payable on account of the provisions of Section 5.1.7 of the Plan in the aggregate amount to be paid on account of Allowed Claims in Class 7 (assuming none of the Class 7 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 7 that have become Allowed Claims as of such time. Moreover, on the Excess Cash Payment Date, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 7, for placement in the Disputed Claims Reserve established on account of Claims in Class 7, the amount, if any, of the Excess Cash Payment that would be payable pursuant to provisions of Section 5.1.7(c) of the Plan (assuming none of the Class 7 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 7 that have become Allowed Claims as of such time. Additionally, when any payment is due on account of Contingent Payment Rights evidenced by Dollar Notes held in the Disputed Claims Reserve established on account of Claims in Class 7, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 7, for placement in the Disputed Claims Reserve established on account of Claims in Class 7, the amount that would be payable on account of Contingent Payment Rights in the aggregate amount to be paid on account of Allowed Claims in Class 7 (assuming none of the Class 7 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 7 that have become Allowed Claims as of such time. (ii) Disputed Class 8 Claims. On the Effective Date, Reorganized Avianca S.A. shall execute and deliver to the Disbursing Agent for Class 8, for placement in the Disputed Claims Reserve established on account of Claims in Class 8, the amount of Peso Notes to be distributed pursuant to Article V above to the Holders of Allowed Claims in Class 8 (assuming none of the Class 8 Claims were Disputed Claims), less the amount of such securities actually distributed pursuant to Section 7.1.2 to the Holders of Claims in Class 8 that were Allowed Claims as of the Effective Date. Then, on the Distribution Date, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 8, for placement in the Disputed Claims Reserve established on account of Claims in Class 8, the amount of Colombian pesos that would be payable on account of the provisions of Section 5.1.8(a)(ii) of the Plan in the aggregate amount to be paid on account of Allowed Claims in Class 8 (assuming none of the Class 8 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 8 that have become Allowed Claims as of such time. In addition, on the Excess Cash Payment Date, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 8, for placement in the Disputed Claims Reserve established 75 on account of Claims in Class 8, the amount, if any, of the Excess Cash Payment that would be payable pursuant to provisions of Section 5.1.8(a)(iii) of the Plan (assuming none of the Class 8 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 8 that have become Allowed Claims as of such time. Moreover, when any payment is due on account of Contingent Payment Rights evidenced by Peso Notes held in the Disputed Claims Reserve established on account of Claims in Class 8, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 8, for placement in the Disputed Claims Reserve established on account of Claims in Class 8, the amount that would be payable on account of Contingent Payment Rights in the aggregate amount to be paid on account of Allowed Claims in Class 8 (assuming none of the Class 8 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 8 that have become Allowed Claims as of such time. Furthermore, when any payment is due on account of Single Payment Rights, Reorganized Avianca S.A. shall pay to the Disbursing Agent for Class 8, for placement in the Disputed Claims Reserve established on account of Claims in Class 8, the amount of Colombian pesos that would be payable on account of Single Payment in the aggregate amount to be paid on account of Allowed Claims in Class 8 (assuming none of the Class 8 Claims were Disputed Claims), less the amount of such payments that are being paid at such time on account of Claims in Class 8 that have become Allowed Claims at such time. (iii) Recourse of Holders of Disputed Claims in Classes 7 and 8 Ultimately Allowed. Holders of Disputed Claims in Class 7 and Class 8 that are ultimately allowed will have recourse only to the undistributed property in the Disputed Claims Reserve established on account of Claims in Classes 7 and 8, as the case may be, with respect to distributions made on account of their Disputed Claims before such Disputed Claims are allowed, but not otherwise to Reorganized Avianca S.A. or Reorganized Avianca, Inc., or their respective properties or any assets previously distributed on account of any Allowed Claim. (c) Property Held in Disputed Claims Reserves. Cash held in the Disputed Claims Reserves (including interest, maturities, dividends and other payments received on account of the Dollar Notes, Single Payment Rights, Peso Notes, and the Investment Yield thereon) will be deposited in a segregated bank account in the name of the Disbursing Agent for the applicable Disputed Claims Reserve. The Disbursing Agent for the applicable Disputed Claims Reserve shall invest the cash held in such account in a manner consistent with Reorganized Avianca S.A.'s investment and deposit guidelines. The Disbursing Agent shall also place in the applicable Disputed Claims Reserve the Investment Yield from such investment of cash. Dollar Notes, Peso Notes, and Cash paid on account of Dollar Notes, Peso Notes, the Initial Fixed Payment, the Excess Cash Payment, and Single Payment Rights held in the Disputed Claims Reserves will be held in trust for the benefit of the potential claimants of such property by the Disbursing Agent for the applicable Disputed Claims Reserve and will be accounted for separately. 76 3. Distributions On Account Of Disputed Claims Once They Are Allowed. (a) After Allowance of a Disputed Claim. Within 30 days after the end of each calendar quarter following the Effective Date, the applicable Disbursing Agent shall make all distributions on account of any Disputed Claim that has become an Allowed Claim during the preceding calendar quarter. Such distributions will be made pursuant to the provisions of the Plan governing the applicable Class, including the incremental distribution provisions set forth in Section 6.3.2 of the Plan. Holders of Disputed Claims that are ultimately allowed will also be entitled to receive, on the basis of the amount ultimately allowed, the net amount of: (a) any principal, interest, or other payments placed in the applicable Disputed Claims Reserve on account of the Initial Fixed Payment, excess Cash Payment, if any, the Dollar Notes, Single Payment Rights, and Peso Notes that were held in the applicable Disputed Claims Reserve; and (b) a Pro Rata share of the Investment Yield from the investment of any Cash in the applicable Disputed Claims Reserve, from the date payments on account of the Initial Fixed Payment, Excess Cash Payment, if any, Dollar Notes, Single Payment Rights and Peso Notes, as the case may be, would have been due had such Claims then been allowed to the date that such distribution is made from the applicable Disputed Claims Reserve, in each case after reduction for the amount of taxes, if any, paid or payable out of the applicable Disputed Claims Reserve or by Reorganized Avianca S.A. and properly attributable to such interest, maturities, dividends, or other payments received. Whenever a distribution on account of a Disputed Claim in Class 8 becomes an Allowed Claim, the distribution of the Pro Rata share of Class 8 Trust Certificates shall be effected by the transfer to the Class 8 Trustee, for deposit in the Class 8 Trust, of Peso Notes in a fixed principal amount equal to the aggregate share of $35,559,000 and evidencing the Contingent Payment Right to receive the share of the Contingent Principal Amount determined as set forth in the Plan to be distributed on account of said Disputed Claim that have become an Allowed Claim, and Reorganized Avianca S.A. shall direct the Class 8 Trustee to issue to the Holders of said Disputed Claims that have then become Allowed Claims the Class 8 Trust Certificates to be distributed in accordance with the provisions of the Plan governing the Class 8, including the incremental distribution provisions set forth in Section 6.3.2 thereof. (b) After Resolution of All Disputed Claims. If any property allocated to a Disputed Claims Reserve remains in the Disputed Claims Reserve after all objections to the applicable Disputed Claims have been resolved, such remaining property will be distributed as soon as practicable pursuant to the provisions of the Plan governing the applicable Reserve Class (i.e., Pro Rata), except that if Dollar Notes or Peso Notes remain in the Disputed Claims Reserve established for Claims in Class 7 or Class 8, as the case might be, in a fixed Principal amount that exceeds the Pro Rata share of the General Unsecured Pool Value of $35,559,000 to which the Holders of Allowed Claims in Class 7 are entitled pursuant to the provisions of Section 5.1.7 or 5.1.8 of the Plan (less the fixed principal amount of Plan Securities previously distributed to Holders of Allowed Claims in the applicable Class), then the Plan Securities remaining in such Disputed Claims Reserve in the fixed principal amount of such excess must be returned to Avianca S.A. and cancelled. 77 4. Tax Requirements For Income Generated By Disputed Claims Reserves. The Disbursing Agents for the Disputed Claims Reserves shall pay, or cause to be paid, out of the property held in the applicable Disputed Claims Reserves, any tax imposed by any governmental unit on the income generated by the funds held in the applicable Disputed Claims Reserve. The Disbursing Agents shall also file or cause to be filed any tax or information returns related to the Disputed Claims Reserves that are required by any governmental unit. E. MEANS OF PLAN IMPLEMENTATION. 1. General Corporate Matters. Reorganized Avianca S.A. and Reorganized Avianca, Inc. shall each take such action as is necessary under the laws of the State of New York, federal laws, Colombian laws, and other applicable laws to effectuate the terms and provisions of the Plan. Among other actions, it is a condition to the Plan that, on or before the Effective Date, Reorganized Avianca S.A. shall have obtained approval from the Superintendence of Ports and Transportation of, and shall register with the Chamber of Commerce of Barranquilla, its Restated Charter, in accordance with Article 158 of the Colombian Commercial Code and of Article 85 of Law 222 of 1995, and Avianca, Inc. shall file its Restated Certificate of Incorporation with the New York Department of State in accordance with New York Business Corporation Law Section 808. 2. Effective Date Transactions. On the Effective Date, the following transactions (collectively, the "Effective Date Transactions") will be effectuated: (a) Reorganized Avianca S.A. and the Dollar Notes Indenture Trustee shall enter into the Dollar Notes Indenture, and Reorganized Avianca, Inc. shall execute and/or deliver to the Dollar Notes Indenture Trustee all instruments, agreements, legal opinions, and other operative documents required by and relative to the Dollar Notes Indenture (including, but not limited to, the Dollar). (b) Reorganized Avianca S.A. shall direct the Dollar Notes Indenture Trustee to issue, authenticate, and deliver to the Disbursing Agents For Claims in Classes 7, for distribution in accordance with the Plan, the Dollar Notes to be distributed in accordance with the provisions of Section 5.1.7 of the Plan or to be placed in a Disputed Claims Reserve in accordance with the provisions of Section 6.2.2 of the Plan. (c) Reorganized Avianca S.A. and the Class 8 Trustee shall enter into the Trust Agreement, and the Class 8 Trustee, Reorganized Avianca S.A. and Reorganized Avianca, Inc. shall execute and/or deliver to the Class 8 Trustee all instruments, guaranties, agreements, legal opinions and other operative documents required by and relative to the Class 8 Trust Agreement. (d) Reorganized Avianca S.A. shall execute and deliver to the Class 8 Trustee, for deposit into the Class 8 Trust, a Peso Note in the aggregate fixed principal amount equal to the sum of the fixed principal amounts of the Class 8 Trust Certificates to be distributed in 78 accordance with the provisions of Section 5.1.8 of the Plan and shall place in the Disputed Claims Reserve a Peso Note in the aggregate fixed principal amount determined in accordance with the provisions of Section 6.2.2 of the Plan. (e) Reorganized Avianca S.A. shall direct the Class 8 Trustee to issue to the Holders of Allowed Claims in Class 8 the Class 8 Trust Certificates to be distributed in accordance with the provisions of Section 5.1.8 of the Plan or to be placed in a Disputed Claims Reserve in accordance with the provisions of Section 6.2.2 of the Plan. (f) Valores Bavaria and Reorganized Avianca S.A. shall execute and deliver such agreements, instruments, and other documents as are necessary or appropriate to carry out the undertaking by Valores Bavaria to assume the VB Liabilities. (g) Reorganized Avianca S.A. shall disburse up to $740,000 in Cash payments to eligible management personnel in accordance with the provisions of the Restructuring Bonus Plan. (h) Reorganized Avianca S.A. shall remit (either to the Disbursing Agent for Claims in Class 7 or to the Disbursing Agent for Claims in Class 8) the Initial Fixed Payment of $(USD)10,000,000, to be distributed in accordance with the provisions of Sections 5.1.7 and 5.1.8 of the Plan or to be placed in a Disputed Claims Reserve in accordance with the provisions of Section 6.2.2 of the Plan. (i) Reorganized Avianca S.A. shall remit (either to the Disbursing Agent for Claims in Class 7 or to the Disbursing Agent for Claims in Class 8) a good faith estimate of the Excess Cash Payment, if any, to be distributed in accordance with the provisions of Sections 5.1.7 and 5.1.8 of the Plan or to be placed in a Disputed Claims Reserve in accordance with the provisions of Section 6.2.2 of the Plan. (j) The DIP Lenders shall mark all instruments evidencing Avianca's indebtedness to the DIP Lenders under the DIP Financing Facility "Cancelled" and shall deliver the same to the Reorganized Debtor and shall release any and all collateral securing such indebtedness. (k) Reorganized Avianca S.A. and SAM shall enter into the SAM Subordination Agreement in accordance with the terms of Section 5.1.10 of the Plan. (l) SAM shall execute and deliver to the Creditor Representative the SAM Power of Attorney in accordance with the terms of Section 5.1.10 of the Plan. (m) All other agreements, instruments and other documents required to be procured, executed and/or delivered and all payments to be made in order to effect the closing of the Transactions (as defined in Investment Agreement) must be executed, delivered, or made, as the case might be. 79 3. Management of Reorganized Avianca S.A. And Reorganized Avianca, Inc. Under the Plan, from and after the Effective Date, the respective Boards of Directors and the officers of Reorganized Avianca S.A. and of Reorganized Avianca, Inc. are likely to change; and the persons holding positions as directors and/or officers might be different from those holding such positions prior to the Effective Date. The composition of such Boards of Directors and of such officers will be determined in accordance with the respective provisions of the Restated Charter and Restated Bylaws of Reorganized Avianca S.A. and of Reorganized Avianca, Inc. See Section III.D above - "Pre-Effective Date Management" and Section III.J above - "Post-Effective Date Management." 4. Substantive Consolidation. Except as otherwise expressly provided in the Plan, the Reorganized Avianca S.A. and Reorganized Avianca, Inc. shall continue to maintain their separate corporate existences for all purposes other than the treatment of Claims under the Plan. On the Effective Date, the Substantive Consolidation order will have the effects set forth in Section 7.3 of the Plan, which are described above in the last paragraph of Section V.B hereof - "The Effects and Appropriateness of Substantive Consolidation." 5. Investments. On the Effective Date, the following transaction will be effectuated in order to recapitalize Avianca S.A.: (a) Transfer of Valores Bavaria's Equity Securities. On the Effective Date, Valores Bavaria and its Subsidiaries shall, pursuant to Section 2.3 of the Investment Agreement, transfer to the SPVs, in exchange for the payment of $(USD)100, any and all of their respective ownership interests in the equity securities of Avianca S.A., including any and all of their respective ownership interests in the Ordinary Stock and in 101,746,321,334 shares of the Preferred Stock, and in any and all other securities convertible into stock of Avianca S.A. (b) Transfer of Equity Securities of Avianca S.A. and SAM Held on the Effective Date. On the Effective Date, Valores Bavaria and the Coffee Federation shall, in accordance with the provisions of Sections 2.2 and 3.1.7 of the of the Investment Agreement, secure the transfer to the SPVs by Trust 1 and Trust 2, in exchange for the payment of $(USD)100, of all of their respective shares of Ordinary Stock and Preferred Stock and all of their respective shares of equity securities in SAM. (c) Transfer of the DIP Loan. In order to facilitate the conversion into equity of the Claim arising from the principal indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility, on the 80 Effective Date, Valores Bavaria and PrimeOther shall, pursuant to Section 2.1 of the Investment Agreement, transfer to the Coffee Federation, in exchange for the payment of $(USD)6,500,000, their respective interests in such Claim. (d) Investment by the Coffee Federation. For the consideration described in Section V.E.4(f) below - "Distributions of Equity Securities of Avianca S.A.," on the Effective Date, the Coffee Federation shall release and cancel all Claims arising from the principal indebtedness of the Debtors to the DIP Lenders under the DIP Financing Facility, i.e., Claims in the amount of $(USD)18,500,000. (e) Investment by Oceanair For the consideration described in the next Section hereof, Oceanair, directly or indirectly (through one of its Affiliates) shall (a) on the Effective Date, contribute to Reorganized Avianca S.A., for the account of the SPVs, Colombian pesos having the value, determined on the Business Day immediately preceding the Effective Date, of the sum of $(USD)9,821,429, (b) on the dates set forth in Section V.E.4(g) below - "Post-Effective Date Investments," remit to Reorganized Avianca S.A., for the account of the SPVs, the sums set forth therein, all in accordance with the terms of the Investment Agreement, and (c) on the Effective Date, deliver to Reorganized Avianca S.A., to secure its obligations to make the investments set forth in Section V.E.4(g) hereof, the Letter of Credit. See Section B.3.(b)(ii) of SUMMARY OF PLAN above -- "Investments by Equity Sponsors, Equity Investments, Oceanair Transactions, Letter of Credit." (f) Distributions of Equity Securities of Avianca S.A. As a general rule, with some exceptions, under Colombian law, issued and outstanding shares of stock cannot be cancelled, but the percentage interest in the equity of a company represented thereby may be substantially diluted by the issuance of additional shares of stock. The Minority Shareholders of shares of Ordinary Stock on the Effective Date will, therefore, be permitted to retain the same respective number of shares of Ordinary Stock after the Effective Date as each of them holds on the Effective Date, but their aggregate percentage interest in the equity of Reorganized Avianca S.A. will be diluted to approximately one-hundredth of one per cent (0.01%) after the issuance of all of the shares of Ordinary Stock of Reorganized Avianca S.A. contemplated by the Plan. Accordingly, in consideration of the investments being made by the Equity Sponsors described in the immediately preceding two (2) Sections hereof (and not on account of the Interests in Reorganized Avianca S.A. held by the Holders of such Interests as of the Effective Date), 99.99% of the Ordinary Stock and Preferred Stock outstanding on the Effective Date will be transferred to the SPVs as described in the foregoing Section V.E.4(b) above (and the remaining outstanding shares of Ordinary Stock held by Minority Shareholders - i.e., Holders as of the Effective Date other than Valores Bavaria, its Affiliates, and the Coffee Federation - will be retained by such Minority Shareholders). In addition, Reorganized Avianca S.A. shall also issue to the SPVs (in the manner designated by the Equity Sponsors) an additional number of shares of Ordinary Stock equal to the number of Colombian pesos having the value of $(USD)28,321,429, determined based upon the exchange rate in effect on the Business Day immediately preceding the 81 Effective Date. All of such shares will be issued at a subscribed, paid-in capital price of $(COL)0.01 per share and with a premium, capital surplus of $(COL)0.99 per share. (g) Post-Effective Date Investments. After the Effective Date, Oceanair, directly or indirectly (through one of its Affiliates), will, in accordance with the terms of the Investment Agreement, make, for the account of the SPVs, the following investments in Reorganized Avianca S.A. in the aggregate amount of $(USD)34,678,571: - Until Oceanair, directly or indirectly (through one of its Affiliates), has made, in accordance with the provisions of Section 7.4.7 of the Plan, for the account of the SPVs, investments in Reorganized Avianca S.A. in the aggregate amount of $(USD)34,678,571 (whether in return for equity or Subordinated Debt), Oceanair, directly or indirectly (through one of its Affiliates), will invest in Reorganized Avianca S.A., for the account of the SPVs, thirteen (13) equal monthly installments, commencing on the first (1st) Business Day of the first (1st) month following the Effective Date and continuing on the first (1st) Business Day of each of the following twelve (12) months thereafter, each in the amount of Colombian pesos having the value of $(USD)321,429, determined based upon the exchange rate in effect on the Business Day immediately preceding the date on which said investment is made, and, in exchange therefor, Avianca S.A. shall issue to the SPVs, at or about the end of each six (6) month period following the Effective Date, a number of shares of Ordinary Stock equal to the number of Colombian pesos Oceanair has invested in Reorganized Avianca S.A., for the account of the SPVs, pursuant to the foregoing provision of this clause during such six (6) month period. All of such shares will be issued at a subscribed, paid-in capital price of $(COL)0.01 per share and with a premium, capital surplus of $(COL)0.99 per share. - Until Oceanair, directly or indirectly (through one of its Affiliates), has, in accordance with the provisions of Section 7.4.7 of the Plan, made, for the account of the SPVs, investments in Reorganized Avianca S.A. in the aggregate amount of $(USD)34,678,571, Oceanair, directly or indirectly (through one of its Affiliates) will invest in Reorganized Avianca S.A., for the account of the SPVs, thirteen (13) monthly installments, commencing on the first (1st) Business Day of the first (1st) month following the Effective Date and continuing on the first (1st) Business Day of each of the following twelve (12) months thereafter, each in the amount of Colombian pesos having the value, determined based upon the exchange rate in effect on the Business Day immediately preceding the date on which said investment is made, of the U.S. dollar amount equal to the lesser of (i) $(USD)4,500,000 or (ii) the greater of $(USD)1,500,000 or the amount, if any, by which the Minimum Cash Balance (as defined in the Plan) exceeds the Actual Cash Balance, and, in exchange therefor, Reorganized Avianca S.A. shall issue to the SPVs, at or about the end of each six (6) month period following the Effective Date, a number of shares of Ordinary Stock equal to the number of Colombian pesos Oceanair has invested in Reorganized Avianca S.A., for the account of the SPVs, pursuant to this clause during said six (6) month period. All of such shares will be 82 issued at a subscribed, paid-in capital price of $(COL)0.01 per share and with a premium, capital surplus of $(COL)0.99 per share. As defined in Section 1.1.91 of the Plan, "Minimum Cash Balance" means $(USD)35 Million, converted into Colombian pesos at the exchange rate in effect on the day before the date of calculation, subject to adjustment as more specifically set forth in said Section 1.1.91. See Section 1.1.91 of the Plan for definition of "Minimum Cash Balance." - Until Oceanair, directly or indirectly (through one of its Affiliates), has, in accordance with the provisions of Section 7.4.7 Plan, made, for the account of the SPVs, investments in Reorganized Avianca S.A. in the aggregate amount of $(USD)34,678,571(whether in return for equity or Subordinated Debt), Oceanair, directly or indirectly (through one of its Affiliates), will invest in Reorganized Avianca S.A., for the account of the SPVs, additional monthly installments, commencing on the first (1st) Business Day of the fourteenth (14th) month following the Effective Date and continuing on the first (1st) Business Day of each month thereafter, each in the amount of Colombian pesos having the value, determined based upon the exchange rate in effect on the Business Day immediately preceding the date on which said investment is made, of the U.S. dollar amount equal to the lesser of (i) $(USD)4,500,000 or (ii) the greater of $(USD)1,500,000 or the amount, if any, by which the Minimum Cash Balance (as defined in the Plan) exceeds the Actual Cash Balance; and, in exchange therefor, the SPVs shall receive from Avianca S.A. the following: (A) the right to receive, at or about the end of each six (6) month period commencing the fourteenth (14th) month after the Effective Date, a number of shares of Ordinary Stock equal to the number of Colombian pesos Oceanair, directly or indirectly (through one of its Affiliates), shall have invested in Avianca S.A., for the account of the SPVs, pursuant to this clause on such first (1st) Business Day (and all of such shares will be issued at a subscribed, paid-in capital price of $(COL)0.01 per share and with a premium, capital surplus of $(COL)0.99 per share), but only to the extent, if any, that the Minimum Cash Balance exceeds the Actual Cash Balance of Reorganized Avianca S.A. reflected on its books and records on the last Business Day of the immediately preceding month, and (B) Subordinated Debt in the principal amount, if any, by which $(USD)1,500,000 exceeds the amount, if any, by which the Minimum Cash Balance exceeds such Actual Cash Balance. See Section 1.1.91 of the Plan for definition of "Minimum Cash Balance." In addition to the amounts specified above, Oceanair shall, on December 31, 2007, invest in Reorganized Avianca S.A., for its own account, an amount equal to the lesser of $(USD)1,000,000 or one-half (1/2) of any Incremental Compliance Costs as of such date. In exchange therefor, Reorganized Avianca S.A. shall promptly issue to Oceanair a debt instrument in the principal amount of such investment made that is payable (on a junior or pro rata basis, as applicable, with certain, potential deferred debt payments to Class 7 and Class 8 creditors described in Section V.5(a) above) out of 85% of Avianca's EBITDA in excess of 110% of Avianca's forecasted EBITDA, or, if insufficient excess EBITDA exists to cover such debt, then on April 30, 2011, such debt will be cancelled. 83 (h) Allocation of Ownership of SPVs. In consideration of the investments made and undertaken to be made as set forth in Sections 7.4.4, 7.4.5, and 7.4.7 of the Plan as described above, the Equity Sponsors have agreed, pursuant to the terms of the Investment Agreement and the other Transaction Documents (as defined in the Investment Agreement), that Oceanair will hold 75% of the beneficial ownership of each SPV and that the Coffee Federation will hold 25% of the beneficial ownership of each SPV. 6. Corporate Action. (a) Avianca S.A and Reorganized Avianca S.A. As of the Effective Date, Reorganized Avianca S.A. shall have adopted the Avianca S.A. Restated Charter, and the charter of Reorganized Avianca S.A. shall thereupon be in the form of Avianca S.A. Restated Charter. The Avianca S.A. Restated Charter shall, among other things, contain appropriate provisions consistent with the Plan and other Plan Documents (a) prohibiting the issuance of nonvoting equity securities as required by Section 1123(a)(6) of the Bankruptcy Code, and (b) implementing such other matters as Reorganized Avianca S.A. believes are necessary and appropriate to effectuate the terms and conditions of the Plan. Except as specifically provided in the Plan, the adoption of the Avianca S.A. Restated Charter or similar constituent documents, the selection of directors and officers for Reorganized Avianca S.A., the distribution of Cash, and the adoption, execution and delivery of all contracts, instruments, indentures, modifications and other agreements related to any of the foregoing, and other matters provided for under the Plan involving corporate action to be taken by or required of Reorganized Avianca S.A. shall be deemed to have occurred and be effective as provided herein, and shall be authorized and approved in all respects without any requirement of further action by stockholders, officers or directors of Reorganized Avianca S.A. To the extent required by law, the Boards of Directors of Avianca S.A. and of Reorganized Avianca S.A., respectively, shall take all such actions as may be necessary from time to time to approve all of the foregoing, if any, as may be required by applicable law, as well as to take all actions as may be necessary to meet all of the requirements of the Plan, including, but not limited to, the issuance of all Plan Securities to be issued by Avianca S.A. or Reorganized Avianca S.A.. As agreed by the Coffee Federation and Valores Bavaria pursuant to the terms of the Investment Agreement, the Coffee Federation and Valores Bavaria shall secure the approval by Trust 1 and Trust 2 of the issuance of the shares of Ordinary Stock pursuant to the provisions of Section 7.4.6 of the Plan and the conversion of each share of Preferred Stock into one (1) share of Ordinary Stock, all free of the application of preemptive rights as otherwise provided by the Restated Avianca S.A. Charter. Reorganized Avianca S.A. shall adopt such resolutions and regulations, if any, as shall be necessary to effect the issuance of the shares of Ordinary Stock pursuant to the provisions of Sections 7.4.6 and 7.4.7 of the Plan and the conversion of each share of Preferred Stock into one (1) share of Ordinary Stock free of the application of preemptive rights as otherwise provided by the Avianca S.A. Restated Charter. Reorganized Avianca S.A., the Coffee Federation and Valores Bavaria shall take such action as may be necessary or appropriate to secure the approval by the Superintendent of Ports and Transportation of the conversion of such shares of Preferred Stock into shares of Ordinary Stock pursuant to the provisions of the Investment Agreement. 84 (b) Avianca, Inc. and Reorganized Avianca, Inc. As of the Effective Date, Reorganized Avianca, Inc. will be deemed to have taken such corporate action, subject to the approval of its sole stockholder, as is required to adopt the Avianca, Inc. Restated Certificate of Incorporation containing provisions consistent with the Plan and other Plan Documents and implementing such matters as Avianca, Inc. believes are necessary and appropriate to effectuate the terms and conditions of the Plan, including provisions authorizing the issuance and distribution of the Plan Securities, and as is required to effect the adoption, execution and delivery of all contracts, instruments, indentures, modifications and other agreements related to any of the foregoing, and other matters provided for under the Plan involving corporate action to be taken by or required of Avianca, Inc.. To the extent required by law, the Boards of Directors of Avianca, Inc. and of Reorganized Avianca Inc., respectively, shall take such action as may be necessary from time to time to approve such of the foregoing, if any, as may be required by applicable law, as well as take all actions as may be necessary to meet all requirements of the Plan, including, but not limited to, the issuance of all of the Plan Securities to be issued by Avianca, Inc. or Reorganized Avianca, Inc. 7. Distributions. (a) Generally. All distributions required by the Plan to Holders of Allowed Claims will be made by a Disbursing Agent pursuant to a Disbursing Agreement, provided that no Disbursing Agreement will be required if Reorganized Avianca S.A. (in its capacity as a Disbursing Agent) or Reorganized Avianca, Inc. (in its capacity as a Disbursing Agent) makes such distributions. A Disbursing Agent may designate, employ or contract with other Entities to assist in or perform the distribution of the property to be distributed. Each and every Disbursing Agent and/or such other Entities may serve without bond. (b) Means of Cash Payment. U.S. dollar denominated Cash payments required by the Plan will be made by check drawn on a domestic U.S. bank, or, at the option of Reorganized Avianca Inc., by wire transfer from a domestic U.S. bank, except that payments made to Colombian or other foreign Creditors holding Unsecured Claims or at the option of Reorganized Avianca S.A. to Colombian or other foreign governmental units holding Priority Tax Claims will be made by such means as are customary or as may be necessary in a particular foreign jurisdiction. Colombian peso denominated Cash payments required by the Plan will be made by such means as are customary in the Republic of Colombia and/or as may be required by the laws of the Republic of Colombia. (c) Calculation of Distribution Amounts of Securities. (i) Limitations on Denominations Of Dollar Notes. Subject to the provisions of Section 7.6.3 b of the Plan, Dollar Notes will be issued only in denominations of $(USD)1,000 or an integral multiple thereof. 85 (ii) No Fractional Dollar Notes Issued. The Plan defines "Fractional Dollar Notes" to mean that portion of the principal amount of a Dollar Note that (a) exceeds zero dollars or an integral multiple of $(USD)1,000.00 but is less than $(USD)1,000.00, and (b) would be distributed to the Holder of record of an Allowed Class 7 Claim absent the limitation set forth in Section 7.6.6a of the Plan on the denominations of Dollar Notes to be issued pursuant to the Plan. On the Distribution Date, or as soon thereafter as reasonably practicable, the Disbursing Agent for Class 7 Claims shall calculate the aggregate principal amount of Fractional Dollar Notes that would be distributed to Holders of record of Allowed Class 7 Claims fulfilling the conditions for distributions under the Plan, absent the limitation set forth in Section 7.6.3a of the Plan on the denominations of Dollar Notes to be issued pursuant to the Plan. Such Disbursing Agent will from time to time notify Reorganized Avianca S.A. of such aggregate principal amount of Fractional Dollar Notes, and Reorganized Avianca, S.A. shall promptly after receiving such notice deliver to such Disbursing Agent Cash in such aggregate principal amount for the purpose of distributing to each Holder of record of Allowed Class 7 Claims Cash in the dollar amount of the Fractional Dollar Notes to which such Holder would have been entitled, absent the limitation set forth in Section 7.6.6a of the Plan on the denominations of the Dollar Notes. (d) Delivery of Distributions. Subject to Bankruptcy Rule 9010, distributions to Holders of Allowed Claims will be made at the address of each such Holder as set forth on the Chapter 11 schedules filed by Avianca with the Bankruptcy Court, unless superseded by the address as set forth on proofs of Claim filed by such Holders or other writings notifying Avianca of a change of address (or at the last known address of such a Holder if no proof of Claim or proof of Interest is filed or if Avianca has not been notified in writing of a change of address). If any Holder's distribution is returned as undeliverable, no further distributions to such Holder will be made, unless and until Reorganized Avianca, Inc. or the Disbursing Agent is notified of such Holder's then current address, at which time all missed distributions will be made to such Holder together with any interest or dividends earned thereon. Amounts in respect of undeliverable distributions made through the Disbursing Agent shall be returned to the Disbursing Agent making such distribution until such distributions are claimed. All Claims for undeliverable distributions will be made on or before the later of the second anniversary of the Distribution Date and the date ninety (90) days after such Claim is Allowed. After such date all unclaimed property held by a Disbursing Agent for distribution to Holders of Allowed Claims will, net of expenses of distribution, be distributed Pro Rata to the Holders of Allowed Claims in Class 7 and Class 8 (excluding the Allowed Amount of the Designated VB Claims and excluding Allowed Claims in Class 8 held by Holders who shall have elected to receive Single Payment Rights), and the Claim of any Holder with respect to such property will be discharged and forever barred. 86 (e) Timing and Amounts of Distributions to Holders of Allowed Claims in Reserve Classes. The amount of distributions to be made on the Effective Date to Holders of Allowed Claims in the Reserve Classes will be calculated as if each Disputed Claim in the applicable Class were an Allowed Claim in its Face Amount. Beginning on the date that is 30 days after the end of the calendar quarter following the Effective Date and quarterly thereafter, distributions will also be made pursuant to Section 6.3.1 of the Plan to Holders of Disputed Claims in the Reserve Classes whose Claims were allowed during the preceding calendar quarter. Whenever from time to time all or any portion of a Disputed Claim becomes a Disallowed Claim, the consideration placed in a Disputed Claims Reserve on account of the Disputed Claim shall be distributed to the Holders of Allowed Claims in accordance with the following: On each Annual Additional Distribution Date, each Holder of a previously allowed Claim in a Reserve Class will receive an additional distribution from the Disputed Claims Reserve on account of such Claim in an amount equal to (i) the amount of consideration that such Holder would be entitled to receive as if such Claim had become an Allowed Claim during the calendar quarter ending on the applicable Annual Additional Distribution Date, minus (ii) the aggregate amount of consideration previously distributed on account of such Claim. Each such annual additional distribution will also include, on the basis of the amount then being distributed, the net amount of: (i) a Pro Rata share of any principal, interest, or other payments received on account of the Initial Fixed Payment, the Excess Cash Payment, if any, the Dollar Notes or Peso Notes (including the Contingent Payment Rights evidenced by the Dollar Notes or Peso Notes) and the Single Payment Rights, as the case might be, that were held in the applicable Disputed Claims Reserve; and (ii) a Pro Rata share of the Investment Yield from the investment of any Cash in the applicable Disputed Claims Reserve, from the date payments on the account of the Initial Fixed Payment, Excess Cash Payment, if any, Dollar Notes, Single Payment Rights, and Peso Notes would have been due had such Claim initially been paid 100% of the allowed amount to the date that such distribution is made, in each case after reduction for the amount of taxes paid or payable out of the applicable Disputed Claims Reserve or by Reorganized Avianca S.A. and properly attributable to such interest, maturities, dividends, other payments received or Pro Rata share of Investment Yield. In the event that the principal amount of Dollar Notes deposited in the Disputed Claims Reserve established for Claims in Class 7 is insufficient to make the distribution on an Annual Additional Distribution Date pursuant to the provisions described in the immediately preceding paragraph, Reorganized Avianca S.A. is obligated under the provisions of Section 7.6.5 of the Plan to direct the Dollar Notes Indenture Trustee to issue, authenticate, and deliver additional Dollar Notes to the Disbursing Agent for Claims in Class 7, to be placed in said Disputed Claims Reserve and distributed in accordance with the provisions described in the preceding paragraph hereof in the amount required to eliminate the insufficiency. Moreover, in the event that the principal amount of Peso Notes deposited in the Disputed Claims Reserve established for Claims in Class 8 is insufficient to make the distribution on an Annual Additional Distribution Date pursuant to the provisions described in the immediately preceding paragraph, Reorganized Avianca S.A. shall execute and deliver to the Disbursing Agent for Claims in Class 8, to be placed in said Disputed Claims Reserve and distributed in accordance with the provisions described in the preceding paragraph hereof in the amount required to eliminate the insufficiency. Additionally, in 87 the event that the amount of Cash in a Disputed Claims Reserve is insufficient to make the distribution on an Annual Additional Distribution Date pursuant to the provisions described in such preceding paragraph hereof, the Cash in each such Disputed Claims Reserve will be reallocated and/or Reorganized Avianca S.A. shall deliver Cash to the Disbursing Agent for Claims in the affected Class, for placement in the applicable Disputed Claims Reserve, so that each such Disputed Claims Reserve contains sufficient funds to make all distributions on such Annual Additional Distribution Date provided for pursuant to the provisions of Section 7.6.5b of the Plan. (f) Fees and Expenses of Disbursing Agents. Except as otherwise ordered by the Bankruptcy Court, the amount of any reasonable fees and expenses incurred by a Disbursing Agent on or after the Confirmation Date, and any compensation and expense reimbursement claims (including reasonable fees and expenses of its attorneys and other agents) made by such Disbursing Agent will be paid by Reorganized Avianca S.A. in accordance with the applicable Disbursing Agreement without further order of the Bankruptcy Court; provided that the Bankruptcy Court will hear and determine any disputes in respect of such fees and expenses. (g) Time Bar to Cash Payments. Checks issued by Reorganized Avianca S.A. or Reorganized Avianca, Inc. in respect of Allowed Claims will be null and void if not negotiated within six (6) months after the date of issuance thereof. Requests for reissuance of any check shall be made directly to Reorganized Avianca S.A. or Reorganized Avianca, Inc. by the Holder of the Allowed Claim with respect to which such check originally was issued. Any claim in respect of such a voided check must be made on or before the second anniversary of the Distribution Date. After such date, all claims in respect of void checks will be discharged and forever barred, and the funds represented thereby will, net of expenses of distribution, be distributed Pro Rata to the Holders of Allowed Claims in Class 7 and Class 8 (excluding the Allowed Amount of the Designated VB Claims and excluding Allowed Claims in Class 8 held by Holders who have elected to receive Single Payment Rights). (h) De Minimis Distributions. Notwithstanding any provision to the contrary contained in the Plan, no distribution of less than twenty-five dollars [$(USD)25.00] or less than seventy-five thousand pesos [$(Col) 75,000.00] in Cash will be made to any Holder of an Allowed Claim, unless such Holder has requested such distribution in writing from Reorganized Avianca S.A. before the second (2nd ) anniversary of the Confirmation Date. Such undistributed amount will be, net of expenses of distribution, be distributed Pro Rata to the Holders of Allowed Claims in Class 7 and Class 8 (excluding the Allowed Amount of the Designated VB Claims and excluding Allowed Claims in Class 8 held by Holders who shall have elected to receive Single Payment Rights). 8. Vesting Of Property Of Avianca. Except as otherwise provided in the Plan (including any Plan Document) or any other indentures, instruments or agreements to be executed and delivered pursuant to the Plan or the 88 Confirmation Order, upon the Effective Date all property of the combined Estate, wherever situated, shall vest in Reorganized Avianca S.A. or Reorganized Avianca, Inc., as the case may be, and will be retained by Reorganized Avianca S.A. or Reorganized Avianca, Inc. or distributed to Creditors or Interest Holders as provided in the Plan. On the Effective Date, all property of the combined Estate, whether retained by Reorganized Avianca S.A. or Reorganized Avianca, Inc. or distributed to Creditors or Interest Holders, will be free and clear of all Claims, Liens, Encumbrances and interests, except the Claims, Liens, Encumbrances and interests of Creditors and Interest Holders expressly provided for in the Plan (including any Plan Document). 9. Preservation And Maintenance Of Causes Of Action.. Except as otherwise provided in any contract, instrument, release, indenture or other agreement entered into in connection with the Plan, in accordance with section 1123(b) of the Bankruptcy Code, Reorganized Avianca S.A. and Reorganized Avianca, Inc. will retain and may enforce any claims, rights and causes of action that Avianca or its Estate may hold against any Entity, including avoidance, recovery or other actions, claims, rights and causes of action, whether pending on the Effective Date, arising under sections 510, 542-550 or 553 of the Bankruptcy Code or otherwise. (a) Non-Insider Avoidance Actions. The Debtors believe that efforts to avoid potentially preferential transfers to non-Insiders pursuant to 11 U.S.C. Section 547 would be expensive and yield little benefit to the estate. The Debtors listed payments to Creditors within ninety (90) days prior to the Petition Date on Exhibit 3a to the Statement of Financial Affairs for Avianca S.A. and for Avianca, Inc. The gross amount of payments to Creditors during this 90-day period for Avianca S.A. totaled $124,024,388, and for Avianca, Inc., they totaled $21,013,171. Although these appear to be significant numbers, the gross payments listed do not take into account valid defenses such as ordinary course and new value that would dramatically reduce the recovery of such amounts. Furthermore, the vast majority of the payments were made to Colombian Creditors, and the Bankruptcy Court has no basis to obtain jurisdiction over them other than by their voluntarily submitting to the Court's jurisdiction. While there may be circumstances where certain transactions would be avoidable under provisions of the Bankruptcy Code, the Debtors have serious doubts as to the extraterritorial application of the U.S. Bankruptcy Code to Colombian Creditors in Colombian courts. This is particularly true where the "center of gravity" of the transaction is not in the United States. See Maxwell Communication Corp. v. Societe Generale plc (In re Maxwell Communication Corp.), 186 B.R. 807, 812 (S.D.N.Y. 1995), aff'd 93 F.3d 1036 (2nd Cir. 1996). With regard to transactions with U.S. Creditors for whom jurisdiction and extraterritorial application of U.S. laws is not an issue, the Debtors believe that pursuit of avoidance actions against U.S. Creditors only would violate the fundamental fairness principles of the Bankruptcy Code. Accordingly, the Debtors do not currently intend to pursue any non-Insider avoidance actions. 89 (b) Insider Avoidance Actions. The Debtors also believe that efforts to avoid potentially preferential transfers to Insiders pursuant to 11 U.S.C. Section 547 would yield little benefit to the estate. The Debtors have determined that, in the one year period prior to the filing of the cases, the Debtors transferred $34,132,559.46 to Aces; $3,169,337.42 to SAM; $755,176.77 to Helicol; $14,587,253 to other affiliates; and $5,500,000 between the Debtors. The Debtors' review of these transactions reveals that the vast majority of the transfers were made in reimbursement of payments one entity made on behalf of another based on cash flow needs and pre-existing relationships. Because these transactions occurred both ways, with the Debtors sometimes paying amounts owed by affiliates, any such claims are subject to offset. Avoidance and recovery of any of these transactions would involve complex forensic accounting and the significant costs associated with such accounting. The Debtors also made payments during the one year prior to the filing of the case to various officers and directors, who may be considered Insiders in the aggregate amount of $(COL)3,268,559,349. These amounts were payments made in the ordinary course of the Debtors' businesses for salary, regular bonuses, and benefits to which the recipients were entitled under their employment agreements or Colombian laws. Moreover, efforts to recover any of such amounts in an avoidance action under the Bankruptcy Code could also be subject to the same difficulties set forth in (a) above by reason of the related transactions' lack of connection to the United States. As a result, the Debtors do not believe that such transfers are avoidable. Accordingly, the Debtors do not currently intend to pursue any Insider avoidance actions. F. EXECUTORY CONTRACTS AND UNEXPIRED LEASES. 1. General Treatment. All unexpired leases and Executory Contracts of Avianca will be rejected by Reorganized Avianca S.A. or Reorganized Avianca, Inc., as the case may be, as of the Effective Date, unless (a) assumed under Section 9.2 of the Plan, or (b) assumed pursuant to an order entered on or prior to the Effective Date, or (c) a motion to assume any such Executory Contract or unexpired lease is pending before the Bankruptcy Court on the Effective Date, or (d) assumed pursuant to the Confirmation Order, or (e) rejected pursuant to an Order entered on or prior to the Effective Date. 2. Assumed Contracts And Leases. The Executory Contracts and unexpired leases of Avianca S.A. or Avianca, Inc. specifically identified on SCHEDULE 9.2 to the Plan will be assumed by Reorganized Avianca S.A. or Reorganized Avianca, Inc., as the case might be, as of the Effective Date. 3. Bar To Rejection Damages. Section 9.2 of the Plan provides that, if the rejection of an Executory Contract or unexpired lease by Avianca results in damages to the other party or parties to such contract or lease, a Claim for such damages, if not previously evidenced by a filed proof of Claim or barred by a Final Order, will be forever barred and will not be enforceable against the Debtor, Reorganized Avianca 90 S.A. or Reorganized Avianca, Inc. or their properties or agents, successors, or assigns, unless a proof of Claim relating thereto is filed with the Bankruptcy Court within thirty (30) days after the later of (a) the entry of a Final Order authorizing such rejection and (b) the Confirmation Date, or within such other period as may be ordered by the Bankruptcy Court. 4. Cure Of Defaults For Executory Contracts And Unexpired Leases. Each Executory Contract and unexpired lease to be assumed pursuant to the Plan will be reinstated and rendered unimpaired in accordance with Sections 1124(2) and 365(b)(1) of the Bankruptcy Code. In connection therewith, Avianca shall: (a) cure, or provide adequate assurance that it will cure, any monetary default (other than of the kind specified in Section 365(b)(2) of the Bankruptcy Code), by payment of the default amount in Cash on the Distribution Date or on such other terms as the parties to such Executory Contract or unexpired lease may otherwise agree, (b) compensate, or provide adequate assurance that Avianca will promptly compensate, parties other than Avianca to such contract or lease for any actual pecuniary loss to such parties resulting from such default, and (c) provide adequate assurance of future performance under such contract or lease. In the event of a dispute regarding: (i) the amount of any cure payments, (ii) the ability of Reorganized Avianca S.A. or Reorganized Avianca, Inc. or any of their assignees to provide "adequate assurance of future performance" (within the meaning of section 365 of the Bankruptcy Code) under the contract or lease to be assumed, or (iii) any other matter pertaining to assumption, the cure payments or performance required by section 365(b)(1) of the Bankruptcy Code will be made following the entry of a Final Order resolving the dispute and approving the assumption. 5. Rejection Claims. Any Rejection Claim not barred pursuant to the provisions of Section 9.2 of the Plan, as described above in Section V.F.2 hereof - "Bar to Rejection Damages," will be an Allowed Claim in the amount set forth in the filed proof of Claim evidencing such Claim unless an objection is filed to such Claim not later than sixty (60) days after the filing of such proof of Claim or thirty (30) days after the Effective Date. Upon the filing of any such objection, the amount of the Allowed Rejection Claim, if any, will be determined by the Bankruptcy Court unless such Claim has sooner become an Allowed Claim. G. CONDITIONS PRECEDENT TO CONFIRMATION AND EFFECTIVE DATE. 1. Conditions Precedent To Confirmation Of The Plan. Confirmation of the Plan will not occur unless all of the following conditions precedent (collectively, the "Confirmation Conditions") have been satisfied or, in accordance with Section 10.3 of the Plan, waived: (a) The Confirmation Order must approve in all respects all of the provisions, terms, and conditions of the Plan (including, but not limited to, all EXHIBITS thereto); (b) The Confirmation Order must approve in all respects all of the provisions, terms, and conditions of the Investment Agreement; 91 (c) The Substantive Consolidation Order must have been entered or included in the Confirmation Order; (d) All of the requirements of section 1129 of the Bankruptcy Code must be met; (e) Whether or not Class 8 accepts the Plan, Creditors holding at least 80% in amount of Claims in Class 8 allowed for purposes of voting on the Plan must have agreed in writing to be bound by the provisions of the Plan by executing and delivering to Avianca or its designee a Novation Agreement; (f) The Confirmation Order must include a finding that the Debtor's estimate of the aggregate amount of Administrative Claims, excluding Claims the Holders of which have then agreed to accept treatment other than payment in Cash in full on the Distribution Date and also excluding such Claims representing obligations incurred by Avianca in the ordinary course of business, is reasonable and is not in excess of $(USD)12,800,000; (g) The Confirmation Order must include a finding that the Debtor's estimate of the aggregate amount of Allowed Priority Claims is reasonable and is not in excess of $(USD)4,000,000; (h) The Confirmation Order must include a finding that the Debtor's estimate of the aggregate amount of Allowed Class 9 Claims is reasonable and is not in excess of $(USD)4,500,000; and (i) The Confirmation Order must include a finding that the only material Claims in Class 6 are (a) Claims that are the Secured Claims arising from the indebtedness of Avianca S.A. on account of its legal obligation to provide for the payment of pension benefits to which employees or former employees of Avianca S.A. or SAM are entitled as a result of their employment by Avianca S.A. or SAM, as the case might be, which are secured, in whole or in part, by the collateral assignment of instruments or other evidences of indebtedness on which Valores Bavaria is an obligor and (b) Claims against Avianca arising under Executory Contracts or unexpired leases that are subject to setoff under Section 553 of the Bankruptcy Code. (j) All Claims arising from the indebtedness evidenced by the Master Trust Notes, whether secured or unsecured, shall have been eliminated as a result of the consummation of a settlement and compromise of such Claims approved, after notice and a hearing, by the Bankruptcy Court. 2. Conditions To Effective Date. The Effective Date of the Plan will not occur unless all of the following conditions precedent (collectively, the "Effective Date Conditions") have been satisfied or, in accordance with Section 10.3 of the Plan, waived: (a) Each of the foregoing Confirmation Conditions must have been satisfied or, in accordance with Section 10.3 of the Plan, waived; 92 (b) The Confirmation Order must have been entered and must not have been stayed; (c) All of the previously described Effective Date Transactions set forth in Section 7.1.2 of the Plan (see Section V.E.2 above - "Effective Date Transactions") must have been effected, and all other agreements and instruments to be delivered under or necessary to effectuate the Plan must have been executed and delivered; (d) No condition to the issuance and authentication of the Dollar Notes to be distributed pursuant to Article V of the Plan must be unsatisfied; (e) The notification, if any, required by Section 7A of the Clayton Act to be given by the Debtor in connection with the closing of the transactions contemplated by the Investment Agreement must have been given, and the waiting period, if any, required under such Section 7A must have ended; (f) Any requirements of Colombian law for the issuance of the Peso Notes must have been fulfilled; and (g) The transactions contemplated by the Investment Agreement must have been closed, all shares of Ordinary Stock and Preferred Stock to be transferred or issued pursuant thereto must have been transferred or issued, as the case might be, all consideration to be paid at the closing in accordance with the terms thereof must have been paid, and all security to have been delivered at the closing must have been delivered. (h) The Debtor must have entered into the Security Advisor Stipulation in a form approved by Oceanair, which approval shall not be unreasonably withheld, and such stipulation must have been approved by a Final Order entered by each of the Bankruptcy Court and the United States District Court for the Southern District of New York. 3. Waiver Of Conditions. Section 10.3 of the Plan provides that the Proponents may waive, without notice and without leave of or Order of the Bankruptcy Court, all or any portion of any of the Confirmation Conditions or any of the Effective Date Conditions, provided that the Proponents may waive the condition set forth in Section 10.1.10 of the Plan (described in Paragraph V.G.1(j) above) only with the approval of the Committee and upon the modification of the Plan, in accordance with the provisions of Section 13.7 of the Plan, to provide for the Claims arising from the indebtedness evidenced by the Master Trust Notes, whether secured or unsecured, and provided, further that the condition set forth in Section 10.2.8 of the Plan (described in Paragraph V.G.2(h) above) may be waived only with the consent of Oceanair, which shall not be unreasonably withheld. 93 H. EFFECTS OF CONFIRMATION AND EFFECTIVENESS OF THE PLAN. 1. Discharge Of Claims. Except as otherwise provided in the Plan or in the Confirmation Order, the rights afforded in the Plan and the payments and distributions to be made hereunder will discharge all existing debts and Claims of any kind, nature, or description whatsoever against Avianca, any of its assets or properties or any property dealt with under the Plan to the extent permitted by section 1141 of the Bankruptcy Code; upon the Effective Date, all existing Claims against Avianca will be discharged; and all Holders of Claims and Interests will be precluded from asserting against Avianca, any of its assets or properties, or any property dealt with under the Plan any other or further Claim based upon any act or omission, transaction, or other activity of any kind or nature that occurred prior to the Confirmation Date, whether or not such Holder filed a proof of Claim. 2. Discharge Of Avianca. Except as otherwise expressly provided in the Plan, any consideration distributed to Creditors under the Plan will be in exchange for and in complete satisfaction, discharge, and release of all Claims of any nature whatsoever against Avianca or any of its assets or properties; and, except as otherwise expressly provided in the Plan, upon the Effective Date, Avianca will be discharged and released to the extent permitted by section 1141 of the Bankruptcy Code from any and all Claims, including demands and liabilities that arose before the Confirmation Date, and all debts of the kinds specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (a) a proof of Claim based upon such debt is filed or deemed filed under section 501 of the Bankruptcy Code; or (b) the Holder of a Claim based upon such debt has accepted the Plan. Except as so provided in the Plan or the Bankruptcy Code, the Confirmation Order will be a judicial determination of discharge of all liabilities of Avianca. As provided in section 524 of the Bankruptcy Code, such discharge will void any judgment against Avianca at any time obtained to the extent it relates to a Claim discharged, and operates as an injunction against the commencement or continued prosecution of any action against Avianca or its property, Reorganized Avianca S.A. or its property, or Reorganized Avianca, Inc. or its property to the extent it relates to a Claim discharged. 3. INJUNCTION. EXCEPT AS EXPRESSLY PROVIDED IN THE PLAN OR IN THE CONFIRMATION ORDER, FROM AND AFTER THE EFFECTIVE DATE, ALL HOLDERS OF CLAIMS AGAINST THE COMBINED ESTATE ARE PERMANENTLY RESTRAINED AND ENJOINED FROM CONTINUING, OR TAKING ANY ACT, TO ENFORCE ANY CLAIM AGAINST REORGANIZED AVIANCA S.A. OR REORGANIZED AVIANCA, INC.; PROVIDED THAT EACH HOLDER OF A CLAIM MAY, TO THE EXTENT PERMITTED BY AND IN ACCORDANCE WITH THE PROVISIONS OF THE PLAN, COMMENCE OR CONTINUE ANY ACTION OR PROCEEDING TO DETERMINE THE AMOUNT OF ITS CLAIM IN THE BANKRUPTCY COURT, AND ALL HOLDERS OF CLAIMS WILL BE ENTITLED TO ENFORCE THEIR RIGHTS UNDER THE PLAN AND THE PLAN DOCUMENTS. 4. Exculpations And Limitation Of Liability. 94 Notwithstanding any other provision of the Plan, none of (a) the Debtor, the Reorganized Debtor, any Subsidiary or Affiliate of the Debtor or the Reorganized Debtor, or any of their respective principals, shareholders, employees, agents, representatives, officers, directors, members, partners, professionals, successors and assigns, (b) the Committee or any of its members or professionals, (c) any Equity Sponsor or any of its principals, shareholders, employees, agents, representatives, officers, directors, members, partners, professionals, successors and assigns, (d) Trust 1, Trust 2, Valores Bavaria, Inversiones, PrimeOther, PrimeAir Ltda., the Coffee Federation, Fondo Nacional de Cafe, or any of their respective principals, shareholders, employees, agents, representatives, officers, directors, members, partners, professionals, successors and assigns, or (e) any other Entities who have participated in negotiating, drafting, soliciting acceptances of, resolving or attempting to resolve objections to, or implementing, the Plan or have otherwise participated in the process of developing and obtaining the confirmation and consummation of the Plan, will have any liability to the Debtor, the Reorganized Debtor, the Estate, any Holder of a Claim or Interest, or any other Entity for any action taken or omitted to be taken in connection with or arising out of the Plan, the solicitation of votes on or administration of the Plan, the property distributed under the Plan, or the offer, issuance, sale, or purchase of securities under the Plan, except for willful misconduct or gross negligence as determined by a Final Order of the Bankruptcy Court, and, in all respects, such persons will be entitled to rely upon the advice of counsel with respect to their duties and responsibilities under the Plan. 5. RELEASES BY RECIPIENTS OF DOLLAR NOTES, CLASS 8 TRUST CERTIFICATES, AND SINGLE PAYMENT RIGHTS. EXCEPT AS PROVIDED IN THE PLAN, EACH ENTITY RECEIVING DOLLAR NOTES, CLASS 8 TRUST CERTIFICATES (OR BOOK ENTRIES THEREOF), AND/OR SINGLE PAYMENT RIGHTS ON ACCOUNT OF AN ALLOWED CLAIM, UPON RECEIPT OF SUCH DOLLAR NOTES OR, IN THE CASE OF CLASS 8 CERTIFICATES (OR BOOK ENTRIES THEREOF) OR SINGLE PAYMENT RIGHTS, UPON THE ENTITY'S EXECUTION OF A NOVATION AGREEMENT AND THE OCCURRENCE OF THE EFFECTIVE DATE OR UPON THE ENTITY'S RECEIPT AND ACCEPTANCE OF ANY PROPERTY DISTRIBUTED PURSUANT TO THE PLAN ON ACCOUNT OF ITS CLAIM, WILL BE DEEMED FOREVER TO RELEASE, WAIVE, AND DISCHARGE ALL KNOWN AND UNKNOWN CLAIMS OF ANY NATURE THAT SUCH ENTITY HAS, HAD, OR MIGHT HAVE AGAINST AVIANCA, REORGANIZED AVIANCA S.A., REORGANIZED AVIANCA, INC., AVIANCA'S OR AVIANCA, INC.'S RESPECTIVE BOARD OF DIRECTORS OR ITS MEMBERS, AVIANCA S.A.'S OR AVIANCA, INC.'S CORPORATE OFFICERS, THE COMMITTEE OR ITS MEMBERS, BNY, OR ANY EQUITY SPONSOR, OR ANY OF THEIR RESPECTIVE ATTORNEYS OR FINANCIAL ADVISORS, ON ACCOUNT OF, OR RELATING TO, ANY CLAIM OR CAUSE OF ACTION RELATING IN ANY WAY TO THE CLAIMS DISCHARGED UNDER THE PLAN OR THE NEGOTIATION, DOCUMENTATION, AND IMPLEMENTATION OF THE PLAN. THE CONFIRMATION ORDER WILL ENJOIN, FROM AND AFTER THE EFFECTIVE DATE, THE PROSECUTION, WHETHER DIRECTLY, DERIVATIVELY, OR OTHERWISE, OF ANY CLAIM, DEBT, RIGHT, CAUSE OF ACTION, OR LIABILITY RELEASED OR TO BE RELEASED PURSUANT TO SECTION 11.5 OF THE PLAN. 6. RELEASE OF STOCKHOLDERS, OFFICERS, DIRECTORS, AND REPRESENTATIVES. SECTION 11.6 OF THE PLAN PROVIDES THAT, AS OF THE EFFECTIVE DATE, THE DEBTOR AND THE REORGANIZED DEBTOR, ON THEIR OWN BEHALF AND ON BEHALF OF ALL OF THEIR STOCKHOLDERS AND CREDITORS, EACH RELEASES, ACQUITS AND FOREVER DISCHARGES EACH OF TRUST 1, TRUST 2, VALORES BAVARIA, INVERSIONES, PRIMEOTHER, PRIMEAIR LTDA, THE COFFEE FEDERATION, FONDO NACIONAL DE CAFE, OR ANY EQUITY SPONSOR AND THEIR RESPECTIVE PRINCIPALS, SHAREHOLDERS, EMPLOYEES, AGENTS, 95 REPRESENTATIVES, OFFICERS, DIRECTORS, MEMBERS, PARTNERS, PROFESSIONALS, SUCCESSORS AND ASSIGNS, AND ANY ENTITY CLAIMED TO BE LIABLE DERIVATIVELY THROUGH ANY OF THE FOREGOING (EACH SUCH PARTY, A "RELEASED PARTY") FROM ANY AND ALL ACTIONS, CAUSES OF ACTION, LIABILITIES, OBLIGATIONS, RIGHTS, SUITS, ACCOUNTS, COVENANTS, CONTRACTS, AGREEMENTS, PROMISES, DAMAGES, JUDGMENTS, CLAIMS, DEBTS, REMEDIES AND DEMANDS WHATSOEVER, WHETHER LIQUIDATED OR UNLIQUIDATED, FIXED OR CONTINGENT, MATURED OR UNMATURED, KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, EXISTING AS OF THE EFFECTIVE DAVE OR THEREAFTER ARISING, IN LAW, AT EQUITY OR OTHERWISE, INCLUDING ANY AND ALL RIGHTS, LIABILITIES, AND OBLIGATIONS ACQUIRED UNDER COLOMBIAN LAW AND ENFORCEABLE IN COLOMBIA, BASED IN WHOLE OR IN PART UPON ANY ACT OR OMISSION OR OTHER EVENT OCCURRING PRIOR TO THE COMMENCEMENT OF THE CASE OR DURING THE COURSE OF THE CASE (INCLUDING THROUGH THE EFFECTIVE DATE), IN ANY WAY RELATING TO THE DEBTOR, THE CASE, OR THE OWNERSHIP, MANAGEMENT, AND OPERATION OF THE DEBTOR, THAT THE DEBTOR OR REORGANIZED DEBTOR, OR ANY OF THEIR STOCKHOLDERS AND/OR CREDITORS WOULD HAVE BEEN LEGALLY ENTITLED TO ASSERT IN ITS OWN RIGHT (WHETHER INDIVIDUALLY OR COLLECTIVELY) OR THAT ANY HOLDER OF A CLAIM OR INTEREST OR OTHER ENTITY WOULD HAVE BEEN LEGALLY ENTITLED TO ASSERT ON BEHALF OF THE DEBTOR OR ITS ESTATE (THE "RELEASED CLAIMS"); PROVIDED THAT THE FOREGOING RELEASE SHALL NOT OPERATE AS A WAIVER OF OR RELEASE OF (i) ANY LIABILITY, CLAIM, OR CAUSE OF ACTION ARISING OUT OF ANY EXPRESS CONTRACTUAL OBLIGATION OWING BY ANY CURRENT OR FORMER DIRECTOR, OFFICER OR EMPLOYEE OF A DEBTOR, (ii) ANY REIMBURSEMENT OBLIGATION OF ANY CURRENT OR FORMER, DIRECTOR, OFFICER, OR EMPLOYEE WITH RESPECT TO A LOAN OR ADVANCE MADE BY A DEBTOR TO SUCH DIRECTOR, OFFICER, OR EMPLOYEE, OR (iii) THE VB LIABILITIES OR THE LIABILITY OF ANY ENTITY THAT IS LIABLE WITH VALORES BAVARIA ON, OR THAT HAS SECURED THE VB LIABILITIES. IN ADDITION, ANY CREDITORS ACCEPTING ANY DISTRIBUTION PURSUANT TO THE PLAN OR OTHERWISE TREATED UNDER THE PLAN SHALL BE PRESUMED CONCLUSIVELY TO HAVE RELEASED THE RELEASED PARTIES FROM THE RELEASED CLAIMS. SUCH CREDITORS, ALONG WITH THEIR RESPECTIVE PRINCIPALS, SHAREHOLDERS, EMPLOYEES, AGENTS, REPRESENTATIVES, OFFICERS, DIRECTORS, MEMBERS, PARTNERS, PROFESSIONALS, SUCCESSORS AND ASSIGNS, SHALL BE PERMANENTLY ENJOINED FROM AND AFTER THE EFFECTIVE DATE FROM DIRECTLY OR INDIRECTLY COMMENCING OR CONTINUING, IN ANY MANNER, A JUDICIAL, ADMINISTRATIVE, OR OTHER ACTION OR PROCEEDING AGAINST THE RELEASED PARTIES OR ENFORCING AGAINST THE RELEASED PARTIES A JUDGMENT OBTAINED ON ACCOUNT OF OR IN RESPECT OF THE RELEASED CLAIMS. THE RELEASES DESCRIBED IN THIS SECTION 11.6 SHALL BE ENFORCEABLE AS A MATTER OF CONTRACT AND ARE IN ADDITION TO, AND NOT IN LIEU OF, ANY OTHER RELEASE OR DISCHARGE PROVIDED BY APPLICABLE LAW, INCLUDING SECTION 1141 OF THE BANKRUPTCY CODE, OR SEPARATELY GIVEN, CONDITIONALLY OR UNCONDITIONALLY, BY THE DEBTOR OR ANY OTHER ENTITY. THE RELEASES DESCRIBED IN THIS SECTION 11.6 SHALL, UPON THE ENTRY OF THE CONFIRMATION ORDER, HAVE THE EFFECT OF RES JUDICATA (A MATTER ADJUDGED), TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAWS OF THE REPUBLIC OF COLOMBIA. 7. Challenges to Effect of Injunction, Exculpations, and Releases CAXDAC and ACDAC have made Avianca aware that they consider the injunction, exculpations, and releases provided by Article XI of the Plan to be impermissibly broad and inconsistent with the classification of certain Classes of Claims as Unimpaired. Avianca believes that such provisions are entirely appropriate and will not jeopardize the Confirmation of the Plan. For a discussion of the conflicting positions respecting these provisions, see Section V.C.4.(a)(ii) above -- "SUMMARY OF THE REORGANIZATION PLAN - Classification of Claims and Interests - Treatment of Classified Claims and Interests - Unimpaired Classes of Claims and 96 Interests - Class 2 Claims (CAXDAC Claims)" and also see Section XII.C.3 below --"VOTING REQUIREMENTS - Acceptance or Rejection of the Plan - Cramdown." I. RETENTION OF JURISDICTION. 1. Scope Of Jurisdiction. Pursuant to sections 1334 and 157 of Title 28 of the United States Code, from and after the Confirmation Date, the Bankruptcy Court will retain and have jurisdiction of all matters arising in, arising under, and related to the Case and the Plan pursuant to, and for the purposes of, Sections 105(a) and 1142 of the Bankruptcy Code and for, among other things, the following purposes: (a) To hear and determine any and all adversary proceedings, applications or contested matters pending on the Effective Date or brought after the Effective Date; (b) To hear and determine any and all applications for substantial contribution and for compensation and reimbursement of expenses filed by Professional Persons; (c) To hear and determine Rejection Claims, disputes arising from the assumption and assignment of Executory Contracts and unexpired leases, and Disputed Claims which are Impaired Claims or which are held by Holders of Unimpaired Claims who have filed proofs of their Claims in accordance with Section 8.1 of the Plan; (d) To hear and determine, pursuant to the provisions of section 505 of the Bankruptcy Code, all issues related to the liability of Avianca for any tax incurred prior to the Effective Date; (e) To enforce the provisions of the Plan and to determine any and all disputes arising under the Plan; (f) To enter and implement such orders as may be appropriate in the event Confirmation is for any reason stayed, reversed, revoked, modified or vacated; (g) To modify any provision of the Plan to the extent permitted by the Bankruptcy Code and to correct any defect, cure any omission or reconcile any inconsistency in the Plan or the Confirmation Order as may be necessary to carry out the purposes and intent of the Plan; (h) To enter such orders as may be necessary or appropriate in furtherance of consummation and implementation of the Plan; and (i) To enter an order closing the Case. CAXDAC has advised the Debtor that it believes that the Plan, by providing for jurisdiction over various matters, e.g., disputes regarding the satisfaction of the CAXDAC Claims, in United States courts, violates Colombian law, including Article 14 of the Colombian Labor Code. Avianca believes that the Bankruptcy Court's retention of jurisdiction over the matters stipulated in 97 Article XII of the Plan is consistent not only with the Bankruptcy Code but also with Article 14 of the Colombian Labor Code. Avianca believes that CAXDAC, through its active participation in Avianca's chapter 11 Case, including its appearances in Bankruptcy Court and its serving as Chairman of the Committee, has recognized the jurisdiction of the Bankruptcy Court in connection with Avianca's chapter 11 Case and cannot effectively sustain the position that the Bankruptcy Court cannot, after the Confirmation Date, exercise jurisdiction over matters integrally related to the Case. Moreover, Avianca observes that the Plan does not reserve exclusive jurisdiction in the Bankruptcy Court over any cause of action that CAXDAC may claim a right to enforce against Avianca to enforce the CAXDAC Claims after the Effective Date or otherwise purport to prevent CAXDAC from bringing an action in a Colombian court of competent jurisdiction to enforce any such right. Accordingly, Avianca believes that the Plan, insofar as it provides for jurisdiction over certain matters in the Bankruptcy Court, is not in violation of Colombian law. 2. Failure Of The Bankruptcy Court To Exercise Jurisdiction. Section 12.2 of the Plan provides that, if the Bankruptcy Court abstains from exercising, or declines to exercise, jurisdiction or is otherwise without jurisdiction over any matter arising in, arising under or related to the Case, including the foregoing described matters set forth in Section 12.1 of the Plan, then Article XII of the Plan will have no effect upon and will not control, prohibit, or limit the exercise of jurisdiction by any other court having jurisdiction with respect to such matter. J. MISCELLANEOUS MATTERS. 1. Compliance With Tax Requirements. In connection with the Plan, Avianca, Reorganized Avianca S.A. or Reorganized Avianca, Inc., as the case may be, and each Disbursing Agent shall comply with all applicable withholding and reporting requirements imposed by federal, state, local and foreign taxing authorities, and all distributions to be made pursuant to the Plan will, except as otherwise provided in the Plan Documents, be subject to such withholding and reporting requirements. Creditors may be required to provide certain tax information as a condition to receipt of distributions pursuant to the Plan. 2. Dissolution of Committee. On the Effective Date the Committee shall dissolve automatically, whereupon its members, Professional Persons and agents shall be released from any and all further duties and responsibilities in the Case and under the Bankruptcy Code, except with respect to obligations arising under confidentiality agreements, joint interest agreements and protective orders entered during the pendency of the Case, which shall remain in full force and effect in accordance with their respective terms. Professional Persons retained by the Committee and the respective members thereof shall not be entitled to compensation or reimbursement of expenses for services rendered or expenses incurred after the Effective Date, except for services rendered and expenses incurred in connection with any applications for allowance of compensation for services rendered and reimbursement of expenses incurred on or before the Effective Date. 98 3. Payment Of Statutory Fees. On or before the Effective Date, Avianca shall pay all fees payable pursuant to section 1930 of title 28 of the United States Code, as determined by the Bankruptcy Court at the Confirmation Hearing. 4. Post-Confirmation Date Fees And Expenses Of Professional Persons. After the Confirmation Date, Avianca, and after the Effective Date, Reorganized Avianca S.A. and Reorganized Avianca, Inc. shall, in the ordinary course of business and without the necessity for any approval by the Bankruptcy Court (except as may be required by Section 1129(a)(4) of the Bankruptcy Code), pay the reasonable fees and reasonable expenses of the Professional Persons related to implementation and consummation of the Plan; provided that no such fees and expenses shall be paid except upon receipt by Avianca or Reorganized Avianca S.A. or Reorganized Avianca, Inc., as may be applicable, of a detailed written invoice from the Professional Person seeking compensation and expense reimbursement, and provided further that any such party may, within ten (10) days after receipt of an invoice for fees and expenses, request that the Bankruptcy Court determine the reasonableness of such fees and expenses. 5. Binding Effect. The Plan is binding upon and is to inure to the benefit of the Reorganized Debtor, the Holders of Claims, the Holders of Interests, and their respective successors and assigns; provided that if the Plan is not confirmed, the Plan will be deemed null and void and nothing contained therein will be deemed or should be construed (a) to constitute a waiver or release of any Claims by Avianca, any Creditor, or any other Entity, (b) to prejudice in any manner the rights of Avianca or any other Entity, or (c) to constitute any admission by Avianca or any other Entity. 6. Governing Law. Unless an applicable rule of law or procedure is supplied by federal law (including the Bankruptcy Code and the Bankruptcy Rules) or the New York corporation laws or the Colombian corporation laws, the internal laws of New York will govern the construction and implementation of the Plan and any agreements, documents, and instruments executed in connection with the Plan or the Case, except as may otherwise be provided in such agreements, documents, and instruments. 7. Amendments And Modifications. The Proponents may, in accordance with section 1127(a) of the Bankruptcy Code and Bankruptcy Rule 3019, after hearing on notice to the Committee, BNY and such other Entities as are entitled to such notice pursuant to Bankruptcy Rule 3019, amend or modify the Plan prior to the entry of the Confirmation Order. 99 8. Revocation. Avianca reserves the right to revoke and withdraw the Plan prior to Confirmation. If Avianca revokes or withdraws the Plan, then the Plan will be deemed null and void and, in such event, nothing contained in the Plan should be construed to constitute a waiver or release of any Claims or other rights by or against Avianca or any Entity in any further proceedings involving Avianca or otherwise. 9. Notices. All notices, requests, or demands for payments provided for in the Plan must be in writing and will be deemed to have been given when personally delivered by hand, or deposited in any general or branch post office of the United States Postal service, or received by e-mail or telecopy; provided that BNY shall give any required notices to the Holders of Master Notes in accordance with the terms of the Master Trust Agreement. Notices, requests, and demands for payments must be addressed and sent, postage prepaid, or delivered as follows: (a) In the case of notices, requests, or demands for payments to Avianca, Reorganized Avianca S.A. or Reorganized Avianca, Inc., at Departamento de Tesoreria, Avenida Eldorado No. 93-30, Bogota, Colombia, Attn: Secretario General, and at any other address designated by Avianca, Reorganized Avianca S.A. or Reorganized Avianca, Inc. by notice to each Holder of a Claim or Interest, with copies to Smith, Gambrell & Russell, LLP, Suite 3100, Promenade II, 1230 Peachtree Street, Atlanta, Georgia 30309, Attn: Ronald E. Barab, Esq.; and (b) In the case of notices to Holders of Claims or Interests, at the last known address according to Avianca's or Reorganized Avianca S.A.'s or Reorganized Avianca, Inc.'s books and records, or at any other address designated by a Holder of a Claim or Interest, by notice to Avianca or Reorganized Avianca S.A. or Reorganized Avianca, Inc; provided that any notice of change of address will be effective only upon receipt. 10 Term Of Injunctions Or Stays. Unless otherwise provided herein or in the Confirmation Order, all injunctions or stays provided for in the Case prior to the Confirmation Date under Sections 105 or 362 or the Bankruptcy Code or otherwise and extant on the Confirmation Date will remain in full force and effect until the Effective Date. 11. Waiver And Estoppel. On the Effective Date each Holder of a Claim or Interest will be deemed to have waived any right to assert that its Claim or Interest should be allowed in a certain amount, is entitled to a certain priority, is secured, or is not subordinated, by virtue of an agreement made by the Debtor and/or its counsel, the Committee and/or its counsel, or any other party, if such agreement was not disclosed in the Plan, the Disclosure Statement, or papers filed with the Bankruptcy Court. Any Holder of a Claim or Interest who believes that such Holder has been granted any concession or assured of any right, priority or security respecting such Holder's Claim on account of an agreement that has not been described in the Plan, this Disclosure Statement or other papers filed 100 with the Bankruptcy Court must file papers with the Bankruptcy Court before the earlier of any applicable deadline otherwise set by the Bankruptcy Court, such as a proof of claim bar date, or the Effective Date, in order to preserve any such right, priority or security. 12. Conflicts. In the event that the provisions of the Disclosure Statement and the provisions of the Plan conflict, the provisions of the Plan will prevail and govern. VI. CERTAIN RISK FACTORS TO BE CONSIDERED Each Holder of any Claim against or Interest in Avianca should read and carefully consider the following risk factors, as well as the other information set forth in this Disclosure Statement (and the documents delivered together herewith and/or incorporated by reference herein), before deciding whether to vote to accept or to reject the Plan. A. GENERAL CONSIDERATIONS. The formulation of a reorganization plan is the principal purpose of a Chapter 11 case. The Plan sets forth the means for satisfying the holders of Claims against and Interests in Avianca S.A. and/or Avianca, Inc. Certain Claims may receive partial distributions pursuant to the Plan, and in some instances, no distributions at all. See Section V.B hereof - "Classification and Treatment of Claims and Interest." The recapitalization of Avianca S.A. and Avianca, Inc. realizes their going concern value for their Holders of Claims and/or Interests. Moreover, the reorganization of their respective businesses and operations under the proposed Plan also avoids the potentially adverse impact of a liquidation on their employees, and many of their customers, trade vendors, suppliers of goods and services and lessors. B. CERTAIN BANKRUPTCY CONSIDERATIONS. If the Plan is not confirmed and consummated, there can be no assurance that the Chapter 11 Case will continue rather than be converted to a liquidation, or that any alternative plan of reorganization would be on terms as favorable to the Holders of Claims and/or Interests as the terms of the Plan. If a liquidation or protracted reorganization were to occur, there is a risk that there would be little, if any, value available for distribution to such Holders. See APPENDIX A attached to this Disclosure Statement for a hypothetical liquidation analysis of Avianca S.A. and of Avianca, Inc. C. INHERENT UNCERTAINTY OF FINANCIAL PROJECTIONS. The projections set forth in the Business Plan and Pro Forma Projections, attached hereto as APPENDIX B, cover Avianca's operations on a consolidated basis through Fiscal Year 2011. These projections are based on numerous assumptions including the timing, confirmation and consummation of the Plan in accordance with its terms, the anticipated future performance of Reorganized Avianca S.A. and Reorganized Avianca, Inc. (collectively, herein called the "Reorganized Debtors"), industry performance, general business and economic conditions, and various other matters, many of which are beyond the control of the Proponents and the Reorganized 101 Debtors and some or all of which might not materialize. In addition, unanticipated events and circumstances occurring subsequent to the date that this Disclosure Statement was approved by the Bankruptcy Court might affect the actual financial results of the Reorganized Debtors' operations. These variations might be material and might adversely affect the ability of the Reorganized Debtors to make payments with respect to post-Effective Date indebtedness. Because the actual results achieved throughout the periods covered by the Business Plan and Pro Forma Projections might vary from the projected results, the Business Plan and Pro Forma Projections should not be relied upon as a guaranty, representation, or other assurance that the projected results will occur or that the actual results will coincide with the projected results. Except with respect to the Projections and except as otherwise specifically and expressly stated herein, this Disclosure Statement does not reflect any events that may occur subsequent to the date hereof and that may have a material impact on the information contained in this Disclosure Statement. Neither Avianca nor either of the Reorganized Debtors intends to update the Projections; thus, the Projections will not reflect the impact of any subsequent events not already accounted for in the assumptions underlying the Projections. D. COMPETITION RISKS. The future forecasts indicate several threats to Avianca's core market which should be reviewed in detail. Internationally, several other air carriers have announced services to the countries of the Andean Community (Bolivia, Colombia, Ecuador, Peru, and Venezuela), as well as additional capacity to/from Colombia and Argentina, Spain, Central America, and the United States. The following chart shows the summary of recent announcements and authorizations for these new operations:
INTERNATIONAL ------------- CARRIER ROUTE AIRCRAFT TYPE ------- ----- ------------- AEROLINEAS ARGENTINAS BOGCCSBUE A310 AEROREPUBLICA BAQMIA MD80 BOGCCSMIA MD83 AIRMADRID BOGCTGMAD A330 FENIX BOGLIM 737 BOGUIO 737 BOGCCS 737 BOGPAR 767 BOGLON 767 BOGFCO 767 BOGSJUFRA 767 BOGSCL 767 LAN PERU BOGUIOLIM A320 TACA BOGLIM A320 BOGUIO A320 BOGCCS A319 WEST CARIBBEAN BOGSJO MD83 ADZSJO ATR 42
102 In the domestic Colombian market, Aerocivil (the Colombian Civil Aviation Authority) has granted permits to several up starting airlines as well as established carriers. The following chart shows the recent announcements and authorizations made by the various operators:
DOMESTIC -------- CARRIER ROUTE AIRCRAFT TYPE ------- ----- ------------- ESTELAR BOGBGA EMB-120 BOGCLO EMB-120 BOGCUC EMB-120 BOGFLA EMB-120 BOGNVA EMB-120 BOGPEI EMB-120 BOGPPN EMB-120 BOGVVC EMB-120 MQUEOHMQU EMB-120 UNIVERSAL BOGADZ F-100 BOGBAQ F-100 BOGBGA F-100 BOGCLO F-100 BOGCTG F-100 BOGCUC F-100 BOGLET F-100 BOGPEI F-100 BOGMDE F-100 BOGSMR F-100 CLOADZ F-100 PEIADZ F-100 WEST CARIBBEAN ADZMDE MD83 ADZPEI MD83 MDEBAQ ATR42 BOGBAQ MD83 CLOBAQ MD83
On the other hand, last September, Aerocivil published a new capacity policy in which market size will determine the number of operators allowed as follows: - 0 to 100,000 passengers per year as per last year end: 2 operators. - 100,000 to 399,999 passengers per years as per last year end: up to 3 operators. - 400,000 or more passengers per year as per last year end: up to 4 operators. There have been several hearings since the policy was issued and up to now such policy has been followed. Avianca expects that there might be some pressure from other carriers to modify this policy. 103 The projections set forth in the Company's June 13, 2004, Business Plan assume that some, but not all of these proposed air service announcements by competitors will actually be implemented by them. E. CLASS 8 CLAIMS AND LAWS 550 OF 1999 AND 222 OF 1995. Under Colombian law, it is uncertain whether that the Plan will be binding upon any Colombian-based Creditor that does not execute and return a written Novation with its Ballot voting in favor of the Plan or electing to convert its Class 8 Claim to a Class 9 Claim (Convenience Class) in the amount of $(COL)44,319,300. See Section I.D above - "General Voting Procedures, Ballots, and Voting Deadline." (All Colombian-based Creditors that do not execute and return a written Novation, collectively, are herein called "Dissenting Colombian Creditors"). There can be no assurance that such Dissenting Colombian Creditors will not file collection actions against Avianca S.A. in Colombia in respect of their Class 8 Claims. There also can be no assurance that the Holders of at least 80% of the total amount of the Class 8 Claims will execute and return the written Novations so as to satisfy one of the conditions precedent to the Confirmation of the Plan (the "80% Condition"). See Section V.G above - "Conditions Precedent To Confirmation And Confirmation Date." If the 80% Condition is not satisfied, there can be no assurance: (a) that Avianca will be able to avoid a voluntary or involuntary reorganization in Colombia pursuant to Law 550 of 1999 or (b) that either the Dissenting Creditors or the Colombian Superintendent of Ports, Avianca's financial regulator, will refrain from seeking the involuntary dissolution of Avianca S.A. under the laws of the Republic of Colombia pursuant to the provisions of Law 222 of 1995. In the event of either a reorganization proceeding under Law 550 or a liquidation under Law 222, it would be unlikely that any distribution would be made to the Holders of any Claims (including, but not limited to, all Holders of Class 7 Claims and Class 8 Claims) other than the Holders of "Colombian Law Priority Claims," as defined below in Section VI.T hereof - "Liquidation and Reorganization under Colombian Law." The Proponents, therefore, strongly recommend that the Holders of Class 8 Claims execute and return the written Novations with their Ballots voting in favor of the Plan. F. IMPACT OF INTEREST RATES AND DEVALUATION. Assuming Confirmation of the Plan, a significant portion of the Reorganized Debtors' debt upon emergence will have interest rates that vary with prevailing short-term rates. In addition, the financing cost of additional aircraft will reflect long-term interest rates at the time of delivery of such aircraft. To the extent that either short-term rates or long-term rates in the future exceed those forecasted by the Proponents, interest costs will increase, which could have an adverse effect on the Reorganized Debtors. Additionally, the Colombian peso has shown a historical volatility trend, affected by several internal and external factors. Typically, each period of relative stability is followed by a large devaluation of the Colombian peso. The ability of customers to fly to international destinations is thereby adversely affected as a consequence of such deterioration in their purchasing power for foreign currencies. This, in turn, has an adverse impact upon the financial performance of the Company. 104 G. ACCESS TO FINANCING. Avianca's operations are dependent on the availability and cost of working capital financing and may be adversely affected by any shortage or increased costs of such financing. Avianca's post-petition operations have been financed from operating cash flow and borrowings pursuant to the DIP Financing Facility. However, to the extent that the Company has future working capital needs after Confirmation of the Plan and the capitalization of the DIP Financing Facility, there can be no assurances that Reorganized Avianca S.A. will be able to secure an additional working capital financing from any financial institution, particularly in light of the current economic environment related to the airline industry. Moreover, even if Reorganized Avianca S.A. were able to secure such a financing in the future, there can be no assurances that it would be able to do so at an interest rate and with other associated costs of such financing upon terms as favorable to the Company as those under the DIP Financing Facility. The Plan does not contemplate that Reorganized Avianca S.A. will have any additional capital financing beyond that provided pursuant to the Investment Agreement with the Equity Sponsors. See III.I.4 above--THE COMPANY, The Equity Sponsors, Lack of Public Financial Information. H. CLAIMS ESTIMATIONS. There can be no assurance that the estimated Claim amounts set forth herein are correct; the actual allowed amounts of Claims may differ from the estimates. The estimated amounts are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the actual allowed amounts of Claims may vary from those estimated herein. I. AIRLINE INDUSTRY. Historically, Avianca has had among the highest operating costs of all the Colombian airlines. This is partially due to its route structure and fleet mix. The restructuring plan outlined herein includes steps to address this competitive disadvantage, including labor cost reductions, fleet rationalization, network redesign, and financial restructuring. Given the industry and economic environment, however, it is likely that one or more of Avianca's major competitors will implement its own restructuring initiatives. The impact of other airlines' restructuring actions on Avianca's competitive cost position cannot be determined at this time. Additionally, since the September 11, 2001, terrorist attacks on New York City and Washington D.C., the United States has been on a heightened state of alert for further attacks on American cities. Moreover, the United States is engaged in a worldwide war on terrorism, and the prospects for continued instability is likely - particularly, given the current political situations in Afghanistan, Iraq, Israel, and North Korea. The Proponents cannot predict the impact of these factors on general economic conditions, the demand for air transportation, or the price of oil. J. OIL PRICES. Aviation fuel is one of the most significant expenses for an airline, representing approximately 20% of the Proponents' projected operating expenses of Avianca-SAM for 2004. The price of aviation fuel is directly influenced by the price of crude oil, which, in turn, is 105 influenced by a wide variety of macroeconomic and geopolitical events and is completely beyond the control of Avianca and the Reorganized Debtors. To the extent that the future price of aviation fuel is greater than that assumed in the Proponents' projections, the financial performance of the Reorganized Debtors could be materially and adversely impacted. In particular, the possible commencement of intensified or additional hostilities in the Middle East could cause significant disruptions in the supply of crude oil and have a large impact on the price of aviation fuel. However, Avianca has approved a Global Price Risk Management Policy in order to manage the short and middle term jet fuel price risk, through the execution of hedging strategies, based on objective criteria. With the purpose of risk reduction in mind, Avianca has established three main goals for the Risk Policy: (i) protection against price rises, (ii) recovery of monetary resources when prices fall, and (iii) minimization of the initial payment requirements needed to open a hedge position. This Risk Policy should reduce the volatility of Avianca's cash flows and, thus, reduce the risk that otherwise would exist in the absence of such Risk Policy. K. CHANGE OF CONTROL AND COLOMBIAN AND INTERNATIONAL REGULATION OF THE AIRLINE INDUSTRY. The airline industry is highly regulated, and the imposition of new or modified regulations can have a significant impact on the Reorganized Debtors. New regulations relating to environmental, safety, security, scheduling, and/or industry related matters might be considered by various governmental agencies. The adoption of such regulations could cause increased operating expenses and in some cases restrictions on the operations of airlines, including the Reorganized Debtors, which could have a material adverse effect on the Reorganized Debtors' financial condition, cash flow, and results of operations. Colombian regulation of the civil aviation industry does not significantly vary from the regulatory scheme of most other countries. Under Colombian law, the Government is responsible for the planning, control, regulation, and surveillance of transportation and related activities; but, and at the same time, the transportation industry enjoys special protection subject to the conditions and benefits provided under the rules applicable for any public service. Thus, for example, Colombian workers employed in an industry, such as civil aviation, that qualifies as essential public service, are not permitted to go on strike. Colombian airline companies are allowed to compete in the market under principles of free competition. However, the Government is empowered to impose restrictions to prevent unfair competition and abuses by persons or companies having a preeminent position in the marketplace, as well as to guarantee efficiency and safety. Colombia is a party to the Chicago Convention for International Air Transportation. Accordingly, the internal rules and regulations applicable to the airline industry, known as the Reglamento Aeronautico Colombiano ( Colombian Aeronautical Regulations ) (the "RAC"), comply with the standard rules, regulations, and recommended practices for the industry established by the International Civil Aviation Organization (the "ICAO"). 106 Pursuant to the legislation in force in Colombia, any company willing to operate in the country as a public transportation company for commercial air services, as is the case for Avianca and SAM, must hold an operations permit and a certificate of operations issued by Aerocivil. The operations permit and the certificate of operations are granted once a company proves its administrative, technical, and financial capabilities for the activities proposed to be conducted. Companies must maintain such capacity to be able to remain in business, and these permits and certificates of operations cannot be assigned or transferred at any time. In the Colombian domestic market, the CAA has established an open skies policy, which allows new, qualified operators that meet the requirements discussed above to enter the market at any time. In the international market, some countries are also following the same trend of open sky policies for their international operation. Other countries apply specified restrictions for particular routes, as well as impose, under bilateral treaties in force, conditions of material ownership and actual control of the foreign air carrier flying routes to and from a designated country by national citizens of such country. Colombia has derogated from its historical legislation restricting foreign investment in the air transportation industry. The situation substantially changed because of the Government's recognition of the investment needs of Colombian air transportation companies. Nevertheless, there are a number of bilateral air transportation agreements in effect with Colombia that contain clauses requiring that substantial ownership and actual control of airlines designated for exploitation of traffic rights under such bilateral agreements must be in the possession of nationals of Colombia. Under the Plan, Reorganized Avianca will, arguably, not meet these requirements of some bilateral agreements to which Colombia is a party. Avianca currently operates to/from several countries where these restrictions on national ownership and control of the designated airline by national citizens of the designating country are still in effect under the bilateral agreements existing with Colombia. These countries include Aruba, Brazil , Curacao, Mexico, Spain, and the United States. Reorganized Avianca expects to obtain waivers from these restrictions taking into account (i) the new situation of substantial ownership and actual voting control of its non-Colombian Equity Sponsor, Oceanair; (ii) the material ownership of its Colombian Equity Sponsor, FNC; and (iii) its day-to-day operational control by its Colombian Executives. No assurances can be given, however, that Reorganized Avianca will be successful in obtaining any or all of these waivers. However, the Company's obtaining such waivers is not a condition precedent to the consummation of the Investment Agreement with the Equity Sponsors. Additionally, Avianca is a party to certain contracts that include change of control provisions. Accordingly, Avianca must obtain waivers of these provisions from the respective contracting parties to these contracts so as not to be in default thereunder. However, the Company's obtaining such waivers is not a condition precedent to the closing of the Investment Agreement nor a condition precedent to either the Confirmation of the Plan or to the Effective Date. If the Company is unable to secure such waivers, the consequences of it being in breach of such contracts might have a material adverse impact upon Avianca's operations and its financial condition. 107 Finally, there can be no assurance that there will be no issues arising under the laws of Brazil (under which Oceanair is organized) or the laws of Niue (under which Synergy is organized) that could have an adverse impact on Avianca's ability to operate its airline. L. PRICE DISCOUNTING. The airline industry is highly competitive and susceptible to price discounting, particularly in the international markets. Under domestic Colombian law, carriers are not restricted in setting domestic fares so long as such fares fall within the then effective, government approved range of fares (which are adjusted annually) and fares offered by one airline are frequently matched by competing airlines. Despite the improved financial condition of the Reorganized Debtors as a result of the reorganization and the investments to be made by the Equity Sponsors, the Reorganized Debtors may have less financial resources than some of their competitors. Accordingly, the Reorganized Debtors may be less able to withstand a prolonged industry recession, fare war or other unforeseen circumstances or crisis, thereby affecting the performance of the Reorganized Debtors and their ability to timely and fully perform all of their obligations under the Plan. M. LABOR DISPUTES. Avianca S.A. has collective bargaining agreements ("CBAs") with the following three groups of employees: (a) the pilots association ("ACDAC"), (b) the flight attendants association ("ACAV"), and (c) the ground personnel association ("SINTRAVA"). Under Colombian law, a CBA is automatically extended for a period of six months unless a company or trade union gives the other written notice at least 60 days prior to the stated expiration date of an existing CBA of its intentions to renegotiate such existing CBA (or, if automatically renewed, such notice must be given 60 days prior to the expiration of such renewal term). Although differences between the Company and its pilots resulted in a temporary slow down of operations commencing July 9, 2004, the slow down was terminated on or about August 9, 2004, upon the Company's and ACDAC's reaching an agreement in principle for a modification and extension through March 31, 2006, of their CBA, which otherwise was scheduled to be automatically renewed on September 30, 2004, for a period expiring March 30, 2005. The agreement is subject to ratification by the union membership and approval by the Bankruptcy Court. The Company believes that it is likely that these two conditions will be satisfied and that the agreement will become effective before the Plan becomes effective. There can be no assurance, however, that the new CBA will in fact be ratified by the union membership. Moreover, there can be no assurance that major disputes, including disputes with any certified collective bargaining representatives of the Reorganized Debtors' employees, will not arise in the future. Such disputes and inherent costs associated with their resolution could have a material adverse effect on the Reorganized Debtors' operations and financial performance The CBAs with both ACAV and SINTRAVA have stated expiration dates of June 30, 2004. Thus, both of them had until May 1, 2004, to notify the Company of their intentions to renegotiate. Neither of them did, nor did the Company. To the contrary in prior meetings with the Company, both unions and the Company indicated their intentions that, upon the expiration of their CBAs, to 108 have their respective CBAs automatically renewed for an additional six month period, through December 31, 2004. N. PRESERVATION OF MARKET POSITION. Because the Colombian airline industry is highly competitive, there can be no assurance that the Reorganized Debtors will be able to preserve the market positions that Avianca-SAM currently has. See Section III.B above - "Operations" and Section III.E above - "Significant Actions By Alianza Summa During The Bankruptcy Case." O. HIGH LEVERAGE. Based on the consummation of the transactions contemplated by the Plan, it is projected that the Reorganized Debtors will be highly leveraged after the Effective Date. This high degree of leverage will pose substantial risks to holders of the Plan Securities to be issued pursuant to the Plan and could have material adverse effects on the marketability, price, and future value of such securities. Among these risks, this high degree of leverage will increase the Reorganized Debtors' vulnerability to adverse general economic and airline industry conditions and to increased competitive pressures. P. SAM'S OPERATIONS. SAM currently has a negative net worth. Its operations would be materially and adversely affected by any legal actions taken by its creditors that might result either in the institution of reorganization proceedings under Law 550 or liquidation proceedings under Law 222 in Colombia, unless Avianca S.A. were able and willing to support SAM's cash flow needs. Avianca S.A.'s operations and financial condition would, in turn, likely be materially and adversely affected thereby. The assumptions set forth in the Business Plan and Pro Forma Financial Projections attached hereto as APPENDIX B are based upon the Proponents' best judgment of future events concerning the operations of SAM, some or all of which might not materialize; and, as a result, the actual results of the Reorganized Debtors' operations might significantly vary from those projected. Moreover, if SAM were to be liquidated, its routes would be subject to bid by competing airlines. No assurance can be given that Avianca S.A. would be the successful bidder in such event. Q. LIQUIDATION OF ACES. Aces, Avianca-SAM's partner in the strategic marketing and operations alliance known as Alianza-Summa, is now in liquidation under the supervision of a liquidator appointed by the Colombian Superintendence of Corporations (the "Liquidator"). Under the Memorandum of Understanding pursuant to which Alianza-Summa was created, Avianca-SAM and Aces agreed on establishing mechanisms for each one of them to benefit from the integrated itinerary and operations according to principles of equilibrium and fairness, which were also to be applied to any other agreement entered into by the companies based on the Memorandum of Understanding. In December 2003, a payment was made to Aces on account of this equilibrium and fairness principle, based on the results of the alliance's integrated itinerary and operations as measured by each partner's EBITDA. In June of 2003, Aces sent Avianca-SAM invoices, aggregating approximately $2.6 Million for Avianca and $ 3.2 Million for SAM, which Avianca-SAM disputed. Aces has not 109 filed a proof of claim in the Chapter 11 Case with respect to this matter. Aces did file a proof of claim against Avianca Inc for a total amount of approximately $2.5 Million. In addition, each of Avianca S.A. and SAM have accounts receivables owing from Aces for a total amount of approximately $13.5 Million, in the case of Avianca S.A., and $391,016, in the case of SAM, both pre-petition and post-petition. Because Avianca S.A.'s and Avianca Inc.'s estates are consolidated in the Chapter 11 Case, the Debtors believe they should be able to setoff or recoup their reciprocal debt with Aces, leaving a net balance still owing by Aces in favor of Avianca S.A. However, the enforceability of such set-off is problematic under Colombian law. There can, therefore, be no assurance that the Liquidator for Aces will not assert claims and institute legal proceedings against Avianca-SAM in the courts of Colombia to recover the accounts payable, or, if asserted, that Avianca-SAM's setoff or recoupment will be recognized as valid. R. LACK OF MARKET FOR PLAN SECURITIES. There can be no assurance that an active market for any of the Plan Securities to be distributed pursuant to the Plan will develop and no assurance can be given as to the prices at which such securities might be traded. Moreover, the Proponents do not have any present intentions to attempt to have the Plan Securities listed on any securities exchange in the United States, Colombia, or elsewhere. S. TAX PLANNING. Due to time and resource constraints from the commencement of the Chapter 11 Case, Avianca has used and may continue to use certain estimating techniques in connection with its tax planning efforts (for example, in determining the existence and magnitude of built-in gains or losses). The use of such estimating techniques, while cost-effective, necessarily results in lower confidence levels with respect to certain of the tax analyses. T. LIQUIDATION AND REORGANIZATION IN BANKRUPTCY UNDER COLOMBIAN LAW. Reorganization in bankruptcy proceedings under Colombian law are not judicial, but rather administrative. The cases are initiated before a governmental agency by the filing of a bankruptcy petition or ex officio by the corresponding administrative authority. Such agency, in the case of an airline, is the Superintendence of Transportation and Ports. Notwithstanding the administrative character of the proceeding, certain judicial functions are conferred upon the Superintendence. There are two types of bankruptcy proceeding: the first is the "restructuring agreement", governed under Law 550 of 1999 ("Law 550"), and the second is the "straight liquidation proceeding", regulated under Law 222 of 1995 ("Law 222"). In a liquidation of Avianca S.A. under Law 222, Avianca S.A.'s obligations for taxes, certain other amounts owed to Colombian governmental agencies or authorities, and amounts owed in respect of labor and employment obligations have legal priority over all other claims (including, but not limited to, both secured and general unsecured claims). (All such priority claims under Law 222 are herein called the "Colombain Law Priority Claims"). As explained below, the priority of payment of Claims is essentially the same in a Law 550 reorganization proceeding.. 110 1. Reorganization in Bankruptcy under Law 550 of 1999. (a) Nature of Reorganization Proceedings. Law 550 is a relatively new law that became effective on January 1, 2000. Pursuant to Article 5 of Law 550, a restructuring agreement is defined as "the convention that, under the terms of this law, is signed in favor of one or several companies in order to correct deficiencies arising in their operations capability and to fulfill pecuniary obligations in order for those companies to recover within the terms and conditions therein foreseen". A restructuring agreement concerning an airline can be initiated by a petition filed by the legal representative of the airline, or by one or several creditors, or officially promoted by the Superintendent of Transportation if the airline is past due on more than 5% of its current debt. According to Article 7 of Law 550 the Superintendent of Transportation, when deciding the official promotion or when accepting an agreement application, will appoint a person with individual legal status to act as "promoter" in connection with the restructuring agreement. The promoter has functions similar to those of a mediator and thus will participate in the negotiation, analysis, and development of restructuring agreements "in their financial, administrative, accounting, legal, and other aspects required" (Article 7). Some of the most relevant functions assigned to the promoter are related to the determination of the voting rights for creditors and the ability to suggest settlement formulas and to participate in the agreement's surveillance committee. The filing of a proceeding under Law 550 could eventually lead to the liquidation of that airline. (b) Types of Creditors. Under Law 550 five different classes of creditors exist: (i) internal creditors, (ii) workers and pensioners, (iii) public institutions and social security institutions, (iv) financial corporations, and (v) other external creditors. In order for a restructuring agreement to be approved, at least two creditors, holding no less than a majority in amount of claims and interests in all five classes noted above, including votes from at least three of those classes must vote in favor of the restructuring agreement. Article 29 of Law 550 provides that "in case only three (3) classes of creditors exist and concur, the majority must be made up of votes from the creditors belonging to two (2) types of existing creditors, provided that the absolute majority of admissible votes is obtained; and if only two types of creditors exist, the majority required by law must be made up of the votes from both types of creditors." When the restructuring agreement is approved, it will be set forth in writing and will be binding upon all creditors (including dissenting creditors) provided that public policy regulations and legal priorities have been observed. If the restructuring agreement is not achieved, a liquidation proceeding will be initiated. 111 (c) Notice to Creditors. Law 550 limits the notice requirement to an edict and a registration that is made in the chambers of commerce in which the company has its domiciles and branches within the Republic of Colombia. Article 11 of Law 550 in fact provides that on the same date the promoter is appointed: "[t]he corresponding appointing institution must post in its offices in a place visible to the public during a five-day term, a document informing about the agreement's promotion." Within the same term, the promoter must register the announcement at the Mercantile Registry of the chambers of commerce with jurisdiction in the debtor's domiciles, and in the debtor's branch offices. Such registration will be subject to the rate set forth by the National Government; the appointment institution must also report initiation of restructuring agreement negotiations through an announcement published in a newspaper with widespread circulation in the debtor's domicile as well as in the debtor's branch offices. It must be noted that no specific requirements regarding notice to foreign creditors exist under Law 550. Therefore, such Law provides no special protection for creditors domiciled outside the Republic of Colombia; these creditors would be required to constantly monitor proceedings in order to protect their interests. (d) Voting. The promoter must summon a meeting to consider the vote of creditors by means of a notice in a widespread circulation newspaper at the debtor's domicile and branch offices, which will be published at least five calendar days before the date of the meeting. (Article 23, Law 550). During the meeting provided for in Article 23, the promoter will determine the number of admissible votes corresponding to each of the creditors and will also determine the existence and amount of the credits that must be the subject matter of the agreement. Creditors may object in writing to such determinations by means of a complaint that must be filed before the Superintendence of Transportation either in person or through an attorney. Voting takes place either in person or by proxy. Therefore, foreign creditors are usually required to retain legal representation in Colombia in order to fully protect their interests within the proceeding. As a general rule, all creditors voting in favor of the restructuring agreement are required to formally execute the agreement personally or through a legal representative (Article 31 of Law 550). This article provides that the agreement must be set out in its entirety in a written document, signed by those who voted favorably or by their legal or voluntary representatives. Such document will in turn be acknowledged before a notary public by each signer, or before the promoter; and it must be registered in public deed, including the stipulations said formality requires. (e) Credit Priorities under Colombian Law. Law 550 requires that the restructuring agreement provide stipulations regarding the priority, terms, and conditions under which the creditors will be paid. Although there is a certain degree of flexibility to determine voluntary priorities, public policy provisions impose 112 strict boundaries to such flexibility. In fact, under traditional Civil Code regulation, obligations are classified and ranked according to a strict legal order. Specifically, Articles 2495, 2497, 2499, 2502, and 2509 of the Colombian Civil Code create and rank five classes of creditors designating the order in which the payments or distributions are to be made. Each category of creditors displaces the succeeding one. In the event of liquidation and in the absence of sufficient assets to cover all liabilities, the higher ranking class must receive its full distribution before any amounts are distributed to the lower ranking classes. Labor, pension, and tax liabilities are included within the first class of creditors. Secured creditors and creditors holding pledges or mortgages rank within the second and third classes respectively. Even secured creditors are subordinated to pension, labor and tax creditors. The restructuring agreement cannot contain any stipulation that would in any manner disregard the priority scheme for the first class of liabilities. On the other hand, Paragraph 3 or Article 33 states the following: "Without prejudice to that set forth in the previous paragraphs of this article, payments that violate the order established for such purpose in the agreement will be ineffective in full right; and the respective creditor, in addition to being obligated to return any sums received with late payment interest, will have the payment of its credit postponed, with regard to the other creditors. In this event, the creditor must have voted in favor of the agreement and, in all other cases, it must be proven that the creditor was previously informed by the surveillance committee of the priority established in the agreement. In order to ascertain the enforceability of the strict priority referred to in the previous paragraph, Law 550 of 1999 confers upon such creditors a veto right on the restructuring agreement if it contradicts first priority rights as provided for in the law. (f) Revocation Actions. Law 550 includes provisions relative to the setting aside of preferences and fraudulent conveyances. Pursuant to Article 39, any creditor may file an action for revocation of the following acts and contracts performed by the debtor within an eighteen month period prior to initiation of restructuring agreement negotiations: (1) the annulment of obligations, payments made, granting of securities, guaranty contracts, mercantile trust contracts, sales with repurchase agreements, financial leasing contracts that involve transfer of the debtor's assets (leaseback) and, in general, any action involving the disposal, establishment or cancellation of liens, limitation or dissolution of the ownership over entrepreneur's assets that cause direct, certain and even future damage to the creditors; (2) any lucrative title act that demerits the company's equity, and (3) the acts and contracts entered into or executed with the administrator of any debtor, in a corporate manner or not, referred to in Article 22 of Law 222 of 1995, with the partners, controlling parties and persons referred to in sections (a), (b), (c) and (d), paragraph 2, article 20 of law 550, including employment contracts and labor settlements. 113 2. Risks Associated with a Law 550 Proceeding in Colombia. (a) Possible Interference with Chapter 11 Cases. Initiation of a proceeding under Colombian law 550 of 1999 could considerably hinder the Chapter 11 proceedings in the United States due to the following factors: - Conflicting provisions set forth under both statutes could entail significant obstacles vis-a-vis Avianca's reorganization process. Payment on prepetition obligations (existing prior to the 550 proceeding) would be stayed upon the commencement of a Colombian insolvency proceeding. Consequently, Avianca would not be legally allowed to meet its obligations regarding rents on leases and other administrative expenses incurred after the initiation of the Chapter 11 cases. - Both reorganization proceedings (under Chapter 11 and Law 550) pursue similar objectives. An initiation of a 550 case will unnecessarily create overlapping protections to foreign and domestic creditors. - A 550 proceeding could pointlessly damage Avianca's commercial image and could affect its good will in Colombia. - Voting rights determination and analogous procedures under a Law 550 process could endure for well over a year, thus severely hindering creditor and debtor interests. - Initiation of a Law 550 case could entail potential non-compliance with U.S. bankruptcy law. (b) No Cross-Border Insolvency Treatment under Colombian Bankruptcy Law. Colombian bankruptcy law is yet to include a cross-border insolvency treatment. Compatibility of decisions rendered by Colombian and foreign bankruptcy courts could be uncertain. This situation may also create obstacles regarding the determination of main forum and ancillary proceedings. On the other hand, rejection of Executory Contracts and final release of a debtor corporation will not be available under Colombian bankruptcy laws. Furthermore, differences in the legal regulations concerning ranking of creditors may cause inconvenient conflicting approaches. Notwithstanding the above-explained difficulties, in the event of a Law 550 proceeding, the Company would have to undertake efforts to harmonize both proceedings. 114 3. Cause for Dissolution of Avianca S.A. Pursuant to Article 457 of the Colombian Commercial Code, a cause for dissolution arises when a company's losses reduce its net worth below fifty percent (50%) of its subscribed, paid-in capital. Upon verification of losses of this magnitude, a company in this situation is constrained from undertaking any additional debts; and it must promptly submit a complete report to its shareholders at a duly called shareholders' meeting. Article 220 of the Code provides that the shareholders may avoid dissolution of the company by adopting any necessary measures, provided such actions are undertaken within six (6) months after the occurrence of the losses of the magnitude giving rise to the cause for dissolution. According to the authoritative construction provided by the Superintendence of Corporations, such time limit is counted from the moment in which the shareholders acknowledge the unfavorable situation, and not from the specific date on which the losses are verified (Superintendence of Corporations, Decision DAL-27527, September 23, 1985). The financial statements of Avianca S.A. (as of December 31, 2003) submitted to the General Shareholders Assembly held on March 29, 2004, accounted for losses which had cut Avianca's net worth below the legally allowed percentage. Therefore, Avianca's shareholders acknowledged that a cause of dissolution existed under Article 457 of the Commercial Code, and they promptly provided guidance to Avianca's Board of Directors and senior management as to some of the measures that Avianca had to adopt to overcome such cause for its dissolution. Although Article 79 of Law 812 of 2003 extended the aforementioned time limit by an additional twelve (12) months, for a total period of eighteen (18) months to be counted from the shareholders' acknowledgement of the existence of a cause for dissolution, on March 30, 2004, the Constitutional Court rendered this extension provision unconstitutional (and, thus, invalid) due to procedural considerations. (Constitutional Court Decision C-305/04). Hence, the applicable time limit for shareholders of a financially troubled company to adopt measures to address an insolvency situation is again six (6) months from the date the shareholders acknowledge that a cause for dissolution exists. However, Constitutional Court decisions generally have no retroactive effects under Colombian law, unless the Court expressly provides otherwise. Article 45 of Law 270 of 1996. According to Colombian case law, as a general rule, decisions rendering a law unconstitutional have no effects in respect of rights acquired under laws existing before a constitutional decision came into force (Constitutional Court, Decision C-055/96). Therefore, because the Constitutional Court has not asserted any retroactive effects of Decision C-305/04, such ruling should only have consequences concerning future matters. Thus, previously defined situations, such as Avianca's, should continue to be governed under Article 79 of Law 812 of 2003. Because Avianca's shareholders meeting took place before the Constitutional Court ruling, it is reasonable to believe that the 18 month period will still be applicable for purposes of Avianca adopting measures to cure the cause for dissolution. Thus, the time period for Avianca's shareholders to continue to adopt additional measures to address the Company's financial situation should expire on September 29, 2005 - the eighteenth (18th) month anniversary of the March 29, 2004 meeting of Avianca's shareholders at 115 which they acknowledged that a cause for the Company's dissolution existed. While the correctness of Avianca's interpretation of the applicable time period is not free from doubt, Avianca is confident that, in any event, Avianca's shareholders had at least until September 29, 2004, to adopt such measures - the sixth (6th) month anniversary of such shareholders' meeting; and its shareholders adopted additional measures at a meeting duly held on September 13, 2004. The Superintendent of Corporations has also held that such period of time is granted by Colombian law to allow a financially troubled company to make modifications necessary to improve its financial condition. This does not imply, however, that the cause for dissolution must effectively be remedied within such given time frame. The Superintendent of Corporations has determined that such provisions of Colombian law do not purport to fix a specific deadline for the shareholders to succeed in overcoming such a company's financial difficulties, but only set a timeframe in which the shareholders must take measures aimed at solving them (Superintendence of Corporations, Decision 220-30791, May 18, 1995). U. ENFORCEABILITY OF FOREIGN JUDGMENTS IN COLOMBIA. Any final arbitration award or final foreign judgment may be recognized and enforced in Colombia solely through a procedural system provided for under Colombian law known as "exequatur." Subject to the provisions of Articles 693 and 694 of the Code of Civil Procedure, no re-trial or re-examination of the merits of the case is required. Although pursuant to the relevant statute a simple, formal examination takes place, the process may be lengthy and subject to a long waiting period. Article 693 provides that a foreign judgment or arbitration award is enforceable in Colombia in accordance with the terms specified by treaty or, in the absence of a treaty, on the same conditions given to Colombian judgments by the country in which the foreign judgment has been rendered. Proof or evidence of reciprocity or of the existence of a treaty would have to be submitted to the Colombian Supreme Court of Justice within "exequatur" proceedings. Article 694 of the Colombian Code of Civil Procedure specifies the following prerequisites for enforcing a foreign judgment or arbitration award: 1. It does not implicate objective rights ("derechos reales") on goods located in Colombia at the time of initiation of the process where the judgment or award would be given. 2. It is not contrary to Colombian laws reflecting public policy except for procedural laws. 3. It is final and complies with the foreign country's formalities of execution, authentication and legalization. 4. It does not concern a matter within the exclusive jurisdiction of the Colombian courts. 116 5. Its subject is not involved in any current proceeding or judgment in Colombia. 6. The judgment debtor has received the notice and opportunity to contest the claim required by the country of origin, which circumstance is presumed where (3) above would be proved. In the absence of an exequatur proceeding, it is uncertain whether the orders of the Bankruptcy Court, including the confirmation order will be enforceable in Colombia. Furthermore, the Debtor is unaware of any other Colombian company that has sought and achieved confirmation of a plan of reorganization under Chapter 11 of the Bankruptcy Code and sought to enforce against creditors in Colombia the provisions of its plan by means of an exequatur proceeding in Colombia. While Avianca believes that an exequatur proceeding may be available as an enforcement mechanism for the provisions of the Plan, upon the entry of an order of the Bankruptcy Court confirming the Plan, no assurance can be given respecting the outcome of any such proceeding, and Avianca has not relied on the availability of such a proceeding in order to assure compliance with the Plan by its Creditors located in Colombia. Specifically, the Proponents have made it a condition to Confirmation of the Plan (which condition can be waived only by the Proponents) that Creditors located in Colombia holding not less than 80% in amount of Allowed Claims in Class 8 (Colombian-held General Unsecured Creditors) have signed a novation agreement, expressly agreeing to be bound by the provisions of the Plan. Satisfaction of this condition will entitle the Reorganized Debtor to enforce the provisions of the Plan against those Creditors who in fact sign such a novation agreement as a matter of contract rather than by way of an exequatur proceeding. See Section V.G.1 above -- "SUMMARY OF THE REORGANIZATION PLAN - Conditions Precedent to Confirmation and Effective Date - Conditions Precedent to Confirmation of the Plan." V. DILUTION RESULTING FROM INVESTMENTS TO BE MADE BY THE EQUITY SPONSORS. Under the Plan, all of the shares of Ordinary Stock to be issued by Avianca S.A. in exchange for any and all of the equity investments that the Equity Sponsors make in Avianca S.A. will be issued to the SPVs at a price per share of $(COL)0.01 subscribed, paid-in capital and $(COL)0.99 capital surplus. In addition, any and all payments in respect of all of the Subordinated Debt of Avianca S.A., if any, issued to evidence any of the investments to be made by Oceanair pursuant to the terms of the Investment Agreement will be subordinated to the payment in full of all Allowed Class 7 and Class 8 Claims. Under Colombian law, issued and outstanding shares of the capital stock of a company cannot be cancelled, but the percentage interests in the equity of a company represented thereby may be diluted by the issuance of additional shares of capital stock. In order to comply with this provision of Colombian law, the Plan provides that, in consideration of the investments in Avianca S.A. being made by the Equity Sponsors (and not on account of the Interests in Avianca S.A. held by the Holders of such Interests as of the Effective Date), 100% of the Ordinary Stock and Preferred Stock issued and outstanding on the Effective Date, after giving effect to all of the transactions and transfers contemplated by Article VII of the Plan to be taken as of the Effective Date, will remain 117 outstanding. As a result, the existing Minority Shareholders will retain their interest in Avianca S.A. but, as a result of the issuance of all of the new shares of Ordinary Stock to be issued to the SPVs in exchange for the equity investments to be made in Avianca S.A. by the Equity Sponsors, the aggregate percentage interest in the equity of Avianca S.A. represented by all of the shares of Ordinary Stock held by such Minority Shareholders will be diluted to approximately one-one hundredth of a percent (0.01%). The remaining 99.99% of the Outstanding Ordinary Stock will be held by the SPVs. W. AIRCRAFT ACCESS. In late August 2004, the U.S. Attorney for the Southern District of New York advised Avianca that, because of multiple seizures from Avianca aircraft of unmanifested baggage or cargo containing narcotics, in the view of the U.S. Government, Avianca's practices and procedures are not adequately restricting access to the aircraft. Avianca is engaged in negotiations with the U.S. Attorney in an effort to eliminate the Government's concerns by concluding a Security Advisor Stipulation (as defined in the Plan) pursuant to which the Company would agree to engage an internationally recognized security consulting firm in order to identify and implement additional aircraft security measures and also to make additional investments in the area of aircraft access procedures. Based upon currently available information, the Company estimates that the aggregate additional costs associated with hiring such a consultant and implementing its recommendations would be approximately $3.255 Million over a 2-year period. Any such agreement would need to be submitted for approval to the United States District Court for the Southern District of New York and the Bankruptcy Court and could involve a payment in lieu of a civil forfeiture and/or deposit to secure Avianca's implementation of the agreed-upon measures. In the event that Avianca and the U.S. Attorney reach such a negotiated settlement and obtain the necessary approvals, and so long as Avianca performs its obligations under the settlement, Avianca expects that no further action would be taken by the U.S. Attorney with regard to its aircraft access measures. While Avianca believes that it is reasonably likely to reach a negotiated settlement with the U.S. Attorney and to obtain the necessary approvals, no assurance can be given that a settlement will in fact be reached or that the approvals would in fact be forthcoming. In the event that no negotiated settlement is reached or that no such settlement is approved, or in the event that a settlement is reached and the approvals are obtained but Avianca does not perform its obligations pursuant to the settlement, the U.S. Attorney may take action against Avianca respecting its aircraft access concerns, including actions to seize aircraft or to require payments in lieu of forfeitures of Avianca's interest in leased aircraft. While the Company has a record of cooperation with law enforcement authorities and has, in cooperation with law enforcement, detected and arranged for the seizure of many packages containing illegal narcotics, leading to a significant number of arrests, and although the Company believes that it would have available valid defenses to any such action by the U.S. Attorney, no assurance can be given respecting the outcome of any such action or that its operations would not be interrupted by such action, regardless of the ultimate outcome. A condition precedent to the Effective Date is that the Debtor has entered into the Security Advisor Stipulation in a form approved by Oceanair, which approval cannot be unreasonably 118 withheld, and such stipulation must have been approved by a Final Order entered by each of the Bankruptcy Court and the United States District Court for the Southern District of New York. VII. RESALE OF SECURITIES AND RIGHTS RECEIVED UNDER THE PLAN. A. REGISTRATION OF PLAN SECURITIES IN THE UNITED STATES. The Proponents do not believe that registration under the Securities Act of 1933 (the "Securities Act") or comparable state laws is required with respect to the Plan Securities to be distributed to Holders of Claims or Interests under the Plan. Section 1145(a)(1) of the Bankruptcy Code exempts the offer and sale of securities under a plan of reorganization from registration under section 5 of the Securities Act and state laws if three principal requirements are satisfied: (i) the securities must be offered and sold under a plan of reorganization and must be securities of the debtor, of an affiliate participating in a joint plan with the debtor, or of a successor to the debtor under the plan; (ii) the recipients of the securities must hold claims against or interests in the debtor; and (iii) the securities must be issued in exchange (or principally in exchange) for the recipient's claim against or interest in the debtor. The Proponents believe that the offer and sale of the Plan Securities under the Plan to Holders of Claims and/or Interests satisfy the requirements of section 1145(a)(1) of the Bankruptcy Code. B. SUBSEQUENT TRANSFERS OF PLAN SECURITIES IN THE UNITED STATES. To the extent that the Plan Securities are covered by Section 1145(a)(1) of the Bankruptcy Code, they may be resold in the United States by a Holder thereof without registration under the Securities Act pursuant to the exception provided in Section 4(1) thereof unless, as more fully described below, such Holder is an "underwriter" with respect to such securities. However, as previously noted, the Proponents do not have any present intentions to attempt to have any of the Plan Securities listed on any securities exchange in the United States, Colombia, or elsewhere. See Section VI.P above - "Lack of Market for Plan Securities." Generally, Section 1145(b)(1) of the Bankruptcy Code defines an "underwriter" as any person who: (i) purchases a claim against, an interest in, or a claim for an administrative expense against the debtor, if such purchase is with a view to distributing any security received in exchange for such a claim or interest; (ii) offers to sell securities offered under a plan for the holders of such securities; (iii) offers to buy such securities from the holders of such securities, if the offer to buy is - (A) with a view to distributing such securities; and (B) under an agreement made in connection with the plan, the consummation of the plan, or with the offer or sale of securities under the plan; or 119 (iv) is an "issuer" with respect to the securities, as the term "issuer" is defined in section 2(11) of the Securities Act. Under section 2(11) of the Securities Act, an "issuer" includes any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control of the issuer. To the extent that any Entity that receives any Plan Securities pursuant to the Plan is deemed to be an "underwriter" as defined in section 1145(b) of the Bankruptcy Code, resales by such Entity in the United States would not be exempted by section 1145 of the Bankruptcy Code from registration under the Securities Act or other applicable laws. Such Entity would only be permitted to resell such Plan Securities in the United States pursuant to an effective registration statement under the Securities Act and applicable state securities laws or pursuant to a transaction that is exempt from such registration. Whether or not any particular Entity would be deemed to be an "underwriter" with respect to any of the Plan Securities to be issued pursuant to the Plan would depend upon various facts and circumstances applicable to such Entity. Accordingly, the Proponents express no view as to whether any particular Entity receiving Plan Securities under the Plan would be an "underwriter" with respect to any of such Plan Securities. Given the complex and subjective nature of the question of whether a particular Holder of Plan Securities may be an underwriter, the Proponents make no representation concerning the right of any Entity to resell or trade in any of the Plan Securities in the United States. The Proponents recommend that potential recipients of any of the Plan Securities consult their own counsel concerning whether they may resell or trade in any of the Plan Securities without compliance with the Securities Act and applicable state securities laws. C. REGISTRATION OF PLAN SECURITIES IN THE REPUBLIC OF COLOMBIA. The Proponents do not believe that registration under the Colombian Securities Market regulations (Resolution 400 of 1995 issued by the Superintendent of Securities, as amended and modified) or comparable laws is required with respect to either the Dollar Notes to be distributed to Holders of Allowed Class 7 Claims or the Class 8 Trust Certificates (or book entries thereof) to be distributed to Holders of Allowed Class 8 Claims. D. SUBSEQUENT TRANSFERS OF PLAN SECURITIES IN THE REPUBLIC OF COLOMBIA. The Dollar Notes and the Class 8 Trust Certificates (or book entries thereof ) will be freely transferable by endorsement and may be resold by a Holder thereof without registration in Colombia. However, the Proponents do not have any present intentions to attempt to have the Dollar Notes or the Class 8 Trust Certificates (or book entries thereof) listed on any securities exchange in Colombia, the United States, or elsewhere. See Section VI.R above - "Lack of Market for Plan Securities." 120 E. EXEMPTION FROM STAMP TAXES. Under Section 1146(c) of the U.S. Bankruptcy Code, the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan of reorganization confirmed under Section 1129 of the Bankruptcy Code are not taxable under any law imposing a stamp tax or similar tax. Therefore, no stamp tax should be applicable to the issuance of the Dollar Notes. Nor should any stamp tax be applicable to the issuance of the Peso Notes if the Colombian governmental authorities respect this exemption. See Section IX.D.1(a) below - "SOME TAX CONSEQUENCES IN COLOMBIA - Stamp Tax." VIII. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES. A summary description of certain material United States federal income tax consequences of the Plan is provided below. This description is for informational purposes only and, due to a lack of definitive judicial or administrative authority or interpretation, substantial uncertainties exist with respect to various tax consequences of the Plan as discussed herein. Only the principal United States federal income tax consequences of the Plan to the Reorganized Debtors and to Holders of Claims who are entitled to vote or to accept or reject the Plan are described below. No opinion of counsel has been sought or obtained with respect to any tax consequences of the Plan. No rulings or determinations of the Internal Revenue Service (the "IRS") or any other tax authorities have been sought or obtained with respect to any tax consequences of the Plan, and the discussion below is not binding upon the IRS or such other authorities. No representations are being made regarding the particular tax consequences of the Confirmation and consummation of the Plan to the Reorganized Debtors or to any Holder of a Claim. No assurance can be given that the IRS would not assert, or that a court would not sustain, a different position from any discussed herein. The discussion of United States federal income tax consequences below is based on the Internal Revenue Code of 1986, as amended (the "Tax Code"), Treasury Regulations, judicial authorities, published positions of the IRS and other applicable authorities, all as in effect on the date of this document and all of which are subject to change or differing interpretations (possibly with retroactive effect). The following discussion does not address foreign, state, or local tax consequences of the Plan, nor does it purport to address the United States federal income tax consequences of the Plan to special classes of taxpayers (e.g., banks and certain other financial institutions, insurance companies, tax-exempt organizations, governmental entities, persons that are, or hold their Claims through, pass-through entities, persons whose functional currency is not the United States dollar, foreign persons, dealers in securities or foreign currency, employees, persons who received their Claims pursuant to the exercise of an employee stock option or otherwise as compensation and persons holding Claims that are a hedge against, or that are hedged against, currency risk or that are part of a straddle, constructive sale or conversion transaction). Furthermore, the following discussion does not address United States federal taxes other than income taxes. EACH HOLDER IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE TRANSACTIONS DESCRIBED HEREIN AND IN THE PLAN. 121 A. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO AVIANCA, INC. AND AVIANCA S.A. 1. U.S. Federal Income Taxation of Avianca S.A. Avianca S.A. has taken the position that it has no gross income subject to U.S. federal income tax pursuant to an exemption from U.S. income taxation for income from the international operation of aircraft under Tax Code sections 883(a) and (c) and applicable regulations. Avianca S.A. intends to claim an equivalent U.S. income tax exemption for future tax years. Avianca S.A. is eligible for the exclusion from income provided in Tax Code section 883 if for at least half the number of days in Avianca S.A.'s taxable year more than 50 percent of the value of Avianca S.A.'s outstanding shares is owned, or is treated as owned by applying certain attribution rules, by one or more qualified shareholders. Qualified shareholders include individuals who are residents of a qualified foreign country, which is defined as a foreign country that grants to corporations organized in the United States an equivalent exemption for income derived from the carriage of passengers or cargo. Colombia and Brazil are listed in Internal Revenue Service Rev. Rul. 2001-48 as countries that grant equivalent exemptions. Accordingly, subsequent to the Effective Date Avianca S.A. should remain eligible for the exemption under Tax Code section 883 provided more than 50 percent of the value of its outstanding shares continues to be owned, or treated as being owned, by individuals who are residents of qualified foreign countries. With respect to previous taxable years, Avianca S.A. has filed U.S. federal income tax returns in order to claim the Tax Code section 883 exemption. However, with respect to the current and subsequent taxable years, additional requirements for that exemption were imposed under final regulations under Tax Code section 883 that became effective on August 26, 2003 and are applicable to taxable years of foreign corporations beginning 30 days or more after August 26, 2003. For example, in connection with Avianca S.A.'s future claims of exemption from U.S. federal income tax for its income from the international operation of aircraft, Avianca S.A. must require shareholders to complete an ownership statement in accordance with Treas. Reg. Section 1.883-4(d)(4) in order to substantiate Avianca S.A.'s continued eligibility under Tax Code section 883. As a result of its claimed exemption from U.S. income taxation, Avianca S.A. expects that some of the tax consequences discussed in this section will (1) not be applicable to Avianca S.A., or (2) have no material effect in determining the income, if any, of Avianca S.A. which may be subject to U.S. federal income taxation. 2. U.S. Federal Income Tax Effect of Substantive Consolidation for Bankruptcy. As discussed at Section 7.3 of the Plan and Section V of this Disclosure Statement, the Plan contemplates the substantive consolidation of Avianca, Inc. and Avianca S.A., to combine the assets and liabilities of Avianca, Inc. and Avianca S.A. and treat them as held by a single entity for purposes of the Plan. The Tax Code does not recognize such a substantive consolidation for bankruptcy purposes. Furthermore, each of Avianca, Inc. and Avianca S.A. has a distinct business purpose and conducts business activity. As a result, for U.S. federal income tax purposes, each of Avianca, Inc. and Avianca S.A. generally will be recognized as a separate taxable entity, and transactions under the Plan affecting creditor or shareholder interests in Avianca, Inc. and Avianca 122 S.A. will generally have independent U.S. federal income tax consequences. Because of the absence of definitive authority in this context, the application of certain U.S. federal income tax consequences discussed in this section is unclear. 3. Cancellation of Indebtedness Income. Upon implementation of the Plan, the amount of Avianca, Inc.'s and Avianca S.A.'s aggregate outstanding indebtedness will be reduced substantially. In general, the discharge of a debt obligation in exchange for an amount of cash and other property having a fair market value (or, in the case of a new debt instrument, an "issue price" as determined under section 1273 or section 1274 of the Tax Code, whichever is applicable) less than the "adjusted issue price" of the debt gives rise to cancellation of indebtedness ("COD") income to the debtor. However, COD income is not taxable to the debtor if the debt discharge occurs in a Title 11 bankruptcy case. Rather, under the Tax Code, such COD income instead will reduce certain of the debtor's tax attributes, generally in the following order: (a) net operating losses ("NOLs") and NOL carryforwards; (b) general business credit carryforwards; (c) minimum tax credit carryforwards; (d) capital loss carryforwards; (e) the tax basis of the debtors' depreciable and nondepreciable assets (but not below the amount of its liabilities immediately after the discharge); and (f) foreign tax credit carryforwards. The reduction in tax attributes occurs only after the tax for the year of the debt discharge has been determined (i.e., such attributes may be available to offset taxable income that accrues between the date of discharge and the end of the debtor's tax year). Any excess COD income over the amount of available tax attributes is not subject to United States federal income tax and has no other United States federal income tax impact. Because some of Avianca, Inc.'s and Avianca S.A.'s outstanding indebtedness will be satisfied in exchange for Dollar Notes, Peso Notes and Single Payment Rights to be issued under the Plan, the amount of COD income, and accordingly the amount of any tax attributes required to be reduced, will depend in part on the "issue price" of such Dollar Notes, Peso Notes and Single Payment Rights as determined under the Tax Code. These values cannot be known with certainty until after the Effective Date. Thus, although it is expected that Avianca, Inc. will and Avianca S.A. may be required to reduce their respective tax attributes for U.S. federal income tax purposes, the exact amount of such reduction cannot be predicted. It is unclear what, if any, U.S. tax attributes of Avianca S.A. may be reduced as a result of COD income under the Plan. However, because of its claim of U.S. federal income tax exemption (discussed in Section VIII.A.1 of this Disclosure Statement), Avianca S.A. believes that either (1) no reduction of any U.S. tax attributes it may have will be required under the Plan, or (2) any reduction of its tax attributes will have no material effect in determining the income, if any, of Avianca S.A. which may be subject to U.S. federal income taxation. 123 4. Issuance of Dollar Notes and Cash Payment to Non-Colombian Holders of General Unsecured Claim (Class 7 Claims). As discussed in Sections 5.1.7 and 7.1.2 of the Plan and Section V of this Disclosure Statement, Reorganized Avianca S.A. will issue Dollar Notes under the Dollar Notes Indenture and will make certain cash payments in amounts equal to the applicable Pro Rata Portion of the Initial Fixed Payment, in each case, for the benefit of certain creditors of Avianca S.A. and Avianca, Inc. 5. Intercompany Claims (Class 10 Claims). Avianca Inc. and Avianca S.A. hold Intercompany Claims which, on the Effective Date, may either be reinstated, in whole or in part, or be cancelled and discharged, in whole or in part. Intercompany Claims held by SAM will be reinstated, but subordinated pursuant to the SAM Subordination Agreement. (a) If Avianca Inc. cancels or discharges its Intercompany Claims against Avianca S.A. on the Effective Date, such cancellation or discharge would be treated as a distribution of property by Avianca Inc. to Avianca S.A. to the extent of the fair market value of the Intercompany Claims that are cancelled or discharged. This deemed distribution of property by Avianca, Inc. could result in a constructive dividend by Avianca, Inc. to Avianca S.A. equal to the fair market value of the property distributed (to the extent of the current or accumulated earnings and profits of Avianca, Inc.). Any constructive dividend would be subject to U.S. withholding tax at the rate of 30%. In addition, Avianca S.A. would be deemed to have repurchased the applicable Intercompany claim for an amount equal to its fair market value, resulting in the creation of cancellation of indebtedness income to the extent that the adjusted issue price of the debt to which that Intercompany Claim relates exceeds the fair market value deemed paid by Avianca S.A. See the discussion of cancellation of indebtedness income in Section VIII(A)(3) above under the heading "Cancellation of Indebtedness Income." (b) If Avianca S.A. cancels or discharges its Intercompany Claims against Avianca Inc. on the Effective Date, such cancellation or discharge would be treated as a contribution of property by Avianca S.A. to Avianca Inc. to the extent of Avianca S.A.'s adjusted basis in such Intercompany Claims (other than the portion of the adjusted basis in the cancelled or discharged Intercompany Claims that relates to accrued but unpaid interest). The deemed contribution of property by Avianca S.A. would increase Avianca S.A.'s basis in its stock interest in Avianca, Inc. by the amount of the deemed contribution. Accordingly, Avianca, Inc. would not recognize cancellation of indebtedness income for Intercompany Claims that Avianca S.A. cancels or discharges on the Effective Date. However, to the extent any such Intercompany Claim so cancelled or discharged relates to accrued but unpaid interest, the IRS might contend that such capitalized interest should be treated as a constructive payment of interest by Avianca Inc. to Avianca S.A. Any such constructive payment would be subject to U.S. withholding tax at a rate of 30%. See the discussion of cancellation of indebtedness income in Section VIII(A)(3) above - "Cancellation of Indebtedness Income." 124 6. Net Operating Losses - Section 382. Avianca, Inc. does not have a NOL carryforward. As discussed in Section VIII.A.1, Avianca S.A. claims an exemption from U.S. federal income taxation. Therefore, Avianca S.A. has not calculated the amount of any NOL it might otherwise have for U.S. federal tax purposes as a result of its operations. Avianca S.A. anticipates that it will experience an "ownership change" (within the meaning of Tax Code section 382) on the Effective Date as a result of the issuance of shares of its Ordinary Stock to the SPVs pursuant to the Plan. As a result, Reorganized Avianca S.A.'s ability to use any pre-Effective Date NOLs and capital loss carryforwards to offset its income for U.S. federal tax purposes in any post-Effective Date taxable year could be severely limited under Tax Code section 382. However, because of its claim of exemption from U.S. federal income taxation (discussed in Section VIII.A.1 of this Disclosure Statement), Avianca S.A. believes that either (1) section 382 is inapplicable to Avianca S.A. in this context, or (2) the limitations of section 382 will have no material effect in determining the U.S. federal income tax liability, if any, of Avianca S.A. B. UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO UNITED STATES HOLDERS OF CERTAIN CLAIMS. 1. United States Holders. This section discusses certain United States federal income tax consequences of the transactions contemplated by the Plan to Holders that are "United States Holders," as defined below. The United States federal income tax consequences to such Holders (including the character, timing and amount of income, gain or loss recognized) will depend upon, among other things, the following: - Whether the Claim and the consideration received in respect thereof are "securities" for United States federal income tax purposes; - The manner in which a Holder acquired the Claim; - The length of time the Claim has been held; - Whether the Claim was acquired at a discount; - Whether the Holder has taken a bad debt deduction with respect to the Claim (or any portion thereof) in the current or any prior year; - Whether the Holder has previously included in its taxable income accrued but unpaid interest with respect to the Claim; 125 - The Holder's method of tax accounting; and - Whether the Claim is an installment obligation for United States federal income tax purposes. THEREFORE, ALL HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS FOR INFORMATION THAT MAY BE RELEVANT TO THEIR PARTICULAR SITUATIONS AND CIRCUMSTANCES AND THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY THE PLAN. This discussion assumes that no Holder has taken a bad debt deduction with respect to a Claim (or any portion thereof) in the current or any prior year and that such Claim did not become completely or partially worthless in a prior taxable year. For purposes of the following discussion, a "United States Holder" is a Holder that is (1) a citizen or individual resident of the United States, (2) a partnership or corporation created or organized in the United States or under the laws of the United States or any political subdivision thereof, (3) an estate, the income of which is subject to United States federal income taxation regardless of its source, or (4) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States fiduciaries have the authority to control all substantial decisions of the trust or (b) the trust was in existence on August 20, 1996 and properly elected to be treated as a United States person. A "Non-United States Holder" means any Holder other than a United States Holder. (a) Accrued Interest. Under the Plan, some cash or property may be distributed or deemed distributed to certain Holders with respect to their Claims for accrued interest. Holders of Claims for accrued interest that previously have not included such accrued interest in taxable income will be required to recognize ordinary income equal to the amount of cash and the fair market value (or in the case of a Dollar Note, the issue price) of the property received with respect to such Claims for accrued interest. Holders of Claims for accrued interest that have included such accrued interest in taxable income will not be required to recognize additional taxable income on the receipt of cash or property with respect to such Claims for accrued interest (to the extent that the amount of cash and the fair market value (or in the case of a Dollar Note, the issue price) of the property received does not exceed the amount of accrued interest previously included in taxable income), and such Holders generally may take an ordinary deduction to the extent that such Claim is not fully satisfied under the Plan (after allocating the distribution between principal and accrued interest), even if the underlying Claim is held as a capital asset. The adjusted tax basis of the property received in exchange for Claims for accrued interest will equal the fair market value (or in the case of a Dollar Note, the issue price) of such property on the Effective Date, and the holding period for the property received in exchange for such Claims will begin on the day after the Effective Date. The extent to which consideration distributable under the Plan is allocable to interest is not clear. Claimholders are advised to consult their own tax advisors to determine the amount, if any, of consideration received under the Plan that is allocable to interest. 126 (b) Market Discount. The market discount provisions of the Tax Code may apply to Holders of certain Claims. In general, a debt obligation other than a debt obligation with a fixed maturity of one year or less that is acquired by a holder in the secondary market (or, in certain circumstances, upon original issuance) is a "market discount bond" as to that holder if its stated redemption price at maturity (or, in the case of a debt obligation having original issue discount, the revised issue price) exceeds the adjusted tax basis of the bond in the holder's hands immediately after its acquisition. However, a debt obligation will not be a "market discount bond" if such excess is less than a statutory de minimis amount. Gain recognized by a creditor with respect to a "market discount bond" will generally be treated as ordinary interest income to the extent of the market discount accrued on such bond during the creditor's period of ownership, unless the creditor elected to include accrued market discount in taxable income currently. A holder of a market discount bond may be required under the market discount rules of the Tax Code to defer deduction of all or a portion of the interest on indebtedness incurred or maintained to acquire or carry the bond. In such circumstances, such holder may be allowed to deduct such interest in whole or in part, on the disposition of such bond. (c) Dollar Notes. Each of the Dollar Notes includes the obligations to pay (a) fixed Principal amounts, together with interest on the unpaid balance thereof outstanding from time to time plus (b) Contingent Principal Amounts. Avianca S.A. intends to treat the Dollar Notes as subject to regulations governing contingent payment debt instruments (which are referred to in this disclosure statement as the CPDI regulations). The CPDI regulations set forth special rules with respect to the taxation of debt instruments which (1) provide for contingent payments based on factors for which there is no objective source of valuation, such as sales or profits of the issuer, (2) are not publicly traded, and (3) are issued as consideration for nonpublicly traded property (rather than cash or publicly traded property). Under the CPDI regulations, such a debt instrument is separated into its contingent and noncontingent components. For purposes of calculating original issue discount, the noncontingent component (i.e., the obligation to pay the fixed Principal amounts, the "Noncontingent Component") and the contingent component (i.e., the obligation to pay the Contingent Principal Amounts, the "Contingent Component") will each be treated as a separate debt instrument. The Noncontingent Component of each Dollar Note will be subject to the normal original issue discount rules for noncontingent debt instruments. However, payments on the Contingent Component of each Dollar Note will be accounted for when made, with a portion of each such payment treated as principal and the remainder treated as interest (as described in section VIII.A.(c)(iv) below). (i) Taxation of Stated Interest on Noncontingent Component of the Dollar Notes. A United States Holder generally will be required to include in gross income as ordinary interest income the stated interest on a Dollar Note at the time that the interest accrues or is received, in accordance with the United States holder's regular method of accounting for U.S. federal income tax purposes. As discussed in Section IX.C.1(c) below - "Withholding Tax," Colombia may impose a withholding tax of up to 39.55% on payments of stated interest on 127 Dollar Notes. If such payments of stated interest are subject to Colombia withholding tax, a United States Holder may be eligible for a foreign tax credit against such United States Holder's federal income tax on such stated interest. Availability of such a foreign tax credit will be subject to the particular facts and circumstances of such United States Holder and the limitations imposed by the "high withholding tax interest basket" rules of section 904(d)(2)(B) of the Tax Code. Alternatively, a United States Holder may elect to take a deduction (rather than a credit) for the Colombia withholding tax in computing such United States Holder's federal taxable income. (ii) Original Issue Discount on Noncontingent Component of the Dollar Notes. Although it is unlikely, the Noncontingent Component of the Dollar Notes could be issued with original issue discount for U.S. federal income tax purposes. The amount of original issue discount with respect to Noncontingent Component of each such Dollar Note would be equal to the excess of the "stated redemption price at maturity" of the Noncontingent Component of such Dollar Note over its "issue price." The "stated redemption price at maturity" of the Noncontingent Component of each Dollar Note will include all cash payments, other than stated interest to the extent that it is unconditionally payable at least annually at a single fixed rate, which we refer to as "qualified stated interest," required to be made thereunder until maturity. Qualified stated interest on the Noncontingent Component of the Dollar Notes is 10% per annum. If Noncontingent Component of each Dollar Note lacks adequate stated interest, the "issue price" of the Noncontingent Component of such Dollar Note will equal its imputed principal amount. A debt instrument has adequate stated interest if its stated principal amount is less than or equal to its imputed principal amount. The stated principal amount is the sum of all payments due under the debt instrument, excluding any amount of qualified stated interest. The imputed principal amount is determined as of the Effective Date and equals the present values of all payments (including principal and qualified stated interest) due under the Noncontingent Component of each Dollar Note using the applicable federal rate, compounded semiannually. The applicable federal rates, published monthly by the Secretary of the Treasury for the following calendar month, are based on similar yields to maturity of outstanding marketable obligations of the United States. For exchanges of debt instruments, the applicable Federal rate is the lowest 3-month rate, which is the lowest applicable Federal rate in effect for any month in the 3-calendar-month period ending with the first calendar month in which there is a written binding contract for the exchange, or in the month of exchange if there is no written binding contract. Because the interest on the Noncontingent Component of the Dollar Notes constitutes qualified stated interest that accrues at a rate per annum in excess of what the applicable federal rate may reasonably be expected to be at the time the Noncontingent Component of the Dollar Notes are issued, the Noncontingent Component of the Dollar Notes are not likely to be issued with original issue discount. Furthermore, the amount of original issue discount with respect to a debt instrument is considered to be zero if such discount is less than one-fourth of one percent of the stated redemption price at maturity multiplied by the number of complete years from the issue date to the maturity date of the debt instrument ("di minimis" original issue discount). 128 (iii) Taxation of Original Issue Discount on the Noncontingent Component of the Dollar Notes. If there is more than de minimis original issue discount, each Holder of the Noncontingent Component of a Dollar Note will be required to include in gross income, as ordinary interest income, an amount equal to the sum of the "daily portions" of the original issue discount on the Noncontingent Component of such Dollar Note for each day the Holder holds a Dollar Note. The daily portions of original issue discount required to be included in a Holder's gross income will be determined on a constant yield basis by allocating to each day during the taxable year in which the Holder holds the Noncontingent Component of such Dollar Note a pro rata portion of the original issue discount thereon that is attributable to the "accrual period." Thus, any original issue discount may be included in income before the receipt of any cash. The amount of the original issue discount attributable to each accrual period will be the product of the "adjusted issue price" of the Noncontingent Component of such Dollar Note at the beginning of the accrual period multiplied by the "yield to maturity" of the Noncontingent Component of the Dollar Note, less the amount of any qualified stated interest allocable to the accrual period. Appropriate adjustments will be made in computing the amount of original issue discount attributable to the initial accrual period. The adjusted issue price of the Noncontingent Component of such Dollar Notes at the beginning of the first accrual period is the issue price. Thereafter, the adjusted issue price is the issue price of the Noncontingent Component of such Dollar Notes plus the aggregate amount of original issue discount that accrued in all prior accrual periods, less payments, other than payments of qualified stated interest, on the Noncontingent Component of such Dollar Notes. The yield to maturity of the Noncontingent Component of a Dollar Note will be the discount rate that, when used to compute the present value, on a semi-annual compounded basis, of all principal and interest payments to be made under the Noncontingent Component of a Dollar Note, produces a present value equal to the issue price of the Noncontingent Component of the Dollar Note. (iv) Taxation of The Contingent Component of the Dollar Notes. Under the CPDI regulations part of any Variable Payment Amount paid under the Contingent Component of a Dollar Note is treated as a payment of interest and is includible in gross income by the holder and deductible by the issuer in their respective taxable years in which the payment is made. Such a contingent payment is treated as a payment of principal in an amount equal to the present value of the payment determined by discounting the payment from the date it was made to the issue date of the contingent debt instrument at the applicable federal rate that would apply to a debt instrument issued on the contingent debt instrument's issue date and maturing on the date the contingent payment is made. The amount of the contingent payment in excess of the portion determined to be principal is treated as a payment of interest. (d) Information Reporting and Backup Withholding. Certain payments, including payments in respect of accrued interest or market discount, are generally subject to information reporting by the payor to the IRS. Moreover, such reportable payments are subject to backup withholding under certain circumstances. Under the Tax Code's backup withholding rules, a United States holder may be subject to backup withholding 129 at the applicable rate (currently 28%) with respect to certain distributions or payments pursuant to the Plan, unless the Holder (i) comes within certain exempt categories (which generally include corporations) and, when required, demonstrates this fact or (ii) provides a correct United States taxpayer identification number and certifies under penalty of perjury that the holder is a U.S. person, the taxpayer identification number is correct and that the holder is not subject to backup withholding because of a failure to report all dividend and interest income. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a holder's United States federal income tax liability, and a holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing an appropriate claim for refund with the IRS. 2. Holders of General Unsecured Claims (Class 7 Claims). Pursuant to the Plan, Reorganized Avianca S.A. will issue Dollar Notes under the Dollar Notes Indenture and will pay the applicable Pro Rata portions of the Initial Fixed Payment to the Non-Colombian Holders of General Unsecured Claims. The United States federal income tax consequences arising from the Plan to Holders of such Claims will vary depending upon, among other things, whether such Claims constitute "securities" for United States federal income tax purposes. The determination of whether a debt instrument constitutes a "security" depends upon an evaluation of the nature of the debt instrument. Generally, corporate debt instruments with maturities when issued of less than five years are not considered securities, and corporate debt instruments with maturities when issued of ten years or more are considered securities. EACH HOLDER IS URGED TO CONSULT ITS TAX ADVISOR REGARDING THE STATUS OF ITS CLAIM. (a) If (A) the Claim and the Dollar Notes exchanged therefor both constitute "securities" for United States federal income tax purposes, and (B) the Dollar Notes are received by the Holder with respect to Claims against Avianca S.A., the exchange of such Claims for Dollar Notes and cash (i.e., the Pro Rata portion of the Initial Fixed Payment) should constitute a "recapitalization" for United States federal income tax purposes. The exchange of such Claims for Dollar Notes and cash (i.e., the Pro Rata portion of the Initial Fixed Payment) should constitute a "recapitalization" for United States federal income tax purposes. Although a party to a "recapitalization" generally does not recognize gain or loss for federal income tax purposes in that transaction, if that party receives in the recapitalization cash or property other than stock or securities of the issuer, that party must recognize any gain to the extent of the amount of cash and the fair market value of such other property. Provided that the sum of the issue price of the Dollar Notes and the amount of cash received does not exceed a Holder's adjusted tax basis in its Claim, a Holder should not be required to recognize gain upon the receipt of the cash. A Holder may not recognize a loss upon the receipt of cash or other property in a "recapitalization." A Holder's tax basis in the Dollar Notes received in exchange for its Claim (other than the Dollar Notes received for accrued interest) should be equal to the aggregate adjusted tax basis in the Claims exchanged therefor (exclusive of any basis in such Claim attributable to 130 accrued interest) decreased by the amount of the cash received. Such Holder's holding period for the Dollar Notes (other than Dollar Notes received for accrued interest) will include the holding period of the Claims exchanged therefor, provided that such Claims are held as capital assets on the Effective Date. As discussed in Section VIII.B.1.(a) above, holders of General Unsecured Claims will recognize ordinary income to the extent that the consideration they receive (whether stock, securities or other property) in discharge of their Claims is treated as received in satisfaction of accrued and unpaid interest with respect to such Claims. Moreover, under the market discount rules discussed in Section VIII.B.1.(b) above, any accrued but unrecognized market discount with respect to such Claims generally will be treated as ordinary income to the extent of the gain recognized upon the subsequent disposition of Dollar Notes received in exchange for the Claim. The treatment of accrued market discount in a nonrecognition transaction is, however, subject to the issuance of Treasury regulations that have not yet been promulgated. In the absence of such regulations, the application of the market discount rules in the present transaction is uncertain. If a holder of a Claim was required under the market discount rules of the Tax Code to defer its deduction of all or a portion of the interest on indebtedness, if any, incurred or maintained to acquire or carry the Claim, continued deferral of the deduction for interest on such indebtedness may be required. Any such deferred interest expense would be attributed to the Dollar Notes received in exchange for the Claim and would be treated as interest paid or accrued in the year in which the Dollar Notes are disposed of. (b) If (A) either the Claim or the Dollar Notes exchanged therefor do not constitute "securities" for United States federal income tax purposes, or (B) Avianca S.A. issues Dollar Notes to creditors of Avianca Inc., the exchange of such Claims for Dollar Notes and cash (i.e., the Pro Rata portion of the Initial Fixed Payment) should constitute a taxable exchange for United States federal income tax purposes. The exchange of such Claims for Dollar Notes and cash (i.e., the Pro Rata portion of the Initial Fixed Payment) should constitute a taxable exchange for United States federal income tax purposes. As a result, a United States Claim holder would generally recognize income, gain or loss for United States federal income tax purposes in an amount equal to the difference between (1) the sum of the issue price, as determined under applicable regulations, on the Effective Date of the Dollar Notes and the amount of cash received in exchange for its Claim and (2) the Holder's adjusted tax basis in its Claim. The character of such gain or loss as capital gain or loss or as ordinary income or loss will be determined by a number of factors, including the tax status of the Holder, the nature of the Claim in such Holder's hands, whether the Claim constitutes a capital asset in the hands of the Holder, whether the Claim was purchased at a discount, and whether and to what extent the Holder has previously claimed a bad debt deduction with respect to its Claim. Any such gain recognized would generally be treated as ordinary income to the extent that the Dollar Notes and cash are received in respect of accrued but unpaid interest or accrued market discount that, in either case, has not been previously taken into account under the Holder's method of tax accounting. See Sections VIII B.1.(a) and B.1.(b). A Holder recognizing a loss as a result of the Plan may be entitled to a bad debt deduction, either in the taxable year of the Effective Date or a prior taxable year. A Holder's tax basis in the Dollar Notes received in exchange for its Claims would generally be equal to the issue price on the Effective Date of such Dollar Notes. Any gain or 131 loss would be long-term gain or loss if the Holder's holding period for the applicable Claims was more than one year on the Effective Date. The holding period for Dollar Notes received pursuant to the Plan would begin on the day after the Effective Date. C. NON-UNITED STATES HOLDERS. THIS DISCLOSURE STATEMENT DOES NOT COVER ANY OF THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN TO NON-UNITED STATES HOLDERS OF CLAIMS. EACH SUCH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF THE PLAN. D. IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE. THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING WITH A TAX PROFESSIONAL. THE ABOVE DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. THE TAX CONSEQUENCES ARE IN MANY CASES UNCERTAIN AND MAY VARY DEPENDING ON A HOLDER'S PARTICULAR CIRCUMSTANCES. ACCORDINGLY, ALL HOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE UNITED STATES FEDERAL, STATE AND LOCAL, AND APPLICABLE FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE PLAN, INCLUDING WITH RESPECT TO TAX REPORTING AND RECORD KEEPING REQUIREMENTS. IX. SOME TAX CONSEQUENCES IN COLOMBIA. A. NATURE OF THE REORGANIZATION PLAN. The Plan is a proposal for the reorganization of Avianca S.A. and Avianca, Inc. under Chapter 11 of the U.S. Bankruptcy Code under the jurisdiction of the U.S. Bankruptcy for the Southern District of New York (the "Bankruptcy Court"), which includes, among other aspects, a restructuring proposal for, and form of payment of, the debts incurred by the Debtors and owing to their creditors as of March 21, 2003, the date on which the petition for protection under Chapter 11 was filed. The Plan included in this Disclosure Statement foresees entering into several legal acts, including the capitalization of Avianca S.A. through investment of new resources and capitalization of certain debts, as well as restructuring of debts existing as of March 21, 2003, both in Avianca S.A. and Avianca Inc. The Plan includes a proposal for the payment in full of those debts that as a result of their nature must be fully paid. It also provides for the reduction of original amount and/or postponement of payment of the Debtors' unsecured non-priority debts pursuant to applicable law and as provided in the Plan. The Plan is subject to voting approval by the creditors whose debts will be reduced, who may accept or reject it. After the voting, if the U.S. Bankruptcy Court confirms the Plan, it will be 132 binding on Avianca and its creditors, as well as other interested parties, including the Equity Sponsors. The purpose of this section is to illustrate the tax effects generated in Colombia with respect to the Plan once it becomes effective. Considering that the process is being carried out in the United States of America under such country's applicable laws, upon confirmation by the U.S. Bankruptcy Court, it will, under applicable Colombian law, be deemed to be a private restructuring agreement of debts executed abroad (hereinafter referred to as the "Agreement"). B. JURIDICAL EFFECTS OF THE AGREEMENT WITH RESPECT TO RESTRUCTURED DEBTS. With respect to the different claims, three situations may arise: (i) the obligations continue unaltered; (ii) the obligations continue existing but their amount and/or form of payment are modified; or (iii) the obligations are extinguished and new ones arise due to the effects of a novation agreement. C. TAX EFFECTS FOR THE AGREEMENT. 1. General Tax Effects. (a) Stamp Tax. The stamp tax is assessed on public documents or private instruments issued or accepted in the Colombian national territory or issued abroad, but performed in Colombia, or that generate obligations in the national territory, on which the incorporation, existence, amendment or extinction of obligations, or its extension or assignment is evidenced, as provided in article 519 of the Colombian Tax Statute. For stamp tax purposes, the time on which the obligations arise, their nature and contents, as well as the territory where to be performed, that is, whether or not they generate obligations in Colombia must be taken into account. Accordingly, in the present case the following must be taken into account: - That the Agreement is issued abroad; - That performance of the Agreement is verified abroad, except for Colombian creditors having signed the novation agreement; - With respect to claims with foreign creditors, it is important to point out that the obligation to pay the restructured debt is not an obligation generated or executed in the national territory, given that the fact that Avianca S.A. must draw money abroad for payment of foreign creditors cannot be understood as an obligation generated or performed in the Colombian national territory. On the contrary, such obligation is accrued abroad and must be performed abroad; 133 - Due to the nature of many of the obligations dealt with in the Agreement, operations such as external credit are exempt from stamp taxes, as expressly provided in article 529 of the Colombian Tax Statute, as well as the documents mentioned in article 530 of the same Statute; - Obligations are subject to stamp taxes when the obligation has an economic content, therefore obligations having other contents but the economic one do not trigger the tax. - The documents arising from the Agreement issued to implement the negotiation conditions are not subject to such tax, because they are expressly excluded by paragraphs 9 and 42 of article 530 of the Colombian Tax Statute, for being accessory documents. Therefore, the only obligations contained in the Agreement subject to stamp taxes are novated obligations, executed or generated in the Colombian territory. The tax is accrued over the value of the new obligation, when it exceeds the amount of $(COL)56,684,000 and it is assessed at a rate of 1.5%. Nevertheless, under Section 1146(c) of the U.S. Bankruptcy Code, the issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan of reorganization confirmed under under Section 1129 of the Bankruptcy Code are not taxable under any law imposing a stamp tax or similar tax. Thus, the Holders of Allowed Class 8 Claims may have an exemption from this stamp tax if the exemption provided by Section 1146(c) of the Bankruptcy Code is respected by the Colombian governmental authorities. No assurance can be given, however, that the Colombian governmental authorities will respect this exemption. See Section VI.U hereof - "Enforceability of Foreign Judgments in Colombia." (b) Income Tax. (i) For Avianca S.A. Obligations partially extinguished to Avianca S.A, by virtue of the Agreement constitute assessable income in the year in which the obligations are restructured. If a profit is generated, such profit may be offset, whether totally or partially, with the accumulated losses of former years, as provided in article 147 of the Colombian Tax Statute. Given that Avianca S.A. has tax losses accumulated from former fiscal years, the net income originating in the taxable year in which the credits are extinguished may be amortized with these losses, thus constituting a neutral effect. (ii) For Avianca Inc. This company is domiciled in the United States of America and according to the terms of the Agreement, it will act in such country as agent of Avianca S.A.; and, therefore, no tax obligations are generated in Colombia. 134 (iii) For Creditors of Avianca S.A. Creditors paying income taxes in Colombia who accept the Plan may deduct from their gross income the extinguished value, as provided in article 146 of the Colombian Tax Statute, and provided, further, that the conditions stipulated in the Regulatory ruling Decree 187 of 1975 are met. However, according to Article 195 of the Tax Code, the recovery of deductions originated in bad debts constitutes an assessable income in the taxable period in which such recovery is materialized. Creditors paying taxes in Colombia not accepting the Plan, could eventually make a reserve or deduct from the portfolio of bad debts, provided the conditions demanded by the law are met. (c) Withholding and Remittance Taxes. The withholding of taxes is the legal mechanism established to collect income taxes in Colombia on Colombian source income. Generally speaking, the withholding tax rate on Colombian source income depends on the specific type of income (for example, a 10% withholding tax rate for non-exempt services that are deemed to be Colombian source even though performed outside Colombia). Under Articles 24.4 and 265 of the Colombian Tax Code, interest paid in respect of obligations owed by a Colombian Entity or resident are generally deemed to be Colombian source income, regardless of the place of domicile or residence of the recipient creditor. Under Articles 408 and 321 of the Colombian Tax Code, such interest is subject to a withholding tax of 35% plus a remittance tax of 7% on the putative balance of interest to be paid, for an overall effective income tax rate of 39.55% [35% + (7% x 65%) = 35% + 4.55%]. However, Article 25 of the Colombian Tax Code provides, among other things, an exemption from Colombian withholding and remittance taxes on principal or interest payments in respect of (i) credit facilities obtained abroad by Colombian companies whose activities are considered of interest to the economic and social development of Colombia in accordance with the policies of the Economic and Social Policy Council ("CONPES"), and (ii) "income originating in leasing agreements made directly, or through leasing companies, with foreign companies not domiciled in Colombia to finance investments in machinery and equipment engaged in export processes or activities considered to be of interest to Colombia's economic and social development in accordance with CONPES policy." Art 1 of Regulatory Decree 2105/96 specifically determined that activities "of interest to the economic and social development of Colombia" include "all activities in the primary sector, manufacturing, and the provision of services, it being understood that the service sector includes activities such as transport, engineering, hotel management, tourism, and health, commerce, and the construction of housing." Avianca S.A. should, thus, be considered as a company whose activities are considered of interest to Colombia's economic and social development in accordance with CONPES policy. Accordingly, all payments made by Avianca S.A. under the Dollar Notes to non-Colombian Entities or residents whose original credits derived from (i) credit facilities obtained abroad, (ii) leasing agreements made directly, or through leasing companies, with foreign companies not domiciled in Colombia to finance investments in machinery and equipment leasing agreements, or (iii) any other credits or operations having an express exemption under Colombian 135 tax laws, should be exempt from any Colombian withholding or remittance taxes (collectively, the "Exempt Foreign Credit and Services Payments"). In addition, Holders of Class 8 Trust Certificates should have a loss in connection with their obligations owing from Avianca, which might allow them, in certain cases, to offset their withholding tax on the interest payments they receive under the Plan. If for any reason the exemption under Article 25 of the Colombian Tax Code is unavailable for any given Class 7 Creditor, then the withholding rate applicable to the payment of interest on a past due obligation owing to such a non-Colombian Entity or resident could be either (i) the same as the specific withholding rate that applies to payments in respect of the underlying obligation under the legal principle that "the accessory follows the nature of its principal", or (ii) the general withholding rate applicable to non-exempt interest payments made abroad. This is different from the payment of interest on past due obligations owing to Colombian Entities or residents, which are subject to the specific rate of 7% regardless of the withholding tax rate on the underlying obligations. Nevertheless, any additional Colombian withholding tax might not materially and adversely affect the net return to many Holders of Dollar Notes or Class 8 Trust Certificates. Under the tax regimes of most countries, a foreign tax credit is available against a taxpayer's putative income tax on foreign source interest income. The credit is usually equal to the foreign withholding tax paid with respect to such interest income up to the amount of the putative income tax that otherwise would be owed, and any unused foreign tax credit can often be carried forward and applied in future years against other qualified foreign source income. Alternatively, a Holder might be able to take a deduction (rather than a credit) for any withholding tax in computing such Holder's taxable income. See, e.g., Section VIII.B.1(c)(i) above - "Taxation of Stated Interest on Noncontingent Component of the Dollar Note." In addition, as noted above, Holders of Class 8 Trust Certificates might have a loss in connection with their obligations owing from Avianca that offsets their withholding tax on the interest payments they receive under the Plan. However, the availability of credits, deductions or losses will vary with the circumstances of each Holder's particular tax situation. EACH HOLDER IS ENCOURAGED TO CONSULT ITS TAX ADVISOR AND THE TERMS OF THE CLASS 8 TRUST CERTIFICATES AND THE DOLLAR NOTES REGARDING THE POSSIBLE TAX CONSEQUENCES. (d) Sales Tax. Given that it is a negotiation of credits, the Agreement considered individually does not constitute a fact generating sales tax, as provided in article 420 of the Colombian Tax Statute, and therefore it is not subject to sales tax. (e) Industry and Commerce Tax. This tax, created by Law 14 of 1983, emerges from the performance of industrial, commercial or service activities within a municipal jurisdiction and it is calculated based on the gross income. Extinguishment of claims by Avianca S.A, creditors must be filed as an income, but for the purposes of this municipal tax, it should be taken as a reduction of debt not subject to the tax. Notwithstanding the above, the lack of rules and juridical unsteady derived from 136 varied and dissimilar interpretations, may cause that any municipality, in particular the municipality of the main domicile, question the accrual of the tax, but there would be serious arguments to affirm that such activity is not subject to this tax. 2. Particular Tax Effects. (a) With Respect to the Novated Obligations with Colombian Creditors. Novation is the substitution of a new obligation for a former obligation, which is therefore extinguished (Article 1687 of the Civil Code). Obligations executed in Colombia that are subject to a novation agreement are extinguished as new ones emerge, whose treatment is as follows: (i) For Avianca S.A. Payments made do not have any relation with former claims. Therefore, on the amount of interest Avianca pays, Avianca needs to apply withholdings equivalent to 7% of the such interest. (ii) For the Creditors. They will be subject to tax withholdings equal to 7% of the interest paid, but might have losses on their investments in Avianca that offset this tax. See Section IX.C.1(c) above - "Withholding and Remittance Taxes." (b) With Respect to Non-novated Obligations with Colombian Creditors. If any Creditors who hold obligations executed in Colombia in which novation does not occur were to contest the Debtors' position that such Creditors are bound by the Plan and were to prevail, then such obligations would keep their original nature and their tax treatment. The income tax effect of the restructuring of their debt pursuant to the Plan would, therefore, be unaffected. Otherwise, then such obligations would be treated as being subject to novation and receive the treatment described in the preceding Section IX.C.2(a)(ii). (c) With Respect to Obligations with Foreign Creditors. Given that Avianca S.A. will pay its claims with its own resources and that there is no novation of these claims, claims with foreigners keep the nature of the business originating them. (d) Conclusion. Under these criteria, the juridical and tax consequences are the following: - When Avianca S.A. pays, it makes the payment on its account; and 137 - Given that the parties and the nature of the obligations remain unaltered, the situations with respect to the payment must be analyzed individually taking into account factors such as the following: (A) If the Initial Obligation Was for Exempt Foreign Credit and Services Payment Not Subject to Withholding Taxes in Colombia. In this case, at the time of drawing the funds for payment of the obligation abroad, no withholding has to be made. (B) If the Initial Obligation Was for Foreign Services Subject to Withholding Taxes in Colombia. In this case, at the time the obligation was incurred, the pertinent withholdings should have been booked; and, therefore, at the time of payment of money abroad, they will be subject to withholding at the same applicable rate (in most cases, 10%). (C) If the Initial Obligation Was for Colombian Services Subject to Withholding Taxes in Colombia. In this case, the pertinent withholding on the Principal amount owed should be the same as the withholding rate on the underlying obligation, and the withholding tax on the interest owed should be at the statutorily fixed rate of 7% per annum. 3. Registry Tax. The Reorganization Plan contemplates the capitalization of Avianca S.A with the income of new investments funds and capitalization of debt. The increase of the subscribed and paid-in capital generated in this capitalization gives rise to the departmental tax known as registry tax, which generates from filing of juridical acts before some entities, in this case, at the Chamber of Commerce, pursuant to article 226 of Law 223 of 1995. The tax is calculated at a rate of seven per thousand (0.07%) over the value filed in the capital stock account, as subscribed capital stock.. D. IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE. THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN OF COLOMBIAN INCOME TAX CONSEQUENCES OF THE PLAN AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING WITH A TAX PROFESSIONAL. THE ABOVE DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. THE TAX CONSEQUENCES ARE IN MANY CASE UNCERTAIN AND MAY VARY DEPENDING ON A HOLDER'S PARTICULAR CIRCUMSTANCES. ACCORDINGLY, ALL HOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE COLOMBIAN FEDERAL, PROVINCIAL AND LOCAL, AND APPLICABLE FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE 138 PLAN, INCLUDING WITH RESPECT TO TAX REPORTING AND RECORD KEEPING REQUIREMENTS. X. FEASIBILITY OF THE PLAN AND THE BEST INTERESTS TEST. A. FEASIBILITY OF THE PLAN. To confirm the Plan, the Bankruptcy Court must find that confirmation of the Plan is not likely to be followed by the liquidation or the need for further financial reorganization of the Reorganized Debtors. This requirement is imposed by section 1129(a)(11) of the Bankruptcy Code and is referred to as the "feasibility" requirement. The Proponents believe that they will be able to timely perform all obligations described in the Plan, and, therefore, that the Plan is feasible. To demonstrate the feasibility of the Plan, the Proponents have prepared financial Projections for Fiscal Years 2004 through 2011, as set forth in APPENDIX B attached to this Disclosure Statement. The Projections indicate that the Reorganized Debtors should have sufficient cash flow to pay and service their debt obligations and to fund their operations. Accordingly, the Proponents believe that the Plan satisfies the feasibility requirement of section 1129(a)(11) of the Bankruptcy Code. As noted in the Projections, however, the Proponents caution that no representations can be made as to the accuracy of the Projections or as to the Reorganized Debtors' ability to achieve the projected results. Many of the assumptions upon which the Projections are based are subject to uncertainties that will be outside the control of the Reorganized Debtors. Some assumptions inevitably will not materialize, and events and circumstances occurring after the date on which the Projections were prepared may be different from those assumed or may be unanticipated, and may adversely affect the Reorganized Debtors' financial results. Therefore, the actual results may vary from the projected results and the variations may be material and adverse. See Section VI hereof - "Certain Risk Factors to Be Considered," for a discussion of certain risk factors that may affect financial feasibility of the Plan. THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, THE PRACTICES RECOGNIZED TO BE IN ACCORDANCE WITH UNITED STATES OR COLOMBIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION REGARDING PROJECTIONS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN AUDITED BY THE PROPONENTS' INDEPENDENT ACCOUNTANTS. ALTHOUGH PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS, SOME OF WHICH IN THE PAST HAVE NOT BEEN ACHIEVED AND WHICH MAY NOT BE REALIZED IN THE FUTURE. THE PROJECTIONS ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH WILL BE BEYOND THE CONTROL OF THE REORGANIZED DEBTORS. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS BEING ANY REPRESENTATION OR WARRANTY BY THE PROPONENTS, BY THE REORGANIZED DEBTORS, OR BY ANY 139 OTHER PERSON THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE PRESENTED IN THE PROJECTIONS. B. ACCEPTANCE OF THE PLAN. As a condition to Confirmation, the Bankruptcy Code requires that each Class of Impaired Claims and Interests vote to accept the Plan, except under certain circumstances. Section 1126(c) of the Bankruptcy Code defines acceptance of a plan by a class of impaired claims as acceptance by holders of at least two-thirds (2/3) in dollar amount and more than one-half (1/2) in number of claims in such class, but for this purpose counts only those who actually vote to accept or to reject the Plan. Thus, a Class of Claims will have voted to accept the Plan only if two-thirds in amount and a majority in number actually voting cast their Ballots in favor of acceptance. Under section 1126(d) of the Bankruptcy Code, a Class of Interests has accepted the Plan if Holders of such Interests holding at least two-thirds in amount actually voting have voted to accept the Plan. Holders of Claims or Interests who fail to vote are not counted as either accepting or rejecting the Plan. C. BEST INTERESTS TEST. Even if a plan is accepted by each class of holders of claims and interests, the Bankruptcy Code requires a bankruptcy court to determine that the plan is in the "best interests" of all holders of claims and interests that are impaired by the plan and that have not accepted the plan. The "best interests" test, as set forth in section 1129(a)(7) of the Bankruptcy Code, requires a bankruptcy court to find either that (i) all members of an impaired class of claims or interests have accepted the plan or (ii) the plan will provide a member who has not accepted the plan with a recovery of property of a value, as of the effective date of the plan, that is not less than the amount that such holder would recover if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. To calculate the probable distribution to members of each impaired class of holders of claims and interests if the debtor were liquidated under Chapter 7, a bankruptcy court must first determine the aggregate dollar amount that would be generated from the debtor's estate if its Chapter 11 case were converted to a Chapter 7 case under the Bankruptcy Code. This "liquidation value" would consist primarily of the proceeds from a forced sale of the debtor's assets by a Chapter 7 trustee. The amount of liquidation value available to unsecured creditors would be reduced by the costs of liquidation under Chapter 7 of the Bankruptcy Code, including the compensation of a trustee, as well as of counsel and other professionals retained by the trustee, asset disposition expenses, additional administrative claims and other wind-down expenses. The liquidation itself would trigger certain priority payments that otherwise would be due in the ordinary course of business. Those priority claims would be paid in full from the liquidation proceeds before the balance would be made available to pay general unsecured claims or to make any distribution in respect of equity interests. The liquidation also would prompt the rejection of a large number of Executory Contracts and thereby create a significantly higher number of unsecured claims. Once the court ascertains the recoveries in liquidation of secured creditors and priority claimants, it must determine the probable distribution to general unsecured creditors and equity 140 security holders from the remaining available proceeds in liquidation. If such probable distributions have an aggregate value greater than the distributions to be received by such creditors and equity security holders under a debtor's plan, then such plan is not in the best interests of creditors and equity security holders. D. APPLICATION OF THE BEST INTERESTS TEST TO THE LIQUIDATION ANALYSIS AND THE VALUATION OF THE REORGANIZED DEBTORS. A liquidation analysis prepared with respect to Avianca is attached as APPENDIX A to this Disclosure Statement. The Proponents note, however, that any liquidation analysis is uncertain because of the various assumptions that must be made. For example, the liquidation analysis necessarily contains an estimate of the amount of Claims which will ultimately become Allowed Claims. In preparing the liquidation analysis, the Proponents have projected an amount of Allowed Claims based upon a review of their scheduled Claims. Additions were made to the scheduled Claims to adjust for estimated Claims related to post-petition obligations, pension liabilities and other employee-related obligations, post-retirement obligations and certain lease damage Claims. No order or finding has been entered by the Bankruptcy Court estimating or otherwise fixing the amount of Claims at the projected amounts of Allowed Claims set forth in the liquidation analysis. The estimate of the amount of Allowed Claims set forth in the liquidation analysis should not be relied on for any other purpose, including, without limitation, any determination of the value of any distribution to be made on account of Allowed Claims and Interests under the Plan. In addition, as noted above, the valuation analysis of the Reorganized Debtors also contains numerous estimates and assumptions. For example, the value of the Plan Securities cannot be determined with precision due to the absence of a public market for the Plan Securities. Notwithstanding the difficulties in quantifying recoveries to Creditors with precision, the Proponents believe that, taking into account the liquidation analysis and the valuation analysis of the Reorganized Debtors, the Plan meets the "best interests" test of section 1129(a)(7) of the Bankruptcy Code. The Proponents also believe that the members of each impaired class will receive more under the Plan than they would in a liquidation in a hypothetical chapter 7 case. Creditors will receive a better recovery through the distributions contemplated by the Plan because the continued operation of the Reorganized Debtors as going concerns rather than a forced liquidation will allow the realization of more value for assets of the consolidated Estate. Moreover, Creditors such as the employees of Avianca would retain their jobs and most likely make few if any other Claims against the combined Estate. Lastly, in the event of liquidation, the aggregate amount of Unsecured Claims will no doubt increase significantly, and such Claims will be subordinated to priority Claims that will be created. Also, a Chapter 7 liquidation would give rise to additional administrative Claims. For example, employees will file Claims for wages, pensions and other benefits, some of which will be entitled to priority. Landlords, aircraft lessors and mortgage holders will no doubt file large Claims for both unsecured and administrative amounts. The resulting increase in both general unsecured and priority Claims will no doubt decrease percentage recoveries to Unsecured Creditors of Avianca. All of these factors lead to the conclusion that recoveries under the Plan would be at least as much, and in many cases significantly greater, than the recoveries available in a Chapter 7 liquidation. The Debtors' conclusion that confirmation of the Plan will provide each Holder of a Claim or Interest in an Impaired Class with a recovery at least equal to the recovery that the Holder would 141 receive pursuant to a liquidation under chapter 7 of the Bankruptcy Code is based upon a comparison of Avianca's estimate of the value of the distributions to the Holders of Claims and Interests resulting from a liquidation, based upon the value set forth in the liquidation analysis attached as APPENDIX A to this Disclosure Statement (summarized in the following table), with Avianca's estimate of the value of the distributions to the Holders of Claims and Interests to be received pursuant to the Plan. The Debtors' estimates of the values of such distributions, together with the Debtors' estimates of the net present values of the percentages of each Claim to be satisfied, whether pursuant to a liquidation (under chapter 7, or pursuant to Colombian Law 222 of 1995, or both ) or pursuant to the Plan, are set forth in the Percentage Recovery Table set forth below. The estimates in such table are based upon the following assumptions: (i) the Chapter 11 Cases are converted to chapter 7 cases, with a parallel insolvency proceeding initiated under Colombian Law 222 (liquidation); (ii) The estates of Avianca S.A. and Avianca, Inc would be consolidated for purposes of liquidation; (iii) all U.S. and Colombian assets and properties of the Debtors would be liquidated; (iv) Claims of all creditors, including all U.S. and all Colombian creditors, would be asserted both in the U.S. Chapter 7 proceeding and in the Colombian Law 222 proceeding; (v) the proceeds of the liquidation in the U.S. would be applied in accordance with the order of priorities of claims under Chapter 7; (vi) the proceeds of the liquidation in Colombia would be applied in accordance with the order of priorities of claims under Colombian law; (vii) the expenses of winding up the businesses of the Debtors and of the liquidation (post-Chapter 7 conversion) are first priority claims in the U.S., just ahead of the other administrative expenses of the Chapter 11 proceeding (including the DIP loan); (viii) the expenses of winding up the businesses of the Debtors and of the liquidation (post-Chapter 7 conversion) are first priority claims in the Colombian proceeding, but the administrative claims and expenses of the Chapter 11 proceeding would be considered general unsecured claims in the Colombian proceeding (including the DIP loan) because they would be "prepetition" claims in Colombia; (ix) the order of priorities of claims under Colombian Law 222 are as follows after payment of post-Law 222 administrative expenses: first, claims for (a) pensions, (b) wages and labor, and (c) taxes; second, claims secured by personal property (however, it should be emphasized that collateral will be liquidated and used, first, to satisfy claims in the prior classes); third, claims secured by real property; fourth, general unsecured claims; and fifth, equity; and (x) although the matter is not free from doubt, the Debtors believe that CAXDAC Claims would be entitled to priority as a tax claim rather than as a pension claim, although CAXDAC would be expected to argue that it is entitled to treatment as a pension claim. Included in the footnote to the Percentage Recovery Table is an estimate of the percentage recovery including payment of the Contingent Principal Amounts under the Contingent Payment Rights assuming that the Company meets its forecasted proforma projections set forth in APPENDIX B hereto (which do not include any estimate of the Incremental Compliance Costs). No assurance can be given that the Company will meet such projections or that any Contingent Principal Amounts will be paid 142 PERCENTAGE OF RECOVERY TABLE FOR DISCLOSURE In USD Millions
Estimated Claim Estimated Liquidation Estimated Liquidation Estimated Plan Recovery Amount Recovery Under Chapter 7 Recovery under Law 222 --------- ------------------------ ---------------------- ----------------------- Amount Percentage Amount Percentage Amount Percentage ------ ---------- ------ ---------- ------ ---------- Class 1 and Unclassified Wind-down expenses $ 16.3 $ 6.7 40.8% $ 9.6 59.2% N/A N/A Super priority and other administrative claims 225.6 34.4 15.3% 9.3 4.1% $225.6 100.0% Class 2 (CAXDAC Claims) 116.8 0.0 0.0% 0.0 0.0% 116.8 100.0% Class 3 (General Pension Claims) 21.4 0.0 0.0% 21.4 100.0% 21.4 100.0% Class 4 (Aerocivil Claims) 3.8 0.0 0.0% 0.0 0.0% 3.8 100.0% Class 5 (Master Trust Note Claims) Intentionally Omitted Class 6 (Other Secured Claims) 100.3 0.0 0.0% 100.3 100.0% 100.3 100.0% Class 7 (Non-Colombian-Held General Unsecured Claims) (a) 102.5 0.0 0.0% 0.0 0.0% 36.7 35.7% Class 8 (Colombian-Held General Unsecured Claims) (a) 25.7 0.0 0.0% 0.0 0.0% 9.2 35.7% Class 9 (Convenience Class Claims) 2.6 0.0 0.0% 0.0 0.0% 2.6 100.0% Class 10 (Intercompany Claims) 22.8 0.0 0.0% 0.0 0.0% 22.8 100.0% Class 11 (Preferred Stock Interests) N/A 0.0 N/A 0.0 N/A N/A Class 12 (Ordinary Stock Interests) N/A 0.0 N/A 0.0 N/A N/A Class 13 (Avianca, Inc. Stock Interests) N/A 0.0 N/A 0.0 N/A N/A
Note: (a) The percentage of recovery for Class 7 and Class 8 is calculated using a 10.0% discount rate to discount the value of the future payments to the Creditors provided for by the Initial Fixed Payment, Dollar Notes, and Class 8 Trust Certificates as defined in the Plan. The percentage of recovery for Class 7 and Class 8 does not include an estimate of (i) the value of the Contingent Payment Rights, (ii) the Excess Cash Payment or (iii) any Incremental Compliance Costs. The recovery for Class 7 and Class 8 would be 43.8% if the estimated value of the Contingent Payment Rights using the Financial Projections set forth in Appendix B (which do not include an estimate of Incremental Compliance Costs) were included. The company does not currently anticipate that the Excess Cash Payment, if any, will be material. XI. ALTERNATIVES TO CONFIRMATION AND CONSUMMATION OF THE PLAN. The Proponents believe that the Plan affords Holders of Claims the potential for the greatest realization on the assets of the consolidated Estate and, therefore, is in the best interests of such Holders. If the Plan is not confirmed, however, the theoretical alternatives include: (a) continuation of the pending Chapter 11 Case; (b) an alternative plan or plans of reorganization; or (c) liquidation of Avianca under Chapter 7 or Chapter 11 of the Bankruptcy Code. A. CONTINUATION OF THE BANKRUPTCY CASE. If Avianca S.A. and Avianca, Inc. remain in Chapter 11, they could continue to operate their businesses and manage their properties as debtors in possession, but they would remain subject to the restrictions imposed by the Bankruptcy Code. It is not clear whether they could survive as going concerns in a protracted Chapter 11 Case. They could have difficulty sustaining the high costs and the erosion of market confidence that might result if they remain Chapter 11 debtors in possession. In addition, certain material financing arrangements, such as the DIP Financing Facility expires by its terms on January 31, 2005, or earlier under certain conditions. 143 B. ALTERNATIVE PLANS OF REORGANIZATION. If the Plan is not confirmed, the Proponents, or, after the expiration of the Proponents' exclusive period in which to propose and solicit a reorganization plan, any other party in interest in the Chapter 11 Case could propose a different plan or plans. Such plans might involve either a reorganization and continuation of the businesses of Avianca S.A. and Avianca, Inc, or an orderly liquidation of their assets, or a combination of both. There are a number of risk factors associated with any standalone plan of reorganization for the Debtors (hereinafter a "Standalone Plan") in addition to those discussed in Section VI above - "Certain Risk Factors To Be Considered." These additional risk factors for any Standalone Plan include the following: 1. Increased Risk of Law 550 Proceedings or Law 222 Proceedings in Colombia. Devising, negotiating, and implementing any Standalone Plan would take considerably more time. And with the passage of time, the risks increase that the Debtors' creditors will initiate in Colombia either reorganization proceedings under Colombian Law 550 or liquidation proceedings under Colombian Law 222. 2. Increased Risk of Inability to React to Actions of Competitors. The Debtors believe that there will be a significant increase in competition in the coming months. See Section VI.H above - "Certain Risk Factors To Be Considered - Airline Industry Competition." The Debtors' ability to effectively compete against new and existing competition is significantly driven by, among other criteria, financial stability. A Standalone Plan will significantly hamper the Debtors' ability to react to in this competitive environment. 3. Restricted Capital Expenditure. The Debtors' Joint Plan of Reorganization will substantially increase the Debtors' ability to make capital expenditures. In the absence of the Investments by the Equity Sponsors, the Debtors' ability to make investments that capitalize on market opportunities, cost reduction opportunities, and general improvements to product quality will be severely limited. 4. Significant Cash Impact. There are significant cash impacts to devising, negotiating, and implementing any Standalone Plan, including the following: (i) there will continue to be significant costs and expenses of advisors and professionals for the Debtors, as well as for the Official Committee of Unsecured Creditors; (ii) upon emergence from bankruptcy, the Debtors will be entitled to the return of significant deposits, which would be delayed by any proposed Standalone Plan; and (iii) without the new Investments by the Equity Sponsors, the Debtors' ability to negotiate for, and receive, improved terms on certain financing will be difficult, including both credit lines and payment terms with vendors. 144 5. Increased Risk of Labor Disputes. Although neither of the Debtors has experienced any major disruptions or disputes with its workforce in the recent past, the longer it takes the Debtors to emerge from bankruptcy, the risk increases that such disputes, including disputes with any certified collective bargaining representatives of the Reorganized Debtors' employees, will arise in the future. 6. Employees May Seek Other Opportunities. In the absence of the new Investments by the Equity Sponsors and in the case of a Standalone Plan, the likelihood is greater that the Debtors' employees may seek job opportunities with companies that are more financially stable. C. LIQUIDATION UNDER CHAPTER 7 OR CHAPTER 11. If no plan is confirmed, the Proponents' Chapter 11 Case could be converted to a case under Chapter 7 of the Bankruptcy Code. In a Chapter 7 case, a trustee or trustees would be appointed to liquidate their assets. It is impossible to predict precisely how the proceeds of the liquidation, if any, would be distributed to the respective Holders of Claims or Interests . However, the Proponents believe that Creditors would lose the substantially higher going concern value in a forced liquidation. In addition, the Proponents believe that in liquidation under Chapter 7, before Creditors received any distribution, additional administrative expenses involved in the appointment of a trustee or trustees and attorneys, accountants and other professionals to assist such trustees would cause a substantial diminution in the value of their combined Estate. The assets available for distribution to Creditors would be reduced by such additional expenses and by Claims, some of which would be entitled to priority, that would arise by reason of the liquidation and from the rejection of leases and other Executory Contracts in connection with the cessation of operations and the failure to realize the greater going concern value of the assets of their combined Estate. Avianca S.A. and Avianca, Inc. could also be liquidated pursuant to a Chapter 11 plan. In a liquidation under Chapter 11, the assets of their combined Estate could be sold in an orderly fashion that might be conducted over a more extended period of time than in a liquidation under Chapter 7. Thus, a Chapter 11 liquidation might result in larger recoveries than a Chapter 7 liquidation, but the potential delay in distributions could result in lower present values received and higher administrative costs. Because a trustee is not required in a Chapter 11 case, expenses for professional fees could be lower than in a Chapter 7 case, in which a trustee must be appointed. Any distribution to the Holders of Claims or Interests under a Chapter 11 liquidation plan potentially may be delayed substantially. The Proponents' liquidation analysis, prepared with its accountants and financial advisors, is premised upon a hypothetical liquidation in a Chapter 7 case and is attached as APPENDIX A to this Disclosure Statement. In this analysis, the Proponents have taken into account the nature, status and underlying value of their assets, the ultimate realizable value of their assets and the extent to which such assets are subject to liens and security interests. 145 The likely form of any liquidation would be the sale of individual assets. Based on this analysis, it is likely that a Chapter 7 liquidation of the assets of Avianca S.A. and Avianca, Inc. would produce less value for distribution to Creditors than the amount recoverable under the Plan. The Proponents believe that the recoveries that could reasonably be expected to be available in a Chapter 7 liquidation are not likely to afford Holders of Claims or Interests as great a realization potential as does the Plan. D. LIQUIDATION IN BANKRUPTCY PROCEEDINGS UNDER COLOMBIAN LAW. Law 222 sets forth the basic regulation for liquidation in bankruptcy procedures. According to the act any corporation or business venture that is unable to satisfy its debts as they become due is bound to file for bankruptcy before the Superintendence of Corporations. In a straight bankruptcy, the Superintendence appoints a liquidator to sell the company's properties and pay credits according to legal priorities. With the exception of intervention proceedings of financial institutions, the Superintendence of Companies is in charge of all liquidation in bankruptcy procedures in the events of insolvency of any legal person (corporations, foundations associations, etc.). These procedures may be initiated both at the request of the debtor or "ex officio" by the governmental agency when all the legal conditions are met. The Superintendence has broad administrative and even judicial powers to administer and control the procedure. All creditors (secured or not) will have to file a claim to be admitted to the bankruptcy proceedings. Accordingly, all third parties must present a proof of claim by means of a statement describing the nature of the obligation, the amount due and whether the claim is fully or partially secured. As a general rule, no payment will be made to creditors who did not file in the appropriate time. Creditors domiciled in a foreign country will have a longer term of 30 business days to be counted from the summons date to file their claims. All claims will have to be collected within the bankruptcy proceedings. Thus, no legal action may be initiated outside the bankruptcy forum. The situation of creditors in the context of a regular liquidation in a Colombian bankruptcy will be governed by the following principles: 1. Credit Priorities. The priorities for distribution are set forth both in the Colombian Civil Code (articles 2488 - 2511) and Law 222 of 1995. Pursuant to those rules, the liquidator must pay all administrative fees and expenses caused during the proceeding in advance to any distributions to other creditors. The remaining assets must be distributed pursuant to the following basic order: (i) First priority: all pension liabilities, all employment related credits and tax claims; (ii) Second priority: claims secured with pledge on the company's movables; (iii) Third priority: claims secured with mortgage (on the company's real estate); 146 (iv) Fourth priority: Not applicable to corporations; (v) Unsecured creditors without any legal priority. 2. Equity Distributions If there are any assets remaining after the payment of all classes of creditors, such assets must be distributed to the preferred shareholders and ordinary shareholders in that order. 3. Set Off Prohibition. A bankruptcy estate for the benefit of all creditors will be formed by the liquidator. Therefore, it is the liquidator's duty to collect all account receivables. As a general rule there will be no set off rights for any creditors. 4. Treatment of Collateral. If there are creditors in possession of any collateral on the insolvent entity's assets (i.e. pledges or mortgages) the concerned secured properties will be retained in the creditors' possession unless the Superintendent of Corporations imposes a turnover obligation on those creditors. In the latter occurrence, the assets will be integrated to the bankruptcy estate and, if necessary, sold for the benefit of all creditors pursuant to legal priorities. 5. Potential Claim of Secondary Liability against Corporate Parent. In a proceeding under Colombian Law 222 of 1995, a controlling stockholder of its insolvent Colombian subsidiary may be held liable for the indebtedness of the subsidiary, if it can be established (a) that the subsidiary's insolvency has been be caused by the controlling stockholder, (b) that there has been actual wrongdoing or negligence on behalf of the controlling corporation which has resulted in the subsidiary's insolvency, and (c) the controlling activity which caused the subsidiary's insolvency was undertaken for the benefit of the parent company or for the benefit of another subsidiary and against the interests of the insolvent enterprise. (Article 148 of Colombian Law 222 of 1995). Any liability imposed by reason of the foregoing is not direct, but rather is secondary, and, accordingly, in the context of a liquidation procedure, the controlling shareholder liability will be imposed only if there has been an actual default by the subsidiary and failure of the subsidiary to pay. Consequently, an insufficiency of assets must be fully established prior to any legal action against the controlling shareholder. The criteria to define the relationship of subordination between parent companies and their subsidiaries are set forth in Article 261 of the Commercial Code as amended by Law 222 of 1995 (Article 27). Although Article 148 of the aforesaid Colombian Law 222 sets forth a presumption that a controlled corporation has become insolvent owing to the controlling activities of its parent company, the parent may overcome the legal presumption by bringing forward evidence demonstrating that, notwithstanding the control, there was a different reason for the subsidiary's insolvency. Avianca's direct and indirect controlling stockholders have advised the Company that, if their activities in respect of the control of Avianca S.A. were to be challenged, they would vigorously defend against any claim 147 of secondary liability asserted pursuant to the foregoing authority. The Company can give no assurance with respect to the outcome of any such claim. XII. VOTING REQUIREMENTS. A. GENERALLY. On September 28, 2004, the Bankruptcy Court entered an order (the "Solicitation Procedures Order"), among other things, approving this Disclosure Statement, setting voting procedures, and scheduling the Confirmation Hearing for the Plan. A copy of the Confirmation Hearing Notice is enclosed with this Disclosure Statement. The Confirmation Hearing Notice sets forth in detail, among other things, the voting deadlines and objection deadlines with respect to the Plan. The Confirmation Hearing Notice and the instructions attached to the Ballot should be read in connection with this section of this Disclosure Statement. If you have any questions about (i) the procedure for voting your Claim or Interest or with respect to the packet of materials that you have received, (ii) the amount of your Claim or your Interest holdings, or (iii) if you wish to obtain, at your own expense, unless otherwise specifically required by Federal Rule of Bankruptcy Procedure 3017(d), an additional copy of the Plan, this Disclosure Statement or any appendices or exhibits to such documents, please contact either the U.S. Balloting Agent or the Colombian Balloting Agent as follows: U.S. BALLOTING AGENT: Smith Gambrell & Russell, LLP Suite 3100 1230 Peachtree Street, NE Atlanta, GA. 30309-3592 Attention: Ginny Smithson (Phone: +404-815-3506) COLOMBIAN BALLOTING AGENT: Aerovias Nacionales de Colombias S.A. Avianca Avenida Calle 26 No.92-30 Bogota O.C., Colombia Attention: Angela Maria Clavijo (Phone: +57-1-457-8662, Ext.2412 / 2727) The Bankruptcy Court may confirm the Plan only if it determines that the Plan complies with the technical requirements of Chapter 11 of the Bankruptcy Code and that the disclosures by the Proponents concerning the Plan have been adequate and have included information concerning all payments made or promised by the Proponents in connection with the Plan and the Chapter 11 Case. In addition, the Bankruptcy Court must determine that the Plan has been proposed in good faith and not by any means forbidden by law, and under Federal Rule of Bankruptcy Procedure 3020(b)(2), it may do so without receiving evidence if no objection is timely filed. 148 In particular, the Bankruptcy Code requires the Bankruptcy Court to find, among other things, that (a) the Plan has been accepted by the requisite votes of all Classes of impaired Claims and Interests unless approval will be sought under section 1129(b) of the Bankruptcy Code in spite of the nonacceptance by one or more such Classes, (b) the Plan is "feasible," which means that there is a reasonable probability that the Reorganized Debtors will be able to perform their obligations under the Plan and continue to operate their businesses without further financial reorganization or liquidation, and (c) the Plan is in the "best interests" of all Holders of Claims or Interests, which means that such Holders will receive at least as much under the Plan as they would receive in a liquidation under Chapter 7 of the Bankruptcy Code. The Bankruptcy Court must find that all conditions mentioned above are met before it can confirm the Plan. Thus, even if all the Classes of impaired Claims accept the Plan by the requisite votes, the Bankruptcy Court must still make an independent finding that the Plan satisfies these requirements of the Bankruptcy Code, that the Plan is feasible, and that the Plan is in the best interests of the Holders of Claims or Interests. UNLESS YOUR BALLOT IS TIMELY SUBMITTED TO THE U.S. BALLOTING AGENT ON OR BEFORE NOVEMBER 4, 2004, AT 5:00 P.M. (PREVAILING EASTERN TIME) OR TO THE COLOMBIAN BALLOTING AGENT ON OR BEFORE NOVEMBER 4, 2004, AT 5:00 P.M. (PREVAILING BOGOTA TIME), THE PROPONENTS MAY, IN THEIR SOLE AND ABSOLUTE DISCRETION, REJECT SUCH BALLOT AS INVALID AND, THEREFORE, DECLINE TO COUNT IT AS AN ACCEPTANCE OR REJECTION OF THE PLAN. IN NO CASE SHOULD A BALLOT BE DELIVERED TO THE COURT, THE PROPONENTS OR ANY OF THEIR ADVISORS, OR THE COMMITTEE OR ANY OF THEIR ADVISORS. SEE SECTION II.D HEREOF - "GENERAL VOTING PROCEDURES, BALLOTS AND VOTING DEADLINE." B. PARTIES IN INTEREST ENTITLED TO VOTE. Under section 1124 of the Bankruptcy Code, a class of claims or interests is deemed to be "impaired" under a plan unless (a) the plan leaves unaltered the legal, equitable and contractual rights to which such claim or interest entitles the holder thereof or (b) notwithstanding any legal right to an accelerated payment of such claim or interest, the plan cures all existing defaults (other than defaults resulting from the occurrence of events of bankruptcy) and reinstates the maturity of such claim or interest as it existed before the default. In general, a holder of a claim or interest may vote to accept or to reject a plan if (1) no party in interest has objected to such claim or interest and (2) the claim or interest is impaired by the plan. If the holder of an impaired claim or impaired interest will not receive any distribution under the plan in respect of such claim or interest, the Bankruptcy Code deems such holder to have rejected the plan. If the claim or interest is not impaired, the Bankruptcy Code deems that the holder of such claim or interest has accepted the plan and the plan proponent need not solicit such holder's vote. The Holder of a Claim or Interest that is "impaired" under the Plan is entitled to vote to accept or reject the Plan if (1) the Plan provides a distribution in respect of such Claim or Interest and (2) (a) the Claim or Interest has been scheduled by Debtor (and such Claim is not scheduled as disputed, contingent or unliquidated), (b) such Holder has timely filed a proof of Claim as to which no objection has been filed, or (c) such Holder has timely filed a motion pursuant to Federal Rule of Bankruptcy Procedure 3018(a) seeking temporary allowance of such Claim for voting purposes 149 only and either (i) the Debtor has not opposed the Motion and objected to the Claim or (ii) the Motion has been approved by the Court, in which case the Holder's vote will be counted only as approved by the Court. A vote may be disregarded if the Court determines, pursuant to section 1126(e) of the Bankruptcy Code, that it was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code. The Solicitation Procedures Order sets forth assumptions and procedures for tabulating Ballots, including Ballots that are not completed fully or correctly. C. ACCEPTANCE OR REJECTION OF THE PLAN. 1. Classes Entitled To Vote. Each Holder of an Allowed Claim in a Class of Claims against Avianca which may be impaired under the Plan, including any Holder of a Class 7 Claim, Class 8 Claim, or Class 10 Claim will be entitled to vote separately to accept or reject the Plan, except that Holders of Interests in Classes 11 and 12, who will not receive or retain any property under the Plan on account of such Interests, will not be entitled to vote separately to accept or reject the Plan, as such Classes are deemed not to have accepted the Plan pursuant to Section 1126(g) of the Bankruptcy Code. Each Holder of a Claim or Interest in a Class of Claims or Interests which is unimpaired under the Plan, including Class 1, Class 2, Class 3, Class 4, Class 6, Class 9, and Class 13 are deemed to have accepted the Plan pursuant to Section 1126(f) of the Bankruptcy Code. As discussed in Section V.C.4.(a)(ii) above, CAXDAC contends that, notwithstanding the Proponents' designation of Class 2 as Unimpaired under the Plan, Class 2 should be considered Impaired under the Plan. If the Bankruptcy Court, after notice and a hearing, determines that Class 2 is Impaired, then Class 2 shall be deemed not to have accepted the Plan, unless the Holder of the Class 2 Claims votes to accept the Plan. See Section V.C.4.(a)(ii) above--SUMMARY OF THE REORGANIZATION PLAN, Classification and Treatment of Claims and Interests, Treatment of Classified Claims and Interests, Unimpaired Classes of Claims and Interests, Class 2 (CAXDAC Claims). 2. Acceptance Requirement. Acceptance of the Plan by an impaired Class of Claims occurs when: (i) the Holders (other than any Holder designated under Section 1126(e) of the Bankruptcy Code) of at least two-thirds in amount of the Allowed Claims actually voting in such Class have voted to accept the Plan and (ii) the Holders (other than any Holder designated under Section 1126(e) of the Bankruptcy Code) of more than one-half in number of the Allowed Claims actually voting in such Class have voted to accept the Plan. Rejection of the Plan by an impaired Class of Claims occurs when the Plan fails to garner the affirmative vote of the Holders under either or both of the foregoing requirements. 3. Cramdown. In the event that any impaired Class or Classes of Claims or Interests does not accept the Plan, Avianca reserves the right to (a) request that the Bankruptcy Court confirm the Plan in accordance with Section 1129(b) of the Bankruptcy Code and/or (b) modify the Plan pursuant to the provisions of Section 13.8 of the Plan to provide treatment sufficient to assure that the Plan does not 150 discriminate unfairly, and is fair and equitable, with respect to the Class or Classes not accepting the Plan, and, in particular, the treatment necessary to meet the requirements of Sections 1129(a) and (b) of the Bankruptcy Code with respect to the rejecting Classes and any other Classes affected by such modifications. Section 1129(b) of the Bankruptcy Code provides that a plan can be confirmed even if it has not been accepted by all impaired classes, as long as at least one impaired class of Claims has accepted it. The Court may confirm a plan at the request of the debtor, notwithstanding the plan's rejection (or deemed rejection) by impaired classes, as long as such plan meets the "cram down" provisions of Section 1129(b) of the Bankruptcy Code and the Court finds that such plan "does not discriminate unfairly" and is "fair and equitable" as to each impaired class that has not accepted it. A plan does not discriminate unfairly within the meaning of the Bankruptcy Code if a dissenting class is treated equally with respect to other classes of equal rank. In the event that any impaired Class rejects the Plan, the Proponents reserve the right to (a) request that the Bankruptcy Court confirm the Plan in accordance with Section 1129(b) of the Bankruptcy Code and/or (b) modify the Plan pursuant to the provisions of Section 13.7 of the Plan to provide treatment sufficient to assure that the Plan does not discriminate unfairly, and is fair and equitable, with respect to the Class or Classes not accepting the Plan, and, in particular, the treatment necessary to meet the requirements of Sections 1129(a) and (b) of the Bankruptcy Code with respect to the rejecting Classes and any other Classes affected by such modifications. The courts have held generally that a plan "does not discriminate unfairly" if, upon consideration of all the facts and circumstances, the treatment of a dissenting class is substantially equal to the treatment of other similar classes, if any, and no class senior in distribution to the dissenting class receives a distribution in an amount which is in excess of the allowed claims or interest in such class. See e.g., In re John-Manville Corp., 68 B.R. 618 (Bankr. S.D.N.Y. 1986), , aff'd in part, reversed in part, 78 B.R. 407 (S.D.N.Y.1987), aff'd sub nom., Kane v. Johns-Manville Corp., 843 F.2d 636 (2d Cir.1988); In re Pine Lake VIII Apartment Co., 19 B.R. 819 (Bankr. S.D.N.Y. 1982). The Johns-Manville and Pine Lake decisions result from an interpretation of the legislative history of section 1129(b) wherein it is stated that "there is no unfair discrimination as long as the total consideration given all other classes of equal rank does not exceed the amount that would result from an exact aliquot distribution." H.R. Rep. No. 95-195, at 416 (1977), reprinted in 1978 U.S.C.C.A.N. 6372. Subsequent to such decisions, several courts addressing whether a plan that treated classes of equal legal status differently violated the Bankruptcy Code's prohibition against "unfair discrimination" determined that such treatment did not. Discrimination between classes has been found not to be unfair when: (i) there is a reasonable basis for discrimination; (ii) the discrimination is necessary to the reorganization; (iii) the discrimination is proposed in good faith; (iv) the degree of discrimination is proportional to its rationale, and (v) no class senior in distribution to the dissenting class receives a distribution in an amount that is in excess of the allowed claims or interests in such class. See In re Creekstone Apartments Assoc., L.P. v. Resolution Trust Co., 168 B.R. 639 (Bankr. M.D. Tenn. 1994); In re Kliegl Bros. Universal Elec. Stage Lighting Co., 149 B.R. 306 (Bankr. E.D.N.Y. 1992). In Creekstone Apartments, the debtor's plan proposed a ten percent distribution on Resolution Trust Corporation's ("RTC") deficiency claim and a one-hundred percent distribution on all other general unsecured claims. In re Creek stone Apartments Assoc., 151 L.P. v. Resolution Trust Co., 168 B.R. at 644. The court determined that the discrimination between classes of claimants was not unfair because the favorable treatment of general unsecured claims was necessary to maintain the debtor's ability to obtain trade credit from vendors and the discrimination was not meant to favor Insiders. Id. Similarly, in Kliegl Bros., the court found that a seventy-five percent distribution on union member wage claims versus fifteen percent on other unsecured claims was justified. In re Kliegl Bros. Universal Elec. Stage Lighting Co., 149 B.R. at 309. The court found that the mere suggestion that the union might strike and the debtor's critical need to continue to utilize the services of the union's members were enough justification for the larger distribution on the union's claims, even though the court recognized that "there [had] been no testimony to support such a finding." Id. In re Chateaugay Corp., 155 B.R. 625 (Bankr. S.D.N.Y. 1993), aff'd 177 B.R. 176 (S.D.N.Y. 1995), aff'd, In re Chateaugay Corp., 89 F.3d 942 (2d Cir. 1996), the debtor proposed to segregate and pay in full its unpaid worker's compensation claims, while Aetna, a creditor of equal legal status, would receive common stock after confirmation for its surety-reimbursement claims, which would not constitute payment in full. At confirmation, the debtor presented evidence that its employees perceived these benefits to be state law "entitlements," and that these benefits might be the only wage replacement that such employees would receive. 89 F.3d at 419. The debtor asserted that were it unable to satisfy workers' compensation obligations, the unions representing the employees would react so negatively as to jeopardize peaceful labor relations and thereby cast into doubt LTV's ability to secure sales contracts from customers. Id. Further, while the statement is dicta because the issue of unfair discrimination was not before the court, the court also concluded that the plan could have been confirmed over the objection of dissenting classes because: "Debtors have put forth a valid rationale for the disparate treatment of the individual workers' claims that does not apply to Aetna's claims and it is unlikely that Aetna can prove that the disparate treatment afforded the individual workers discriminates unfairly against Aetna." Chateaugay Corp., 155 B.R. at 635, n. 11. While Class 2, Class 7 and Class 8 are each composed of claims that are classified as general unsecured claims under the Bankruptcy Code, the three classes do not receive identical treatment under the Plan. The Class 2 claims, which constitute the CAXDAC Claims, are treated differently because the CAXDAC Claims are decreed by the Colombian government and because failure to satisfy in full the CAXDAC Claims may result in a Colombian government decision to restrict the Debtor's ability to operate as an airline carrier in Colombia, will jeopardize peaceful labor relations with its most critical union, the pilots, and cast considerable doubt on the Proponents' ability to continue to utilize the services of its pilots, whose pensions constitute the CAXDAC Claims. CAXDAC has advised the Debtor that CAXDAC believes that the Plan impermissibly classifies the CAXDAC Claims in Class 2, while Claims consisting of "land pension claims" are placed in Class 3 (General Pension Claims) or Class 6 (Other Secured Claims) and treats the Claims in Classes 3 and 6 more favorably than the CAXDAC Claims. CAXDAC has further advised the Debtor that it believes that such separate classification and treatment violates several provisions of the Bankruptcy Code as well as several provisions of Colombian law. Avianca believes not only that the classification of CAXDAC Claims in a class separate and distinct from the Claims in Classes 3 and 6 is appropriate, but also that different treatment of the Claims in 152 Classes 2, 3 and 6 is appropriate and mandated under the Bankruptcy Code and is in complete compliance with Colombian law. As a preliminary matter, Avianca believes, as set forth above, that Class 2 (CAXDAC Claims) is Unimpaired, see Section V.C.4.(a)(ii)--SUMMARY OF THE REORGANIZATION PLAN, Classification of Claims and Interests, Treatment of Classified Claims and Interests, Unimpaired Classes of Claims and Interests, Class 2 Claims (CAXDAC Claims), and, therefore, is conclusively presumed to have accepted the Plan. See 11 U.S.C. Section 1126(f). If Avianca's position that Class 2 (CAXDAC Claims) is sustained, then the Plan may be confirmed notwithstanding a finding of discrimination between Class 2 and Classes 3 and 6. See 11 U.S.C. Section 1129(b). Nevertheless, if CAXDAC were to prevail in its contention that Class 2 (CAXDAC Claims) is Impaired, then Avianca believes that the discrimination between the treatment of the Claims in Class 2 and the treatment of the Claims in Classes 3 and 6 would be determined by the Bankruptcy Court not to be "unfair discrimination" under section 1129(b) of the Bankruptcy Code and that the Plan would still be confirmed. First, Avianca believes that the treatment of the CAXDAC Claims, and the rights of CAXDAC and the obligations of Avianca with respect thereto, have been mandated by Colombian law, and that the laws and regulations that govern the CAXDAC Claims are separate and distinct from those that govern the "land pension claims." Although CAXDAC has advised Avianca that it believes that Article 10 of the Labor Code prohibits discrimination between the treatment of the CAXDAC Claims and the treatment of the "land pension claims," Avianca contends that Article 10 of the Labor Code discriminates only among individuals who are in equal positions, not between pensioners such as CAXDAC pensioners, who are creditors of CAXDAC, and land pensioners, who are creditors of Avianca. Likewise, while CAXDAC has advised Avianca that it believes that Article 53 of the Colombian Constitution prohibits discrimination between the CAXDAC Claims and the "land pension claims," Avianca believes that Article 53 guaranties only equal opportunities for workers and not identical treatment for workers who are not otherwise similarly situated. As the pensioners who are beneficiaries of the "land pensions" are creditors of Avianca, and the pensioners who are beneficiaries of the fund administered by CAXDAC are creditors of CAXDAC, Avianca believes that the two types of pensioners are not similarly situated. A bankruptcy court may find that the plan is "fair and equitable" with respect to a class of secured claims only if the plan provides (a) that each secured creditor in the class retains under the plan its liens on the property securing its claim and receives deferred cash payments totaling at least the allowed amount of its secured claim, of a value, as of the effective date of the plan, of at least the value of such secured creditor's interest in the estate's interest in such property, (b) for the sale, subject to Section 363(k) of the Bankruptcy Code, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and for the treatment of the liens on such proceeds as described in (a) above or (c) below, or (c) for the realization by the secured creditor of the indubitable equivalent of its secured claim. A bankruptcy court may find that a plan is "fair and equitable" with respect to a nonaccepting impaired class of unsecured claims only if (a) each impaired unsecured creditor in such class receives or retains under the plan property of a value, as of the effective date of such 153 plan, equal to the allowed amount of its claims, or (b) no holder of any claim or interest which is junior to the claims of such nonaccepting impaired class of claims receives or retains any property under the plan on account of its claim or interest. A bankruptcy court may find that a plan is "fair and equitable" with respect to a class of interests if (a) the plan provides that each holder of an interest of such class receives or retains on account of such interest property of a value, as of the effective date of the plan, equal to the greater of (i) the allowed amount of any fixed liquidation preference to which such holder is entitled, or (ii) any fixed redemption price to which such holder is entitled, or the value of such interest; or (b) no holder of any interest that is junior to the interests of such nonacceptng impaired class of interests receives or retains any property under the plan on account of its interest. The Coffee Federation, a holder of Class 11 Claims, shall, indirectly through the SPVs, become the beneficial owner of an issuance of Ordinary Stock under the provisions of the Plan, while members of Class 7 and Class 8, each a class of higher legal status, will neither receive nor retain under the Plan property of a value, as of the Effective Date of the Plan, equal to the allowed amount of such Claims. Because the Coffee Federation will receive the indirect benefits of such issuance because of its release and cancellation of its Claims against the Debtors and its $18.5 Million contribution to the Reorganized Debtors through the capitalization of the DIP Financing Facility, no holder of any claim or interest which is junior to the claims of such nonaccepting impaired class of claims receives or retains any property under the Plan on account of its claim or interest. The Proponents are aware of a decision by the Supreme Court in Bank of America Nat'l Trust and Sav. Assoc. v. 203 North LaSalle Street P'Ship, 526 U.S. 434, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999), wherein the court determined that a debtor's pre-bankruptcy equity-holders could not, over the objection of a senior class of impaired creditors, contribute new capital to receive ownership interests in the new entity if such opportunity is given exclusively to the old equity-holders without consideration of alternatives or market valuation. Id. at 437, 119 S.Ct. at 1414. The Proponents believe that the Plan is "fair and equitable" because the Debtors offered and held discussions with numerous potential investors, within and without the United States and Colombia. Some of the discussions resulted in offer sheets being distributed to the Debtors and the commencement of due diligence. The Proponents therefore believe that the Plan satisfies the "fair and equitable" test because such opportunity was not given exclusively to the old equity-holders without consideration of alternatives or exposure to market valuation. In the event one or more Classes of Claims or Interests reject(s) the Plan, the Bankruptcy Court will determine at the Confirmation Hearing whether or not the Plan is fair and equitable and whether or not the Plan discriminates unfairly against any rejecting impaired Class of Claims or Interests. 154 XII. CONCLUSION. A. HEARING ON AND OBJECTIONS TO CONFIRMATION. 1. Confirmation Hearing. The Confirmation Hearing for the Plan has been scheduled for November 16, 2004, at 10:00 a.m. (prevailing Eastern time). Such hearing may be adjourned from time to time by announcing such adjournment in open court, all without further notice to parties in interest, and the Plan may be modified by Avianca pursuant to section 1127 of the Bankruptcy Code prior to, during or as a result of such hearing, without further notice to parties in interest. 2. Date Set for Filing Objections to Confirmation of the Plan. The time by which all objections to Confirmation of the Plan must be filed with the Court and received by the parties listed in the Confirmation Hearing Notice has been set for November 4, 2004, at 5:00 p.m. (prevailing Eastern time). A copy of the Confirmation Hearing Notice is enclosed with this Disclosure Statement. B. RECOMMENDATION. The Plan provides for an equitable and early distribution to Creditors, preserves the value of the Proponents' businesses as going concerns, and preserves the jobs of the Proponents' employees. The Proponents believe that any alternative to Confirmation of the Plan, such as liquidation or attempts by another party in interest to file a plan, could result in significant delays, litigation and costs, as well as the loss of jobs by the Proponents' employees. Moreover, the Proponents believe that Creditors will receive greater and earlier recoveries under the Plan than those that would be achieved in liquidation or under an alternative plan. FOR THESE REASONS, THE PROPONENTS URGE YOU TO RETURN TIMELY RETURN YOUR BALLOT VOTING TO ACCEPT THE PLAN. Dated September 22, 2004. AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA AVIANCA, INC. Debtors and Debtors in Possession By: /s/Juan Emilio Posada ------------------------------------ Juan Emilio Posada, President Avianca S.A. By: /s/Juan Arbelaez ------------------------------------ Juan Arbelaez, General Manager Avianca, Inc. 155 SIGN HERE || Avianca S.A. and Avianca Inc. APPENDIX A ASSUMPTIONS AND FOOTNOTES TO ACCOMPANY HYPOTHETICAL LIQUIDATION ANALYSIS Avianca and its financial advisors have prepared this Hypothetical Liquidation Analysis (the "Liquidation Analysis" or the "Analysis") in connection with the Disclosure Statement. The Liquidation Analysis indicates the values, which may be obtained by classes of Claims upon disposition of assets, pursuant to a Chapter 7 liquidation and a simultaneous Colombian Law 222 of 1995 liquidation, as an alternative to continued operation of the business under the Plan. Accordingly, collateral values discussed herein may be different than amounts referred to in the Plan. The Liquidation Analysis is based upon the assumptions discussed below. All capitalized terms not underlined in this exhibit have the same meanings ascribed to them in the Disclosure Statement to which this exhibit is attached. The Liquidation Analysis has been prepared assuming that the Debtors' current Chapter 11 cases convert to Chapter 7 proceedings on September 30, 2004 (the "Liquidation Date") and its assets are liquidated. The Liquidation Analysis has also been prepared assuming that the Debtor's current Chapter 11 cases are simultaneously converted into a Chapter 7 case and a Colombian Law 222 of 1995 liquidation. The Liquidation Analysis is based on the audited book values as of April 30, 2004 for Avianca SA and the unaudited book values as of April 30, 2004 for Avianca, Inc., unless otherwise stated, and these book values are assumed to be representative of the Debtors' assets and liabilities as of the Liquidation Date. This analysis has been adjusted to reflect certain material changes that have or are anticipated to occur after April 30, 2004, which are described in detail below. In accordance with the Plan, the Analysis presents separately the assets and claims of each Debtor. The Analysis excludes the non-debtor entity, Sociedad Aeronautica de Medellin, S. A, that may also default and therefore liquidate in case of a liquidation of Avianca S.A. The Analysis represents an estimate of liquidation values and recovery percentages based upon hypothetical liquidations whereby a trustee would be appointed by the Court to convert assets into cash. The determination of the hypothetical proceeds from the liquidation of assets is an uncertain process involving the extensive use of estimates and assumptions that, although considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies beyond the control of the Debtors and its management. ACCORDINGLY, NEITHER THE DEBTORS NOR ITS ADVISORS MAKE ANY REPRESENTATION OR WARRANTY THAT THE ACTUAL RESULTS WOULD OR WOULD NOT APPROXIMATE THE ASSUMPTIONS REPRESENTED HEREIN. ACTUAL RESULTS COULD VARY MATERIALLY. In preparing the Liquidation Analysis, the Debtors have projected an amount of Allowed Claims based on a review of its scheduled claims. Additions were made to the scheduled claims to adjust for estimated claims related to post-petition obligations, and certain lease damage claims. No order or finding has been entered by the Bankruptcy Court estimating or otherwise fixing the amount of Claims at the projected amounts of Allowed Claims set forth in the Analysis. The estimate of the amount of Allowed Claims set forth in the Liquidation Analysis should not be relied upon for any other purpose, including, without limitation, any determination of the value of any distribution to be made on account of Allowed Claims under the Plan. The actual amount of Allowed Claims may be materially different than the amount of claims estimated in the Analysis. All operations of the Debtors are assumed to cease immediately upon liquidation. All Debtors would liquidate simultaneously and assets would be disposed primarily through sale, liquidation and/or termination, as appropriate. The Analysis does not contemplate the sale of any business as a going concern. The liquidation is assumed to occur over an 18 month period (the "Wind-down Period") to maximize recovery on all assets. The foreign operations outside of Colombia and the United States of the Debtors represent an immaterial portion of the Debtors' business. Therefore a detailed analysis of the recovery of assets and distribution has not been performed for each foreign jurisdiction. The Liquidation Analysis does not include recoveries resulting from any potential preference claims, fraudulent conveyance litigation, or other avoidance actions. 2 THE FOLLOWING NOTES DESCRIBE THE SIGNIFICANT ASSUMPTIONS REFLECTED IN THE LIQUIDATION ANALYSIS FOR THE DEBTORS. ASSET RECOVERY 1. Cash, Cash Equivalents and Short-Term Investments include cash in the Debtors' domestic and foreign bank accounts, cash equivalents, and investments that mature within 3 months. The estimated recovery for this category of assets is 100%. This is an estimate of cash at September 30, 2004 and it is assumed that the entire $18.5 million of the DIP Facility remains outstanding up to September 30, 2004. The Chapter 7 analysis assumes that all cash in the United States at time of case conversion would be kept in the United States and used to offset creditors in the Chapter 7 liquidation. The Law 222 of 1995 liquidation assumes that all cash in Colombia and other foreign bank accounts would be collected as part of the Law 222 liquidation and used to pay creditors in that liquidation. 2. Restricted Cash includes restricted use cash equivalents. In the Law 222 analysis, the primary component is cash collateral held in fiduciary trust payment mechanisms, which has been considered 100% collectible. The Chapter 7 analysis also includes the $12.0M of cash collateral held by International Air Transport Association ("IATA"), which was transferred by Avianca SA and Avianca Inc. to IATA from June 2003 to December 2003 as a guarantee for sold, but unflown tickets written by travel agencies with an affiliation to IATA. It is assumed that the cash held by IATA would not be collectible in a liquidation scenario. 3. Net Accounts Receivable includes amounts owed to the Debtors by various parties, categorized into two groups, airline ticket related and third party/other. Ticket related receivables include primarily receivables from domestic and international travel agencies, and receivables from IATA. In the Chapter 7 Liquidation Analysis, a majority of the accounts receivable is assumed to offset unused ticket claims by customers and is therefore netted against the unflown ticket liability. In the Colombian Law 222 of 1995 Liquidation Analysis, a majority of the Colombian accounts receivable is assumed collectible, while the international portion is netted against the unused ticket liability. Other Receivables include receivables for services provided to other airlines, outsourced maintenance and ground handling services; travel agency charge-backs; cargo; claims against insurance companies; and unbilled receivables. Recovery 3 values for these two types of receivables vary and were determined based on age and quality of the receivables, as well as an assessment of recovery. 4. Net ACES Receivable consist primarily of interline (related to air travel) amounts due from ACES. The probability of collection of this receivable is assumed to be zero. 5. Inventories primarily include aircraft and engine expendable and repairable parts, miscellaneous materials, miscellaneous supplies and miscellaneous hardware. This inventory does include a number of parts for aircraft fleet types that are no longer flown by Avianca. Thus, it is assumed that aircraft spare parts will have a relatively low recoverability based on the current demand for these materials in the market, the aircraft fleet type, and the cost of replacement. Estimated recovery for inventory-related items at a liquidating auction is between 5% and 15% of net book value based upon the relevant airline experience of the Debtors' and its advisors. 6. Prepaid Expenses and Other Current Assets include items such as fuel, insurance premiums, rent, taxes, and travel agency commissions for tickets written but not yet flown. Prepaid fuel recovery is estimated between 75% and 95%. Recovery for other prepaid expenses varies depending on the nature of the expense; however, the Debtors generally expect that the probability of recovering other prepayments would be minimal and is assumed to be zero. 7. Investments in Affiliated Companies is primarily comprised of the Company's investment in Avianca, Inc and the associated adjustment for inflation. 8. Deposits are comprised of funds held by aircraft lessors (maintenance reserves and deposits) and commercial cesantias paid to travel agents as is customary in Colombia. It is assumed that maintenance reserves will be applied to deficient return conditions and aircraft deposits will be applied to unpaid pre-petition rent. 9. Net Flight Equipment includes owned rotables and components on leased aircraft as well as fleet types which Avianca no longer flies. It is assumed that flight equipment and rotables will have a relatively low recoverability based on the current demand for these materials in the market, the aircraft fleet type, and the cost of replacement. It is 4 assumed that other carriers will continue to reduce capacity, which will continue to increase the market supply and reduce overall recovery values. Recovery for rotables is estimated at 10% of net book value based on the relevant airline experience of the Debtor's and its advisors. It is assumed that all leased aircraft would be rejected, resulting in a 0% recovery for leasehold improvements. 10. Net Ground Equipment includes ramp equipment, loading bridges, maintenance equipment, shop equipment, and motorized vehicles. Recovery value on ground equipment is estimated at 10% of net book value and is based on factors such as age and function of equipment, useful life, possible marketability, demand for the product and decreased value due to a bulk sale at a liquidating auction. 11. Net Other Fixed Assets is comprised of land, office buildings, office equipment, data processing equipment, leasehold improvements, furniture and artwork. A majority of the land and office buildings are pledged as collateral to the DIAN and therefore the chance of recovery is extremely low. Recovery value on Other Fixed Assets is based on factors such as age and function of equipment, useful life, possible marketability, demand for the product and decreased value due to a bulk sale at a liquidating auction. 12. Intangibles include tax operating loss carryforwards; the estimated brand value for the Company's courier business "Deprisa" and its tour operator "Deskubra"; capitalized software; goodwill related to the repeated capitalizations of SAM; and the value of the remaining land pension obligations that Valores Bavaria, S.A. has assumed. It is assumed that all of the individual Debtors will liquidate and therefore have no intangible value. In addition, the trade name and trademarks will have no recovery value. The software relates to various programs that the Debtors use to manage various parts of its business, including inventory, reservations and human resources. The capitalized software implementation costs are assumed to have no recovery value. It is assumed that the Law 222 of Colombia liquidator would recover the funds from Valores Bavaria SA to pay the remaining land pension liabilities. 5 CHAPTER 7 AND LAW 222 OF COLOMBIA COSTS Costs specifically related to the liquidation of individual assets are netted against its estimated gross liquidation value. All other costs associated with the liquidation will be included in Chapter 7 Costs or Law 222 Costs, which net against gross proceeds available for distribution. The Chapter 7 Costs include the following: 13. Chapter 7 Trustee Fee includes all fees paid in full to the Chapter 7 Trustee and the Law 222 of Colombia Trustee by each Debtor in accordance with the following table:
GROSS ASSET PROCEED VALUE TRUSTEE FEE AS A % (IN US$) OF TOTAL ASSETS -------------------------- ------------------ $ 0 - $ 4,999 25% $ 5,000 - $ 49,999 10% $ 50,000 - $ 999,999 5% $ 1,000,000 + 3%
14. Professional Fees include an estimate of $3.15 million of fees for professionals assisting in the wind-down of the estates (e.g., liquidation and recovery of assets, claims reconciliation, and litigation). The professional fees are allocated 50% to the Law 222 of Colombia liquidation and 50% to the Chapter 7 liquidation. 15. Wind-down Expenses include estimated expenses incurred during the Wind-down period and relate mainly to employee wages and benefits for personnel employed during the wind-down period, aircraft parking and transportation costs, auction fees, and general overhead costs. Wind-down expenses are estimated at $7.65 million assuming an 18 month Wind-down and are allocated equally among the two liquidations. CLAIMS - CHAPTER 7 AND LAW 222 OF COLOMBIA AVIANCA S.A. AND AVIANCA INC. CLAIMS 16. Secured Claims include the remaining value of the land pension liability of approximately $100.3 million which is guaranteed by Valores Bavaria S.A. 6 17. Master Trust Noteholder Claims is a secured claim equal to the liquidation value ascribed to the underlying collateral, which in this case was the cash on hand at the time of the filing of approximately $1.0 million. 18. DIP Facility Claim is the credit facility of $18.5 million put in place by the DIP Lenders (Valores Bavaria SA and Federacion Nacional de Cafeteros) shortly after the Company filed for bankruptcy protection. For purposes of this analysis, the repayment of the DIP Facility has been allocated 100% to Avianca S.A. 19. Chapter 11 Administrative Claims include expenses that have been incurred since the filing on March 21, 2003. Significant categories in this class are estimates for post-petition employee wages and benefits, trade payables, accrued aircraft rent, taxes, and claims associated with aircraft leases assumed post-petition which were subsequently rejected. The Analysis assumes that all aircraft leases have been assumed. These lease assumptions would give rise to administrative claims from being subsequently rejected. An estimate for both the Administrative and General Unsecured claim for rejected aircraft leases is included. Administrative claims that could arise from the rejection of previously assumed contracts or leases, other than aircraft and real property, is not contemplated in the Analysis. 20. Priority Claims represent wages, salaries, benefits, vacation, cesantias, etc. earned but unpaid at the filing date. This is limited to $4,650 per person. Priority Claims also include an estimated $1.0 million of expected priority tax claims. 21. CAXDAC Claims are considered to be pari passu to Priority Claims. 22. Aerocivil Claims consist of stamp taxes, passenger taxes and landing fees. 23. Non-Colombian General Unsecured Claims include an estimate for all allowed general unsecured claims for creditors outside of Colombia. Significant items are pre-petition trade payables, accrued aircraft rent, notes payable, aircraft and real property lease rejection claims. It is assumed that all contracts are rejected. Potential damage claims in connection with the rejection of any other contract or lease, including but not limited to rejection of claims associated with guarantees are excluded from this analysis. 7 24. Colombian General Unsecured Claims include an estimate for all allowed general unsecured claims for all Colombian creditors. Significant items are pre-petition trade payables, notes payable, and real property lease rejection claims. It is assumed that all contracts are rejected. Potential damage claims in connection with the rejection of any other contract or lease, including but not limited to rejection of claims associated with guarantees are excluded from this analysis. 25. Convenience claims include an estimate of all Colombian and Non-Colombian general unsecured claims under $15,000. 8 AVIANCA S.A. AND AVIANCA, INC. CHAPTER 7 - CONSOLIDATED LIQUIDATION ANALYSIS Unaudited All figures in 000's of US Dollars
LOWER LIQUIDATION VALUE HIGHER LIQUIDATION VALUE ---------------------------- ------------------------------- ESTIMATED ESTIMATED REALIZATION REALIZATION NOTES NET BOOK VALUE ESTIMATED VALUE RATE ESTIMATED VALUE RATE ----- -------------- --------------- ----------- --------------- ----------- Cash and Short Term Investments A $ 36,359 $ 36,359 100.0% $ 36,359 100.0% Restricted Cash B 12,000 0 0.0% 0 0.0% Net Accounts Receivables 18,691 2,804 15.0% 3,738 20.0% Affiliate Account Receivable 14,479 0 0.0% 0 0.0% Prepaid Expenses 224 0 0.0% 0 0.0% Deposits 2,796 246 8.8% 492 17.6% Net Other Fixed Assets 46 7 15.0% 7 15.0% ------------ ---------- ---- ----------- ---- TOTAL ASSETS/PROCEEDS $ 84,594 $ 39,416 46.6% $ 40,596 48.0% ============ Chapter 7 Trustee Fee (1,206) (1,241) Professional Fees (1,575) (1,575) Wind-down Expenses (3,825) (3,825) ---------- ----------- NET PROCEEDS AVAILABLE TO CREDITORS $ 32,810 $ 33,955 ========== ===========
RECOVERY TO CREDITORS LOWER LIQUIDATION VALUE --------------------- --------------------------------------------------- ESTIMATED ESTIMATED TOTAL PERCENTAGE OF ESTIMATED ALLOWED AMOUNT PAID TO ALLOWED CLAIM NOTES CLAIM CREDITORS PAID ----- ----------------- -------------- ------------- NET PROCEEDS AVAILABLE TO CREDITORS $32,810 Master Trust Note Claims 1,000 (1,000) 0.0% Secured Claims $100,299 0 0.0% Priority DiP Claims 18,500 (18,500) 100.0% Chapter 11 Administrative Claims 204,152 (14,310) 7.0% Priority Claims 2,987 0 0.0% CAXDAC Claims 116,840 0 0.0% Unsecured Pension Claims 21,447 0 0.0% Aerocivil Claims 3,786 0 0.0% NET PROCEEDS AVAILABLE TO GENERAL UNSECURED CREDITORS Non-Colombian Unsecured Creditors 128,242 0 0.0% Colombian Unsecured Creditors 38,533 0 0.0% Convenience Claims 2,636 0 0.0% SAM Claims 22,776 0 0.0% -------- TOTAL UNSECURED CLAIMS $192,187 ======== A - Assumed Cash Balance at September 30,2004 B - Adjusted Deposits equal IATA deposit of $12.0M RECOVERY TO CREDITORS HIGHER LIQUIDATION VALUE --------------------- ---------------------------------------------------- ESTIMATED ESTIMATED TOTAL PERCENTAGE OF ESTIMATED ALLOWED AMOUNT PAID TO ALLOWED CLAIM CREDITORS CLAIM PAID ----------------- --------------- -------------- NET PROCEEDS AVAILABLE TO CREDITORS $ 33,955 Master Trust Note Claims 1,000 (1,000) 100.0% Secured Claims $100,299 0 0.0% Priority DiP Claims 18,500 (18,500) 100.0% Chapter 11 Administrative Claims 204,152 (15,455) 7.6% Priority Claims 2,987 0.0% CAXDAC Claims 116,840 0.0% Unsecured Pension Claims 21,447 Aerocivil Claims 3,786 0.0% NET PROCEEDS AVAILABLE TO GENERAL UNSECURED CREDITORS Non-Colombian Unsecured Creditors 128,242 0 0.0% Colombian Unsecured Creditors 38,533 0 0.0% Convenience Claims 2,636 0 0.0% SAM Claims 22,776 0 0.0% -------- TOTAL UNSECURED CLAIMS $192,187 ======== A - Assumed Cash Balance at September 30,2004 B - Adjusted Deposits equal IATA deposit of $12.0M
9 PERCENTAGE OF RECOVERY TABLE FOR DISCLOSURE STATEMENT In USD Millions
ESTIMATED ESTIMATED LIQUIDATION ESTIMATED LIQUIDATION ESTIMATED PLAN CLAIM RECOVERY UNDER CHAPTER 7 RECOVERY UNDER LAW 222 RECOVERY AMOUNT ------------------------ ---------------------- -------------- ------ Amount Percentage Amount Percentage Amount Percentage ------ ---------- ------ ---------- ------ ---------- Class 1 and Unclassified Wind-down expenses $ 16.2 $6.6 40.7% $9.6 59.3% N/A N/A Super priority and other administrative claims 225.6 32.8 14.5% 9.3 4.1% $225.6 100.0% Class 2 (CAXDAC Claims) 116.8 0.0 0.0% 0.0 0.0% 116.8 100.0% Class 3 (General Pension Claims) 21.4 0.0 0.0% 21.4 100.0% 21.4 100.0% Class 4 (Aerocivil Claims) 3.8 0.0 0.0% 0.0 0.0% 3.8 100.0% Class 5 (Master Trust Note Claims) Intentionally Omitted Class 6 (Other Secured Claims) 100.3 0.0 0.0% 100.3 100.0% 100.3 100.0% Class 7 (Non-Colombian-Held General Unsecured Claims) (a) 102.5 0.0 0.0% 0.0 0.0% 36.7 35.7% Class 8 (Colombian-Held General Unsecured Claims) (a) 25.7 0.0 0.0% 0.0 0.0% 9.2 35.7% Class 9 (Convenience Class Claims) 2.6 0.0 0.0% 0.0 0.0% 2.6 100.0% Class 10 (Intercompany Claims) 22.8 0.0 0.0% 0.0 0.0% 22.8 100.0% Class 11 (Preferred Stock Interests) N/A 0.0 N/A 0.0 N/A N/A Class 12 (Ordinary Stock Interests) N/A 0.0 N/A 0.0 N/A N/A Class 13 (Avianca, Inc. Stock Interests) N/A 0.0 N/A 0.0 N/A N/A
Note: (a) The percentage of recovery for Class 7 and Class 8 is calculated using a 10.0% discount rate to discount the value of the future payments to the creditors provided for by the Initial Fixed Payment, Dollar Notes, and Class 8 Trust Certificates as defined in the Plan. The percentage of recovery for Class 7 and Class 8 does not include an estimate of (i) the value of the Contingent Payment Rights, (ii) the Excess Cash Payment or (iii) any Incremental Compliance Costs. The recovery for Class 7 and Class 8 would be 43.8% if the estimated value of the Contingent Payment Rights using the Financial Projections set forth in Appendix C (which do not include an estimate of Incremental Compliance Costs) were included. The company does not currently anticipate that the Excess Cash Payment, if any, will be material. 10 APPENDIX B SIGN HERE || FINANCIAL PROJECTIONS The Debtors believe that the Plan meets the Bankruptcy Code's feasibility requirement that Plan confirmation is not likely to be followed by liquidation, or the need for further financial reorganization of the Debtors or any successor under the Plan. In connection with the development of the Plan, and for the purposes of determining whether the Plan satisfies this feasibility standard, the Debtors analyzed their ability to satisfy their financial obligations while maintaining sufficient liquidity and capital resources. In this regard, the Management of the Debtors developed and refined the Business Plan and prepared financial projections (the "Projections") for the years ending December 31, 2004 through December 31, 2011 (the "Projection Period"). The Debtors do not, as a matter of course, publish their business plans and strategies or projections or their anticipated financial position or results of operations. Accordingly, the Debtors do not anticipate that they will, and disclaim any obligation to, furnish updated business plans or projections to holders of Claims or Interests after the Confirmation Date, or to include such information in documents required to be filed with the Securities and Exchange Commission (if any) or otherwise make such information public. ALTHOUGH EVERY EFFORT WAS MADE TO BE ACCURATE, THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS OR IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES OF NEITHER COLOMBIA NOR THE UNITED STATES OF AMERICA, THE FINANCIAL ACCOUNTING STANDARDS BOARD, OR THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION REGARDING PROJECTIONS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN AUDITED OR REVIEWED BY THE REORGANIZED DEBTORS' INDEPENDENT CERTIFIED ACCOUNTANTS. WHILE PRESENTED WITH NUMERICAL SPECIFICITY, THE PROJECTIONS ARE BASED ON A VARIETY OF ASSUMPTIONS, WHICH MAY NOT BE REALIZED, AND ARE SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC, AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, WHICH ARE BEYOND THE CONTROL OF THE DEBTORS. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY BY ANY OF THE REORGANIZED DEBTORS, OR ANY OTHER PERSON, THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE PRESENTED IN THE PROJECTIONS. HOLDERS OF CLAIMS AND INTERESTS MUST MAKE THEIR OWN DETERMINATIONS AS TO THE REASONABLENESS OF SUCH ASSUMPTIONS AND THE RELIABILITY OF THE PROJECTIONS IN REACHING THEIR DETERMINATIONS OF WHETHER TO ACCEPT OR REJECT THE PLAN. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: These Projections contain statements which constitute "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. "Forward-looking statements" in these Projected Financial Statements include the intent, belief or current expectations of the Debtors and members of their Management teams with respect to the timing of, completion of and scope of the current restructuring, reorganization plan, bank financing, and debt and equity market conditions and the Debtors' future liquidity, as well as the assumptions upon which such statements are based. While Management believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from these contemplated by such forward-looking statements. Important factors currently known to Management that could cause actual results to differ materially from those contemplated by the forward-looking statements in these Projected Financial Statements include, but are not limited to, further adverse developments with respect to the Debtors' liquidity position or operations of the various businesses of the Reorganizing Debtors and their non-Debtor Affiliates, or adverse developments in the timing or results of the Debtors' current strategic business plan (including the timeline to emerge from Chapter 11), the ability of the Debtors to realize the anticipated general and administrative expense savings and overhead reductions presently contemplated, the level and nature of any restructuring and other one-time charges, and the possible negative effects that could result from potential economic and political factors around the world in the various markets in which the Reorganizing Debtors operate. SUMMARY OF SIGNIFICANT ASSUMPTIONS The Projections were developed by the Management of the Debtors and are based on: a) current and projected market conditions in each of the Debtors' respective markets; b) the ability to maintain sufficient working capital to self-fund operations; c) an investment of $44.5 million from OceanAir and an investment of $18.5 million from the Coffee Federation as the proposed Plan of Reorganization equity sponsors; d) no material changes to the various marketing agreements with other United States based and Latin American based airlines; and e) confirmation of the Plan. The financial projections for the year ending 2004 include results from both the post-petition period and the post-emergence period (confirmation is assumed to be September 20, 2004 and expected emergence on September 30, 2004). The Debtors' flight operations encompass all of the jet and turboprop operations of Avianca as well as their 94.9% owned subsidiary SAM together hereafter referred to as "Avianca" or "the Company". The Projections assume an operating fleet plan of 35 aircraft for Avianca's operations 2004 through 2010, of which 4 aircraft are Boeing 767-200ER, one aircraft is a Boeing 767-300ER, 5 aircraft are Boeing 757-200, 15 aircraft are McDonnell Douglas 83, and 10 aircraft are Fokker 50. Operating Revenues PASSENGER TRANSPORTATION REVENUE: The Debtors' total passenger revenue is projected to decrease from $550.4 million in 2004 to approximately $524.2 million in 2005. The decrease is due to a forecasted increase in competition from existing carriers and start-up carriers which have begun the processes of applying for route authorities and sourcing aircraft. In 2006, Avianca projects an increase in passenger revenue over and above 2005 levels, but below those revenues projected for 2004. Avianca anticipates that either the increased competition on certain routes will force other carriers to leave the markets or that the Debtors would find other equivalent uses for their aircraft in 2006. OTHER: Other Revenue is primarily comprised of revenue from expired tickets, ticket penalties, and the various other outsourcing services that the Debtors offer to other airlines. Other revenue is estimated to increase by approximately $7.6 million over the Projection Period as a result inflation. Operating Expenses PESO BASED COSTS: The Debtors consider the expense lines of operating personnel, on board services, airport facilities, other operational costs, sales expenses, and administrative expenses to be primarily peso based costs. The Debtors have assumed an estimated average annual inflation of 2.5% on 2006 through 2011 costs for peso based costs. AVIATION FUEL: The crude oil price per barrel is built off of the May 11, 2004 New York Mercantile Exchange West Texas Intermediate crude prices. The average price per barrel assumed in 2006 and beyond in the model is $32.98 (excluding taxes). AIRCRAFT AND OTHER RENT: The Debtors have finalized the restructuring of all of their aircraft obligations. The Projections assume that aircraft fleet size, composition, and individual aircraft lease rates remain constant throughout the Projection Period. The restructured obligations primarily consist of a) a modification to existing lease agreements or b) entry into new aircraft lease agreements. Effective monthly rental rates represent a significant reduction in the pre-negotiated rates and are comparable with current market rates. AIRCRAFT MAINTENANCE: Maintenance costs are assumed to increase by approximately $20.3 million by 2011 as a result of fleet aging and replacement aircraft being introduced into the fleet as leases expire. It is assumed that maintenance materials costs will increase by approximately 3.5% annually. TAXES: Tax rates of 35% are assumed for Colombian federal taxes. Avianca SA has a large net operating loss tax carryforward that will effectively shield the company from Colombian federal income taxes through 2009. Balance Sheet Assumptions WORKING CAPITAL: Working capital is comprised of accounts receivable, prepaid expenses, accounts payable and deferred income. Working capital balances are consistent with historical levels. FIXED ASSETS: The increases to flight equipment and ground equipment over the Projection Period are principally associated with improvements in leasehold improvements on the fleet and with the addition of systems necessary to further automate customer service and to safeguard the Company's information. GOODWILL: Intangibles decrease over the course of the projections due to the amortization of the Deskubra and Desprisa trademarks and the amortization of the purchased goodwill from SAM, which is partially offset by the projected increase in the value of the receivable from Valores Bavaria to pay the land pension liability. DEBT STRUCTURE: Upon emergence, the Debtors' long-term debt structure is assumed to consist of notes as described in the Plan to provide for recovery of the unsecured creditors and annual payments to CAXDAC as required by applicable Colombian law. EQUITY: The proposed Plan of Reorganization equity sponsors, OceanAir and the Coffee Federation, are assumed to invest $63.0 million as defined in section 7.4 of the Plan. Cash Flow Assumptions CASH FLOW FROM OPERATING ACTIVITIES: For the Projection Period, cash flow from operating activities is projected to decrease from approximately $71.4 million in 2004 to $52.7 million of positive cash flow in 2011. Decreased cash flow is a result of the flat line operating assumptions in the Projections coupled with the loss of the current tax shield driven by the company's prior losses. CASH FLOW FROM INVESTING ACTIVITIES: Cash flow from investing activities is projected to generate a use of cash of approximately $169.5 million over the Projection Period. Leasehold improvements on rented flight equipment and purchases and installations of systems comprise the majority of investing activity payments. CASH FLOW FROM FINANCING ACTIVITIES: Cash flow from financing activities is projected to generate a use of cash of approximately $180.8 million over the Projection Period. Payment on the notes to unsecured creditors, continuing service of the CAXDAC obligations and payment of Administrative Claims on aircraft leases comprise the majority of the financing activity. AVIANCA SA AND AVIANCA, INC. PROJECTED CONSOLIDATED INCOME STATEMENT (USD MILLIONS)
Projected Projected Projected Projected Projected Projected Projected Projected FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 --------- --------- --------- --------- --------- --------- --------- --------- Operating Revenues: International Passenger Transportation $314.1 $312.7 $327.9 $327.9 $327.9 $327.9 $327.9 $327.9 Domestic Passenger Transportation 236.3 211.5 203.3 208.4 213.6 219.0 224.4 230.0 Cargo and Freight 50.6 51.6 52.4 53.7 55.0 56.4 57.8 59.3 Other 63.7 62.4 63.1 64.7 66.3 67.9 69.6 71.4 ------ ------ ------ ------ ------ ------ ------ ------ TOTAL OPERATING REVENUES $664.8 $638.2 $646.7 $654.7 $662.8 $671.2 $679.8 $688.6 Operating Expenses: Personnel Costs 56.3 56.8 56.3 57.8 59.2 60.7 62.2 63.7 Aircraft and Other Rent 45.2 45.5 45.5 45.5 45.5 45.5 45.5 45.5 Aircraft Insurance 14.5 14.0 14.3 14.3 14.3 14.3 14.3 14.3 Airport Facilities 63.0 62.9 63.7 65.3 67.0 68.6 70.4 72.1 Fuel 117.0 112.8 112.8 112.8 112.8 112.8 112.8 112.8 Maintenance 77.5 79.9 82.3 85.2 88.1 91.2 94.4 97.7 Onboard Services 12.2 11.4 12.0 12.3 12.6 12.9 13.2 13.5 Other 45.2 45.0 45.6 46.8 47.9 49.1 50.4 51.6 Sales 103.8 101.8 101.7 104.0 106.3 108.7 111.2 113.7 Administrative Expenses 53.2 54.0 44.6 45.7 46.9 48.0 49.2 50.5 Depreciation and Amortizations 40.4 19.0 23.6 26.4 28.5 28.7 30.2 25.1 ------ ------ ------ ------ ------ ------ ------ ------ TOTAL OPERATING EXPENSES $628.3 $603.2 $602.5 $615.9 $629.1 $640.6 $653.7 $660.5 OPERATING INCOME/(LOSS) $ 36.5 $ 35.0 $ 44.2 $ 38.7 $ 33.7 $ 30.6 $ 26.1 $ 28.1 Other Income (Expense): Net Interest Income (Expense) 0.8 0.6 1.1 2.0 3.1 3.8 3.8 3.7 Net Currency Adjustments (12.1) 3.4 2.3 3.9 5.1 6.2 7.1 7.3 Pension Provisions (12.2) (19.7) (20.7) (20.4) (20.3) (20.8) (19.9) (20.6) Inflation Adjustments 11.7 3.5 3.8 1.8 (0.0) (1.7) (2.3) (2.6) Other 104.5 (1.5) (1.5) (1.5) (1.5) (10.9) (10.4) (1.5) ------ ------ ------ ------ ------ ------ ------ ------ PRE-TAX INCOME $129.3 $ 21.3 $ 29.3 $ 24.5 $ 20.1 $ 7.3 $ 4.4 $ 14.4 Income Tax Provision (1.1) (0.3) (0.3) (3.0) (2.3) (2.9) (4.8) (7.2) ------ ------ ------ ------ ------ ------ ------ ------ NET INCOME $128.2 $ 21.0 $ 29.0 $ 21.6 $ 17.8 $ 4.4 ($ 0.4) $ 7.2 ------ ------ ------ ------ ------ ------ ------ ------
AVIANCA SA AND AVIANCA, INC. PROJECTED CONSOLIDATED BALANCE SHEET (USD MILLIONS)
Projected Projected Projected Projected Projected Projected Projected Projected FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 --------- --------- --------- --------- --------- --------- --------- -------- Assets: Current Assets: Cash $ 63.7 $ 64.9 $ 71.4 $ 80.0 $ 90.6 $108.1 $113.9 $117.9 Deposits and Others 0.0 1.4 2.8 7.7 9.5 9.5 9.5 9.5 Accounts Receivables 24.4 21.3 23.5 22.7 22.0 21.3 20.7 20.2 Intecompany Receivable 14.2 12.9 12.5 11.9 11.3 10.7 10.2 9.7 Inventories 16.4 17.1 18.6 19.3 19.9 20.6 21.4 22.1 Prepayments & Others 20.6 16.9 14.1 9.5 6.5 3.3 0.0 0.0 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL CURRENT ASSETS $ 139.3 $134.5 $ 143.0 $151.1 $159.9 $173.6 $175.6 $179.3 Long Term Assets: Long term Investments 7.8 7.1 6.9 6.5 6.2 5.9 5.6 5.3 Appraisals & Others 20.8 18.9 18.4 17.5 16.6 15.7 14.9 14.2 Long term Receivables(Deposits) 31.0 31.1 31.8 31.8 31.8 31.8 31.8 31.8 PP&E net 28.1 52.1 67.4 72.5 76.9 83.3 88.4 93.9 Intangibles 177.7 137.5 136.0 131.2 126.4 121.5 116.5 111.4 Deferred Investments 26.2 23.1 21.5 19.4 17.2 15.0 12.8 12.1 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL LONG TERM ASSETS $ 291.6 $269.9 $ 282.0 $278.9 $275.1 $273.1 $270.0 $268.6 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL ASSETS $ 431.0 $404.3 $ 425.0 $430.0 $435.0 $446.7 $445.6 $448.0 ======== ====== ======= ====== ====== ====== ====== ====== Liabilities and Stockholders Equity (Deficit): Current Liabilities: Labor Liabilities $ 16.9 $15.7 $ 15.4 $ 15.8 $ 16.2 $ 16.6 $ 17.0 $ 17.4 Accounts Payable 76.1 60.2 56.0 51.0 47.9 45.0 42.2 43.3 Taxes Payable 26.6 26.4 28.2 30.0 31.4 32.5 34.9 37.8 Deferred Income 35.2 33.1 35.5 35.9 36.4 36.8 37.3 37.8 Intercompany Payable 36.6 33.3 32.4 30.7 29.1 27.7 26.3 24.9 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL CURRENT LIABILITIES $ 191.5 $168.8 $ 167.4 $163.4 $160.9 $158.5 $157.6 $161.5 Long Term Liabilities Prepetition Claims 45.8 34.7 22.5 10.5 0.0 9.4 8.9 0.0 Administrative Claims/DiP Financing 1.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Pension Liabilities 156.0 146.3 148.0 145.3 142.5 139.7 136.8 133.8 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL LIABILITIES $ 395.0 $349.8 $ 337.8 $319.2 $303.5 $307.6 303.3 $ 295.3 Shareholders Equity (Deficit): Common Stock 3.1 2.9 2.8 2.6 2.5 2.4 2.3 2.1 Legal Reserve 1.6 1.5 1.4 1.3 1.3 1.2 1.1 1.1 Additional Paid-In Capital 377.0 342.2 333.2 316.2 300.1 284.8 270.3 256.5 Equity Inflation Adjustment (11.9) (7.6) (3.1) 3.7 11.9 21.3 30.8 40.0 Assets Appraisals & Others 21.0 19.1 18.5 17.6 16.7 15.9 15.0 14.3 Accumulated Losses (482.0) (353.9) (332.9) (303.9) (282.3) (264.5) (260.1) (260.5) Net Income (Losses) 128.2 21.0 29.0 21.6 17.8 4.4 (0.4) 7.2 Cumulative Translation Adjustment (0.0) 0.0 0.0 0.1 0.1 0.1 0.1 0.1 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL STOCKHODERS EQUITY (DEFICIT) $ 35.9 $ 54.5 $ 87.2 $110.9 $131.5 $139.2 $142.2 $152.7 -------- ------ ------- ------ ------ ------ ------ ------ TOTAL LIABILITIES & STOCKHOLDERS EQUITY $ 431.0 $404.3 $ 425.0 $430.0 $435.0 $446.7 $445.6 $448.0 -------- ------ ------- ------ ------ ------ ------ ------
AVIANCA SA AND AVIANCA, INC. PROJECTED CONSOLIDATED CASH FLOWS (USD MILLIONS)
Projected Projected Projected Projected Projected Projected Projected Projected FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 --------- --------- --------- --------- --------- --------- --------- -------- CASH FLOW FROM OPERATING ACTIVITIES $ 71.4 $ 42.6 $ 64.2 $ 63.7 $ 61.3 $ 57.5 $ 53.9 $ 52.7 Cash Flow From Investing Activities Capital Expenditures (6.3) (34.7) (26.7) (20.2) (21.2) (23.0) (23.0) (23.0) Others 1.2 (2.9) (2.8) (6.3) (3.3) (1.5) (1.5) (1.5) ------- ------- ------- ------- ------- ------- ------- ------ NET CASH FLOW PROVIDED BY (USED FOR) ($ 5.1) ($ 37.5) ($ 29.5) ($ 26.5) ($ 24.5) ($ 24.5) ($ 24.5) ($ 24.5) INVESTING ACTIVITIES Cash Flow From Financing Activities CAXDAC (8.1) (15.3) (14.7) (15.5) (15.7) (16.4) (15.7) (16.6) Principal Portion of Prepetition Debt (21.4) (11.1) (12.2) (12.0) (10.5) 0.0 (8.9) (8.4) Postpetition Debt/Ad-Claims (4.9) (1.8) 0.0 0.0 0.0 0.0 0.0 0.0 Financial Income - Interest 0.2 0.4 0.6 0.6 0.7 0.8 0.9 1.0 Interest Payments (1.4) (3.4) (2.7) (1.8) (0.7) 0.0 0.0 0.0 New Investments - Cash 16.3 27.3 0.9 0.0 0.0 0.0 0.0 0.0 Dividend to Investors 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ------- ------- ------- ------- ------- ------- ------- ------ NET CASH PROVIDED BY (USED FOR) ($ 19.4) ($ 3.9) ($ 28.2) ($ 28.7) ($ 26.1) ($ 15.5) ($ 23.6) ($ 24.1) FINANCING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND SHORT TERM INVESTMENTS 46.9 1.2 6.5 8.6 10.6 17.5 5.8 4.1 CASH AND SHORT TERM INVESTMENTS AT BEGINNING OF PERIOD 16.8 63.7 64.9 71.4 80.0 90.6 108.1 113.9 ------- ------- ------- ------- ------- ------- ------- ------ CASH AND SHORT TERM INVESTMENTS AT END OF PERIOD $ 63.7 $ 64.9 $ 71.4 $ 80.0 $ 90.6 $ 108.1 $ 113.9 $117.9 ------- ------- ------- ------- ------- ------- ------- ------
APPENDIX C SIGN HERE || JAN-MAY 2004 MD&A (AV-MM) MARKET DOMESTIC MARKET: AV-MM market share has shown a slight recovery during 2004 after significant decreases during last six months of 2003. The company attributes the decrease in market share primarily to two major events: Routes rationalization (reduction of non-profitable routes) and the pilots' "Flying by the book" operation during late November and early December last year. AV-MM had recovered 300 basis points of market share until February 2004. Aerorepublica had sustained growth in the domestic market during 2003 but this growth started to reverse during the first two months of 2004. West Caribbean and Aires best capitalized on the growth during this period. During March and April 2004, AV-MM slowed down its recent growth trend, reducing its market participation to its lowest point during 2004. May shows an important recovery regarding domestic market share, which affected mainly Aerorepublica, leaving AV-MM with an cumulative average of 47.7% domestic market share up to May 2004. The routes that presented the largest growth during May compared to previous month were: MDE/CLO, CTG/CLO, MDE/BOG and MZL/BOG, while routes like PSO/BOG, MDE/SMR, MTR/BOG and CLO/PSO drove the domestic share reduction. [LINE GRAPH] INTERNATIONAL MARKET: Alianza Summa's international market share had dropped significantly in 2003 due to the Aces liquidation because other air lines picked up an important amount of the market on the former Aces routes. AV-MM market share was stable during Jan-Feb 2004 but has had an important increase starting March since it has been able to capture an important part of VX business and has also taken advantage of the international market growth (13%). AV-MM is getting close to reach 2003 market share numbers. AV-MM's market share has grown 180 b.p. since January, while other international airlines are also taking advantage of the market increase and are planning to increase capacity during second semester of 2004. The routes that presented the best performance during this period were: BUE/CLO, SCL/BOG, MIA/BAQ, SAO/BOG and MIA/CLO. [LINE GRAPH] OPERATIONAL STATISTICS (JAN-MAY 2004) OPERATIONAL STATISTICS
Actual Budget Var Exec (%) ------ ------ --- -------- TOTAL CIA ASK'S 3.813.082 3.763.376 49.706 101,3% RPK'S 2.433.000 2.257.577 175.424 107,8% LOAD FACTOR 63,8% 60,0% 3,8% 106,4% RASK (USD cents) 5,9 5,4 0,5 108,5% YIELD (USD cents) 9,3 9,1 0,2 102,0%
OPERATIONAL STATISTICS
Actual Budget Var Exec (%) ------ ------ --- -------- TOTAL CIA PAX REVENUES 225.504 205.042 20.462 110,0% OFFER SEATS TOTAL 3.781.974 3.759.425 22.549 100,6% REVENUE PAX TOTAL 2.263.932 2.228.259 35.673 101,6% SEAT FACTOR 59,9% 59,3% 0,6% 101,0% AVERAGE FARE (USD) 59,6 54,5 5,1 109,3%
Operational results for this period have significantly outperformed the budget. Revenue Passengers transported were 1.6% above budget, with most of the increase in international passengers, while offered seats were up only 0.6%. RPK's were significantly better (7.8%) than budgeted, while ASK's increased only 1.3%. Together, Load Factors improved from a budgeted 60.0% to an actual 63.8%. Pricing had also a very good performance mainly in the international market bolstering the average fare 9.3% above the budgeted average fare, which also drove RASK and Yield above budget targets. OPERATING PERFORMANCE INDICATORS COMPLETION RATE (WITHIN 48 HOURS)
JAN FEB MAR APR MAY JUN --- --- --- --- --- --- ACTUAL 97,1% 97,5% 97,9% 97,0% 97,0% 97,8% BUDGET 97,3% 96,2% 96,5% 96,7% 97,7% 96,8% 2003 97,2% 95,3% 94,2% 96,2% 97,5% 97,0%
ON TIME PERFORMANCE (15 MINUTES)
JAN FEB MAR APR MAY JUN --- --- --- --- --- --- ACTUAL 77,9% 84,5% 88,2% 86,4% 84,0% 84,3% BUDGET 79,6% 83,0% 82,6% 84,2% 87,5% 79,9% 2003 80,2% 82,8% 78,4% 82,5% 86,9% 83,2%
Completion Rate and On Time performance have been significantly higher than budgete during most part of the year, with the exception of January an May, which has also improved the traveler's perception of the Company. Historical records of both indicators were reached during March 04. The main causes of delays during June were problems with the aircraft (5% of flights); origin airport restrictions (5% of flights); and delay at the airport facilities (2% of flights). FINANCIAL RESULTS
Actual Budget Var Exec ---------------- -------------- USD 000 USD 000 % ------- ------- ---- TOTAL REVENUE 271.977 252.619 19.358 107,7% TOTAL PAX REVENUE 225.504 205.042 20.462 110,0% CARGO & COURIER 20.519 19.185 1.335 107,0% OTHER 16.518 19.357 -2.840 85,3% EXPIRED TICKETS 9.436 9.035 401 104,4% TOTAL OPERATIONAL COST 241.954 240.802 1.151 100,5% FUEL 45.145 44.775 370 100,8% INSURANCE 5.933 5.998 -65 98,9% MAINTENANCE 31.755 31.149 606 101,9% LEASING 18.883 19.525 -643 96,7% ON BOARD SERVICES 5.675 4.534 1.141 125,2% DISTRIBUTION 11.169 10.104 1.065 110,5% OPERATING PERSONNEL 23.864 24.273 -409 98,3% AIRPORT RELATED COST 26.612 26.607 5 100,0% OTHER OPERATIONAL COST 19.119 19.045 74 100,4% SALES EXPENSES 33.740 33.128 612 101,8% OVERHEAD 20.058 21.664 -1.606 92,6% EBITDA 30.023 11.817 18.207 254,1% AMORTIZATIONS 3.788 3.535 253 107,1% DEPRECIATIONS 3.968 2.202 1.766 180,2% PROVISIONS 2.420 1.617 803 149,7% EBIT 19.848 4.463 15.385 444,7% NON OPERATIONAL REVENUES 38.224 12.371 25.854 309,0% NON OPERATIONAL EXPENSES 38.894 12.416 26.478 313,3% PENSION PROVISIONS 17.728 12.907 4.821 137,4% NET INCOME BEFORE TAXES 1.450 -8.490 9.940 -17,1% TAXES 0,0 125,6 -125,6 0,0% NET INCOME 1.450 -8.615 10.065 -16,8%
Financial Results have been significantly better than budget during the first 5 months of 2004 at both the EBITDA and the Net Income levels. During Jan-May, the EBITDA was US$30.0M, exceeding budget by US$18.2M. The better results were basically due to an outstanding Passenger Revenue performance (10.0% ahead of budget) and important savings in Overhead, Operating Personnel and Leasing costs. REVENUES Revenues were better than budget primarily due to higher international passenger counts than expected. While domestic passengers transported were slightly below budget (97.5%) there were 76,387 more international passengers than budgeted for this period. Average fares (both domestic and international) also exceeded budgeted fares during Jan-May which led to Avianca surpassing its passenger revenue goal by 10.0%. It is important to notice that there was a significant positive effect of US$4.8 M in the domestic passenger revenue due to the revaluation of the COP. This outstanding performance helped compensate the shortfall of Other Revenues caused by the larger proportion of OAL passengers flying with Avianca, which has led to larger Alliances commissions paid than received, compared to budget as well as a general over estimation of the revenues generated by Avianca's other activities. Cargo & Courier revenue also exceeded budget during the first quarter of the year mainly due to a larger cargo capacity offered in some international routes (fleet change) and a better pricing strategies. COSTS & EXPENSES Operating costs as a whole have been very close to budget (100.5%) even though the AV-MM operation was larger than budgeted, which led to savings at unit cost level. Fuel cost has started to increase since May 04 reflecting the rise of Jet Fuel market prices, additional to higher consumption than planned. During Jan-May, AV-MM burned 1.3% more fuel than budgeted while prices reached budgeted levels, basically because during January average fuel price was 6% lower than budgeted (US$0.07 /gal). Leasing cost savings of US$643K are explained because Avianca, through March, had leased one fewer B757 spare engine than anticipated and there was a deposit budgeted as an expense while it really represents an asset. Significant savings have been achieved during first five months related to the passenger compensation reflected in the Other Operational Cost bucket reduction. Crew related costs (Operating Personnel) also show an important reduction because Cockpit salary increases have not taken place and some budgeted training costs have been delayed for Q3. The Overhead cost savings reflects some additional savings in most of the organizational areas over what were budgeted. However, the vast majority of the savings arises from Avianca's avoidance of employment of Operational Advisors. All the savings mentioned above helped compensate the volume related cost increase in Distribution and Sales Expenses, while the over execution in On Board Services has occurred mainly due to extremely aggressive goals (at unitary cost levels) that cannot be achieved in order to maintain acceptable passenger service levels. CASH FLOWS Available cash was $17.6 MM better than expected for the months of January through May. Avianca's available cash position benefited $10.5MM from the higher than expected sales. Settlements through IATA for the first five months of the year benefited AV versus plan by $5.9MM. Avianca worked with its insurance underwriters to delay an originally scheduled payment of $3.2MM from May to June. Additionally, Avianca collected $2.5MM in maintenance reserves that were not anticipated in the initial forecast primarily due to the accord reached with GECAS. Avianca benefited from the accord reached with GECAS by $1.9MM versus forecast in the first five months of the year. Due to a change in the customs taxes law, Avianca benefited by $1.2MM versus forecast. Avianca paid for more fuel than expected of $1.7MM due to the delay in the implementation of the Ecopetrol financing agreement. Avianca transferred more employees than expected to outsourcing companies in the first five months of the year and therefore paid $1.9MM more than expected in this line item. Higher than expected passenger counts led to higher than expected passenger tax payments to the Aerocivil of $3.4MM. See the bridge analysis prepared in US$ 000's ERROR! NOT A VALID LINK. APPENDIX D SIGN HERE | | COPIA PARA ARCHIVA FORMA PERMANENTEL LOS PAPELES DE TRABAJO. AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AND STATUTORY AUDITOR'S REPORT [DELOITTE LOGO] Deloitte & Touche Ltda. Cra. 7 N (degrees) 74 - 09 A.A. 075874 Nit. 860.005.813-4 Bogota D.C. Colombia Tel. +57(1) 5461810 - 5461815 Fax: +57(1) 2178088 www.deloitte.com STATUTORY AUDITOR'S REPORT To the shareholders of Aerovias Nacionales de Colombia S.A. - AVIANCA S.A. 1. I have audited the accompanying consolidated balance sheets of AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. and its subsidiaries, as of December 31, 2003 and 2002 and the related consolidated statements of results, changes in shareholders' equity, changes in the financial position and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Among my functions is to express an opinion on these financial statements based upon my audits. 2. Except as mentioned in paragraphs 3 to 5 for the year 2003, I obtained the required information to perform my functions and carry out my work in accordance with generally accepted auditing standards in Colombia. Those standards require that I plan and perform an audit to obtain reasonable assurance as to whether the financial statements are free of material misstatements. An audit of financial statements includes the examination, on a test basis of evidence supporting the amounts and disclosures in the financial statements. An audit also includes an assessment of the accounting principles used and the significant accounting estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis to express my opinion. 3. Due to the fact that the Company is still in the process of analysis of the account taxes, encumbrances and rates, relative to the liability of the Vallejo Plan, which amounts to $24.821 millions, it was not possible for me to obtain evidence on the reasonability of that balance as of December 31, 2003. 4. The shareholders of the Company agreed, through the signing of a Memorandum of Understanding, to maintain the economic balance in the operating result of the entities that compose Alianza Summa. As of December 31, 2003 the Company has neither estimated nor recorded any adjustment for this concept, due to the fact that there is still pending a definite study of the amounts to record. Therefore, it was not possible for me to verify the amount of the adjustment to be recorded for economic balance. Una firma miembro de AUDIT.TAX.CONSULTING.FINANCIAL ADVISORY. DELOITTE TOUCHE [ILLEGIBLE] 5. As mentioned in Notes 3 and 7 to the financial statements, the Company has certain deferred charges for renegotiation with lessors, returns of fleet, lawyers fees, financial consultancy (Related to Chapter 11) and Alianza Summa, which are to be amortized in full once the Court takes a decision on the approval of the business plan. On March 8, 2004 the term of the exclusivity period expires so that the Company presents its business plan, following which, once approved by the Court, it will be possible to know the amount of the benefits and liabilities with foreign and local suppliers. (Pre-petition Chapter 11). 6. As mentioned in Note 12 to the financial statements the intangibles account includes a balance of $108.436 and $118.031 millions as of December 31, 2003 and 2002, respectively, corresponding to goodwill arising from the businesses of specialized messenger services and travel plans named Deprisa and Deskubra. The goodwill recorded is being reversed over a term of four years up to the year 2005. 7. As indicated in Note 7 to the financial statements, the Company recorded in previous years deferred taxes for $50.000 millions, relating to taxes for recoverable through the amortization of fiscal losses whose recoverability to the date is uncertain. 8. As explained in Note 20 to the financial statements, on the basis of the interpretation made by the Company of Law 797 of January 2003 of pension reform, which extended the term of amortization of the actuarial calculation up to the year 2023, there was reversed $80.596 millions relating to a portion of the liability accrued for the future payment to CAXDAC for the retirement pensions of flight personnel and omitted to recognize expenses for $36.763 millions in the year 2002. During the year 2003 this matter was corrected by recording a charge of $117.359 millions to the results of the year 2003. 9. In my opinion, except for a) the effect of the adjustments that might have been determined, if the information of paragraphs 3 to 5 had been obtained, and b) the effect of the adjustments described in paragraphs 6 to 8, the aforementioned consolidated financial statements, taken from the accounting books, present fairly, in all material aspects, the financial position of Aerovias Nacionales de Colombia S.A. - AVIANCA S.A., as of December 31, 2003 and 2002, and the results of their operations, the changes in their shareholders' equity, changes in their financial position and their cash flows for the years then ended, in conformity with generally accepted accounting principles in Colombia, applied on a consistent basis. 10. As mentioned in Note 3 to the financial statements, without considering the effect of the matters mentioned in paragraphs 3 to 7 above, the Company and its subsidiaries present accumulated losses of $1.316.952 millions, of which $340.709 millions correspond to those reported in 2003, a net deficit in working capital of $213.347 millions, negative net Shareholders' equity of $368.667 millions and payment restrictions to its creditors. Additionally the Company has not complied with certain financial indicators required by the contracts subscribed to with the holders of foreign Notes represented by the Bank of New York that cause an important doubt on the - 2 - capacity of the Company to continue as a going concern and place it on a dissolution status for technical bankruptcy in accordance with the Commerce Code. The plans of management to overcome this situation are described in Note 3 to the financial statements, which do not include any adjustment relating to the recovery and classification of the amounts of assets or the amounts and classification of liabilities that might be required if the Company could not continue developing its operations as a going concern. 11. As mentioned in Note 30 to the consolidated financial statements, in year 2001 Avianca S.A. assumed in the name of SAM an account payable in favor of British Aerospace in the amount of $36.133 millions. This account payable, which balance as of December 31, 2003 reached the sum of $18.206 millions, constitutes a contingent liability for SAM whose value and demandability shall depend on the contractual compliance assumed by Avianca. 12. As explained in Notes 2 and 28 to the consolidated financial statements, in accordance with Law 788 of 2002 the Company and its subsidiaries recorded inflation adjustments on their Inventories with effect from January 1, 2003. Consequently, the balance of Inventories as of December 31, 2003 includes inflation adjustments of $4.670 millions causing a decrease in the loss before taxes for the year 2003 of this amount. 13. This report originally issued in Spanish, has been translated into English for the convenience of non-Spanish speaking readers. /s/ Ismael Duque Montenegro ------------------------------ ISMAEL DUQUE MONTENEGRO Statutory Auditor Professional Card 3270 - T March 3, 2004. - 3 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS)
ASSETS 2003 2002 CURRENT: Cash and cash equivalents (Note 5) $ 95.254.520 $ 53.022.900 Debtors (Note 6) 187.613.560 145.985.414 Deferred (Note 7) 20.091.671 14.298.717 --------------- --------------- Total current assets 302.959.751 213.307.031 --------------- --------------- INVESTMENTS (Note 11) 636.669 460.642 DEBTORS - NET (Note 6) 14.553.862 12.735.765 DEPOSITS (Note 8) 127.913.932 80.682.078 INVENTORIES (Note 9) 46.479.608 48.636.889 PROPERTY, PLANT AND EQUIPMENT - NET (Note 10) 74.841.927 81.838.623 INTANGIBLES (Note 12) 451.421.640 482.463.579 DEFERRED (Note 7) 127.579.811 98.573.737 OTHER ASSETS (Note 13) 585.900 18.130.540 VALUATIONS (Note 22) 58.957.770 58.718.630 --------------- --------------- TOTAL ASSETS $ 1.205.930.870 $ 1.095.547.514 --------------- --------------- MEMO ACCOUNTS (Note 23) DEBITS $ 1.743.392.108 $ 1.602.181.040 --------------- --------------- CONTRA CREDITS CONTROL $ 1.036.279.406 $ 1.091.270.557 --------------- ---------------
The attached notes are an integral part of the financial statements The undersigned, legal representative and accontant, certify that we have previously verified the statements contained in these financial statements and they have been accurately taken from the accounting books /s/ Francisco Mendezg /s/ Eduardo Velencia /s/ Ismael Duque Montenegro --------------------- -------------------- --------------------------- FRANCISCO MENDEZG EDUARDO VELENCIA ISMAEL DUQUE MONTENEGRO. Legal Representative Accountant Statutory Auditor T.P. No. 3717-T T.P. No 3270-T (see opinion attached) - 4 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS)
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002 CURRENT LIABILITIES Financial obligations (Note 14) $ 106.239.659 $ 24.546.453 Suppliers (Note 15) 276.667.122 126.235.706 Accounts payable (Note 16) 130.548.705 113.790.645 Taxes, encumbrances and rates (Note 17) 22.921.578 21.985.484 Labor obligations (Note 20) 18.584.249 24.581.258 Estimated liabilities and provisions (Note 18) 200.687.247 166.673.072 Income received in advance (Note 21) 121.221.745 91.044.076 Other liabilities (Note 19) 6.843.269 11.857.183 --------------- --------------- Total Current Liabilities 883.713.574 580.713.877 --------------- --------------- LONG-TERM LIABILITIES Financial obligations (Note 14) 47.167.901 109.391.396 Suppliers (Note 15) 204.154.196 178.584.187 Labor obligations (Note 20) 444.648.418 240.861.089 Others liabilities -- 64.458 --------------- --------------- Total long-term liabilities 695.970.515 528.901.130 --------------- --------------- Total liabilities 1.579.684.089 1.109.615.007 --------------- --------------- MINORITY INTEREST (5.086.342) (2.804.766) SHAREHOLDERS' EQUITY (Note 22) Capital stock 7.437.086 7.437.086 Capital surplus 900.604.103 911.424.224 Reserves 4.260.098 4.261.371 Accumulated losses (976.242.772) (905.700.644) Net loss for the period (340.708.972) (71.999.131) Revaluation of equity (22.874.389) (15.305.051) Valuation surplus 58.857.969 58.619.418 --------------- --------------- Total shareholders' equity (368.666.877) (11.262.727) --------------- --------------- Total liabilities and shareholders' equity $ 1.205.930.870 $ 1.095.547.514 =============== =============== MEMO ACCOUNTS (Note 23) CREDITS $ 1.036.279.406 $ 1.091.270.557 =============== =============== CONTRA DEBITS CONTROL $ 1.743.392.108 $ 1.602.181.040 =============== ===============
The attached notes are an integral part of the financial statements The undersigned, legal representative and accountant, certify that we have previously verified the statements contained in these financial statements, and same have been accurately taken from the accounting books. /s/ Francisco Mendezg /s/ Eduardo Velencia /s/ Ismael Duque Montenegro --------------------- -------------------- --------------------------- FRANCISCO MENDEZG EDUARDO VELENCIA ISMAEL DUQUE MONTENEGRO. Legal Representative Accountant Statutory Auditor T.P No. 3717-T T.P. No 3270-T (see opinion attached) - 5 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS, EXCEPT THE NET LOSS PER SHARE)
2003 2002 OPERATING INCOME: International tickets $ 841.378.326 $ 787.771.136 Domestic tickets 684.239.912 609.297.281 Postal and mailing service 138.936.066 119.920.186 Related activities 57.486.736 54.119.439 -------------- -------------- Total gross operating income 1.722.041.040 1.571.108.042 Less: Discounts 4.595.096 10.396.747 -------------- -------------- Total net operating income 1.717.445.944 1.560.711.295 OPERATING COSTS AND EXPENSES OPERATING COSTS: Salaries, fringe benefits and others 150.569.769 153.913.293 Equipment leasing and others 179.810.753 247.927.453 Insurance 40.869.365 59.040.244 Airport facilities and others 142.041.577 134.275.602 Fuel 267.542.247 208.044.065 Maintenance flight and airport equipment (Note 24) 259.982.246 237.144.958 Services to passengers 45.542.908 45.670.764 Fees, general services and sundry 111.324.573 138.640.556 -------------- -------------- Total operating costs 1.197.683.438 1.224.656.935 -------------- -------------- Gross profit 519.762.506 336.054.360 -------------- -------------- OPERATING EXPENSES OF: Sales (Note 25) 386.677.500 350.791.054 Administration (Note 26) 76.068.566 105.673.153 Depreciations and amortizations and provisions 87.025.904 73.839.856 -------------- -------------- 549.771.970 530.304.063 -------------- -------------- Operating loss (30.009.464) (194.249.703) -------------- -------------- NON-OPERATING INCOME: Dividends and participations 1.892 Equity method (635.728) 3.908.507 Gain in the sale of assets, recoveries and others (Note 27) 71.935.825 258.632.517 Monetary correction (Note 28) 17.906.282 10.428.267 Financial 47.246.735 49.227.262 -------------- -------------- Total non-operating income 136.453.114 322.198.445 -------------- -------------- NON-OPERATING EXPENSES Financial - Interest and commissions 65.765.112 85.018.694 Financial - Difference in exchange 62.488 50.331.107 Others (Note 29) 244.452.765 17.168.236 -------------- -------------- Total non-operating expenses 310.280.365 152.518.037 -------------- -------------- RETIREMENT PENSIONS: Payments 28.578.024 27.131.212 Provision 108.027.625 18.138.534 -------------- -------------- Total retirement pensions 136.605.649 45.269.746 -------------- -------------- Net loss before income tax (340.442.364) (69.839.042) -------------- -------------- Provision income tax: Current year 2.556.475 1.036.267 -------------- -------------- Total income tax (Note 17) 2.556.475 MINORITY INTERES (2.289.867) 1.123.822 -------------- -------------- Net loss for the period $ (340.708.972) $ (71.999.131) ============== ============== Net loss per share $ (0.46) $ (0.10) ============== ==============
The attached notes are an integral part of the financial statements - 6 - AEROVIAS NACIONALES DE COLOMBIA S.A - AVIANCA S.A. AND ITS SUBSIDIARES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS)
CAPITAL SURPLUS --------------------------------------------------------- CAPITAL CAPITAL SURPLUS STOCK PREMIUM ON SURPLUS TOTAL (NOTE 22) PLACEMENT OF STOCK GOODWILL SURPLUS BALANCES JANUARY 1, 2002 6.393.922 $ 687.229.168 $ 119.160.637 $ 806.389.805 Cancellation operating accounts - - - - Valuation surplus - - - - Subscribed and paid-in capital 1.043.164 Premium in placement of stock 102.143.314 102.143.314 Reserval of goodwill (1.130.000) (1.130.000) Inflation adjustment Loss for the period Movement of the period - 4.331.601 (310.496) 4.021.105 --------- -------------- ------------- ------------- BALANCES DECEMBER 31, 2002 7.437.086 793.704.083 117.720.141 911.424.224 Cancellation operating accounts Reserval of goodwill (9.594.457) (9.594.457) Inflation adjustment - - Loss for the period - - Movement of the period (1.225.664) (1.225.664) --------- -------------- ------------- ------------- BALANCES DECEMBER 31, 2003 7.437.086 $ 792.478.419 $ 108.125.684 $ 900.604.103 ========= ============== ============= =============
RESERVES --------------------------------------------------------------------------- RESERVE OF RESERVE OF PROTECTION RENEWAL OF FUTURE LEGAL ASSETS FOR TOTAL FLYING EQUIPMENT DISTRIBUTION RESERVE RESERVE RESERVES BALANCES JANUARY 1, 2002 $ 4.632.085 $ 2.036 $ 427.873 $ 51.254 $ 5.113.248 Cancellation operating accounts - - - - - Valuation surplus - Subscribed and paid-in capital Premium in placement of stock Reserval of goodwill Inflation adjustment Loss for the period - - - Movement of the period (581.220) (265.957) (4.700) (851.877) ------------ ----------- -------- ------------ BALANCES DECEMBER 31, 2002 4.050.865 2.036 161.916 46.554 4.261.371 Cancellation operating accounts - - - Reserval of goodwill - - - Inflation adjustment - - - - Loss for the period - - - - Movement of the period (1.208) (50) (15) (1.273) ------------ --------- ----------- -------- ------------ BALANCES DECEMBER 31, 2003 $ 4.049.657 $ 2.036 $ 161.866 $ 46.539 $ 4.260.098 ============ ========= =========== ======== ============
TOTAL ACCUMULATED LOSSES OF REVALUATION VALUATION SHAREHOLDER'S LOSSES THE PERIOD OF EQUITY SURPLUS EQUITY BALANCES JANUARY 1, 2002 $ (627.096.942) $ (283.550.500) $ (17.553.653) $ 63.728.867 $ (46.575.253) Cancellation operating accounts (283.550.500) 283.550.500 - - - Valuation surplus - (5.010.237) (5.010.237) Subscribed and paid-in capital - - 1.043.164 Premium in placement of stock - - 102.143.314 Reserval of goodwill - - (1.130.000) Inflation adjustment 1.791.344 - 1.791.344 Loss for the period - (71.999.131) - - (71.999.131) Movement of the period 4.946.798 - 457.258 (99.212) 8.474.072 --------------- -------------- -------------- ------------- -------------- BALANCES DECEMBER 31, 2002 (905.700.644) (71.999.131) (15.305.051) 58.619.418 (11.262.727) Cancellation operating accounts (71.999.131) 71.999.131 Reserval of goodwill - - (9.594.457) Inflation adjustment - (7.569.338) - (7.569.338) Loss for the period - - (340.708.972) Movement of the period 1.457.003 238.551 468.617 --------------- -------------- -------------- ------------- -------------- BALANCES DECEMBER 31, 2003 $ (976.242.772) $ (340.708.972) $ (22.874.389) $ 58.857.969 $ (368.666.877) =============== ============== ============== ============= ==============
The attached notes are an integral part of the financial statements AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS)
2003 2002 SOURCE OF FUNDS OPERATIONS: Net loss for the period $ (340.708.972) $ (71.999.131) Depreciation 14.157.118 11.692.681 Provision for investments 33.452 433.026 Provision and write offs for iventories - Net 1.166.943 1.064.544 Recovery of provision for investments - (980.160) Provision and write offs for property, plant and equipment - Net (1.179.478) Recovery of property, plant and equipment on takinga physical - (17.671.390) Unrealized exchange difference on investments - (39.966) Amortization of deferred charges 27.350.541 42.145.701 Amortization of intangibles 24.388.746 - Monetary correction - Net (17.906.282) (10.428.267) --------------- ---------------- Working capital provided by the operations (292.697.932) (45.782.962) Disposal of investments - Net - 1.087.642 Disposal of property, plat and equipment - Net 6.365.382 34.134.967 Disposal of other assets 17.544.344 - Decrease in long-term debtors - 338.332.075 Decrease in inventories 5.660.228 12.210.107 Decrease the crease in valuations - 11.459.794 Increase in long-term suppliers 25.570.009 59.637.731 Increase in other liabilities - 12.906 Increase in consolidated severance pay 2.938.099 2.149.907 Increase in retirement pensios 200.849.230 - Increase in social capital for capitalizations - 1.043.164 Increase in valuations surplus 238.551 Increase in the premium for placement of stock for capitalizations - 105.034.419 Increase in revaluation of equity - 3.846.975 Decrease in retained losses 1.457.003 4.979.248 --------------- ---------------- Total source of funds (32.075.086) 528.145.974 --------------- ---------------- APPLICATION OF FUNDS Addicion to investments (110.540) (277.155) Increase in debtors (1.818.097) - Increase in long-term deposits (47.231.854) (25.058.730) Additions to property, plant and equipment (9.024.521) (35.107.830) Addition to deferred charges (54.057.141) (37.298.301) Addition to intangibles (2.941.264) (341.651.934) Addition to other assets - (17.501.344) Increase in valuations (239.140) - Decrease in long-term financial obligations (62.223.495) (7.894.203) Decrease in retirement pensions - (91.127.773) Decrease in other liabilities (64.459) Decrease un minority interest (2.281.576) (3.218.099) Decrease uin capital surplus (1.225.664) Decrease in reserves (1.273) (851.876) Decrease in equity in (52.868) - Decrease in surplus for appraisals - (5.109.448) --------------- ---------------- Total application of funds (181.271.892) (565.096.693) --------------- ---------------- DECREASE IN WORKING CAPITAL $ (213.346.978) $ (36.950.720) =============== ================
The attached notes are an integral part of the financial statements -8- AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (CONT.) (IN THOUSANDS OF COLOMBIAN PESOS)
2003 2002 Analysis of the changes in working capital Current assets: Cash $ 42.231.619 $ 18.073.699 Debtors 41.628.146 2.230.896 Deferred 5.792.954 (27.374.762) ------------- -------------- Total current assets 89.652.719 (7.070.167) ------------- -------------- Current liabilities: Financial obligations 81.693.206 (21.936.496) Suppliers 150.431.416 31.025.517 Accounts payable 16.758.060 44.916.897 Taxes, encumbrances and rates 936.094 7.564.562 Labor obligations (5.997.009) (45.740.242) Estimated liabilities and provisions 34.014.175 56.053.005 Income received in advance 30.177.669 (33.166.592) Other liabilities (5.013.914) (8.836.098) ------------- -------------- Total current liabilities 302.999.697 29.880.553 ------------- -------------- DECREASE IN WORKING CAPITAL $(213.346.978) $ (36.950.720) ============= ==============
The attached notes are an integral part of the financial statements -9- AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS)
2003 2002 CASH FLOWS IN OPERATING ACTIVITIES: Net loss for the year $(340.708.972) $ (71.999.131) Adjustments to reconcile the net profit with the net cash provided by operations: Depreciation 14.157.118 11.692.681 Provision for investments 33.452 433.026 Recovery of provision for investments - (980.160) Recovery of commercial severance pay - (17.581.253) Provision and write offs for portfolio -Net 26.870.266 2.314.592 Provision and write offs for inventories -Net 1.166.943 1.064.544 Provision and write offs for property, plant and equipment - Net (1.179.478) - Recovery of property, plant and equipment in taking a physical - (17.671.390) Amortization of deferred charges 27.350.541 42.145.701 Amortization of intangibles 24.388.746 Retirement pensions 151.221.889 (112.193.447) Monetary correction - Net (17.906.282) (10.428.267) Unrealized exchange difference on investments - (39.966) Unrealized exchange difference on financial obligations 397.292 18.022.924 Net gain on disposal of investments - (122.146) Net loss on disposal of property, 867.461 4.760.301 Reclassification of financial obligations to suppliers (7.036.646) - Variation in shareholder's equity for effect in the consolidation (1.865.827) (353.200) Changes in the assets and liabilities that provided (used) cash: Debtors (70.316.509) 351.367.840 Deposits (47.231.854) (25.058.730) Inventories 5.660.228 12.210.107 Deferred (59.850.095) (9.923.539) Intangibles (2.941.264) (341.651.934) Other assets 17.544.344 (17.501.344) Valuation surplus (239.140) 11.459.794 Suppliers 176.001.425 90.663.248 Accounts payable 16.758.060 44.916.897 Taxes, encumbrances and rates 936.094 7.564.562 Labor obligations (3.058.910) (43.590.335) Retirement pensions 49.627.341 21.065.674 Estimated liabilities and provisions 34.014.175 56.053.005 Income received in advance 30.177.669 (33.166.592) Other liabilities (5.078.373) (8.823.192) ------------- ------------ CASH PROVIDED BY OPERATING ACTIVITIES 19.759.694 (35.349.730) ------------- ------------ CASH FLOW FROM INVESTING ACTIVITIES: Additions to investments (110.540) (277.155) Addition to property, plant and equipment (9.024.521) (35.107.830) Disposal of investments - 1.209.788 Disposal of property, plant and equipment 5.497.922 29.374.666 ------------- ------------ CASH USED IN INVESTMENT ACTIVITIES (3.637.139) (4.800.531) ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase in financial obligations 52.438.357 51.024.940 Payments of financial obligations (26.329.292) (98.878.563) Increase in capital stock for capitalizations 1.043.164 Increase in the premium on issue of stock for capitalizations 105.034.419 ------------- ------------ CASH (PROVIDED) USED IN FINANCING ACTIVITIES 26.109.065 58.223.960 ------------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 42.231.620 18.073.699 ------------- ------------ CASH AND CASH EQUIVALENTS: AT BEGINNING OF YEAR 53.022.900 34.949.201 ------------- ------------ AT END OF YEAR $ 95.254.520 $ 53.022.900 ============= ============
The attached notes are an integral part of the financial statements. -10- AEROVIAS NACIONALES DE COLOMBIA S.A. AVIANCA S.A. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF COLOMBIAN PESOS AND THOUSANDS DOLLARS; EXCEPT AS OTHERWISE INDICATED) 1. OPERATIONS Aerovias Nacionales de Colombia S.A. - Avianca, is a corporation established on December 5, 1919 with a period of duration of 100 years. Its main purpose is the commercial exploitation of air transportation services of all types and airmail services in all forms under Colombian law. Additionally, the Company is dedicated to the exploitation of the commercial, technical and scientific applications of civil aviation. The General Assembly of Shareholders of the Company in an extraordinary meeting held on August 16,2002, minutes No. 30, authorized the cancellation of the inscription of its shares in the National Registry of Securities and Middlemen and in the Colombian Stock Exchange. With resolution No. 0824 of October 29, 2002 from the Superintendence of Securities the cancellation of the inscription of the securities of Aerovias Nacionales de Colombia S.A. - Avianca in the National Registry of Securities and Middlemen is authorized. CONSOLIDATION PRINCIPLES - The consolidated financial statements include the accounts of Aerovias Nacionales de Colombia S.A. Avianca S.A. and its subsidiaries, that comply with the following features. When more than 50% of the capital belongs to the parent company, directly or through middlemen or with the cooperation of is subordinates or with the subordinated of the latter. - When the parent company and the subsidiaries have, jointly or separately, the right to issue the votes that constitute the minimum deciding majority in the maximum social organ, or have the number of votes necessary to elect the majority of the members of the Board of Directors. When the parent, directly or through or with the cooperation of the subsidiaries, for the reason of an act or transaction with the held company or with its partners, exerts certain dominant influence on the decisions of the organs of the management of the Firm. All the accounts and significant transactions carried out among these Companies have been eliminated in the consolidation. PRESENTATION BASES - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Colombia. The companies considered in he consolidation process are the following: Aerovias Nacionales de Colombia S.A. - Avianca S.A., -11- Sociedad Aeronautica de Medelin Consolidada S.A. Sam S.A., Corporacion de Viajes Coviajes Ltda. and Avianca Inc. The amount of the assets, liabilities, shareholders' equity and results for the period of the Company and subsidiaries included in the consolidation corresponding to the year 2003 is the following:
RESULTS FOR THE ASSETS LIABILITIES EQUITY PERIOD Aerovias Nacionales de Colombia S.A., Avianca S.A. $164.433.658 $1.463.580.205 $ (299.146.547) $(309.717.859) Sociedad Aeronautica de Medellin Consolidada S.A., Sam S.A. 90.239.684 109.159.422 (18.919.738) (45.165.017) Corporacion de Viajes Coviajes Ltda. 27.132 14.400 12.732 (262) Avianca Inc. 121.146.810 100.854.544 20.292.266 (79.394)
2. SUMMARY OF THE MAIN ACCOUNTING POLICIES The accounting records of the Company and subsidiaries follow the accounting principles generally accepted in Colombia prescribed by Decrees 2649 and 2650 of 1993 and other complementary rulings, some of which are summarized below: a. Monetary unit - In accordance with legal provisions, the monetary unit used by the Companies is the Colombian peso. b. Recognition of income and commissions -Any revenues for transportation tickets sold and pending use, are classified as income received in advance until the time of their use. There are also recognized as income those tickets that have not been used in a lapsed time equal to or more than one year, or that for tariff regulation have lost their validity (Expired Tickets). Income originated from other sales and maintenance services are recognized during the contractual period or when the services are rendered. As from the year 2003, non-operating income from penalties were reclassified to operating income. c. Investments - Negotiable investments of fixed income are recorded at cost and valued through the accrual of yields. negotiable investments of variable income and those permanent ones of non-holding entities are valued at cost adjusted for inflation. The provision represents the amount considered as necessary to cover any eventuality that may be present for devaluation in the caption of investments. -12- d. Provision for debtors - Represents the amount estimated as necessary to give adequate protection against losses in normal credits. e. Deposits - Includes deposits given in guarantee to lessors of aircraft in compliance with lease contracts. It additionally includes the advances delivered as commercial severance. As from the year 2002 the Company changed the method of recording advanced payments to agencies and agents for commercial severance, recording them as an advances receivable and not as an expense of the period. f. Inventories - Valued at historical cost not exceeding the replacement value or sale in the market, adjusted for inflation as of January 1, 2003, in accordance with rules on the matter. Cost is determined at the average cost. On the basis of those materials that present a turnover lower than five years, a provision is recorded for protection of inventories against obsolescence and slow movement. g. Deferred - Prepaid expenses - They are mainly commissions on the sale of domestic and international tickets, insurance premiums, advanced interest, fees, leases and subscriptions that are amortized in accordance with the use of the ticket, the life of the policies, the contract or the time it is expected to receive the service, whenever occur. Deferred charges - Mainly comprise the costs incurred in studies and research for projects, such as income control (RAPID), total solution (SAP), reinventing the airline and Chapter 11 (C-11) and costs incurred in the acquisition and implementation of new systems of information, bonuses and expenses generated in the process of integration of Alianza Summa, improvement to leased property among others; which are amortized over the term of the expected benefit. It additionally includes the deferred income tax generated by the effect of the temporary differences between books and taxes in the treatment of certain items. Deferred charges related to the structuring of the Company as well as the deferred charges for the process of integration of Alianza Summa are to be amortized at the time the process of Chapter 11 ends; for budget effects it is estimated that this process shall be terminated in March 2004. h. Intangibles - Intangible assets comprise: i) the trust of administration, guarantee and source of payment created to guarantee the retirement pensions of the land personnel; and ii) the goodwill, originated by definite acquisitions, or appraisals effected by a price higher than the value in the books of the entity or business. Recorded goodwill is being reversed over a term of four years, thus: 1% in 2002, 8% in 2003, 21% in 2004 and 70% in 2005. Goodwill acquired is amortized in a period of 10 years and 3 years, by the straight-line method. Property, plant and equipment - Net - Are recorded at cost adjusted for inflation and depreciated on the basis of the straight-line method over the estimated useful lives -13- generally accepted in Colombia for accounting purposes. The annual rates of depreciation used are the following: buildings 5%, fleet and flight equipment 15% and 10%, furniture and fixtures and machinery and office equipment 10%; vehicles and computer equipment 20%. The Company does not estimate any residual value for its assets because it considers this is not relatively important, the assets are therefore being depreciated in full. Repair and maintenance expenses are charged to results as they are incurred. Financial lease contracts with and without purchase option - In accordance with the legal rules in force, the rental paid in development of the financial lease contracts for planes with purchase option, for complying with the legal requirements and for being international leasing, are charged directly to the expenses of the period based on the terms of the contracts. The rights of the contracts are recorded in memo accounts. Once the purchase option is exercised the assets are recorded in property, plant and equipment for the value of the option. k. Valuations - These correspond to the differences existing between: the realization value determined by appraisals of recognized technical value and the net value per books of the properties, plant and equipment, adjusted for inflation. These valuations are recorded in separate accounts within the assets, and as a surplus for valuations, the latter being not capable of distribution. Devaluations of assets are recorded directly in the statement of results as expenses for the period. Labor obligations - The liability corresponds to the obligations that the Company has for legal and extra-legal benefits for its employees. m. Retirement pensions - Represents the present value of all the future monthly payments that the Company must pay to those employees who completed or shall complete certain legal requirements with respect to age, time of service and others, determined on the basis of the actuarial studies that the company obtains annually, according to the provisions of the rules in force. n. Maintenance costs -Based on the technical standards established by the industry, the Company provisions the cost to be incurred in the future for maintenance services and major repairs of aircraft, Boeing 757, 767, MD83 and Fokker 50. The provision is recorded with a charge to results in function of the hours flown during the period. The costs of minor and routine services to maintain in operation the above-mentioned fleet are recorded directly as expenses. The Company makes monthly payments to lessors in order to cover the major part of the major future costs of maintenance and repair services as a higher value of the rent, on the basis of the hours flown and liquidated in the terms of the lease contracts and are taken to expense in the respective period. o. Mileage recognition - The Company does not provision the value of the mileage; the value of the liability is recognized and controlled in the memo accounts to the value of one peso per mile. When the passenger redeems these rights the ticket for the route -14- required is issued and would only represent a revenue for the Company in case of acquiring additional miles. The expense is recognized only for the concept of service on board and when the passenger travels by other Companies with which there are agreements. p. Provision for contingencies - For the year 2003 the Company took the decision of making provision for financial stabilization for the total probable contingencies for labor, commercial, civil and criminal litigation. (Note 19). q. Provision for income tax - The Company determines the provision for income tax on the basis of earnings at the rates specified in the taxation rulings, or on the basis of the presumptive income method. Foreign currency - The transactions and balances in foreign currency are translated into Colombian pesos at the representative market rate, certified by the Banking Superintendence. The exchange difference resulting from debts in foreign currency for the acquisition of inventories and property, plant and equipment is capitalized in such assets until these be in conditions of sale or use. The exchange difference originated in accounts receivable or payable not related to inventories or fixed assets is taken to results. The exchange rate used to adjust the resulting balance in U.S. Dollars at December 31, 2003 and December 31,2002 was $2.778,21 (pesos) and $2.864,79 (pesos) per USD 1, respectively. s. Inflation adjustments - Non-monetary assets and liabilities, with the exception of the inventories up to the year 2002 and the shareholders' equity, with the exception of the valuations surplus, are adjusted to recognize the effects of inflation, using adjustment percentages determined on the basis of the variation of the consumer price index. (6,12% for the year 2003 and 7,03% for the year 2002). The monetary correction thus determined is included in the results for the period. In conformity with the principles that govern the inflation adjustments in Colombia, such adjustments do neither include the inflation occurred up to December 1991, nor require that the comparative financial statements presented along with financial statements of subsequent dates, be restated in updated currency. As from the year 2003, in accordance with the Provisions of Law 788 of 2002, the Company records inflation adjustments on its inventories. Up to December 31, 2002 the inflation adjustment was not required. t. Net loss per share - It is determined on the basis of the weighted average of shares outstanding during the period. -15- u. Cash equivalents - For the purposes of presentation in the statement of cash flows, the Company classifies in the caption of cash equivalents, investments with maturity of three months or less counted as from the date of their original issuance. v. Accounting estimates - The preparation of financial statements in conformity with the generally accepted accounting principles requires that the Management makes some estimations and assumptions that affect the amounts reported on assets, liabilities, income and expenses reported during the period. w. Memo accounts - Include rights and contingent responsibilities, as well as differences between the accounting and fiscal figures. x. Reclassifications - Some figures of the financial statements for the year 2002 were reclassified for comparative purposes and are presented under denominations of the accounts indicated in the Standard Chart of Accounts. y. Translation of financial statements - The financial statements of the foreign subsidiary are translated into Colombian pesos, before initiating the consolidation process, in accordance with the accounting principles applied in Colombia. The figures of the balance sheet are translated at the closing exchange rate, with the exception of the equity that is translated at historical rates, and the figures of the statement of results are translated at the average exchange rate. 3. GOING CONCERN In order to respond to the situation created by the financial difficulties that the Company, product of the deep crises of the industry, Avianca and its affiliate in the United States - Avianca Inc. presented on March 21, 2003 a petition to take advantage of the protection of Chapter 11 of the U.S. Bankruptcy Code (C-11). The process permits, under a framework of legal protection, to restructure debt with creditors maintaining the normal course of business, while an advance is made in the financial and operating reorganization and operational that make viable the permanence of the business concern. As it is common in these processes under the legislation of the United States at the closing of the year 2003 the South District Court of New York had granted to the Company four extensions of the exclusivity period, so that the Administration be the only in charge of presenting the reorganization plan. This right has been maintained by the enterprise, thanks to the progress in the restructuring plan, which have generated a positive change in the operating results. Given the compliance with the partial goals within the process and that there does not exist a limit for the requests for extension of the period of exclusivity, the Airline obtained at the beginning of the year 2004 a new extension of this right. At the closing of the year 2003 and 2002, Avianca and its subsidiaries recorded accumulated losses of($1.316.951.744) and ($977.699.775), loss of the period of($340.708.972) and -16- ($71.999.131), the negative equity was in the order of($368.666.877) and ($1.262.727) and the working capital presented a decrease of ($213.346.978). ACTION PLAN OF THE ADMINISTRATION - 'Flight Plan of The Transformation' Several internal and external factors have made that the Company presently be in a transition phase, amongst which we must emphasize: Liquidation of the company Aerolineas Centrales de Colombia S.A. Aces S.A. - After analyzing the information about the general condition of the Companies, the developments of the process of restructuring carried on, its financial position and the various alternatives to face the situation, the Assembly of Shareholders that met in the city of Medellin on Wednesday the 20th of August 2003, took the decision of liquidating the company Aerolineas Centrales de Colombia S.A. - ACES S.A. Supported by management's report, in spite of the efforts and alternatives explored to save the Company, the Assembly of Shareholders' determination became the most convenient alternative, in the framework of the social responsibility as businessmen. 4. INTEGRATION PROCESS ALIANZA SUMMA - The operational integration agreed among the companies Avianca, Sam and Aces, in development of the integration agreements entered into the majority shareholders of Avianca and Aces and which was approved by the Civil Aeronautics, is not understood as automatically completed for the fact of the Aces liquidation ordered by the Assembly of Shareholders last August 20, 2003. Since the integration agreements between the shareholders continue in force, the basic operating agreements that were the support of Alianza among the three companies, namely, the Memorandum of Operating Understanding, the Charter Contract and the Shared Code Agreement shall be liquidated in front of Aces and temporarily will maintain their validity in relation to Avianca and Sam, unless the Civil Aeronautics demands its modification or definite termination. Thus, Avianca and Sam that continue operating domestically and internationally. The mark Alianza Summa prevails as a mark-umbrella during this stage of transition and until a decision is taken in this respect. FLIGHT PLAN OF THE TRANSFORMATION -For the whole Organization the present period marks great operating, financial and of service repositioning challenges. For that, the Company - Through the Flight Plan of the Transformation - carries on actions that permit confronting the situation and come out strengthened, assuring its survival, solidity, competitiveness, service and consolidation of the human talent: With the aim of achieving its solidity, the Company has carried out important actions and secured achievements in: -17- Optimization of the practices of revenue management. Redesign of the network toward the routes and more profitable frequencies. Renegotiation of fleet rents. Rationalization of the cost structure. Restructure of the financial liabilities. - Cash management in order to provide liquidity and meet the commitments. It is worth noting that in the framework of the restructuring process the Company is carrying on under the protection of the C-11 important achievements have been reached: - Legal protection for the operating restructuring and the Avianca's balance sheet. - Return of planes without significant penalties and reductions of already 50% in the amount of the aircraft monthly rents. - Transformation of route network in order to achieve more efficient and profitable itineraries. - Consolidation of the fleet through the reduction and simplification of 7 to 4 types of fleet and return of 19 aircrafts. - Organizational redesign with a rigorous work in four key fronts - major contracts, routes, processes and human talent - seeking to be more agile and productive and obtain significant reductions in costs. - Conservation of the route network of Alianza Summa, with the prior approval of the Civil Aeronautics to operate the routes that Aces was operating before its liquidation. - "Oxigeno" Project for the reduction of costs that has achieved compliance in more than double the goals proposed at the beginning of the year. - Continuity in the projects initiated since May 2002 such as alliances and shared-code agreements with important international airlines, external services through Assistance(R), homologation of airport procedures and fitting of technological systems. The Company maintains its policy of sure, punctual, warm and profitable service aimed toward securing the loyalty of its clients. The Flight Plan points out the priorities valued by clients at the time of making use of the security, compliance and satisfaction with the service. For that purpose efforts are aimed toward the development of projects that permit: Maintaining the highest standards of Security. Continuing as leaders in punctuality. Innovate in products and services. To be the airline preferred by Colombians. -18- About human Talent the Company works in the consolidation of a winner human team, committed, enthusiastic and recognized for its culture of service and focused toward results. 5. CASH AND CASH EQUIVALENTS
2003 2002 a) Cash (1) $41.963.229 $ 12.284.725 b) Investments Wachovia 23.282.860 - The Bank of New York (2) 14.148.961 36.237.428 Banco Tequendama (3) 10.279.370 - Custom Bond - 2.177.240 Bancafe Internacional (4) 1.908.700 464.168 Fiducomercio 1.290.954 1.570 Bank of America - 983.371 Companias Profesionales de Bolsa 767.536 Fidugraria S.A. 713.603 - Union Planters - 710.290 Fiduciaria La Previsora 358.210 110.976 Exporcredit Colombia S.A.(5) 280.262 Corporacion Financiera Colombiana S.A. 150.407 Fiduciaria Santander Investment Trust 29.280 29.280 Ultrabursatiles 47.768 Corredores Asociados 20.174 14.083 Banco Superior 12.300 - Other minor ones 906 9.769 ----------- ------------ Total $95.254.520 $ 53.022.900 =========== ============
(1) Upon decision by the Court of New York, in Colombia resources should be maintained to cover the expenses corresponding to 7 days, excesses must be transferred to the dollar accounts in the United States. In Banco Bogota account No.165010554, the Company has a Stand By constituted for USD51,000 whose maturity date is July 21, 2004. (2) Fiducia (Master Trust) that manages the revenues from the sale of tickets abroad with credit cards, a modality that commenced operating during the year 2002. This investment is supporting the financial obligations with the same bank. As of December 31, 2002 the bank withheld this cash and redeemed it in the month of February 2003. By the end of year 2003 the balance is withheld due to restrictions of Chapter 11. (3) This corresponds to cash withheld by governmental Provisions in Caracas Venezuela. (4) This corresponds to a CDT with quarterly renewal. (5) Given as guarantee for temporal import of a Fokker 50. -19- 6. DEBTORS
2003 2002 Domestic clients (1) $ 54.903.366 $ 52.496.922 Foreign clients (2) 55.490.063 46.214.080 Accounts receivable, Clearing House (3) 15.516.954 19.057.515 Accounts receivable, Aces (4) 37.246.851 - Prepayments and advances (5) 26.729.394 7.484.425 Tax advances and contributions (6) 10.932.232 7.053.871 Employees 1.051.647 1.548.975 Insurance claims (7) 344.324 5.128.157 Accounts receivable, outsiders (4) 4.034.341 12.049.959 Sundry debtors (8) 41.748.184 26.429.998 ------------ ------------- Subtotal 247.997.356 177.463.902 Less: Provision for debtors 45.829.934 18.742.723 ------------ ------------- Subtotal 202.167.422 158.721.179 ------------ ------------- Long-term portion: Employees 440.272 685.806 Accounts receivable, outsiders (4) 14.113.590 12.049.959 ------------ ------------- Long-term portion 14.553.862 12.735.765 ------------ ------------- Current portion $187.613.560 $ 145.985.414 ============ =============
(1) Corresponds to accounts receivable from offices, travel agencies, general agents and domestic legal entities. (2) Corresponds to accounts receivable from offices, travel agencies, general agents and legal entities abroad. (3) Corresponds to accounts receivable through the Clearing House directly and to other Companies for use of tickets, cargo and services. (4) Corresponds to accounts receivable from Aces for the operation (Domestic and foreign lnterlinea and other services related to the operation) and tickets issued by Aces, which are honored by Avianca since August 2003 for the amount of $17 thousand millions. This amount is Provisioned in full. (5) Corresponds to: Prepayments and advances to suppliers (*) $ 20.569.670 $7.092.847 Prepayment and advances to contractors (**) 4.491.106 66.552 Prepayment and advances to suppliers of Avianca Inc. - - Prepayment and advances others 1.668.618 352.026 ------------- ---------- $ 26.729.394 $7.484.425 ============= ==========
(*) Basically corresponds to prepayments made to Fuel suppliers. Furthermore prepayments were made to some of the suppliers of Chapter eleven (C11), among the suppliers there is Serdan. -20- (**) Basically corresponds to the prepayments made to Civil Aeronautics for collection of airport rates. (6) Corresponds to:
2003 2002 Withholding tax at source $ 6.815.076 $ 477.355 VAT withheld 1.159.912 6.173.273 Industry and Commerce Tax withheld 396.266 1.016.978 Others - overages, advances and withholdings 2.560.978 (613.735) ------------ ----------- $ 10.932.232 $ 7.053.871 ============ ===========
(7) Corresponds to a claim to Colseguros in the amount of $3.969.825, for the anticipated installments for the months of April and May of the aviation policy, originated in the termination of same. This amount was offset with Colseguros per transaction agreement signed on October 31, 2003; to this date such agreement is pending authorization by the Court of New York. (8) Corresponds to: Income receivable - P.C.A. dividends $ 1.083.462 $ 1.083.462 Income receivable - interest deposits on Boeing planes 1.841 103.582 Income receivable - services (*) 7.713.896 6.610.277 Income receivable - Leases 122.260 118.569 Income receivable - sale of assets 235.236 3.632.969 Reserves of maintenance G.E. Capital Services 10.939.020 11.288.178 Interest receivable retirement pensions trust (**) 17.033.434 Others 4.619.035 3.592.961 ------------ ----------- Total $ 41.748.184 $26.429.998 ============ ===========
(*) Corresponds to collections for utilities, gauging of equipment, miles, participation Deskubra leaflets, land assistance, maintenance services, stamp taxes. (**) Corresponds to interest of the year 2003, originated by the loan to Valores Bavaria, which were recorded by Fiduciaria La Previsora for the payment of the land Provisions only up to year 2004. The movement of the Provision for portfolio that covers the risk of uncollectible for the accounts receivable trade, was the following: Begining balance $ 18.484.772 $16.428.131 Write offs (8.998.506) (2.861.918) Provision 36.343.668 5.176.510 ------------ ----------- Total Provision for debtors $ 45.829.934 $18.742.723 ============ ===========
-21- 7. DEFERRED
2003 2002 Current - Prepaid expenses Commissions (1) $ 9.618.980 $ 12.298.673 Services 143.208 Fees (2) 918.543 58.768 Insurance and bonds (3) 8.571.422 1.416.966 Leases 606.396 393.507 Subscriptions 202.244 130.803 Others 30.878 ------------ ------------ Total $ 20.091.671 $ 14.298.717 ============ ============ Long term - Deferred charges: Work in progreSs (4) $ 2.655.830 $ 17.266.711 Special bonuses (5) 13.840.447 12.093.333 Alianza Summa (6) 4.274.935 5.044.784 Computer programs (7) 2.022.006 3.444.568 Leasehold improvements (8) 3.298.207 4.021.015 Deferred income tax (9) 50.000.000 50.000.000 Studies, research and projects (10) 38.129.922 Licenses 435.001 Major services and of reserves flight eqt. (11) 6.491.599 Third party repairs 357.833 - Others 43.279 50.200 Inflation adjustments 6.030.752 6.653.126 ------------ ------------ Total $127.579.811 $ 98.573.737 ============ ============
(1) The balance reflected in this caption corresponds to all those commissions that have been cancelled or discounted through selling reports and that as of the date the service has not yet been rendered. (2) Corresponds to advisory services for maintenance of the SAP system and brokerage for Insurance Intermediation to AON RE. (3) The increase presented corresponds to the installments of the civil liability policy for the period of the year 2004. (4) Made up by the various acquisition costs and implementation of new systems of information, such as: Project SAP Amortization began as from January 2000 for a period of 5 years $1.559.570 Project Prov V Amortization started as from January 2002 for a period of 3 years 535.837 Project Nas In process of assembly 560.423 ---------- $2.655.830 ==========
(5) Delivered to collaborators separated from the Company for the effects of the integration of Alianza Summa, began amortization as from January 2003 for a period of five (5) years. (6) Constituted by the costs and expenses for the organization and launching of project "Alianza Summa". Started amortization as from January 2003 for a period of five (5) years. (7) Made up by all the rights on software and licenses owned by the Company, acquired to expedite the processes and optimize the information systems, amortization was started for a period of three (3) years from the time of their acquisition. -22- (8) Includes the fitting of installations and corporate offices as in the areas of service to client, complying with parameters of occupational health, comfort and security generating better quality of life ad attention to our travelers. Amortization started as from January 2003 for a period of five (5) years. (9) To this date the Company has registered $50.000 millions relating to one part of the tax for recovery in the future by the amortization of accumulated fiscal losses. As mentioned in Note 3 to the financial statements, the Administration of the Company considers that all the necessary measures have been taken that permit the realization of this asset in the future. (10) Made up by the various acquisition and implementation costs of the following projects: Oxygen $ 190.736 Total solution - SAP 8.549.865 Control of Income 1.447.730 Alianza Aerol Americana 525.584 Fleet negotiation and planning 239.185 Chapter 11 - C11 (*) 27.176.822 ----------- $38.129.922 ===========
(*) As of December 31, 2003 there were recorded as deferred the costs for fees incurred with the lawyers advisors in the Court of New York with Chapter 11. (11) Expenses generated by the delivery of one B767 N535 plane to Ansett World Wide Aviation Services, relating to the indirect damages for the anticipated return of the aircraft in the amount of USD2.500.000 which shall be amortized in 22 installments as from the month of November 2003. BLANK SPACE -23- 8. DEPOSITS
2003 2002 ENTITY CONCEPT DOLLARS COL DOLLARS COL Agencies and Agents (1) Commercial Severance Pay USD - $ 27.245.377 USD $ 21.395.325 Iata Clearing House (2) On guarantee 12,000 33.338.520 G. E. Capital Services On guarantee MD-83. B-757. B-767 & kit 4,385 12.183.840 3,298 9.446.645 Pegasus Aviation Inc. On guarantee B-757 3,375 9.376.459 3,205 9.181.652 Airplane On guarantee MD-83. B-757 and turbine 3,144 8.734.970 3,144 9.007.186 American Express On guarantee B-757 - - 2,599 7.444.332 Anssett Worldwide Aviation On guarantee MD-83. B-757. B-767 2,602 7.229.616 2,101 6.019.660 Fokker Aircraft B.V. On guarantee Fokker 50. tools 1,274 3.540.147 1,724 4.939.627 Stanley B. Burns On guarantee 787 2.186.451 1,212 3.472.125 International Lease Finance Corp. On guarantee B-757 1,000 2.778.210 1,000 2.864.790 Customs Bond On guarantee 910 2.528.171 - - Rolls Royce On guarantee Motor B-757 695 1.929.942 715 2.048.325 Pratt & Whitney On guarantee Motor MD-83 550 1.528.015 - CIT Aerospace On guarantee Motor B-757 655 1.819.728 445 1.274.832 ARC On guarantee 450 1.250.194 - - Icelandair On guarantee B-757 350 972.373 Bank Of America On guarantee 343 953.651 Aircraft Services (ASIG) On guarantee 270 750.117 Aeronautica Civil (3) On guarantee Svs Apto - 1.200.000 Ferreteria Industrial S.A. On guarantee Embargo 1.281.580 Eucardo Garcia On guarantee Embargo 1.200.000 Yitral Textil Ltda. On guarantee Embargo 444.410 - Municipality de On guarantee Embargo 395.318 - Barranquilla Others (4) 5.046.843 3.587.579 ------------- ------------ Total USD 32,790 $ 127.913.932 USD 19,443 $ 80.682.078 =========== ============= ========== ============
(1) Corresponds to amount delivered to the agencies and general agents in an anticipated way such as commercial severance pay, which is liquidated and paid in a monthly manner along with the sales commissions, in accordance to the contracts signed with them. (2) Deposits required by IATA Clearing House as payment guarantee to travel agencies, which is to be refunded 10 days after emerging from Chapter 11. (3) Deposits required by the Civil Aeronautics in order to guarantee the airport services related to C-11. (4) These amounts represent deposits for plane safety, in guarantee, Deskubra plans and of security. BLANK SPACE - 24 - 9. INVENTORIES
2003 2002 Materials, parts and accessories (1) $ 56.857.209 $ 60.345.089 Inventory of service to passengers 3.212.722 3.178.945 Purveyors and others 3.153.117 2.523.085 Inventories in transit 1.039.147 3.451.981 Inflation Adjustments (2) - - ------------ ------------ Subtotal 68.508.760 69.499.100 ------------ ------------ Less - Provision for obsolescence 22.029.152 20.862.211 ------------ ------------ Total $ 46.479.608 $ 48.636.889 ============ ============
The movement of the provision for obsolescence was the following: Beginning balance $ 20.862.211 $ 13.642.609 Write offs 5.513.159 361.738 Provision for the year 6.680.100 7.581.340 ------------ ------------ Total $ 22.029.152 $ 20.862.211 ============ ============
(1) The Company granted guarantees with Aerocivil by virtue of the business trust contract in guarantee entered into with Fiduifi S.A. for an amount of USD2.015.873. (2) The balance of inflation adjustments at year 2002 in the amount of $14.018.019 was recorded as higher value of the inventory and for the year 2003 the calculation of the inflation adjustment was started on the basis of regulatory decree 416 of the tax reform of the year 2003. 10. PROPERTY, PLANT AND EQUIPMENT-NET Flight equipment (1) $ 169.758.935 $ 164.162.936 Land 640.602 709.897 Buildings (2) 4.860.593 4.630.272 Machinery and equipment (3) 29.883.527 27.731.831 Office equipment (4) 11.912.433 11.357.850 Computer equipment 28.009.251 25.098.175 Medical equipment 68.786 63.485 Vehicles 2.811.920 2.913.830 Property. plant and equipment in transit 3.033.809 2.840.610 -------------- -------------- Subtotal 250.979.856 239.508.886 -------------- -------------- Accumulated depreciation (176.137.929) (157.670.263) -------------- -------------- Total $ 74.841.927 $ 81.838.623 ============== ==============
- 25 - (1) The fleet and air equipment mainly corresponds to the inflation adjusted cost of the components of the flight equipment in operation. The company granted guarantees to Aerocivil by virtue of the business trust contract in guarantee entered into with FIDUIFI S.A. for an amount of USD 1,126,034. SAM has on the land and buildings as of the date of the purchase-sale promise for $469 million pesos signed with Valores Bavaria. (2) As guarantee to the debt the Company has with DIAN, there were delivered 38 immovables for a commercial amount of $19.217.484. (3) The Company determined not to insure the machinery and equipment, considering that these do not represent casualty risks such as collisions, robberies, etc. For their robust contexture, since their carcass has a minimum of 1/2 inch of width, such equipments are the paymovers and tractors, which displace themselves at a maximum speed of 20 k/h. in the airport areas. (4) Additionally, the Company has fixed assets in the amount of $7.6 millions on consignment with the General Agent in London. 11. INVESTMENTS
2003 2002 Permanent investments: Savia Ltda. $ 275.000 $ 275.000 Stichting "Sita Inc Foundation" 578.249 236.087 Helicol S.A. (1) 1.754.370 1.655.967 Other foreign companies 64.876 64.876 Other investments 143.856 136.028 Provision for protection of investments (2.179.682) (1.907.316) ------------ ------------- $ 636.669 $ 460.642 ============ =============
1) As of December 31, 2003 and 2002, the value of the Company investment in sociedad Helicopteros Nacionales de Colombia S.A. - Helicol is provisioned in full, due to the difficult financial situation of the issuer. 12. INTANGIBLES Goodwill formed (1) $ 108.436.180 $ 118.030.637 Goodwill acquired (2) 702.273 702.273 Management trust (3) 342.283.187 363.730.669 ------------- ------------- $ 451.421.640 $ 482.463.579 ============= =============
(1) Corresponds to the valuation of the Deprisa Internacional and Deskubra businesses for a value of $119.161 millions. according to technical appraisal performed by a specialized Firm During the years 2003 and 2002 there were reversed $9.594 and $1.130 respectively against the capital surplus, respectively, equivalent to an 8% and a 1% (see Note 2; in order to comply in a term of up to 4 years for the reversion of the balances recorded as such, it is stipulated in external circular No. 003 of 2002 of the Superintendence of Securities. - 26 - (2) In the year 2002 the Savia investment was capitalized in the amount of $702 millions represented in 275.000 shares, investment that shall be amortized in a period of 3 years. (3) Corresponds to the autonomous equity created with Fiduciaria La Previsora for an amount of $350.000 millions in order to guarantee the payments to land pensioned persons through the irrevocable transfer of all the active economic rights that may be derived from the open pledge contract with holding of shares of Sociedad de Inversiones Fenicia S.A. entered into with Valores Bavaria S.A. (debtor Bavaria S.A. as co-debtor) and Aerovias Nacionales de Colombia S.A.- AVIANCA S.A. (creditor) in the aforementioned amount. 13. OTHER ASSETS
2003 2002 Assets with Colseguros (1) $ 18.124 $ 17.573.145 Art and Culture Property 566.849 557.395 Other minor ones 927 ---------- ------------ Total $ 585.900 $ 18.130.540 ========== ============
(1) Corresponds to the refund which Avianca has a right to of the amount that Colseguros must transfer to reinsurers for the cancellation of the aviation policies as from April 30, 2002. This amount shall be credited to the premiums of the period that began on November 18, 2002 and will end on November 17,2003 (Note 19). The Company formalized a transaction agreement with Colseguros for the adjustment of said balance, agreement that is still pending approval by the Court of New York. 14. FINANCIAL OBLIGATIONS The Company has maintained during the years ended December 31, 2003 and 2002, obligations for approximately $54.004.270 and $44.666.260 respectively, mainly consisting of promissory notes and trust commitments. On such obligations annual interest was paid in an average of the 11,75% for the obligations in foreign currency and DTF TA plus additional points between a 2.00% and a 10,80% for the domestic obligations. The DTF TA rate passed from the 7,38% in December 2002 to 7,92% in December 2003, of which as of December 2003 and December 2002 are accrued interest of $42.785 and $93.543, respectively. BLANK SPACE - 27 -
FORM OF FINAL AMOUT INTEREST ACRREUED ENTITY PAYMENT MATURITY USD RATE INTEREST 2003 2002 Domestic: Valores Bavaria P.V. 31/03/04 DTF+2% 558,838 $ 5.923,575 $ 5.923.575 Banco de Bogota M.V. 02/04/06 DTF+7% 4.626.506 31.211.963 31.211.963 Others (1) 7.921.348 6.790.119 Foreign: Service S.V. 31/01/08 2.376 9% 6.806.081 The Bank of New York S.V. 24/12/05 29.044 11.75% 7.592.544 56.953.790 83.206.11 Primeother P.V. 30/06/04 13.500 Libor+7 37.505.834 Federacion cafeteros P.V. 30/06/04 5.000 Libor+7 13.891.050 ------------- ------------- Subtotal 153.407.560 133.937.849 ------------- ------------- Current portion 106.239.659 24.546.453 ------------- ------------- Total long term $ 47.167.901 $ 109.391.396 ============= =============
The maturity of the obligations in the following years is thus:
OBLIGATIONS IN DOMESTIC OBLIGATIONS IN FOREIGN CURRENCY CURRENCY TOTAL 2005 $16.227.784 USD 10.659 $ 29.614.164 $ 45.841.948 2006 1.325.953 - 1.325.953 ----------- ---------- ------------ ------------ $17.553.737 USD 10.659 $ 29.614.164 $ 47.167.901 =========== ========== ============ ============
(1) Corresponds to: - Obligations with Banco Colpatria for $2.000.000, which shall be paid per month due at a rate of the DTF+6% and its final maturity shall be September 2003, - Obligation with the Banco Superior for $3.437.035 which is paid by quarter due at a rate of the DTF+8% and its final maturity date is in June 2004-Obligation with Serfinanzas for $641.550, which is paid per semester due at a rate of DTF+ 10,8% and its final maturity is in June 2004. -Obligation with Ifileasing for $726.771 which shall be payable after the month is due at a rate of the DTF+8% and its fma1 maturity is in August 2005 and Expocredit de Colombia $1.115.993 which is paid per year due at a rate of 8% and its final maturity is on December 18, 2004. These obligations were acquired for working capital and are guaranteed by trust commission and promissory notes; in the case of the obligation contracted with The Bank of New York it is guaranteed with the assignment of the rights derived from the collections of sales for credit cards in the United States while such obligation lasts. BLANK SPACE - 28 - 15. SUPPLIERS
2003 2002 Domestic suppliers (1) $ 110.572.852 $ 62.828.312 Foreign suppliers (2) 368.936.816 235.721.699 Interline billing (3) 1.311.650 6.269.882 -------------- -------------- Total 480.821.318 304.819.893 Long term (4) 204.154.196 178.584.187 -------------- -------------- Short term $ 276.667.122 $ 126.235.706 ============== ==============
(1) The Domestic Suppliers with the major importance are: DIAN, ACES, Exxon Mobil de Colombia and Valores Bavaria, (2) The Foreign Suppliers with the major importance are: Aircraft lessors, maintenance aircraft suppliers and foreign fuel suppliers. Domestic and foreign suppliers increased because the Company on taking refuge in Chapter 11 before the Court of New York, leaves the domestic and foreign accounts payable frozen that were generated before March 21, 2003. Some payments have been made to critical suppliers of the operation in Colombia and in foreign countries upon prior authorization from the U. S. Court of Bankruptcy, New York South District. The most representative debts are:
2003 Pegasus Aviation Inc. USD 6.385 $18.340.955 G.E.Capital Aviation Services 6.702 19.490.157 Exxon Mobil de Colombia S.A. - 10.909.116 Administrative Unit Tax Direction - 10.502.002 Pratt & Whitney Eagle Services 7.180 20.528.064 Alfa Romeo Avio-Fiat Avio 3.101 9.161.323 Israel Aircraft Industries 2.721 8.571.103 Valores Bavaria S.A. - 8.053.062 Aerolineas Centrales de Colombia 2.487 14.478.012 Ansett World Wide Aviation Services 1.856 5.361.007
(3) Interline billing are all those accounts payable that are generated with other airlines. (4) A break up of the long-term suppliers is the following: BLANK SPACE - 29 - 2003 2002 G .E. Capital Aviation Service USD 22.953 $ 63.768.164 USD 24.970 $ 71.535.142 Wasserstein Limited 15.277 42.442.434 - Debis Air-Finance B.V. 11.624 32.294.024 12.826 36.744.107 Ansett World Wide Aviation Services 7.902 21.953.645 8.037 23.023.343 Valores Bavaria S.A. - 18.872.818 - 18.751.961 Aerfi Group PLC 5.159 14.332.631 - P.C.A. S.A. - 3.353.964 - 3.353.964 British Aerospace Inc. (First Secur) (a) 1.109 3.080.626 6.355 18.206.498 Babcock & Brown (Alps-94) - - 975 2.792.426 Inversiones Cromos S.A. - 2.721.298 - 2.691.298 Red Colombia S.A. - 573.388 - 573.388 Empresa Colombiana de Telecomunicaciones 432.625 432.625 Caracol Television S.A. 257.376 257.376 Inmobiliaria Aguila S.A. (b) - 71.202 Fokker Services V.B. Technical SVCS - 30.000 Petroleum Aviation and Services S.A.( c) - 120.857 Primer Air Ltda. 71.203 - ------------ ---------- ------------ USD 64.024 $204.154.196 USD 53.163 $178.584.187 ========== ============ ========== ============
(a) On June 27, 2001 a restructuring agreement was signed between the Company Avianca S.A. and the supplier of the flight equipment RJ-100. As a result of this agreement it was established that the total liabilities with this supplier reached an amount of USD 17.722.335 for rent, interest and two promissory notes signed at the time of returning the flight equipment. British Aerospace negotiated the promissory note with Dresdner Kleinwort Wasserstain Limited; the debt as of December 2003 is of USD 16.628.684.24 including interest. (b) The debt with Inmobiliaria Aguila was assumed by Primer Air Ltda. (c) In the year 2002 the debt with Petroleum Aviation and Services S.A. was assumed by Valores Bavaria. During the year 2002 renegotiations were made with the entities: Grupo Ansett, Grupo Gecas, Grupo Pegasus, lessors of the flight equipment to extend the term of the contract up to six (6) months for payments and reduction of the leases for the same time. BLANK SPACE - 30 - 16. ACCOUNTS PAYABLE
2003 2002 Interest payable (1) $ 16.531.231 $ 44.121.401 Withholding tax 11.832.630 11.291.937 Costs and Expenses payable 7.615.698 9.455.065 Accounts payable to Contractors 5.938.384 7.460.988 Accounts payable insurance 13.563.140 4.600.036 Accounts payable, fees 11.587.334 3.581.436 Withholdings and payroll contributions 3.240.516 2.400.203 Accounts payable Chapter 11 (2) 45.170.354 Other accounts payable (3) 15.069.418 30.879.579 ------------- ------------- Total corto plazo $ 130.548.705 $ 113.790.645 ============= =============
(1). The most representative supplies of accounts payable. interest as of December 31st, are the following: Wassertein Perrela & Co (a) $ 684.584 $ 18.206.498 Caja de Auxilio y Prestaciones ACDAC "CAXDAC" (b) 4.141.952 16.281.741 Valores Bavaria S.A. (b) 936.617 5.293.538 Pratt & Whitney Eagle Services - 1.005.633 Bank of the New York (c) 4.981.876 Banco de Bogota (c) 4.518.210 P.C.A. 217.700 145.369 Inversiones Cromos 310.526 242.215 Others 739.766 2.946.407 ------------ ------------- Total $ 16.531.231 $ 44.121.401 ============ =============
(a) For the year 2003 the debt of Wasserstein Perella & Co. was reclassified to Accounts payable, long term. (b) Debts with Valores Bavaria and others were reclassified to accounts payable, Chapter 11 (C-11). (c) Interest and obligations with The Bank of New York and Banco de Bogota, were accrued, and these have not been cancelled for restriction of Chapter 11 (C-11). Restructure agreement - As part of the restructure long-term agreement with foreign creditors, it was agreed to restructure in the same terms the debts for services that existed with those related with the group Valores Bavaria S.A. The value of the definite capital for the long-term suppliers for the Companies related to the group Valores Bavaria S.A. was of $23.910 millions, which term for their cancellation is of 7 years counted as from February 1, 2001 with a grace period for contributions to capital of 4 years, counted as from February 1, 2001 that extends up to January 31, 2005 As from the fifth year and at the maturity of the respective semester, as of July 31, 2005 and each 31st day of January and 31st day of July until their payment in full, shall be paid in equal installments of credit to Capital. The rate of remuneratory interest in pesos is equivalent to a 9% per year in dollars for year due of 365 days. The interest for the first year, that is, from February 1, 2001 thru January 31, 2002, were capitalized and became a higher value of the definite capital; interest for the second year were paid by due semester, the first payment being on July 31, 2003 and thereafter, each 31st day of January and each 31st day of July, until the date of its total payment. - 31 - The debt contracted with Petroleum Aviation Services was transferred by Valores Bavaria S.A. as from May 2002, with respect to the debt that existed with Vise Ltda. Such debt was transferred in a 95% to Valores Bavaria S.A., and the 5% to Inmobiliaria Aguila S.A., as from May 1, 2002. With respect to the debt that existed with Serdan S.A. and Mision Temporal S.A. it was transferred to Valores Bavaria in full with effect on October 11, 2002. Restructuring Agreement Sam S.A. -As part of the long term restructuring agreement with foreign creditors, it was agreed to restructure under the same terms the debts for services that might exist with related companies to the group of Val ores Bavaria S.A. The payment term is of7 years, counted as from February 1, 2001, with a grace period that extends up to January 31, 2005. (2) In taking refuge in Chapter 11 before The Court of New York, the Company leaves frozen the domestic accounts payable and the foreign accounts payable that were generated before March 21, 2003. Some payments have been made to suppliers critical of the operation in Colombia and abroad, prior authorization from the U.S. Court of Bankruptcy of the South District of New York, the most representative debts being: Caja de Auxilios and Prestaciones Caxdac 12.527.448 Administrative Special Unit of the National Treasury 11.176.991 Oag Worldwide 1.283.751 Lasa S.A. 1.202.058 Aerosucre S.A. 1.066.833 Sabreinc 1.024.491 Pros Revenue Management Inc. 922.460 McCann Ericson Corporation S.A. 683.388 Coopava Cooperativa de Trabajadores 682.798 The Bank of New York 669.085
(*) The Court of New York has been approving payments to some direct suppliers necessary for the development of the business purpose of the Company. (3) Corresponds to accounts payable for transportation of luggage and flight services, among others. 17. TAXES, ENCUMBRANCES AND RATES
2003 2002 Sales tax payable $ 13.111.296 $ 9.944.031 Industry and Commerce Tax 2.427.834 2.167.950 Other taxes payable (1) 7.382.448 9.873.503 ------------ ------------ Total $ 22.921.578 $ 21.985.484 ============ ============
(1) Corresponds to the sales tax generated and recovered from abroad and which was analyzed and adjusted against the recovery of other costs and expenses. Through resolution 900009 of June 11, 2003 the Direction of National Taxes and Customs, Barranquilla Office, prior compliance with the legal obligations, granted the Company a faciliy of payment to cancel the pending obligations for sales tax (VAT) returns, withholdings at source, customs penalties and their respective interest. The debt at that date was the sum of $21.015.587, giving a term of 33 months as from the month of June 2003. As guarantee, there - 32 - were delivered 38 immovables for an amount of $19.217.484 and an insurance policy for an amount of $7.000.000. As of December 31, 2003 the Company has fulfilled timely with the payment of the installments of the payment facility and with the new tax obligations acquired after such facility was granted. INCOME TAX For the years 2003 and 2002 the Company did not calculate any income tax due to the fact that the liquid fiscal equity for the prior years, basis for the calculation of the presumptive income, is negative. At December 31st the income tax returns are open for the taxable years 2002 and 2001, as well as the withholding tax returns and sales tax since the year 2001 to date. At this time, the income tax returns for the years 2002 and 2001 are being reviewed by the tax authorities and would become firm on September 4, 2005 and September 5, 2004 respectively. Likewise, the declaration of tax on sales for the 5th period of 2001 is being reviewed. For years 2003 and 2002 the Company calculated the provision for income tax taking as the base the presumptive income on the liquid equity of the immediately prior year. The SAM S.A.'s income tax returns have been reviewed by the fiscal authorities or the term for carrying out such review has expired for all the tax returns up to the year 1998. The income tax relating the taxable year 1999 was corrected by the Company on April 2002, renewing its term for review; that correction did not generate any penalty whatsoever, inasmuch as the tax payable was not modified, and it continued being zero. The declaration of the taxable year 2000 and 2001 is in the process of taxation inspection on the part of the Direction of Taxes and National Customs - DIAN. The Company considers that in case of amendment of those declarations the statements of results shall not be affected, inasmuch as any additional value of taxable income or decrease in costs and deductions shall be offset with a greater deduction of prior period losses. BLANK SPACE - 33 - 18. ESTIMATED LIABILITIES AND PROVISIONS
2003 2002 Maintenance (1) $ 82.559.347 $ 64.143.534 Insurance (2) 611.432 29.633.565 Fiscal obligations (3) 40.204.943 38.101.944 Facilities 7.213.533 6.569.203 Contingencies (4) 13.895.472 4.627.880 Communications 4.704.559 4.072.497 Hotel services 1.593.549 3.469.114 Landings 2.604.547 2.977.392 Services to passengers 2.428.158 1.548.026 Distribution systems and reserves (5) 2.852.716 1.943.258 Legal expenses 416.732 1.364.209 Labor (6) 22.347.163 Extraordinary expenses (7) 6.555.497 588.808 Others (8) 12.699.599 7.633.642 -------------- ------------- Total $ 200.687.247 $ 166.673.072 ============== =============
(1) For the year 2003 the Company recognizes the costs of the maintenance services and major repairs in accordance with the hours flown during the period. Minor and rutinary costs of services in order to maintain the fleet in operating conditions are recognized at the time of the service. (2) In the year 2002 there was recorded the Provision of invoices for extra-premiums of the policies of Civil Liability and of hulls for the months of October, November, like all the policies of the December operation; at the same time the contingency to Colseguros was recorded for premium at short term, which is in the process of negotiation with respect of the demandability of same and the eventual paymet agreement (Note 14). During October 2003 the Company signed a transaction agreement with the Aseguradora Colseguros, in order to credit and cross these amounts with the accounts receivable; nevertheless to this date it is pending approval by the Court of New York. (3) Corresponds to the Provision that the Company has estimated, for the higher value taken as discountable, between the tariff of the tax on sales charged (10%) and the tariff of the sales tax discounted (16%). With Law 788 of December 27, 2002, the sales tax rate for sale of air tickets was unified in 16%. (4) Corresponds to the Provision of the total of probable contingencies for labor, commercial, civil and criminal litigation. Likewise there is recorded a Provision for USD 750,000 corresponding to the penalty for narcotics in the United States. (5) Relates to the accounts payable for the months of June, July and August pending billing for this concept. (6) Provision effected for the pension titles of the ISS that were not redeemed. (7) Relates to the Provision for the negotiation in the refund of fleet with ILFC, which shall be renegotiated within Chapter 11. - 34 - (8) Relates to the bonuses for flexible salary of the management personnel of the Company, which is still pending definition and approval by the Count of New York, on Chapter 11, provision for surveillance services in New York and Miami from January to October 2003 pending billing. 19. OTHER LIABILITIES
2003 2002 Prepayments and advances received (1) $ 713.569 $ 3.623.110 Deposits received (2) 3.637.615 3.762.190 Income received for third parties (3) 2.492.085 4.471.883 ----------- ------------- Total $ 6.843.269 $ 11.857.183 =========== =============
(l) Prepayments and advances received from clients, their decrease is due to the termination of the promotion Tuti Fruti flight plans by Bavaria, (2) Relates to Deposits given as guarantees of contracts for the future purchase of immovables entered into with Bavaria in the amount of $3.637.597. (3) Relates to the collection of airport rates especially in the bases of Madrid and Miami, and the exit taxes and stamp tax toward foreign countries. 20. LABOR OBLIGATIONS Consolidated serverance pay (1) $ 6.370.656 $ 8.722.837 Pensions payable 186.878 Interest on severance pay 708.036 994.730 Consolidated vacations 6.586.634 7.757.694 Retirement pensions (2) 438.452.826 237.603.596 Extra-legal fringe benefits 8.218.317 9.676.116 Salaries payable 2.655.470 Others 53.850 687.374 ------------- -------------- Subtotal 463.232.667 265.442.347 ------------- -------------- Labor obligations, current portion 18.584.249 24.581.258 ------------- -------------- Labor obligations, long term $ 444.648.418 $ 240.861.089 ============= ============== (1) Consolidated severance pay Law 50 of 1990 $ 1.970.595 $ 4.494.014 Former legislation 4.400.061 4.228.823 ------------- -------------- Total consolidated severance pay $ 6.370.656 $ 8.722.837 ============= ============== Less: short-term current portion $ 175.064 $ 5.465.344 ------------- -------------- Consolidated severance pay, long term $ 6.195.592 $ 3.257.493 ============= ==============
- 35 - (2) Retirement pensions Land personnel: Present value future retirement pensions (*) $ 304.847.998 $ 308.708.430 -------------- ---------------- Pensions to be amortized (66.940.583) (71.218.621) -------------- ---------------- Subtotal 237.901.415 237.489.809 -------------- ----------------
(*) For the year 2003 and 2002 the value of the pensional titles is recorded within this account of 176 and 205 active employees of the Company (Flight Attendants), in the amount of $52.439.977 and $61.444.234, respectively. This caption also records the value of 146 pensioned personnel in charge of the Company in the amount of $11.088.173. Additionally, within the present value future retirement pensions there are 2.769 pensioned personnel in charge of Valores Bavaria with an actuarial reserve of $292.966.262. Retirement pensions Flight personnel, pilots and copilots (1) Present value future retirement pensions (*) $ 415.679.254 $ 317.963.251 --------------- --------------- Retirements pensions to be amortize (147.233.592) (260.130.567) --------------- --------------- Effective transfers under Caxdac (67.900.251) (57.718.897) --------------- --------------- Subtotal 200.545.411 113.787 --------------- --------------- Total provision for retirement pensions $ 438.452.826 $ 237.603.596 =============== ===============
(*) Within this account there is recorded the value of the pensional titles of 237 pilots with an amount of $31.195.380. The payments for retirement pensions to pilots and co-pilots, covered with the special regime of transition are effected through Caja de Auxilios and of Prestaciones ACDAC (CAXDAC), with the funds the Company transfers to it. In conformity to article 21 of Law 797 of January 29, 2003, Avianca reduced 36,5 and SAM 47,4 percentual points from the percentage of accumulated amortization up to the year 2001, The effect of this reduction in the percentage of accumulated amortization implied the reversal of $80.596 millions corresponding to the liability amortized for retirement pensions up to the year 2001, and $36.763 millions of the expense for the year 2002. During the year 2003 there was recorded as non-operating expense the amount of the reversal of retirement pensions in the amount of $117.359 millions, originated on the interpretation of Law 797 of January 2003. The amounts to be transferred include, in addition to future transfers, any amounts of money that as of the date of issuance of the Law may have not been transferred and the interest accrued thereon. In accordance with the above, the Companies, must have the 100% of their obligation for pensions amortized in the year 2002. At December 31, 2002 the amount amortized reflects the changes in the law. the Court declared article 21 of Law 797 unenforceable, remaining in force decrees 1282 and 1283 of 1994. Likewise, on January 13, 2003 the Colombian government issued Decree 051, whereby article 77 of Decree 2649 of 1993 is amended with the paragraph 4, indicating that economic entities other than those supervised by the Banking Superintendence that have complied with the amortization - 36 - obligations of the actuarial calculation, in the manner provided in this article, may as from the financial statements cut at December 31, 2002, distribute the percentage to be amortized of their actuarial calculation up to the year 2023 in a linear manner. Likewise, it is cleared up that the economic entities that had not carried out the amortization of the actuarial calculation in the financial statements with a cut prior to December 31, 2002 in the way provided in this article, may apply this paragraph 4, if and when they amortize in the aforementioned financial statements the portion they were obligated to, prior to that date. On August 11, 2003 decree 2279 was issued by the Ministry of Finance and Public Credit, whereby the paragraph of article 54 of Law 100 of 1993, amended by article 21 of Law 797 of 2003, is partially regulated, which clears up that the obligation of transferring resources to administrative entities in annual payments, is extended up to the year 2023, but the term of amortization of the actuarial calculation is maintained without modification; on this subject the Superintendence of Ports and Transportation made comments on the matter last September 12, 2003 per resolution No. 1591. On December 29, 2003 Law 860 was sanctioned which establishes again the term for the payment now of the amounts amortized and unamortized amounts for the year 2023, through montly payments in twelve installments per month due within the first ten days of the following month. Such law likewise converts the payment of the interest for delay owed up to the date of issuance, in a current debt payable in eight years. In the year 2001, the amortization of the actuarial calculation for retirement pensions for pensioned flyers or in regime of transition in Caxdac, Avianca reflects the procedure established by Circular No. 088 of 1995 issued by the Banking Superintendence. Before issuance of Law 797 of 2003, Avianca had pending remittance the amount of $42.270.245 relating to the transfers of the years indicated below: Capital amount, transfer of year 1998 $ 12.192.034 Capital amount, transfer of year 1999 21.113.566 Capital amount, transfer of year 2000 8.964.645
As of December 31, 2002 Sam had pending remittance of $14.748.520 corresponding to the transfers of the years indicated below: Capital amount, transfer of year 1997 $ 2.989.645 Capital amount, transfer of year 1998 1.131.917 Capital amount, transfer of year 1999 2.458.661 Capital amount, transfer of year 2000 8.168.297
21. INCOME RECEIVED IN ADVANCE This caption is made up of the revenues originated in the sale of air transportation tickets sold pending to be used. 22. SHAREHOLDERS' EQUITY CAPITAL - As of December 31, 2003 and 2002 the authorized capital was represented by 1.000.000.000.000 (1 billion) shares, of which 108.000.000.000 are preferred shares, with a - 37 - nominal value of $0,01 per share; and the subscribed and paid-in capital for 2003 was of 743.708.638.300 shares of which 101.746.321.300 are preferred. CAPITAL SURPLUS - Corresponds to the higher value received by the company from the subscription of shares. REVALUATION OF EQUITY - Reflects the effect of the inflation adjustment applied to the equity accounts, with the exception of revaluations. Their balance can only be distributed as earnings when the entity be liquidated or their value is capitalized in conformity with the legal rules. VALUATION SURPLUS - The Company has recorded the following valuations:
2003 2002 Property, plant and equipment $ 56.467.398 $ 56.658.067 Investments 496.403 66.595 Other assets 1.993.969 1.993.968 ------------- ------------ Total $ 58.957.770 $ 58.718.630 ============= ============
The commercial values in 2002 were obtained through technical studies made by a specialized external firm or by personnel linked by labor to the Company. 23. MEMO ACCOUNTS
Debtors: Contingent rights Property and securities given on guarantee $ 161.997.902 $ - Property and securities given to third parties 34.632 34.632 Property and securities given to third parties commercial severance pay deposit 2.114.405 Inflation adjustments, given property and securities 59.289 248 Litigation and/or claims 17.096.959 17.096.958 Purchase/sale agreements 110.330 110.330 Inflation adjustments 47.899 37.091 --------------- --------------- Subtotal contingent rights 179.347.011 19.393.664 --------------- --------------- Fiscal: Difference in accounts receivables 41.596.347 15.627.389 Fiscal difference on investments 1.939.691 251.349 Fiscal difference on inventories 21.436.555 15.633.149 Fiscal difference on other assets 209.844.238 237.770.305 Accumulated fiscal loss 711.114.740 783.379.548 Inflation adjustments 147.029.381 114.931.083 --------------- --------------- Subtotal fiscal debtors 1.132.960.952 1.167.592.823 --------------- ---------------
- 38 -
2003 2002 Control: Turbines leasing 41.626.344 15.061.957 Fully depreciated assets - Administrative center trust 342.283.188 362.313.515 Agencies' prepayment of commercial severance pay - 14.619.066 Inflation adjustments 47.174.613 23.200.015 --------------- --------------- Subtotal control debtors 431.084.145 415.194.553 --------------- --------------- Total debtor memo accounts $ 1.743.392.108 $ 1.602.181.040 =============== =============== Creditor: Contingent liabilities Labor suits $ 16.837.560 $ 2.585.224 Claims and lawsuits 6.078.335 8.222.495 SAM losses (Equity method) 86.343.455 56.450.366 Coviajes losses (Equito method) 70.859 70.555 Lot La Soledad Barranquilla 51.137.273 51.137.273 Guarantees and bank endorsements 46.197.977 118.841.999 Purchase options mat's property per Vallejo Plan 32.890.816 32.890.816 Property and securities received in guarantee 1.153.628 1.153.628 Property and securities received by third parties 12.476.477 - Avianca plus redeemable miles 3.591.020 4.283.980 Inflation Adjustments 50.620.310 36.355.586 Civil lawsuits and claims 277.313.299 - Taxation lawsuits and claims 8.463.061 --------------- --------------- Subtotal contigent liabilities 593.174.070 311.991.922 --------------- --------------- Fiscal: Differences in liability accounts 167.190.202 140.281.944 Inflation adjustments 3.660.621 6.660.963 --------------- --------------- 170.850.823 146.942.907 --------------- --------------- Control: Components in consignment - 17.718.056 Financial lease contracts, other concepts 272.254.513 612.156.183 Inflation adjustments - 2.461.489 --------------- --------------- Subtotal control creditor 272.254.513 632.335.728 --------------- --------------- Total creditor memo accounts $ 1.036.279.406 $ 1.091.270.557 =============== ===============
- 39 - 24. MAINTENANCE EXPENSES FLIGHT AND AIRPORT EQUIPMENT
2003 2002 Major repairs $ 112.432.284 $ 92.825.746 Component repairs 83.688.357 85.989.076 Payments for maintenance reserves 63.861.605 58.330.136 ------------- ------------- Total maintenance expenses $ 259.982.246 $ 237.144.958 ============= =============
In accordance with the maintenance programs established by the Company, in the year 2003 major repairs and of components were made on one important part of the fleet, which in accordance with industry standards was completing the necessary time to carry out such repairs. 25. SELLING EXPENSES Personnel expenses $ 23.003.500 $ 15.949.786 Reserve and distribution systems (1) 74.382.176 58.818.396 Publishing and advertising 10.401.301 7.416.614 Taxes, contributions, fees and others 18.401.114 17.512.953 General services 34.993.783 17.922.609 Commissions (Note 7) 187.636.898 182.657.966 Services to passengers (2) 18.087.129 24.635.868 Maintenance and rental of equipment 8.492.040 8.879.227 Sundry 11.279.559 16.997.635 ------------- -------------- Total selling expenses $ 386.677.500 $ 350.791.054 ============= ==============
(1) Corresponds to the payment periodically made to the various entities that manage the system of domestic and international reserves, which the various Agencies and Agents have access to, in the normal process of selling the air tickets. (2) Corresponds to expenses for lodging, maintenance, transportation of passengers, yield from the sale of travel plans. 26. ADMINISTRATION EXPENSES Personnel expenses $ 17.500.468 $ 27.657.991 Fees (1) 21.579.901 10.556.470 Taxes, contributions and others 9.090.756 23.379.912 Maintenance and rental of equipment (2) 12.878.329 14.486.868 General services 12.286.989 26.409.290 Sundry 2.732.123 3.182.622 ------------ ------------- Total selling expenses $ 76.068.566 $ 105.673.153 ============ =============
- 40 - (1) The increase in fees is due to the expenses for restructuring the company, and the services rendered by Bain and Seabury Group. (2) Maintenance of computer equipment and the rental of the Administrative Center of Avianca - Bogota. 27. GAIN ON THE SALE OF ASSETS, RECOVERIES AND OTHERS
2003 2002 Income from sanctions and penalization refunds $ - $ 14.997.531 Sales of flight equipment 1.972.201 8.549.608 Indemnifications received 1.111.190 1.830.345 Recovery of airport rates (1) 18.837.271 - Recovery of insurance flight eqt. Dec. 2002 (2) 4.490.446 Recovery of foreign taxes 4.203.664 Yields on American Express deposit 595.754 Recovery of disabilities 597.106 Recovery of expenses for prior periods 2.483.434 Recovery costs prior periods retirement pensions CAXDAC (3) - 112.192.600 Recovery commercial severance pay (4) - 17.498.416 Recovery of inventories and components (5) 1.125.064 17.671.390 Recovery for termination of Colseguros policy 1.040.941 Airport rates - 2.112.231 Recovery of accounts receivable 3.260.783 5.007.300 Recovery of maintenance reserves (6) 23.019.465 71.172.004 Recovery of cost or expense rights on retirement (7) 1.976.912 Others 7.221.594 7.601.092 ------------- ------------- Total $ 71.935.825 $ 258.632.517 ============= =============
(1) Corresponds to the recovery of the collection of domestic and international airport rates, according to the analysis and reconciliation carried out during the year 2003 to this account. (2) Corresponds to the recovery of the insurance provision for the month of December 2002. (3) In the year 2002, recoveries of costs and expenses were recorded for retirement pensions, per pension reform law 797 of 2003. (Note 20) (4) Likewise in the year 2002 according to the change in accounting policy, recoveries of costs and expenses were recorded for commercial severance pay of agencies and agents for the years 1995 to 2001 in the amount of 16,006 millions, thus governing the statements on the contracts subscribed. (5) In accordance with physical inventory of equipment components of flight and in land equipment in the year 2002 a recovery of $ 17.671 millions was recorded. (6) The recovery of reserves for maintenance corresponds to the amounts recognized by the lessors as refunds of the additional maintenance directly paid by Avianca. Such refund is made by the lessors with a portion of the reserves Avianca pays monthly to the lessors as part of the rental payment. (7) Recovery originated by the Institute of Social Security's certification on the amount that Avianca has pending of payment on pension titles. - 41 - 28. MONETARY CORRECTION
2003 2002 Property, plant and equipment (net) $ 3.321.807 $ 5.240.369 Inventories 4.669.890 - Investments 99.201 109.062 Intangibles - 304.033 Deferred assets 2.299.474 3.167.381 Other assets (298) (875) Revaluation of equity 7.516.208 1.608.297 ------------- ------------ Income balance - Net $ 17.906.282 $ 10.428.267 ============= ============
29. NONOPERATING EXPENSES - OTHERS Provision retirement pensions year 2002 (1) $ 136.016.777 $ Pension bonds for flight attendants ISS (2) 22.123.372 Account payable Wassestein Perella (British Aerospace) (3) 29.226.302 Negotiation with ILFC for return of aircraft 6.334.318 - Indemnity, dismissal and retired personnel disability 3.626.184 1.869.051 Claims for noncompliance with contracts 364.922 1.550.189 Fines imposed by the U.S. Departament of the Treasury Customs Service 2.083.658 Provision of 10% advance commercial severance pay year 2002 2.217.956 Expense for bank adjustment year 2002 2.816.175 - Loss on retirement of assets and others 4.580.523 9.310.880 Fines, penalties, litigation and indemnities 8.941.791 874.992 Taxes assumed 3.637.208 418.392 Expense global policy on performance bond DIAN 483.546 Provision on discountable VAT Vallejo Plan 1.200.000 Correction on account receivable agency 2.529.376 Insurance policies November 2002 5.817.817 Expense on Sita distribution system April 2002 742.611 Expenses on employees' medical insurance Avianca Inc. 376.180 Commission expense on credit cards Avianca Inc. 306.925 Noteholders' fees 2002 and 2001 1.901.794 Adjustment airport facilities year 2002 2.084.146 Lease of components year 2002 1.516.944 - Other costs and expenses prior years (4) 5.524.240 3.144.732 ------------- ------------ Total nonoperating expenses - others $ 244.452.765 $ 17.168.236 ============= ============
(1) Ajustment retirement pensions relating to reversal of provision for land calculation in the year 2002. - 42 - (2) Provision effected for the I.S.S. pension titles that were not redeemed (Note 19). (3) Adjustment effected for noncompliance with the cessation of payments of debt Chapter 1 (4) Increase is caused by the adjustment resulting from the reconciliation of old portfolio and bank items 30. CONTINGENCIES AND COMMITMENTS CONTINGENCIES AVIANCA S.A. AND SAM - The Company is carrying on the defense of various administrative and judicial processes of a contentious-administrative, civil, commercial and labor nature with respect to which an unfavorable decision would represent an obligation to pay. Labor, civil and administrative processes - There exist processes of a labor and civil nature in course against the Company in which the pretensions estimated by the complainants amount to the following sums in pesos and U.S. dollars: $16.837 million for labor proceedings; $17.630 million and USD94,044 for civil proceedings. There also exist administrative processes whose amount in discussion in said processes reach the sum of $12.948 millions. It is estimated that the probable contingency of loss for the enterprise, for the year 2004, for labor proceedings is of $1.770 million, and for Administrative processes is of $1.070 millions. With respect to the civil processes no judgments are expected for the year 2004. Additionally, the Company has not given any compliance whatsoever to some of the commitments of the Vallejo Plan for an approximate amount of $24.821 millions, which are being analyzed in order to determine their adjustment and registration. Tax, exchange and customs processes - With respect to the taxation and exchange processes which amount under discussion reaches the sum of $10.600 millions, the Company expects favorable judgments. DESCRIPTION OF THE RELEVANT PROCESSES FOR THE COMPANY - Process nullity judgment penalty for lack of ICA information taxable year 1993 - A penalty was imposed by the District Direction of Taxes, due to the fact that the Company refrained from furnishing information on the income for the taxable year 1993, according to requirement of December 22, 1998 that for such purpose issued the District authority. On November 30, 2000 there was filed before the Administrative Court of Cundinamarca the complaint for a nullification and restablishment of the right, through which the judgment in reference was initiated. On January 26, 2001, through writ the demand was admitted. On August 15, 2002 the pretentions of the demand were decided in a way fully favorable. On October 29, 2002, through writ, the Council of State gave transfer for 3 days to support the recourse of appeal, interposed by the demanded party. On Mach 20, 2003 a brief of conclusion was filed. On May 2, 2003 the expedient went up to the to the Office for sentence, to date far the judgment is pending. The sum under discussion amounts to $182 millions. - 43 - Process on ICA proceeding, taxable year 1993 - On January 11, 2002 a claim was filed before the Administrative Court of Cundinamarca for the nullity and re-establishment of the right, through which the judgment in reference was initiated. On February 15, 2002 by writ, the claim was admitted and furthermore it was ordered to furnish security for an amount of $147 millions, equivalent to a 10% of the sum under discussion. On February 13, 2003 a brief of conclusion was filed; to this date it is pending decision. On May 21, 2003 the pretensions of the demand were decided in a favorable way. On September 5, 2003 the Court admitted the appeal interposed by the district attorney. On December 1, 2003 there was filed the brief of conclusion. It presently is pending going up to the office for judgment. The sum under discussion amounts to $1.471 millions. Proceeding for annulment tax on sales, first bimester of 2002. - On the second amendment of the declaration there was not included a penalty for correction in the first opportunity. On July 17, 2001 the proceeding for annulment and re-establishment of the right was filed before the Administrative Court of Atlantico folt through which the process in reference was initiated. To this date it is pending judgment. The sum under discussion amounts to $53 millions. Exchange penalty - An exchange penalty was levied for untimely filing of the report on the activity of two (2) offsetting accounts before the Bank of the Republic. To this date it is pending of being taken to the office for judgment. The amount discussed is $2.287 millions. Proceeding for annulment coactive collection tax obligations - On November 18, 2001 there was presented before the Administrative Court of Atlantico the proceeding of annulment and reestablishment of the right, through which the process in reference was initiated. On March 22, 2002 through writ, the Administrative Court of Atlantico ordered furnish security for the amount of $676 millions. To this date it is pending judgment. The amount discussed is $6.756 millions. Process of Aces against Copa and Avianca-Sam: Aces demanded Avianca - Sam and Copa adducing the existence of an absolute monopolistic practice and of a monopolistic relative practice developed in the framework of an agreement of shared code entered into by those three enterprises. The process is in the probatory stage in the Civil Court of the Circuit of Panama, which may last over two years with appeal recourses. The present status of the process does not permit to determine in a certain manner the possibilities of an unfavorable judgment for Avianca-Sam and favorable for Aces. The process is in the probatory initial stage, and while there be no judgment of first instance it is not possible to grade the risk or probabilities of success for either party, and anyway, the decision will be subject to recourses. On the other hand, the new aeropolitical developments may give place to decisions of abdication of the action or settlement for judgments in contra. The Administration of the Company, along with its external and internal legal advisors consider that the probable resolution of these contingencies will not materially affect the financial condition or results of the Company. On the contingent in which risks are considered, the - 44 - respective provisions have been made, which as of December 31, 2003 and 2002 amount to $13.317.080 and $4.049.000, respectively. Process of Aircraft M. vs Avianca: This process is at the office of the presiding judge of the first instance for judgment. It is estimated that the duration of the process is of five years. Since there has not yet being any judicial pronouncement in this respect, a remote adverse result is expected. The sum of such process amounts to USD 56,000. Agreement with British Aerospace - On June 27, 2001 an agreement was signed for restructuring of the debt between the Company, Avianca S.A. and the supplier of the flight equipment RJ-100, in which there were established certain commitments and obligations that must be properly complied with by the signatory airlines. By virtue of such agreement Avianca assumed the liability of the Company with the supplier, determined in $36.133 millions, but the Company continues being the underwriter and solidary debtor. The balance of this debt, that as of December 31, 2003 amounts to $18.206 millions for Avianca, represents a contingent balance, which value and demandability for the Company shall be in function of the contractual compliance assumed by Avianca. The Administration of the Company along with its external and internal legal advisors consider that the probable resolution of these contingencies shall not materially affect the financial position or results of the Company. On the contingencies in which risks are considered, the respective provisions have been made, which as of December 31, 2003 amounted to $578.892. FORWARD CONTRACTS - As of December 31, 2002 the Company had constituted covering contracts of forward rate under the modality of Non Delivery for USD3,000, with due date lower than one year, to guarantee the cash flow in foreign currency required to attend the operating costs in the short term. In accordance with their modality and due date, the Company records the rights and obligations of this type of contracts in memo accounts. For the year 2003 no contracts of this nature have been made. SWAP CONTRACTS - As of December 31, 2002 the Company has constituted a Master Commodity Price Swap Agreement for 5.000.000 gallons Platts USD Gulf Coast Jet Fuel Pipeline, 54 Grade, with due date lower than one year, to cover the fluctuation in the purchase of fuel. In accordance with their modality and due date, the Company records the rights and obligations of this type of contracts in memo accounts. For the year 2003 no contracts of this type have been made. COMMITMENTS - By virtue of the contracts subscribed with the Bank of New York and Avianca S.A., the following commitments were acquired: Deliver within the first four months of the year the audited financial statements, including a report on the changes in the share composition and uses and sources of funds, certified by independent public accountants. Notify to the bank the existence of any claim or process initiated against the Company and which may put in risk the rights of the bank. - 45 - - Maintain and preserve the assets necessary for the proper development of its business activities. - Not to substantially change the nature of its business purpose. Adequately reflect the transaction object of the guarantee in the financial statements. Comply with all the legal rules applied to the development of the business purpose of the enterprise and related activities. Administer the accounts receivable during the validity of the contracts. Requirements of information in accordance with the format established in the contract: Quarterly report on the movement of the account where the collection of accounts payable assigned is recorded. Projected collections. - Commitments of payments and the financial ratios. Likewise, any other information that may be required by the bank. NONCOMPLIANCE WITH THE FINANCIAL INDICATORS (COVENANTS) - By virtue of the contracts subscribed between Avianca S .A. and the leasing of aircraft, the company must maintain the following financial indexes at the closing of each period: Ratio of interest coverage 1,1 to 1 Ratio of coverage of the adjusted debt 5,5 to 1 Ratio of service of the required debt 2,5 to 1
2002 Indicators: Ratio of interest coverage 6,94 Ratio of coverage of the adjusted debt 6,10 Ratio of service of the required debt 3,54
Since Avianca S.A., has not complied with the financial indexes, the bank has granted periodic permits of noncompliance in conformity with the negotiations the financial area has effected. For the year 2003 the compliance of the Covenants for renegotiations with the Noteholders has not been forwarded. - 46 - COMMITMENTS OF FINANCIAL LEASES -
2003 2002 USD USD Value of monthly rental pending 3,397 6,198
The Company has leases for 34 aircrafts, of which the contract with major length goes up to November 1, 2007. The rentals pending range between 1 and 46 months. FUTURE COMMITMENTS LEASE OF FLIGHT EQUIPMENT IN DOLLARS
2004 2005 2006 2007 Equipment USD USD USD USD Total 37,207 27,204 17,918 7,011
31. MATTERS OF INTEREST SUPERINTENDENCE OF PORTS AND TRANSPORTATION - With resolution 544 of May 23, 2003 this Superintendence submits to control, the Company Aerovias Nacionales de Colombia S.A. Avianca S.A. TAX REFORM - On December 29, 2003 Law 863 was subscribed as tax reform, which application commences as from January 1, 2004. A detail of the main reforms is the following: The period in force for the equity tax for the taxable years 2004, 2005 and 2006 is extended, establishing a rate equivalent to 0.3% of the taxable base detennined for equities over $3.000 millions. It is a non-deductible tax from the income tax. For the taxable years 2004, 2005 and 2006, a surcharge of income is created equivalent to a 10% of the net income tax determined for each taxable year. This means that the income tax will pass temporarily from the 35% to the 38,5%. A regulation is amended with respect to the taxation of the financial movements (GMF); in the sense that an increase in one point to the GMF, was approved, for which reason it will pass from the three to the four per thousand; this shall be in effect until the year 2007. As from January 1, 2008 will return to the three per thousand; furthermore, the new rules shall reform subjects relating the value-added tax (VAT), determination of the rate of minority interest and deduction of costs and expenses, mainly. - 47 - [ILLEGIBLE] AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND THE YEAR ENDED DECEMBER 31, 2003 AND STATUTORY AUDITOR'S REPORT [DELOITTE LOGO] Deloitte & Touche Ltda. Cra. 7 N degrees 74 - 09 A.A. 075874 Nit. 860.005.813-4 Bogota D.C. Colombia Tel. +57(1) 5461810 - 5461815 Fax: +57(1) 2178088 www.deloitte.com STATUTORY AUDITOR'S REPORT To the shareholders of Aerovias Nacionales de Colombia S.A. - AVIANCA S.A. 1. I have audited the accompanying consolidated balance sheets of AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A., and its subsidiaries as of June 30, 2004 and December 31, 2003 and the related consolidated statements of results, changes in shareholders' equity, changes in financial position and cash flows for the six months ended June 30, 2004 and the year ended December 31, 2003. These financial statements are the responsibility of the Company's management. Among my functions, is to express an opinion on these financial statements based upon my audits. 2. Except as mentioned in paragraphs 3 to 7, I obtained the information required to perform my functions and carry out my work in accordance with generally accepted auditing standards in Colombia. Those standards require that I plan and perform an audit in order to obtain reasonable assurance as to whether the consolidated financial statements are free of material misstatement. An audit of consolidated financial statements includes an examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements. An audit also includes an assessment of the accounting principles used and the significant accounting estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis to express my opinion. 3. As the Company is still in the process of analyzing the account: taxes, encumbrances and rates, relative to the Plan Vallejo liability of $26.321 million, it was not possible for me to obtain evidence as to the reasonableness of that balance. 4. The shareholders of the Company agreed, by signing a Memorandum of Understanding, to maintain the economic balance in the operating result of the entities that comprise Alianza Summa. To date the Company has neither estimated nor recorded any adjustment for this concept as there is still pending a definitive study of the amounts to record. Therefore, it was not possible for me to verify the amount of the adjustment to be recorded for economic balance. Also, due to a lack of analysis and recording of the accounts receivable and payable to Aerolineas Centrales de Colombia S.A. - Aces, it was not possible for me to obtain sufficient evidence to express an opinion on such balances that as of June 30, 2004 amounted to $41.435 million (with a provision of $33.124 million) and $7.817 million, respectively. [ILLEGIBLE] Audit.Tax.Consulting.Financial Advisory. Deloitte Touche Tohmatsu 5. It was not possible for me to obtain replies to requests for confirmation from certain local and foreign suppliers, whose balances as per the books of Sociedad Aeronautica de Medellin Consolidada S.A. Sam S.A. as of June 30, 2004 amounted to $2.322 million. Responses to such confirmations are considered necessary to corroborate the information in the Company's accounting records. It was not possible for me through the application of alternative audit tests, to satisfy myself as to the balance of the suppliers' account of Sociedad Aeronautica de Medellin Consolidada S.A. Sam S.A. as of June 30, 2004, which is in the process of analysis and reconciliation. 6. Due to the change of the information system for the sale of tickets it was not possible to record ticket by ticket sales for the months of May and June 2004 which were recorded on the basis of estimates. Consequently, it was not possible for me to obtain sufficient evidence to satisfy myself as to the reasonableness of the balances in accounts receivable - clients, prepaid expenses - commissions, revenues received in advance, other liabilities - prepayments and advances received and other liabilities - revenues received in advance, which as of June 30, 2004 amounted to $89.727 million, $16.964 million, $138.321 million, $6.949 million and $2.192 million respectively. 7. As there does not exist a defined process for the Company to recognize within its financial statements payments to retired persons, the yields of the fund and the administration expenses of the fund, and other concepts effected and recognized by the Caja de Auxilio y Prestaciones de la Asociacion de Aviadores Civiles (CAXDAC) on a monthly basis for retirement pensions for flight personnel, it was not possible for me to obtain sufficient evidence on that balance which as of June 30, 2004 amounted to $80.260 million and which shows a difference with the statement of CAXDAC as of the same date of $13.378 million. Consequently, the liability and the expense for retirement pensions of flight personnel may be understated by that amount. 8. As mentioned in Notes 3 and 8 to the financial statements, at June 30, 2004 the Company records as of deferred charges for renegotiations with lessors for fleet returns of $4.902 million, lawyer's fees and financial consulting (related to Chapter 11) of $41.020 million, the effect of the Alianza Summa integration of $4.347 million and for special bonuses in the amount of $12.141 million. In accordance with generally accepted accounting principles in Colombia, these concepts should have been recorded in the statement of results for the period; nevertheless, the Company decided to defer them to be amortized in total once the Court makes a decision on the approval of the business plan. On August 24, 2004 the term of the exclusivity period expires following which the Company will present its business plan. Once approved by the Court, it will be possible to know the amount of the benefits and liabilities with foreign and local suppliers (Prepetition - Chapter 11). 9. As mentioned in Note 13 to the financial statements, the intangibles account includes a balance of $96.140 million and $108.436 million, as of June 30, 2004 and December 31, 2003, respectively, corresponding to goodwill arising from the businesses of specialized messenger services and travel plans called Deprisa and Deskubra. The goodwill recorded is being amortized over four years to 2005. 10. As indicated in Note 8 to the financial statements, the Company recorded in previous years deferred taxes of $50.000 million, relating to taxes recoverable through the amortization of fiscal losses whose recoverability to date is uncertain. - 2 - 11. As mentioned in Note 28, the monetary correction account and the revaluation of equity show an excess of $5.388 million as of June 30, 2004. Should such amount have not been recorded, earnings for the period and the revaluation of equity would have been decreased by that amount. 12. In my opinion, except for a) the effect of the adjustments that might have been determined, if the information in paragraphs 3 to 7 had been obtained, and b) the effect of the adjustments described in paragraphs 8 to 11, the aforementioned consolidated financial statements, taken from the accounting books, present fairly, in all material aspects, the consolidated financial position of Aerovias Nacionales de Colombia S.A. - AVIANCA S.A. and its subsidiaries as of June 30, 2004 and December 31, 2003 and the results of their operations, the changes in their shareholders' equity, changes in their financial position and their cash flows for the six months ended June 30, 2004 and the year ended December 31, 2003, in conformity with generally accepted accounting principles in Colombia, applied on a consistent basis. 13. As mentioned in Note 3 to the consolidated financial statements, without considering the effect of the matters mentioned in paragraphs 3 to 11 above, the Company and its subsidiaries show accumulated losses as of June 30, 2004 of $1.291.464 million, a negative net shareholders' equity of $383.761 million and payment restrictions to their creditors. Furthermore, the Company has not complied with certain financial indicators required by the contracts signed with foreign note holders represented by the Bank of New York. Additionally, with its affiliate in the United States Avianca Inc., it filed for protection under Chapter 11 of the U.S. Bankruptcy Code which causes a significant doubt about the capacity of the entity to continue as a going concern and places it on a dissolution cause for technical bankruptcy in accordance with the Commerce Code. Management plans to overcome this situation are described in Note 3 to the consolidated financial statements, which do not include any adjustment relating to the recovery and classification of the amount of assets or the amount and classification of liabilities, that might be required if the Company and its subsidiaries were not able to continue their operations as a going concern. 14. The accompanying financial statements have been translated into English for the convenience of readers in the United States of America. /s/ ISMAEL DUQUE MONTENEGRO --------------------------- ISMAEL DUQUE MONTENEGRO Statutory Auditor Professional Card 3270 - T August 20, 2004 - 3 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS)
JUNE 30, 2004 DECEMBER 31, 2003 ASSETS CURRENT: Cash and cash equivalents (Note 5) $ 111,549,321 $ 95,254,520 Debtors (Note 6) 179,613,199 187,613,560 Deferred (Note 7) 24,837,303 20,091,671 --------------- --------------- Total current assets 315,999,823 302,959,751 --------------- --------------- INVESTMENTS (Note 11) 688,550 636,669 DEBTORS - NET (Note 6) 4,884,537 14,553,862 DEPOSITS (Note 8) 161,482,627 127,913,932 INVENTORIES (Note 9) 43,932,708 46,479,608 PROPERTY, PLANT AND EQUIPMENT - NET (Note 10) 66,952,743 74,841,927 INTANGIBLES (Note 12) 448,062,839 451,421,640 DEFERRED (Note 7) 133,717,777 127,579,811 OTHER ASSETS (Note 13) 612,932 585,900 VALUATIONS (Note 22) 58,829,967 58,957,770 --------------- --------------- TOTAL ASSETS $ 1,235,164,503 $ 1,205,930,870 =============== =============== MEMO ACCOUNTS (Note 23) DEBITS $ 1,818,492,905 $ 1,743,392,108 =============== =============== CONTRA CREDITS CONTROL $ 1,024,577,554 $ 1,036,279,406 =============== ===============
The attached notes are an integral part of the financial statements /s/ ELISA MURGAS /s/ EDUARDO VALENCIA /s/ ISMAEL DUQUE MONTENEGRO -------------------- -------------------- --------------------------- ELISA MURGAS EDUARDO VALENCIA ISMAEL DUQUE MONTENEGRO Legal Representative Accountant Statutory Auditor T.P. No. 3717-T T.P No 3270-T (See Opinion Attached) - 4 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS)
JUNE 30, 2004 DECEMBER 31, 2003 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Financial obligations (Note 14) $ 128.429.908 $ 106.239.659 Suppliers (Note 15) 271.755.514 276.667.122 Accounts payable (Note 16) 127.101.290 130.548.705 Taxes, encumbrances and rates (Note 17) 15.015.619 22.921.578 Labor obligations (Note 20) 18.157.687 18.584.249 Estimated liabilities and provisions (Note 18) 182.271.085 200.687.247 Income received in advance (Note 21) 138.321.433 121.221.745 Other liabilities (Note 19) 12.709.690 6.843.269 --------------- --------------- Total current liabilities 893.762.226 883.713.574 --------------- --------------- LONG-TERM LIABILITIES Financial obligations (Note 14) 25.199.569 47.167.901 Suppliers (Note 15) 183.011.743 204.154.196 Labor obligations (Note 20) 522.257.604 444.648.418 --------------- --------------- Total long-term liabilities 730.468.916 695.970.515 --------------- --------------- Total liabilities 1.624.231.142 1.579.684.089 --------------- --------------- MINORITY INTEREST (5.305.988) (5.086.342) SHAREHOLDERS' EQUITY (Note 22) Capital stock 7.437.086 7.437.086 Capital surplus 888.125.032 900.604.103 Reserves 4.262.584 4.260.098 Accumulated losses (1.317.171.683) (976.242.772) Net earnings (loss) for the period 25.708.072 (340.708.972) Revaluation of equity (50.851.943) (22.874.389) Valuation surplus 58.730.201 58.857.969 --------------- --------------- Total shareholders' equity (383.760.651) (368.666.877) --------------- --------------- Total liabilities and shareholders' equity $ 1.235.164.503 $ 1.205.930.870 =============== =============== MEMO ACCOUNTS (Note 23) CREDITS $ 1.024.577.554 $ 1.036.279.406 =============== =============== CONTRA DEBITS CONTROL $ 1.818.492.905 $ 1.743.392.108 =============== ===============
The attached notes are an integral part of the financial statements /s/ ELISA MURGAS /s/ EDUARDO VALENCIA /s/ ISMAEL DUQUE MONTENEGRO -------------------- -------------------- --------------------------- ELISA MURGAS EDUARDO VALENCIA ISMAEL DUQUE MONTENEGRO Legal Representative Accountant Statutory Auditor T.P. No. 3717-T T.P No 3270-T (See Opinion Attached) - 5 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND FOR THE YEAR ENDED DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS, EXCEPT THE NET LOSS PER SHARE)
JUNE 30, 2004 DECEMBER 31, 2003 OPERATING INCOME: Tickets $ 813.556.033 $ 1.521.023.142 Postal and mailing service 66.876.426 138.936.066 Related activities 18.371.338 57.486.736 --------------- --------------- Total gross operating income 898.803.797 1.717.445.944 OPERATING COSTS AND EXPENSES OPERATING COSTS: Salaries, fringe benefits and others 77.057.036 150.569.769 Equipment leasing and others 67.343.381 179.810.753 Insurance 20.155.543 40.869.365 Airport facilities and others 74.913.817 142.041.577 Fuel 151.340.353 267.542.247 Maintenance of flight and airport equipment (Note 24) 105.610.921 259.982.246 Services to passengers 20.905.746 45.542.908 Fees, general services and sundry 59.479.390 111.324.573 --------------- --------------- Total operating costs 576.806.187 1.197.683.438 --------------- --------------- Gross profit 321.997.610 519.762.506 --------------- --------------- OPERATING EXPENSES: Sales (Note 25) 178.033.996 386.677.500 Administration (Note 26) 36.201.201 76.068.566 Depreciation, amortization and provisions 37.751.134 87.025.904 --------------- --------------- 251.986.331 549.771.970 --------------- --------------- Operating profit (Loss) 70.011.279 (30.009.464) --------------- --------------- NON-OPERATING INCOME: Gain on the sale of assets, recoveries and others (Note 27) 55.843.340 71.935.825 Monetary correction (Note 28) 36.585.144 17.906.282 Financial 19.218.409 47.184.247 --------------- --------------- 111.646.893 137.026.354 --------------- --------------- Total non-operating income NON-OPERATING EXPENSES Loss for translation 575.731 635.728 Financial - interest and commissions 31.783.159 65.765.112 Others (Note 29) 63.981.322 244.452.765 --------------- --------------- Total non-operating expenses 96.340.212 310.853.605 --------------- --------------- RETIREMENT PENSIONS : Payments 15.838.927 28.578.024 Provision 43.471.311 108.027.625 --------------- --------------- 59.310.238 136.605.649 --------------- --------------- Earnings (Loss) before income tax 26.007.722 (340.442.364) --------------- --------------- Provision for income tax: Current year 425.571 2.556.475 --------------- --------------- Total income tax (Note 17) 425.571 2.556.475 MINORITY INTEREST (125.921) (2.289.867) --------------- --------------- Net earnings (Loss) for the period $ 25.708.072 $ (340.708.972) =============== =============== Net earnings (Loss) per share $ 0.03 $ (0.46) =============== ===============
The attached notes are an integral part of the financial statements - 6 - AEROVIAS NACIONALES DE COLOMBIA S.A - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND FOR THE YEAR ENDED DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS)
CAPITAL SURPLUS ----------------------------------------------------- PREMIUM ON CAPITAL STOCK PLACEMENT OF TOTAL CAPITAL (NOTE 22) STOCK GOODWILL SURPLUS BALANCES AS OF JANUARY 1, 2003 $ 7,437,086 793,704,083 117,720,141 911,424,224 Cancellation of operating accounts - - - - Reversal goodwill - - (9,594,457) (9,594,457) Inflation adjustment - - - - Loss for the period - - - - Movement for the period - (1,255,664) - (1,225,664) --------------- --------------- --------------- --------------- BALANCES AS OF DECEMBER 31, 2003 $ 7,437,086 $ 792,478,419 $ 108,125,684 $ 900,604,103 =============== =============== =============== =============== Cancellation of operating accounts - - - - Reversal of goodwill - - (12,479,071) (12,479,071) Inflation adjustment - - - - Earnings for the period - - - - Movement of the period - - - - --------------- --------------- --------------- --------------- BALANCES AS OF JUNE 30, 2004 $ 7,437,086 $ 792,478,419 $ 95,646,613 $ 888,125,032 =============== =============== =============== ===============
RESERVES ------------------------------------------------------------------------------------------ FOR RENEWAL OF FOR THE FLYING FOR FUTURE PROTECTION OF TOTAL EQUIPMENT DISTRIBUTION LEGAL ASSETS RESERVES BALANCES AS OF JANUARY 1, 2003 4,050,865 2,036 161,916 46,554 4,261,371 Cancellation of operating accounts - - - - - Reversal goodwill - - - - - Inflation adjustment - - - - - Loss for the period - - - - - Movement for the period (1,208) - (50) (15) (1,273) --------------- --------------- --------------- --------------- --------------- BALANCES AS OF DECEMBER 31, 2003 $ 4,049,657 $ 2,036 $ 161,866 $ 46,539 $ 4,260,098 =============== =============== =============== =============== =============== Cancellation of operating accounts - - - - - Reversal of goodwill - - - - - Inflation adjustment - - - - - Earnings for the period - - - - - Movement of the period 2,486 - - - 2,486 --------------- --------------- --------------- --------------- --------------- BALANCES AS OF JUNE 30, 2004 $ 4,052,143 $ 2,036 $ 161,866 $ 46,539 $ 4,262,584 =============== =============== =============== =============== ===============
TOTAL ACCUMULATED EARNINGS (LOSS) REVALUATION OF VALUATION SHAREHOLDERS' LOSSES FOR THE PERIOD EQUITY SURPLUS EQUITY BALANCES AS OF JANUARY 1, 2003 (905,700,644) (71,999,131) (15,305,051) 58,619,418 (11,262,727) Cancellation of operating accounts (71,999,131) 71,999,131 - - - Reversal goodwill - - - - (9,594,457) Inflation adjustment - - (7,569,338) - (7,569,338) Loss for the period - (340,708,972) - - (340,708,972) Movement for the period 1,457,003 - - 238,551 468,617 --------------- --------------- -------------- --------------- --------------- BALANCES AS OF DECEMBER 31, 2003 $ (976,242,772) $ (340,708,972) $ (22,874,389) $ 58,857,969 $ (368,666,877) =============== =============== ============== =============== =============== Cancellation of operating accounts (340,708,972) 340,708,972 - - - Reversal of goodwill - - - - (12,479,071) Inflation adjustment - - (27,977,554) - (27,977,554) Earnings for the period - 25,708,072 - - 25,708,072 Movement of the period (219,939) - - (127,768) (345,221) --------------- --------------- -------------- --------------- --------------- BALANCES AS OF JUNE 30, 2004 $(1,317,171,683) $ 25,708,072 $ (50,851,943) $ 58,730,201 $ (383,760,651) =============== =============== ============== =============== ===============
The attached notes are an integral part of the financial statements - 7 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND FOR THE YEAR ENDED DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS)
JUNE 30, 2004 DECEMBER 31, 2003 SOURCE OF FUNDS OPERATIONS: Net Earnings (Loss) for the period $ 25.708.072 $ (340.708.972) Depreciation 11.927.845 14.157.118 Provision for investments - 33.452 Provision and write off of inventories - Net 7.726.650 1.166.943 Foreign exchange of investments 36.767 - Provision and write off of property, plant and equipment 4.049.370 (1.179.478) Amortization of deferred charges 9.335.334 27.350.541 Amortization of intangibles 120.390 24.388.746 Monetary correction - Net (36.585.144) (17.906.282) --------------- --------------- Working capital provided by the operations 22.319.284 (292.697.932) Disposal of property, plant and equipment - Net 1.661.462 6.365.382 Disposal of other assets 621 17.544.344 Decrease of long-term debtors 11.484.269 - Decrease of inventories - 5.660.228 Increase in long-term suppliers - 25.570.009 Increase in consolidated severance pay - 2.938.099 Increase in retirement pensions 80.287.606 200.849.230 Increase in valuations surplus - 238.551 Increase in reserves 2.486 - Decrease in prior years' losses 219.939 1.457.003 --------------- --------------- Total source of funds 115.975.667 (32.075.086) --------------- --------------- APPLICATION OF FUNDS Addition to investments - (110.540) Increase in debtors - (1.818.097) Increase in long-term deposits (33.568.695) (47.231.854) Addition to inventories (2.037.864) - Additions to property, plant and equipment (6.548.875) (9.024.521) Additions to deferred charges (13.383.081) (54.057.141) Additions to intangibles (9.494.169) (2.941.264) Increase in valuations - (239.140) Decrease in long-term financial obligations (21.968.332) (62.223.495) Decrease in suppliers (21.142.453) - Decrease in consolidated severance pay (2.678.420) - Decrease in other liabilities - (64.459) Decrease in minority interest (219.646) (2.281.576) Decrease in capital surplus - (1.225.664) Decrease in reserves - (1.273) Decrease in surplus for valuation (127.768) - Decrease for revaluation of the equity - (52.868) --------------- --------------- Total application of funds (111.169.303) (181.271.892) --------------- --------------- INCREASE (DECREASE) IN WORKING CAPITAL $ 4.806.364 $ (213.346.978) =============== ===============
The attached notes are an integral part of the financial statements - 8 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION, (.) (IN THOUSANDS OF COLOMBIAN PESOS)
DECEMBER 31, JUNE 30, 2004 2003 Analysis of changes in working capital Current assets: Cash and cash equivalents $ 16.294.801 $ 42.231.619 Debtors (6.185.417) 41.628.146 Deferred 4.745.632 5.792.954 --------------- --------------- Total current assets 14.855.016 89.652.719 --------------- --------------- Current liabilities: Financial obligations 22.190.249 81.693.206 Suppliers (4.911.608) 150.431.416 Accounts payable (3.447.415) 16.758.060 Taxes, encumbrances and rates (7.905.959) 936.094 Labor obligations (426.562) (5.997.009) Estimated liabilities and provisions (18.416.162) 34.014.175 Income received in advance 17.099.688 30.177.669 Other liabilities 5.866.421 (5.013.914) --------------- --------------- Total current liabilities 10.048.652 302.999.697 --------------- --------------- INCREASE (DECREASE) IN WORKING CAPITAL $ 4.806.364 $ (213.346.978) =============== ===============
The attached notes are an integral part of the financial statements - 9 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND FOR THE YEAR ENDED DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS)
JUNE 30, 2004 DECEMBER 31, 2003 CASH FLOW IN OPERATING ACTIVITIES Net earnings (loss) for the period $ 25,708,072 $ (340,708,972) Adjustments to reconcile the net earnings with the net cash provided by (used in) operations: Depreciation 11,927,845 14,157,118 Provision for investments - 33,452 Provision and write off portfolio - Net 3,578,672 26,870,266 Provision and write off inventories - Net 7,726,650 1,166,943 Provision and write off property, plant and equipment - Net 4,049,370 (1,179,478) Amortization of deferred charges 9,335,334 27,350,541 Amortization of intangibles 120,390 24,388,746 Retirement pensions 43,016,021 151,221,889 Retirement pension cost and expenses prior periods 18,796,222 - Monetary correction - Net (36,585,144) (17,906,282) Unrealized exchange difference on investments 36,767 397,292 Net loss on disposal of property 1,646,234 867,461 Reclassification of financial obligations to suppliers - (7,036,646) Variation in shareholders equity accounts for effect of the consolidation (124,989) (1,865,827) Changes in the assets and liabilities that provided (used) cash: Debtors 14,091,014 (70,316,509) Deposits (33,568,695) (47,231,854) Inventories (2,037,864) 5,660,228 Deferred (18,128,713) (59,850,095) Intangibles - (2,941,264) Other assets - 17,544,344 Valuation surplus - (239,140) Suppliers (26,054,061) 176,001,425 Accounts payable (3,447,415) 16,758,060 Taxes, encumbrances and rates (7,905,959) 936,094 Labor obligations (3,104,982) (3,058,910) Retirement pensions 18,475,363 49,627,341 Estimated liabilities and provisions (18,416,162) 34,014,175 Income received in advance 17,099,688 30,177,669 Other liabilities 5,866,421 (5,078,373) --------------- --------------- CASH PROVIDED BY OPERATING ACTIVITIES 32,100,079 19,759,694 --------------- --------------- CASH FLOW FROM INVESTING ACTIVITIES: Additions to investments (6,548,875) (110,540) Addition to property, plant and equipment (9,494,169) (9,024,521) Disposal of property, plant and equipment 15,228 5,497,922 Disposal of other assets 621 - --------------- --------------- CASH USED IN INVESTING ACTIVITIES (16,027,195) (3,637,139) --------------- --------------- CASH FLOW FROM FINANCING ACTIVITIES: Increase in financial obligations 14,975,647 52,438,357 Payments of financial obligations (14,753,730) (26,329,292) --------------- --------------- CASH PROVIDED IN FINANCING ACTIVITIES 221,917 26,109,065 --------------- --------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 16,294,801 42,231,620 --------------- --------------- CASH AND CASH EQUIVALENTS: AT BEGINNING OF YEAR 95,254,520 53,022,900 --------------- --------------- AT END OF YEAR $ 111,549,321 $ 95,254,520 =============== ===============
The attached notes are an integral part of the financial statements. - 10 - AEROVIAS NACIONALES DE COLOMBIA S.A. - AVIANCA S.A. AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND FOR THE YEAR ENDED DECEMBER 31, 2003 (IN THOUSANDS OF COLOMBIAN PESOS AND THOUSAND DOLLARS; EXCEPT AS OTHERWISE INDICATED) 1. OPERATIONS Aerovias Nacionales de Colombia S.A. - Avianca, is a corporation established on December 5, 1919 with a period of duration of 100 years. Its main purpose is the commercial exploitation of air transportation services of all types and airmail services in all forms under Colombian law. Additionally, the Company is dedicated to the exploitation of the commercial, technical and scientific applications of civil aviation. The General Assembly of Shareholders of the Company in an extraordinary meeting held on August 16, 2002, minutes No. 30, authorized the cancellation of the inscription of its shares in the National Registry of Securities and Middlemen and in the Colombian Stock Exchange. With resolution No. 0824 of October 29, 2002 from the Superintendence of Securities the cancellation of the inscription of the securities of Aerovias Nacionales de Colombia S.A. - Avianca in the National Registry of Securities and Middlemen is authorized. With Resolution 544 of May 23, 2003 the Superintendence of Ports and Transportation submits the Company to control. In accordance with the Company by-laws, an annual closing of its operations must be prepared at December 31st each year; however, for requirements from the Superintendence of Ports and Transportation additional closings are being prepared in the months of April, June, August and October 2004. CONSOLIDATION PRINCIPLES - The consolidated financial statements include the accounts of Aerovias Nacionales de Colombia S.A. Avianca S.A. and its subsidiaries, that comply with the following features: - When more than 50% of the capital belongs to the parent company, directly o through mid dlemen or with the cooperation of is subsidiaries or with the subordinated of the latter. - When the parent company and the subsidiaries have, jointly or separately, the right to issue the votes that constitute the minimum deciding majority in the maximum social organ, or have the number of votes necessary to elect the majority of the members of the Board of Directors. - When the parent, directly, through or with the cooperation of the subsidiaries, for the reason of an act or transaction with the held company or with its partners, exerts certain dominant influence on the decisions of the organs of the management of the Firm. - 11 - All the accounts and significant transactions carried out among these Companies have been eliminated in the consolidation. PRESENTATION BASES - The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Colombia. The companies considered in the consolidation process are the following: Aerovias Nacionales de Colombia S.A. - Avianca S.A., Sociedad Aeronautica de Medelin Consolidada S.A. Sam S.A., Corporacion de Viajes Coviajes Ltda. and Avianca Inc. The amount of the assets, liabilities, equity and results for the period for the Company and for each of the Company's subordinates included in the respective consolidation for the year 2004 is the following:
RESULTS FOR THE ASSETS LIABILITIES EQUITY PERIOD Aerovias Nacionales de Colombia S.A., Avianca S.A. $1.183.108.904 $1.497.120.994 $(314.012.090) $ 24.314.051 Sociedad Aeronautica de Medellin Consolidada S.A., Sam S.A. 104.144.325 127.429.787 (23.285.462) (2.482.818) Corporacion de Viajes Coviajes Ltda. 9.040 15.000 (5.960) (10.301) Avianca Inc. 108.586.666 89.837.280 18.749.387 (968.459)
2. SUMMARY OF THE MAIN ACCOUNTING POLICIES The accounting records of the Subordinate Companies follow the accounting principles generally accepted in Colombia prescribed by Decrees 2649 and 2650 of 1993 and other complementary rulings, some of which are summarized below: a. Monetary unit - In accordance with legal provisions, the monetary unit used by the Companies is the Colombian peso. b. Recognition of income and commissions - Any revenues for transportation tickets sold and pending use, are classified as income received in advance until the time of their use. There are also recognized as income those tickets that have not been used in a lapsed time equal to or more than one year, or that for tariff regulation have lost their validity (Expired Tickets). Income originated from other sales and maintenance services are recognized during the contractual period or when the services are rendered. As from the year 2003, nonoperating income from penalties were reclassified to operating income. - 12 - c. Investments - Negotiable investments of fixed income are recorded at cost and valued through the accrual of yields; negotiable investments of variable income and those permanent ones of non-holding entities are valued at cost adjusted for inflation. The provision represents the amount considered as necessary to cover any eventuality that may be present for devaluation in the caption of investments. d. Provision for debtors - Represents the amount estimated as necessary to give adequate protection against losses in normal credits. e. Deposits - Includes deposits given in guarantee to lessors of aircraft in compliance with lease contracts. It additionally includes the advances delivered as commercial severance. As from the year 2002 the Company changed the method of recording advanced payments to agencies and agents for commercial severance, recording them as an advances receivable and not as an expense of the period. f. Inventories - Valued at historical cost not exceeding the replacement value or sale in the market, adjusted for inflation as from January 1, 2003, in accordance with rules on the matter. The cost is determined at the average cost. The provision is determined on the basis of technical analysis of obsolescence and slow movement. g. Deferred - Prepaid expenses - They are mainly commissions on the sale of domestic and international tickets, insurance premiums, advanced interest, fees, leases and subscriptions that are amortized in accordance with the use of the ticket, the life of the policies, the contract or the time it is expected to receive the service, whenever occur first. Deferred charges - Mainly comprise the costs incurred in studies and research for the projects, such as control of revenues (RAPID), total solution (SAP), re-inventing the airline and chapter 11 (C-II) and costs incurred in the acquisition and implementation of new information systems, bonuses and general expenses in the process of integration of the Alianza Summa improvement to leased property among others; which are amortized over the term of the expected benefit. It additionally includes the deferred income tax generated by the effect of the temporary differences between books and taxes in the treatment of certain items. The deferred charges related to the restructuring of the Company, as well as the deferred charges for the integration process of the Alianza Summa shall be amortized at the time in which the process of Chapter 11 ends; for budget effects it is estimated that this process shall be terminated in September 2004. h. Intangibles - Intangible assets comprise: i) the trust of administration, guarantee and source of payment created to guarantee the retirement pensions of the land personnel; and ii) the goodwill, originated by definite acquisitions, or appraisals effected by a price higher than the value in the books of the entity or business. The goodwill formed is being - 13 - reversed in a term of four years, thus: 1% in 2002, 8% in 2003, 21% in 2004 and 70% in 2005. The goodwill acquired is amortized in a period of 13 years, by the straight-line method. i. Property, plant and equipment - Net - Are recorded at cost adjusted for inflation and depreciated on the basis of the straight-line method over the estimated useful lives generally accepted in Colombia for accounting purposes. The annual rates of depreciation used are the following: buildings 5%, fleet and flight equipment 15% and 10%, furniture and fixtures and machinery and office equipment 10%; vehicles and computer equipment 20%. The Company does not estimate any residual value for its assets because it considers this is not relatively important, the assets are therefore being depreciated in full. Repair and maintenance expenses are charged to results as they are incurred. j. Financial lease contracts with and without purchase option - In accordance with the legal rules in force, the rental paid in development of the financial lease contracts for planes with purchase option, for complying with the legal requirements and for being international leasing, are charged directly to the expenses of the period based on the terms of the contracts. The rights of the contracts are recorded in memo accounts. Once the purchase option is exercised the assets are recorded in property, plant and equipment for the value of the option. k. Valuations - These correspond to the differences existing between: the realization value determined by appraisals of recognized technical value and the net value per books of the properties, plant and equipment, adjusted for inflation. These valuations are recorded in separate accounts within the assets, and as a surplus for valuations, the latter being not appropriate for distribution. Devaluations of assets are recorded directly in the statement of results as expenses for the period. l. Labor obligations - The liability corresponds to the obligations that the Company has for legal and extra-legal benefits for its employees. m. Retirement pensions - Represents the present value of all the future monthly payments that the Company must pay to those employees who completed or shall complete certain legal requirements with respect to age, time of service and others, determined on the basis of the actuarial studies that the company obtains annually, according to the provisions of the rules in force. n. Maintenance costs - Based on the technical standards established by the industry, the Company provisions the cost to be incurred in the future for maintenance services and major repairs of aircraft, Boeing 757, 767, MD83 and Fokker 50. The provision is recorded with a charge to results in function of the hours flown during the period. The costs of minor and routine services to maintain in operation the above-mentioned fleet are recorded directly as expenses. The Company makes monthly payments to lessors in order to cover the major part of the major future costs of maintenance and repair services as a higher value of the rent, on the - 14 - basis of the hours flown and liquidated in the terms of the lease contracts and are taken to expense in the respective period. o. Mileage recognition - The Company does not provision the value of the mileage; the value of the liability is recognized and controlled in the memo accounts to the value of one peso per mile. When the passenger redeems these rights the ticket for the route required is issued and would only represent a revenue for the Company in case of acquiring additional miles. The expense is recognized only for the concept of service on board and when the passenger travels by other Companies with which there are agreements. p. Provision for contingencies - For the year 2003 the Company took the decision of making provision for financial stabilization for the total probable contingencies for labor, commercial, civil and criminal litigation,. (Note 19). q. Provision for commercial severance-For the year 2004 the Company determined to make the decision of constituting a provision to cover probable contingencies for the concept of commercial agency with the travel agencies and agents, equivalent to a 10% of the balance of the deposits delivered as commercial severance to such agencies and agents. (Note 9). r. Provision for income tax - The Company determines the provision for income tax on the basis of earnings at the rates specified in the taxation rulings, or on the basis of the presumptive income method. s. Foreign currency - The transactions and balances in foreign currency are translated into Colombian pesos at the representative market rate, certified by the Banking Superintendence. The exchange difference resulting from debts in foreign currency for the acquisition of inventories and property, plant and equipment is capitalized in such assets until these be in conditions of sale or use. The exchange difference originated in accounts receivable or payable not related to inventories or fixed assets is taken to results. The exchange rate used to adjust the balance resulting in U.S. dollars as of June 30, 2004 and as of December 31, 2003 was of $2.699,58 (pesos) and $2.778,21 (pesos) per USD 1, respectively. t. Inflation adjustments - Non-monetary assets and liabilities, with the exception of inventories up to the year 2002, and the shareholders' equity with exception of the valuation surplus are adjusted to recognize the effects of inflation, using adjustment percentages determined on the basis of the variation of the consumer price index (4,48% at June 30, 2004 and 6,49% for the year 2003). The monetary correction thus determined, is included in the results for the period. In conformity with the principles that govern the inflation adjustments in Colombia, such adjustments do neither include the inflation occurred up to December 31, 1991, nor require that the comparative financial statements presented along with financial statements of subsequent dates, be restated in updated currency. - 15 - As from the year 2003, in accordance with the Provisions of Law 788 of 2002, the Company records inflation adjustments on its inventories. Up to December 31, 2002 the inflation adjustment was not required thereof. u. Net loss per share - It is determined on the basis of the weighted average number of shares outstanding during the period. v. Cash equivalents - For the purposes of presentation in the statement of cash flows, the Company classifies in the caption of cash equivalents, investments with maturity of three months or less counted as from the date of their original issuance. w. Accounting estimates - The preparation of financial statements in conformity with the generally accepted accounting principles requires that the Management makes certain estimations and assumptions that affect the amounts reported on assets, liabilities, income and expenses reported during the period. x. Memo accounts - Include rights and Contingent liabilities , as well as differences between the accounting and fiscal figures. y. Reclassifications - Some figures of the financial statements for the year 2002 have been reclassified for comparative purposes and are presented under classifications of the accounts indicated in the Standard Chart of Accounts. z. Translation of financial statements - The financial statements of the foreign subordinate are translated into Colombian pesos, before initiating the consolidation process, in accordance with the accounting principles applied in Colombia. The figures of the balance sheet are translated at the closing exchange rate, with the exception of the equity that is translated at historical rates, and the figures of the statement of results are translated at the average exchange rate. aa. Language translation for the convenience of readers - The financial statements have been translated into English for the convenience of readers in the United States of America. 3. GOING CONCERN In accordance with the terms of the U.S. Federal Economic Restructuring code, Avianca and its affiliate Avianca Inc. advance in the process of Chapter 11 initiated on March 21, 2003, before the Bankruptcy Court of the South District of New York. Under this frame of legal protection, the Company seeks to restructure the pre-existent debt as of March 21, 2003 with its creditors, while it maintains the administration of its businesses. MANAGEMENT'S ACTION PLAN - `Flight Plan of the Transformation' Simultaneously with the process of C-11 the Management of the Company has been carrying on the action plan called `Flight Plan of the Transformation', that has permitted it the development of different projects oriented toward the optimization of the practices of revenue management, - 16 - the re-design of the network toward the more profitable routes and frequencies, the renegotiation of the rental payments, the cost structure rationalization and the cash management to provide liquidity. As of June of the year 2004, Avianca has achieved important results, both operating and financial, among which there may be emphasized: - Improvement of the total revenues in the order of 25,3% in the period January to June, in front of the results for the same period of the immediately prior year. The above, for effects of the growth in the international market and better tariff practices (Commercial quantitative approach). - Results of EBITDA and operating profit in amounts that exceed the 100% of increase with respect to the period January to June 2003, while the operating costs increased by 9,8%. - Maintenance of the domestic market participation (47,9%) and international (45,6%). - Strengthening of the business units, New business and other sources of income. 4. RESTRUCTURING PROCESS FLIGHT PLAN OF THE TRANSFORMATION- The Company maintains its policy of safe, punctual, warm and profitable service, oriented toward achieving the loyalty of its clients. The Flight Plan indicates as priorities those ones valued by clients, namely, safety, compliance and satisfaction with the service. For that purpose effort is made toward the development of projects that permit: - To maintaining the highest standards of security. - To be leaders in punctuality. - To innovate in products and services. - To be the airline preferred by Colombians. About Human Talent the Company works in the consolidation of a winner human team, committed, enthusiast, recognized for its culture service and focused toward results. PRESENTATION OF THE RESTRUCTURING PLAN - Avianca submitted to the consideration of the Court of New York the proposal of the terms of its Financial Reorganization Plan, agreed since June 30, 2004 with the support of the Creditors Committee, and which was filed on July 1, 2004. The terms of the Reorganization Plan include a capitalization of US$63 million conformed by resources of OceanAir and of the National Federation of Coffee Growers of Colombia. Such Plan gathers the financial projections, classification of the debts and treatment of them, as well as the structure of capital necessary for its feasibility, same shall be duly spread once approved in conformity with the procedures proper of the process that shall permit the Enterprise to reorganize its economic position and emerge strengthened from C-11. - 17 - STAGES TO BE FOLLOWED - After the presentation of the Plan, the Judge must pronounce himself on the legality of same. The date for this hearing, initially planned for August 18th, shall be held on August 24th. Once the terms and final conditions are adopted it shall be forward for knowledge and voting by the creditors. The results of the scrutiny shall be sent to the Judge, who has between 15 and 20 additional days to analyze the voting. Upon termination of this period, the Judge shall call for a Hearing for Confirmation of the Plan. As from that moment it is not possible to present new investment proposals and/or Reorganization Plans. Once the decision is confirmed, the Enterprise must complete the documentation and the steps required to emerge from the C-11. The Company expects to come out of same before the end of 2004. 5. CASH AND CASH EQUIVALENTS
JUNE 30, DECEMBER 31, 2004 2003 a) Cash (1) $ 52.311.470 $ 41.963.229 b) Investments Wachovia (2) 18.910.237 23.282.860 The Bank of New York (3) 26.583.940 14.148.961 Banco Tequendama (4) 182.784 10.279.370 Bancafe Internacional (5) 707.357 1.908.700 Fiducomercio 1.852.741 1.290.954 Fiducoldex 3.144.954 - Banco Mercantil (6) 1.898.141 - Company of Stock Exchange Professionals (7) 2.580.282 767.536 Fiduagraria S.A. - 713.603 Fiduciaria La Previsora 847.387 358.210 Exporcredit Colombia S.A.(8) 655.787 280.262 Corporacion Financiera Colombiana S.A. 150.407 150.407 Fiduciaria Santander Investment Trust - 29.280 Ultrabursatiles 1.000.822 47.768 Corredores Asociados 50.439 20.174 Banco Superior (9) 627.715 12.300 Other minors 44.858 906 -------------- ------------- Total $ 111.549.321 $ 95.254.520 ============== =============
(1) Upon decision of the Court of New York in Colombia resources should be maintained to cover the expenses corresponding to 7 days, the excesses must be transferred to the dollar accounts in the United States. In Banco Bogota account No.165010554, the Company has a Stand By constituted for USD51,000 whose maturity date is July 21, 2004. (2) This investment was transferred to the bank account, for such money shall be handled from the bank. - 18 - (3) Fiducia (Master Trust) that manages the revenues from the sale of tickets abroad with credit cards, a modality that commenced to operate during the year 2002. This investment is supporting the financial obligations with the same bank. As of December 31, 2002 the bank withheld this cash and redeemed it in the month of February 2003. By the end of year 2003 the balance is withheld for restrictions of Chapter 11. (4) This corresponds to cash withheld by governmental Provisions in Caracas Venezuela. (5) This corresponds to a CDT with quarterly renewal. (6) Are being acquired monthly to be recovered in the following month, in order not to leave cash without generating any yield. (7) The increase is due to the constitution of a REPO investment in June 2004, in the amount of $2,000 million, and the difference corresponds to the purchase of foreign currency. (8) Delivered as guarantee for the temporary import of one Fokker 50. (9) Collects all the sales by the BSP selling agencies and are destined to the payment of suppliers. 6. DEBTORS
JUNE 30, DECEMBER 31, 2004 2003 Domestic clients (1) $ 68.159.957 $ 54.903.366 Foreign clients (2) 21.567.237 55.490.063 Accounts receivable, Clearing House (3) 27.450.011 15.516.954 Accounts receivable, Aces (4) 41.434.685 41.281.192 Prepayments and advances (5) 44.062.804 26.729.394 Tax advances and contributions (6) 16.165.882 10.932.232 Employees 1.645.861 1.051.647 Insurance claims 534.762 344.324 Sundry debtors (7) 12.325.562 41.748.184 --------------- ---------------- Subtotal 233.346.761 247.997.356 Less: Provision for debtors 48.849.025 45.829.934 --------------- ---------------- Subtotal 184.497.736 202.167.422 --------------- ---------------- Long-term portion: Employees 408.088 440.272 Accounts receivable outsiders (4) 4.476.449 14.113.590 --------------- ---------------- Long-term portion 4.884.537 14.553.862 --------------- ---------------- Current portion $ 179.613.199 $ 187.613.560 =============== ================
(1) Corresponds to accounts receivable from offices, travel agencies, general agents and domestic legal entities. (2) Corresponds to accounts receivable from offices, travel agencies, general agents and legal entities abroad. (3) Corresponds to accounts receivable through the Clearing House directly to other Companies for use of tickets, cargo and services. - 19 - (4) Corresponds to accounts receivable from Aces for the operation (Domestic and foreign Interlinea and other services related to the operation) and tickets issued by Aces, which are honored by Avianca since August 2003 for the amount of $17 thousand million. This amount is Provisioned in full. (5) Corresponds to:
JUNE 30, DECEMBER 31, 2004 2003 Prepayments and advances to suppliers (*) $ 18.182.941 $ 20.569.670 Prepayment and advances to contractors (**) 22.252.649 4.491.106 Prepayment and advances others 999.095 1.668.618 --------------- ---------------- Total $ 41.434.685 $ 26.729.394 =============== ================
(*) Basically corresponds to prepayments made to Fuel suppliers, furthermore prepayments were made to some of the suppliers of Chapter eleven (C11), among the suppliers there is Serdan, among others. (**) Basically corresponds to the prepayments made to Civil Aeronautics for collection of airport rates. (6) Corresponds to: Withholding tax at source $ 10.309.555 $ 6.815.076 Withholding tax sales 538.722 1.159.912 Industry and Commerce Tax withheld 826.251 396.266 Other - surpluses, advances and withholdings 4.491.354 2.560.978 --------------- ---------------- Total $ 16.165.882 $ 10.932.232 =============== ================
(7) Corresponds to: Income receivable - P.C.A. dividends $ 1.083.462 $ 1.083.462 Income receivable - interest deposits on Boeing planes - 1.841 Income receivable - services (*) 6.213.723 7.713.896 Income receivable - Leases 355.319 122.260 Income receivable - sale of assets 2.644.291 235.236 Reserves of maintenance. G.E. Capital Services - 10.939.020 Interest receivable retirement pensions trust (**) 153.976 17.033.434 Others 1.874.791 4.619.035 --------------- ----------------- Total $ 12.325.562 $ 41.748.184 =============== ================
(*) Corresponds to collections for utilities, gauging of equipment, miles, participation Deskubra leaflets, land assistance, maintenance services, stamp taxes. (**) Corresponds to interest of the year 2003, originated by the loan to Valores Bavaria, which were recorded by Fiduciaria La Previsora for the payment of the land Provisions only up to year 2004. The movement of the Provision for portfolio that covers the risk of uncollectible for the accounts receivable trade, the increase for the Aces' obligation and for the tickets honored to that Company, and its behavior, was the following: Original balance $ 45.355.038 $ 18.484.772 Write offs (881.313) (8.998.506) Provision 4.375.301 36.343.668 --------------- ---------------- Total provision for debtors $ 48.849.026 $ 45.829.934 =============== ================
- 20 - 7. DEFERRED
JUNE 30, DECEMBER 31, 2004 2003 Current - Prepaid expenses: Commissions (1) $ 16.963.774 $ 9.618.980 Utilities 605.719 143.208 Fees (2) 389.668 918.543 Insurance and bonds (3) 6.558.752 8.571.422 Leases 18.588 606.396 Interest 225.599 - Subscriptions 75.106 202.244 Others 97 30.878 --------------- ---------------- Total $ 24.837.303 $ 20.091.671 =============== ================ Long term - Deferred charges: Work in process (4) $ - $ 2.655.830 Special bonuses (5) 12.140.810 13.840.447 Research studies and projects (6) 65.006.614 38.129.922 Deferred charges Alianza Summa (7) - 4.274.935 Software (8) 2.404.761 2.022.006 Leasehold improvements (9) 1.582.480 3.298.207 Deferred income tax (10) 50.000.000 50.000.000 Licenses 671.984 435.001 Major services and of reserve flight equipment(11) - 6.491.599 Third parties' repairs - 357.833 Others - 43.279 Inflation adjustments 1.911.128 6.030.752 --------------- ---------------- Total $ 133.717.777 $ 127.579.811 =============== ================
(1) The balance reflected in this caption corresponds to all those commissions that have been cancelled or discounted through selling reports and that as of the date the service has not yet been rendered. (2) Corresponds to advisory services for maintenance of the SAP system and brokerage for Insurance Intermediation to AON RE. (3) The decrease is due to the amortization that was made from January to June of the policy of civil liability for the period of year 2004 Avianca and Sam. (4) The acquisition and implementation costs of projects Nas and Pros were transferred to the account of Studies, Research and Projects (6). (5) Delivered to collaborators separated from the Company for effects of the Alianza Summa integration the amortization of which began as from January 2003 for a period of five (5) years and for collaborators separated from the Company for restructuring C-11. (6) Made up by the different acquisition and implementation costs of the following projects: - 21 - To be amortized when the restructure of Chapter 11 Oxygen is defined. $ 144.443 Total solution -SAP Amortization for 3 years began on May 2004 10.060.380 Control revenues In process of erection 2.160.165 Alianza Aerol Americana 601.287 Negotiation and planning For amortization as soon as the restructuring of fleets Chapter 11 is defined, 214.050 Reinventing Airline 17.142 Engineering 336.431 For amortization when restructuring of Chapter 11 is Chapter 11 - C11 (2) defined 41.020.428 Pros Amortization for 3 years began in January 2003, 532.102 Nas 671.581 Alianza Summa Amortization for 5 years began in January 2003, 4.346.756 Expenses between B757-N535 Amortization for 1,8 years began in Nov de 2003, 4.901.849 --------------- Total $ 65.006.614 ---------------
(7) Constituted by the costs and expenses for the organization and launching of the project "Alianza Summa", which was transferred to the Studies, Research and Projects account (6). (8) Is made up of all the software and license rights that the Company possesses, acquired to expedite the processes and optimize the information systems; amortization began for a period of three (3) years since the time of its acquisition. (9) Includes the fitting of installations and corporative offices as in the areas of service to client, complying with parameters of occupational health, confort and security generating better quality of life ad attention to our travelers. Amortization started as from January 2003 for a period of five (5) years. (10) To this date the Company has registered $50.000 million relating to one part of the tax for recovery in the future by the amortization of accumulated fiscal losses. As mentioned in Note 3 to the financial statements, the Administration of the Company considers that all the necessary measures have been taken that permit the realization of this asset in the future. (11) Expenses generated by the delivery of a Plane B767 N535 to Ansett World Wide Aviation Services, corresponding to the consequential damage for the anticipated return of the aircraft in the amount of USD2,500,000 which shall be amortized in 22 installments as from the month of November 2003 and were transferred to the Studies, research and projects account (6). BLANK SPACE - 22 - 8. DEPOSITS
JUNE 30, 2004 DECEMBER 31, 2003 ENTITY CONCEPTO DOLARES COL DOLARES COL Agencies and Agents (1) Commercial severance pay USD - $ 30.862.345 USD - $ 27.245.377 Iata Clearing House (2) In guarantee 8.000 21.596.640 12.000 33.338.520 Iata Security (3) In guarantee 4.000.000 10.798.320 - - G, E, Capital Services In guarantee - - - - MD-83, B-757, B-767 y kit 4.401 11.881.696 4.385 12.183.840 Customs Bond (4) In guarantee 910.000 2.456.618 - - Pegasus Aviation Inc In guarantee B-757 3.375 9.111.083 3.375 9.376.459 Airplane In guarantee MD-83, B-757 and turbine 3.144 8.487.749 3.144 8.734.970 American Express In guarantee B-757 2.930 7.909.425 - - Anssett Worldwide Aviation In guarantee MD-83, B-757, B-767 2.505 6.631.390 2.602 7.229.616 Fokker Aircraft B,V, In guarantee Fokker 50, Tools 1.401 3.783.654 1.274 3.540.147 Stanley B, Burns In guarantee 787 2.124.569 787 2.186.451 International Lease Finance Corp, In guarantee B-757 1.000 2.699.580 1.000 2.778.210 Customs Bond In guarantee - - 910 2.528.171 Rolls Royce In guarantee Motor B-757 695 1.875.320 695 1.929.942 Pratt & Whitney In guarantee Motor MD-83 550 1.484.769 550 1.528.015 CIT Aerospace In guarantee Motor B-757 655 1.768.225 655 1.819.728 ARC In guarantee 450 1.214.811 450 1.250.194 Icelandair In guarantee B-757 109 294.902 350 972.373 Bank of America In guarantee 343 926.660 343 953.651 Aircraft Services (ASIG) In guarantee 270 728.887 270 750.117 AVSA Current Account In guarantee 600 1.619.748 - - VISA & Master Card In guarantee 8.364 22.579.691 - - Diners Club In guarantee 50 134.979 - - Discover In guarantee 500 1.349.790 - - Aeronautica Civil (5) In guarantee Svs Apto - 1.200.000 - 1.200.000 Ferreteria Industrial S.A. In guarantee Embargo - 587.037 - 1.281.580 Eucardo Garcia In guarantee Embargo - 1.200.000 - 1.200.000 Vitral Textil Ltda, In guarantee Embargo - 445.879 - 444.410 Municipio de Barranquilla In guarantee Embargo - 395.318 - 395.318 DLAN In guarantee Embargo - 24.087 - - Instituto de Seguros Sociales In guarantee Embargo - 220.198 - - Other (6) 125 5.089.257 - 5.046.843 ------------- ------------ ----------- ------------ Total USD 4.950.254 $161.482.627 USD 32.790 $127.913.932 ============= ============ =========== ============
(1) Corresponds to amount delivered to the agencies and general agents in an anticipated way such as commercial severance pay, which is liquidated and paid in a monthly manner along with the sales commissions, in accordance to the contracts signed with them. (2) Deposits required by IATA Clearing House as payment guarantee to travel agencies, which shall be refunded 10 days after issuance of Chapter 11. (3) Deposits as support of the transactions of sales in the United States. (4) Deposits required by the U.S. Customs to guarantee the exports. (5) Deposits required by the Civil Aeronautics in order to guarantee the airport services related to C-11. (6) These amounts are made up by deposits for plane safety, in guarantee, Deskubra plans and of security. - 23 - 9. INVENTORIES
JUNE 30, DECEMBER 31, 2004 2003 Materials, parts and accessories (1) $ 58.636.861 $ 56.857.209 Inventory of service to passengers 3.232.145 3.212.722 Purveyors and others 3.614.955 3.153.117 Inventories in transit 1.477.780 1.039.147 Inflation Adjustments 6.726.769 - -------------- -------------- Subtotal 73.688.510 68.508.760 -------------- -------------- Less - Provision for obsolescence 29.755.802 22.029.152 -------------- -------------- Total $ 43.932.708 $ 46.479.608 ============== ==============
The movement of the provision for obsolescence was the following: Original balance $ 22.029.152 $ 20.862.211 Write offs - 5.513.159 Provision of the year 7.726.650 6.680.100 -------------- -------------- Total $ 29.755.802 $ 22.029.152 ============== ==============
(1) The Company granted guarantees with Aerocivil by virtue of the mercantile trust contract entered into with Fiduifi S.A. for an amount of USD2,015,873. 10. PROPERTY, PLANT AND EQUIPMENT - NET Flight equipment (1) $ 178.776.362 $ 169.758.935 Land 674.350 640.602 Buildings (2) 5.087.360 4.860.593 Machinery and equipment (3) 31.553.308 29.883.527 Office equipment (4) 9.644.831 11.912.433 Computer equipment 30.870.091 28.009.251 Medical equipment 74.648 68.786 Vehicles 3.054.845 2.811.920 Property, plant and equipment in transit 4.861.048 3.033.809 -------------- -------------- Subtotal 264.596.843 250.979.856 -------------- -------------- Accumulated depreciation (197.644.100) (176.137.929) -------------- -------------- Total $ 66.952.743 $ 74.841.927 ============== ==============
- 24 - (1) The fleet and air equipment mainly correspond to the adjustment cost for inflation of the components of the flight equipment in operation. The Company granted guarantees to Aerocivil by virtue of the business trust contract in guarantee entered into with Fiduifi S.A. for an amount of USD1,126,034. SAM has on the Land and Buildings to this date a promise of purchase sale for $469 million, signed with Valores Bavaria. (2) As guarantee to the debt with DIAN the Company delivered 38 immovables for a commercial amount of $19,217,484. (3) The Company determined not to insure the machinery and equipment, considering that these do not represent casualty risks such as collisions, robberies, etc. For their robust contexture itself, since their carcass has a minimum of 1/2 inch of width, these equipments are the paymovers and tractors, which displace themselves at a maximum speed of 20 k/h. in the airport areas. (4) The Company has fixed assets in the amount of $7.6 million on consignment with the General Agent in London. 11. INVESTMENTS
JUNE 30, DECEMBER 31, 2004 2003 Permanent investments: Savia Ltda. $ 275.000 $ 275.000 Stichting "Sita Inc Foundation" 561.882 578.249 Helicol S.A. (1) 1.836.235 1.754.370 Other foreign companies 92.823 64.876 Other investments 131.180 143.856 Provision for protection of Investments (2.208.570) (2.179.682) -------------- -------------- Total $ 688.550 $ 636.669 ============== ==============
(1) As of December 31, 2003 and 2002, the value of the Company investment in Sociedad helicoperos Nacionales de Colombia S.A. Helicol is provisioned in full, due o the difficult financial situation of the issuer. 12. INTANGIBLES Goodwill formed (1) $ 96.139.919 $ 108.436.180 Goodwill acquired (2) 145.547 702.273 Management trust (3) 351.777.373 342.283.187 -------------- -------------- Total $ 448.062.839 $ 451.421.640 ============== ==============
(1) Corresponds to the appraisal of the Deprisa Internacional and Deskubra businesses for an amount of $119.161 million, in accordance with technical appraisals made by a specialized firm durig the lapse of the year 2004. For the years 2003 and 2002 there were reversed against the capital surplus account $23.020.718 equivalent to a 19,32% (See Note 2); in order to comply with the term of up to four (4) years for the reversal of the balances recorded, such as provided in External Circular No. 003 of 2002 from the Superintendence of Securities. (2) In the year 2002 the Savia investment was capitalized in the amount of $702 million represented in 275.000 shares, investment that shall be amortized in a period of 3 years. - 25 - (3) Corresponds to the autonomous equity created with Fiduciaria La Previsora for an amount of $350.000 million in order to guarantee the payments of retired persons of land through the irrevocable transfer of all the active economic rights derived from the pledge contract with tenancy of shares of Inversiones Fenicia S.A., entered into between Valores Bavaria S.A. (Debtor Bavaria S.A. as codebtor) and Aerovias Nacionales de Colombia S.A. - Avianca S.A. (Creditor) in the aforementioned amount. 13. OTHER ASSETS
JUNE 30, DECEMBER 31, 2004 2003 Assets with Colseguros $ 18.319 $ 18.124 Art and Culture Property 593.450 566.849 Other minor ones 1.163 927 -------------- -------------- Total $ 612.932 $ 585.900 ============== ==============
14. FINANCIAL OBLIGATIONS AT SHORT TERM - The Companies have maintained during the period and the year ended at June 30, 2004 and December 31, 2003, obligations of approximately $90.635.788 and $106.239.659 respectively, mainly constituted by promissory notes and trust commissions. On such obligations, annual interest was paid in an average of 11.75% for the obligations in foreign currency and DTF TA plus additional points, between 2,00% and 10,80% for the domestic obligations. The DTF TA rate passed from 7,92% in December 2003 to 7,81% in June 2004, of which there are accrued to December 2003 and June 2004 interest for $42.859 and $18.846, respectively. AT LONG TERM -
ENTITY FORM OF FINAL AMOUNT INTEREST ACCRUED JUNE 30, DECEMBER 31, PAYM'T MATURITY USD RATE INTEREST 2004 2003 Domestic: Valores Bavaria P.V. 31/12/04 DTF + 2% $ 780.500 $ 5.923.575 $ 5.923.575 Banco de Bogota M.V. 02/04/06 DTF + 7% 1.884.852 31.211.963 31.211.963 Primeother P.V 31/12/04 Libor+7 113.413 6.166.710 - Federacion Nacional de Cafeteros P.V. 31/12/04 Libor+7 109.444 6.166.710 - Expocredit Colombia 19/10/04 225.598 3.351.577 - Others (1) - 7.131.072 7.921.348 Foreign: The Bank of New York S.V. 24/12/05 20.701 11.75% 3.078.988 55.883.750 56.953.790 Primeother P.V 30/06/04 11.250 Libor+7 1.688.613 30.370.275 37.505.834 Federacion Nacional de Cafeteros P.V. 30/06/04 2.750 Libor+7 - 7.423.845 13.891.050 ------------- ------------- Sub - total 153.629.477 153.407.560 ------------- ------------- Current portion 128.429.908 106.239.659 ------------- ------------- Total long term $ 25.199.569 $ 47.167.901 ============= =============
- 26 - The maturity of the obligations in the following years is thus:
OBLIGATIONS IN OBLIGATIONS IN FOREIGN DOMESTIC CURRENCY CURRENCY TOTAL 2005 $ 10.805.667 USD 4.841 $ 13.067.949 $ 23.873.616 2006 1.325.953 - - 1.325.953 ----------------- ----------- ------------- ------------ $ 12.131.619 USD 4.841 $ 13.067.949 $ 25.199.569 ================= ========== ============= ============
(1) Corresponds to: - Obligation with Banco Colpatria for $2.000.000, which is paid month due at a rate of DTF+6% and its final maturity is on December 12, 2004. - Obligation with Banco Superior for $3.437.035 which is paid quarterly due at a rate of DTF+8% and its final maturity is on December 28, 2004 - Obligation with Serfinanza for $641.550. which is paid by semester due at a rate of DTF+10,8% and its final maturity is on December 19, 2004. - Obligation with Ifileasing for $521.907 which is paid month due at a rate of DTF+8% and its final maturity is on August 2005 and Expocredit de Colombia for $525.105 which is paid at a rate of 8% and its final maturity is on December 18, 2004. These obligations were acquired for working capital and are guaranteed by Trust Commission and promissory notes; in the case of the obligation contracted with The Bank of New York it is guaranteed with the assignment of the rights derived from the collections of sales for credit cards in the United States while such obligation lasts; for the primeother loan a promissory note was signed, the same as for the Federacion Nacional de Cafeteros, and its maturity date is at 6 months. 15. SUPPLIERS
JUNE 30, DECEMBER 31, 2004 2003 Domestic suppliers (1) $ 156.798.547 $ 110.572.852 Foreign suppliers (2) 291.213.287 368.936.816 Interline and home office billing (3) 6.755.423 1.311.650 -------------- -------------- Total 454.767.257 480.821.318 Long term (4) 183.011.743 204.154.196 -------------- -------------- Short term $ 271.755.514 $ 276.667.122 ============== ==============
(1) The Domestic Suppliers with the major importance are: DIAN, ACES, Exxon Mobil de Colombia and Valores Bavaria, (2) The Foreign Suppliers with the major importance are: Aircraft lessors, maintenance aircraft suppliers and foreign fuel suppliers. Domestic and foreign suppliers increased because Avianca and its affiliate Avianca Inc., on taking refuge on Chapter 11 before the Court of New York, leaves the domestic and foreign accounts payable frozen, which - 27 - were generated before March 21 2003. Some payments have been made to critical suppliers of the operation in Colombia and in foreign countries upon prior authorization from the U. S. Court of Bankruptcy, New York South District. The most representative debts are:
JUNE 30, 2004 Pegasus Aviation Inc. USD 6.261 $ 16.901.422 G,E, Capital Aviation Services 4.085 11.029.107 Exxon Mobil de Colombia S.A. - 10.909.116 Unidad Administrativa Direccion de Impuestos - 10.564.361 Pratt & Whitney Eagle Services 3.244 8.756.464 Alfa Romeo Avio - Fiat Avio 2.263 6.108.417 Valores Bavaria S.A. - 8.053.062 Aerolineas Centrales de Colombia - 7.817.506 Ansett World Wide Aviation Services 2.075 5.603.727
(3) Interline billing are all those accounts payable that are generated with other airlines. (4) A break up of the long-term suppliers is the following:
JUNE 30, 2004 DECEMBER 31, 2003 G.E. Capital Aviation Service USD 16.399 $ 44.270.128 USD 22.953 $ 63.768.164 Wasserstein Perella & CO 16.305 44.015.961 15.277 42.442.434 Debis Air - Finance B.V. 11.398 30.768.718 11.624 32.294.024 Ansett World Wide Aviation Services 7.748 20.916.734 7.902 21.953.645 Valores Bavaria S.A. - 18.751.962 - 18.872.818 Aerfi Group PLC 5.058 13.655.675 5.159 14.332.631 P.C.A. S.A. - 3.353.964 - 3.353.964 British Aerospace Inc, (First Secur) (a) - - 1.109 3.080.626 Babcock & Brown (Alps-94) - - - - Inversiones Cromos S.A. - 2.721.298 - 2.721.298 Red Colombia S.A. - 573.388 - 573.388 Empresa Colombiana de Telecomunicaciones - 432.625 - 432.625 Caracol Television S.A. - 257.377 - 257.376 Primer Air Ltda (b) - 71.203 - 71.203 Rafael Espinoza - 49.525 - - Petroleum Aviation and Services S.A.(c) - 120.857 - - Foreign exchange - 3.052.328 - - ------------ -------------- ------------ ------------- USD 56.908 $ 183.011.743 USD 64.024 $ 204.154.196 ============ ============== ============ =============
(a) On June 27, 2001, a restructuring agreement was signed between the Company, Avianca S.A. and the supplier of the flight equipment RJ-100. As a result of this agreement it was established that the total liability with this supplier amounted to USD17,722,335 for leases, interest and two promissory notes signed at the time of returning the flight equipment. Bristish Aerospace negotiated the note with Dresdner Kleinwort Wasserstein Limited. To December 2003 the debt is of USD16,628,684.24 including interest. (b) The debt with Inmobiliaria Aguila was assumed by Primer Air Ltda. (c) In the year 2003 the debt with Petroleum Aviation and Services S.A. was assumed by Valores Bavaria. - 28 - During the year 2003 renegotiations were carried out with the entities: Ansett Group, Gecas Group, Pegasus Group, leassors of the flight equipment to extend the term of the contract up to six (6) months for payments and reduction of rent for the same time. 16. ACCOUNTS PAYABLE
JUNE 30, DECEMBER 31, 2004 2003 Interest payable (1) $ 26.011.434 $ 16.531.231 Accounts payable, taxes 7.431.166 11.832.630 Costs and expenses payable 6.720.421 7.615.698 Accounts payable to Contractors 8.239.228 5.938.384 Accounts payable, insurance 483.567 13.563.140 Accounts payable, fees 12.524.110 11.587.334 Payroll withholdings and contributions 2.064.536 3.240.516 Accounts payable Chapter 11 (2) 54.031.289 45.170.354 Other accounts payable (3) 9.595.539 15.069.418 ------------ -------------- Total $127.101.290 $ 130.548.705 ============ ==============
(1) The most representative suppliers of accounts payable, interest as of June 30th and December 31st, are the following: Wassertein Perrela & Co (a) $ 4.033.075 $ 684.584 Caja de Auxilio y Prestaciones ACDAC "CAXDAC" (b) 4.525.390 4.141.952 Valores Bavaria S.A. (b) 1.227.979 936.617 Bank of New York (c) 7.406.820 4.981.876 Banco de Bogota (c) 5.690.280 4.518.210 Others 3.127.890 1.267.992 -------------- ------------- Total $ 26.011.434 $ 16.531.231 ============== =============
(a) For the year 2003 the debt of Wasserstein Perella & Co. was reclassified to Accounts payable, long term. (b) Debts with Valores Bavaria and others were reclassified to accounts payable, Chapter 11 (c) Interest and obligations with The Bank of New York and Banco de Bogota, were accrued, and these have not been cancelled for restriction of chapter 11 (C-11). Restructuring agreement - Avianca S.A.- As part of the restructure long-term agreement with foreign creditors, it was agreed to restructure in the same terms the debts for services that existed with those related with the group Valores Bavaria S.A. The value of the definite capital for the long-term suppliers for the Companies related to the group Valores Bavaria S.A. was of $23.910 million, which term for their cancellation is of 7 years counted as from February 1, 2001 with a grace period for contributions to capital of 4 years, counted as from February 1, 2001 that extends up to January 31, 2005. As from the fifth year and at the maturity of the respective semester, as of July 31, 2005 and each 31st day of January and 31st day of July until their payment in full, shall be paid in equal installments of credit to Capital. The rate of remunerating interest in pesos is - 29 - equivalent to a 9% per year in dollars for year due of 365 days. The interest for the first year, that is, from February 1, 2001 thru January 31 2002, was capitalized and became a higher value of the definite capital; interest for the second year were paid by due semester, the first payment being on July 31, 2003 and thereafter, each 31st day of January and each 31st day of July, until the date of its total payment. The debt contracted with Petroleum Aviation Services was transferred by Valores Bavaria S.A., as from May 2002, with respect to the debt that existed with Vise Ltda. Such debt was transferred in a 95% to Valores Bavaria S.A., and the 5% to Inmobiliaria Aguila S.A., as from May 1, 2002. With respect to the debt that existed with Serdan S.A. and Mision Temporal S.A. it was transferred to Valores Bavaria in full with effect on October 11, 2002. Restructuring agreement - Sam S.A. - As part of the long-term restructuring agreement made with foreign creditors it was agreed to restructure in the same terms the debts for services that might exist with the enterprises related to the group Valores Bavaria S.A. The term for its payment is 7 years, counted as from February 1, 2001, with a grace period that extends up to January 31, 2005. (2) The Company on taking refuge in Chapter 11 before the Court of New York, leaves frozen the domestic and foreign accounts payable that were generated before March 21, 2003. Some payments have been made to critical suppliers of the operation in Colombia and abroad, prior authorization from the Bankruptcy Court of the United States, South district of New York. The most representative debts are: Caja de Auxilios y Prestaciones Caxdac $ 12.527.448 Unidad Administrativa Especial de Tesoro Nacional 10.564.361 Oag Worldwide 1.150.144 Lasa S.A. 1.202.058 Aerosucre S.A. 1.067.145 Sabreinc 928.668 Pros Revenue Management Inc 828.929 McCann Ericson Corporation S.A. 683.388 Coopava Cooperativa de Trabajadores 724.952 The Bank of New York 599.421
(*) The Court of New York has been approving payments to some direct suppliers necessary for the development of the business purpose of the Company. (3) Corresponds to accounts payable for transportation of baggage and flight services, among others. 17. TAXES, ENCUMBRANCES AND RATES
JUNE 30, DECEMBER 31, 2004 2003 Sales tax payable $ 13.452.075 $ 13.111.296 Industry and Commerce Tax(1) (44.661) 2.427.834 Other taxes payable(2) 1.608.205 7.382.448 ---------------- --------------- Total $ 15.015.619 $ 22.921.578 ================ ===============
(1) Corresponds to the sales tax generated and recovered from abroad and which was analyzed and adjusted against the recovery of other costs and expenses. (2) Corresponds to the sales tax generated and recovered from foreign countries, and which was analyzed and adjusted against recovery of other costs and expenses. Based on resolution 900009 of June 11, 2003 the Direction of Taxes and National Customs, Barranquilla Office, upon prior compliance with the legal obligations, granted the Company a - 30 - payment facility to pay the pending obligations for sales tax returns VAT, withholdings at source, customs penalties and its respective interest. As guarantee there were delivered 38 immovables for the amount of $19.217.484 and an insurance policy for the amount of $7.000.000. In Avianca as of June 30th there is pending payment $23.111.000 discriminated thus: $6.551.000 for customs sanctions, $15.965.000 balance withholdings of December de 2002 and $ 595.000 for interest. INCOME TAX For the years 2003 and 2002 the Company did not calculate any income tax due to the fact that the liquid fiscal equity for the prior years, basis for the calculation of the presumptive income, is negative. As of June 30, 2004, in Avianca and Sam there are open the income tax returns for the taxable years 2003, 2002 and 2001, as well as the withholding tax returns and sales tax since the year 2001 to date. At this time, the income tax returns for the years 2002 and 2001 are being reviewed by the tax authorities and would become firm on September 4, 2005 and September 5, 2004 respectively. Likewise, the sales tax return for the first period of 2002 is being reviewed. As of June 30, 2004, in Sam there are open the tax returns for the taxable years 2002 and 2003, the same as the withholding tax returns and sales tax returns. For the years 2003 and 2004 Sam calculated the provision for income tax taking as a base the presumptive income on the liquid equity for the immediately preceding year. 18. ESTIMATED LIABILITIES AND PROVISIONS
JUNE 30, DECEMBER 31, 2004 2003 Maintenance (1) $ 86.697.112 $ 82.559.347 Insurance (2) 694.000 611.432 Fiscal obligations (3) 32.036.046 40.204.943 Facilities 3.771.219 7.213.533 Contingencies (4) 22.465.750 13.895.472 Communications 822.858 4.704.559 Hotel services 3.698.301 1.593.549 Landings 3.305.370 2.604.547 Services to passengers 421.900 2.428.158 Distribution and reserve systems (5) 105.644 2.852.716 Legal expenses 9.282 416.732 Labor expenses (6) 4.953.294 22.347.163 Extraordinary expenses (7) 778.760 6.555.497 Others (8) 22.511.549 12.699.599 ----------------- ---------------- Total $ 182.271.085 $ 200.687.247 ================= ================
(1) The Company recognizes the costs of maintenance services and major repairs in accordance with the hours flown during the period. Minor and rutinary costs of services in order to maintain the fleet in operating conditions are recognized at the time of the service. - 31 - (2) In the year 2002 there was recorded the Provision of invoices for extra-premiums of the policies of Civil Liability and of hulls for the months of October, November, like all the policies of the December operation, at the same time the contingency to Colseguros was recorded for premium at short term, which is in the process of negotiation with respect of the demandability of same and the eventual paymet agreement (Note 13). During October 2003 the Company signed a transaction agreement with the Aseguradora Colseguros, in order to credit and cross these amounts with the accounts receivable; nevertheless to this date it is pending approval by the Court of New York. (3) Corresponds to the provision that the Company has estimated, for the higher value taken as discountable, between the tariff of the tax on sales charged (10%) and the tariff of the sales tax discounted (16%). With Law 788 of December 27, 2002, the sales tax rate for sale of air tickets was unified in 16%. (4) Corresponds to the Provision of the total of probable contingencies for labor, commercial, civil and criminal litigation. Likewise there is recorded a Provision for USD$750,000 corresponding to the penalty for narcotics in the United States. (5) Relates to the accounts payable for the months of June, July and August pending billing for this concept. (6) Provision effected for the pension titles of the ISS that were not redeemed. (7) Corresponds to the provision for the negotiation in the return of fleet with ILFC, that will be renegotiated within Chapter 11. (8) Corresponds to bonuses for flexible salary of the directive personnel of the Companies; for Avianca it is pending definition and approval by the Court of New York, for Chapter 11, provision of services in Avianca of surveillance in New York and Miami from January to October 2003 pending billing. 19. OTHER LIABILITIES
JUNE 30, DECEMBER 31, 2004 2003 Prepayments and advances received (1) $ 6.949.335 $ 713.569 Deposits received (2) 3.637.859 3.637.615 Income received for third parties (3) 2.122.496 2.492.085 ---------------- ---------------- Total $ 12.709.690 $ 6.843.269 ================ ================
(1) Prepayments and advances received from clients, their decrease is due to the termination of the promotion Tuti Fruti flight plans by Bavaria. (2) Corresponds to deposits of Avianca as guarantee of contracts for the future purchase of immovables entered into with Bavaria in the amount of $3.637.597. (3) Relates to the collection of airport rates especially in the bases of Madrid and Miami, and the exit taxes and stamp tax toward foreign countries. During the month of June 2004, the U.S. Government required from the