Jazz Air Income Fund. Unaudited Consolidated Financial Statements March 31, 2007

Transcription

1 Unaudited Consolidated Financial Statements

2 May 9, Management s Report The accompanying unaudited interim consolidated financial statements of Jazz Air Income Fund are the responsibility of management and have been approved by the Board of Trustees. The unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. The unaudited interim consolidated financial statements include some amounts and assumptions based on management s best estimates which have been derived with careful judgement. In fulfilling its responsibilities, management has developed and maintains a system of internal accounting controls. These controls are designed to ensure that the financial records are reliable for preparation of the financial statements. The Board of Trustees reviews and approves the Fund s unaudited interim consolidated financial statements. (signed) Joseph D. Randell President and Chief Executive Officer (signed) Allan D. Rowe Senior Vice President and Chief Financial Officer

3 Unaudited Consolidated Balance Sheets As at and December 31, (in thousands of Canadian dollars) December 31, Assets Current assets Cash Distribution receivable (note 4) 10,296 1,903 Investment in Jazz Air LP (note 3) 1,028, ,570 1,039, ,486 Liabilities Current liabilities Accounts payable to Jazz Air LP 80 Distributions payable (note 4) 10,296 1,823 10,296 1,903 Unitholders Equity Fund units (note 5) 1,040, ,174 Accumulated other comprehensive income (note 6) (202) Cumulative earnings 22,635 15,392 Cumulative distributions (34,522) (19,983) Guarantees (note 7) Contingent liabilities (note 8) The accompanying notes are an integral part of these interim consolidated financial statements. 1,028, ,583 1,039, ,486

4 Unaudited Consolidated Statements of Earnings and Cumulative Earnings For the periods ended and For the three months ended For the period from February 2, to Equity in net earnings of Jazz Air LP 7,237 3,039 Interest income 6 1 Net earnings for the period 7,243 3,040 Cumulative earnings Beginning of period 15,392 Cumulative earnings End of period 22,635 3,040 Basic earnings per unit Fully diluted earnings per unit Unaudited Consolidated Statements of Cumulative Distributions For the periods ended and For the three months ended For the period from February 2, to Cumulative distributions Beginning of period 19,983 Distributions declared during the period 14,539 3,580 Cumulative distributions End of period 34,522 3,580 The accompanying notes are an integral part of these interim consolidated financial statements.

5 Unaudited Consolidated Statements of Comprehensive Income For the periods ended and (expressed in thousands of Canadian dollars, except units and earnings per unit) For the three months ended For the period from February 2, to Net earnings for the period 7,243 3,040 Proportionate share of comprehensive income from Jazz Air LP Change in fair value of derivatives designated as cash flow hedges (207) Comprehensive income 7,036 3,040 The accompanying notes are an integral part of these interim consolidated financial statements.

6 Unaudited Consolidated Statements of Cash Flows For the periods ended and (in thousands of Canadian dollars) For the three months ended For the period from February 2, to Cash provided by (used in) Operating activities Net earnings for the period 7,243 3,040 Equity in net earnings of Jazz Air LP, net of cash distributions received, not involving cash (7,237) (3,039) Cash distributions from Jazz Air LP earned 14,539 3,580 14,545 3,581 Net changes in non-cash working capital balances related to operations Increase in distributions receivable (8,393) (1,823) Decrease in payable to Jazz Air LP (80) 6,072 1,758 Financing activities Distributions to Unitholders (6,066) (1,757) Issue of units 246,174 (6,066) 244,417 Investing activities Investment in Jazz Air LP (246,174) Net change in cash during the period 6 1 Cash Beginning of period 13 Cash End of period 19 1 Cash receipts of interest 6 1 The accompanying notes are an integral part of these interim consolidated financial statements.

7 For the three-month period ended 1 Basis of presentation Jazz Air Income Fund (the Fund ) is an unincorporated, open-ended trust established under the laws of the Province of Ontario by a declaration of trust dated November 25, 2005 and amended by an amended and restated declaration of trust dated January 24, (the Fund Declaration of Trust ). The Fund qualifies as a mutual fund trust for the purposes of the Income Tax Act (Canada). The principal and head office of the Fund is located at 5100 de Maisonneuve Boulevard West, Montreal, Québec, H4A 3T2. The Fund has been established to acquire and hold, directly or indirectly, investments in Jazz Air LP ( Jazz LP ) and its general partner Jazz Air Holding GP Inc. ( Jazz GP ), a regional airline, and such other investments as the Trustees may determine. These unaudited interim consolidated financial statements include the accounts of the Fund and all of its subsidiaries and all variable interest entities ( VIE s) for which it is the primary beneficiary (note 2). Investments in entities over which the Fund has significant influence are accounting for using the equity method. 2 Significant accounting policies The accompanying unaudited interim financial statements have been prepared in accordance with the requirements of Canadian Institute of Chartered Accountants (CICA) Handbook Section 1751, Interim Financial Statements. Accordingly, certain information and note disclosure normally included in annual financial statements prepared in accordance with Canadian generally accepted accounting principles have been omitted or condensed. These unaudited interim financial statements should be read in conjunction with the audited financial statements of Jazz Air Income Fund for the period from February 2, to December 31,. Variable Interest Entities At its inception, the Fund adopted Accounting Guideline 15 ( AcG 15 ) Consolidation of Variable Interest Entities ( VIE ). AcG 15 defines a VIE as an entity that either does not have sufficient equity at risk to finance its activities without subordinated financial support from other parties, or where the equity investors lack the characteristic of a controlling financial interest, or that do not absorb the expected losses or receive the expected returns of the entity. VIEs are subject to consolidation by an entity if that entity is deemed the primary beneficiary of the VIE. The primary beneficiary is the party that is either exposed to a majority of the losses from the VIE s activities or is entitled to receive a majority of the VIE s residual returns or both. The Fund has determined that Jazz LP is a VIE and that it has a variable interest in Jazz Air LP; however, management has concluded that Air Canada, and not the Fund, is the primary beneficiary. As a result, the Fund accounts for its investment in Jazz LP using the equity method of accounting. (1)

8 For the three-month period ended 2 Significant accounting policies (continued) Changes in accounting policies Financial instruments Commencing with the first quarter of, the Fund adopted three new accounting standards issued by the Accounting Standards Board and included in the CICA handbook as follows: (i) Section 1530 Comprehensive Income; (ii) Section 3855 Financial Instruments Recognition and Measurements; and (iii) Section 3861 Financial Instruments Disclosure and Presentation. The new standards lay out how financial instruments are to be recognized depending on their classification. Depending on financial instruments classification, changes in subsequent measurements are recognized in net income or comprehensive income. The Fund has implemented the following classifications: Cash and cash equivalents are classified as Financial Assets Held for Trading. These financial assets are marked-to-market through net income at each period end. Distributions receivable are classified as Loans and Receivables. After their critical fair value measurement, they are measured at amortized cost using the effective interest rate method. For Jazz, the measured amount generally corresponds to cost. Accounts payable, and distributions payable are classified as Other Financial Liabilities. After their initial fair value measurement, they are measured at amortized cost using the effective interest rate method. For Jazz LP, the measured amount generally corresponds to cost. In the opinion of management, the unaudited interim financial statements include all adjustments considered necessary by management to present a fair statement of the results of operations, financial position and cash flows. The unaudited interim financial statements were prepared using the same policies and methods of computation as the audited financial statements of the Fund for the year ended December 31,, with the exception of the implementation of the new financial instruments standards. 3 Investment in Jazz LP and Jazz Air GP Inc. On January 25,, the Fund filed a prospectus relating to the initial public offering of 23,500,000 Fund units for gross proceeds of 235,000, which closed on February 2,. In addition, on February 27, as a result of the exercise by the underwriters of the over allotment option related to the offering, the Fund issued 1,500,000 Fund units for gross proceeds of 15,000. The Fund used these proceeds to invest in 25,000,000 limited partnership units or 20.3% of Jazz LP. The Fund has reflected its proportionate share of the costs of the offering of 3,826 as a reduction in investment and in its equity resulting in an initial investment and Trust units of 246,174. In addition, the Fund also acquired, for nominal consideration, 25,000,000 common shares or 20.3% of Jazz GP, the general partner concurrent with the acquisition of the Jazz LP units. (2)

9 For the three-month period ended 3 Investment in Jazz LP and Jazz Air GP Inc. (continued) On February 9,, ACE exchanged 638,223 of its units of Jazz LP ( Jazz Units for 638,223 units of the Fund ( Fund Units ). The 638,223 Fund Units were contributed to a trust in order to fund grants to employees under Jazz s Initial Long-term Incentive Plan. On March 14,, pursuant to a statutory plan of arrangement approved in October, ACE exchanged 25,000,000 Jazz Units for an equivalent number of Fund Units. These Fund Units were distributed to ACE s shareholders as part of a special distribution. On the same date, ACE also exchanged an additional 25,000,000 Jazz Units for 25,000,000 Fund Units in accordance with terms of the Investor Liquidity Agreement. On March 30,, ACE exchanged its remaining 47,226,920 Jazz Units for an equivalent amount of Fund Units. As a result of these transactions, at, the Fund held 100% of Jazz LP, compared to 20.3% at, with ACE no longer holding a direct interest in Jazz LP at, compared to 79.7% at. The February 9,, March 14, and March 30, transactions have been accounted for as step-by-step purchases. The allocation of the excess of the Fund s cost over the carrying value of the net assets of Jazz LP as at February 2,, has been allocated to the value of the CPA in the amount of 239,000 and will be amortized over 20 years which is the term of the CPA plus renewals. As at February 9,, March 14, and March 30,, the allocation of the excess of the Fund s cost over the carrying value of the net assets of Jazz LP, has been allocated on a preliminary basis to the value of the CPA in the amounts of 5,000, and 358,000, respectively and will be amortized over the remaining term of the CPA plus renewals as at the date of the share exchanges. Commencing with the first quarter of, Jazz LP adopted four new accounting standards issued by the Accounting Standards Board: (i) Section 1530 Comprehensive Income; (ii) Section 3855 Financial Instruments Recognition and Measurements; (iii) Section 3861 Financial Instruments Disclosure and Presentation; and (iv) Section 3865 Hedges. Section 3865, Hedges, establishes how hedge accounting may be applied. Jazz LP has decided to apply hedge accounting to its interest rate swaps and treat them as cash flow hedges. These derivatives are marked-tomarket at each period end and resulting gains/losses are recognized in comprehensive income to the extent the hedging relationship is effective. These new standards have been applied without restatement of prior period amounts. Upon initial application, all adjustments to the carrying amount of financial assets and liabilities have been recognized as an adjustment to the opening balance of partners capital or accumulated other comprehensive income, depending on the classification of existing assets or liabilities. The Fund has recognized a 409 adjustment to the opening balance of accumulated other comprehensive income with respect to the interest rate swaps of its equity investee designated as cash flow hedges. As at, the Fund s investment in Jazz LP includes its net proportionate share of accumulated other comprehensive income. (3)

10 For the three-month period ended 3 Investment in Jazz LP and Jazz Air GP Inc. (continued) The following table details the carrying value of the Fund s investment in Jazz LP December 31, 23,500,000 Jazz Units acquired on February 2,, 1,500,000 Jazz Units acquired on February 27,, net of issue costs of 3, , , ,223 Jazz Units exchanged by ACE for 638,223 Fund Units and contributed to Jazz s Initial Long-term Incentive Plan on February 9, 5,457 25,000,000 Jazz Units exchanged by ACE for 25,000,000 Fund Units and distributed to ACE shareholders on March 14, 200,750 25,000,000 Jazz Units exchanged by ACE for 25,000,000 Fund Units on March 14, 200,750 47,226,920 Jazz Units exchanged by ACE for 47,226,920 Fund Units on March 30, 387,733 Proportionate share of Jazz LP s net earnings since February 2, 37,529 26,413 Amortization of CPA value since February 2, (14,833) (10,954) Proportionate share of Jazz LP s other comprehensive income since January 1, (202) Distributions declared by Jazz LP since February 2, (34,522) (19,983) Priority distributions (80) (80) 1,028, ,570 In the first quarter, the Fund has recognized, in its equity earnings, amortization of 3,879 (1,651 for the period from February 2, to ) of the value attributed to the CPA. (4)

11 For the three-month period ended 4 Distributions The Fund declared a distribution payable for the period ended of per Fund Unit. The distribution of 10,296 is payable April 16, to unitholders of record on. In accordance with the limited partnership agreement, priority distributions are to be made to the Fund in order to cover the Fund s operating expenses. During this period, no priority distributions were declared by Jazz LP since no material operating expenses were incurred by the Fund. The monthly distributions are dependent on Jazz LP s monthly distributions, have amounted to per unit in after the initial prorated amount for February and for the first three months of. Total distributions for the periods are as follows: Amount Amount per unit January 31, 2, February 28, 2, , Units 14,539.0 The Fund may issue an unlimited number of Fund Units for the consideration of, and on the terms and conditions determined by, the Trustees. Each Fund Unit is transferable and represents an equal undivided beneficial interest in any distribution from the Fund. All Fund Units are of the same class and have equal rights and privileges. Units are redeemable at any time on demand by the unitholder. The redemption price per unit is equal to the lesser of 90.0% of the market price on the date of surrender of the unit for redemption and 100.0% of the closing market price on the redemption date. The issued and outstanding Fund Units are summarized as follows: Number of Fund Units Description December 31, 25,000,000 Issued for 10 each, net of issue costs of 3, , , ,223 Issued on February 9, for 8.55 each 5,457 50,000,000 Issued on March 14, for 8.03 each 401,500 47,226,920 Issued on March 30, for 8.21 each 387, ,865,143 Total 1,040, ,174 (5)

12 For the three-month period ended 5 Units (continued) In connection with the initial public offering and the over-allotment option, the Fund issued 23,500,000 Fund Units on February 2, and 1,500,000 Fund Units on February 27,. As a result, at February 27, the total number of Fund Units issued was 25,000,000 for a total consideration of 246,174, net of 3,826 representing the Fund s proportionate share of the 18,805 of offering cost paid. Under the terms of an Investor Liquidity Agreement, the Jazz Units held by ACE, to the extent not subordinated, are exchangeable for Fund Units on a one-to-one basis. The subordinated Jazz Units held by ACE became exchangeable after December 31,. The Investor Liquidity Agreement also provides for registration and other liquidity rights that enable ACE to require the Fund to file a prospectus and otherwise assist with a public offering subject to certain restrictions. During the quarter, ACE exercised its exchange right in connection with the transactions described in note 3, and the Fund issued 638,223 Fund Units at 8.55 each, 50,000,000 Fund Units at 8.03 each, and 47,226,920 Fund Units at 8.21 each for a total number of Fund Units issued and outstanding at of 122,865,143 for a total consideration of 1,040, Accumulated other comprehensive income Derivates designated as cash flow hedges constitute the sole item in Accumulated other comprehensive income. The changes that occurred during the period were as follows: Adjusted opening balance due to the new accounting policies adopted regarding financial instruments (note 2) (409) Change in fair value during the period 207 Balance End of period (202) 7 Guarantees The Trust has guaranteed payment of Jazz LP s borrowings under its credit facilities. This guarantee is supported by first ranking security over all of the present and future assets of the Trust, including a first ranking pledge of all securities held by the Trust in Jazz LP and Jazz GP. In addition, both the Trust and the Fund have agreed not to carry on any business, encumber or dispose of any assets, enter into any merger, own any assets or incur any debt other than the business of holding trust or an income fund, and the ownership of securities of Jazz LP and Jazz GP, and otherwise permitted by their respective Declaration of Trust. As at, Jazz LP had authorized credit facilities of 150,000, of which 115,000 had been drawn. (6)

13 For the three-month period ended 8 Contingent liabilities The Fund Declaration of Trust provides that the Trustees will act honestly and in good faith with a view to the best interest of the Fund and in connection with that duty, will exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Fund Declaration of Trust provides that each Trustee will be entitled to indemnification from the Fund in respect of the exercise of the Trust s power and the discharge of the Trustee s duties, provided that the Trustee acted honestly and in good faith with a view to the best interests of all unitholders, or in the case of a criminal or administrative action proceeding that is enforced by a monetary penalty, where the Trustee had reasonable grounds for believing that his/her conduct was lawful. No claims with respect to such occurrences have been made and, as such, no amount has been recorded in these financial statements with respect to these indemnifications. (7)