ITEM 1. BUSINESS.
Global is a public company that trades in the U.S. over-the-counter market. Our common stock is quoted on the OTC Bulletin Board under symbol GACF. Global was formed as a holding company to establish, maintain and administer the equity and debt funding of any acquired subsidiaries as well as maintain such capitalization of any subsidiaries.
Global subsidiaries include Hamilton Aerospace Technologies, Inc. (“HAT), which was organized on April 5, 2002 and World Jet Corporation, (“World Jet”), which was organized on April 22, 1997. On May 2, 2002, Global acquired newly formed HAT, a Delaware corporation, in a stock-for-stock exchange. HAT was created as a provider of aircraft maintenance, repair and overhaul (“MRO”) services to owners and operators of Transport Category commercial jet aircraft. Its customers are all aircraft operators or owners, including passenger and cargo air carriers, and aircraft leasing companies. On July 15, 2004, (effective as of January 1, 2004), Global acquired World Jet, a privately owned Nevada corporation pursuant to a stock purchase agreement whereby Global acquired 100% of the stock of World Jet for a total purchase price of $2,050,000.00 payable as follows: 1) $1,250,000.00 in cash, 2) $300,000.00 promissory not
e, and 3) 1,000,000 shares of Global stock at a price of $0.50 per share as well as assuming all liabilities of World Jet. World Jet is an aircraft parts sales and aircraft parts brokerage facility servicing aircraft operators, aircraft leasing companies and MRO facilities.
On August 26, 2005, Global together with BCI Aircraft Leasing, (“BCI”), formed a joint venture Delaware limited liability company called Jetglobal, LLC, (“Jetglobal”). This was a special purpose LLC formed to acquire and remarket commercial jet aircraft. BCI was primarily responsible for the marketing aspects of Jetglobal while Global was responsible for the technical, repair and maintenance aspects associated with remarketing purchased aircraft. Global invested an initial amount of $1,125,000 for a 30% membership and profit interest and BCI invested an initial amount of $2,625,000 for a 70% membership interest in Jetglobal. Pursuant to the terms of Jetglobal’s Operating Agreement, although the Company had a 30% membership interest, it was only res
ponsible for 25% of the costs and expenses associated with Jetglobal During 2007, the Company transferred its ownership interest in Jetglobal to BCI Aircraft Leasing in consideration for aircraft inventory and trailing interest in certain Jetglobal claims against third parties. The Company and BCI executed a final agreement and a settlement on April 20, 2007, and revised it on June 29, 2007. The terms of the final agreement with BCI did not result in any impairment to the company.
During 2006, the Company formed a Mexican corporation, Hamilton Aerospace Mexico, S. A. de C.V. for the purpose of satisfying the Mexican government requirements associated with HAT’s Tijuana operation and the servicing of Mexican airline, Avolar Aerolineas.
Global Aircraft Leasing Partners, LLC, a Delaware limited liability company, (“GALP”), is a start-up aircraft-leasing venture formed to acquire aircraft, through a combination of debt and equity financing, and lease these commercial jet aircraft to operators throughout the world. On September 4, 2007, the Company and GALP entered into an agreement that calls for the company assuming a 40% equity interest in GALP, effective October 1, 2007. Notwithstanding the effective date of the agreement, the parties have agreed that in return for marketing and technical support provided to GALP to date, the Company will be entitled to a commission equal to 40% of the net profits earned on all transactions entered into by GALP from the date of its inception through October 1, 2007. Under the terms of the agreement, in consideration for its 40% equity participation in GALP, the company will make a one time capital contribution of $40,
000. As further
consideration the Company will provide to GALP ongoing technical support to facilitate GALP’s commercial aircraft purchasing, leasing and sales activities. All technical services provided to GALP by HAT and World Jet will be billed at company-standard rates. The Company has made $20,000 in capital contribution as of December 31, 2007. Final agreement relative to operations has not yet been finalized and Global has no equity participation in GALP for the year ended December 31, 2007. Global will not be required to invest capital in aircraft acquired by GALP, and all debt assumed by GALP as a result of aircraft acquisitions will be non-recourse with respect to the Company. Other members of GALP will include equity funding specialists and aircraft leasing professionals. Global and GALP have also agreed that Global will have first right of refusal for all aircraft maintenance, aircraft parts and technical consulting requirements
that GALP may have as a result of its aircraft acquisition and leasing activities.
During the year ended December 31, 2007, 68% of the Company’s operations were conducted by two operating subsidiaries: HAT which accounted for approximately 60% of the Company’s revenue and Word Jet which accounted for approximately 8% of the Company’s revenue. The Company’s share of Jetglobal 2007 net income was $214,800. Global contributed 32% of the Company’s revenue through its aircraft-trading activity.
HAMILTON AEROPSACE TECHNOLOGIES, INC.
HAT is an aircraft repair station, licensed by the Federal Aviation Administration (FAA) and by the European Aviation Safety Agency (EASA), and is known as an "Air Agency" in FAA parlance. Its MRO services include maintenance, repair, overhaul and modification services for narrow-body Transport Category aircraft, repair and overhaul services on a wide range of aircraft components and aircraft interiors. Our major modification services include the conversion of passenger aircraft to freighter configuration and technical support for third party modification programs.
While the airlines and large leasing operators get the lion's share of attention, aircraft repair stations, such as HAT, occupy a truly pivotal role for the following reasons:
First, no modification, service or repair can be made to any aircraft, nor can any parts be installed, inspected or
certified, except by FAA-certified maintenance facilities including repair stations.
Second, aircraft require regular inspection and maintenance in accordance with FAA regulations and must
regularly visit FAA-certified maintenance facilities including repair stations.
Third, most operators must as a matter of economics rely on repair stations to obtain parts for them, and many
operators rely on repair stations entirely to manage their parts usage and even their line fleet.
Fourth, when operator customers have parts inventories to be disposed of or planes to be torn down and parted
out, repair stations are often called upon to do the work and find buyers for the parts.
Fifth, because of their closeness to their operator customers, repair stations frequently are the first to learn of
bargains on parts inventories and aircraft and frequently have first crack at finding a buyer or lessee for a customer
aircraft.
Sixth, repair stations can avoid many of the effects of aviation downturns because air fleets still must undergo
scheduled maintenance irrespective of industry conditions. Even in a severe downturn when large numbers of
aircraft are parked, aircraft storage can still be a profit center for repair stations.
Operations
As your jet rolls away from the gate and over the tarmac toward the runway, you may have noticed at some airports the hangars in which large commercial jets were being serviced. This is exactly what HAT does. HAT was created to provide aircraft maintenance, repair, overhaul and modification services to owners and operators of Transport Category commercial jet aircraft. Its customers are all aircraft operators or owners, including passenger and cargo air carriers and aircraft leasing companies.
When economic factors adversely affect the airline industry, they tend to reduce the overall demand for aircraft maintenance and repair services, causing downward pressure on pricing and increasing the credit risks associated with doing business within the industry. Additionally, the price of fuel affects the aircraft maintenance and repair markets, since older aircraft, which consume more fuel and which account for most of our aircraft maintenance and repair business, become less viable as the price of fuel increases. We cannot assure you that economic and other factors that have affected the airline market in the past and may affect the airline industry in the future will not adversely impact our business, financial condition or results of operations. However, since inception, HAT has aggressively increased its market share by focusing on quality service, turn ar
ound time and breadth of services offered.
MRO Services
HAT is a full service aviation maintenance and modification repair facility that primarily performs heavy maintenance and component overhaul of large narrow body jets, such as the Boeing 727, 737, 757, DC9 and MD80 series aircraft. HAT provides airport terminal “turn around” maintenance for most of the airlines operating into Tucson International Airport. Below is a brief description of HAT’s core services:
Routine minor and major maintenance (phase checks A, B, C and D)
Line maintenance for carriers landing and taking off from Tucson
International Airport Corrosion control and prevention programs
Structural inspections
Avionic upgrades and modifications
Interior reconfiguration and refurbishment
Strip and paint services to operators' livery requirements
Comprehensive systems and structural modifications
Flight test support
Component overhaul
Installation of stage 3 hush-kits (Fed Ex, Raisbeck, ABX, Nordam and Av Aero)
Regulatory Oversight
Regulation
In the United States, the Federal Aviation Administration (FAA) regulates the manufacture, repair, overhaul and operation of all aircraft and aircraft equipment operated in the U.S. pursuant to the Federal Aviation Regulations (FARs). The FAA must certify each authorized repair station, and certified facilities are issued an Air Agency Certificate. Each certificate contains ratings and limitations that specifically authorize the repair station to only perform certain types of services on specific makes and models of aircraft. FAA regulations are designed to ensure that all aircraft and aircraft equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition-monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for
the various types of aircraft and aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. We closely monitor the FAA and industry trade groups in an attempt to understand how possible future regulations might impact us.
A good working relationship with the FAA is essential to the successful operation of an FAA-approved Repair Station such as HAT. The policy of HAT management is to work closely and proactively with the FAA, which has resulted in the relationship needed to insure that when significant issues do occasionally arise between HAT and the FAA they are addressed in a reasonable and constructive nature.
HAT holds FAA Air Agency Certificate #HOCR426X ("FAA Certificate") as an authorized and approved FAA repair station, which permits HAT to service narrow body large commercial jet aircraft. This certificate grants HAT the following ratings: Instrument, Accessory, Limited Airframe, and Limited Engine for the following aircraft (with certain limitations for each rating and aircraft):
HAT is inspected regularly by the FAA for conformity to federal regulations and consistently passes those inspections with no significant discrepancies. Weekly visits by the primary maintenance inspector (PMI) from the FAA provide continuous monitoring of all HAT activities. HAT maintains a working relationship with the FAA staff and all work is carried out according to the standards and requirements of the FARs.
HAT also holds an equivalent certificate in the European Economic Community. Without the EASA certificate, HAT would not be allowed to work on aircraft that operate in European Economic Community ("EEC") airspace.
Both certificates are in good standing. Licensure and regulation of aviation companies is almost exclusively federal in nature.
Quality Assurance (which includes Quality Control and Inspection) and Production functions are separate and distinct at HAT, as required by the FAA, and the management of each is autonomous from the other, as federal law requires. Upon completion, all work will have been fully documented as to the materials used, parts and labor applied, and conformity to the approved data and FARs.
Aircraft Heavy Maintenance and Repair
Maintenance and repairs for narrow body commercial jet aircraft constitutes HAT's core business. These services include simple repairs and servicing, heavy maintenance referred to as a "C-check" and complete overhaul referred to as a "D-check." In addition, HAT performs major configuration changes of commercial aircraft, such as interior reconfiguration and conversion from passenger service to cargo service. Each airline operator has a governmental-approved and mandated maintenance schedule for each of its commercial aircraft on the line. Certain maintenance is typically performed by the operator's maintenance personnel (for example, daily line checks), while other, more substantial maintenance can be self-performed or contracted out to certified repair stations.
HAT provides services for each aircraft under a Maintenance and Service Agreement (MSA) with each operator. These contracts are generally fixed-price labor-only, with a cap on hours expended on unforeseen repairs. Parts are either provided by the operator or can be procured by HAT and resold to the operator. Delivery of the aircraft to and from HAT's facility are at the operator’s cost and risk, and HAT requires each operator to execute a Final Acceptance and Release which acknowledges that the services have been performed properly, that the commercial aircraft is airworthy, and which, apart from contractual warrantees, releases HAT from any financial or legal responsibility with respect to the aircraft and services. With certain long-term customers HAT has entered in
to a General Terms Agreement, which is an umbrella agreement that covers the general framework for all services HAT expects to render to the customer.
In addition to scheduled maintenance services, HAT also offers refinishing, painting and return-to-service maintenance. HAT also offers numerous related services, such as worldwide commercial aircraft pre-purchase inspection and appraisal services, post-purchase configuration, maintenance and operational program development, post-contract and post-lease condition assessment, commercial aircraft accident assessment and recovery, flight line maintenance, termination of lease recovery, and aircraft storage and storage maintenance.
Modification Services
HAT modification services include passenger to cargo conversions, engine noise suppression, power plant retrofits, and avionics upgrades to the latest in navigation, communication, and digital technology. HAT also provides interior replacement and refurbishment services as well variety of custom seating arrangements to meet operators' requirements, including all types of commercial configurations and special purpose interiors for sports teams, humanitarian missions or VIP aircraft.
HAT plans to opportunistically grow its modification services. However, HAT intends at this time to concentrate its business-building efforts on its primary maintenance services.
Market
Narrow body commercial airliners (Boeing 727s, 737s, 757s, DC9s, MD80s) are HAT’s primary market for selling aircraft maintenance, repair, and component overhaul services. Major commercial airlines, lower-tier airlines, package carriers, and charter operators operate these aircraft. The summer 2007 edition of MRO Management cites
the industry consultancy 2007 AeroStrategy Annual Industry Forecast as projecting 3.6% annual MRO growth over the ten years from 2006 to 2016 rising from $41 billion to $58 billion, respectively. Of those numbers 14% is classified aircraft heavy maintenance, 21% modifications, 21% line maintenance, 21% component maintenance and 35% engine maintenance. HAT’s target market of specific narrow body commercial jet aircraft constitutes an estimated 25% of the worldwide commercial aircraft maintenance market. Due to the relatively small portion of its revenues that come from activities other than its core MRO services, HAT has not examined the markets for those other activities.
Customers and Revenue Streams
When it was first launched, HAT concentrated its marketing efforts on so-called "Tier 2" operators of older, narrow-body commercial jets, particularly Boeing 727 aircraft. HAT has expanded those efforts and now pursues both Tier 1 and Tier 2 narrow-body operators of 727, 737, 757, MD80 and DC9 aircraft.
HAT's customers include: BCI Aircraft Leasing (22%), an aircraft leasing company; Global Aircraft Leasing Partners (25%); Avolar Aerolineas, S.A. de C. .V (13%), a Mexican airline; Enterprise Aviation (5.2%); P
ratt and Whitney (3.8%); United Breweries Holding, Ltd. (5.0%); ART Portfolio (3.7%); Pegasus Aviation (1.9%), a large aircraft leasing company and long-time Hamilton Aviation customer; as well as a number of smaller customers. HAT also does line maintenance at Tucson International Airport for Alaska Airlines, American Airlines, Contintental Airlines, Delta Airlines, Frontier Ai
rlines, Jet Blue Airlines, Northwest Airlines and United Airlines. HAT is working to increase and diversify its customer base and expects to sign more maintenance contracts.
Ancillary Activities and Services
In addition to its core maintenance, repair, component overhaul and modification services, HAT opportunistically generates additional income from the following revenue sources encountered in the course of the company's day-to-day business activities:
Distress purchases: HAT is able to buy planes and parts at pennies on the dollar, re-certify parts, engines and airframes and resell them at a profit.
Parts Sales: HAT generates revenue on all parts it installs in customer aircraft.
Commission Sales: HAT buys parts on request for customers that don't maintain parts inventory and charges a commission for that service.
Aircraft storage: HAT offers environmentally favorable aircraft storage to aircraft operators and has some 40 aircraft parked on its ramp for which the customers are paying both tarmac space rental and storage maintenance labor and components charges. Because it costs tens of thousands of dollars to fly them to another comparable facility, most of these aircraft will be returned to service at a cost of hundreds of thousands of dollars each in new work for HAT.
Inspection and Certification: HAT charges a service to inspect and to re-certify parts, engines and airframes for customers.
Aircraft Sales and Leasing Commissions: HAT takes full advantage of its position as a maintenance provider to earn commissions on aircraft sales or leases.
Aircraft Ferry and Flight Crew Services: HAT offers aircraft ferry service and flight crew operations, to shuttle aircraft for maintenance or repositioning. Contract crews are used in order not to create additional overhead.
These other services are synergistic in that each can generate additional services and opportunities. For example, as described above HAT typically gets the maintenance and overhaul work on aircraft stored on its tarmac, due to the tens of thousands of dollars often required to relocate such aircraft. HAT also frequently gets the first offer to buy or broker aircraft due to knowledge of the industry and its ability inspect, appraise, and return the aircraft to service on a turn-key basis in accordance with the new operator’s specifications. These opportunities exist due to the strategic market position that aircraft repair stations, such as HAT, occupy at the center of the aviation industry.
WORLD JET CORPORATION, INC.
Operations and Services
World Jet sells and brokers the sale of aircraft parts, airframe components, engines and engine materials including Expendables, Rotables and Consumables. Expendables are miscellaneous hardware items such as nuts, bolts, rivets, screws, etc. used as part of the aircraft part installation and service process. Rotables are serialized aircraft parts and components that are FAA certificated and tracked as FAA certified parts. Consumables are miscellaneous supplies such as sealants, grease, oil, lubricants, tape, etc. that are used and consumed in conjunction with the installation of Expendables and Rotables. World Jet brokers the sale of aircraft parts, airframe components, engines and engine materials and also maintains an inventory of it’s own overhauled aircraft parts, airframe components, engines and engine materials for re-sale. When brokering such materials and parts, World Jet introduces other aircraft parts sellers with
aircraft parts consumers who are in need of certain aircraft parts and receives a brokerage commission for arranging such sale. World Jet also maintains an inventory of aircraft parts, airframe components, engines and engine materials for resale that World Jet obtains from distressed companies and by purchasing aircraft and salvaging and overhauling parts removed there from.
If any parts purchased by World Jet from distressed companies or removed and salvaged from aircraft purchased by World Jet require any repairs or overhaul, World Jet out-sources such repair and/or overhaul work to an FAA approved repair and overhaul facility which must comply with FAA regulations regarding the traceability of certificated aircraft parts. World Jet services aircraft operators, aircraft leasing companies and MRO facilities such as HAT.
Key Operational Strategies
Business Philosophy
Management has rejected a policy of growth for growth’s sake in favor of focusing on profitability and building a good reputation for Global’s operations group by limiting work contracts to those perceived to have a high probability of success, or those that are supportive of Global’s aircraft trading activities. This strategy is also very beneficial to the company’s marketing efforts in that a good track record of maintenance and modification contracts delivered successfully on-time and on-budget is by far the most potent tool for securing new work contracts.
The principal focus of the operations group at Global is the implementation of strategies to enhance worker productivity, which include assigning dedicated crews and dedicated project managers to each aircraft in work, ongoing training for supervisors, project managers and quality control personnel, and improving material flow to each job site.
In managing its operations, the Company is committed to continuously evaluating the adequacy of its management structure and its existing systems and procedures; including its quality control, financial, and internal controls systems. Global is focused on maintaining a small, but tightly knit and multi-tasking, highly experienced management team.
Goals
Corporate goals are very narrow and focused. They are:
Maximize the profitability of the Company by identifying and developing those business opportunities that offer the highest return on investment.
Optimize the Company’s debt and capital structure.
Cautiously build Company value through the strategic exploitation of synergistic arbitrage and acquisition opportunities.
Marketing Strategies
HAT has identified maintenance and modification of the Boeing 727, 737 and 757 and the DC-9/MD80 jet aircraft as its major target markets through at least 2008. Although aircraft maintenance is a multi-billion dollar annual industry, in many ways it is a very tightly knit community in which many key players are well known to one another. As a result, there exists a surprisingly efficient flow of information throughout the industry that makes a company's reputation by far its most important marketing asset.
The market for HAT’s aircraft maintenance and modification services, although global in scope, is made up of a relatively small number of aircraft owners and operators. As such, HAT does not rely on media advertising, but rather focuses its marketing efforts on building personal relationships with the aircraft owners, operators, operations managers, consultants, customer representatives and key industry vendors that make up this surprisingly tight knit international aviation community.
World Jet’s marketing plan centers around building a loyal base of customers by providing quality service. World Jet strives to broaden its customer base by building inventories, through bargain purchases and securing consignment arrangements for large inventories, which provide customers with a broad range of parts availability.
While Global does provide press releases to industry trade journals, the majority of its advertising budget is spent on educating and marketing to customers and customer representatives on a face-to-face basis. Some of these meetings are made at industry trade conferences or at the customer’s offices. More frequently, these meetings take place in Tucson when the customer or its representative visits to inspect the Company’s facilities or aircraft stored at the HAT facility. Since the most potent marketing tool available to any repair station is a good reputation for delivering aircraft back to its customers on time and on budget, much of HAT’s “marketing” really consists of maintaining good communication, performing well and otherwise making sure that each maintenance visit is an enjoyable experience for the customer and his on-site representatives or consultants.
Global regularly provides press releases on major jobs and provides interviews for trade journals as a method for maintaining visibility in the industry. Global also maintains a web site that describes its facilities, personnel and capabilities at http://www.globalaircraftsolutions.com.
Competition
The barriers to entry in the commercial jet maintenance and modification business are very high due to the stringency of FAA regulation, the complexity and sophistication of modern jet aircraft, and the reluctance of operators to entrust their aircraft maintenance to new, unproven start-up facilities. Even if a new entrant succeeds in completing the very costly and time consuming process of obtaining FAA approval for a new repair station, they are then faced with the difficult task of convincing operators to input aircraft into an unproven facility that may experience learning curve cost overruns and delays.
Given the many billions of aircraft maintenance dollars spent each year, and the relatively limited number of approved repair stations, much of the meaningful competition in today's aircraft maintenance industry is not so much competition for customers as it is for qualified personnel to perform the work. In view of the importance of employing highly competent personnel in the quality critical field of commercial aircraft maintenance, HAT's pay scales generally meet or exceed national standards. Also, HAT has been very successful in recruiting key personnel by focusing on providing a good quality work environment and due to the desirability of Tucson's lifestyle.
In the local area, HAT's major competitor for narrow-body aircraft maintenance work is Evergreen Air Center, which is located in Marana, Arizona and employs approximately 500 people. Evergreen Air Center services Evergreen Airline's fleet of Boeing 747 and McDonnell Douglas DC-9 commercial aircraft and provides services to outside customers. Nationally, HAT competes in the narrow-body segment of the market with Tramco, owned by Goodrich Corporation and located in Seattle, Washington; AAR Group, Inc., located in Oklahoma City, Oklahoma; Mobile Aerospace, located in Mobile, Alabama; Timco, located in Greensboro, North Carolina, Macon, Georgia and Lake City, Florida; and FlightStar, located in Jacksonville, Florida. Internationally, HAT competes with Coopesa, located in San Jose, Costa Rica and Aeromar, part of the Taca Groupa, located in San Salvador, El Salvador.
Because World Jet is a parts broker, the most significant determiner of competitive advantage for World Jet is parts availability. Major parts’ brokers competing in the marketplace with World Jet include: Pac Air Industries, Unical Aviation, Pacific Air Industries, Volvo Aero, Aero Controls, AAR-Allen Aircraft, Kellstrom Industries, Broward Aviation, Memphis Group, ABX-Air, A.J. Walter, Turbo Resources, Jet Accessory Center, Aero Inventory-UK, American Jet Industries, Continental A/L and Wencor West.
Operations Strategies
Through experience, the management team at HAT has learned that, in the aircraft maintenance business, taking on too much work results in reduced profit margins, dissatisfied customers and, ultimately, the loss of future business. On the other hand, limiting work contracts to the number and type that can be performed effectively results in improved profit margins and increased future business opportunities.
Also, for budgetary purposes, most aircraft maintenance customers today prefer fixed-bid contracts on their scheduled maintenance checks. This offers efficient well-managed repair stations the opportunity to significantly improve their profit margins, while still maintaining customer satisfaction.
By maintaining small, tightly knit work crews, retaining experienced crew chiefs and carefully screening work contracts, HAT has found that it can routinely come under budget on scheduled aircraft maintenance contracts fix-priced at rates widely accepted by the industry. Accordingly, while mindful of the need for long-term growth by the Company, Management is presently focused on pursuing a strategy of maximizing operations profitability and customer satisfaction rather than rapid growth.
Financial Strategies
The principle financial strategy of Global is to secure debt financing sufficient to insure the efficient day-to-day operation of the HAT and World Jet facilities and enable the Company to provide reasonable payment terms to creditworthy customers. Management is also interested in securing additional funding for the purpose of certain productivity-improving or synergistic acquisitions and other asset-based business opportunities.
Business Development Strategies
As described in Operations Strategies above, Management is, for the foreseeable future, taking a conservative approach to growing the core aircraft maintenance services business and is focusing aggressively on seeking to increase operating profit margins and customer satisfaction. In practical terms, this translates into annual sales revenue growth rates of no more than 20% in the Company’s core aircraft maintenance business and greater management focus on growing the less labor-intensive and higher-margin aircraft trading and aircraft parts sales segments of the Company. Our goal is a growth rate in both the aircraft trading and parts sales side of the business in the range of at least 10% to 25% per year over at least the next two years.
Distressed aviation assets often come to the attention of HAT, as a maintenance service provider and aircraft storage facility, prior to becoming known to the market at large. Frequently, such assets can be placed with end-users known to HAT. These arbitrage opportunities can involve distressed parts inventories, distressed aircraft that can be torn-down for parts, or distressed aircraft that can be purchased, repaired and sold or leased at a profit. These types of arbitrage opportunities annually represent potentially tens of millions of dollars of additional lucrative potential business available to HAT. As Global gains more access to capital from outside sources or as a result of Company operating profits, management anticipates the revenue to Global from these types of opportunistic arbitrage transactions may become a significant portion of Global’s future growth.
The large aircraft repair business is highly competitive. Revenues are sensitive to adverse changes in the air carrier business. The heavily regulated airline industry, however, requires scheduled maintenance and repair services irrespective of industry economics, thus providing a reasonably steady market for HAT's services and for World Jet’s parts. HAT competes principally on the high quality of its services, its price competitiveness due to its location in the Southwest with its dry, mild climate and ability to do many MRO projects outdoors, and the low cost of its Tucson facility. World Jet competes on parts availability, time of delivery, and competitive pricing.
Employees and Employment
At December 31, 2007, a total of approximately 112 employees were employed by HAT, 20 of which performed administrative functions. World Jet had approximately 20 employees consisting of sales staff and administrative personnel. Global had a staff of 6.
All employees are highly trained and qualified. During the last quarter of 2003, a reassessment of the HAT business plan resulted in the decision to employ a work force whose number would be adequate to handle the workflow without downtime in slower periods. This decision was focused on increased efficiency and profitability. The employment capacity of the facilities currently occupied by HAT is estimated to be at least up to 500 full-time employees working two staggered shifts, which allows for considerable growth in the future. Global, World Jet and HAT are non-union and believe that their relationships with employees are good. HAT's management is also experienced in the hiring, training, and retention of people necessary to operate its repair, maintenance and modification facilities.
Based upon the available talent pool, Global, World Jet, and HAT believe that their needs for labor will be addressed in the future. This includes the key technical positions that require licensure by the FAA. The Company does not expect that identifying; attracting and retaining qualified personnel in any of the key areas will be difficult.
In addition, Pima Community College, located in Tucson, has been training mechanics since 1991. Pima operates a major new training facility adjacent to HAT's facility. HAT works closely with Pima to apprentice new Pima students to work at HAT and to hire experienced Pima alumni.
Due to complexity of aircraft maintenance operations, it is essential that HAT employ highly experienced and highly competent people in key management positions. This is necessary both to attract and keep business and to maintain HAT's good standing with the FAA. Accordingly, HAT has found it most cost effective to attract and keep key personnel by offering attractive salaries, while aggressively replacing those key employees who, after given a reasonable opportunity to do so, fail to successfully meet their job requirements. The critical public safety issues associated with commercial aircraft maintenance require that HAT quickly identify and address any shortcomings in the oversight of its activities.
Similarly, in an industry where aircraft down time represents tens of thousands of dollars a day in lost revenue, and a misdrilled hole or a bolt left in an engine inlet can cost tens of thousands of dollars to address, HAT has found it most cost effective to pay its production personnel wages at the higher end of national standards while demanding in return a high level of professionalism from its employees. To insure that a good level of communication is maintained with all employees, HAT provides regular written evaluations to all employees.
Product liability
Our business exposes us to possible claims for personal injury or death, which may result from the failure of an aircraft or an aircraft part repaired or maintained by us or from our negligence in the repair or maintenance of an aircraft or an aircraft part. While HAT maintains what we believe to be adequate liability insurance to protect us from claims of this type, based on our review of the insurance coverage maintained by similar companies in our industry, we cannot assure you that claims will not arise in the future or that our insurance coverage will be adequate. Additionally, there can be no assurance that insurance coverage can be maintained in the future at an acceptable cost. Any liability of this type not covered by insurance could materially adversely affect our business, financial condition, results of operations or ability to operate as a going concern.
Industry Overview
As is the case in most industries, the aviation industry is cyclical in nature. Historical evidence suggests that the typical business cycle in the aviation industry has duration of approximately 10 years peak to peak. The recession in the aviation industry which was triggered by terrorist activity seems to have bottomed out and the industry is rebounding evidenced by a SpeedNews report that the past two years shows the first consecutive years profit for U.S. Airlines since 1999-2000. We believe that the following trends are currently affecting the aviation industry and our operations in particular:
National Economy
The national economy appears to be trending towards recession. If this trend continues, then within two years or less, it will materially effect our business, with aircraft being withdrawn from service by the major airlines and becoming available in the secondary market. This gives rise to potential opportunity for the Company, in both aircraft trading and heavy maintenance return-to-service work.
Growth in the Market for Aircraft MRO Services
The summer 2007 edition of MRO Management cites the industry consultancy 2007 AeroStrategy Annual Industry Forecast as projecting 3.6% annual MRO growth over the ten years from 2006 to 2016 rising from $41 billion to $58 billion, respectively. Of those numbers 14% is classified aircraft heavy maintenance, 21% modifications, 21% line maintenance, 21% component maintenance and 35% engine maintenance. HAT’s target market of specific narrow body commercial jet aircraft constitutes an estimated 25% of the worldwide commercial aircraft maintenance market.
We anticipate that these factors will in the long term increase the demand for maintenance and repair services. Based on this and other data, HAT estimates the worldwide market for MRO services in 2008 at over $40 billion annually and that approximately $5 billion of that amount will be provided in North America. We believe airlines perform approximately well over half of the North American services and that the balance is performed by independent facilities such as HAT.
Diversified Services and Strong Competitive Position
Our services include a wide range of aircraft maintenance and repair services across a number of different airframes. The breadth of our services allows us to be a vendor of choice to our customers in a highly fragmented industry. HAT competes principally on the high quality of its services, its price competitiveness due to its location in the Southwest with its dry, mild climate that allows services to be performed with only rare weather interruptions and to do much of its service out of doors, and the low cost of its Tucson facility.
Emphasis on Quality
The FAA and EASA license our MRO facility. We emphasize quality and on-time delivery to our customers. We are focused on meeting and exceeding FAA and EASA requirements. As industry, regulatory and public awareness have focused on safety, our ability to meet and exceed these requirements on a consistent basis has become important to customers.
ITEM 1A.
ITEM 1A. RISK FACTORS
In addition to the other information contained in or incorporated by reference into this Form 10-K, you should carefully consider the following risk factors and other information contained in this report.
Problems in the Airline Industry
Problems in the airline industry could adversely affect our business. Since our customers consist primarily of passenger and cargo air carriers and aircraft leasing companies, the threat of terrorist activities continues to adversely impact the airline industry and consequently adversely impact our business. However, it does affect our business to a much lesser extent than it affects MRO firms that rely heavily on major airlines for business. When economic factors adversely affect the airline industry, they tend to reduce the overall demand for maintenance and repair services, causing downward pressure on pricing and increasing the credit risks associated with doing business with airlines. We cannot assure you that economic and other factors, which may affect the airline industry, will not adversely impact our business, financial condition or results of operations. Such adverse effects in the airline industry, can also adversely
affect our aircraft parts sales business conducted by our wholly owned subsidiary, World Jet. Any event or occurrence that adversely impacts the aircraft maintenance industry will also adversely impact the aircraft parts sales industry because aircraft parts sales are directly related to the demand for maintenance of aircraft.
Increasing Cost of Jet Fuel
The trend in the market towards increasing jet fuel prices may adversely affect our business. The price of jet fuel affects the maintenance and repair markets, since older aircraft, which consume more fuel and which account for most of our maintenance and repair services business, become less viable as the price of fuel increases.
Terrorist Attacks
The continuing threat of terrorism has had a negative impact on the airline industry in general, and thereby indirectly on us. Factors arising (directly or indirectly) from these terrorist attacks which could affect our business may include: (i) the impact of these terrorist attacks and the impact in declines in air travel as a result of these terrorist attacks on the financial condition of one or more of our airline customers, (ii) possible increases in jet fuel prices as a result of events relating to these terrorist attacks, (iii) potential reductions in the need for aircraft maintenance due to declines in airline travel and cargo business and (iv) the adverse effect these terrorist attacks, or future events arising as a result of these terrorist attacks, on the economy in general.
Aviation Industry is Subject to Heavy Government Regulation
In the United States, the Federal Aviation Administration (FAA) regulates the manufacture, repair, overhaul and operation of all aircraft and aircraft equipment operated in the U.S. pursuant to the Federal Aviation Regulations (FARs). The FAA must certify each authorized repair station, and certified facilities are issued an Air Agency Certificate. Each certificate contains ratings and limitations that specifically authorize the repair station to only perform certain types of services on specific makes and models of aircraft. FAA regulations are designed to ensure that all aircraft and aircraft equipment are continuously maintained in proper condition to ensure safe operation of the aircraft. Similar rules apply in other countries. All aircraft must be maintained under a continuous condition-monitoring program and must periodically undergo thorough inspection and maintenance. The inspection, maintenance and repair procedures for
the various types of aircraft and aircraft equipment are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians. Certification and conformance is required prior to installation of a part on an aircraft. We closely monitor the FAA and industry trade groups in an attempt to understand how possible future regulations might impact us.
There is no assurance that new and more stringent government regulations will not be adopted in the future or that any such new regulations, if enacted, will not materially adversely affect our business, financial condition or results of operations. Further, our operations are also subject to a variety of worker and community safety laws. In the United States, the Occupational Safety and Health Act mandates general requirements for safe workplaces for all employees. Specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with health and safety requirements under the Occupational Safety and Health Act. There is no assurance that the company will retain current regulatory agency certifications or be able to obtain future required regulatory agency certifications.
Dependence on a Small Number of Customers
For the year ended December 31, 2007, our largest continuing customer accounted for 46.5% of our revenue. Three customers accounted for 76.9% or our revenue. These results were impacted by a one-time aircraft sale to one customer of $7.85 million, which represents 31.7% of revenue. We recognize that any customer concentration
creates risks and efforts are continually being made to broaden and strengthen our customer base. While the relative significance of customers varies from period to period, the loss of, or significant curtailments of purchase of our services by, one or more of our significant customers at any time could adversely affect our revenue and cash flow. The customers upon whom the Company subsidiaries relied for 10% or more of their revenue during the year ending December 31, 2007 are as follows:
HAT was World Jet’s largest customer for the year ended December 31, 2007, accounting for 60.4% of World Jet’s revenue. Since HAT and World Jet now operate as wholly owned subsidiaries of Global, any significant adverse events that affect HAT and Global will also adversely impact World Jet. Likewise, any significant curtailment in purchases of aircraft parts by one or more of World Jet’s significant customers could adversely affect World Jet’s revenues and cash flow.
Inability to collect significant accounts receivable
During 2006, Avolar’s increasing fleet size resulted in increasing receivables due HAT. At the same time, Avolar’s past due receivables increased significantly. In order to protect the Company’s financial status, in February 2006 Management put Avolar on a COD basis and negotiated a schedule for Avolar to bring its account current. The parties also agreed that Avolar would obtain whatever services and credit it could from other maintenance service providers in order to facilitate Avolar’s pay-down of monies due HAT. By the end of 2007, Avolar had made progress reducing the amount owed HAT, but Avolar is not in full compliance with the terms of its payment schedule agreed to with HAT. Avolar has stated its intention to bring its accounts current with HAT and World Jet and renew its maintenance and support agreements with both companies.
By the end of the fourth quarter 2006 and into the first quarter 2007 the past due amounts due HAT by BCI Aircraft Leasing, Inc. had also reached unacceptable levels. Additionally, BCI had failed to provide information legally demanded by the Company regarding the financial results of its joint venture with BCI, Jetglobal. On April 20, 2007 the Company entered into a settlement agreement with Jetglobal and BCI wherein in consideration for the Company’s 30% ownership interest in Jetglobal, the Company received title, free and clear, to five aircraft valued at $1,500,000 each. A sixth aircraft purchased from Global by Jetglobal, and which had MRO work performed by HAT, was returned to the Company in satisfaction of money due to the Company, $1,150,000 for that particular aircraft. The Company also retains a trailing interest of 18% of any amount paid Jetglobal under (i) satisfaction of the claim against Delta and (ii) the Jetg
lobal claim against AFG for breach of contract.
Lease of Property
Global’s wholly owned subsidiary, HAT, is currently conducting operations on leased property at the Tucson International Airport, (“TIA”). Currently, World Jet is also occupying space under this same lease. The lease is a one-year lease commencing March 1, 2005 and permits HAT to apply for two additional one-year options. We are in the second year of additional two years of option to renew. The rent has been paid current to date. TIA is implementing a Master Plan for airport development, which precludes issuing a long-term lease to HAT, but should not affect HAT’s facilities for at least five years. Until HAT possesses a long-term lease there remains a risk that HAT will have to relocate operations, which could have an adverse impact on HAT’s operations.
Risk of Operating in One Location
During 2007, Global conducted more than 68% of its operations through its two wholly owned subsidiaries, HAT and World Jet. HAT has been located at 6901 South Park Avenue, Tucson, Arizona since its inception. During the fourth quarter of 2006, World Jet relocated its sales offices to facilities at this HAT site. World Jet serves as HAT’s parts supply facility for aircraft parts and stores its inventory at 7001 South Park Avenue, Tucson, Arizona. During 2007, World Jet accounted for 8% of Global’s total revenue. The repair and maintenance operation of HAT comprised 60% of Global’s revenue. By having only one location for aircraft repair and maintenance for HAT and sales offices for World Jet both are at risk of temporary or permanent cessation of all operations should they encounter an event which renders the facility unusable for any period of time or either encounters any issues or problems related to the use of t
he facility at this location.
World Jet stores its inventory in only one location in Tucson, Arizona at 7001 South Park. Cessation of operation at this location due to events, which render the facility unusable for any period of time or any damage to or destruction of this facility and/or the inventory, will also adversely impact the Company.
Reliance on Executive Officers and Key Employees
Our continued success depends significantly upon the services of our executive officers and upon our ability to attract and retain qualified personnel in all of our operations. While we have issued employment agreements with each of our executive officers and certain of our key employees, most of our employees are employed on an at-will basis. The loss of one or more of our executive officers and of a significant number of our other employees without capable replacements could materially adversely affect our business, financial condition or results of operations.
Competition
The airline industry and the markets for our products and services are extremely competitive, and we face competition from a number of sources. Our competitors are other companies providing MRO services. Certain of our competitors have in the past responded to market competition and conditions by reducing prices on their services to increase or retain market share. Any material deterioration in our financial condition is likely to affect our ability to compete with price-cutting by our competitors. Some of our competitors have substantially greater financial and other resources than us. We cannot assure you that competitive pressures will not materially adversely affect our business, financial condition or results of operations.
Product Liability
Our business exposes us to possible claims for personal injury or death, which may result from the failure of an aircraft or an aircraft part repaired or maintained by us or from our negligence in the repair or maintenance of an aircraft or an aircraft part. While the Company maintains what we believe to be adequate liability insurance to protect us from claims of this type, we cannot assure you that claims will not arise in the future or that our insurance coverage will be adequate. Additionally, there can be no assurance that insurance coverage can be maintained in the future at an acceptable cost. Any liability of this type not covered by insurance could materially adversely affect our business, financial condition, results of operations or our ability to continue as a going concern.
Susceptibility to Other Liability Claims
Our business exposes us to possible claims for personal injury or death, which may result if we were negligent in repairing or overhauling an airplane. We cannot assure you that claims will not arise in the future or that our insurance coverage will be adequate to protect us in all circumstances. Additionally, we cannot assure you that we will be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability claim not covered by adequate insurance could materially adversely affect our business, financial condition or results of operations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
Item 2.02, Results of Operations and Financial Condition, Item 7.01, Regulation and Disclosure, and Item 9.01 Financial Statements and Exhibits. The exhibit was 99.1, Transcript of Conference Call of August 15, 2006 discussing financial performance and results of operations for fiscal quarter ended June 30, 2006. Issued August 28, 2006..1
Item 2.02, Results of Operations and Financial Condition, Item 7.01, Regulation FD Disclosure, and Item 9.01 Financial Statements and Exhibits. The exhibit was the transcript of the May 18, 2006 Conference Call discussing financial performance for fiscal quarter ended March 31, 2006. Issued May 22, 2006..1
Item 7.01 Regulation FD Disclosure and Item 9.01 Financial Statements and Exhibits. The exhibit was the Investor Presentation on May 18, 2006. Issued May 19, 2006..1
Item 2.02, Results of Operations and Financial Condition and Item 9.01, Financial Statements and Exhibits. The exhibit was a copy of the May 16, 2006 Press Release. Issued May 16, 2006 1
Item 2.02, Results of Operations and Financial Condition, Item 7.01, Regulation FD Disclosure and Item 9.01, Financial Statements and Exhibits. The exhibits were copy of April 25, 2006 Press Release and copy of May 16, 2006 Press Release. Issued May 16, 2006..1
Item 1.01, Entry into a Material Definitive Agreement, Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers, Item 9.01, Financial statements and Exhibits. The exhibit was a Press Release issued May 3, 2006. Issued May 4, 2006..1
Item 2.02, Results of Operations and Financial Condition, Item 7.01, Regulation FD Disclosure and Item 9.01, Financial Statements and Exhibits. The exhibit was a copy of the April 25, 2006 Press Release. Issued April 25, 2006 ..................1
Item 2.02 Results of Operations and Financial Condition, Item 7.01, Regulation FD Disclosure and Item 9.01 Financial Statements and Exhibits. The exhibit was the transcript of April 10, 2006 Conference Call discussing financial performance and results of operations for fiscal year ended December 31, 2005. Issued April 13, 2006.1
Item 2.02, Results of Operations and Financial Condition, Item 7.01, Regulation FD Disclosure and Item 9.01, Financial Statements and Exhibits. The exhibit was copy of April 10, 2006 Press Release. Issued April 11, 2006.1
Item1.01, Entry into a Material Definitive Agreement, Item 2.03, Creation of a Direct Financial Obligation of a Registrant and Item 9.01, Financial Statements and Exhibits. The Exhibits were Press Release dated December 13, 2005 and a Form of Modification to Loan Agreement with M&I Bank as lender. Issued January 30, 2006 1
Item 1.01, Entry into a Material Definitive Agreement and Item 9.01, Financial Statements and Exhibits. The exhibits were Operating Agreement for Jetglobal, LLC, Press Release issued September 1, 2005 and Aircraft Sale & Purchase Agreement between Jetglobal, LLC and Jetran, which is the subject of a request for confidential treatment. Issued January 25, 2006.1
Item 4.01, Changes in Registrant’s Certifying Accountant, Item, 5.02, Departure of Directors or Principal Officers; Election of Directors; appointment of Principal Officers, Item 9.01, Financial Statements and Exhibits. The exhibits are Letter from Larry O’Donnell CPA, PC to the SEC and January 9, 2006 Press Release announcing the Change in Registrant’s Certifying Accountant and the addition of a member to the Board of Directors. Issued November 15, 2006 ...............1
Item 2.02, Results of Operations and Financial Condition, Item 7.01 Regulation FD Disclosure and Item 9.01, Financial Statements and Exhibits. The exhibit is the transcript of the November 17, 2006 Conference Call discussing financial performance and results of operation for fiscal quarter ended September 30, 2006. Issued November 15, 2006.1
Item 2.02, Results of Operations and Financial Condition, Item 7.01, regulation and Disclosure, and Item 99.1, Financial Statements and Exhibits. The exhibit was 99.1, Copy of November 15, 2006 Press Release. Issued November 15, 2006..1
1 - Incorporated by reference to another registration statement, report or document.
2 - Included as part of this Report.
(b) Reports on Form 8-K.
Filed during 4th quarter of 2007:
Issued November 7, 2007, Item 1.01, Entry into a Material Definitive Agreement, Item 2.03, Creation of a Direct Financial Obligation under an Off-Balance Sheet Arrangement of a Registrant, Item 9.01, Financial Statements and Exhibits. The exhibit was a loan extension agreement with the senior lender of the Company.
Issued December 26, 2007, Item 1.01, Entry into a Material definitive Agreement, Item 2.03, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant, Item 3.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table represent aggregate fees billed to the Company for the years ended December 31, 2007 and 2006 by Moss Adams, L.L.P., the company’s former principal accounting firm, and for the year ended December 31, 2007 by, Daszkal Bolton, L.L.P., the Company’s current principal accounting firm.
(a) Primarily audit services for acquisitions and review services
(b) Primarily tax returns, advice and planning
(c) Primarily advisory services relating to compliance with reporting requirements
(d) All fees have been approved by the Audit Committee. All work was performed by the principal accounting firm’s full-time permanent employees.
The Audit Committee has considered whether performance of services other than audit services is compatible with maintaining the independence of Daszkal Bolton, L.L.P.
In 2004, the Audit Committee adopted a formal policy concerning approval of audit and non-audit services to be provided by the independent auditor to the Company. The policy requires that all services Daszkal Bolton L.L.P., the Company’s independent registered public accountant, may provide to the Company, including audit services and permitted audit-related and non-audit pre-approved by the Committee.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 10, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Global Aircraft Solutions, Inc.
We have audited the accompanying balance sheets of Global Aircraft Solutions, Inc. as of December 31, 2007, and the related statements of operations, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles use
d and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Global Aircraft Solutions, Inc., as of December 31, 2007, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Global Aircraft Solutions, Inc.:
We have audited the accompanying consolidated balance sheet of Global Aircraft Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting p
rinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Global Aircraft Solutions, Inc. and subsidiaries at December 31, 2006, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements the Company intends to divest its 30% ownership in Jetglobal, LLC.
As described in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company changed its method of accounting for share-based payments to conform to Statement of Financial Accounting Standards No. 123R, Share-Based Payment.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Global Aircraft Solutions, Inc.:
We have audited the accompanying consolidated statements of operations, shareholders’ equity and cash flows of Global Aircraft Solutions, Inc. and subsidiaries for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion of these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, results of operations and cash flows of Global Aircraft Solutions, Inc. and subsidiaries for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
GLOBAL AIRCRAFT SOLUTIONS, INC.
An additional 1,319,918 shares will be issued on the vesting dates of employment agreements now in force (See Earnings per Share).
The accompanying notes are an integral part of these consolidated financial statements.
Schedule of non-cash investing and financing activities:
During the 4th quarter of 2005 $1,475,000 in accounts receivable was transferred to a Note receivable. The Note stipulated weekly payments of $52,993.76, had an interest rate of 8 % per annum, and was all due and payable on or before June 9, 2006. The Note was paid.
During the 4th quarter of 2005, a note receivable in the amount of $600,000 was issued to Avolar Aero Lineas SA de CV. The principal balance at December 31, 2007 was $0.
During 2007, $8,650,000 of aircraft inventory was received as part of a Settlement Agreement wherein BCI, Global’s partner in Jetglobal, transferred assets to Global in return for Global’s interest in Jetglobal.
Property, plant and equipment increased $11,355 during 2007 as a result of capital lease agreements. Net asset value of machinery and equipment acquired under capital leases totaled $235,670 and net asset value of office equipment acquired under capital leases totaled $77,604 at December 31, 2007. Amortization of assets under capital leases is included in depreciation expense. The actual cash payouts for capital lease obligations are reflected in cash flow statement.
The accompanying notes are an integral part of these consolidated financial statements.
GLOBAL AIRCRAFT SOLUTIONS, INC.
Notes to Financial Statements
December 31, 2007, December 31, 2006 and December 31, 2005
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Global Aircraft Solutions, Inc., and its wholly owned subsidiaries, Hamilton Aerospace Technologies, Inc. (“HAT”) and Johnstone Softmachine Corporation (“Johnstone”), and World Jet Corporation (“World Jet”), collectively, the “Company”. HAT and Johnstone were acquired by Global on May 2, 2002. Johnstone is currently inactive.
All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements.
2. ORGANIZATIONS AND NATURE OF OPERATIONS
Global Aircraft Solutions, Inc., formerly Renegade Venture (Nev.) Corporation, formerly Renegade Venture Corporation, was incorporated on February 13, 1989, as a Delaware corporation. In 1997, the Company was re-domiciled as a Nevada Corporation through a merger with a newly formed Nevada Corporation, Renegade Venture (NEV.) Corporation, a wholly owned subsidiary of Renegade Venture Corporation.
On May 2, 2002, the Company acquired 100% of the common stock of Hamilton Aerospace Technologies Inc. ("HAT") pursuant to a Stock Exchange Agreement whereby the former shareholders of HAT received 12,500,000 common shares of Renegade Venture (NEV.) Corporation, now Global Aircraft Solutions, Inc. Subsequent to this reverse merger there were 16,200,000 total common shares outstanding. HAT was formed on April 5, 2002 and commenced operations on April 15, 2002. HAT provides large aircraft maintenance, repair and modification services to owners and operators of large transport-category commercial jet aircraft. Services of this nature are required and needed by passenger and cargo air carriers, aircraft lessors, and governmental entities. HAT provides services to both domestic and foreign customers.
On April 12, 2002, Renegade Venture (NEV.) Corporation, now Global Aircraft Solutions, Inc., acquired 100% of the common stock of Johnstone Softmachine Corporation (Johnstone) pursuant to the Stock Purchase Agreement and Plan of Reorganization by and between LogiCapital Corporation (the principal shareholder of Johnstone), an entity controlled by John Brasher, who, at that time, was a director of Renegade Venture (NEV.) Corporation (he has since resigned) and Renegade Venture (NEV.) Corporation. Mr. Brasher was also a principal stockholder of Renegade Venture (NEV.) Corporation prior to the merger. As such, this transaction represented a transfer between control groups and is reported on a historical cost basis. Johnstone was formed on May 8, 1996 has had no substantial operations, and is in the development stage. Johnstone currently lacks the funding necessary to commence operations.
On July 15, 2004, the Company finalized an agreement to buy 100% of the common stock of World Jet Corporation, a privately held aircraft parts and brokerage company for $2.05 million payable as follows: $1,250,000 in cash at closing, $300,000 in the form of a note maturing January 27, 2005, and 1,000,000 shares of restricted common stock valued at $0.50 per share for the purposes of this transaction ($500,000). The effective date of this agreement is January 1, 2004. The shares were issued in July 2004. As a result of the acquisition, the Company expected to increase its sales to existing customers as well as those serviced by World Jet by combining the products and services of the two companies. It also expected to lower its parts costs through World Jet’s purchasing abilities.
During 2006, the Company formed Mexican corporation, Hamilton Aerospace Mexico, S.A. de C.V. The purpose of the new corporation was to satisfy Mexican governmental requirements related to the flight line servicing of Mexican airline, Avolar Aerolineas, S.A. de C.V.
During 2007, Global transferred its ownership interest in Jetglobal, LLC, an entity in which the Company had a 30% ownership interest, to BCI Aircraft Leasing, ("BCI") the other partner in Jetglobal, LLC in consideration for aircraft inventory and trailing interest in certain claims of Jetglobal against third parties. The Company and BCI executed a final agreement and settlement on April 20, 2007, and revised on June 29, 2007. The terms of the final agreement with BCI did not result in any impairment to the Company.
On September 4, 2007, the Company and Global Aircraft Leasing Partners, LLC, a Delaware limited liability company, (“GALP”) reached a tentative agreement that Global would assume a 40% equity interest in GALP. GALP is a start-up aircraft-leasing venture formed to acquire aircraft, through a combination of debt and equity financing, and lease these commercial jet aircraft to operators throughout the world. It has been mutually agreed by the parties that in consideration for a 40% equity participation in GALP, the company will make a one time capital contribution of $40,000. As further consideration the Company will provide to GALP ongoing technical support to facilitate GALP’s commercial aircraft purchasing, leasing and sales activities. All technical services provided to GALP by HAT and World Jet will be billed at Company-standard rates. The Company had made $20,000 in capital contribution as of December 31, 2007.
A final operating agreement has not yet been finalized and Global had no equity participation in GALP for the year ended December 31, 2007. Global will make an additional capital contribution or $20,000 upon the parties reaching a final operating agreement. Global will not be required to invest capital in aircraft acquired by GALP, and all debt assumed by GALP as a result of aircraft acquisitions will be non-recourse with respect to the Company. Other members of GALP will include equity funding specialists and aircraft leasing professionals. Global and GALP have also agreed that Global will have first right of refusal for all aircraft maintenance, aircraft parts and technical consulting requirements that GALP may have as a result of its aircraft acquisition and leasing activities.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider cash and investments in securities with maturities at the date of purchase of three months or less to be cash and cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the accompanying financial statements as of December 31, 2006 have been reclassified to conform to the current year presentation, with no effect on reported net income.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories include new, used parts and parts stripped from aircraft. These stripped parts inventory items are initially carried at original cost basis determined on the pro-rata fair value of the individual parts based on market or catalog pricing. All aircraft parts inventory are grouped as "Inventory" and accounted under 'Current Asssts'. This is based on standard aviation industry practice of showing all aircraft parts under a single line item of inventory. Aircraft parts typically have more than one year of life. Rotable parts have the same life as the aircraft. Repairable parts can be repaired several times over the life of the aircraft and installed on the aircraft. It has been and remains our policy to expense any items that we determine to be obsolete, or unlikeable to sell. The Company has an allowance for slow moving and obsolete parts invento
ry in the amount of $125,980. This allowance was expense during 2007.
The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided for on the straight-line on the straight-line method over the estimated useful lives of the assets. The estimated useful life of computer equipment and software is three years at both our HAT and World Jet subsidiaries; the estimated useful life of all other categories of assets at our HAT subsidiary is five years. World Jet uses estimated useful lives of 3, 5, and 7 years for its other assets. Amortization of leasehold improvements is computed using the shorter of the lease term or the expected useful life of the assets. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred.
The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors.
Revenue and Cost Recognition
Revenues from fixed-fee contracts or portions of contracts for MRO sales are recognized by employing the percentage-of-completion method, measured by the cost-to-cost method, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. The cumulative catch-up method is used to account for changes in estimates of total revenues, total costs or extent of progress. Each project is considered complete when the subject aircraft departs, or is cleared to depart, our facility. Revision in cost and labor hour estimates and recognition of losses, if any, on these contracts are reflected in the accounting period in which the facts become known. During the periods covered by these financial statements, no material prior period revisions were necessary. As of December 31, 2007 there are no material amounts in excess of the agreed contract price that the Company seeks to collect f
rom customers or others for customer-caused delays, errors in specifications or designs, contract termination, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs.
Revenue from part sales is recognized when parts are shipped. All parts are shipped FOB shipping point; title passes at time of shipping and the Company has no further contractual or legal obligation to the customer upon shipping. Revenues from time and material contracts and all other ancillary services are recognized as the services are performed. Revenue from aircraft sales is recognized when the customer accepts delivery of the aircraft and/or when title is transferred.
Earnings per share
Basic earnings per share includes no dilution and is computed by dividing net earnings available to common stockholders by the weighted number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the Company’s earnings. Reconciliation of EPS for 2007, 2006 and 2005 are as follows:
The total weighted average shares outstanding for the diluted earning per share calculation for the year ended December 31, 2006 was 40,375,173. Total weighted average shares outstanding for the diluted earning per share calculation for the year ended December 31, 2005 was 35,260,671.
Recently Issued Accounting Pronouncements
In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” This interpretation clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company adopted this Interpretation for the year ended December 31, 2007.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements but could change the current practice in measuring current fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of this Statement will have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. The Company does not anticipate that the adoption of this Statement will have a material impact on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for us on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 159 on the Company’s financial position, cash flows, and results of operations.
Stock-Based Compensation
During 2007, there were options for 10,000 shares, at an option price of $1.05, granted. The options expire in five years from date of issuance and were immediately vested. Using the Black Scholes Model with the monthly stock-prices as variable from April 2002, the call option value of these options were calculated to be $1.05. $10,546 was expensed during 2007 relative to these options. In connection with the adoption of SFAS123R we assessed our valuation technique and related assumptions. Consistent with the provisions of SFAS 123R, Staff Accounting Bulletin #107 (SAB 107), we estimated the fair value of stock option on the date of grant using the Black Scholes Options Valuation Model and the following assumptions: Risk free interest rate of 4.54%, Expected life of 2.5 years, Dividend rate of 0% and expected volatility of 283.137% .
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which requires the Company to measure the cost of employee services received in exchange for all equity awards granted including stock options based on the fair market value of the award as of the grant date. SFAS 123R supersedes Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). The Company has adopted SFAS 123R using the modified prospective method. Accordingly, prior period amounts have not been restated. Under the modified prospective method, stock options awards that are granted, modified or settled after December 31, 2005 will be valued at fair value in accordance with provisions of SFAS 123R a
nd recognized on a straight line basis over the service period of the entire award. At December 31, 2005, all outstanding stock options were fully vested.
Prior to January 1, 2006, the Company accounted for stock based compensation under the recognition and measurement provisions of APB 25 and related interpretations, as allowed by SFAS 123. The Company had adopted the disclosure-only provisions of SFAS 123 as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. Prior to 2006, the Company accounted for stock-based compensation in accordance with APB 25 using the intrinsic value method, which did not require compensation cost to be recognized for the Company’s stock options as all options previously granted had an exercise price equal to the market value of the underlying common stock on the date of the grant. There were no options granted in the year ended December 31, 2005 nor was there vesting of prior year option grants. Therefore, there was no pro-forma effect for the year ended December 31, 2005.
4. SEGMENT INFORMATION
The company has divided its operations into the following reportable segments: (i) Aircraft maintenance, repair, and overhaul; (ii) Aircraft Brokerage; (iii) and Part sales. Each segment represents distinct product lines, marketing, and management of its business. Limited other services for each company, which represent a small percentage of income, have been shown in the aggregate.
The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements and described in the summary of significant accounting policies.
Selected information by business segment is presented in the following tables for the years ended December 31, 2007, December 31, 2006 and December 31, 2005.
*Includes $.011in 2007 and $.300 in 2006 purchased through capital leases (non-cash).
The Company’s facilities and assets are primarily located in the United States. During 2006, the Company formed a Mexican corporation, Hamilton SA de C.V. Minimal supplies are secured from local dealers using the foreign currency but all major revenue and expense transactions are transacted in U.S. dollars. The Company sells and ships to several foreign countries. All foreign revenues are collected and recorded in U.S. dollars. Geographic information regarding sales to foreign countries is presented in the following table:
5. EQUITY IN NET ASSETS AND ADVANCES TO AFFILIATES
On August 26, 2005, the Company together with BCI Aircraft Leasing, (“BCI”), formed a joint venture, Jetglobal, LLC, a Delaware limited liability company. This was a special purpose LLC formed to acquire and remarket commercial jet aircraft. BCI was primarily responsible for the marketing aspects of Jetglobal while the Company was responsible for the technical, repair and maintenance aspects associated with remarketing purchased aircraft. The Company invested an initial amount of $1,125,000 for a 30% membership interest and BCI invested an initial amount of $2,625,000 for a 70% membership interest in Jetglobal. Pursuant to the terms of Jetglobal’s Operating Agreement, although the Company had a 30% membership and profit interest, it was only respon
sible for 25% of the costs and expenses associated with Jetglobal including any business transactions. Management has transferred its ownership interest in Jetglobal, LLC to the other partner, BCI Aircraft Leasing, in consideration for aircraft inventory and a trailing interest in certain claims of Jetglobal against third parties. The parties executed a final agreement and settlement on April 20, 2007, which was revised on June 29, 2007. The terms of the final agreement with BCI did not result in any impairment to the Company. The final agreement calls for a transfer of 6 aircraft with a total value of $8,650,000 and a trailing interest of 18% in the Delta Airlines bankruptcy claim originally estimated to be valued at $2,118,461. (There is also an 18% trailing interest in a lawsuit against AFG for which no value can be estimated at this time.) The gain on this transaction, recorded during the second quarter of 2007 was $27,210. During the third quarter of 2007, BCI, as the appropriately authorized party, beg
an negotiating an agreement with a third party to cash-out the Delta claim. As a result of this transaction, the Company’s share of the Delta claim is $622,000. Additionally, during the third quarter of 2007, a reclassification of funds received from BCI in earlier periods reduced the amount due from investee partner by $1,957,692. These funds had been applied to BCI’s regular account receivable with HAT rather than to its “due from investee partner” account. These two events resulted in a revised amount of gain to the Company from the divestiture of its interest in Jetglobal to $488,441; $466,231 was recorded in the third quarter of 2007.
The table below shows the items received by Global as part of the settlement as well as the calculation of the gain on this transaction.
*As of December 31, 2007, the only outstanding amount is the amount received by BCI for the Delta claim. On December 10, 2007, the Company received $150,000. The remaining $472,000 is to be paid in three installments: two equal installments of $150,000 and a final installment of $172,000. Installments are due each 30 days, commencing January 10, 2008.
**See table below for 2007 activity.
6. GOODWILL
The Company evaluates the carrying value of goodwill annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its goodwill-carrying amount. Such circumstances could include but are not limited to:
1.
a significant adverse change in legal factors or in business climate
2.
unanticipated competition
3.
an adverse action or assessment by a regulator
When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to that unit’s carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The total of the implied fair value of all of the other assets and liabilities of the unit, based on their fair value, less the total amount assigned to those assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
7. INVENTORY
Inventories include new, used parts and parts stripped from aircraft. These stripped parts inventory items are initially carried at original cost basis determined on the pro-rata fair value of the individual parts based on market or catalog pricing. All aircraft parts inventory are grouped as “Inventory” and accounted under ‘Current Assets’ category. This is based on standard aviation industry practice of showing all aircraft parts under a single line item of inventory. Aircraft parts typically have more than one year of life. Rotable parts have the same life as the aircraft. Repairable parts can be repaired several times over the life of the aircraft and installed on the aircraft. It has been and remains our policy to expense any items that we determine to be obsolete, damaged or unlikely to sell. The Company has an allowance for slow moving and obsolete parts inventory in the amount of $125,980. This allowan
ce was expensed during 2007.
The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.
Inventories consisted of the following:
Management reviews listed inventory items to determine whether there are slow moving or obsolete items. At December 31, 2006, it was management’s determination that the carrying value of the inventory items is appropriate and that there were no items requiring an allowance because the carrying value exceeds net realizable value.
The Significant increase in inventory valve was due to the receipt of aircraft upon disposal by the Company of it’s interest in Jetglobal (see Note 5).
During 2007, 2006 and 2005 depreciation expense was $564,071, $582,710 and $489,818 respectively.
Property, plant and equipment include gross assets acquired under capital leases of and $305,219 and $316,574 at December 31, 2006 and December 31, 2007, respectively. Related amortization, which is included in accumulated depreciation, was $24,385 and $88,055 at December 31, 2006 and December 31, 2007, respectively. Net asset value of machinery and equipment acquired under capital leases totaled $235,670 and net asset value of office equipment acquired under capital leases totaled $77,604 at December 31, 2007. Amortization of assets under capital leases is included in depreciation expense.
9. LEASES AND CAPITAL LEASES
Global’s wholly owned subsidiary, HAT, currently conducts operations on leased property at the Tucson International Airport, (“TIA”). Currently, World Jet is occupying space under this same lease. The lease is a one-year lease commencing March 1, 2005 and permits HAT to apply for two additional one-year options. TIA is implementing a Master Plan for airport development, which precludes issuing a long-term lease to HAT, but will not affect HAT’s facilities for at least five years. There is also executive office space leased at 6451 South Country Club under a five-year lease. Below is a table showing the total of lease commitments at December 31, 2007.
The Company has entered into capital lease agreements to facilitate the purchase of various types of equipment. Below is a table showing the total lease commitments under those agreements and the present value of those lease commitments.
Rent expense paid during the years ended December 31, 2007, 2006 and 2005 was $598,639, $821,277 and $720,263 respectively.
10. SHAREHOLDERS' EQUITY
On August 3, 2005, warrants were converted to 7,200,000 shares of common stock at $.68 per share.
On August 30, 2005, warrants were converted to 399,000 shares of common stock under the non-cash conversion terms of the original agreement of issue. No expense was recorded relative to this transaction.
On September 14, 2005, outstanding warrants were converted to 22,812 shares of common stock under the non-cash conversion terms of the original agreement of issue. No expense was recorded relative to this transaction.
On November 23, 2005, 60,000 shares were issued to employees pursuant to 2004 employment agreements. The shares had been fully expensed at issuance.
In the year ended December 31, 2005 the Company granted 200,000 shares under restricted stock awards to two directors. The price at measurement date was $.80 per share 100,000 shares were vested in 2005, $80,000 was expensed in 2005 and 100,000 shares were vested in 2006 and $80,000 was expensed at a rate of 1/12 per month during 2006.
On November 23, 2005 15,000 share of common stock were issued to an employee as a bonus. The price per share at measurement date was $1.30 and the Company has recorded a $19,500 expense in connection with the transaction.
On December 27, 2005, outstanding warrants were converted to 21,017 shares of common stock under the non-cash conversion terms of the original agreement of issue.
During the first quarter of 2006, 10,000 shares of common stock were issued to a new director as a signing bonus. The price of the stock at measurement date was $1.39.
On March 9th of 2006, 100,000 shares of common stock were issued pursuant to the completion of services contracted for under two separate agreements. The expense under the agreement was $70,000.00.
On April 4, 2006, 96,154 shares of common stock were issued for a consideration of $96,154. These shares were relative to warrants that had been outstanding at $1.00 per share.
On April 7, 2006, 100,000 shares of common stock were issued as compensation for outside consultancy services. The services are to be performed during 2006 and 1/12 of the related expense was taken monthly during 2006. The value of the shares at measurement date was $153,000.
On May 9, 2006, 165,814 shares of common stock were issued under the non-cash provisions of warrants @$.34 per share. The non-cash calculation eliminated all of the availability of 219,000 shares under the warrants.
Under the terms of a new three-year employment contract, which begins June 1, 2006, 75,000 shares of common stock vested on May 31, 2007, 100,000 shares of common stock will vest on May 31, 2008 and 125,000 shares of common stock will vest on May 31, 2009. The measurement date for this transaction is May 3, 2006.
Under the terms of a new three-year employment agreement, which begins June 1, 2006, 10,000 shares of common stock vested during the first quarter of 2007 and 10,000 shares will vest on each of two anniversary dates beginning June 1, 2007, (30,000 shares). The value of the shares at measurement date was $36,900, which will be expensed in equal monthly amounts over the term of the agreement.
Under the terms of a new employment contract, which began July 1, 2006, 20,000 shares of common stock were issued to an employee on August 28, 2006. The agreement calls for 20,000 shares to be earned during the second year and issued July 1, 2007 and 20,000 shares to be earned during the third year and issued July 1, 2008. The price of the stock at measurement date was $1.20 per share. Expenses for the stock will be entered into the financial statements on a monthly basis during the three-year term of the agreement.
On August 8, 2006, 125,124 shares of common stock were issued under the non-cash provisions of warrants @ $0.68 per share. The non-cash calculation eliminated all of the availability of 240,000 shares under the warrants. No expense was recorded relative to this transaction.
On August 28, 2006, 270,000 shares of common stock were issued pursuant to the vesting of shares granted under employment contracts entered into in 2004. The price of the shares at measurement date was $0.60 pre share. The appropriate expense has been entered into the Company’s financial statements, on a monthly basis, during the two-year vesting period.
On September 1, 2006, 20,000 shares of common stock were issued to two directors, 10,000 shares each, under the terms of the director compensation plan approved by the shareholders in the annual meeting held May of 2006. The price of these shares at measurement date was $1.35 per share. Appropriate expenses have been recorded in the Company’s financial statements for the third quarter of 2006
Under the terms of a new three-year employment agreement, which begins December 1, 2006, 10,000 shares of common stock will vest on each of three anniversary dates beginning December 1, 2007, (30,000 shares). The value of the shares at measurement date was $29,100, which will be expensed in equal monthly amounts over the term of the agreement.
On December 29, 2006, 62,500 shares of common stock were issued under an employment agreement. The price at measurement date was $.95. The terms of the employment contract, originally dated June 1, 2006 were amended at this time and 62,500 shares will vest and subsequently be issued each six months during the contract term for a total of $375,000 shares.
On January 24, 2007, warrants were converted under the non-cash conversion terms of the original agreement of issue. A warrant for 95,192 shares was reduced to 48,494 shares under the cashless exercise formula and 48,494 shares were issued. No expense was recorded for this transaction.
On March 29, 2007, 10,000 shares of common stock were issued from the Company’s registered 2003 Employee Stock Compensation Plan under the terms of a Director’s agreement. The value of the shares had been fully expensed when earned.
On May 15, 2007, 210,000 shares of common stock were issued. These shares included 10,000 shares of common stock that were issued from the Company’s registered 2003 Employee Stock Compensation Plan pursuant to a 2006 employment agreement. The value of the shares was $1.23 per share resulting in an expense in the amount of $12,300. The remaining 200,000 shares of common stock were issued in conjunction with two new employment agreements dated April 9, 2007, the measurement date. The value of the shares was $.60 each, resulting in expense in the amount of $120,000 during the second quarter of 2007.
On May 25, 2007, 20,000 shares of common stock were issued from the Company’s registered 2003 Employee Stock Compensation Plan pursuant to an employment agreement. The value of the stock at measurement date was $1.01 per share. The Company recorded share-based compensation of $20,200 during the second quarter of 2007.
On June 4, 2007, the company issued 100,000 shares of common stock from the Company’s registered 2003 Employee Stock Compensation Plan pursuant to a separation agreement with a former employee. The value of the stock at measurement date, May 25, 2007, was $.75 per share and a total of $75,000 was expensed in the second quarter relative to this transaction.
On June 8, 2007, the Company issued 75,000 restricted shares of common stock for services to be rendered under the terms of an agreement for services. The value of the stock at measurement date was $80,250, ($1.07 per share), which Management determined to be the value of the services to be rendered. The Company is recording the expense over the duration of the agreement.
On June 8, 2007, the Company issued 10,000 shares of common stock from the Company’s registered 2003 Employee Stock Compensation Plan pursuant to vesting under a 2006 employment agreement. The stock had been expensed fully at issuance.
On September 14, 2007, The Company issued 120,000 shares of common stock from the Company’s registered 2003 Employee Stock Compensation Plan pursuant to an agreement with a provider of legal services. The closing price of the stock on the date of issue was $0.79. The agreement calls for the stock to be issued as a substitute payment for a portion of existing attorney’s fees and costs. The issuance of the stock reduces the accounts payable account with the legal firm in the amount of $79,226. The Company recorded an additional $15,574 of expense in connection with this transaction.
Options
In January 2005, 50,000 options, issued as compensation for outside consultancy services, were exercised at the option price of $.30 per share.
During 2006, there were options for 30,000 shares at an option price of $1.03 granted. The options are good for a term of five years and were immediately vested. Using the Black Scholes Model with the monthly stock prices as variable from April 2002, the call option value of these options were calculated to be $1.09. $32,600 was expensed during 2006 relative to these options. In connection with the adoption of SFAS123R we assessed our valuation technique and related assumptions. Consistent with the provisions of SFAS123R, Staff Accounting Bulletin #107 (SAB 107), we estimated the fair value of stock options on the date of grant using the Black Scholes Options Valuation Model and the following assumptions: Risk free interest rate of 4.76%, Expected Life of 2.5 years, Dividend rate of 0% and expected volatility of 91.98% .
On March 9, 2007, options for 10,000 shares, at an exercise price of $1.05 per share, granted to a Director pursuant to a compensation agreement. The options are exercisable for a term of five years and were immediately vested. Using the Black Scholes Model, the call option value of these options was calculated to be $1.05. $10,546 was expensed during 2007 relative to these options. Consistent with the provisions of SFAS 123R, Staff Accounting Bulletin #107 (SAB 107), we estimated the fair value of stock option on the date of grant using the following assumptions: Risk free interest rate of 4.54%, Expected life of 2.5 years, Dividend rate of 0% and Expected volatility of 283.137% .
On December 20, 2007, options for 1,500,000 shares at an exercise price of $0.45 per share were granted as part of a Debenture Agreement discussed in these financial statements under Note 12, Notes Payable. The options are exercisable for a term of five years and were immediately vested. Using the Black Scholes Model, the call option value of these options was calculated to be $0.39. $581,282 was expensed during 2007 relative to these options. Consistent with the provisions of SFAS 123R, Staff Accounting Bulletin #107 (SAB 107), we estimated the fair value of stock option on the date of grant using the following assumptions: Risk free interest rate of 3.43%, Expected life of 2.5 years, Dividend rate of 0% and Expected volatility of 170.247% .
On December 20, 2007, warrants for 1,040,866 shares at an exercise price of $1.00 per share and warrants for 1,137,020 shares at an exercise price of $1.36 per share were repriced under the terms of the warrants that were triggered by the issuance discussed above to an exercise price of $0.45 per share. These options are fully vested and are exercisable until September 2, 2009.
The following table shows the shares issued for non-cash transactions, other than warrants, and the expense recorded in each of the years 2005, 2006, 2007 as well as the total recognizable expense of each transaction:
*Shares granted in years prior to 2005 that were under multi-year agreements and expensed in year of grant and applicable succeeding years.
**Underlying contract voided and a new agreement reached due to change in employment circumstances.
Expense of share-based payment transactions is calculated by multiplying the number of shares granted by the closing price of our stock on the measurement date related to the particular transaction.
SUMMARY OF EQUITY COMPENSATION STOCK-OPTION PLANS
The following table shows the activity of the outstanding warrants during the years ended December 31, 2007 and 2006:
The following table shows options granted during the years ended December 31, 2007 and 2006:
Stock-based Compensation Disclosure
Stock issued under plans to employees was issued at the value of the stock at the measurement date. All options issued were immediately exercisable. Until 2004, options issued were immediately exercised. Those options issued to employees that were not immediately exercised remained outstanding at December 31, 2007 and are summarized below:
The aggregate remaining contractual lives in years for the 900,000, 30,000 and 10,000 options outstanding and exercisable on December 31, 2007 was 2.47 and 4.85, respectively. Aggregate intrinsic value represents total pretax intrinsic value (the difference between Global’s closing stock price on December 31, 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders executed their options on December 31, 2007. This amount changes based on the fair market value of Global’s stock. The total intrinsic value of options outstanding as of December 31, 2007 was $783,300. The total intrinsic value of options exercisable on December 31, 2007 was $783,300. There were no options exercised during the year ended December 31, 2007. The Company issues new shares of common stock upon the exercise of stock options.
The 900,000 options issued in 2004 were issued at $0.06 below the share price on the measurement date. Expense in the amount of $54,000 was included in selling, general and administrative expenses for 2004. Because the options were immediately available the intrinsic value and the fair value of the options is calculated at the same $.23 per share.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable, notes receivable and accounts payable and notes payable approximate fair values due to the short-term maturities of these instruments. The fair value of notes payable approximates the carrying value because of the current market value interest rates applied to those obligations. The fair value of capital leases approximates the carrying value of these instruments because the terms are similar to those in the marketplace under which they could be replaced.
12. NOTES PAYABLE
On December 20, 2007, Global and its subsidiaries HAT, World Jet and Hamilton Aerospace S.A. de C.V. ("HATMEX") (collectively the "Companies") entered into and closed on three non-convertible secured debenture financing agreements with two accredited institutional investors ("Holders") in the total amount of $10 million (collectively the "Debentures"). These Debentures consist of (i) one non-convertible senior secured debenture in the amount of $5 million; (ii) one non-convertible senior secured debenture in the amount of $3 million; and (iii) one non-convertible junior secured debenture in the amount of $2 million. The Debentures accrue interest at the rate of 15% per annum which is payable quarterly in arrears beginning April 1, 2008. The Debentures also provide for a cash flow recapture to the Holders equal to 60% of any proceeds related to the sale of Global's aircraft inventory. The Debentures mature on December 19, 2008.
In connection with the Debentures, the Companies and Holders executed a Pledge and Security Agreement, Aircraft Security Agreements, Securities Purchase Agreement, Registration Rights Agreement, and a Post Closing Agreement. Additionally, Global issued a Warrant (as defined and detailed below) to one Holder as an inducement to purchase a Debenture. Mr. John B. Sawyer, President of the Companies, also executed a personal guaranty for $2 million of the Debentures ("Personal Guaranty"). These transaction documents are attached hereto as Exhibits to this Form 8-K. Mr. Ian Herman, CEO of the Companies, executed an identical personal guaranty to Mr. Sawyer for $1 million of the Personal Guaranty.
Pursuant to the Pledge and Security Agreement and Aircraft Security Agreements, the Debentures are secured by (a) a first lien on all the current and future assets of the Companies including any owned aircraft; (b) the equity interests currently held by Global in HAT, WJ and HATMEX; and (c) the 40% membership interest of Global in Global Aircraft Leasing Partners, LLC. However, in the event of default, foreclosure of the foregoing equity and membership interests held by Global can only be enforced if the foreclosure on all other assets of the Companies is insufficient to satisfy repayment of the Debentures.
Similar to the foreclosure conditions set forth in the preceding paragraph, enforcement of the Personal Guaranty cannot occur until and unless the foreclosure on all other assets of the Companies is insufficient to satisfy repayment of the Debentures.
As an inducement for Holder Victory Park Master Fund, Ltd. ("Victory Park") to purchase a Debenture, Global issued Victory Park a 5-year warrant exercisable into 1,500,000 shares of Global common stock ("Common Stock") at an exercise price of $0.45 per share ("Warrant"). However, if Victory Park should choose to exercise the Warrant then it would receive a reduced number of Common Stock shares based upon the cashless exercise formula contained therein.
The Warrant also contains a contingent obligation which shall be determined pursuant to a one-time value test on December 20, 2008 ("Test Date"). In the event that the difference between the Common Stock VWAP (for the 20 trading days prior to such Test Date) and the exercise price multiplied by the number of Warrant shares is not at least equal to $750,000 ("Target Value"), then Global will be obligated to issue an additional warrant to Victory Park. If Global is obligated to issue an additional warrant (such warrant will contain identical terms and provisions as the Warrant set forth above), that warrant shall be exercisable into that number of Common Stock shares that would cause the
additional warrant and the Warrant combined to equal the Target Value, but in no event shall the additional warrant be exercisable into more than 500,000 warrant shares.
Under the Registration Rights Agreement, Victory Park cannot request Global to register the underlying warrant shares for at least six months after the closing date. After June 20, 2008, Victory Park can request that Global commence the process to register the warrant shares. If Global is required to register the warrant shares subsequent to June 20, 2008, Global will be obligated to file a registration statement within 45 days of such request and cause the registration statement to become effective within 270 days of filing. In the event Global is asked to file a registration statement and fails to comply with the filing and effectiveness deadlines as set forth above, Global will be obligated to pay Victory Park liquidated damages in the amount of 2% of the total amount of the Debentures each and every month until Global satisfies the filing and/or effectiveness requirements.
The Post Closing Agreement allows the Companies to complete certain conditions of closing within certain time frames subsequent to closing and subjects the Companies to an event of default should the Companies fail to meet such conditions within the time frames set forth in the Post Closing Agreement.
Upon the occurrence of certain events of default as defined in the Debentures and the Post Closing Agreement, including events of default under the transaction documents related to the Debentures, the full principal amount of the Debentures, together with interest and other amounts owing become immediately due and payable. Moreover, an event of default also subjects the assets of the Companies and the equity and membership interests as well as the Personal Guaranty to foreclosure.
Proceeds of the Debentures will be utilized to satisfy and terminate the Companies' existing credit facility ($5,052,336) and other existing indebtedness as well as to pay down certain trade accounts and fund working capital.
Pursuant to the closing of this transaction, the Companies incurred a closing fee equal to 3% of the Debentures and legal and accounting costs.
M&I Marshall & Ilsley Bank has an outstanding Letter of Credit for $128,000 to TAA as part of the lease agreement for the HAT facility. This Letter of Credit is secured by a certificate of deposit in the amount of $128,000.
13. RELATED PARTY TRANSACTIONS
BCI Aircraft Leasing, Inc.
BCI Aircraft Leasing, Inc., Global’s former partner in Jetglobal, see Note 5, accounted for 17.4% of Company revenue during 2007 and 16.6% during 2006. The account receivable from BCI at December 31, 2007 was $3,895,149 and at December 31, 2006 was $1,827,482.
The Company had no revenue from Jetglobal in 2007. Jetglobal, LLC accounted for 7.2% of the Company’s revenue in 2006. The total amount due to the Company from Jetglobal was $1,093,316 at December 31, 2006. Jetglobal had no accounts receivable balance at December 31, 2007.
New customer GALP accounted for 46.5% of the Company’s revenue in 2007, which included a $7,850,000 aircraft purchase, representing about 32% of revenues.
14. CONTRACTS IN PROGRESS
At December 31, 2007 and December 31, 2006, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings on uncompleted contracts consist of the following:
Included in the accompanying balance sheet at December 31, 2007 and 2006 under the following caption:
Billings in excess of costs and estimated earnings on uncompleted contracts
Billings in excess are the result of amounts due from customers under contractual terms, which can be, in some cases, in advance of actual work performed.
15. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable represent amounts billed but uncollected on both completed and in-progress aircraft repair and maintenance contracts as well as amounts billed but uncollected on parts shipped to customers.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. The allowance is estimated as a percentage of accounts receivable based on a review of accounts receivable outstanding and the Company's prior history of uncollectible accounts receivable. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance were material to the financial statements in 2007 and 2006. During 2007, the Company had bad debt expense of $3,610,776. During 2006, the Company had bad debt expense of $338,000. The Company believes its allowance at December 31,
2007 is adequate based upon review of our outstanding accounts receivable at December 31, 2007.
As of December 31, 2007 and December 31, 2006, trade accounts receivable consist of the following:
The amounts charged to the allowance for doubtful accounts are as follows for the years ended December 31:
16. INCOME TAXES
The following table summarized components of income tax expense for the years ended December 31, 2007, 2006 and 2005:
Below is a reconciliation of the differences between the effective and statutory rates as follows for the years ended December 31, 2007, 2006 and 2005:
The components of deferred taxes at December 31, 2007 and 2006 in the accompanying balance sheet is summarized below:
During 2007, the Company was notified of an Internal Revenue Service, ("IRS"), examination for the 2005 tax year.
The income tax payable reflects liabilities related to the 2005 and 2006 tax years including preliminary adjustments resulting from the 2005 IRS audit. The income tax payable also includes the tax benefit relatd to the 2-year carryback of th 2007 tax net operating loss, ("NOL"). The Company expects to realize the benefit of the 2007 NOL carryback in conjuncation with the settlement of adjustments resulting from the IRS audit. The Company's current taxes payable also includes $81,208 and $63,192 of interst related to the 2005 and 2006 tax years respectively, and includes amounts resulting from the preliminary adjustments related to the 2005 audit.
17. CONCENTRATIONS
Revenues
The Company’s top four customers accounted for 80.5% of sales during the year ended December 31, 2007. The Company’s top four customers accounted for 52.4% of sales during the year ended December 31, 2006 and 37.6% during the same period in 2005. Three customers accounted for 63.8% of the Company’s accounts receivable at December 31, 2006. Five customers accounted for 45% of the Company’s accounts receivable at December 31, 2005. The broadening of our customer base will spread the risk associated with a potential failure of a significant customer. Efforts are continually being made to broaden our customer base. While the relative significance of customers varies period to period, the loss of, or significant curtailments of purchase of our services by, one or more or our significant customers at any time could adversely affect our revenue and cash flow. The top four customers reference above for 2007, 2006 and
2005 are listed in the table below:
Cash
We are potentially subjected to concentration of credit risks through our cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited or managed by major financial institutions and at times are in excess of FDIC insurance limits. At December 31, 2007 and 2006 cash and cash equivalents held in excess of FDIC insurance limits were approximately $900,000 and $0, respectively.
18. SUBSEQUENT EVENTS
A settlement agreement was reached in HAT's suit against Admiral Merchants Motor Freight, Inc. in February 2008. On April 9, 2008, the Company received $149,258, representing payment in full, less legal fees.
During February 2008, HAT reached a settlement agreement related to the complaint filed by Petro Energy Corporation in in June of 2007. HAT paid $179,278 on March 28, 2008 for full and final settlement of the fuel claim and the $17.5 million claim for fuel services provided to Avolar was withdrawn and dismissed with prejudice.
Report of Independent Accountants
To the Members
Jetglobal, LLC:
We have audited the accompanying balance sheets of Jetglobal, LLC (the “Company”) as of December 31, 2006 and 2005, and the related statements of operations and members’ equity and cash flows for the year ended December 31, 2006 and for the period from inception (August 26, 2005) to December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with accordance with generally accepted auditing standards of the United States of America.. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant e
stimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position Jetglobal, LLC as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the year ended December 31, 2006 and for the period from inception (August 26, 2005) to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
April 17, 2007
Scottsdale, Arizona
The accompanying notes are an integral part of these financial statements.
JETGLOBAL, LLC
STATEMENT OF OPERATIONS
For the Years ended December 31, 2006 and the Period from Inception (August 26, 2005) to December 31, 2005
The accompanying notes are an integral part of these financial statements.
JETGLOBAL, LLC
STATEMENT OF MEMBERS’ EQUITY
For the year ended December 31, 2006 and the Period from Inception (August 26, 2005) To December 31, 2005
The accompanying notes are an integral part of these financial statements.
JETGLOBAL, LLC
Consolidated Statement of Cash Flows
For the Years ended December 31, 2006 and the Period from Inception (August 26, 2005) to
December 31, 2005
The accompanying notes are an integral part of these condensed consolidated financial statements.
1. BASIS OF PRESENTATION
Jetglobal, LLC (the “Company”) was formed on August 26, 2005 to operate as an aircraft trading and leasing company. The Company’s members are BCI Aircraft Leasing Company, (”BCI”), which owns 70% and Global Aircraft Solutions, Inc., (“Global”), which owns 30%. The Company’s customers are international second and third tier airlines and leasing companies, who are located and operate worldwide. As a limited liability company, the liability of any individual member for the obligations of the Company is limited to the extent of capital contributions to the Company by the individual member
The Company operated in a single business segment, aircraft trading. However, as discussed in Note 5, 12 aircraft acquired remained under lease arrangements with Delta Airlines. As a result, the Company had residual lease income from those lease arrangements. As the leases expired during 2006 the lease income ceased. The Company does not intend to enter into other leasing activity.
Subsequent to December 31, 2006, the two members agreed to wind up the operations of the Company in 2007. The members are negotiating a settlement to distribute all of the assets of the Company to the two members. The distribution of the net assets to the two members is intended to be based upon the carrying value of those net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
We consider cash and investments in securities with maturities at the date of purchase of three months or less to be cash and cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Trade Accounts Receivable
Trade accounts receivable represent amounts billed but uncollected on the sale of aircraft.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. The allowance is estimated as a percentage of accounts receivable based on a review of accounts receivable outstanding and the Company's prior history of uncollectible accounts receivable. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.
Inventory
Inventories are stated at the lower of cost or market. Inventories include used aircraft purchased for resale that are available for sale as well as aircraft that have been leased under a short-term operating lease contract.
The Company reviews the market value of inventories whenever events and circumstances indicate that the carrying value of inventories may not be recoverable from the estimated future sales price less cost of disposal and normal gross profit. In cases where the market values are less than the carrying value, a write down is recognized equal to an amount by which the carrying value exceeds the market value of inventories.
Revenue and Cost Recognition
Revenues from aircraft sales are recognized upon the customer’s acceptance of the particular aircraft.
Rental income for aircraft leased on short-term leases is recognized monthly in accordance with those lease agreements.
Income Taxes
The Company is a limited liability company and has elected to be taxed as a partnership under the Internal Revenue Code of 1986. As such, the Company is not a tax paying entity for U.S. federal and state income tax purposes and accordingly, the accompanying balance sheets do not reflect any assets or liabilities for federal or state income taxes. Member’s allocable share of taxable income or loss is reported on the members’ tax returns.
Fair Value of Financial Instruments
The carrying values of accounts receivable and accounts payable and notes payable approximate fair values due to the short-term maturities of these instruments.
Recently Issued Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of SFAS No. 133 and 140.” This Statement simplifies accounting for certain hybrid financial instruments, eliminates the interim guidance in Statement 33 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interest in Securitized Financial Assets,” and eliminates a restriction of the passive derivative instruments that a qualifying special-purpose entity may hold. The Statement is effective for fiscal years beginning after September 15, 2006. The adoption of this Statement is not anticipated to have a material impact on the Partnership’s financial statements.
In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” This interpretation clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The Interpretation is effective for fiscal years beginning after December 15, 2006. This Interpretation is not anticipated to have a material impact on the Partnership’s financial statements.
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. The Statement does not require any new fair value measurements but could change the current practice in measuring current fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of this Statement will have a material impact on the Partnership’s financial statements.
3. TRADE ACCOUNTS RECEIVABLE
As of December 31, 2006, trade accounts receivable consisted of the amount owed on a single aircraft sale. The customer is in possession and has the risks and the rewards of aircraft ownership but the Company is holding title to the aircraft until payment in full is received.
4. NOTES PAYABLE
On May 18, 2006, Jetglobal, LLC signed a Term Note and Agreement with ComVest Capital, LLC. This original agreement was amended May 22, 2006. The final terms of this note included a principal sum of $4,257,000 all due and payable on or before May 10, 2007. The interest rate is 7% per annum during the original term of the loan. The interest rate increases to 7% until July 31, to 9.5% thereafter until October 31, 2006, and to 11.5% for any amounts due after November 1, 2006. Twelve aircraft that were part of the Omnibus Sale Agreement, mentioned in the note below on inventory, were conveyed as collateral security to ComVest. All interest payments were current at December 31, 2006.
5. INVENTORY
Inventories consisted of the following aircraft with associated costs:
The Company acquired 26 aircraft that were all held in separate equipment trusts administered by Wilmington Trust Company through an Omnibus Sale Agreement. The aircraft were divided into two categories: one with 14 aircraft and one with 12. The 14 were conveyed by bill of sale. The 12 were used as collateral security to ComVest Capital, LLC.
The current inventory also has 2 aircraft that were part of the same fleet originally but were purchased by the company on the open market from other parties, as was the one MD80 in the inventory.
Delta Lease
Aircraft N301DL, N302DL, N303DL, N304DL, N305DL, N306DL, N308DL, N309DL, N314DL, N326DL, N329DL & N330DL were continued to be operated and leased by Delta Airlines for during most of year 2006. They were returned to Jetglobal during the 4th quarter of 2006. The total rent paid by Delta Airlines during the tenure of the lease was $1,893,232. These funds were paid directly to ComVest Capital and applied as principal and interest payment on the note discussed under Notes Payable above.
6. MEMBER EQUITY ACCOUNTS
The operating agreement calls for member BCI Aircraft Leasing to be responsible for 75% of the costs and member Global Aircraft Solutions to be responsible for 25% of the costs for the partnership. However the profits and liquidation are to be split 70% to BCI and 30% to Global. An analysis of the partnership Cash In/Out accounts, at December 31, 2006, is presented below:
As mentioned earlier, the two members agreed to wind up the operations of the Company in 2007. The members are negotiating a settlement for the exchange of consideration for the membership interest held by Global. (See Note 1.) 7. DEPOSITS
At December 31, 2005, the Company had $5.4 million on deposit in escrow related to the purchase of the 26 aircraft bought under the Omnibus Sales Agreement. At December 31,2006, these deposits had been used and the purchase of the original 26 aircraft was complete. At December 31, 2006, the Company had $350,000 on deposit related to supplying DIP financing for bankrupt Falcon Airlines. Subsequent to December 31, 2006, the presiding judge in the case has ordered the return of the $350.000.
8. RELATED PARTY TRANSACTIONS
During 2005, Jetglobal had a sale rescinded due to a customer c anceling a sales agreement. This sale was guaranteed by BCI. In settlemelnt of the guarantee commitment to Jetglobal, BCI agreed to take the aircraft in a distribution from Jetglobal and provide Global with a payment equal to the share of lost earnings. As a result, BCI and Global entered into a settlement agreement for $1,957,692. This transaction was accounted for as a distribution to BCI in 2005 at the aircraft carrying value of $2,100,000. BCI settled its guarantee obligation directly with Global. The payment of $1,957,962 was made by BCI to Global in January 2006.
9. CONCENTRATION OF REVENUES
During 2006,I sales to Northern Air Cargo comprised for 38% of Company revenue, Air Philippines comprised 30%, Royal Khmer Airlines comprised 19% and RAVSA comprised 14%.