UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter ended June 30, 2006 Commission File No. 0-28575
GLOBAL AIRCRAFT SOLUTIONS, INC.
Formerly Renegade Venture (NEV.) Corporation
------------------------------------------------
(Exact name of issuer as specified in its charter)
NEVADA 84-1108499
-------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6901 South Park Avenue
Tucson, Arizona 85706
Mail: P.O. Box 23009
Tucson AZ 85734-3009 (520) 294-3481
- --------------------------------------- ----------------------
(Address of Principal Executive Offices) (Issuer's Telephone No.)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period `that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 126-2 of the Exchange Act).
Yes [ ] No [ x ]
The number of shares outstanding of each of the Registrant's classes of common
equity, as of June 30, 2006 are as follows:
Class of Securities Shares Outstanding
- ----------------------------- -----------------
Common Stock, $.001 par value 39,090,183
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets:
As of December 31, 2005 (audited) and June 30, 2006
(unaudited).................................................. 3
Condensed Consolidated Statements of Operations:
For the three months and six months ended June 30, 2005 and
2006 (unaudited)............................................ 5
Consolidated Statement of Changes in Stockholders' Equity:
For the year ended December 31, 2005 (audited) and
six months ended June 30, 2006 (unaudited)................... 6
Consolidated Statements of Cash Flows:
For the six-month periods ended June 30, 2005 and 2006
(unaudited).................................................. 8
Notes to Financial Statements (unaudited) ................... 10
Item 2. Management's Discussion and Analysis of Financial condition... 24
and Results of Operation
Item 3. Quantitative and Qualitative Disclosure about Market Risk..... 29
Item 4. Controls and Procedures....................................... 29
PART II. OTHER INFORMATION
Item 5. Other Information............................................ 29
Item 6. Exhibits..................................................... 30
Signatures................................................... 30
Certifications
ITEM 1. FINANCIAL STATEMENTS.
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Balance Sheet
December 31, 2005 and June 30, 2006
ASSETS
2005 2006
(audited) (unaudited)
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 368,013 $ 176,419
Accounts receivable 4,993,138 8,644,220
Note receivable 1,997,868 1,026,896
Inventory 6,580,092 5,988,341
Restricted funds 98,500 98,500
Other current assets 304,987 192,999
----------- -----------
TOTAL CURRENT ASSETS $14,342,598 $16,127,375
Property, plant and equipment 1,642,141 1,457,967
Investment 25,000 25,000
Equity in net assets of and advances to affiliates 6,333,690 7,846,089
Customer list, net 133,886 66,943
Agreement with vendor, net 28,490 14,245
Goodwill 38,992 38,992
Inventory, non-current 2,187,343 2,568,395
Deferred income taxes 130,000 297,348
Other assets 192,481 61,426
----------- -----------
TOTAL ASSETS $25,054,621 $28,503,780
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Balance Sheet
December 31, 2005 and June 30, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2006
(audited) (unaudited)
------------ ------------
CURRENT LIABILITIES
Notes payable - short term $ 2,564,739 $ 4,811,929
Accounts payable - trade 7,181,397 3,438,846
Customer deposits 69,193
Billings in excess of costs and estimated
earnings on contracts in progress 23,458 906,625
Accrued liabilities 570,724 766,369
Income taxes payable 685,904 2,007,088
Commitments and contingencies
------------ ------------
TOTAL CURRENT LIABILITIES $ 11,026,222 $ 12,000,050
------------ ------------
TOTAL LIABILITIES $ 11,026,222 $ 12,000,050
============ ============
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 100,000,000 shares authorized and
38,998,215 and 39,470,354 shares issued 2005 and 2006 and 30,650,386 and
39,090,183 shares outstanding 2005 and 2006 $ 38,998 $ 39,470
Additional paid-in capital 11,904,673 12,237,265
Deferred compensation (80,000) (116,500)
Contributed capital 620,289 620,289
Retained earnings 1,544,409 3,723,206
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 14,028,399 $ 16,503,730
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,758,012 $ 28,503,780
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Statement of Operations
For the Three Months and Six Months ended June 30, 2005 and 2006
(unaudited)
Three Three
Months Months Six Months Six Months
ended June 30, ended June 30, ended June 30, ended June 30,
2005 2006 2005 2006
Net sales $ 8,829,378 10,198,651 17,481,614 21,707,374
Cost of sales (6,375,131) (7,768,045) (12,674,327) (15,303,454)
Inventory write down (55,208) (110,417)
------------ ------------ ------------ ------------
Gross profit $ 2,399,039 $ 2,430,606 $ 4,686,870 $ 6,403,920
Selling, general and administrative expense (1,738,041) (1,831,271) (3,366,775) (3,801,734)
Penalties (1,006) (11,171) (1,006) (11,171)
------------ ------------ ------------ ------------
Gain (loss) from operations $ 659,992 $ 588,164 $ 1,329,089 $ 2,591,015
Other income (expense):
Interest income 173,956 24,368 204,019 54,725
Interest expense (170,402) (147,194) (304,391) (231,868)
Discounts taken 17,715
Miscellaneous expense (116)
Miscellaneous income 18,666 18,113 93,917 18,605
Gain (loss) on asset disposal (8,518) (8,518)
Equity in income of unconsolidated affiliates 968,993 923,121
------------ ------------ ------------ ------------
$ 682,212 $ 1,443,926 $ 1,340,349 $ 3,346,964
Net profit (loss), Before taxes
Estimated taxes, State and Federal (45) (388,550) (90) (1,168,187)
------------ ------------ ------------ ------------
Net profit (loss), After taxes $ 682,167 $ 1,055,376 $ 1,340,259 $ 2,178,777
============ ============ ============ ============
Net profit (loss) per share, Basic 2006 2nd
Qtr 39,011,179 shares, Year to date 38,829,760 shares;
2005 2nd Qtr 30,700,386 shares, Year to date
30,695,693 shares $ 0.02 $ 0.03 $ 0.04 $ 0.06
Net profit (loss) per share, Fully diluted 2006 2nd
Qtr 40,363,176 shares, Year to date 40,786,236 shares;
2005 2nd Qtr 34,623,863 shares, Year to date
33,980,830 shares $ 0.02 $ 0.03 $ 0.04 $ 0.06
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
GLOBAL AIRCRAFT SOLUTIONS, INC.
Formerly Renegade Venture (NEV.) Corporation
Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 2005 and the Two Quarters Ended June 30, 2006
Additional Contributed Deferred Treasury Accumulated Stockholder
Paid-in Capital Compensation Stock Earnings/Deficit Equity
Capital
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares Amount Amount Amount Amount Amount Amount
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Balance December 30,650,386 31,030 7,033,950 620,289 0 (1,578,927) 6,106,342
31, 2004
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
1st Qtr, 2005
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued, 50,000 50 14,950
Options exercised
50,000 @ $0.30
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
2nd Qtr, 2005
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
No change
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
3rd Qtr, 2005
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued to 7,200,000 7,200 4,644,000
Barron Partners
for a cash
consideration of
$.68 per share
- -------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued 421,812 422 (422)
under non-cash
provision of
warrants.
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
4th Qtr, 2005
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued to 200,000 200 156,800 (80,000)
Directors under
Restricted stock
award at $0.80,
100,000 shares
for 2005; 100,000
shares to be
expensed in 2006
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued to 15,000 15 19,485
employee under
agreement,
price
at measurement
date of $1.30
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued to 60,000 60 35,940
employees under
agreement, price
at measurement
date of $.60
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued 21,017 21 (21)
under non-cash
provision of
warrants
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Net Income/Loss 3,123,356
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Balance 38,618,215 38,998 11,904,683 620,289 (80,000) 1,544,429 14,028,399
December 31
2005
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
1st Qtr, 2006
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Stock issued as a 10,000 10 13,890
signing bonus to
new director,
price at
measurement date
$1.39
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
6
Stock issued for 100,000 100 69,900
services rendered
valued at $70,000
Stock price at
measurement date
50,000 shares @
$.56 and 50,000
shares @$.85
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Compensation 58,250
expensed
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
2nd Qtr, 2006
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued 96,154 96 96,058
warrants
exercised @1.00
per share for a
consideration of
$96,154
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Stock issued for 100,000 100 152,900 (153,000)
consultancy
services to be
rendered in 2006,
price at
measurement date
$1.53
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Shares issued 165,814 166 (166)
under non-cash
provision of
warrants
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Net Income/Loss 2,178,777
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
Balance 39,090,183 39,470 12,237,265 620,289 (116,500) 3,723,206 16,503,730
June 30, 2006
- ------------------- ---------- --------- ---------- ------------ -------------- --------- ---------------- -----------
7
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Statement of Cash Flows
For the Six Months ended June 30, 2005 and 2006
(unaudited)
2005 2006
Cash flows from operating activities:
Net Profit/(Loss) 1,340,259 2,178,777
Adjustments to reconcile net profit to net cash
provided (used) by operating activities:
Depreciation 231,912 271,655
Amortization 81,188 81,189
Allowance for Doubtful Accounts 110,417 (91,907)
Share of affiliate net income (923,121)
Gain/(loss) on disposal of fixed assets 13,785
Expenses paid with stock 120,497 310,108
Changes in Assets and Liabilities:
Accounts receivable 77,407 (6,682,733)
Prepaid expenses (455,312) 60,280
Costs and estimated earnings in excess of
billings on contracts in progress (337,388)
Inventory 2,264,908 208,688
Inventory, non-current (2,323,820) 2,011
Restricted Funds (98,500)
Other current assets
Other non-current assets (26,782) (36,293)
Accounts payable-trade (695,247) (2,651,993)
Accounts payable-related party (6,219)
Due to factor 290,911
Customer deposits (280,537) 69,193
Billings in excess of cost and estimated
earnings on contracts in progress (966,238) 883,167
Income tax payable 1,321,184
Accrued liabilities (396,315) 195,645
Net cash provided by/(used for) operating activities (1,068,859) (4,790,365)
Cash flows from investing activities:
Purchase of property, plant and equipment (68,081) (101,267)
Notes receivable 973,452
Non-consolidated affiliate (Investment)/receipt 1,385,722
Net cash used for investing activities (68,081) 2,257,907
8
Cash flows from financing activities:
Proceeds from issuance of common stock 15,000 96,154
Payments related to issuance of common stock
Proceeds from bank loans 750,000 3,166,794
Repayment of bank loans (95,747) (919,604)
Proceeds from short term financing
Other financing activities, net 58,142 (2,480)
Net cash provided by/(used for) provided by financing activities 727,395 2,340,864
Net decrease in cash and cash equivalents (409,545) (191,594)
Cash and cash equivalents at beginning of period 549,904 368,013
Cash and cash equivalents at end of period 140,359 176,419
Interest paid for the six months ended June 30, 2006 was $193,807. Interest paid
for the six months ended June 30, 2005 was $304,391. Taxes paid during the six
months ended June 30, 2006 were $0. Taxes paid during the six months June 30,
2005 were $90.00.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
9
GLOBAL AIRCRAFT SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2005
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared, by
management, in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions for Form
10-Q and Regulation SK. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. All adjustments that, in the opinion
of management, are necessary for a fair presentation of the results of
operations for the interim periods have been made and are of a recurring nature
unless otherwise disclosed herein. The results of operations for the six months
ended June 30, 2006 are not necessarily indicative of the results that will be
realized for the entire fiscal year. These financial statements should be read
in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2005
The condensed consolidated financial statements include the accounts of Global
Aircraft Solutions, Inc. ("Global") formerly Renegade Venture (NEV.) Corporation
and its wholly owned subsidiaries, Hamilton Aerospace Technologies, Inc.
("HAT"), Johnstone Softmachine Corporation ("Johnstone"), and World Jet
Corporation ("World Jet") collectively, the ("Company"). Global acquired HAT and
Johnstone on April 30, 2002. For accounting purposes, the HAT/Global transaction
was treated as an acquisition of Global by HAT and as a recapitalization of
Global. The acquisition of 100 per cent of World Jet stock was finalized July
15, 2004, with an effective date of January 1, 2004. The financial statements
reflect the accounting activity of HAT since its inception, April 5, 2002 and of
World Jet since January 1, 2004. Johnstone is currently inactive.
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 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. During 2005, the Company
had bad debt expense of $473,000. The Company believes its allowance at June 30,
2006 is adequate based upon review of our outstanding accounts receivable at
June 30, 2006.
10
At June 30, 2006, the Company has a receivable of $570,000 from a customer that
has filed Reorganization under Chapter 11 of the Bankruptcy Code. Management
believes that it has a substantial position in the bankruptcy proceeding and
that the Company has adequate collateral, which it will take as payment for this
receivable. The Company has provided a standard allowance for all receivables at
June 30, 2006.
Inventory
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventory items held for over one year are classified as "inventory,
non-current". 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 include used parts and parts stripped from aircraft. These 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.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided for 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 is five years at our HAT subsidiary; 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
charges 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 for MRO sales are recognized on 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
our facility. Revision in cost and labor hour estimates and recognition of
losses 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 June 30, 2006 there are no
material amounts in excess of the agreed contract price that the Company seeks
to collect from customers or others for customer caused delays, error in
specifications or design, 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.
Revenues from time and material contracts and all other ancillary services are
recognized as the services are performed.
Income (Loss) per share - Basic earnings per share includes no dilution and is
computed by dividing net earnings (loss) available to 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. Reconciliations of EPS for
quarters ended June 30, 2006 and 2005 are as follows:
11
For the Six Months ended June 30, 2006
- -------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
Net Income $2,178,777
Basic EPS
Income available to common stockholders $2,178,777 38,829,760 $0.06
- -------------------------------------------------------------------------------------------------------------------
Warrants 1,162,726
Options 793,750
Diluted EPS
Income available to common stockholders + assumed $2,178,777 40,786,236 $0.05
conversions
For the Quarter ended June 30, 2006
- -------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
Net Income $1,055,376
Basic EPS
Income available to common stockholders $1,055,376 39,011,179 $0.03
- -------------------------------------------------------------------------------------------------------------------
Warrants 568,791
Options 783,206
Diluted EPS
Income available to common stockholders + assumed $1,055,376 40,363,176 $0.03
conversions
- --------------------------------------------------- -- ------------------------------------------------------------
For the Six Months ended June 30, 2005
- -------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
Net Income $1,340,259
Basic EPS
Income available to common stockholders $1,340,259 30,695,354 $0.04
- -------------------------------------------------------------------------------------------------------------------
Warrants 2,475,247
Options 809,890
Diluted EPS
Income available to common stockholders + assumed $1,340,259 33,980,830 $0.04
conversions
- -------------------------------------------------------------------------------------------------------------------
For the Quarter ended June 30, 2005
- -------------------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
Net Income $682,167
Basic EPS
Income available to common stockholders $682,167 30,700,386 $0.02
- -------------------------------------------------------------------------------------------------------------------
Warrants 3,094,764
Options 828,713
Diluted EPS
Income available to common stockholders + assumed $682,167 34,623,863 $0.02
conversions
- -------------------------------------------------------------------------------------------------------------------
Calculation of Weighted Average Shares for Six Months ended June 30,
2006
------------------------------------------------------------------------
Issues Shares O/S Dates Days Average
------------ ------------- ---------------------- ------- --------------
38,618,215 01/01/06 - 03/09/06 67 14,295,140
110,000 38,728,215 03/09/06 - 04/04/06 26 5,563,169
96,154 38,824,369 04/04/06 - 04/07/06 3 643,498
100,000 38,924,369 04/07/06 - 05/09/06 32 6,881,656
165,814 39,090,183 05/09/06 - 07/01/06 53 11,446,297
------------ ------------- ---------------------- ------- --------------
Total shares 38,829,760
------------ ------------- ---------------------- ------- --------------
12
Calculation of Weighted Average Shares for the Quarter ended June 30,
2006
------------------------------------------------------------------------
Issues Shares O/S Dates Days Average
------------ -------------- ---------------------- ------- -------------
38,728,215 04/01/06 - 04/04/06 3 1,276,754
96,154 38,824,369 04/04/06 - 04/07/06 3 1,279,924
100,000 38,924,369 04/07/06 - 05/09/06 32 13,687,690
165,814 39,090,183 05/09/06 - 07/01/06 53 22,766,810
------------ -------------- ---------------------- ------- -------------
Total shares 39,011,179
------------ -------------- ---------------------- ------- -------------
Calculation of Dilution for Six Months ended June
30,2006
---------------------------------------------------------
No. of shares Incremental
shares
Outstanding
----------------------- -------------- ------------------
Warrants @ $0.52 104,111 66,515
Warrants @ $0.68 367,200 285,000
Warrants @ $1.00 1,040,866 318,042
Warrants @ $1.36 12,072,747 493,168
Options @ $0.17 900,000 793,750
----------------------- -------------- ------------------
Total 1,956,476
dilution
----------------------- -------------- ------------------
(Average Price $1.44)
----------------------- -------------- ------------------
---------------------------------------------------------
Calculation of Dilution for the Quarter ended June 30,
2006
---------------------------------------------------------
No. of shares Incremental
shares
Outstanding
----------------------- -------------- ------------------
Warrants @ $0.52 104,111 62,784
Warrants @ $0.68 367,200 259,695
Warrants @ $1.00 1,040,866 246,312
Options @ $0.17 900,000 783,206
----------------------- -------------- ------------------
Total 1,351,997
dilution
----------------------- -------------- ------------------
(Average Price $1.31)
----------------------- -------------- ------------------
13
Calculation of Weighted Average Shares for Six Months ended June 30,
2005
------------------------------------------------------------------------
Issues Shares O/S Dates Days Average
----------- -------------- ---------------------- ------- --------------
30,650,386 01/01/05 - 01/18/05 17 2,878,769
50,000 30,700,386 01/18/05 - 06/30/05 164 27,816,924
----------- -------------- ---------------------- ------- --------------
Total shares 30,695,693
----------- -------------- ---------------------- ------- --------------
Calculation of Weighted Average Shares for Three Months ended June 30,
2005
--------------------------------------------------------------------------
Issues Shares O/S Dates Days Average
----------- -------------- ----------------------- -------- --------------
30,700,386 04/01/05 - 06/30/05 91 30,700,386
----------- -------------- ----------------------- -------- --------------
Total shares 30,700,386
----------- -------------- ----------------------- -------- --------------
Calculation of Dilution for Six Months ended June 30,
2005
---------------------------------------------------------
No. of shares Incremental
shares
Outstanding
----------------------- -------------- ------------------
Warrants @ $0.34 720,000 450,989
Warrants @ $0.52 158,654 67,995
Warrants @ $0.68 7,740,000 1,956,264
Options @ $0.17 900,000 731,868
Options @ $0.20 100,000 78,022
----------------------- -------------- ------------------
Total 3,285,137
dilution
----------------------- -------------- ------------------
(Average Price $0.91)
----------------------- -------------- ------------------
Calculation of Dilution for Quarter ended June 30, 2005
---------------------------------------------------------
No. of shares Incremental
shares
Outstanding
----------------------- -------------- ------------------
Warrants @ $0.34 720,000 477,624
Warrants @ $0.52 158,654 76,971
Warrants @ $0.68 7,740,000 2,528,911
Warrants @ $1.00 1,137,020 11,258
Options @ $0.17 900,000 748,515
Options @ $0.20 100,000 80,198
----------------------- -------------- ------------------
Total 3,923,476
dilution
----------------------- -------------- ------------------
(Average Price $1.01)
----------------------- -------------- ------------------
14
Equity in Net Assets and Advances to Affiliates
The investment in a 30% interest in Jetglobal, LLC is accounted for using the
equity method since the Company does not control Jetglobal, LLC, but over which
it does exert significant influence. Under the equity method the investment is
recorded at cost plus advances and the Company's share of earning less
distributions and the Company's share of income or losses. The Company considers
whether future fair value of its investments has declined below their carrying
value whenever adverse events or changes in circumstances indicate that recorded
values may not be recoverable. If the Company considered any such decline to be
other than temporary, a write-down would be recorded to estimate fair value.
All significant intercompany profits and balances have been eliminated.
Intangible Assets
The amounts assigned to Customer List and Agreement with Vendor are recorded at
the value assigned when they were acquired in a business purchase. The amounts
are being amortized over three years using the straight-line method. The Company
assesses the ongoing recoverability of intangible assets subject to amortization
by determining whether the intangible asset balance can be recovered over the
remaining amortization period through projected undiscounted future cash flows.
If projected future cash flows indicate that the unamortized intangible asset
balances will not be recovered, an adjustment is made to reduce the net
intangible asset to an amount consistent with projected future cash flows
discounted at the Company's incremental borrowing rate.
The company's amortizable intangibles consisted of customer lists and vendor
agreements. Amortization expense on these totaled $162,376 and $162,376 for the
years ended December 31,2004 and 2005, respectively. Amortization expense
related to customer lists and vendor agreements will be fully expensed at
$162,376 during 2006. Amortization for the first half of 2006 was $81,189.
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 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 the goodwill exceeds its implied
fair value.
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." This Statement clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials.
This Statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The initial application of SFAS No. 151 had no
impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67." This
Statement references the financial accounting and reporting guidance for real
estate time-sharing transactions that is provided in AICPA Statement of Position
04-2, "Accounting for Real Estate Time-Sharing Transactions." This Statement
also states that the guidance for incidental operations and costs incurred to
sell real estate projects does not apply to real estate time-sharing
transactions. This Statement is effective for financial statements for fiscal
years beginning after June 15, 2005. The initial application of SFAS No. 152 had
no impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment of APB Opinion No. 29." This Statement eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The initial
application of SFAS No. 153 had no impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123 ( R), " Share Based Payment."
This Statement is a revision of SFAS No. 123, and supersedes APB Opinion No. 25.
SFAS No. 123 ( R) requires the recognition of the cost of employee services
received in exchange for an award of equity instruments based on the grant date
for value of the award. The cost will be recognized over the period during which
an employee is required to provide service in exchange for the award. No
compensation cost is recognized for equity instruments for which employees do
15
not render the required service period. In April, the SEC release No. 33-8568
delayed the implementation of SFAS No. 123 ( R). The Statement was adopted by
the Company beginning in the first quarter of fiscal year 2006. SFAS No. 123 (
R) permits public companies to adopt its requirements using one of two methods:
(1) A "modified prospective method in which compensation cost is recognized
prospectively for both new grants issued subsequent to the date of adoption, and
all unvested awards outstanding at the date of adoption. Expense for the
outstanding awards must be based on the valuation determined for the pro forma
disclosures under SFAS No. 123. (2) A "modified retrospective" method, which
includes the requirements of the modified prospective method described above,
but also permits entities to restate all prior periods presented based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma
disclosures. The Company has adopted the modified prospective application
method.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error - an
amendment of APB Opinion No. 29." This Statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the usual instance that the pronouncement does not
include specific transition provision. When a pronouncement includes specific
transition provisions, those provisions should be followed. Opinion 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. This Statement requires
retrospective application to prior periods financial statements of changes in
accounting principle, unless it is impractical to determine either the
period-specific effects of the cumulative effect of the change. This Statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company does not expect application
of SFAS No. 154 to have a material affect on its financial statements.
Stock-Based Compensation
There were no options granted in the first half of 2006, ended June 30, 2006 nor
was there vesting of prior year option grants. Therefore, there is no pro-forma
effect for the six-month period ended June 30, 2006.
3. SEGMENT INFORMATION
The company has divided its operations into the following reportable segments:
Aircraft maintenance, repair, and overhaul; Aircraft Brokerage; and Part sales.
These segments, for the most part, reflect the discrete operations of our
consolidating companies HAT, Global and World Jet respectively. 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 six months ended June 30, 2006 and June 30, 2005.
Three Months Three Months Six Months Six Months
Ended Ended ended Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
- -------------------------------------------- -- -------------- -- -------------- - -------------- -- --------------
($ millions) ($ millions) ($ millions) ($ millions)
- -------------------------------------------- -- -------------- -- -------------- - -------------- -- --------------
Segment sales:
Aircraft maintenance 7.202 4.691 13.523 9.613
Aircraft trading .650 2.470 3.223 3.995
Part sales 3.242 2.093 6.227 4.407
Other 1.182 .623 2.007 1.623
Sub Total 12.276 9.877 24.980 19.638
Elimination of intersegment sales -2.077 -1.047 -3.273 -2.156
Total consolidated sales 10.199 8.830 21.707 17.482
Operating income:
Aircraft maintenance 1.813 .586 3.428 .741
Aircraft trading .924 .710 .032 1.260
Part sales .765 .534 1.544 1.168
Other .777 .569 1.464 1.528
Sub total 2.431 2.399 6.404 4.697
16
Selling, general, administrative expense -1.842 -1.738 -3.813 -3.367
Other, net -.114 .021 .167 .010
Share of Jetglobal net income (a/c trading) .969 .923
Consolidated earnings before taxes 1.444 .682 3.347 1.340
Interest income by segment
Aircraft maintenance .008 .019 .028 .047
Aircraft trading .007 0 .007 0
Part sales 0 .154 0 .154
Corporate .009 .001 .020 .003
Total interest income by segment .024 .170 .055 .204
Interest expense by segment
Aircraft maintenance .008 .050 .010 .150
Aircraft trading 0 0 0 0
Part sales .001 .120 .001 .154
Corporate .138 0 .221 0
Total interest expense by segment .147 .170 .232 .304
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
- ------------------------------------------ -- -------------- -- -------------- -- -------------- - --------------
($) ($) ($) ($ )
- ------------------------------------------ -- -------------- -- -------------- -- -------------- - --------------
Depreciation and amortization by segment:
Aircraft maintenance 96,912 84,287 188,956 166,508
Aircraft trading
Part sales
Corporate 79,380 74,057 163,888 146,592
Total 176,292 158,344 352,844 313,100
Net asset values:
Aircraft maintenance 7,807,592 5,775,717 7,807,592 5,775,717
Aircraft trading 3,422,403 128,400 3,422,403 128,400
Part sales 9,112,905 4,379,254 9,112,905 4,379,254
Corporate 8,160,880 1,736,713 8,160,880 1,736,713
Total 28,503,780 12,020,084 28,503,780 12,020,084
Capital expenditures:
Aircraft maintenance 9,009 18,860 76,211 37,788
Aircraft trading
Part sales
Corporate 18,131 10,821 25,056 30,293
Total 27,140 29,681 101,267 68,081
17
All of the Company's facilities and assets are located in the United
States. The Company sells and ships to several foreign countries. All foreign
revenues are recorded and collected in U.S. dollars. Geographic information
regarding sales to foreign countries is presented in the following table:
Six Months Six Months
Ended Ended
June 30, 2006 June 30, 2005
-----------------------------------------------------------
Angola $ 26,880
Australia 1,700
Brazil 5,100
Columbia 11,800
Germany 28,025
Indonesia 835
Italy 891 46,983
Ireland 209,395
Jordan 2,032,460 1,532,471
Korea 154,010
Lebanon 6,403
Malawi 111,000 149,975
Mexico 2,136,979 2,104,486
Pakistan 68,000 459,612
Philippines 128,936
South Africa 17,354
Spain 1,100
UAE 1,722,500
United Kingdom 98,383 30,700
-----------------------------------------------------------
TOTALS $ 4,765,042 $ 6,320,936
4. 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 is a special purpose LLC formed to acquire and remarket commercial jet
aircraft. BCI will be primarily responsible for the marketing aspects of
Jetglobal while the Company will be 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 has a 30% membership and profit interest, it is only responsible for
25% of the costs and expenses associated with Jetglobal including any business
transactions. As of June 30, 2006, Equity in net assets and advances to
affiliates consisted of the following:
Initial investment in Jetglobal $1,125,000
Payment of 25% share of purchase of
aircraft 4,627,404
Expenses paid on behalf of Jetglobal 359,468
Share of 2005 net income 1,111,096
Payment of earnings share to Global -300,000
Share of 1st Qtr 2006 expense -45,872
Share of 2nd Qtr 2006 income 968,993
Balance at June 30, 2006 $7,846,089
18
Net sales, gross profit and net income within Jetglobal were $7,599,000,
$4,154,000 and $3,703,000 for the year ended December 31, 2005. At December 31,
2005, the balance sheet of Jetglobal had assets of $21,715,000 and no
liabilities. Net sales, gross profit and net income within Jetglobal were
$7,291,442, $3,761,828 and $2,977,072 for the six-months ended June 30, 2006. At
June 30, 2006, the balance sheet of Jetglobal had assets of $23,193,916 and
liabilities of $4,848,267.
5. STOCK, STOCK OPTIONS AND WARRANTS
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
agreements were entered into on April 1, 2005 and November 18, 2004. The board
determined the value of the services to be $70,000.00. The value of the stock at
the respective measurement dates was $.84 and $.56 per share, respectively.
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 will be 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 will vest 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.
Share value Vesting Date
on
Measurement
Date
--------------------- ------------- ------------- -------------
Common Shares 39,090,183
Issued and
Outstanding
Unconverted
Warrants Issued:
@ $0.68 .50 540,000
@ $1.36 .50 7,740,000
@ $0.52 .65 104,111
@ $1.00 .65 1,040,866
@ $1.36 .65 1,137,020
Subtotal 10,561,997
Options Issued:
@ $0.17 .23 900,000
Subtotal 900,000
--------------------- ------------- ------------- -------------
19
Awards of stock
pending under
employment
contracts
--------------------- ------------- ------------- -------------
.60 07/30/2006 270,000
1.30 05/31/2007 75,000
1.30 05/31/2008 100,000
1.30 05/31/2009 125,000
--------------------- ------------- ------------- -------------
Subtotal 570,000
--------------------- ------------- ------------- -------------
Total 51,122,180
--------------------- ------------- ------------- -------------
Pro-forma 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 June 30,
2006 and are summarized below:
Weighted Average
Exercise Price
- ------------------------- ---------------------------------------------------
Options outstanding at 900,000 $0.17 Exercisable on grant
beginning of year date
Granted during quarters None
1 & 2
Exercised during None
quarters 1 & 2
Forfeited during None
quarters 1 & 2
- -
Outstanding at 6/30/2006 900,000 $0.17 Exercisable on grant
date
Options exercisable at 900,000 $0.17
quarter end, June 30,
2006
A summary of the Company's stock option plans as of June 30, 2006 and changes
during the year is presented below:
Weighted Average
Exercise Price
- ------------------------- ------------------------------------------------------
Options outstanding at 900,000 $0.17 Exercisable on grant
beginning of year date
Granted during quarters None
1 & 2
Exercised during None
quarter 1 & 2
Forfeited during None
quarters 1 & 2
Outstanding at 3/31/2006 900,000 $0.17 Exercisable on grant
date
Options exercisable at 900,000 $0.17
quarter end, June 30,
2006
Weighted average fair None
value of options
granted during the year
The aggregate remaining contracual lives in years for the options outstanding
and exercisable on June 30, 2006 was 2.875. Aggregate intrinsic value represents
total pretax intrinsic value (the difference between Global's closing stock
price on June 30, 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 exercised their options on June 30, 2006. This amount changes
based on the fair market value of Global's stock. The total intrinsic value of
options outstanding as of June 30, 2006 was $972,000. The total intrinsic value
of options exercisable on June 30, 2006 was $972,000. There were no options
exercised during the quarter ended June 30, 2006. The Company issues new shares
of common stock upon the exercise of stock options.
At June 30, 2006, 375,000 shares were available for future grants under the
Company's 2002 Compensatory Stock Option Plan. At June 30, 2006, the Company had
approximately $371,995 of total unamortized compensation expense, net of
estimated forfeitures, related to stock option plans that will be recognized
over the weighted average period of 3.41 years.
20
6. TRADE ACCOUNTS RECEIVABLE
As of June 30, 2006, trade accounts receivable consisted of the following:
June 30, December 31,
2006 2005
Unaudited Audited
Contracts in progress $ 2,312,946 $ 769,322
Completed contracts 6,406,165 4,516,323
----------- -----------
$ 8,719,111 $ 5,285,645
Less: allowance for doubtful (74,891) (292,507)
accounts
----------- -----------
$ 8,644,220 $ 4,993,138
=========== ===========
7. CONTRACTS IN PROGRESS
At June 30, 2006 costs and estimated earnings in excess of billings and billings
in excess of costs and estimated earnings on uncompleted contracts consisted of
the following:
June 30, December 31,
2006 2005
Unaudited Audited
Costs incurred on uncompleted $ 3,731,728 $ 1,072,582
contracts
Profit earned to date 1,804,504 1,156,235
----------- -----------
5,536,232 $ 2,228,817
Less: Billings to date (6,061,160) (2,252,275)
----------- -----------
$ (524,928) $ (23,458)
=========== ===========
Included in the accompanying balance sheet at June 30, 2006 and December 31,
2005 under the following caption:
Billings in excess of costs and estimated earnings on uncompleted contracts.
June 30, December 31,
2006 2005
Unaudited Audited
Billings in excess from $(524,928) $ (23,458)
above
Time and material, prebilled (381,697) 0
--------- ---------
Net $(906,625) $ (23,458)
========= =========
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.
21
8. NOTES RECEIVABLE
On September 1, 2003 Global was tendered a $100,000 note receivable. The note
bears interest at 5%. The due date of the note has been amended to September 20,
2006. At June 30, 2006, the note, plus interest, was outstanding in the amount
of $114,151.
During the 4th quarter of 2005, a note receivable in the amount of $600,000 was
issued to the Company by Avolar Aero Lineas SA de CV. The due date of the note
has been extended to September 20, 2006. The note bears interest at 6.5% per
annum. At June 30, 2006, the balance due plus interest was $626,926.
On March 7, 2006, Global accepted a note from Aloha Airlines, Inc. in the amount
of $425,000, payable at $48,622.21 per month commencing April 2, 2006. The note
bears interest at 7.06% per annum. The final payment is due December 2, 2006.
Payments on this note are current and the principal due on this note was
$285,818.98 on June 30, 2006.
9. INVENTORY
Inventories consisted of the following:
June 30, December 31,
2006 2005
Unaudited Audited
Maintenance Hardware 508,334 $ 604,983
Parts for Resale 4,810,579 5,525,109
Aircraft & Engines 669,428 450,000
---------- ----------
$5,988,341 $6,580,092
========== ==========
Non-current inventories consisted of the following:
June 30, December 31,
2006 2005
Unaudited Audited
Maintenance Hardware $ 808,155 $ 767,657
Parts for Resale 1,760,240 1,419,686
Aircraft & Engines
---------- ----------
$2,568,395 $2,187,343
========== ==========
10. PROPERTY AND EQUIPMENT
June 30, December 31,
2006 2005
Unaudited Audited
Land and improvements $ 25,094 $ 25,094
Buildings and improvements 201,079 190,479
Vehicles 71,728 79,028
Computers and Software 312,495 306,164
Other office equipment 57,575 59,568
Machinery and equipment 2,068,449 2,023,994
---------- ----------
Sub Total $2,744,044 $2,684,327
Less accumulated depreciation 1,286,077 1,042,186
---------- ----------
Property and equipment, Net $1,457,967 $1,642,141
========== ==========
22
During the 2005, depreciation expense was $489,818 and depreciation expense was
$271,655 during the 1st half of 2006.
11. COMMITMENTS AND CONTINGENCIES
On December 9, 2005, Global Aircraft Solutions, Inc ("Global"), Hamilton
Aerospace Technologies, Inc. ("HAT"), a wholly owned subsidiary of Global
Aircraft Solutions, Inc. and World Jet Corporation, ("WJ") a wholly owned
subsidiary of Global Aircraft Solutions, Inc. (collectively the "Borrowers")
closed on a first Modification to the May 5, 2005 Initial Loan Agreement with
M&I Marshall & Ilsley Bank ("M&I Bank"). The modification increased the $2.5
million operating line of credit to $5 million ("Line of Credit"); added a
Guidance Line of Credit in the amount of $7 million ("Guidance Credit") solely
for the acquisition of aircraft and Letter of Credit Facilities in combined
amounts not to exceed $200,000.00. The interest rate on the Line of Credit was
reduced from 3.50% per annum to 3.00% per annum in excess of the applicable
LIBOR rate. At December the applicable interest rate was 7.39% per annum. The
interest rate on the Guidance Credit is also 3.00% per annum in excess of the
applicable LIBOR rate. The interest rate for each Letter of Credit Facility, if
drawn upon, shall also be 3.00% per annum in excess of the applicable LIBOR
rate. The Line of Credit and any Letter of Credit Facility remains secured by a
first priority lien on Global's, HAT's and WJ's personal property. Any advances
pursuant to the Guidance Credit shall be secured by a first priority lien on any
aircraft purchased with such advance. The term of the Line of Credit; the
Guidance Credit and the Letter of Credit Facility all expire on October 31, 2007
and the entire outstanding principal balance, all accrued and unpaid interest,
and all other sums due and payable under both the Line of Credit and Guidance
Credit shall be due on the expiration date.
While there is no required monthly repayment obligation of the Line of Credit,
the Line of Credit is based upon and limited by a borrowing base equal to the
sum of 80% of the outstanding amount of all Eligible Accounts as defined in the
Loan Agreement and 50% of the net book value of all Eligible Inventory as
defined in the Loan Agreement. While there is no required monthly repayment
obligation of the Guidance Credit, the Borrowers are required to repay, from
time to time, (i) an amount equal to any amount by which the outstanding
principal balance of the Guidance Credit exceeds $7 million, (ii) all amounts
received by Borrowers under any aircraft purchase agreement, other than an
initial down payment to the extent it does not exceed twenty-five percent (25%)
of the purchase price, and (iii) any portion of an advance or readvance not paid
within ninety (90) days of the advance or readvance. Borrowers are also
responsible to immediately repay to bank the amount of an advance upon any
breach of the aircraft purchase agreement. If any Letter of Credit Facility is
drawn upon, all principal and accrued and unpaid interest shall be due and
payable upon demand.
The Borrowers paid total fees and expenses of approximately $37,500.00 in
connection with the modification to the Line of Credit and addition of the
Guidance Credit and Letter of Credit Facility. The Borrowers will owe a loan fee
to the bank equal to 1% of the amount of any requested advance under the
Guidance Credit with a cap of $52,500.00 in cumulative fees. The Borrowers will
owe the bank a fee for the issuance of any Letter of Credit in the amount of 2%
of the amount of the letter of credit.
The balance due of the Line of Credit at June 30, 2006 was $4,811,929. The Line
of Credit also secures a Letter of Credit for $128,000, which was issued to TAA
as part of the lease agreement for the HAT facility. The total available credit
facility is $12,000,000 at December 31, 2005 subject to the borrowing base and
the Guidance Credit Line provisions that $7,000,000 be used for aircraft
purchases only.
At June 30, 2006, the Company is in compliance with the quick ratio (defined as
cash, liquid cash equivalents and accounts receivable, divided by current
liabilities) as per the new agreement. The ratio is to be at least .60 to 1. At
June 30, 2006 the ratio for the Company was .735 to 1.
12. RELATED PARTY TRANSACTIONS
BCI Aircraft Leasing, Inc., Global's partner in Jetglobal, see Note 4, accounted
for 25% of the Company's revenue during the first half of 2006, ended June 30,
2006. The account receivable balance due from BCI at June 30, 2006 was
$1,463,726. Jetglobal accounted for 6% of the Company's revenue during the first
half of 2006, ended June 30, 2006. The account receivable balance due form
Jetglobal at June 30, 2006 was $2,011,846.
13. SUBSEQUENT EVENTS
On July 6, 2006, Comvest Capital, LLC as "Lender", and Global Aircraft
Solutions, as "Borrower", entered into a subordinated loan agreement. Under the
loan agreement, the Company will be indebted to the Lender in the principal
amount of $2,800,000. The principal amount of the agreement is all due and
payable October 6, 2006 with interest payments due monthly on the last day of
each month in the amount of 15% of the outstanding balance. These funds were
borrowed for potential investment purposes, but as the investment did not
materialize, the company will repay the loan amount by due date.
23
To facilitate this loan agreement, on July 6, 2006, the Company and its wholly
owned subsidiaries Hamilton and WorldJet entered into a Subordination and
Intercreditor Agreement with M&I Marshall & Ilsley Bank (Lender) and Comvest
Capitlal, LLC, (Creditor).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements and information relating
to Global Aircraft Solutions, Inc. ("Global") and its wholly owned subsidiaries
Hamilton Aerospace Technologies Inc., "HAT", and World Jet Corporation, "World
Jet", that are based on the beliefs of our management as well as assumptions
made by and information currently available to our management. When used in this
report, the words "anticipate", "believe", "estimate", "expect", "intend",
"plan" and similar expressions, as they relate to Global, HAT, World Jet, or its
management, are intended to identify forward-looking statements. These
statements reflect management's current view of Global, HAT, and World Jet
concerning future events and are subject to certain risks, uncertainties and
assumptions, including among many others relating to our results of operations:
competitive factors, shifts in market demand, and other risks and uncertainties,
that may affect our ability to generate sufficient working capital to meet our
operating requirements and service our indebtedness, our ability to refinance
our secured debt, or to convert such debt to equity, maintaining good working
relationships with our vendors and customers, our ability to attract and retain
qualified personnel, future terrorist-related activities, economic factors that
affect the aviation industry, changes in government regulation, increases in
fuel prices, and the overall economy. Should any of the assumptions underlying a
forward-looking statement prove incorrect, actual results could differ
materially from those anticipated.
PART 1
The following discussion and analysis should be read in conjunction with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations in our annual report on form 10-KSB for
2005. Global Aircraft Solutions, Inc. ("Global"), formerly Renegade Venture
(Nev.) Corporation, 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 the symbol
GACF. On May 2, 2002, Global acquired newly formed aviation company Hamilton
Aerospace Technologies, Inc., a Delaware corporation ("HAT") in a
stock-for-stock exchange. HAT was formed on April 5, 2002, to create a premier
provider of large aircraft maintenance, repair, overhaul and modification
("MRO") services to owners and operations of certain Transport Category
commercial jet aircraft. Its customers are all aircraft operators, including
passenger and cargo air carriers, and aircraft leasing companies. On July 25,
2004, Global acquired 100 percent of the common stock of World Jet Corporation
("World Jet"), a privately owned Nevada corporation. World Jet, incorporated in
1997, is an aviation parts sales company servicing aircraft operators, aircraft
leasing companies and MRO facilities. The acquisition of World Jet had an
effective transaction date of January 1, 2004 and the World Jet results of
operations are included in all quarters of calendar year 2004.
Global's plan of operation for the immediate future includes seeking and
acquiring, if possible, aviation industry related businesses to complement its
HAT and World Jet subsidiaries. Additionally, the Company will seek to expand
HAT and World Jet by organic growth. The Company will also endeavor to grow the
aircraft trading segment of its business. Global will not limit its search for
business combination candidates to any particular geographical area. Management
of Global will seek combination candidates in the United States and other
countries, as available time and resources permit, through existing associations
and by word of mouth. This plan of operation has been adopted in order to
attempt to increase value for Global's shareholders.
Company management has rejected a policy of growth for growth's sake in favor of
focusing on profitability and building a good reputation for the Company and its
subsidiaries by limiting contracts to those perceived to have a high probability
of success. This strategy is also 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; and expedited delivery of parts at a competitive price leads
to greater volume of parts sales. 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. The Company is focused on maintaining
a small, but tightly knit and multi-tasking, highly experienced management team.
24
In the United States, the Federal Aviation Administration (FAA) regulates the
manufacture, repair, overhaul and operation all aircraft and aircraft equipment
operated in the U.S. The FAA must certify each authorized repair station, and
certified facilities are issued an Air Agency Certificate. Each certificate
contains rating and limitations that specifically authorize the repair station
to only perform certain types of services on specific makes and models of
aircraft. Aircraft maintenance and modification is a highly regulated industry,
and 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 very positive 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.
World Jet is a seller/broker of aircraft parts which is not an operation or
activity which is regulated by the FAA or any other governing body or
governmental agency; however, any aircraft parts sold by World Jet must be
accompanied by documentation verifying that such part is traceable to either an
FAA approved manufacturer, overhaul or repair facility, or an FAA certificated
operator. In furtherance of satisfying customers that World Jet does sell and
broker parts that are traceable to FAA certification, World Jet voluntarily
participates in the Airline Suppliers Association which requires an annual audit
of suppliers of aircraft parts to verify that such supplier maintains the proper
traceability documents, properly tags aircraft parts in support of such
traceability and maintains proper packaging and storage of aircraft parts. In
addition to the foregoing, World Jet also certifies to each customer that any
part or material sold was not involved in any incident and is not government
surplus.
Global's aircraft trading represents a significant niche in our business.
Successful efforts in this area will go a long way to building our company.
During 2005, aircraft trading accounted for 19% of the Company's revenue. The
considerable impact that can be made through growth of aircraft trading is
evident when you consider that fewer than 10 transactions took place in our
aircraft trading segment, (which excludes any Jetglobal activity), during the
year ended December 31, 2005. During the first half of 2006 aircraft trading
accounted for 15% of Company revenues. Obviously, there is opportunity for a
positive synergistic increase in MRO revenue and part sales revenue related to
those aircraft traded with both new and continuing customers. In addition to the
in-house aircraft trading, activities during the first half of 2006 for
Jetglobal resulted in $7,291,442 sales, which are accounted for by the Company
by use of the equity method. Global's share of Jetglobal net income was
$923,121.
HAT competes principally on the high quality of its services and its price
competitiveness due to its location in the Southwest. Location related benefits
include low labor rates; a dry, mild climate enabling HAT to do many MRO
projects outdoors; and low overhead. World Jet competes on price competitiveness
and expedited delivery of parts. World Jet has spent years acquiring inventories
at deep discounts and this inventory is the type HAT uses on a daily basis.
World Jet's customer base includes airlines, aircraft leasing companies and MRO
facilities. The large aircraft repair business and the aircraft parts sales
business are highly competitive. Revenues are sensitive to adverse changes in
the air carrier business, with factors such as airline profit levels, changes in
fuel costs, average fare levels, and passenger demand. 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 and World Jet's services.
RECENT DEVELOPMENTS AFFECTING OUR OPERATIONS
The continued alerts by the U.S. Department of Homeland Security and fears of
new terrorist attacks, the U.S.-led invasion of Iraq, high fuel costs and the
general state of the economy could quite possibly produce negative impact on the
aviation industry.
RESULTS OF OPERATIONS
As a holding company, the bulk of our day-to-day operations are currently and
were as of June 30,2006, conducted by our operating subsidiaries, HAT, which was
organized on April 5, 2002 and began operations on April 15, 2002, and World
Jet, which was acquired July 25, 2004, with an effective date of January 1,
2004. Our in-house aircraft trading transactions were conducted by the parent
company Global Aircraft Solutions, Inc. Jetglobal, LLC, also conducts aircraft
trading which benefits the Company in the amount of 30% of the profits earned.
(see Note 4 in the notes to the financial statements included in this filing.)
OPERATING SEGMENTS
See Note 3 to the Condensed Consolidated Financial Statements for certain
segment and geographic financial data relating to our business. The Company has
divided its operations into the following reportable segments: Aircraft
maintenance, repair, and overhaul; aircraft trading (i.e. aircraft brokerage and
/or the purchase for resale or lease of aircraft and /or aircraft engines; and
part sales. All aircraft maintenance, repair and overhaul is performed at HAT.
Beginning January 1, 2005, all aircraft trading has been done through Global.
Prior to that date all aircraft trading transactions were handled through HAT.
Subsequent to its acquisition in January 2004, substantially all part sales were
done by the Company's wholly owned subsidiary, World Jet.
25
HAT operating revenues consist primarily of service revenues and sales of
materials consumed while providing services. World Jet revenues consist
primarily of sales of aircraft parts. Cost of sales consists primarily of labor
and materials, cost of parts and freight charges. Global revenues consist of
revenues derived from aircraft trading. Operating results have fluctuated in the
past and may fluctuate significantly in the future. Many factors affect our
operating results, including timing of repair orders and payments from large
customers, competition from other third-party MRO service providers, the state
of the aviation industry and the number of customers seeking services, the
impact of fixed pricing on gross margins and our ability to accurately project
our costs, our ability to obtain financing and other factors.
Significant portions of our operating expenses, such as insurance, rent, debt
payments, certain salaries and such, are relatively fixed. Since we typically do
not obtain long-term commitments from our customers, we must anticipate the
future volume of orders based upon the historic patterns of our customers and
upon discussions with our customers as to their future requirements.
Cancellations, reductions or delays in orders by a customer or group of
customers could have a material adverse effect on our business, financial
condition and results of operations.
Net sales for the three months ended June 30, 2006 increased $1.4 million, or
15.5%, to $10.2 million from $8.8 million for the three months ended June 30,
2005. The increases were due to increases in the segments of Hamilton Aerospace
Technologies and Global Aircraft Trading.
Net sales for the six months ended June 30, 2006 increased $4.2 million, or
24.2%, to $21.7 million from $17.5 million for the six months ended June 30,
2005. The reasons for the increase in net sales for the six months ended June
30, 2006 compared to the comparable period of the prior year, was due to the
reasons described above.
Cost of sales consists of costs of inventory sold for World Jet, time and
materials for HAT and aircraft purchase price for Global aircraft trading.
Cost of sales for the three months ended June 30, 2006 increased $1.4 million,
or 21.8%, to $7.8 million from $6.4 million for the three months ended June 30,
2005. Cost of sales for the six months ended June 30, 2006 increased $2.6
million, or 20.7%, to $21.7 million from $17.5 million in the prior year period
ended June 30, 2005. Cost of sales for the three and six months ended June 30,
2006 increased compared to the prior year as a result of increase in net sales.
Cost of sales for Global for the six-month period ending June 30, 2006 includes
the cost of an engine in the amount of $686,710. This engine had to be purchased
to replace one damaged during shipping. The company has initiated a suit to
recover this amount from the freight company involved and has made a claim
against our insurance. If the claim is accepted for the full amount, the profit
before tax would have been over $2.0 million.
Gross profit for the three months ended June 30, 2006 of $2.4 million exceeded
the prior year quarter gross profit by $32,000. The sales from Jetglobal are
not reflected in the Net Sales of Global Aircraft Solutions, as Global is 30%
beneficiary of the venture. The income from Jetglobal is shown as "Equity in
income of unconsolidated affiliates". For the quarter ended June 30, 2006 the
"Equity in income of unconsolidated affiliates" from Jetglobal is $968,933.
Gross profit levels during any particular period are dependent upon the number
and type of aircraft serviced, the contract terms under which services are
performed and the efficiencies that can be obtained in the performance of such
services. Significant changes in any one of these factors could have a material
impact on the amount and percentage of gross profits. Additionally, gross profit
could be impacted in the future by considerations as to the value of our
inventory.
While the Company aggressively seizes revenue-producing opportunities such as
aircraft sales, management gauges results by looking at what historically has
been the core revenue producing activity, the sale of labor hours. In the first
half of 2005, revenue produced from labor was $7,947,876 as compared with
$8,158,106 the first half of 2006. This represents an increase of 3%. The
comparative costs for all direct labor, including work performed by outside
contractors, was $4,797,509 in the first half of 2005 compared with $5,043,471
for the same period in 2006. All direct labor costs were 45% of total sales in
first half of 2005 compared with 38% in the first half of 2006. The relationship
between direct labor costs and direct labor revenues rose 2% from 2005 to 2006.
Direct labor percentages will always vary to some degree due to the nature of
flat-rate bidding as opposed to billing for all time and materials. Also, a
substantial sudden increase in volume can be expected to have a temporary impact
on efficiencies and are viewed by Management as a temporary consequence of
growth. Management is confident that adjustments to increased volume will be
made and profitability will benefit over time.
Selling, general and administrative expenses for the three months ended June 30,
2006 decreased as percentage to sales to 18% from 19.7% in three months ended
June 30, 2005. Selling, general and administrative expenses for the six months
ended June 30, 2006 decreased as percentage to sales to 17.5% from 19.3% in six
months ended June 30, 2005.
Interest expense for the Company, during the first half of 2006, was $231.868.
Management is cautiously optimistic that our adeptness at garnering jobs with
the likelihood of similar high gross profit potential and our continued
vigilance at holding down costs will be sustainable for the remainder of 2006.
HAT's option of being selective in the work booked is due to their growing
reputation for providing quality, on-budget, on-time deliveries to their
customers. HAT and World Jet are experiencing success in securing new customers
26
and securing more business from existing customers as well. Global has
experienced some success in branching out into the aircraft trading arena and
Management believes this segment will experience increasing growth and profits
during the last half of 2006 and into the future.
The following tables depict our pre-tax operating profit for the second quarter
of 2005 and for the second quarter of 2006 on a stand-alone basis and a
consolidated for Global, HAT and World Jet:
2nd Quarter 2005
Global HAT World Jet Intercompany Consolidated
Stand-Alone Stand-Alone Stand-Alone Eliminations
Revenues 1,420,000 6,364,608 2,092,211 1,047,441 8,829,378
Less: Cost of sales 750,068 5,169,421 1,558,291 1,047,441 6,430,339
Less: Expenses 373,059 1,124,751 241,237 1,739,047
Pre-tax Operating Profit 296,873 70,436 292,683 659,992
(Loss)
2nd Quarter 2006
Global HAT World Jet Intercompany Consolidated
Stand-Alone Stand-Alone Stand-Alone Eliminations
Revenues 1,300,000 7,788,142 3,187,544 2,077,035 10,198,651
Less: Cost of sales 1,574,485 5,841,501 2,429,094 2,077,035 7,768,045
Less: Expenses 658,864 711,683 471,895 1,842,442
Pre-tax Operating Profit (933,349) 1,234,958 286,555 588,164
(Loss) 286,555
The cost of sales in Global exceeds the revenues because it includes a one-time
engine purchase of $678K as discussed in the cost of sales comments above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
On December 9, 2005, Global Aircraft Solutions, Inc ("Global"), Hamilton
Aerospace Technologies, Inc. ("HAT"), a wholly owned subsidiary of Global
Aircraft Solutions, Inc. and World Jet Corporation, ("WJ") a wholly owned
subsidiary of Global Aircraft Solutions, Inc. (collectively the "Borrowers")
closed on a first Modification to the May 5, 2005 Initial Loan Agreement with
M&I Marshall & Ilsley Bank ("M&I Bank"). The modification increased the $2.5
million operating line of credit to $5 million ("Line of Credit"); added a
Guidance Line of Credit in the amount of $7 million ("Guidance Credit") solely
for the acquisition of aircraft and Letter of Credit Facilities in combined
amounts not to exceed $200,000.00. The interest rate on the Line of Credit was
reduced from 3.50% per annum to 3.00% per annum in excess of the applicable
LIBOR rate. The interest rate at December 31, 2005 was 7.39% per annum. The
interest rate on the Guidance Credit is also 3.00% per annum in excess of the
27
applicable LIBOR rate. The interest rate for each Letter of Credit Facility, if
drawn upon, shall also be 3.00% per annum in excess of the applicable LIBOR
rate. The Line of Credit and any Letter of Credit Facility remains secured by a
first priority lien on Global's, HAT's and WJ's personal property. Any advances
pursuant to the Guidance Credit shall be secured by a first priority lien on any
aircraft purchased with such advance. The term of the Line of Credit; the
Guidance Credit and the Letter of Credit Facility all expire on October 31, 2007
and the entire outstanding principal balance, all accrued and unpaid interest,
and all other sums due and payable under both the Line of Credit and Guidance
Credit shall be due on the expiration date.
While there is no required monthly repayment obligation of the Line of Credit,
the Line of Credit is based upon and limited by a borrowing base equal to the
sum of 80% of the outstanding amount of all Eligible Accounts as defined in the
Loan Agreement and 50% of the net book value of all Eligible Inventory as
defined in the Loan Agreement. While there is no required monthly repayment
obligation of the Guidance Credit, the Borrowers are required to repay, from
time to time, (i) an amount equal to any amount by which the outstanding
principal balance of the Guidance Credit exceeds $7 million, (ii) all amounts
received by Borrowers under any aircraft purchase agreement, other than an
initial down payment to the extent it does not exceed twenty-five percent (25%)
of the purchase price, and (iii) any portion of an advance or readvance not paid
within ninety (90) days of the advance or readvance. Borrowers are also
responsible to immediately repay to bank the amount of an advance upon any
breach of the aircraft purchase agreement. If any Letter of Credit Facility is
drawn upon, all principal and accrued and unpaid interest shall be due and
payable upon demand.
The Borrowers paid total fees and expenses of approximately $37,500.00 in
connection with the modification to the Line of Credit and addition of the
Guidance Credit and Letter of Credit Facility. The Borrowers will owe a loan fee
to the bank equal to 1% of the amount of any requested advance under the
Guidance Credit with a cap of $52,500.00 in cumulative fees. The Borrowers will
owe the bank a fee for the issuance of any Letter of Credit in the amount of 2%
of the amount of the letter of credit. The balance due of the Line of Credit at
June 30, 2006 was $4,811,929. The Line of Credit also secures a Letter of Credit
for $128,000 which was issued to TAA as part of the lease agreement for the HAT
facility.
Also see Note 13, Subsequent Events, of the Financial Statements that are
included in this filing.
Our ability to make payments of principal and interest on outstanding debt will
depend upon our future operating performance, which will be subject to economic,
financial, competitive and other factors, some of which are beyond our control.
Our ability to repay our indebtedness is dependent on several factors: our
continued ability to secure high profit margin jobs, more fully utilizing our
capacities, creating a higher bottom line and consequently more cash; and our
ability to establish revolving credit lines, which we can draw on as needed.
Significant changes in the Company's Balance Sheet for the quarter ended June
30, 2006 were as follows:
Total assets increased from $25,031,498 at March 31, 2006 to
$28,503,780 at June 30, 2006. Significant changes for the period were:
Cash on hand decreased $119,329.
Accounts receivable increased $2,927,065.
Notes receivable decreased $843,935 during the second quarter
of 2006. Most of this difference was due to Falcon Air Express
returning engines to satisfy the balance of their note in the
amount of $669,428.
Costs and expenses on uncompleted contracts in excess of
billings decreased $984,067.
Equity in net assets of or advances to affiliates increased
$2,648,873. During the quarter the Jetglobal partners agreed
that $1,975,000 previously shown as a payment by Jetglobal to
Global should actually be taken as a contra against BCI's
account receivable.
The Company's second quarter Balance Sheet reflects the
reclassification of $2,568,395 of inventory to inventory,
noncurrent. This number largely represents unsold World Jet
inventory acquired as part of the World Jet purchase on
January 1, 2004
During the second quarter of 2006, total liabilities increased from
$9,807,548 at March 31, 2006 to $12,000,050 at June 30, 2006, primarily
due to:
Accounts payable increased over the March 31, 2006 balance by
$856,117.
Billings in excess of costs and expenses on uncompleted
contracts increased $906,625.
Accrued liabilities increased $191,027 reflecting the
increased outstanding accrued payroll due to the scheduled
timing of check issuance.
Income taxes payable increased $541,547.
28
Cash
As of June 30, 2006 we had $176,419 in cash on hand and approximately $8,644,220
in collectible receivables. Management believes that anticipated cash flows will
be adequate to sufficiently provide working capital. We cannot assure you that
financing alternatives will be available to us in the future to support our
working capital requirements.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60 of the SEC encourages all companies to
include a discussion of critical accounting policies or methods used in the
preparation of the financial statements. Our consolidated financial statements
filed as part of this annual report include a summary of the significant
accounting policies and methods used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION. We recognize revenues related to engine overhaul services
when we ship the overhauled engine. Revenues from fixed-fee contracts for MRO
sales are recognized on 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. Revision in
cost and labor hour estimates and recognition of losses on these contracts are
reflected in the accounting period in which the facts become known. Revenues
from time and material contracts are recognized as the services are performed.
Revenues from part sales are recognized when parts are shipped.
USE OF ESTIMATES. Management's Discussion and Analysis of Financial Condition or
Plan of Operation is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. Management evaluates these estimates on an
on-going basis, including those related to estimated losses on disposal of
discontinued operations, the allowance to reduce inventory to the lower of cost
or net realizable value, the estimated profit recognized as aircraft
maintenance, design and construction services are performed, the allowance for
doubtful accounts and notes receivable, future cash flows in support of long
lived assets, medical benefit accruals, and the estimated fair values of
facilities under capital leases. Management bases its estimates on historical
experience and on various other assumptions that they believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential losses arising from changes in interest
rates, foreign currency fluctuations and exchange rates, equity prices and
commodity prices including the correlation among these factors and their
volatility. The Company is primarily exposed to interest rate risk. Though the
Company sells to foreign customers, all transactions are conducted and
enumerated in U.S. dollars.
Interest Rate Risk
Changes in interest rates may result in changes in the fair market value of the
Company's financial instruments, interest income and interest expense. The
Company does not have a cash equivalent investment portfolio therefore, the
29
Company's financial instruments that are exposed to interest rate risk would be
in the nature of long-term borrowings. Our current borrowings are in the nature
of a Line of Credit that is due and payable on or before October 31, 2007. This
Line of Credit is discussed in detail above under the heading "Liquidity".
Management believes that a hypothetical 10% movement in interest rates would not
have a material impact on the Company's future earnings or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within 90 days of filing this report on Form 10-Q (the "Evaluation Date"),
our Chief Financial Officer and Chief Executive Officer, together with HAT's
President and Principal Financial and Accounting Officer, evaluated our
disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based on that evaluation, these officers have concluded that as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to material information relating to our company (including our
consolidated subsidiaries) required to be included in our reports filed or
submitted by us under the Exchange Act.
(b) There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation.
PART II. OTHER INFORMATION
ITEM 5. OTHER ITEMS
None
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of Principal Executive Officer, Mr. Ian
Herman
31.2 Certification of President and Chief Operating
Officer, Mr. John B. Sawyer
31.3 Certification of CFO and Principal Financial Officer,
Govindarajan Sankar
32.1 Certification of Mr. Ian M. Herman, Chief Executive
Officer
SIGNATURES
In accordance with the requirements of the Exchange act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized individual.
Date: August 14, 2006
GLOBAL AIRCRAFT SOLUTIONS, INC.
By: /s/ Ian Herman
---------------------------------
Ian Herman,
Chief Executive Officer
In accordance with the requirements of the Exchange act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized individual.
Date: August 14, 2006
GLOBAL AIRCRAFT SOLUTIONS, INC.
By: /s/ Raj Sankar
---------------------------------
Raj Sankar,
Chief Financial Officer
30