GLOBAL AIRCRAFT SOLUTIONS, INC.
Mailing Address: P.O. BOX 23009,
Tucson, Arizona 85734-3009 U.S.A.
Phone (520) 294-3481
Fax (520) 741-1430
www.globalaircraftsolutions.com
PROSPECTUS SUPPLEMENT NO. 3 DATED FEBRUARY 28, 2008
(To Prospectus Dated February 8, 2006)
Trading Symbol - GACF.OB (OTCBB Market)
This prospectus relates to the resale by selling shareholders of Global Aircraft
Solutions, Inc. ("Global" or "Company") of a total of 20,343,215 shares of
common stock of the Company issued by us in private transactions exempt from
registration with the SEC pursuant to Rule 506 under Regulation D as promulgated
by the SEC Act 1933 and a total of 10,887,865 shares of common stock of the
Company issueable upon exercise of all issued and outstanding warrants held by
the selling shareholders. The shares of common stock are being offered for sale
by the selling shareholders at prices established on the Over-the-Counter
Bulletin Board during the term of this offering. On February 1, 2008, the last
reported sale price of our common stock was $0.42 per share. These prices will
fluctuate based on the demand for the shares of common stock.
The selling shareholders named in this prospectus are offering all of the
31,348,080 shares of common stock offered through this prospectus. We will not
receive any of the proceeds from the sale of the 12,715,386 shares of common
stock by the selling shareholders. However, the Company may receive proceeds
from the exercise of any of the 18,632,694 warrants issued unless the warrant
holders elect to implement the cashless exercise option that is available for
any warrants exercised prior to the existence of an effective registration
statement with respect to such underlying shares. (See Section entitled "Use of
Proceeds" and "Offering").
This offering and an investment in our shares involves a high degree of risk and
is suitable only for those persons with substantial financial resources in
relation to their investment and who understand the particular risks of this
investment. Please see "Risk Factors" on pages 9-13 to read about factors you
should consider carefully before buying our shares.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this Prospectus Supplement (or the Original
Prospectus, as previously supplemented) is truthful or complete. Any
representation to the contrary is a criminal offense.
Page 1
TABLE OF CONTENTS
SUMMARY........................................................................3
OFFERING.......................................................................7
RISK FACTORS...................................................................9
FORWARD LOOKING STATEMENTS....................................................14
USE OF PROCEEDS...............................................................14
DIVIDEND POLICY...............................................................15
DILUTION......................................................................15
SELLING SHAREHOLDERS..........................................................16
PLAN OF DISTRIBUTION..........................................................19
LEGAL PROCEEDINGS.............................................................20
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................23
DESCRIPTION OF SECURITIES.....................................................25
INTEREST OF NAMED EXPERTS AND COUNSEL.........................................25
DISCLOSURE OF COMMISSION POSITION FOR SECURITIES ACT LIABILITY................25
ORGANIZATION WITHIN THE LAST FIVE YEARS.......................................25
DESCRIPTION OF BUSINESS.......................................................26
MANAGEMENT DISCUSSION AND ANALYSIS............................................36
DESCRIPTION OF PROPERTY.......................................................54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................54
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................54
EXECUTIVE COMPENSATION........................................................55
COMPENSATION DISCUSSION & ANALYSIS ...........................................55
FINANCIAL STATEMENTS..........................................................59
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTANT CONTROL
AND FINANCIAL DISCLOSURE......................................................59
FURTHER INFORMATION...........................................................60
Page 2
SUMMARY
Global Aircraft Solutions, Inc. ("Global" or "Company") was incorporated in
Nevada on September 5, 1997. Our principal office is located at 6901 S. Park
Ave., Tucson, AZ 85706. 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. On April 12, 2002, Global
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 Global
(he has since resigned). Mr. Brasher was also a principal stockholder of Global
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 May 2, 2002, Global acquired newly formed Hamilton Aerospace Technologies,
Inc., a Delaware corporation, located at 6901 S. Park Ave., Tucson, AZ 85706
("HAT") in a stock-for-stock exchange. HAT was formed on April 5, 2002 and
commenced operations on April 15, 2002, to create a premier 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, including passenger and cargo air carriers, and aircraft leasing
companies. In conjunction with commencing operations on April 15, 2002, HAT
entered into an agreement to purchase the operating assets and inventory from an
existing MRO, Hamilton Aviation ("Sale of Assets Agreement") as well as entering
into a Lease/Purchase Agreement with Hamilton Aviation for the same assets so
that HAT could commence operations pending a closing of the Sale of Assets
Agreement ("Lease Agreement"). Shortly after entering into this Sale of Assets
Agreement, Hamilton Aviation filed for reorganization under Chapter 11 of the
United States Bankruptcy Code. The Sale of Assets Agreement was submitted to the
Bankruptcy Estate for approval as part of Hamilton Aviation's plan of
reorganization; and pending the Bankruptcy Estate's review and acceptance of the
Sale of Assets Agreement and such plan of reorganization, HAT and Hamilton
entered into an interim agreement whereby HAT agreed to assume Hamilton
Aviation's service contracts pending approval of the Sale of Assets Agreement.
During the Bankruptcy Estate's review of the Sale of Assets Agreement and plan
of reorganization, HAT and Hamilton renegotiated the terms and purchase price of
the Sale of Assets Agreement; and in March 2004, the modified Sale of Assets
Agreement was approved by the Bankruptcy Estate and memorialized and finalized
by the entry of a Settlement Agreement among HAT, Hamilton Aviation and the
Bankruptcy Estate. This Settlement Agreement was then confirmed by Order of the
Bankruptcy Court dated May 6, 2004.
On July 15, 2004, Global acquired World Jet Corporation ("World Jet") a
privately owned Nevada corporation, located at 6900 S. Park Ave., Tucson, AZ
85706 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 note, 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 including the income tax liability for
World Jet fiscal 2003. World Jet is an aircraft parts sales and aircraft parts
brokerage facility servicing aircraft operators, aircraft leasing companies and
MRO facilities. Tucson, Arizona is the only workplace for Global, HAT and World
Jet.
On August 26, 2005, Global together with BCI Aircraft Leasing, ("BCI"), formed a
joint venture Delaware limited liability company called Jetglobal, LLC. 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
Global will be 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
has a 30% membership interest, it is only responsible for 25% of the costs and
expenses associated with Jetglobal including any business transactions.
During the year ended December 31, 2005, 73% of the Company's operations were
conducted by two operating subsidiaries: HAT which accounted for approximately
56% of the Company's revenue and Word Jet which accounted for approximately 17%
of the Company's revenue. The Company's share of Jetglobal 2005 net income was
over $1,000,000. Global contributed 27% of the Company's revenue through its
entrance into the aircraft trading venue. In addition to the operating expenses
incurred by Global for administrative, legal and accounting functions associated
with Global managing the shares of its wholly owned subsidiaries as well as all
activities related to capitalizing and maintaining adequate capitalization
levels for its subsidiaries, Global, beginning in 2005, also reports expenses
generated in the pursuit of aircraft trading.
Page 3
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 of the Company's aircraft
trading has been done through Global. (the Company's partnership, Jetglobal ,
also did aircraft trading). 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.
During 2006, the Company formed Mexican corporation, Hamilton Aerospace Mexico,
S. A. de C.V. for the purpose of satisfying governmental requirements of the
country of Mexico associated with HAT's Tijuana operation and the servicing of
Mexican airline, Avolar Aerolineas.
During the year ended December 31, 2006, 87% of the Company's operations were
conducted by two operating subsidiaries: HAT which accounted for approximately
75% of the Company's revenue and Word Jet which accounted for approximately 12%
of the Company's revenue. The Company's share of Jetglobal 2006 net income was
approximately $1,700,000. Global contributed 13% of the Company's revenue
through its aircraft-trading venue. In addition to the operating expenses
incurred by Global for administrative, legal and accounting functions associated
with Global managing the shares of its wholly owned subsidiaries as well as all
activities related to capitalizing and maintaining adequate capitalization
levels for its subsidiaries, Global, beginning in 2005, also reports expenses
generated in the pursuit of aircraft trading.
OPERATING SEGMENTS
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 of the Company's aircraft
trading has been done through Global. (the Company's partnership, Jetglobal ,
also did aircraft trading). 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.
On March 13, 2007, the Company entered into an exclusive service agreement with,
Global Aircraft Leasing Partners ("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. Global and GALP originally entered into a strategic alliance wherein
Global would acquire a 20% interest in GALP in exchange for a capital
contribution of $20,000, together with infrastructure, industry expertise,
management assistance, and other non-monetary contributions. At June 30, 2007,
negotiations were still being conducted to establish an operating agreement for
GALP, as well as to make final determination as to the Company's percentage of
interest, which may be finalized at either the initial 20% or at 40%, depending
on the result of those negotiations. The Company had not made any capital
contribution as of June 30, 2007 and consequently was not a participating member
of GALP during the period covered by these financial statements. Global will
specifically not be required to invest capital in aircraft acquired by GALP.
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.
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2005:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2005 Revenues 11,396,538 23,505,112 10,622,681 (4,295,683) 41,228,648
Year End Cost of Sales (7,930,337) (19,594,059) (7,829,248) 4,295,683 (31,057,961)
Results Expenses (2,489,347) (3,692,489) (1,599,557) (7,781,393)
Operating
Profit (Loss) 976,854 218,564 1,193,876 2,389,294
Page 4
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2004:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2004 Revenues 1,047,680 25,288,888 7,058,464 (2,543,914) 30,851,118
Year End Cost of Sales (456,643) (20,871,009) (5,411,688) 2,543,914 (24,195,426)
Results Expenses (1,524,055) (2,873,658) (937,209) (5,334,922)
Operating Profit 933,018 1,544,221 709,567 1,320,770
(Loss)
2005 - 2006
During 2006, revenues were $34,542,195 which represents a decrease of 16.2% from
2005`s figure of $41,228,648. (see following paragraph regarding Jetglobal
revenue). The Company had $3.123 million in net income in 2005 and $.826 million
in 2006; and EBITDA decreased from $4,528,655 in 2005 to 2,468,664 in 2006. A
decline from 2005`s $2,389,294 in 2006 resulted in a loss from operations of
$2,109.
It should be noted that the required accounting treatment for Jetglobal's
results is an entry on the Company's Income Statement for the Company's
percentage of the net income of the Jetglobal partnership. During 2005,
Jetglobal had a sale rescinded due to a customer canceling a sales agreement.
This sale was guaranteed by Jetglobal's other partner. This other partner and
Global entered into an agreement in 2005 wherein Global sold its interest in the
four aircraft that were part of the 2005 rescinded transaction to its Jetglobal
partner, BCI, at a price of $1,957,692 and a profit of $1,096,154.. The cost for
the aircraft was the original Jetglobal acquisition cost. Global transferred all
of its rights in the four aircraft from Jetglobal to BCI. Because the aircraft
were sold to the controlling owner, BCI, the sale was effectively accounted for
by Jetglobal as a distribution of the aircraft to the controlling owner. During
early 2007, the Company has embarked on a new partnership that will be involved
with aircraft leasing, (see Subsequent Events section of the Financial
Statements included with this filing). Those who look to revenue growth as the
fundamental indication of a company's success and growth need to be aware that
no matter how much revenue is generated by trading partners in which we have
minority interest and no control over management, no increase in revenue will be
shown on the Company's results. Net income, however, will reflect the Company's
percentage of the net income of trading partners.
Efforts to take advantage of opportunities, as they arose, to grow our aircraft
trading business met with some success. Aircraft trading denotes the purchase
and resale or lease, for profit, of aircraft, aircraft engines, and /or other
aircraft major components. Aircraft trading specifically encompasses the
transactions representing approximately 9% of the Company's 2006 annual revenue.
This aircraft trading was done directly by the Company without Jetglobal
participation. Aircraft sales in 2006 were $3.175 compared with $13.6 million in
2005. Gross profit during the fourth quarter of 2006 was $49,338. Gross profit
for the fourth quarter of 2005 was $2,307,561.
While the Company aggressively seizes revenue-producing opportunities such as
aircraft trading, management gauges results by looking at what has been the core
revenue producing activity to date, the sale of labor hours. In 2006, revenue
produced from labor was $14.3 million and was virtually the same in 2005 at
$14.3 million. Billable hours for each period are essentially the same. The
comparative costs for all direct labor, including work performed by outside
contractors, was $8,945,712 in 2006 compared with $9,190,898 in 2005,
representing a 3% decrease in cost. The relationship between direct labor costs
to direct labor revenues decreased approximately 2% to about 62% in 2006 as
compared with 64% in 2005. 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. Included in the operating expenses for the Company in the years
ended December 31,2006 and December 31, 2005 are $617,459 and $326,594,
respectively, associated with the award of stock and stock options.
Page 5
Company SG&A expenses in 2006 were $8,591,738 and as a percentage of revenue
were 25%. In 2005, SG&A expenses were $7,780,332, which was 19% as a percentage
of revenues. During 2006, SG&A expenses included approximately $669,500 due to
commissions related to aircraft sales transactions compared with $1,260,000 in
2005. Other notable increases in SG&A expenses included:
Our World Jet subsidiary had an increase in SG&A of $267,421 the largest
part of which was associated with the movement of inventory to its new
location at 7001 South Park coupled with the counting and
classification, prior to the 2007 audit of the balance of the inventory
purchased from Jetglobal.
Global had a significant increase in professional fees in the amount of
$618,000 over the 2005. Approximately $96,900 was related to auditing
and accounting fees.
Interest expense for 2006 was $587,183 and for 2005 was it was $386,927.
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2006:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2006 Revenues 4,475,000 26,058,040 10,591,165 (6,582,010) 34,542,195
Year End Cost of Sales (3,489,909) (20,929,517) (8,103,408) 6,582,010 (25,940,824)
Results Expenses (3,394,122) (3,342,380) (1,866,978) (8,603,480)
Operating Profit (2,409,031) 1,786,143 620,779 (2,109)
(Loss)
o The "Eliminate" column reflects the $ amounts of Inter-Company Sales by
World Jet to HAT in 2006.
o On a consolidated basis Revenues and Cost of Sales are reduced to reflect
the Revenues and Cost of Sales for external sales only, with a zero $
impact on stand alone or consolidated profit (loss) figures.
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2005:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2005 Revenues 11,396,538 23,505,112 10,622,681 (4,295,683) 41,228,648
Year End Cost of Sales (7,930,337) (19,594,059) (7,829,248) 4,295,683 (31,057,961)
Results Expenses (2,489,347) (3,692,489) (1,599,557) (7,781,393)
Operating Profit 976,854 218,564 1,193,876 2,389,294
(Loss)
Page 6
The current registration includes 12,715,386 shares of common stock of the
Company that have been issued pursuant to a private placement exempt from
registration with the SEC pursuant to Rule 506 under Regulation D as promulgated
by the SEC pursuant to Section 4(2), and 18,632,694 shares of common stock of
the Company issueable upon exercise of warrants 7,200,000 of which were
exercised by selling shareholder Barron on July 27, 2005; 399,000 of which were
exercised by selling shareholder JG Capital on September 20, 2005 and 22,812
which were exercised by selling shareholder Grushko on September 14, 2005 (2).
If all warrants are exercised, the number of shares of common stock the Company
is registering (31,348,080) will represent 63.6% of the authorized and
outstanding shares of common stock of the Company.
Unless otherwise indicated, "Global Aircraft Solutions, Inc." "we", "us" "our"
"Company" refer to Global Aircraft Solutions, Inc. and its subsidiaries.
OFFERING
Securities Being Offered 20,343,215 shares of common stock (1) and up to 10,887,865 shares of
common stock upon the exercise of all warrants (2).
Securities Issued
and to be Issued 40,181,301 shares of common stock were issued and outstanding as of
the date of this prospectus and an additional 10,887,865 shares of
common stock will be issued and outstanding if all warrants are
exercised (3). Also see footnote (2)
Use of Proceeds We will not receive any proceeds from the sale of the private
placement issue of (i) 18,799,000 shares of common stock by the
selling shareholders, Contrarion Equity Fund, LP ("CEF"), CRT Capital
Group, LLC ("CRT"), Contrarioan Long Short, L.P. ("CLS"), Silver
Point Capital Offshore Fund, Ltd. ("SPCOF"), Delta Offshore, Ltd.
("DOFS"), Delta Institutional ("DI"), Brencourt Advisors, LLC ("BA"),
Brencourt Distressed Securities Master, Ltd. ("BDSM"), Loeb Partners
Corporation ("Loeb"), JMG Triton Offshore Fund, Ltd. LP ("Triton"),
JMG Capital Partners, LP ("JMG"), Blackmore Offshore, Ltd. ("BOFS"),
Blackmore Wallace Partners, LP ("BWP"), Delta Onshore, LP ("DONS"),
Blackmore Partners ("BP"), Delta Pleiades, LP ("DP"), Silver Point
Capital Fund, LP ("SPCF") , AHFP Contrarian ("AHFP"), AF Capital, LLC
("AFC"), Core Fund, L.P. ("CF"), Cedarview Opportunities Master Fund
("COMF") and JG Capital, Inc. ("JG Capital") (ii) 1,000,000 shares of
common stock by selling shareholder Ralph Garcia; and (iii) 1,515,386
shares of common stock by selling shareholders Alpha Capital
("Alpha"), Stonestreet Limited Partnership ("Stonestreet"),
Whalehaven Capital Fund Limited ("Whalehaven") and Greenwich Growth
Fund Limited ("Greenwich"). We will receive the proceeds from the
exercise of any of the warrants issued to the selling shareholders
Barron Partners, LP ("Barron"), Whalehaven, Stonestreet, Greenwich,
Alpha, JG Capital, Inc., Heza Holding, Inc. and Grushko & Mittman,
P.C. ("Grushko") ") unless the cashless exercise feature (which is
available to all warrant holders if the registration of shares
underlying such warrants is not effective at the time of a warrant
exercise), is exercised by the warrant holder. See section entitled
"Use of Proceeds".
Page 7
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(1) 9,600,000 shares of common stock were issued to the selling shareholders,
Barron Partners, pursuant to a private placement under Rule 506 of Regulation D
of SEC Act of 1933,7,200,000 shares of common stock were issued to selling
shareholder Barron Partners on July 27, 2005 upon the exercise of $.68 warrants
and stock issueable upon exercise of such warrants pursuant to a private
placement under Rule 506 of Regulation D of SEC Act of 1933 on May 31, 2004,
399,000 shares of common stock were issued to selling shareholder JG Capital on
September 20, 2005 upon the cashless exercise of a $.34 warrant representing
501,000 of 720,000 shares of common stock (discounted to 399,000 shares upon a
cashless exercise) issueable upon exercise of such warrants pursuant to a
private placement under Rule 506 of Regulation D of SEC Act of 1933 on September
2, 2004, 22,812 shares of common stock were issued to selling shareholder
Grushko on September 14, 2005 upon the cashless exercise of a $.52 warrant
(discounted to 22,812 from 31,731 shares upon a cashless exercise) issueable
upon exercise of such warrants pursuant to a private placement under Rule 506 of
Regulation D of SEC Act of 1933 on September 2, 2004; and 21,017 shares of
common stock were issued to selling shareholder Heza on December 27, 2005 upon
the cashless exercise of a $.52 warrant (discounted to 21,017 from 31,731 shares
upon a cashless exercise) issueable upon exercise of such warrants pursuant to a
private placement under Rule 506 of Regulation D of SEC Act of 1933 on September
2, 2004 . All of the 16,800,000 shares of common stock owned by Barron were sold
by Barron in a private placement to Qualified Institutional Buyers CEF, CRT,
CLS, DOFS, DI, BA, BDSM, Loeb, Triton, JMG, BOFS, BWP, DONS, BP DP, SPCOF , SPCF
and AHFP. A total of 2,115,386 shares of common stock were issued to selling
shareholders as follows: Whalehaven Capital Fund Limited ("Whalehaven") 288,462
shares; Stonestreet Limited Partnership ("Stonestreet") 384,616 shares; Alpha
Capital ("Alpha") 1,250,000 shares and Greenwich Growth Fund Limited
("Greenwich") 192,308 shares pursuant to a private placement under Rule 506 of
Regulation D of SEC Act of 1933. 1,000,000 shares of common stock were issued to
selling shareholder Ralph Garcia pursuant to a private placement under Rule 506
of Regulation D of SEC Act of 1933 as partial compensation for the acquisition
of World Jet Corporation.
(2) Warrants entitling the selling shareholder Barron Partners, JG Capital,
Inc., Alpha, Stonestreet, Whalehaven, Greenwich, Heza Holding, Inc. and Grushko
& Mittman, P.C. to an additional 10,887,865 shares of common stock upon the
exercise of such warrants as follows: Barron Partners - warrants to purchase
7,200,000 shares of common stock at an exercise price of $1.36 per share; JG
Capital, Inc. - warrants to purchase 219,000 (instead of 321,000 shares due to
the discount of 102,000 shares for a cashless exercise of warrants) shares of
common stock at $0.34 per share, 95,192 shares of common stock at an exercise
price of $0.52 per share, 540,000 shares of common stock at $0.68 per share,
47,597 shares of common stock at $1.00 per share, and 587,597 shares of common
stock at $1.36 per share; ; Alpha- warrants to purchase 625,000 shares of common
stock at an exercise price of $1.00 per share and 625,000 shares of common stock
at an exercise price of $1.36 per share; Stonestreet - warrants to purchase
192,308 shares of common stock at an exercise price of $1.00 per share and
192,308 shares of common stock at an exercise price of $1.36 per share;
Whalehaven - warrants to purchase 144,231 shares of common stock at an exercise
price of $1.00 per share and 144,231 shares of common stock at an exercise price
of $1.36 per share; Greenwich - warrants to purchase 96,154 shares of common
stock at an exercise price of $1.00 per share and 96,154 shares of common stock
at an exercise price of $1.36 per share; Heza Holding, Inc. - warrants to
purchase 15,865 shares of common stock at an exercise price of $1.00 per share,
and 15,865 shares of common stock at an exercise price of $1.36 per share;
Grushko - warrants to purchase 15,865 shares of common stock at an exercise
price of $1.00 per share, and 15,865 shares of common stock at an exercise price
of $1.36 per share. All warrants are subject to a cashless exercise option at
the election of the warrant holder if the shares issueable upon exercise of the
warrants are not registered at the time such warrants are exercised.
(3) The amount of shares issued and outstanding will increase up to a maximum of
49,333,080 upon the exercise of all warrants. The amount of issued and
outstanding shares includes 1.5 million shares of common stock issued to Seajay
Holding which have been voided by the Company and for which the Company has
filed a lawsuit against Seajay Holdings seeking a court order for the return of
the 1.5 million shares (See "Legal Proceedings" section).
Page 8
RISK FACTORS
Investing in our common stock involves a high degree of risk. Before agreeing to
buy, you should carefully consider the following risk factors, in addition to
the other information contained or incorporated by reference in this prospectus:
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 lingering effects of the terrorist events of September
11, 2001 continue 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 potential for increasing costs in 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 events of September 11th have 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
As discussed earlier, the aviation industry is highly regulated by the FAA in
the United States and by similar agencies in other countries. We must be
certified by the FAA, and in some cases authorized by the original equipment
manufacturers, in order to repair aircraft components and to perform maintenance
and repair services on aircraft. Commercial jets, like any other complex
vehicles, require periodic maintenance to allow for their safe and economical
operation. Unlike many vehicles, the repair and modification of such aircraft is
highly regulated by the various aviation authorities in each country of
operation around the world.
Page 9
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
The year ended December 31, 2004, our 2 largest continuing customers accounted
for 34% of our total revenues and our largest continuing customer accounted for
21% of total revenues. For the year ended December 31, 2005, our largest
continuing customer accounted for 8.3% of our revenue. Four customers accounted
for 37.6% of our revenue. For the year ended December 31, 2006, our largest
continuing customer accounted for 18.42% of our revenue. Four customers
accounted for 52.4% of our revenue and only two customers accounted for 38.7% of
our revenue. We recognize that any customer concentration creates risks and we
are, therefore, assessing strategies to lessen this concentration and increase
our customer base as well as to expand the Company into aircraft sales and
leasing venues to reduce our exposure to the adverse effects of the loss of one
or more of our significant customers. 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 its revenue as of the year
ending December 31, 2006 are as follows:
HAT WORLD JET
Customer Percentage of Percentage
Revenue Customer of Revenue
- --------------------------------------------------------------------------------
Avolar Aerolineas, S.A. de C.V 24.4% HAT 62.2%
BCI Aircraft Leasing, Inc. 22.0% Automatic, LLC 21.2%
HAT was World Jet's largest customer for the year ended December 31, 2006,
accounting for 62.2% 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.
Page 10
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, late in
February 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 March 2007, Avolar has made progress reducing the amount owed Hamilton
Aerospace, 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 Hamilton Aerospace 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. The parties are now drafting language wherein BCI
will pay the Company cash plus transfer, free and clear, ownership to the
Company of enough aircraft out of the JetGlobal assets to settle in full all
amounts due the Company for services provided to BCI and from the Company's
ownership in JetGlobal. Although BCI is presently cooperating with the Company
to resolve these issues equitably, a final agreement and settlement has not at
this time been reached between the companies.
LEASE OF PROPERTY
Global's wholly owned subsidiary, Hamilton Aerospace Technologies, Inc. ("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
first 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 will 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 2006, Global conducted more than 72% 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 2006, World Jet
accounted for 12% of Global's total revenue. The repair and maintenance
operation of HAT, located at 6901 South Park Avenue, Tucson, Arizona comprised
50% 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 the 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.
STATUS AS A GOING CONCERN
The Company operating through its two wholly owned subsidiaries, HAT and World
Jet, engages in business operations solely related to the aviation industry. Any
problems in the airline/aviation industry may have an adverse impact on our
operations and ability to operate as a going concern. Any terrorist incidents,
increases in the price of Jet fuel, or other economic factors which adversely
impact the airline/aviation industry could effect our ability to operate as a
going concern. Moreover, any events which may adversely impact our ability to
continue operations at our facilities at Tucson, Arizona could also adversely
affect our ability to operate as a going concern.
Page 11
IMPACT OF BEING AN OTC BULLETIN BOARD STOCK
Global's common stock is quoted on the OTC Bulletin Board under the trading
symbol GACF and is traded in the over-the-counter markets. Unless and until our
common shares become quoted on the NASDAQ system or listed on a national
securities exchange, we may at any time be subject to the "penny stock"
provisions of the Exchange Act and applicable SEC rules. At any time when the
market price of our common stock is below $5.00 per share, our common stock may
be deemed to be a penny stock. In that event, our common stock will be subject
to rules that impose additional sales practices on broker-dealers who sell our
securities. For transactions covered by the penny stock rules, the broker-dealer
must make a suitability determination for each purchaser and receive the
purchaser's written agreement prior to the sale. In addition, the broker-dealer
must make certain mandated disclosures in penny stock transactions, including
the actual sale or purchase price and actual bid and offer quotations, the
compensation to be received by the broker-dealer and certain associated persons,
and deliver certain disclosures required by the SEC. So long as Global's common
shares are considered "penny stocks", many brokers will be reluctant or will
refuse to effect transactions in Global's shares, and many lending institutions
will not permit the use of penny stocks as collateral for any loans. This could
have an adverse effect on the liquidity of our common stock.
OUR COMMON STOCK IS THINLY TRADED AND OUR STOCK PRICE MAY BE MORE VOLATILE THAN
THE MARKET IN GENERAL
Because our common stock is thinly traded, its market price may fluctuate
significantly more than the stock market in general or the stock prices of
similar companies, which are exchanged, listed or quoted on NASDAQ. Our public
float is approximately 25,689,715 shares, thus our common stock will be less
liquid than the stock of companies with broader public ownership, and, as a
result, the trading prices for our common stock may be more volatile. Among
other things, trading of a relatively small volume of our common stock may have
a greater impact on the trading price for our stock than would be the case if
our public float were larger
SINCE BECOMING A PUBLIC COMPANY, WE HAVE NEVER PAID DIVIDENDS.
Since becoming a public company in September of 1997, Global has never paid a
dividend and does not expect to pay a cash dividend upon its capital stock in
the foreseeable future. Payment of dividends in the future will depend on our
earnings (if any) and our cash requirements at that time, but we expect to
retain earnings for business expansion over the foreseeable future.
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 or are issuing 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.
Page 12
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, 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 c overage 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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and exercise of all warrants, the Company will
have outstanding 49,333,080 shares of Common Stock. Of these shares, the Common
Stock sold in the Offering will be freely tradable without restriction or
limitation under the Securities Act of 1933, as amended (the "Securities Act"),
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. The Company, its executive officers, directors and
stockholders, have agreed that, for a period of 180 days from the date of this
Prospectus, they will not sell, offer to sell, solicit an offer to buy, contract
to sell, grant any option to purchase or otherwise transfer or dispose of, any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock, subject to certain exceptions. The
sale of a substantial number of shares of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and/or impair the
Company's ability in the future to raise additional capital through the sale of
its equity securities.
PRICE VOLATILITY
The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results and other
factors. From time to time in recent years, the securities markets have
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of particular
companies. These broad fluctuations may adversely affect the market price of the
Common Stock.
IMPACT OF WARRANT EXERCISE ON MARKET
In the event of the exercise of a substantial number of warrants within a
reasonably short period of time after the right to exercise commences, the
resulting increase in the amount of our common stock in the trading market could
substantially affect the market price of our common stock.
PREEMPTIVE RIGHTS
The selling shareholders, Barron Partners, Alpha, Stonestreet, Whalehaven and
Greenwich have preemptive rights/rights of first refusal with respect to all
shares they hold or may acquire whereby each such investor shall have the right
to participate in any equity or debt convertible into equity or equivalent
financing, by the Company on a pro rata basis at 100 percent (100%) of the
offering price, provided that the price of such financing is not less than $0.68
per share. If the price is less than $0.68 per share, then each investor shall
have the right to invest at 80% of such price. One risk of such preemptive
rights is that it may make it difficult to attract new capital since new
investors could, in effect, overpay compared to those who possess preemptive
rights that it may make it extremely difficult to obtain new financing unless we
purchase back the issued preemptive rights. Another risk factor of the existing
preemptive rights would be that dilution may occur to the extent that the
selling shareholders exercise their preemptive rights/rights of first refusal
(see section titled "Dilution").
Page 13
THE MARKET PRICE OF OUR COMMON STOCK COULD BE DEPRESSED BY FUTURE SALES
Future sales of our common stock, or the perception that these sales could
occur, could adversely affect the market price of our common stock. We cannot
assure you as to when, and how many of, the shares of our common stock will be
sold and the effect these sales may have on the market price of our common
stock. In addition, we may issue additional shares of common stock in connection
with possible future acquisitions or other transactions. Although these
securities may be subject to regulatory or contractual resale restrictions, as
these restrictions lapse or if these shares are registered for sale to the
public, they may be sold to the public. In the event we issue a substantial
number of shares of our common stock, which subsequently become available for
unrestricted resale, there could be a material adverse effect on the prevailing
market price of our common stock.
FORWARD LOOKING STATEMENTS
This prospectus 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 (including those described under "Risk Factors"
below and elsewhere in this\report), 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.
USE OF PROCEEDS
We will not receive any proceeds from the sale of (i) the 3,355,669 shares of
common stock offered through this prospectus by selling shareholder CEF, (ii)
the 2,500,000 shares of common stock offered through this prospectus by selling
shareholder CRT, (iii) the 2,000,000 shares of common stock offered through this
prospectus by Silver Point, (iv) the 1,599,900 shares of common stock offered
through this prospectus by selling shareholder DOFS, (v) the 1,260,000 shares of
common stock offered through this prospectus by selling shareholder SPCOF, (vi)
the 650,000 shares of common stock offered through this prospectus by Alpha,
(vii) the 1,015,500 shares of common stock offered through this prospectus by
selling shareholder DI, , (viii) the 1,000,000 shares of common stock offered
through this prospectus by selling shareholder BA, (ix) the 1,000,000 shares of
common stock offered through this prospectus by selling shareholder BDSM, (x)
the 1,000,000 shares of common stock offered through this prospectus by selling
shareholder Ralph Garcia, (xi) the 800,000 shares of common stock offered
through this prospectus by selling shareholder Loeb (xii) the 750,000 shares of
common stock offered through this prospectus by selling shareholder JMG, (xiii)
the 750,000 shares of common stock offered through this prospectus by selling
shareholder Triton, (xiv) the 740,000 shares of common stock offered through
this prospectus by selling shareholder SPCF (xv) the 534,313 shares of common
stock offered through this prospectus by selling shareholder CLS, (xvi) the
486,763 shares of common stock offered through this prospectus by selling
shareholder BOFS,(xvii) the 384,616 shares of common stock offeredthrough this
prospectus by Stonestreet, (xviii) the 335,038 shares of common stock offered
through this prospectus by selling shareholder BWP, (xix) the 300,000 shares of
common stock offered through this prospectus by selling shareholder AFC; (xx)
the 288, 462 shares of common stock offered through this prospectus by selling
shareholder Whalehaven, (xxi) the 200,100 shares of common stock offered through
this prospectus by selling shareholder DONS (xxii) the 200,000 shares of common
stock offered through this prospectus by selling shareholder CF; (xxiii) the
192, 308 shares of common stock offered through this prospectus by selling
shareholder Greenwich (xxiv) the 184,500 shares of common stock offered through
this prospectus by selling shareholder DP, (xxv) the 178,199 shares of common
stock offered through this prospectus by selling shareholder BP, (xxvi) the
110,018 shares of common stock offered through this prospectus by selling
shareholder AHFP; (xvii) the 100,000 shares of common stock offered through this
prospectus by selling shareholder COMF . We have received the proceeds of
$4,896,000.00 from the exercise by Barron of a $.68 warrant to purchase
7,200,000 shares of common stock. These proceeds will be used as follows:
Page 14
$3,196,000 - debt reduction (factoring, M&I credit facility and vendor debt)
$1,000,000 - HAT working capital
$700,000 - World Jet working capital
We may receive the proceeds from the exercise of any warrants issued to selling
shareholders Barron, JG Capital, Inc. Whalehaven, Alpha, Stonestreet, Greenwich,
Heza Holdings or Grushko. However, all such warrants have a cashless exercise
feature that may be implemented by the warrant holder in the event the shares
underlying any warrants remain unregistered at the time the warrants are
exercised by such shareholder. JG Capital has elected the cashless exercise
option on 501,000 of the 720,000 shares underlying a $.34 warrant issued
pursuant to a private placement on September 2, 2004; however, the total shares
issued to JG Capital upon such exercise on September 20, 2005 was 399,000 as a
consequence of the discount rate applied for exercise of the cashless feature of
the warrant. Grushko has elected the cashless exercise option on 31,731 shares
underlying a $.52 warrant issued pursuant to a private placement on September 2,
2004; however, the total shares issued to Grushko upon such exercise on
September 14, 2005 was 22,812 as a consequence of the discount rate applied for
exercise of the cashless feature of the warrant. Heza has elected the cashless
exercise option on 31,731 shares underlying a $.52 warrant issued pursuant to a
private placement on September 2, 2004; however, the total shares issued to Heza
upon such exercise on December 27, 2005 was 21,017 as a consequence of the
discount rate applied for exercise of the cashless feature of the warrant. If
the remaining warrants are exercised without implementing the cashless exercise
feature, these proceeds will amount to $13,700,926.00. The intended use of these
proceeds will be for working capital, acquisition of assets and acquisitions of
businesses. We have used the proceeds of $3,264,000.00 already received from the
Barron Partners private placement equity funding and the $1,100,000.00 private
placement equity funding received from Stonestreet, Alpha Capital, Whalehaven
and Greenwich as follows: $3,264,000.00 - working capital and acquisition of
World Jet $1,100,000.00 - purchase of operating assets from bankruptcy estate of
Hamilton Aviation
DIVIDEND POLICY
The Company does not intend to pay any cash dividends with respect to its Common
Stock in the foreseeable future, Rather, the Company intends, after the
consummation of the Offering, to retain its earnings, if any, for use in the
operation of its business.
DILUTION
The Company is a reporting Company. Dilution to our existing shareholders will
occur should the selling shareholders exercise the warrants. If the selling
shareholders exercise any of the warrants dilution may occur to the extent of
such exercise. If all warrants are exercised in addition to any common stock
currently held by any of the selling shareholders, the selling shareholders will
own the following percentages of the issued and outstanding common stock of the
Company:, Barron Partners, will own 14.6%; selling shareholder CEF will own
6.8%; selling shareholder CRT will own 5%; selling shareholder Alpha will own
5%; selling shareholder JG Capital, Inc. will own 4.03%; selling shareholder
DOFS will own 3.2%; selling shareholder SPCOF will own 2.55%; selling
shareholder BA will own 2%; selling shareholder BDSM will own 2%; selling
shareholder DI will own 2%; selling shareholder Loeb will own 1.6%; selling
shareholder Stonestreet will own 1.56%; selling shareholder JMG will own 1.5%;
selling shareholder Triton will own 1.5%; selling shareholder SPCF will own
1.5%; selling shareholder Whalehaven will own 1.16%; selling shareholder AHFP
will own .2%; selling shareholder CLS will own 1%; selling shareholder AFC will
own .6%; selling shareholder CF will own .4%; selling shareholder DONS will own
..4%; selling shareholder DP will own .3%; selling shareholder BP will own .3%;
selling shareholder BWP will own .67%; selling shareholder BOFS will own .98%;
selling shareholder Greenwich will own .77%; selling shareholder COMF will own
..2%; selling shareholder Heza Holdings will own 0.12%; and selling shareholder
Grushko will own 0.12%. The selling shareholders, Barron, Alpha, Stonestreet,
Whalehaven and Greenwich also have preemptive rights/rights of first refusal
with respect to all shares held or acquired whereby each such investor shall
have the right to participate in any equity or debt convertible into equity or
equivalent financing, by the Company on a pro rata basis at 100 percent (100%)
of the offering price, provided that the price of such financing is not less
than $0.68 per share. If the price is less than $0.68 per share, then each
investor shall have the right to invest at 80% of such price. The selling
shareholders, , CEF, CLS, DONS, DP, DI, DOFS, BP, BWP, BOFS, JMG, Triton, Loeb,
BA, BDSM, CRT, Silver Point, AHFP, Heza Holdings, Grushko, Ralph Garcia and JG
Capital, Inc., do not have any such preemptive rights.
The Company has also adopted the following stock option and stock compensation
plans for directors, officers and employees of Global and HAT: (i) 2002
Compensatory Stock Option Plan for directors and officers of Global and HAT
which has reserved a maximum of 3,000,000 shares of common stock of which
1,920,000 shares of common stock remain available to be issued; and (ii) 2003
Employee Stock Compensation Plan for employees of HAT which has reserved a
maximum of 5,000,000 shares of common stock of which 2,800,000 shares of common
stock remain available to be issued.
Page 15
SELLING SHAREHOLDERS
The selling shareholders named in this prospectus are offering all of the
31,348,080 shares of common stock offered through this prospectus. The shares
include the following:
5. 9,600,000 shares of our common stock that selling shareholder, Barron
Partners, acquired from us in an offering that was exempt from registration
pursuant to Section 4(2) as amended of the Securities Act of 1933 and
completed on May 31, 2004 and 7,200,000 shares of common stock that were
issued to selling shareholder Barron Partners on July 27, 2005 upon the
exercise of a $.68 warrant and stock issueable upon exercise of such
warrant which was issued pursuant to a private placement under Rule 506 of
Regulation D of SEC Act of 1933 on May 31, 2004 for a combined total of
16,800,000 shares all of which such 16,800,000 shares of common stock were
sold by Barron in a private placement transaction to the following
qualified institutional buyers who are selling shareholders: 3,355,669
shares of common stock to CEF; 2,500,000 shares of common stock to CRT;
1,599,900 shares of common stock to DOFS; 1,260,000 shares of common stock
to SPCOF; 1,000,000 shares of common stock to BA; 1,015,500 shares of
common stock to DI; 1,000,000 shares of common stock to BDSM; 800,000
shares of common stock to Loeb; 750,000 shares of common stock to JMG;
750,000 shares of common stock to Triton; 740,000 shares of common stock to
SPCF; 534,313 shares of common stock to CLS; 335,038 shares of common stock
to BWP; 486,763 shares of common stock to BOFS; 200,100 shares of common
stock to DONS; 184,500 shares of common stock to DP;178,199 shares of
common stock to BP and 110,018 shares of common stock to AHFP. A total
2,115,386 shares of our common stock that the selling shareholders
Whalehaven (288,462), Stonestreet (384,616), Alpha (1,250,000; 600,000 of
which were sold by Alpha in a private placement transaction on August 4,
2005 as follows: AFC - 300,000 shares; CF - 200,000 shares; and COMF -
100,000 shares) and Greenwich (192,308) acquired from us in an offering
that was exempt from registration pursuant to Section 4(2) as amended of
the Securities Act of 1933 and completed on September 3, 2004; 1,000,000
shares of our common stock that the selling shareholder Ralph Garcia
acquired from us in an offering that was exempt from registration pursuant
to Section 4(2) as amended of the Securities Act of 1933 as partial
consideration for the purchase of World Jet; 7,200,000 shares of our common
stock that selling shareholder, Barron Partners, may receive pursuant to
warrants issued in conjunction with the private placement of Common Stock,
warrants and shares issueable upon the exercise of warrants on May 31,
2004.
A total of 399,000 shares of our common stock that selling shareholder JG
Capital received upon exercise of a $.34 warrant issued pursuant to a
private placement on September 2, 2004; A total of 22,812 shares of our
common stock that selling shareholder Grushko received upon exercise of a
$.52 warrant issued pursuant to a private placement on September 2, 2004
and the following shares of common stock issueable upon the exercise of
warrants issued pursuant to a private placement of common stock and
warrants under Rule 506 of Regulation D of SEC Act 1933 on September 2,
2004: A total of 21,017 shares of our common stock that selling shareholder
Heza received upon exercise of a $.52 warrant issued pursuant to a private
placement on September 2, 2004 and the following shares of common stock
issueable upon the exercise of warrants issued pursuant to a private
placement of common stock and warrants under Rule 506 of Regulation D of
SEC Act 1933 on September 2, 2004; 1,489,386 shares of our common stock
selling shareholder, JG Capital, Inc., may receive pursuant to warrants;
1,250,000 shares of our common stock selling shareholder Alpha may receive
pursuant to warrants; 384,616 shares of our common stock selling
shareholder Stonestreet may receive pursuant to warrants; 288,462 shares of
our common stock selling shareholder Whalehaven may receive pursuant to
warrants; 192,308 shares of our common stock selling shareholder Greenwich
may receive pursuant to warrants; 31,731 shares of our common stock selling
shareholder Heza Holdings may receive pursuant to warrants; and 31,731
shares of our common stock selling shareholder Grushko may receive pursuant
to warrants.
The following table provides as of February 2, 2006, information regarding the
beneficial ownership of our common stock held by each of the selling
shareholders, including:
1. The number of shares owned by each prior to this offering;
2. The total number of shares that are to be offered for each;
3. The total number of shares that will be owned by each upon completion
of the offering;
4. The percentage owned by each; and
5. The identity of the beneficial holder of any entity that owns the
shares.
Page 16
To the best of our knowledge, the named parties in the table that follows are
the beneficial owners and have the sole voting and investment power over all
shares or rights to the shares reported. In addition, the table assumes that the
selling shareholders do not sell shares of common stock not being offered
through this prospectus and do not purchase additional shares of common stock;
however, all selling shareholders may be deemed underwriters. Based upon
information provided to use by the selling shareholders, CRT Capital Group, LLC
is the only selling shareholder that is a broker-dealer and therefore considered
an underwriter. None of the other selling shareholders are broker-dealers or
affiliates of a broker-dealer. Because the selling shareholders may be deemed to
be "underwriters" within the meaning of the Securities Act, the selling
shareholders will be subject to the prospectus delivery requirements of the
Securities Act and the rules promulgated thereunder and they may be subject to
certain statutory liabilities under the Securities Act, including, but not
limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under
the Exchange Act. We have informed the selling shareholders that the
anti-manipulative provisions of Regulation M promulgated under the Exchange Act
may apply to their sales in the market. With certain exceptions, Regulation M
precludes the selling shareholders, any affiliated purchasers, and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any
security which is the subject of the distribution until the entire distribution
is complete. Regulation M also prohibits any bids or purchases made in order to
stabilize the price of a security in connection with the distribution of that
security.
The column reporting the percentage owned upon completion assumes that all
shares offered are sold, and is calculated based on 49,333,080 shares
outstanding upon the exercise of all warrants.
Name of Shares Total of Total Percent
Selling Shareholder Owned Prior Shares Shares Owned
To This Offered After After
Offering For Sale Offering Offering
- -----------------------------------------------------------------------------------------
Barron Partners, LP 7,200,000(4) 7,200,000 0 0
(Andrew Worden
controlling person)
Contrarian Equity Fund, L.P. 3,355,669 3,355,669 0 0
CRT Capital Group, LLC 2,500,000 2,500,000 0 0
Alpha Capital 2,500,000(6) 2,500,000 0 0
Konrad Ackerman
and Rainer Posch
controlling persons)
JG Capital, Inc. 1,888,386(5) 1,888,386 0 0
(Richard Josephberg
controlling person)
Delta Offshore, Ltd. 1,599,900 1,599,900 0 0
Silver Point Capital
Offshore Fund, Ltd. 1,260,000 1,260,000 0 0
Deltal Institutional, LP 1,015,500 1,015,500 0 0
Ralph Garcia 1,000,000 1,000,000 0 0
Brencourt Advisors, LLC 1,000,000 1,000,000 0 0
Brencourt Distressed
Securities Masters, Ltd. 1,000,000 1,000,000 0 0
Page 17
Loeb Partners Corporation 800,000 800,000 0 0
Stonestreet 769,232(7) 769,232 0 0
JMG Capital Partners, LP 750,000 750,000 0 0
JMG Triton Offshore Fund, Ltd. 750,000 750,000 0 0
Silver Point Capital Fund, L.P. 740,000 740,000 0 0
Whalehaven 576,924(8) 576,924 0 0
Contrarian Long Short, L.P. 534,313 534,313 0 0
Blackmore Offshore, Ltd. 486,763 486,763 0 0
Greenwich 384,616(9) 384,616 0 0
Blackmore Wallace Partners 335,038 335,038 0 0
AF Capital, LLC 300,000 300,000 0 0
Delta Onshore, LP 200,100 200,100 0 0
Core Fund, LP 200,000 200,000 0 0
Delta Pleiades, LP 184,500 184,500 0 0
Blackmore Partners 178,199 178,199 0 0
AHFP Contrarian 110,018 110,018 0 0
Cedarview Opportunies
Master Fund 100,000 100,000 0 0
Heza Holding, Inc. 52,748(10) 52,748 0 0
(Ari Kluger
controlling person)
Grushko 54,543(11) 54,543 0 0
(Edward Grushko,
controlling person)
- ----------
(4) all of which is common stock issueable upon the exercise of warrants
(5) 1,489,386 of which is common stock issueable upon the exercise of warrants
(6) 1,250,000 of which is common stock issueable upon the exercise of warrants
(7) 384,616 of which is common stock issueable upon the exercise of warrants
(8) 288,462 of which is common stock issueable upon the exercise of warrants
(9) 192,308 of which is common stock issueable upon the exercise of warrants
(10) 31,731 of which is common stock issueable upon the exercise of warrants
(11) 31,731 of which is common stock issueable upon the exercise of warrants
To our knowledge, none of the selling shareholders:
1. Has had a material relationship with Global or HAT other than as a
shareholder as noted above at any time within the past three years; or
2. Has ever been an officer or director of Global or HAT
Selling Shareholder Ralph Garcia, was the majority shareholder of the acquired
company World Jet Corporation during the past three (3) years.
Page 18
PLAN OF DISTRIBUTION
The selling shareholders have not informed us of how they plan to sell their
shares. However, they may sell some or all of their common stock in one or more
transactions, including block transactions:
1. on such public markets or exchanges as the common stock may from time to
time be trading;
2. in privately negotiated transactions;
3. through the writing of options on the common stock;
4. in short sales; or
5. in any combination of these methods of distribution.
The sales price to the public may be:
1. the market price prevailing at the time of sale;
2. a price related to such prevailing market price; or
3. such other price as the selling shareholders determine from time to time.
The shares may also be sold in compliance with the Securities and Exchange
Commission's Rule 144.
The selling shareholders may also sell their shares directly to market makers
acting as principals or brokers or dealers, who may act as agent or acquire the
common stock as a principal. Any broker or dealer participating in such
transactions as agent may receive a commission from the selling shareholders,
or, if they act as agent for the purchaser of such common stock, from such
purchaser. The selling shareholders will likely pay the usual and customary
brokerage fees for such services. Brokers or dealers may agree with the selling
shareholders to sell a specified number of shares at a stipulated price per
share and, to the extent such broker or dealer is unable to do so acting as
agent for the selling shareholders, to purchase, as principal, any unsold shares
at the price required to fulfill the respective broker's or dealer's commitment
to the selling shareholders.
Brokers or dealers who acquire shares as principals may thereafter resell such
shares from time to time in transactions in a market or on an exchange, in
negotiated transactions or otherwise, at market prices prevailing at the time of
sale or at negotiated prices, and in connection with such re-sales may pay or
receive commissions to or from the purchasers of such shares. These transactions
may involve cross and block transactions that may involve sales to and through
other brokers or dealers. If applicable, the selling shareholders also may have
distributed, or may distribute, shares to one or more of their partners who are
unaffiliated with us. However, only those selling shareholders who are listed in
this prospectus, or added through post-effective amendment or supplement, may
resell through this prospectus. We can provide no assurance that all or any of
the common stock offered will be sold by the selling shareholders.
We are bearing all costs relating to the registration of the common stock. Any
commissions or other fees payable to brokers or dealers in connection with any
sale of the common stock, however, will be borne by the selling shareholders or
other party selling the common stock.
The selling shareholders must comply with the requirements of the Securities Act
of 1933 and the Securities Exchange Act of 1934 in the offer and sale of their
common stock. In particular, during times that the selling shareholders may be
deemed to be engaged in a distribution of the common stock, and therefore be
considered to be an underwriter, they must comply with applicable law and may,
among other things:
1. not engage in any stabilization activities in connection with our
common stock;
2. furnish each broker or dealer
3. through which common stock may be offered, such copies of this
prospectus amended from time to time, as may be required by such
broker or dealer; and
4. not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under
the Securities Exchange Act.
Page 19
LEGAL PROCEEDINGS
Global
As Plaintiff:
On June 29, 2004, the Company initiated a lawsuit against Corwin Foster and Jane
Doe Foster, husband and wife, and Seajay Holdings, LLC a Michigan Limited
Liability Company (the "Defendants") in the United States District Court for the
District of Arizona requesting entry of a judgment for the return of 1,500,000
shares of common stock. Global and HAT have asserted claims that Corwin Foster
(who is the sole shareholder and president of Seajay Holdings) and Seajay
Holdings acquired 1,500,000 shares of common stock of Global as part of a Stock
Exchange Agreement without consideration for the receipt of such common stock.
The Company is pursuing the return of these shares. This lawsuit emanates from a
stock exchange agreement of April 2002 whereby Old Mission Assessment ("OMAC")
agreed to provide HAT financing and capital for its newly established business.
OMAC and its officers Corwin Foster and others, entered into two debenture
related agreements on April 15, 2002 whereby OMAC agreed to pay to HAT the sum
of $1,500,000 under each debenture agreement on or before July 15, 2002. In
consideration of this agreement HAT agreed to provide to various investing
parties, including Corwin Foster's entity Seajay Holdings, shares of stock of
HAT. On May 2, 2002, Global acquired HAT in a stock exchange thereby entitling
the investing parties, including Corwin Foster's entity Seajay Holdings, to
Global stock in consideration for the $3,000,000 investment. Seajay Holdings
acquired 1,500,000 shares of common stock of Global pursuant to this
transaction. Although Global stock was issued to the investors, including Corwin
Foster's entity Seajay Holdings, HAT/Global only received $400,535 of the agreed
upon $3,000,000 to be paid pursuant to the debenture agreements. Since payment
in full was never received by Global for the shares of common stock issued as
consideration for the debenture agreements, Global was able to secure the return
of all common stock issued in connection with the debenture agreements except
the 1,500,000 shares of common stock issued to Corwin Foster's entity Seajay
Holdings. Global has agreed to return the $400,535 of the agreed upon $3,000,000
received pursuant to the debenture agreements. This sum was released from escrow
and paid to United Pay Phone, an investor in OMAC, pursuant to an agreed upon
order of court.
Although Global has made repeated demands upon Corwin Foster and Seajay Holdings
to return the 1,500,000 shares of common stock, Corwin Foster and Seajay
Holdings have failed and refused to return such stock. As a consequence of
Corwin Foster's and Seajay Holdings failure to return the common stock received,
Global initiated legal proceedings for damages in the amount of no less than
$1,000,000 plus interest and fees; the return of the 1,500,000 shares of common
stock; and punitive damages in the amount of $10,000,000.
On or about July 24, 2006 which was far beyond the procedurally acceptable time
within which to file a counterclaim and without the required leave of court,
Corwin Foster filed a counterclaim against Global, HAT, Hamilton Aviation, Ian
Herman, Gordon Hamilton, John Sawyer, Ronald Clark, Frank Hooper, United
Payphone, Financial Capital, Interwest Transfer and the law offices of Tharpe
Howell alleging fraud, unjust enrichment, breach of contract and constructive
trust.
All of these claims are categorically denied and Global has filed a motion to
strike this counterclaim based upon the above referenced defects.
Global's Motion for Summary Judgment was dismissed in June 2007 and the matter
is expected to proceed to trial in early 2008.
HAT
As Plaintiff:
On November 13,2006, HAT commenced a civil action in the Superior Court of
Arizona against Admiral Merchants Motor Freight, Inc., vital Express, et al, to
recover damages to an aircraft engine that the defendants were contracted to
transport from HAT's maintenance facility in Tucson to a facility in Vancouver,
B.C. HAT is alleging that the Defendants did not properly secure the engine
during transport, thereby causing damage to the engine which resulted in
approximately $588,127.00 in damages to HAT. The claim has been removed to the
Federal District Court in Arizona and is currently pending discovery.
Page 20
As Defendant:
On June 6, 2007, HAT was served with a civil complaint filed by Petro Energy
Corporation in the Superior Court of California. The Complaint alleges that
Petro Energy and HAT entered into a fuel services agreement and that HAT has
failed to pay a total of $155,177 pursuant to the terms of the fuel services
agreement. The Complaint further alleges that John Sawyer and HAT also owe Petro
Energy $60,000 for fuel services provided to Falcon Air and $17.5 million for
fuel services provided to Avolar Airlines.
The $60,000 claim was paid by Falcon Air to Petro Energy on June 20, 2007 and is
no longer at issue.
The basis of Petro Energy's claims against HAT and John Sawyer for services
Petro Energy provided to Avolar is that John Sawyer, as president of HAT,
induced Petro Energy to contract with Avolar and that as a consequence of this
inducement, John Sawyer and HAT are responsible to Petro Energy for Avolar's
unpaid fuel invoices. Notwithstanding the fact that the Petro Energy contract is
solely with Avolar and does not involve John Sawyer or HAT either as a
contracting party or guarantor, Petro Energy alleges that John Sawyer and HAT
are responsible for payment of Avolar's invoices owed to Petro Energy.
HAT filed an answer to the complaint denying all the allegations set forth
therein and the matter is currently pending. The claim for $155,177 is a general
non-material incidental claim incurred in the ordinary course of business which
Management believes will be resolved with out any material effect on Global's
financial position or liquidity. Management of the Company believes that the
$17.5 million claim against HAT and John Sawyer is totally without merit and
believes the eventual outcome will not have a material effect on Global's
financial position or liquidity.
World Jet
World Jet is not involved in any material legal proceedings.
There is no pending or threatened governmental or regulatory action against
Global or any of its subsidiaries.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS
The Directors and Officers of Global, all of whose terms will expire as follows:
Name & Address Age Position Date First Elected Term
or appointed Expires
- --------------------------------------------------------------------------------
Ian Herman 60 Chairman/CEO /Director 5/02 05/09
John Sawyer 41 Director & President 5/02 05/08
Gordon Hamilton 53 Director 5/02 05/07
Michael Hanley 58 Director 7/07 N/A*
Lawrence Mulcahy 56 Director 5/04 05/08
Seymour Siegel 64 Director 1/06 05/09
Each of the foregoing persons may be deemed a "promoter" of the company, as that
term is defined in the rules and regulations promulgated under the Securities
and Exchange Act of 1933.
*Director Hanley was appointed to replace director Alfredo Mason who resigned,
Mr. Hanley's appointment is scheduled for ratification at the next annual
meeting.
Page 21
Director Hamilton is elected to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified;;
directors Sawyer and Mulcahy are elected to serve until the 2008 annual meeting
of stockholders and until their successors have been elected and qualified; and
directors Herman and Siegel are elected to serve until the 2009 annual meeting
of stockholders and until their successors have been elected and qualified
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and qualified.
No Executive Officer or Director of the Corporation has been the subject of any
Order, Judgment, or Decree of any Court of competent jurisdiction, or any
regulatory agency permanently or temporarily enjoining, barring suspending or
otherwise limiting him from acting as an investment advisor, underwriter, broker
or dealer in the securities industry, or as an affiliated person, director or
employee of an investment company, bank, savings and loan association, or
insurance company or from engaging in or continuing any conduct or practice in
connection with any such activity or in connection with the purchase or sale of
any securities.
No Executive Officer or Director of the corporation has been convicted in any
criminal proceeding (excluding traffic violations) or is the subject of a
criminal proceeding which is currently pending.
No Executive Officer or Director of the corporation is the subject of any
pending legal proceedings.
Resumes
Ian Herman: CEO /Chairman. From June 2006 to the present, Mr. Herman has served
as the CEO and Chairman of Global Aircraft Solutions, Inc. From 2002 until June
2006 Mr. Herman served as the CEO/CFO and Chairman of Global Aircraft Solutions,
Inc.. From 2000 through the present, Mr. Herman has been the President of the
Financial Capital Group, Inc. which is engaged in financial and business
consulting. From 1995-2000, Mr. Herman was Chairman and a Board Member for the
British government handling major inward investments into the United Kingdom as
well as administering and evaluating projects in diverse industries totaling
more than $200,000,000.00. During his tenure with the British government, Mr.
Herman was awarded the Freedom of the City of London in recognition of his
services. During the period of 1990-1999, Mr. Herman was the Chief Executive
Officer of his own accounting and business consulting business specializing in
publishing, healthcare, telecommunications, airlines, manufacturing and
information technology. From 1988-1990 Mr. Herman was Chairman and Chief
Executive Officer for British World Airways Limited.
John B. Sawyer: President, Chief Operating Officer and Director. From May 2002
through the present, Mr. Sawyer has been the President of Global Aircraft
Solutions, Inc.. From 1998 through May 6, 2002, John Sawyer was Chief Operating
Officer of Hamilton Aviation, Inc. From 1996 until 1997, Mr. Sawyer was
president of Matrix Aeronautica S.A. de C.V., a Mexican repair station located
in Tijuana, Baja California. John received an A.A. in Aerospace Engineering from
the University of Texas (Austin). In 1986 John joined Pan American World Airways
based in Berlin, Germany. Subsequent to that he worked as a Production Foreman
at Raytheon, a Quality Control Supervisor at TIMCO, a Heavy Maintenance
Representative for World Airways, and Director of Quality Control at Federal
Express Feeder.
Gordon D. Hamilton: Director. Gordon is the son of Hamilton Aviation founder,
Gordon B. Hamilton, and literally grew up in the aviation business. Mr. Hamilton
joined Hamilton Aviation full time as Vice President, Marketing after graduating
with honors from the University of Chicago in 1978 with a BA in Tutorial
Studies. Gordon became President and Chief Executive Officer of Hamilton
Aviation in 1993; a position that he held until joining Hamilton Aerospace in
2003.
Michael Hanley: Director. Mr. Hannley is a local Tucsonan with 35 years of
banking experience and is the President and CEO of the Bank of Tucson which he
founded in 1996. From August 1986 until December 1995, Mr. Hannley was the
Senior Vice President for National Bank of Arizona. From May 1981 until June
1986, Mr. Hannley was employed by Great American Savings, he was the Divisional
Vice President beginning in May 1981 and assumed the duties of Senior Vice
President Administration in June 1986. Prior to his employment with Great
American Savings, Mr. Hannley was employed as the Regional Vice President of
Southern Arizona Bank/First Interstate Bank from July 1972 through May 1981.
Page 22
Lawrence Mulcahy: Director. Since 1988, Mr. Mulcahy has served as the President
of L.L. Industries, d/b/a Davis Kitchens. Davis Kitchens is a wholesale
distributor of cabinetry for commercial and residential use. Since 1994, Mr.
Mulcahy has served as the President of Becker Specialties and Manufacturing in
Tucson, AZ, a manufacturer of plastic laminate countertop blanks. Mr. Mulcahy
has also been a partner in Davis Kitchens since 1994. Mr. Mulcahy received his
B.S. in Economics from the University of Arizona and was a member of the United
States Air Force prior to attending college.
Seymour Siegel: Director. Mr. Siegel is a principal in the Siegel Rich Division
of Rothstein, Kass & Company, P.C. Rothstein, Kass & Company is a national firm
of accountants and consultants with over 600 members and offices in 7 cities.
Mr. Siegel was managing partner and founder of Siegel Rich and Co., P.C., which
merged into Weiser & Co., LLP, a large regional firm where he was a senior
partner until forming Siegel Rich Inc. in 1994, which in April 2000, became a
division of Rothstein Kass. Mr. Siegel is also currently the Chairman of the
Audit Committee of Hauppauge Digital, Inc., Emerging Vision, Inc., and Gales
Industries, Inc.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information on the ownership of the company's
voting securities by Officers, Directors and major shareholders as well as those
who own beneficially more than five percent (5%) of the company's issued and
outstanding common stock through the most current date - November 8, 2007:
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT OF COMMON STOCK PERCENT OF COMMON STOCK
OWNED BENEFICIALLY OUTSTANDING (1)
Ian M. Herman 2,446,834 (2) 6.07%
John B. Sawyer 2,366,666 (3) 5.78%
Lawrence Mulcahy 130,000 (4) *
Seymour Siegel 40,000 (5) *
All Directors and Executive Officers as a Group 4,983,500 12.12%
* Represents an individual as the beneficial
owner of less than 1% of the outstanding common
stock
Barron Partners 7,200,000 (6) 15.19%
730 Fifth Ave.
9th Floor
New York, NY 10019
Ewing & Partners 5,675,000 (7) 14.12%
4514 Cole Ave.
Suite 808
Dallas, Tx75205
Contrarian Capital Management, LLC 4,000,000 (8) 9.95%
411 West Putnam Ave.
Suite 225
Greenwich, CT 06830
Delta Offshore 3,000,000 (9) 7.47%
900 Third Ave.
5th Floor
New York, NY 10022
Doucet Capital, LLC 2,052,645 (10) 5.12%
2204 Lakeshore Dr.
Suite 218
Birmingham, AL 35209
* Denotes less than 1% ownership
Page 23
- ----------
1 Percent of common stock is based on 40,181,301 shares of common stock
issued and outstanding on July 13, 2007 with beneficial ownership being
determined in accordance with the rules of the SEC and including voting or
investment power with respect to securities. Securities "beneficially
owned" by a person may include securities owned by or for, among others,
the spouse, children or certain other relatives residing with such person
as well as other securities as to which the person has or shares voting or
investment power or has the option or right to acquire within 60 days of
July 13, 2007. Percent of Class Owned is based on the 40,181,301 shares of
common stock issued and outstanding on July 13, 2007 plus any shares that
may be acquired by the stockholders as a result of the exercise of existing
options or warrants within 60 days after July 13, 2007.
2 Includes 133,334 shares of common stock issuable to Mr. Herman upon the
exercise of options at $.17 per share which expire May 13, 2008. Based on
the December 31, 2006 Schedule 13G filed by Rochdale Investment Management,
LLC, all shares of common stock, exclusive of the 133,334 shares underlying
an option, are held in trust by Rochdale Investment Management, LLC as the
trustee for the Herman Family Trust. Of the total shares, Rochdale
Investment Management Group has sole voting and dispositive power over
2,313,500 shares.
3 Includes 766,666 shares of common stock issuable to Mr. Sawyer upon the
exercise of options at $.17 per share which expire May 13, 2008.
4 Includes 10,000 shares of common stock issuable to Mr. Mulcahy upon
exercise of options at $1.03 per share which expires August 24, 2011.
5 Includes 20,000 shares of common stock issuable to Mr. Siegel upon exercise
of options granted. 10,000 shares at an exercise price of $1.03 which
expires August 24, 2011 and 10,000 shares at an exercise price of $1.05 per
share which expires on March 8, 2012
6 All shares of common stock underlying a warrant that may be acquired by the
exercise of a $1.36 warrant which expires May 31, 2009.
7 In setting forth this information, the Company relied upon the February 9,
2007 Schedule 13G filing of Ewing & Partners, Timothy Ewing, Ewing Asset
Management, LLC, Endurance General Partners, LP and Endurance Partners
(Q.P.), L.P. Of the total shares, Ewing & Partners, Timothy Ewing, Ewing
Asset Management, LLC, Endurance General Partners, LP had sole voting and
dispositive power over all the shares and Endurance Partners (Q.P.), L.P.
had sole voting and dispositive power over 4,447,871 shares and there is no
shared voting or dispositive power.
8 In setting forth this information, the Company relied upon the August 8,
2005 Schedule 13G filing of Contrarian Capital Management,. Of the total
shares, Contrarian Capital management, LLC had shared voting and
dispositive power over all the shares and Contrarian Equity Fund, LP had
shared voting and dispositive power over 3,355,669 shares. No amendments
have been filed to this Schedule 13G.
9 In setting forth this information, the Company relied upon the August 10,
2005, joint filing of Schedule 13G of Delta Offshore, Ltd. and Trafelet &
Company, LLC. Of the total shares, Trafelet & Company had shared voting and
dispositive power over all the shares and reporting entity Delta Offshore,
Ltd. had shared voting and dispositive power over 1,599,900 shares. No
amendments have been filed to this Schedule 13G.
10 In setting forth this information, the Company relied upon the October 23,
2007 filing of Schedule 13D of Doucet Capital, LLC. Of the total shares,
Doucet Capital, LLC, Doucet Asset Management, LLC, Christopher Doucet
(managing member of Doucet Capital, LLC and CEO of Doucet Asset Management)
and Suzette Doucet (member of Doucet Capital and CFO of Doucet Asset
Management) had shared voting and dispositive power over all the shares.
Doucet Capital, LLC is listed as a holding company which owns Doucet Asset
Management, LLC, a SEC registered investment advisor firm No amendments
have been filed to this Schedule 13D.
Page 24
DESCRIPTION OF SECURITIES
The company's Certificate of Incorporation authorizes the issuance of
100,000,000 Shares of Common Stock, .001 par value per share and 5,000,000
shares of preferred stock. On May 17, 2004, the Company cancelled all authorized
shares of preferred stock. There is no preferred stock outstanding. The board of
directors retains the right to issue shares of preferred stock and determine the
rights associated with the preferred stock including, but not limited to rate of
dividends; voting rights; priority; rights in liquidation; and any other
privileges. Holders of shares of Common Stock are entitled to one vote for each
share on all matters to be voted on by the stockholders. Holders of Common Stock
have cumulative voting rights. Holders of shares of Common Stock are entitled to
share ratably in dividends, if any, as may be declared, from time to time by the
Board of Directors in its discretion, from funds legally available therefore. In
the event of a liquidation, dissolution, or winding up of the Company, the
holders of shares of Common Stock are entitled to share pro rata all assets
remaining after payment in full of all liabilities. Barron Partners, Alpha,
Stonestreet, Whalehaven, and Greenwich are the only holders of Common Stock that
have preemptive or rights of first refusal with respect to such shares.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified
any part of this prospectus or having given an opinion upon the legality of the
securities being registered or upon other legal matters in connection with the
registration or offering of the common stock was employed on a contingency
basis, or had, or is to receive, in connection with the offering, a substantial
interest, direct or indirect, in the registrant. Nor was any such person
connected with the registrant as a promoter, managing or principal underwriter,
voting trustee, director, officer or employee.
DISCLOSURE OF COMMISSION POSITION FOR SECURITIES ACT LIABILITIES
Global's By-Laws allow for the indemnification of company Officers and Directors
in regard to their carrying out the duties of their offices. We have been
advised that in the opinion of the Securities and Exchange Commission
indemnification for liabilities arising under the Securities Act is against
public policy as expressed in the Securities Act, and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities is asserted by one of our directors, officers, or other controlling
persons in connection with the securities registered, we will, unless in the
opinion of our legal counsel the matter has been settled by controlling
precedent, submit the question of whether such indemnification is against public
policy to a court of appropriate jurisdiction. We will then be governed by the
court's decision.
ORGANIZATION WITHIN LAST FIVE YEARS
Global was incorporated in Nevada on September 5, 1997 as a holding company.
Global was formed as a holding company to establish, maintain and administer the
equity and debt funding of any acquired subsidiaries as well as maintaining such
capitalization of any subsidiaries. In April 2002, Global issued 3,000,000
shares of common stock to LogiCapital in a stock for stock exchange of Johnstone
SoftMachine ("JSM") a Colorado Corporation that never existed past the
development stage. JSM held a data license, but Global never exploited such data
license and no revenue was generated therefrom as Global chose to focus its
efforts entirely in the aircraft maintenance, repair and overhaul industry. On
May 2, 2002, Global acquired newly formed HAT in a stock-for-stock exchange. On
July 15, 2004 (effective as of January 1, 2004), Global acquired World Jet
Corporation, a privately owned Nevada corporation, located at 6900 S. Park Ave.,
Tucson, AZ 85706 ("World Jet") 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 note, 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 including the income tax
liability for World Jet fiscal 2003. World Jet is an aircraft parts sales and
aircraft parts brokerage facility servicing aircraft operators, aircraft leasing
companies and MROM facilities.
Page 25
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 of the Company's aircraft
trading has been done through Global. (the Company's partnership, Jetglobal ,
also did aircraft trading). 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.
On August 26, 2005, Global together with BCI Aircraft Leasing, ("BCI"), formed a
joint venture Delaware limited liability company called Jetglobal, LLC. 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
Global will be 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
has a 30% membership interest, it is only responsible for 25% of the costs and
expenses associated with Jetglobal including any business transactions.
During 2006, the Company formed Mexican corporation, Hamilton Aerospace Mexico,
S. A. de C.V. for the purpose of satisfying governmental requirements of the
country of Mexico associated with HAT's Tijuana operation and the servicing of
Mexican airline, Avolar Aerolineas.
On March 13, 2007, the Company entered into an exclusive service agreement with,
Global Aircraft Leasing Partners ("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. Global and GALP originally entered into a strategic alliance wherein
Global would acquire a 20% interest in GALP in exchange for a capital
contribution of $20,000, together with infrastructure, industry expertise,
management assistance, and other non-monetary contributions. At June 30, 2007,
negotiations were still being conducted to establish an operating agreement for
GALP, as well as to make final determination as to the Company's percentage of
interest, which may be finalized at either the initial 20% or at 40%, depending
on the result of those negotiations. The Company had not made any capital
contribution as of June 30, 2007 and consequently was not a participating member
of GALP during the period covered by these financial statements. Global will
specifically not be required to invest capital in aircraft acquired by GALP.
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.
DESCRIPTION OF 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 maintaining such
capitalization of any subsidiaries. At the beginning of 2005, it was decided
that in addition to its role as holding company, Global would become active in
aircraft trading, replacing HAT in that arena. The only revenue that was
reported by Global prior to 2005 was revenue derived from a contract with Mesa
Airlines beginning in the third quarter of 2003 and ending in December of 2004.
That revenue represented the first revenue produced by the parent Company
(Global) since consolidation with HAT. This work was performed by HAT, but
revenue and expenses were booked to Global because the customer wanted to
contract directly with HAT's parent (Global) rather than with the wholly owned
subsidiary (HAT).
HAT was organized on April 5, 2002 and World Jet was organized on April 22,
1997. On May 2, 2002, Global acquired newly formed HAT, a Delaware corporation
("HAT") in a stock-for-stock exchange. HAT was formed on April 5, 2002, and
began operations on April 15, 2002. HAT was created as a provider of aircraft
maintenance, repair, overhaul ("MRO") services to owners and operators of
Transport Category commercial jet aircraft. Its customers are all aircraft
operators, including passenger and cargo air carriers, and aircraft leasing
companies. HAT has also developed a segment of business in aircraft trading.
Aircraft trading denotes the purchase and resale or lease, for profit, of
aircraft, aircraft engines, and/or other aircraft major components. On July 15,
2004, (effective as of January 1, 2004), Global acquired World Jet Corporation,
a privately owned Nevada corporation, located at 6900 S. Park Ave., Tucson, AZ
85706 ("World Jet") 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 note, 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 including the income tax
liability for World Jet fiscal 2003. World Jet is an aircraft parts sales and
aircraft parts brokerage facility servicing aircraft operators, aircraft leasing
companies and MROM facilities.
Page 26
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 of the Company's aircraft
trading has been done through Global. (the Company's partnership, Jetglobal ,
also did aircraft trading). 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.
On August 26, 2005, Global together with BCI Aircraft Leasing, ("BCI"), formed a
joint venture Delaware limited liability company called Jetglobal, LLC. 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
Global will be 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
has a 30% membership interest, it is only responsible for 25% of the costs and
expenses associated with Jetglobal including any business transactions.
During the year ended December 31, 2005, 73% of the Company's operations were
conducted by two operating subsidiaries: HAT which accounted for approximately
56% of the Company's revenue and Word Jet which accounted for approximately 17%
of the Company's revenue. The Company's share of Jetglobal 2005 net income was
over $1,000,000. Global contributed 27% of the Company's revenue through its
entrance into the aircraft trading venue. In addition to the operating expenses
incurred by Global for administrative, legal and accounting functions associated
with Global managing the shares of its wholly owned subsidiaries as well as all
activities related to capitalizing and maintaining adequate capitalization
levels for its subsidiaries, Global, beginning in 2005, also reports expenses
generated in the pursuit of aircraft trading.
During 2006, the Company formed Mexican corporation, Hamilton Aerospace Mexico,
S. A. de C.V. for the purpose of satisfying governmental requirements of the
country of Mexico associated with HAT's Tijuana operation and the servicing of
Mexican airline, Avolar Aerolineas.
During the year ended December 31, 2006, 87% of the Company's operations were
conducted by two operating subsidiaries: HAT which accounted for approximately
75% of the Company's revenue and Word Jet which accounted for approximately 12%
of the Company's revenue. The Company's share of Jetglobal 2006 net income was
approximately $1,700,000. Global contributed 13% of the Company's revenue
through its aircraft-trading venue. In addition to the operating expenses
incurred by Global for administrative, legal and accounting functions associated
with Global managing the shares of its wholly owned subsidiaries as well as all
activities related to capitalizing and maintaining adequate capitalization
levels for its subsidiaries, Global, beginning in 2005, also reports expenses
generated in the pursuit of aircraft trading.
OPERATING SEGMENTS
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 of the Company's aircraft
trading has been done through Global. (the Company's partnership, Jetglobal ,
also did aircraft trading). 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.
On March 13, 2007, the Company entered into an exclusive service agreement with,
Global Aircraft Leasing Partners ("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. Global and GALP originally entered into a strategic alliance wherein
Global would acquire a 20% interest in GALP in exchange for a capital
contribution of $20,000, together with infrastructure, industry expertise,
management assistance, and other non-monetary contributions. At June 30, 2007,
negotiations were still being conducted to establish an operating agreement for
GALP, as well as to make final determination as to the Company's percentage of
interest, which may be finalized at either the initial 20% or at 40%, depending
on the result of those negotiations. The Company had not made any capital
contribution as of June 30, 2007 and consequently was not a participating member
of GALP during the period covered by these financial statements. Global will
specifically not be required to invest capital in aircraft acquired by GALP.
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.
Page 27
HAMILTON AEROSPACE TECHNOLOGIES, INC. ("HAT")
- ---------------------------------------------
HAT is an aircraft repair station licensed by the Federal Aviation
Administration (FAA) and by the Joint Aviation Authority of the European
Economic Community (JAA). Its MRO services include maintenance, repair, overhaul
and modification of narrow-body Transport Category aircraft; repair and overhaul
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, MRO facilities such as HAT are companies in the aviation industry
that provide services for the following reasons:
First, no modification or repair can be made to any aircraft, nor can any
parts be installed, inspected or certified, except by FAA or similarly
certified repair facilities.
Second, aircraft require regular inspection and maintenance in accordance
with FAA or similar regulations and must regularly visit repair stations.
Third, operators frequently rely on repair stations to obtain parts for
them, and many operators rely on repair stations entirely to manage their
parts usage.
Fourth, when operator customers have planes to be torn down and parted out,
or parts inventories to be disposed of, 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 often are the first to learn of bargains on parts inventories and
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.
Seventh, HAT's extensive working relationships with aircraft leasing
companies, airlines, subcontractors and vendors provides the foundation for
identifying and evaluating further asset and company acquisitions.
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 time and breadth of services offered.
Page 28
Regulatory Oversight:
The aviation industry is highly regulated by the FAA in the United States and by
similar agencies in other countries. We must be certified by the FAA, and in
some cases authorized by the original equipment manufacturers, in order to
repair aircraft components and to perform maintenance and repair services on
aircraft. Commercial jets, like any other complex vehicles, require periodic
maintenance to allow for their safe and economical operation. Unlike many
vehicles, the repair and modification of such aircraft is highly regulated by
the various aviation authorities in each country of operation around the world.
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.
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 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 allows HAT the following
ratings: Instrument, Accessory, Limited Airframe, and Limited Engine for the
following aircraft (with certain limitations for each rating and aircraft):
RATING MANUFACTURER MAKE/MODEL
- ------ ------------ ----------
Airframe Boeing B-727-100-200 - All Series
Boeing B-737-100/200/300/400/500 - All Series
Boeing B-757-All Series, Limited
Douglas DC-8 - All Series
Douglas DC-9 - All Series
Power Plant Pratt & Whitney JT-3D
Pratt & Whitney JT-8D
General Electric CFM-56
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, JAA
Agency No. JAA.5903. Without the JAA 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.
Page 29
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 has
extensive engine hush-kit experience including Federal Express and Raisbeck kits
for Boeing 727 aircraft, ABX kits for DC9 aircraft, as well as Nordam and Av
Aero kits for Boeing 737 aircraft. Below is a brief description of HAT's core
services:
o Routine minor and major maintenance (phase checks A, B, C and D)
o Corrosion control and prevention programs
o Structural inspections
o Avionic upgrades
o Interior reconfiguration and refurbishment
o Strip and paint services to operators' livery requirements
o Comprehensive systems and structural modifications
o Flight test support
o Component overhaul
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 such as HAT.
As applied to large commercial jets, the term "maintenance" is a broad one that
includes regular and routine inspections, heavy maintenance ("C-checks"),
scheduled major overhauls ("D-checks"), Airworthiness Directives, Service
Bulletins, Structurally Significant Inspection Documents ("SSIDs"), and other
aging aircraft requirements to assure the continued integrity of commercial
aircraft. All such services are performed under FAA regulations, and only a
licensed facility can provide them.
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 such as Jetran
International, BCI Aircraft Leasing, Q Aviation and Avolar, HAT has entered into
a General Terms Agreement, which is an umbrella agreement that covers the
general framework for all services HAT expects to render to the customer.
HAT is qualified to perform all levels of maintenance service from pre-flight
checks up through complete major overhauls ("D" checks). Because of its low
overhead structure and the experience of its employees, HAT is widely recognized
throughout the industry as a provider of cost-effective, quality maintenance
services for Boeing 727 and 737 and DC9/MD80 aircraft. HAT is now building its
reputation in the newly entered Boeing 757 market.
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.
Page 30
Component Overhaul:
In order to better support its aircraft maintenance operations, HAT has been
developing its component overhaul capabilities. HAT performs maintenance, repair
and overhaul of airframe components, including fairing panels, nacelle systems
and exhaust systems, and refurbishes aircraft interior components. Not only do
these activities enjoy high profit margins, but existing and potential customers
also tend to view extensive component back shop capabilities positively.
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. Also, airline passengers
quickly form their opinion of aircraft from the attractiveness and comfort of
the interior. HAT provides interior replacement and refurbishment services as
well variety of custom seating arrangements to meet operators' requirements,
including all types of commercial configurations as well as 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 in its primary
maintenance services.
Market:
Narrow body commercial airliners (Boeing 727s, 737s, 757's DC9s, MD80s) are
HAT's primary market for selling aircraft maintenance, repair, and component
overhaul services. Major commercial airlines, lower-tier airlines, package
carriers, regional airlines and charter operators operate these aircraft. We
estimate that the North American market for MRO services is approximately $40
billion annually. HAT's target market of specific narrow body commercial jet and
regional 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; Jetglobal, LLC (6.29), an aircraft trading and leasing company; Avolar
Aerolineas, S.A. de C. .V (24.42%) a Mexican airline; ART Portfolio (3.22%);
Pegasus Aviation (2.59), a large aircraft leasing company and long-time Hamilton
Aviation customer; the Mexican Presidential Fleet (2.52%), 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 Airlines, 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:
o 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.
o Parts Sales: HAT generates revenue on all parts it installs in
customer aircraft.
o Commission Sales: HAT buys parts on request for customers that don't
maintain parts inventory and charges a commission for that service.
Page 31
o Aircraft storage: HAT offers environmentally favorable aircraft
storage to aircraft operators and has some 60 aircraft parked on its
ramp for which the customers are paying both tarmac space rental and
storage maintenance labor and components. 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 Hamilton.
o Inspection and Certification: HAT charges a service to inspect and to
re-certify parts, engines and airframes for customers.
o Aircraft Sales and Leasing Commissions: HAT takes full advantage of
its position as a maintenance provider to earn commissions on aircraft
sales or leases.
o 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.
o Labor Contracting: HAT provides teams of technicians to understaffed
competitors on a contract basis, or as field teams to rescue
distressed aircraft in remote locales.
These other services are synergistic in that each can generate additional
services and opportunities. For example, 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 insect, appraise, and return the aircraft to service on a turn-key basis
in accordance with the new operator's specifications. These abilities exist
because, as described above, aircraft repair stations such as HAT are companies
at the center of the aviation industry.
Emphasis on Quality:
Our MRO facility is licensed by the FAA and JAA. We emphasize quality and
on-time delivery to our customers. We are focused on meeting and exceeding FAA
and JAA 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.
Description of Property and Facilities:
The principal executive offices for Global are located at 6901 South Park
Avenue, currently some executive offices are now at 6451 South Country Club
Road, Suite 111 about one mile from the HAT and World Jet operational areas. The
principal executive offices for HAT and World Jet are located at the Hamilton
Aerospace hangar facilities in Tucson, Arizona at Tucson International Airport.
This favorable location provides 360 days of sunshine per year together with
extremely low humidity year round. These facilities are situated on the
northwest ramp on 22 acres of concrete within the airport proper and are
patrolled by the Tucson Airport Authority police force. HAT leases these
facilities at a rental rate of $25,650 per month.
The HAT facility is level and fully paved with concrete sufficient to handle the
largest aircraft on any part of its 22 acres. Two hangars provide the space for
any modification and maintenance work that must be performed indoors. The larger
hanger has 180' clear span and is 185' deep (30,400 sq. ft.), enabling it to
wholly enclose a DC9 and a 727 at the same time. The hangar has been modified to
serve as a paint booth as needed.
The smaller hangar is 100' clear span by 100' deep (10,000 sq. ft.) with 2,000
square feet of office space on the north side and another 4,000 square feet of
enclosed space on the south. Offices for HAT production planning and control
operations are in this area, as engineering, the welding shop, receiving,
materials and purchasing departments. The two hangars face each other at a
distance of approximately 220 feet. Numerous mobile offices have been added to
provide additional space for HAT and World Jet administrative and customer
representative offices.
Page 32
To the southeast of the large hangar is a 12,000 foot covered building used to
store aircraft components and maintenance equipment. A 9,000 square foot
warehouse on the west side of the facility houses the interior department as
well as additional storage for materials and records. Both main hangars are
equipped with lighting, water, compressed air, and 115/220/440 volt AC
electricity. All office spaces are heated and cooled.
During the fourth quarter of 2006, World Jet moved its entire inventory into
59,000 square feet, adjacent to the HAT complex, which World Jet is leasing for
the purpose of inventory storage.
Asset Purchases
On April 15, 2002, HAT entered into an agreement to purchase the operating
assets and inventory from an existing MRO, Hamilton Aviation ("Sale of Assets
Agreement") as well as entering into a Lease/Purchase Agreement with Hamilton
Aviation for the same assets so that HAT could commence operations pending a
closing of the Sale of Assets Agreement. Shortly after entering into this Sale
of Assets Agreement, Hamilton Aviation filed for reorganization under Chapter 11
of the United States Bankruptcy Code. The Sale of Assets Agreement was submitted
to the Bankruptcy Estate for approval as part of Hamilton Aviation's plan of
reorganization; and pending the Bankruptcy Estate's review and acceptance of the
Sale of Assets Agreement and such plan of reorganization, HAT and Hamilton
entered into an interim agreement whereby HAT agreed to assume Hamilton
Aviation's service contracts ("Service Agreement") pending approval of the Sale
of Assets Agreement. During the Bankruptcy Estate's review of the Sale of Assets
Agreement as part of Hamilton Aviation's plan of reorganization, HAT and
Hamilton Aviation renegotiated the terms and purchase price of the Sale of
Assets Agreement; and in March 2004, the modified Sale of Assets Agreement was
approved by the Bankruptcy Estate and memorialized and finalized by the entry of
a Settlement Agreement among HAT, Hamilton Aviation and the Bankruptcy Estate.
This Settlement Agreement was then confirmed by Order of the Bankruptcy Court
dated May 6, 2004.
The Settlement Agreement provides for the acquisition of all the ramp equipment,
special tooling, FAA-approved data, office furnishings and equipment, including
phone and computer systems necessary to perform the functions required to
operate the FAA-approved aircraft repair station. These assets are located in
the HAT facility and are being used daily in HAT's operations. More
specifically, the equipment and tooling includes:
o Ground equipment consisting of stands, compressors, jacks, tugs, power
and hydraulic equipment, etc.
o Special tools appropriate to the specific type of aircraft applied for
on the FAA Air Agency application, including engine slings, jack pads,
hand tools, special fittings, etc.
o Computer hardware and software relevant to the inventory purchased and
repair logistics management
o Machinery including drill presses, lathes, shears, brakes, presses and
other machine shop equipment.
o General tools used in repair, maintenance and modification of
commercial aircraft.
The Settlement Agreement also includes certain intellectual property assets from
Hamilton Aviation as well as the estate of Gordon B. Hamilton (deceased),
including all uses of the name "Hamilton," "Hamilton Aviation," "Gordon B.
Hamilton," "Gordon D. Hamilton," "Hamilton Brothers," and "Hamilton
Aeronautics".
The Settlement Agreement requires a down payment of $100,000, $73,365.75 of
which had already been paid, and monthly payments of $15,000 plus interest at 6%
per annum. An additional lump sum payment is to be made by HAT within 60 days of
the Entry date plus $50,000 shall be paid on or before each annual anniversary
of the Entry Date. The agreement has a reduced payoff provision stipulating that
if all payments have been made in a timely manner by the fifth anniversary date
of the entry date $1,000,000 will be considered as payment in full, otherwise
the amount is to be $1,500,000. The agreement calls for a five year entry date
anniversary profit payment equal to one-half of HAT's net profits in excess of
12%, but limited so as to provide no more than a total of all payments due of
$1,500,000 plus interest over the five-year term of the agreement. The Company
recorded the $1,500,000 as the total liability pursuant to the Settlement
Agreement.
As set forth above, during the quarter ended March 31, 2004, the Sale of Assets
Agreement was renegotiated and finalized in the Settlement Agreement. The
liabilities which accrued during the period HAT was operating pending approval
of the transaction by the bankruptcy estate were not required to be paid. The
overaccrued liabilities have been recognized as a gain during the period ended
June 30, 2004.
Page 33
Employees and Employment
At December 31, 2006, a total of approximately 150 employees were employed by
HAT, 27 of which performed administrative functions. World Jet has approximately
20 employees consisting of sales staff and administrative personnel. In
connection with the acquisition of World Jet by Global, Global retained the
entire World Jet staff including key sales and management personnel to maintain
customer contacts and relations to assure a smooth and consistent administration
of operations.
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 adequately 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.
Significant Employees
The following persons are considered significant employees of our HAT
subsidiary:
Ian Herman, Chairman and Chief Executive Officer. See Biography information
under Section titled Directors, Executive Officers, Promoters, and Control
Persons.
John B. Sawyer, President. See Biography information under Section titled
Directors, Executive Officers, Promoters, and Control Persons.
Alan R. Abate, Vice President and Senior Corporate Officer. Mr. Abate started
his aviation career in 1976 at Hamilton Aviation. During his early years, he
earned his FAA Airframe and Powerplant certificates and honed his skills in
transport category aircraft repair, maintenance and modification. In 1986, Mr.
Abate joined the management team at Hamilton Aviation. Working days and going to
school at night, he earned an Advanced Certificate and AAS degree, with honors,
in Business Administration from Pima College in Tucson, Arizona. Since joining
HAT shortly after its inception in April 2002, Mr. Abate has been responsible
for contract management and corporate administration including human resources
and information systems for Hamilton Aerospace.
Page 34
Patricia Graham, Vice President of Finance. Since 1995, Patricia Graham has been
associated with the aviation industry serving as Divisional Controller for IAC
Complete Controls, Inc., as Regional Controller for American Aircarriers
Support, Inc., and as Controller and Corporate Officer for Evergreen Air Center,
Inc. prior to joining HAT. Ms. Graham graduated Summa Cum Laude from the
University of Arizona with a B.S. in Business Administration. Ms. Graham has
over 15 years history in accounting, fiscal planning and budgetary operations,
as well as 5 years public accounting experience.
David T. Querio - Vice President of Operations, Hamilton Aerospace
Mr. Querio joined the company in May 2004 and brings with him over 21 years of
aviation industry maintenance and maintenance management experience. Prior to
joining HAT, Mr. Querio was Vice President of Operations for a large FAR145
Repair Station supervising in excess of 450 personnel. Prior to this, Mr. Querio
served as Vice President, General Manager of the AMS Goodyear, AZ facility; Vice
President, Engineering and Maintenance for Mesa Airlines; Vice President,
Maintenance for Mahalo Airlines and Vice President; Customer Support, Planning
and Sales for West Virginia Air Center. Mr. Querio also worked for American
Airlines for nine years in numerous mechanical and management positions.
The following persons are considered significant employees of our World Jet, Inc
subsidiary:
Tina Longo, Vice President of Outside Sales & Purchasing. Native Tucsonan, 30
years in the Aviation Parts industry, 15 years with the Hamilton repair station
organization as Director of purchasing/materials. Prior positions with Lockheed
Aerospace, Intertech Aviation, Dynair Corp, and Gates LearJet.
Ramon P. Curbita, Accountant. Has been with the company since 2000. A
professional with 17 years experience in accounting and other related fields. He
has extensive knowledge in various industries such as banking, manufacturing,
construction, wholesale and retail industry. Graduated college with the a
Bachelor of Science Degree in Commerce, major in Accounting and an undergraduate
of Master in Business Administration at the Polytechnic University of the
Philippines. He held various positions as Finance and Operations Manager for Tan
Holdings Group of Companies in Guam and Chief Accountant for Saipan Ice and
Water Company in the Commonwealth of the Northern Mariana Islands, U.S.
Commonwealth, Pacific.
WORLD JET CORPORATION, INC. ("WORLD JET")
- -----------------------------------------
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. World Jet
is recognized by the Airline Suppliers Association, ("ASA"), as an ASA-100 (FAA
Advisory Circular 00-56) accredited supplier of aircraft parts. This
certification, audited annually, is recognized and accepted by the FAA for
suppliers of replacement aircraft parts.
Page 35
Regulatory Oversight
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 ("ASA") 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.
Property and Facilities
During the fourth quarter of 2006, World Jet moved its entire inventory into
59,000 square feet, adjacent to the HAT complex, which World Jet is leasing for
the purpose of inventory storage.
Employees
World Jet has approximately 20 employees consisting of sales staff and
administrative personnel. In connection with the acquisition of World Jet by
Global, Global retained the entire World Jet staff including key sales and
management personnel to maintain customer contacts and relations to assure a
smooth and consistent administration of operations.
MANAGEMENT DISCUSSION AND ANALYSIS
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. During 2004, Global acquired 100
percent of the common stock of World Jet Corporation, 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.
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. 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.
Management is cautiously optimistic that efforts to strengthen the quality of
our customer base, our adeptness at garnering jobs with the likelihood of good
gross profit potential and our continued vigilance at holding down costs will
enhance future results and our profitability will increase in 2007. 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 and securing more
business from existing customers as well.
Page 36
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. This
trading decreased in 2006 and was 9% of total revenue for the Company. 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 and fewer than 5 during the year ended December 31,
2006. 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.
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, cash availability 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.
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.
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.
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.
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.
On March 13, 2007, the Company announced that they had entered into an exclusive
service agreement with, Global Aircraft Leasing Partners ("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. GACF and GALP have entered into a
strategic alliance wherein Global would initially acquire a 20% or 40% interest
in GALP in exchange for a capital contribution of $20,000 or $40,000, together
with infrastructure, industry expertise, management assistance, and other
non-monetary contributions. At June 30, 2007, negotiations were still being
conducted to establish an operating agreement for GALP, as well as to make final
determination as to the Company's percentage of interest, which may be finalized
at either the initial 20% or at 40%, depending on the result of those
negotiations. The Company had not made any capital contribution as of June 30,
2007 and consequently was not a participating member of GALP during the period
covered by these financial statements. Global will specifically not be required
to invest capital in aircraft acquired by GALP. 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.
Global expects that its strategic partnership with GALP will have a positive
effect upon the volume of its MRO and parts sales businesses.
Page 37
Since the formation of the Jetglobal LLC, Management has been unable to obtain
timely and accurate financial information legally demanded by the Company form
Jetglobal. As a consequence, during the first quarter 2007, Management decided
to transfer its ownership interest in Jetglobal , LLC, an entity in which the
Company had a 30% ownership interest, to the other partner in Jetglobal, LLC,
BCI Aircraft Leasing. The parties executed a final agreement and settlement on
April 20, 2007 which was revised on June 29, 2007. Under the terms of the final
agreement and settlement, in consideration for the Company's 30% ownership
interest in Jetglobal, the Company will receive 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 the $1,150,000 unpaid purchase price of the aircraft. The
Company also retained a trailing interest of 18% of any amount paid Jetglobal
under (i) satisfaction of the claim against the Delta Bankruptcy Estate,
estimated at $2,118,461and (ii) the Jetglobal claim against AFG for breach of
contract
Avolar's increasing fleet size resulted in increasing receivables due Hamilton
Aerospace. At the same time, Avolar's past due receivables increased
significantly. In order to protect the Company's financial status, late in
February 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 Hamilton
Aerospace. During the second quarter, Avolar and the Company reassessed Avolar's
payment plan and by the end of June 2007, Avolar had made progress reducing the
amount owed Hamilton Aerospace, and was in full compliance with the terms of its
new payment schedule. Avolar has stated its intention to bring its accounts
current with Hamilton Aerospace and World Jet and continue its maintenance and
support agreements with both companies. However, it remains unlikely that the
income and profit contributions from Avolar to Hamilton Aerospace and World Jet
in 2007 will reach the amounts previously indicated by Management.
RESULTS OF OPERATIONS
We are a holding company, and the bulk of our day to day operations are
currently and were as of December 31, 2006, conducted by our operating
subsidiaries, HAT, which was organized on April 5, 2002 and began operations
April 15, 2002 and World Jet, which was acquired with a transaction date of
January 1, 2004. Our aircraft trading transactions are conducted by Global.
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, most 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.
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. 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.
Page 38
2004 - 2005
Significant events that occurred during 2005 include:
In early July of 2005, The Company's subsidiary HAT, on behalf of
subsidiary World Jet, agreed to purchase the inventory held on consignment
belonging to Jetran International, Ltd. plus one DC9-82, serial number
48092 for a price of $2,900,000.
On July 27, 2005, 7,200,000 shares of restricted common stock were issued
to Barron Partners, L.P. upon their exercise of warrants to purchase same
at $.68 per share. The total purchase price of the stock was $4,896,000.
These proceeds were used in part to cover some of the cost of the above
inventory purchase.
On August 12, 2005, HAT entered into a five-year maintenance contract with
the new Mexican airline, Avolar. Potential value of this agreement is
linked to the planned growth of Avolar. The business plan of Avolar calls
for a thirty aircraft fleet by mid 2008.
On August 26, 2005, Global together with BCI formed a joint venture
Delaware limited liability company called Jetglobal, LLC. This is a special
purpose LLC formed to acquire and remarket commercial jet aircraft. On
September 1, Jetglobal entered into an agreement to acquire a fleet of 26
Boeing 737-200 aircraft from Jetran International.
A modification of our borrowing agreement with our lender was finalized on
December 9, 2005. This new agreement includes an operating credit line of
$5 M and a line of $7M solely for the acquisition of aircraft.
During 2005, we saw revenues increase to $41,228,648, which is a 33.6% increase
over 2004`s $30,851,118. (See following paragraph regarding Jetglobal revenue).
The Company had $2.3 million in net income, before taxes in 2004 compared with
$3.5 million is 2005; and EBITDA increased from $3,108,651 for 2004 to
$4,528,655 in 2005. It should be noted that 2004 net income and EBITDA was aided
by the inclusion of $1,144,502 in extraordinary items while there were no
extraordinary items in 2005. A comparison of the Company's gain from operations
illustrates 80.9% growth from 2004`s $1,320,770 to 2005`s $2,389,294.
It should be noted that the required accounting treatment for Jetglobal's
results is an entry on the Company's Income Statement for the Company's
percentage of the net income of the Jetglobal partnership. This is an important
consideration to keep in mind for 2005 results. Those who look to revenue growth
as the fundamental indication of a company's success and growth need to be aware
that no matter how much revenue is generated by Jetglobals's aircraft trading
activities no increase in revenue will be shown on the Company's results. Net
income, however, will reflect the Company's percentage of the net income of
Jetglobal operations.
Efforts to take advantage of opportunities, as they arose, to grow our aircraft
trading business met with success. Aircraft trading denotes the purchase and
resale or lease, for profit, of aircraft, aircraft engines, and /or other
aircraft major components. Aircraft trading specifically encompasses the
transactions representing approximately 19% of the Company's 2005 annual
revenue. This aircraft trading was done directly by the Company without
Jetglobal participation. Our 2004 revenue included $7.9 million attributable to
aircraft sales compared with $13.6 million in 2005. Gross profit for the fourth
quarter of 2005 was $2,307,561 while gross profit for the fourth quarter of 2004
was $1,554,744, also a substantial increase.
While the Company aggressively seizes revenue-producing opportunities such as
aircraft trading, management gauges results by looking at what has been the core
revenue producing activity to date, the sale of labor hours. In 2004, revenue
produced from labor was $14.3 million and was virtually the same in 2005 at
$14.3 million. Billable hours for each period are essentially the same. The
comparative costs for all direct labor, including work performed by outside
contractors, was $8,428,919 in 2004 compared with $9,190,898 in 2005,
representing a 9% increase in cost. The relationship between direct labor costs
to direct labor revenues rose approximately 5% to about 64% in 2005 as compared
with 59% in 2004. 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. Included in the operating expenses for the Company in the years ended
December 31,2005and December 31, 2004 are $326,594 and $476,613, respectively,
associated with the award of stock and stock options.
Page 39
In order to compare results from one period to the next it should be remembered
that 2005 had no extraordinary gains. There was a reduction in tax expense of
$189,816 resulting from the over-expensing of taxes in our World Jet subsidiary
during a prior period. There was $1,144,502 in gains reported during 2004 that
were the result of several contract renegotiation items. In 2004, our HAT
subsidiary experienced a gain of $88,000 on the waiving of rental fees to
Hamilton Aviation during contract negotiations. HAT also experienced a gain of
$607,194 in 2004 as the result of the acceptance of a payment of $750,000 cash
to satisfy all obligations under then existing agreement generated upon the
purchase of the Hamilton Aviation assets. For details of the Hamilton Aviation
transaction see Note 12, Related Party Transactions, in the footnotes of the
Audited Financial Statements included as part of this report. World Jet reported
gains of $449,308 in 2004 related to renegotiations of amounts due under various
agreements, the predominate items being: $209,708 in commissions was waived,
$173,000 of debt was forgiven and $33,700 was the result of the renegotiation of
management services fees.
Company SG&A expenses were $4,826,519 for 2004 and as a percentage of revenues
were 16%. In 2005 SG&A expenses were $7,780,332, which was 19% as a percentage
of revenues. During 2004, SG&A expenses included approximately $680,000 due to
commissions related to aircraft sales transactions compared with $1,260,000 in
2005. Other notable increases in SG&A expenses included:
o An increase in rent expense and facility use fees from 2004 to 2005 of
$253,824, mainly attributed to additional warehouse space for
inventory storage and annual increases imposed by our landlord, TAA.
Hangar space in Tijuana, Mexico to facilitate servicing our Avolar
contract was $139,093 and was fully recovered from Avolar.
o An increase in insurance from 2004 to 2005 of $192,215 mainly
attributed to Global's new D&O policy and new coverage related to
aircraft trading, and property coverage on additional space required
by inventory additions.
o An increase in travel from 2004 to 2005 of $156,418 relating to the
Avolar project and also to aircraft trading.
Interest expense for 2004 was $329,023 and for 2005 was $386,927.
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2005:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2005 Revenues 11,396,538 23,505,112 10,622,681 (4,295,683) 41,228,648
Year End Cost of Sales (7,930,337) (19,594,059) (7,829,248) 4,295,683 (31,057,961)
Results Expenses (2,489,347) (3,692,489) (1,599,557) (7,781,393)
Operating Profit 976,854 218,564 1,193,876 2,389,294
(Loss)
Page 40
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2004:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2004 Revenues 1,047,680 25,288,888 7,058,464 (2,543,914) 30,851,118
Year End Cost of Sales (456,643) (20,871,009) (5,411,688) 2,543,914 (24,195,426)
Results Expenses (1,524,055) (2,873,658) (937,209) (5,334,922)
Operating Profit 933,018 1,544,221 709,567 1,320,770
(Loss)
2005 - 2006
During 2006, revenues were $34,542,195 which represents a decrease of 16.2% from
2005`s figure of $41,228,648. (see following paragraph regarding Jetglobal
revenue). The Company had $3.123 million in net income in 2005 and $.826 million
in 2006; and EBITDA decreased from $4,528,655 in 2005 to 2,468,664 in 2006. A
decline from 2005`s $2,389,294 in 2006 resulted in a loss from operations of
$2,109.
It should be noted that the required accounting treatment for Jetglobal's
results is an entry on the Company's Income Statement for the Company's
percentage of the net income of the Jetglobal partnership. During 2005,
Jetglobal had a sale rescinded due to a customer canceling a sales agreement.
This sale was guaranteed by Jetglobal's other partner. This other partner and
Global entered into an agreement in 2005 wherein Global sold its interest in the
four aircraft that were part of the 2005 rescinded transaction to its Jetglobal
partner, BCI, at a price of $1,957,692 and a profit of $1,096,154.. The cost for
the aircraft was the original Jetglobal acquisition cost. Global transferred all
of its rights in the four aircraft from Jetglobal to BCI. Because the aircraft
were sold to the controlling owner, BCI, the sale was effectively accounted for
by Jetglobal as a distribution of the aircraft to the controlling owner. During
early 2007, the Company has embarked on a new partnership that will be involved
with aircraft leasing, (see Subsequent Events section of the Financial
Statements included with this filing). Those who look to revenue growth as the
fundamental indication of a company's success and growth need to be aware that
no matter how much revenue is generated by trading partners in which we have
minority interest and no control over management, no increase in revenue will be
shown on the Company's results. Net income, however, will reflect the Company's
percentage of the net income of trading partners.
Efforts to take advantage of opportunities, as they arose, to grow our aircraft
trading business met with some success. Aircraft trading denotes the purchase
and resale or lease, for profit, of aircraft, aircraft engines, and /or other
aircraft major components. Aircraft trading specifically encompasses the
transactions representing approximately 9% of the Company's 2006 annual revenue.
This aircraft trading was done directly by the Company without Jetglobal
participation. Aircraft sales in 2006 were $3.175 compared with $13.6 million in
2005. Gross profit during the fourth quarter of 2006 was $49,338. Gross profit
for the fourth quarter of 2005 was $2,307,561.
While the Company aggressively seizes revenue-producing opportunities such as
aircraft trading, management gauges results by looking at what has been the core
revenue producing activity to date, the sale of labor hours. In 2006, revenue
produced from labor was $14.3 million and was virtually the same in 2005 at
$14.3 million. Billable hours for each period are essentially the same. The
comparative costs for all direct labor, including work performed by outside
contractors, was $8,945,712 in 2006 compared with $9,190,898 in 2005,
representing a 3% decrease in cost. The relationship between direct labor costs
to direct labor revenues decreased approximately 2% to about 62% in 2006 as
compared with 64% in 2005. 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. Included in the operating expenses for the Company in the years
ended December 31,2006 and December 31, 2005 are $617,459 and $326,594,
respectively, associated with the award of stock and stock options.
Page 41
Company SG&A expenses in 2006 were $8,591,738 and as a percentage of revenue
were 25%. In 2005, SG&A expenses were $7,780,332, which was 19% as a percentage
of revenues. During 2006, SG&A expenses included approximately $669,500 due to
commissions related to aircraft sales transactions compared with $1,260,000 in
2005. Other notable increases in SG&A expenses included:
Our World Jet subsidiary had an increase in SG&A of $267,421 the largest
part of which was associated with the movement of inventory to its new
location at 7001 South Park coupled with the counting and classification,
prior to the 2007 audit of the balance of the inventory purchased from
Jetglobal.
Global had a significant increase in professional fees in the amount of
$618,000 over the 2005. Approximately $96,900 was related to auditing and
accounting fees.
Interest expense for 2006 was $587,183 and for 2005 was it was $386,927.
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2006:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2006 Revenues 4,475,000 26,058,040 10,591,165 (6,582,010) 34,542,195
Year End Cost of Sales (3,489,909) (20,929,517) (8,103,408) 6,582,010 (25,940,824)
Results Expenses (3,394,122) (3,342,380) (1,866,978) (8,603,480)
Operating Profit (2,409,031) 1,786,143 620,779 (2,109)
(Loss)
o The "Eliminate" column reflects the $ amounts of Inter-Company Sales
by World Jet to HAT in 2006.
o On a consolidated basis Revenues and Cost of Sales are reduced to
reflect the Revenues and Cost of Sales for external sales only, with a
zero $ impact on stand alone or consolidated profit (loss) figures.
The following table graphically depicts the operating performance for Global,
HAT and World Jet subsidiaries on a stand-alone and consolidated basis for the
year ended December 31, 2005:
Global HAT World Jet * Eliminate
Stand Alone Stand Alone Stand Alone Intercompany Consolidated
Period $ $ $ $ $
2005 Revenues 11,396,538 23,505,112 10,622,681 (4,295,683) 41,228,648
Year End Cost of Sales (7,930,337) (19,594,059) (7,829,248) 4,295,683 (31,057,961)
Results Expenses (2,489,347) (3,692,489) (1,599,557) (7,781,393)
Operating Profit 976,854 218,564 1,193,876 2,389,294
(Loss)
Page 42
Quarter Ended March 31, 2007
Net sales for the three months ended March 31, 2007 decreased $5.2 million, or
45%, to $6.3 million from $11.5 million for the three months ended March 31,
2006. The decreases were due to the absence of aircraft sales by Global coupled
with a decrease in maintenance revenues. Aircraft sales were $2.57 million in
the 1st quarter of 2006 which tend to vary significantly. The 1st quarter of
2007 had only $50,000, which represented a forfeited deposit. Maintenance
revenue was negatively impacted by the cash crunch experienced as a result of
the high unpaid balances of Avolar and BCI discussed under the Liquidity section
of this document.
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 March 31, 2007 decreased $3.4 million, or
45%, to $4.1 million from $7.5 million for the three months ended March 31,
2006. Cost of sales decreased on a quarter-to-quarter basis due to the decrease
in sales.
Gross profit for the three months ended March 31, 2007 of $2.2 million was less
than the same period in the prior year by $1.8 million 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
three months of 2007, revenue produced from labor was $2,448,750 as compared
with $4,234,072 the first three months of 2006. This represents an decrease of
40%. The comparative costs for all direct labor, including work performed by
outside contractors, was $1,623,299 in the first three months of 2007 compared
with $2,179,901 for the same period in 2006. All direct labor costs were 25.8%
of total sales in first three months of 2007 compared with 33% in the first
three months of 2006. The relationship between direct labor costs and direct
labor revenues went up 14% from 2006 to 2007. 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. A sudden decrease in volume
will have a negative impact due to the retention of core labor during slower
periods. Management is confident that adjustments to volume changes will be made
and profitability will benefit over time.
Selling, general and administrative expenses for the three months ended March
31, 2007 increased as percentage of sales to 25.5% from 17.1% in three months
ended March 31, 2006 due to net decrease in sales.
Interest expense for the Company, during the first three months of 2007, was
$131,600.
Management is cautiously optimistic that our adeptness at garnering jobs with
the likelihood of a high gross profit potential and our continued vigilance at
holding down costs will improve for the remainder of 2007. 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 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 remainder of 2007 and into
the future.
The following tables depict our pre-tax operating profit for the first quarter
of 2007 and for the first quarter of 2006 on a stand-alone basis and a
consolidated basis for Global, HAT and World Jet:
Page 43
1st Quarter 2007
Global HAT World Jet Intercompany
Stand-Alone Stand-Alone Stand-Alone Eliminations Consolidated
Revenues 50,000 5,609,431 2,117,156 (1,497,587) 6,279,000
Less: Cost of sales 234 4,010,966 1,612,345 (1,497,587) 4,125,958
Less: Expenses 588,580 692,888 318,634 617 1,599,485
Pre-tax Operating Profit (Loss) (538,814) 905,575 186,177 617 553,557
1st Quarter 2006
Global HAT World Jet Intercompany
Stand-Alone Stand-Alone Stand-Alone Eliminations Consolidated
Revenues 3,175,000 6,554,442 2,975,789 (1,195,684) 11,508,723
Less: Cost of sales 1,949,139 4,586,370 2,195,743 (1,195,843) 7,535,409
Less: Expenses 676,674 777,610 516,179 1,970,463
Pre-tax Operating Profit (Loss) 549,187 1,190,462 263,202 2,002,851
Quarter Ended June 30, 2007
Net sales for the six months ended June 30, 2007 decreased $4.3 million, or
19.8%, to $17.4 million from $21.7 million for the six months ended June 30,
2006. This reduction took place in our maintenance and part sales segments.
Aircraft sales were $3.2 million in the first six months of 2006 compared with
$7.9 million in the first half of 2007. These sales tend to vary significantly
on a period-to-period basis based on the particular aircraft sold as well as the
time necessary to complete a transaction. For example, the 1st quarter of 2007
had only $50,000, which represented a forfeited deposit.
Aircraft maintenance shows a $5.3 million decrease from the six months ended
June 30, 2006 compared to the six month ended June 30, 2007. This reduction in
maintenance directly affected part sales by our World Jet subsidiary because HAT
is their largest customer. Part sales saw a $1.7 million decrease for the same
period comparison. The reduction in revenues for maintenance and part sales is
firstly, a direct result of the situation created by the high unpaid balances of
Avolar and BCI discussed in the liquidity section of this document. This cash
shortage will be cured when sales are closed on the aircraft received in the
Jetglobal settlement and as Avolar and BCI pay their outstanding balances. The
second factor is the time necessary to fill slots in our maintenance program
that were reserved for Jetglobal, BCI and Avolar work. Marketing efforts are
experiencing success in this area and Management believes that the third and
fourth quarters of 2007 should show a gradual and consistent recovery from what
Management believes is a temporary setback in Company-wide growth.
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.
Consolidated cost of sales for the six months ended June 30, 2007 decreased $1.9
million, or 12.2%, to $13.4 million from $15.3 million for the six months ended
June 30, 2006. Cost of sales reflects the decrease in sales for the same
periods. Cost of sales for our aircraft trading segment increased $3.6 million
in first half of 2007 over the first half of 2006 figure. In 2006, cost of sales
included a one-time engine purchase of $687K. After the elimination of this
engine charge, 2006 cost of aircraft sales is 20% of sales compared with 13% in
2007.
Company-wide gross profit for the six months ended June 30, 2007 of $4 million
was less than the same period in the prior year by $2.4 million. 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.
Page 44
While the Company engages in various revenue-producing activities 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
six months of 2007, revenue produced from labor was $4,935,767 as compared with
$8,158,085 the first six months of 2006. This represents an decrease of 39.5%.
The comparative costs for all direct labor, including work performed by outside
contractors, was $3,911,050 in the first six months of 2007 compared with
$6,200,757 for the same period in 2006. All direct labor costs were 22.5% of
total sales in first six months of 2007 compared with 28.6% in the first six
months of 2006. . All direct labor costs were 79% of labor sales in first six
months of 2007 compared with 76% in the first six months of 2006. The
relationship between direct labor costs and direct labor revenues saw relative
costs increase 3% from 2006 to 2007. 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. A sudden decrease in volume should have a
negative impact due to the retention of core labor during slower periods.
Management is confident that adjustments to volume changes should be made and
profitability will benefit over time.
Selling, general and administrative expenses for the six months ended June 30,
2007 remained as percentage of sales at 18% much the same as it was in six
months ended June 30, 2006.
Interest expense for the Company, during the first six months of 2007, was
$386,927. Of that amount, $172,986 is billable to a customer.
Management is cautiously optimistic that our adeptness at garnering jobs with
the likelihood of a high gross profit potential and our continued vigilance at
holding down costs is expected to improve for the remainder of 2007. 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 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 should experience increasing growth and profits during the remainder of
2007 bolstered by sales of all or some of the five aircraft received from the
wind-down of our Jetglobal partnership.
The following tables depict our pre-tax operating profit for the second quarter
and first six months of 2007 and for the second quarter and first six months of
2006 on a stand-alone basis and a consolidated basis for Global, HAT and World
Jet:
First six months of 2007
Global HAT World Jet Intercompany Consolidated
Stand-Alone Stand-Alone Stand-Alone Eliminations
Revenues 7,900,000 8,299,107 3,491,025 (2,287,242) 17,402,890
Less: Cost of sales 6,846,317 6,358,770 2,516,012 (2,287,242) 13,433,857
Less: Expenses 1,103,554 1,402,185 623,687 (1,235) 3,128,191
Pre-tax Operating Profit (49,871) 538,152 351,326 1,235 840,842
(Loss)
2nd Quarter 2007
Global HAT World Jet Intercompany Consolidated
Stand-Alone Stand-Alone Stand Alone Eliminations
Revenues 7,850,000 2,739,676 1,373,869 (789,655) 11,173,890
Less: Cost of sales 6,846,083 2,347,804 903,667 (789,655) 9,307,899
Less: Expenses 519,666 704,605 305,053 (618) 1,528,706
Pre-tax Operating Profit 484,251 (312,733) 165,149 618 337,285
(Loss)
Page 45
First six months of 2006
Global HAT World Jet Intercompany Consolidated
Stand-Alone Stand-Alone Stand-Alone Eliminations
Revenues 4,475,000 14,342,584 6,162,668 (3,272,878) 21,707,374
Less: Cost of sales 3,523,624 10,427,871 4,624,837 (3,272,878) 15,303,454
Less: Expenses 1,335,538 1,497,811 988,074 3,821,423
Pre-tax Operating Profit (384,162) 2,416,902 549,757 2,582,497
(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 658,864 720,201 471,895 1,850,960
Pre-tax Operating Profit (933,349) 1,226,440 286,555 579,646
(Loss)
The cost of sales in Global exceeds the revenues because it includes a one-time
engine purchase of $687K.
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 Guidance Credit portion of the agreement
has expired and no longer exists. 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 June 30, 2007 the applicable interest rate was 8.32% per annum.
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. The term of the Line of 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 the Line of 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. If any Letter of Credit Facility is drawn upon,
all principal and accrued and unpaid interest shall be due and payable upon
demand.
At quarter ending June 30, 2007, the Company was not in compliance with certain
covenants of the loan agreement with M&I Bank. We do not anticipate any actions
by M&I that would materially affect Company liquidity.
The Borrowers paid total fees and expenses of approximately $37,500 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 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 March 31, 2007 was $4,872,000. The
Letter of Credit for $128,000 which was issued to TAA as part of the lease
agreement for the HAT facility, expired during the second quarter of 2007. (see
Note 16, Subsequent Events, to the financial statements included as part of this
filing.
Page 46
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 was originally indebted to the Lender in the
principal amount of $2,800,000. The principal amount of the agreement was
originally 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 yet materialize. This obligation was paid in full during the
second quarter of 2007.
On March 15, 2007, the Company entered into a secured promissory note agreement
with Ardennes Value Fund, a related party due to the Company's planned GALP
participation. The principal amount of the note is $200,000 with simple interest
at a rate of 15% per annum. Required payments are interest only for the first
two months beginning April 15, 2007 and all remaining interest and principal was
paid in full during June 2007.
During the 2nd quarter of 2007, the Company entered into a short-term note
agreement in the amount of $350,000 with Armando and Herminia Rios. The note
specified interest at $10,000 per week. This note was paid in full in July of
2007.
On June 30, 2007 the company entered into a note agreement with Jeffrey Ervine,
a related party pursuant to the planned GALP partnership,. The principal amount
of the note was $800,000 with simple interest at 12% per annum plus a fee of
$80,000. The term of the note is six months. A Boeing aircraft secures the note.
On June 21, 2007, the company secured a line of credit with the Frank and Maxine
Smith Family Trust in the amount of $1,000,000. At June 30, 2007, $300,000 had
been received under this agreement. The terms of the line of credit include a
$55,000 set-up fee and simple interest on the unpaid balance at 15% per annum.
The note is all due and payable November 20, 2007. John B. Sawyer is guarantor
on the line of credit.
During the second quarter of 2007, the Company received $100,000 from Raymon C.
Flores ("Flores"). On July 17, 2007, a note for $300,000 was entered into by the
Company and Flores. The Company received an additional $200,000 during July,
2007. The interest on the note is payable at $8,000 per week and the unsecured
note is due October 27, 2007. Prior to the formal agreement on July 17, 2007,
the Company had agreed to pay interest on the $100,000 received during the
second quarter of 2007 at a rate of $4,000 per week but, this rate is no longer
in effect.
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, late in
February 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 June 2007, Avolar had made progress reducing the amount owed Hamilton
Aerospace. The payment amount due each week on Avolar's payment schedule was
reduced during the quarter and currently Avolar is in compliance with their
payment agreement. 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 Hamilton Aerospace by BCI Aircraft Leasing, Inc. had also
reached unacceptable levels. The parties have negotiated a settlement, which was
discussed earlier, related to the transfer of certain aircraft to eliminate the
Company's ownership in Jetglobal. Although BCI is presently cooperating with the
Company to resolve these issues equitably, a final agreement relative to a cash
payment to settle the amounts due by BCI has not at this time been reached
between the companies. Management believes that the receivable amounts reflected
on the financial statements, presented herein, are recoverable.
At this time, the Company has no plans to make any significant capital
expenditures for the remainder of 2007.
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.
Page 47
Significant changes in the Company's Balance Sheet for the 1st and 2nd quarters
ended June 30, 2007 were as follows:
Total assets increased from $28,474,276 at December 31, 2006 to $28,730,903
at June 30, 2007. Significant changes for the period were:
Cash on hand decreased $102,866.
Accounts receivable increased $111,437.
Due from investee partner at December 31, 2006 decreased $327,953 as a
result of the settlement with BCI related to Jetglobal. The settlement
also contributed to the $ 7,018,545 increase in inventory by adding
$7,150,000 during the second quarter of 2007. Additionally, the
December 31, 2006 balance in equity in net assets of and advances to
affiliates of $6,063,067 became $0 as a result of the settlement
transaction.
During the first six months of 2007, total liabilities decreased from
$12,720,070 at December 31, 2006 to $12,171,488 at June 30, 2007, primarily
due to:
Accounts payable decreased from the December 31, 2006 balance by
$2,081,652.
Notes payable, short term increased 580,577 and Notes payable, related
party increased $800,000.
Billings in excess of costs and expenses on uncompleted contracts
decreased $195,281.
Cash
As of June 30, 2007 we had $1,574 in cash on hand and approximately $7,982,236
in collectible trade receivables.
Thus far in 2007, the Company has experienced a major cash crunch. Management
believes that the Company's cash position will grow consistently healthier for
the remainder of 2007 and that the Company will fully recover from the effects
of this cash shortage. Management is basing its assessment on several factors:
o The Company believes it will be successful, during the third and fourth
quarters of 2007, in selling the five aircraft, received due to the
termination of its partnership in Jetglobal. Management believes that a
conservative estimate of cash realized from the sale of these aircraft will
be in excess of $7,500,000.
o Avolar continues to pay down its receivable balance. Avolar representatives
have recently met with the Company and indicated their desire to payoff all
money due to the Company, (about $2.4 million), during the remainder of
2007.
o Our HAT subsidiary is finishing up work on two BCI aircraft, at BCI's
request. Management has taken a firm position that all money due from BCI,
(about $2 million), will be received prior to the departure of any BCI
owned aircraft.
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.
Page 48
Ian Herman
The Company has an employment agreement with Ian Herman that provides that he
shall serve as Chairman of the Board of Directors and Chief Executive Officer of
the Company until July 21 2006, subject to successive one-year extensions, at
the election of the Company and Mr. Herman, in the event that the Board of
Directors fails to give him written notice, on or before July 21 2006, of its
intent not to renew the agreement or to renew on different terms. The Company
has agreed to compensate Mr. Herman at a base salary of not to exceed
$150,000.00 per year plus employee benefits and has agreed to indemnify him
against certain losses. Mr. Herman is entitled to an increase in base salary
based upon the performance of the Company. In the event the Company's net profit
equals at least $1,000,000.00, Mr. Herman's base salary shall be increased not
to exceed $200,000.00 for such annual period and in the event the Company's
annual net profit is greater than $1,000,000.00, the base salary shall increase
up to $250,000.00, with such increase not to exceed 5% of all net profit in
excess of $1,000,000.00. Mr. Herman may also be entitled to an annual
discretionary bonus as determined by the Company's board of directors.
John Sawyer
The Company has an employment agreement with John Sawyer that provided that he
would serve as President and Chief Operating Officer of the Company until July
21, 2006, subject to successive one-year extensions, at the election of the
Company and Mr. Sawyer, in the event that the Company failed to give him written
notice, on or before July 21, 2006 of the Company's intent not to renew the
agreement or to renew on different terms. Pursuant to this agreement, the
Company agreed to compensate Mr. Sawyer at a base salary not to exceed
$150,000.00 per year plus employee benefits and, agreed to indemnify him against
certain losses. Mr. Sawyer is entitled to an increase in base salary based upon
the performance of the Company. In the event the Company's net profit equals at
least $1,000,000.00, Mr. Sawyer's base salary shall be increased not to exceed
$200,000.00 for such annual period and in the event the Company's annual net
profit is greater than $1,000,000.00, the base salary shall increase up to
$250,000.00, with such increase not to exceed 5% of all net profit in excess of
$1,000,000.00. Mr. Sawyer may also be entitled to an annual discretionary bonus
as determined by the Company's board of directors.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES
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.
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.
Page 49
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.
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 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. Inventory items held for over one year are no longer classified as
"inventory, non-current". All aircraft parts inventory are grouped as
"Inventory, net of allowance for slow moving and obsolete inventory" and
accounted under `Current Assets' category. This is based on standard aviation
industry practice of showing all aircraft parts under 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. This
is a reclassification to conform with what we now believe is more appropriate.
This change will not impact the current quarter results or past results of the
company. However in the future when the allowance for slow moving and obsolete
inventory is provided for, the allowance will be a considered as an expense for
the company.
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 adds 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 form 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 obsolesce, 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. 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. Revenue from aircraft
sales is recognized when the customer accepts delivery of the aircraft and/or
when title is transferred.
Value of Share-Based Payments: The value of stock issued as payment is
determined by the closing price of the Company's stock at measurement date. In
connection with the adoption of SFAS 123R, the company values options by
application of the Black Scholes Model.
Page 50
Stock-Based Compensation
As permitted under the Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation", the Company accounts for
its stock-based compensation to employees in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees". As such, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. Certain pro forma net income and EPS disclosures for employee stock
option grants are also included in the notes to the financial statements as if
the fair value method as defined in SFAS No. 123 had been applied. Transactions
in equity instruments with non-employees for goods or services are accounted for
by the fair value method.
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:
o Maximize the profitability of the Company by identifying and
developing those business opportunities that offer the highest return
on investment.
o Optimize the Company's debt and capital structure.
o 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
2006. 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.
Page 51
World Jet's marketing plan centers around building a loyal base of customers by
providing quality service. World Jet is one of a limited number of parts brokers
who provide 24-hour AOG, (aircraft on ground), coverage to its customers. 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. The marketing strategies described here have
kept, and are keeping, HAT fully booked or over booked for the foreseeable
future. Accordingly, HAT has no plans to change its marketing approach at this
time.
Global regularly provides press releases on major jobs and provides interviews
for trade journals as a method for maintaining visibility in the industry. HAT
also maintains a web site that describes its facilities, personnel and
capabilities at http://www.globalaircraftsolutions.com/
OPERATIONS STRATEGIES
Through experience, the management team at Global 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 common industry
practice 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, Global and it's subsidiaries have 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 equity and/or 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. Since HAT and World
Jet are profitable, Global can, if necessary, meet its financial requirements
internally. However, the equity and/or debt financing currently pursued by
Management will greatly accelerate the growth of value in Global. Consequently,
while Management is aggressively seeking to secure additional financial
resources, it has no interest in entering into overly dilutive equity funding or
onerous debt financing.
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 in favor of more aggressively 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 25% to 50% per
year over at least the next two years.
Page 52
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 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 will 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, due to 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 services and World Jet's parts. HAT competes
principally on the high quality of its services, its price competitiveness due
to its location in the Southwest and low labor rates, 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.
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 a duration of approximately 10 years peak to peak. The aviation
industry appeared by mid-2001 to be headed into a prolonged downturn, and this
trend was violently accelerated by the event of September 11th. Since September
11, 2001, at least five major repair stations either ceased doing business or
filed for Chapter 11 protection. This factor has restricted the supply of
services to the industry and opened up an opportunity for Global. Air carriers
such as United Airlines also have filed for Chapter 11 protection. The recession
in the aviation industry appears to have bottomed out with some indications of a
rebound now appearing on the horizon. We believe that the following trends are
currently affecting the aviation industry and our operations in particular:
Growth in the Market for Aircraft MRO Services
The Boeing 2003 Current Market Outlook Report projects that the average
worldwide passenger growth will be 5.1% per year through 2022. Similarly,
the Boeing 2003 Current Market Outlook Report projects that the average
worldwide cargo traffic growth will be 6.4% per year through 2022. This
report also predicts that by 2022 HAT's target market of regional and
narrow body jets will make up 74% of the worldwide fleet of commercial
aircraft. 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 at approximately
$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
and low labor rates, 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 JAA license our MRO facility. We emphasize quality and on-time
delivery to our customers. We are focused on meeting and exceeding FAA and
JAA 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.
Page 53
DESCRIPTION OF PROPERTY
The principal executive offices for both Global and HAT are located at the HAT
hangar facilities in Tucson, Arizona at Tucson International Airport. This
favorable location provides 360 days of sunshine per year together with
extremely low humidity year round. These facilities are situated on the
northwest ramp on 22 acres of concrete within the airport proper and are
patrolled by the Tucson Airport Authority police force. HAT leases these
facilities at a rental rate of $25,650 per month.
The HAT facility is level and fully paved with concrete sufficient to handle the
largest aircraft on any part of its 22 acres. Two hangars provide the space for
any modification and maintenance work that must be performed indoors. The larger
hanger has 180' clear span and is 185' deep (30,400 sq. ft.), enabling it to
wholly enclose a DC9 and a 727 at the same time. The hangar has been modified to
serve as a paint booth as needed.
The smaller hangar is 100' clear span by 100' deep (10,000 sq. ft.) with 2,000
square feet of office space on the north side and another 4,000 square feet of
enclosed space on the south. Offices for production planning and control are in
this area, as engineering, the welding shop, receiving, materials and purchasing
departments. The two hangars face each other at a distance of approximately 220
feet. Numerous mobile offices have been added to provide additional space for
administrative and customer representative offices.
To the southeast of the large hangar is a 12,000 foot covered building used to
store aircraft components and maintenance equipment. A 9,000 square foot
warehouse on the west side of the facility houses the interior department as
well as additional storage for materials and records. Both main hangars are
equipped with lighting, water, compressed air, and 115/220/440 volt AC
electricity. All office spaces are heated and cooled.
World Jet operates out of a 73,000 square foot facility in Tucson, Arizona. This
facility consists of office space and warehouse space to accommodate the
aircraft parts (Expendables, Rotables and Consumables), airframe components,
engines and engine material inventory maintained by World Jet. This facility is
located directly across the street from HAT which allows HAT immediate access to
aircraft parts, (Expendables, Rotables and Consumables), airframe components,
engines and engine material necessary to perform MRO services without incurring
any costs or delays that may be related to shipping and improves the turn time
of any such services provided. Additionally, World Jet is leasing 59,000 square
feet adjacent to the HAT complex for the purpose of inventory storage.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Global
There were no transactions, or series of transactions, for the years ended
December 31, 2006, 2005, 2004 or 2003 to which Global was a party, in which the
amount exceeds $60,000, and in which to the knowledge of Global, any director,
executive officer, nominee, five percent or greater shareholder, or any member
of the immediate family of any of the foregoing persons, have or will have any
direct or indirect material interest.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
During the fiscal year ended December 31, 2003 through October 26, 2004, the
National Association of Securities Dealers, Inc, quoted the Common Shares under
symbol "RDVN" on the OTC Bulletin Board maintained. Subsequent to October 26,
2004, as the result of the Company's name change to Global Aircraft Solutions,
Inc. the common shares were quoted under the symbol "GACF" at that same
location. The following information relates to the trading of our common stock,
par value $.001 per share. The high and low last sales prices of our common
stock for each quarter during our two most recent fiscal years, as reported by
the OTC Bulletin Board to date, are set forth below:
Page 54
HIGH LOW
2006
First Quarter $ 1.73 $1.37
Second Quarter 1.66 1.15
Third Quarter 1.41 .98
Fourth Quarter 1.18 .93
2005
First Quarter $ .94 $ .73
Second Quarter 1.36 .84
Third Quarter 1.94 1.17
Fourth Quarter 1.57 1.30
EXECUTIVE COMPENSATION
Global currently has in place an employee stock compensation plan and a
compensatory stock option plans. Global has no long-term incentive plans, as
that term is defined in the rules and regulations of the Securities and Exchange
Commission. There are no other compensatory or benefit plans, such as retirement
or pension plans, in effect or anticipated to be adopted at this time, although
in the future the Board of Directors may adopt other plans.
COMPENSATION DISCUSSION AND ANALYSIS
Objectives. We design our compensation programs to maintain a performance and
achievement-oriented environment throughout our company. We also design our
compensation programs to attract, hire, retain and motivate talented and skilled
individuals at all levels of our company. We have designed our executive
compensation program with these same goals in mind.
Generally, we want to pay our executives compensation that is competitive in the
marketplace. We review the median compensation paid to executives at other
comparable aviation companies. We use this information as a starting point to
set compensation levels for our executives. When setting compensation levels, we
also take into account other factors such as the level of responsibility of the
executive, the performance of the executive, the experience and tenure of the
executive, the compensation of the executive compared to the compensation of
other key salaried employees, and the performance of our company and our
business units. In order to build a viable and commercially competitive company,
our executive officers have historically agreed to accept less than the market
rate for executives at similar companies.
Since our stock is traded on the OTCBB, which does not define director
independence nor provide for corporate governance standards, the Company has
elected to adopt corporate governance and independence standards in accordance
with the standards promulgated by NASDAQ
The Compensation Committee. The Compensation Committee assists our Board of
Directors in fulfilling our Board's oversight responsibilities to administer our
executive compensation program and each member of the Committee is independent
as defined in the corporate governance listing standards of the NASDAQ and our
director independence standards.
The Committee reports to the Board of Directors on all compensation matters
regarding our executives and other key salaried employees. The Committee
annually reviews and approves the compensation (including annual base salary,
annual cash incentive compensation, long-term incentive compensation and other
employee benefits) for our executives and other key salaried employees. You may
learn more about the Committee's responsibilities by reading the Committee's
Charter, which is available in the "Corporate Governance" section of our website
at www.globalaircraftsolutions.com.
Page 55
Components of Compensation. The major components of our executive compensation
program are the following:
o Competitive base salaries which reflect, in part, individual
performance;
o Additional annual cash incentive compensation based on the achievement
of financial and other performance goals;
o Stock-based incentive compensation through the granting of stock
options and performance-based restricted and S-8 stock; and
o Other employee benefits, including perquisites.
The 2006 Summary Compensation Table sets forth amounts for these components that
we paid to our Chairman and Chief Executive Officer, our President, our Chief
Financial Officer and our three other highest paid executives for 2006. We refer
to these executives as our named executives.
We compensate our executives principally by using a combination of short-term
compensation (salary and annual cash incentive compensation) and long-term
compensation (stock options, restricted stock and S-8 Stock). We determine the
mix of short-term and long-term compensation by using market compensation
information. Accordingly, we do not have a specific policy for the allocation of
compensation between short-term and long-term compensation or cash and equity
compensation. We tie our annual cash incentive compensation and long-term
incentive compensation to the achievement of performance goals or to the value
of our common stock. We believe it is important that a portion of our
executives' incentive compensation is dependent upon the price of our common
stock in order to align the interests of our executives with the interests of
our shareholders. However, since the price of our common stock is subject to
some factors outside of the control of our company and our executives, we
believe it is also important that a portion of an executive's incentive
compensation be tied to performance goals relating to the operations of our
company. We select performance goals that we believe help to drive our business
and create value for our shareholders.
Our Starting Point. We offer our executives annual base salaries, annual cash
incentive compensation, long-term incentive compensation and other employee
benefits that are intended to be competitive with those offered at similar
aviation repair, maintenance, modification and sales companies. We review
compensation paid at these companies because their business activities make them
most comparable to us. Most of our direct competitors are larger companies, so
we use their executive compensation figures as a starting point and then adjust
downward for size. We also believe these companies likely compete with us for
executive talent. These companies change from time to time. We may also use
general compensation surveys sponsored by nationally recognized compensation
consulting firms to assist us in making compensation decisions.
These peer companies included:
AAR
TIMCO
Tramco
In January 2007, we increased Mr. Sawyer's base salary to $340,000.00. Prior to
setting Mr. Sawyer's new compensation, we compiled additional market
compensation information for presidents of similarly situated companies. We
discovered that the median amount of salary, annual cash incentive compensation,
long-term incentive compensation and total direct compensation paid to
presidents at: (a) the peer companies was in excess of $1,000,000. Using this
information, we established an appropriate compensation package for Mr. Sawyer
Use of Total Compensation Evaluations. When approving changes in compensation
for our named executives, we also prepare Total Compensation Evaluations for
each executive. These Evaluations set forth the dollar amounts of all components
of each named executive's current compensation, including salary, annual cash
incentive compensation, long-term incentive compensation, retirement and savings
programs, health and welfare programs and other executive benefits, including
perquisites. These Evaluations allow the Committee and management to review how
a change in the amount of each compensation component affects each named
executive's total compensation and to review each named executive's total
compensation in the aggregate. Based upon the review of the Evaluations, the
Committee determined the total compensation, in the aggregate, for our named
executives to be reasonable and not excessive.
Page 56
Base Salary. We pay salaries to our employees to provide them with a base
compensation for the day-to-day performance of their job responsibilities. We
assign pay grades to salaried positions at our company. Each pay grade has a
salary range. When assigning a pay grade for an executive position, we review
the salary range against size-adjusted median base salaries at the peer
companies based upon the position and level of responsibility. The Committee
reviews salary grades for our executives annually and makes adjustments to these
grades as deemed necessary or appropriate to maintain competitiveness. Once we
determine a range, we set salary levels within the range based upon other
factors, including the executive's performance, experience and tenure in his
particular position.
Annual salary increases are based on the overall annual salary budget guidelines
for our company and an evaluation of the executive's performance. As part of our
annual budget process, we review our overall salary structure to ensure that it
remains competitive. Each executive undergoes a performance review. The
executive's performance for the prior year is reviewed by his direct supervisor
or, with respect to the performance of the Chairman and Chief Executive Officer,
the President and Chief Financial Officer by the Committee. The Committee
reviews and approves the base salary of each executive annually and at other
times in connection with any promotion or other change in responsibility.
SUMMARY COMPENSATION TABLE
Change in
Pension
Value and
Non-equity Non-qualified
Incentive Deferred
Stock Option Plan Compensation All Other
Name and Salary Bonus Awards Awards Compensation Earnings Compensation Total
Principal Position Year $ $ $ $ $ $ $ $
Ian Herman, 2006 150,967 40,000 5,000 195,967
Chairman & CEO
Govindarajan 2006 84,523 20,000 59,375 27,485 191,383
Sankar, CFO*
John B Sawyer, 2006 237,500 80,000 25,000 342,500
President & COO
Phil Watkins COO 2006 117,731 10,000 24,000 151,731
@ World Jet
Alan Abate, Sr. 2006 124,077 12,500 136,577
VP Administration
@ HAT
David Querio, COO 2006 117,653 12,500 5,000 134,153
Maintenance @ HAT
*Assumed position June 1, 2006, annual salary $150,000. (Prior to Mr. Sankar, Ian Herman served jointly as CEO and CFO).
Page 57
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
(a) (b) (c) (d) (e)
Name Number of Securities % of Total Exercise or Base Expiration Date
Underlying Options/SAR's Granted Price ($/Sh)
Options/SAR's Granted to Employees in
Fiscal Year
- -----------------------------------------------------------------------------------------------------
Seymour Siegel 10,000 33.3 $1.03 5/27/2011
Alfredo Mason 10,000 33.3 $1.03 5/27/2011
Lawrence Mulcahy 10,000 33.3 $1.03 5/27/2011
AGGREGATED OPTION'SAR EXERCISES IN LAST FISCAL YEAR and FISCALYEAR-END OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Name Shares Acquired on Value Realized ($) Exercisable Unexercisable
Exercise
- ---------------------------------------------------------------------------------------------
Ian Herman None N/A 133,334 N/A
John B. Sawyer None N/A 766,666 N/A
Seymour Siegel None N/A 10,000 N/A
Alfredo Mason None N/A 10,000 N/A
Lawrence Mulcahy None N/A 10,000 N/A
2002 Compensatory Stock Option Plan
Global has adopted the 2002 Compensatory Stock Option Plan for officers,
employees, directors and advisors (the "2002 CSO Plan"). The shareholders have
not yet approved this plan however, under our by-laws the directors are
empowered to issue options and shares under the plan. Global has reserved a
maximum of 3,000,000 Common Shares to be issued upon the exercise of options
granted under the 2002 CSO Plan. The 2002 CSO Plan will not qualify as an
"incentive stock option" plan under Section 422A of the Internal Revenue Code of
1986, as amended. The Board of Directors or other plan administrator will grant
options under the 2002 CSO Plan at exercise prices to be determined. With
respect to options granted pursuant to the 2002 CSO Plan, optionees will not
recognize taxable income upon the grant of options granted at or in excess of
fair market value. Global will be entitled to a compensating deduction (which it
must expense) in an amount equal to any taxable income realized by an optionee
as a result of exercising the option. The Board of Directors administers the
2002 CSO Plan. Options to purchase an aggregate of 1,035,000 shares of Global
common stock have been granted under the 2002 CSO Plan Options to purchase
930,000 shares were outstanding at December 31, 2006.
Page 58
2003 Employee Stock Compensation Plan
Global has adopted the 2003 Employee Stock Compensation Plan for officers,
employees, directors and advisors (the "2002 ESC Plan"). The shareholders have
not yet approved this plan however, under our by-laws the directors are
empowered to issue options and shares under the plan. Global has reserved a
maximum of 5,000,000 Common Shares to be issued upon the grant of awards under
the ESC Plan. Employees will recognize taxable income upon the grant of Common
Stock equal to the fair market value of the Common Stock on the date of the
grant and Global will recognize a compensating deduction at such time. The Board
of Directors administers the ESC Plan. 4,657,000 shares of Common Stock
available under the ESC Plan have been awarded and 4,657,500 shares had been
issued at December 31, 2006.
Compensation of Directors
On March 27, 2006, the Compensation Committee agreed that as of the next
ratification of the Board of Directors of the shareholders all outside directors
shall receive uniform compensation. All outside directors shall receive a
one-time award of 10,000 shares plus options for 10,000 shares upon their
election. Thereafter, each shall receive an additional award of 10,000 shares
plus options for 10,000 shares upon successful completion of each year of
service. In addition to the award shares each member shall receive an annual
retainer of $20,000. Each Audit Committee member shall receive an additional
annual retainer of $6,000, while each Compensation Committee member shall
receive an additional annual retainer of $4,000. All Board members shall be paid
a fee of $1,000 for each scheduled meeting attended. Audit committee members
will be paid a fee of $1,000 for each scheduled Audit Committee meeting
attended. Compensation Committee members shall be paid a fee of $500 for each
scheduled Compensation Committee meeting attended.
FINANCIAL STATEMENTS
The audited consolidated financial statements of Global for the years ended
December 31, 2004, 2005 and 2006 and the unaudited financial statements for the
quarter ended March 31, 2007 and June 30, 2007, and related notes which are
included in this offering have been examined by Epstein, Weber and Conover, Moss
Adams, LLP and Daszkal Bolton, LLP and have been so included in reliance upon
the opinion of such accountants given upon their authority as an expert in
auditing and accounting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
CONTROL AND FINANCIAL DISCLOSURE
On January 9, 2006, the Audit Committee of the Board of Directors of the Company
voted to dismiss Larry O'Donnell, CPA, P.C. as the Company's independent
registered public accountant. Larry O'Donnell, CPA, P.C. was notified of the
dismissal on January 9, 2006. This dismissal followed the Audit Committee's
receipt of proposals from other independent auditors to audit the Company's
consolidated financial statements for the fiscal year ended December 31, 2005.
None of the reports of Larry O'Donnell, CPA, P.C. on the Company's financial
statements for either of the past two years or subsequent interim period
contained an adverse opinion or disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope or accounting principles, except that
the reports did contain a going concern paragraph. During the Company's past two
fiscal years and through January 9, 2006 there have been no disagreements with
Larry O'Donnell, CPA, P.C. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Larry O'Donnell, CPA, P.C.
would have caused them to make reference thereto in their reports on the
financial statements of the Company for such years.
On January 9, 2006, the Audit Committee of the Board of Directors of the Company
engaged Epstein, Weber & Conover, PLC ("EWC") as the Company's independent
auditors with respect to the audit of the Company's consolidated financial
statements for the fiscal year ended December 31, 2005. The decision to engage
EWC was made by the Audit Committee of the Board of Directors. Neither the
Company nor someone on behalf of the Company consulted with EWC regarding any of
the items listed in Item 304(a)(2) of Regulation SB.
Effective January 1, 2007, Epstein, Weber & Conover, PLC ("Epstein Weber")
combined its practice with Moss Adams LLP ("Moss Adams") and therefore resigned
as the independent registered public accounting firm for Global Aircraft
Solutions, Inc. (the "Company"). According to information provided to the
Company, all of the partners of Epstein Weber have become partners of Moss
Adams.
Page 59
The reports of Epstein Weber on the Company's financial statements for the
fiscal year ended December 31, 2005 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In connection with the audits of the
Company's financial statements for the fiscal year ended December 31, 2005, and
in the subsequent interim periods through January 1, 2007, (1) there were no
disagreements with Epstein Weber on any matter of accounting principles or
practices, financial statement disclosure or auditing scope and procedure which,
if not resolved to the satisfaction of Epstein Weber, would have caused Epstein
Weber to make reference to the matter in its report and (2) there were no
"reportable events" as that term is defined in Item 304 of Regulation S-K
promulgated under the Securities Exchange Act of 1934 ("Item 304").
b) Effective January 19, 2007, the Company engaged Moss Adams to act as the
Company's principal independent accountant. The Audit Committee of the Board of
Directors of the Company approved the decision to engage Moss Adams.
During the fiscal year ended December 31, 2005, and during all subsequent
periods through January 19, 2007, the Company did not consult Moss Adams
regarding the application of accounting principles to a specified transaction,
either completed or proposed, the type of audit opinion that might be rendered
on the Company's financial statements or any matter that was the subject of a
disagreement with its former accountants or a reportable event as those terms
are defined in Item 304.
FOR FURTHER INFORMATION
We have filed with the SEC, under the Securities Act of 1933, as amended (the
"Securities Act"), a registration statement on Form SB-2 and Post Effective
Amendments thereto with respect to the common stock offered by this prospectus.
This prospectus, which constitutes part of the registration statement, does not
contain all the information set forth in the registration statement or the
exhibits and schedules which are part of the registration statement, portions of
which are omitted as permitted by the rules and regulations of the SEC.
Statements made in this prospectus regarding the contents of any contract or
other documents are summaries of the material terms of the contract or document.
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date on the front of this document. Our
business, financial condition, results of operations and prospects may have
changed since that date. With respect to each contract or document filed as an
exhibit to the registration statement, reference is made to the corresponding
exhibit.
We are a small business reporting company and file annual, quarterly, and
current reports, proxy statements, and other information with the SEC. You may
read and copy these reports, proxy statements, and other information at the
SEC's public reference rooms at 100 F Street, N.E., Washington, D.C. 20549, and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the
SEC at (800) SEC-0330 for more information about the operation of the public
reference rooms. You may also request copies of these documents by writing to
the SEC and paying a fee for the copying cost. Our SEC filings are also
available at the SEC's web site at "http://www.sec.gov" and at our own web site
at "http://www.globalaircraftsolutions.com".
If you are interested in receiving a copy of any of the Company's filings, we
will provide you, without cost, with a copy of any of these filings on request
made orally or in writing to us at the following addressee:
Global Aircraft Solutions, Inc.
P.O. Box 23009
Tucson, AZ 85734
Attn: Investor Relations
Tel: (520) 294-3481
Fax: (520) 741-1430
Page 60
Global Aircraft Solutions, Inc.
formerly,
Renegade Venture (NEV.) Corporation
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
DECEMBER 31, 2005
DECEMBER 31, 2006
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT F-1, F-2 & F3
CONSOLIDATED BALANCE SHEETS F-4 & F-5
CONSOLIDATED STATEMENT OF OPERATIONS F-6
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY F-7
CONSOLIDATED STATEMENT OF CASH FLOWS F-8 & F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10 - F-35
Page 61
F-1
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 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, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of 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 U.S. generally accepted
accounting principles.
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.
/s/ Moss Adams LLP
Scottsdale, Arizona
April 16, 2007
Page 62
F-2
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 as of December 31, 2005 and the related
consolidated statements of operations, shareholders' 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 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, the financial position of Global Aircraft Solutions, Inc.
and subsidiaries as of December 31, 2005 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.
/s/EPSTEIN, WEBER & CONOVER, PLC
Scottsdale, Arizona
April 3, 2006
Page 63
F-3
Larry O'Donnell, CPA, P.C.
2228 South Fraser Street
Unit 1
Aurora, Colorado 80014
Telephone (303)745-4545
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Global Aircraft Solutions, Inc.
Tucson, Arizona
I have audited the accompanying balance sheet of Global Aircraft Solutions, Inc.
(formerly Renegade Venture (Nev.) Corporation ,as of December 31, 2004, and the
related statements of loss, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.
I conducted my audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I 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. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Global Aircraft Solutions, Inc.
(formerly Renegade Venture (Nev.) Corporation as of December 31, 2004, and the
results of its operations and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Larry O'Donnell, CPA, P.C.
March 25, 2005
Page 64
F-4
GLOBAL AIRCRAFT SOLUTIONS, INC.
Consolidated Balance Sheets
December 31, 2006 and 2005
ASSETS
2006 2005
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 104,440 $ 368,013
Accounts receivable 7,870,799 4,751,546
Note receivable 455,859 1,997,868
Due from equity investee partner 3,946,414 2,888,006
Inventory 7,852,691 8,767,435
Restricted funds 65,500 98,500
Deferred income taxes 299,508 130,000
Other current assets 304,987 191,114
----------- -----------
TOTAL CURRENT ASSETS 20,786,325 19,306,355
Property, plant and equipment 1,521,037 1,642,141
Investments 25,000
Equity in net assets of and advances to affiliates 6,063,067 3,687,276
Customer list, net 133,886
Agreement with vendor, net 28,490
Goodwill 38,992 38,992
Other assets 64,855 192,481
----------- -----------
TOTAL ASSETS $28,474,276 $25,054,621
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
Page 65
F-5
GLOBAL AIRCRAFT SOLUTIONS, INC.
Consolidated Balances Sheet
December 31, 2006 and 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
2006 2005
------------ ------------
CURRENT LIABILITIES
Notes payable $ 5,101,568 $ 2,564,739
Accounts payable - trade 5,001,567 7,181,397
Customer deposits 541,878
Billings in excess of costs and estimated
earnings on contracts in progress 224,046 23,458
Accrued liabilities 493,404 570,724
Income taxes payable 735,466 685,904
Current maturities - LT Capital leases 53,247
------------ ------------
TOTAL CURRENT LIABILITIES 12,151,176 11,026,222
LONG-TERM LIABILITIES
Capitalized lease obligations 224,867
Deferred Tax Liability 344,027
------------ ------------
TOTAL LONG-TERM LIABILITIES 568,894
------------ ------------
TOTAL LIABILITIES 12,720,070 11,026,222
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 100,000,000
Shares authorized in 2006 and 2005; shares
issued 39,967,807 and 38,998,215 in 2006
and 2005; shares outstanding 39,587,807 and
38,618,215 2006 and 2005 39,967 38,998
Additional paid-in capital 12,723,213 11,904,683
Deferred compensation (80,000)
Contributed capital 620,289 620,289
Retained earnings 2,370,737 1,544,429
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,754,206 14,028,399
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,474,276 $ 25,054,621
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
Page 66
F-6
GLOBAL AIRCRAFT SOLUTIONS, INC.
Consolidated Statements of Operations
Years ended December 31, 2006, 2005 and 2004
2006 2005 2004
Net sales $ 34,542,195 $ 41,228,648 $ 30,851,118
Cost of sales (25,748,049) (30,842,461) (24,195,426)
Inventory write down (192,775) (215,500) (212,500)
------------ ------------ ------------
Gross profit 8,601,371 10,170,687 6,443,192
Selling, general and administrative expenses (8,591,738) (7,780,332) (4,826,519)
Penalties (11,742) (1,061) (295,903)
------------ ------------ ------------
Gain (loss) from operations (2,109) 2,389,294 1,320,770
Other income (expense):
Interest income 76,414 245,610 87,521
Interest expense (587,183) (386,927) (329,023)
Gain on renegotiation of contract 1,144,502
Miscellaneous expense (197,932) (110) (9,084)
Miscellaneous income 114,874 130,571 31,162
Gain on settlement with equity investee partner 1,268,970
Equity in income of unconsolidated affiliate 1,808,744 (157,874)
------------ ------------ ------------
Net income, before income taxes 1,212,808 3,489,534 2,291,286
Provision for Income Taxes (386,500) (366,178)
------------ ------------ ------------
Net income
$ 826,308 $ 3,123,356 $ 2,291,286
============ ============ ============
Net income per share, Basic (2006 39,118,400 shares; 2005
33,848,722 shares; 2004 24,443,256 shares). $ 0.02 $ 0.09 $ 0.09
============ ============ ============
Net income per share, Fully diluted (2006 40,375,173 shares; 2005
35,260,671 shares; 2004 24,986,985 shares). $ 0.02 $ 0.09 $ 0.09
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
Page 67
F-7
GLOBAL AIRCRAFT SOLUTIONS, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2006, 2005 and 2004
Shares Common Stock Additional Paid Contributed Accumulated Total
in capital capital earnings
$ $ $ $ $
Balance on December 31, 2003 17,480,000 17,860 2,080,373 620,289 (3,870,213) (1,151,691)
Shares sold 11,715,386 11,715 3,956,432 3,968,147
Shares issued for purchase of
World Jet 1,000,000 1,000 499,000 500,000
Shares issued on Options
exercised 55,000 55 17,545 17,600
Options issued 57,000 57,000
Shares issued 400,000 400 91,600 92,000
Compensation expensed 12,000 12,000
Shares vested on employment
agreements 320,000 320,000
Net income 2,291,286 2,291,286
Balance December 31, 2004 30,650,386 31,030 7,033,950 620,289 (1,578,927) 6,106,342
Shares sold 7,200,000 7,200 4,644,000 4,651,200
Shares issued under non-cash
warrant provisions 442,829 443 (443) 0
Options exercised 50,000 50 14,950 15,000
Shares issued, directors 200,000 200 76,800 77,000
Shares vested on employment
agreements 75,000 75 55,425 55,500
Net income 3,123,356 3,123,356
Balance December 31,2005 38,618,215 38,998 11,824,683 620,289 1,544,429 14,028,399
Exercise of warrants 387,092 387 95,767 96,154
Share-based payments to
directors 30,000 30 73,470 73,500
Stock issued to employees for
compensation 552,500 552 581,214 581,766
Tax effects of share-based
payments 148,079 148,079
Net income 826,308 826,308
Balance December 31, 2006 39,587,807 39,967 12,723,213 620,289 2,370,737 15,754,206
An additional 412,500 shares will be issued on the vesting dates of employment
agreements now in force (See table under Note 9).
The accompanying notes are an integral part of these consolidated financial statements.
Page 68
F-8
GLOBAL AIRCRAFT SOLUTIONS, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2006 and 2005
2006 2005 2004
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Income $ 826,308 $ 3,123,356 $ 2,291,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of unconsolidated affiliate (1,808,745) 157,874
Gain on settlement with equity investee partner (1,268,970)
Depreciation 582,710 489,818 325,966
Amortization 162,377 162,376 162,376
Write down of inventory 192,775 212,500 212,500
Deferred income taxes 175,118 6,400
Provision for bad debts 337,508 473,208 14,944
Loss on disposal of fixed assets/investments 50,874
Gain from Renegotiation of Contract (1,144,502)
Expenses paid with stock 617,459 326,594 476,613
----------- ----------- -----------
Net adjustments to reconcile Net Income to net cash 310,076 559,800 47,897
Changes in Assets and Liabilities:
Accounts receivable (4,003,930) (2,775,131) (3,584,402)
Prepaid expenses 190,625 (115,149) (75,157)
Inventory 721,969 (5,260,186) (1,631,494)
Investments (25,000)
Restricted funds 33,000 (98,500) (409)
Other current assets 56,384 83,906
Other non-current assets 127,027 (177,788) (212,500)
Accounts payable - trade (2,235,466) 4,535,546 2,269,999
Accounts payable - related parties (6,219) 16,173
Customer deposits 541,878 (280,537) 252,737
Billings in excess of cost and estimated
earnings on contracts in progress 200,588 (942,780) 642,552
Income Taxes Payable 49,563 374,722 208,989
Accrued liabilities (77,320) (272,908) (414,735)
----------- ----------- -----------
Net cash used by operating activities (3,315,682) (1,279,390) (130,158)
Cash flows from investing activities:
Purchase of property, plant and equipment (187,261) (499,827) (1,388,070)
Purchase of World Jet, net of cash acquired (959,644)
Payments received on notes receivable 1,547,010 196,390
Distributions from Jetglobal, LLC 300,000
Investment in Jetglobal, LLC (867,046) (5,222,594)
----------- ----------- -----------
Net cash provided/(used) by investing activities 792,703 (5,526,031) (2,347,714)
Page 69
F-9
Cash flows from financing activities:
Proceeds from issuance of common stock 96,154 4,911,000 4,381,600
Payments related to common stock issued (244,800) (395,853)
Proceeds from bank loans 5,746,247 7,511,373 1,723,686
Repayments of bank loans (3,419,839) (4,949,634) (1,851,400)
Due to factor (604,409) (394,391)
Redemption of shares (400,535)
Payments on notes payable (280,496)
Payments on capital lease obligations (25,846)
Excess tax benefits from stock options exercised 148,188
Other financing activities, net (5,002) (44,011)
----------- ----------- -----------
Net cash provided by financing activities 2,259,406 6,623,530 3,019,096
Net increase (decrease) in cash and cash (181,891) 541,224
equivalents (263,573)
Cash and cash equivalents at beginning of period 368,013 549,904 8,680
----------- ----------- -----------
Cash and cash equivalents at end of period $ 104,440 $ 368,013 $ 549,904
=========== =========== ===========
o Interest paid in 2006 was $558,644, in 2005 was $375,745 and in
2004 $329,023.
o No taxes were paid in 2004, $121,473 was paid in 2005, and
$14,351 was paid in 2006.
Schedule of non-cash investing and financing activities:
o 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.
o 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 due
date of the note has been extended and the principal balance at
December 31, 2006 was $300,000. The note bears interest at 6.5%
per annum.
Property, plant and equipment increased $305,219 as a result of Capital Lease
agreements. 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.
Page 70
F-10
GLOBAL AIRCRAFT SOLUTIONS, INC.
Notes to Financial Statements
December 31, 2006, December 31, 2005 and December 31, 2004
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Global Aircraft
Solutions, Inc., formerly Renegade Venture (NEV.) Corporation 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. For accounting purposes, the transaction has been treated as an
acquisition of Global, formerly Renegade Venture (NEV.) Corporation by HAT and
as a recapitalization of Global, formerly Renegade Venture (NEV.) Corporation.
The acquisition of 100% of World Jet, Inc. was finalized on July 15, 2003, with
an effective date of January 1, 2003. As such, the financial statements reflect
the accounting activity of HAT since its inception date of April 5, 2002 and of
World Jet since January 1, 2004. Johnstone is currently inactive.
All material transactions and accounts with the subsidiaries have been
eliminated from the consolidated financial statements.
Management has decided to transfer its ownership interest in Jetglobal, LLC, an
entity in which the Company has a 30% ownership interest to the other partner in
Jetglobal, BCI Aircraft Leasing, in consideration for cash and aircraft
inventory. The parties are now drafting an agreement wherein it is anticipated
that BCI will pay the Company cash plus transfer, free and clear, ownership to
the Company, aircraft from Jetglobal inventory to settle, in full, all amounts
due to the Company for services provided to BCI and return the carrying value of
the Company ownership in Jetglobal, LLC. A final agreement and settlement has
not been reached between the arties at this time.
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.
Page 71
F-11
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
expects 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
expects 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.
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.
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 2006 and 2005. During
2006, the Company had bad debt expense of $338,000. During 2005, the Company had
bad debt expense of $473,000. The Company believes its allowance at December 31,
2006 is adequate based upon review of our outstanding accounts receivable at
December 31, 2006. The Company believes its allowance at December 31, 2006 is
adequate based upon review of our outstanding accounts receivable at December
31, 2006.
At December 31, 2006, the Company had a receivable of $590,000, for which the
Company has reserved $285,000, from a customer that has filed for 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.
Page 72
F-12
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
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.
Inventory items held for over one year are no longer classified as "inventory,
non-current". All aircraft parts inventory are grouped as "Inventory, net of
allowance for slow moving and obsolete inventory" and accounted under `Current
Assets' category. This is based on standard aviation industry practice of
showing all aircraft parts under 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. This is a reclassification to
conform with what we now believe is more appropriate. This change will not
impact the current quarter results or past results of the company. However in
the future when the allowance for slow moving and obsolete inventory is provided
for, the allowance will be a considered as an expense for the company.
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 adds 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 form 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 obsolesce, 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, 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, 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. 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.
Page 73
F-13
Earnings per share
Basic earnings per share includes no dilution and is computed by dividing net
earnings 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.
Reconciliation of EPS for 2006, 2005 and 2004 are as follows:
For the Year Ended 2006
------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share Amount
------------------ -------------------- ----------------
Net Income $826,308
Basic EPS
Income available to common stockholders $826,308 39,118,400 $0.02
Warrants 414,022
Options 780,491
Unvested employment agreement shares 62,260
Diluted EPS
Income available to common stockholders + assumed $826,308 40,375,173 $0.02
conversions
Page 74
F-14
For the Year Ended 2005
------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share Amount
------------------ -------------------- ----------------
Net Income $3,123,356
Basic EPS
Income available to common stockholders $3,123,356 33,848,722 $0.09
Warrants 639,449
Options 772,500
Diluted EPS
Income available to common stockholders + assumed $3,123,356 35,260,671 $0.09
conversions
For the Year Ended 2004
------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share Amount
------------------ -------------------- ----------------
Net Income $2,291,286
Basic EPS
Income available to common stockholders $2,291,286 24,443,256 $0.09
Warrants 125,656
Options 418,073
Diluted EPS
Income available to common stockholders + assumed $2,291,286 24,986,985 $0.09
conversions
Page 75
F-15
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. Total weighted average shares
outstanding for the diluted earning per share calculation for the year ended
December 31, 2004 was 24,986,985.
Equity in Net Assets and Advances to Affiliates
The investment in a 30% interest in JetGobal, 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 losses. The Company considers whether
future fair value of it 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 estimated 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
were 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 a
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
year ended December 31, 2006 and 2005, respectively. Amortizable intangibles had
been fully expensed at December 31, 2006.
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.
Page 76
F-16
Income Taxes
Deferred taxes are provided on temporary differences between the tax basis of
assets and liabilities for financial reporting purposes and income tax purposes.
The valuation allowance reduces deferred tax assets to an amount that represents
the Company's best estimate of the amount of such deferred tax assets that, more
likely than not, will be realized.
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 Company's consolidated 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. Any effect of adopting FIN
48 will be recognized as an adjustment to retained earnings on the date of
adoption. The Company is n the process of evaluating its uncertain tax
positions. The impact, in any, cannot currently be estimated. This
Interpretation is not anticipated to have a material impact on the Company's
consolidated 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 Company's consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132 (R)." This pronouncement requires an
employer to make certain recognitions, measurements, and disclosures regarding
defined benefit postretirement plans. The Company does not have any defined
benefit postretirement plans, and SFAS No. 158 will not have any impact on its
financial condition and results of operations.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No 108, "Considering the Effects of Prior Year Misstatements
in Current Year Financial Statements ("SAB 108"). SAB 108 provides guidance on
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108 is
effective for fiscal years ending after November 15, 2006. The adoption of SAB
108 did not have an 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.
Page 77
F-17
Stock-Based Compensation
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 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 4.76%, Expected life of 2.5 years,
Dividend rate of 0% and expected volatility of 91.98%.
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 and
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 is
no pro-forma effect for the year ended December 31, 2005.
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.
4. SEGMENT INFORMATION
The company has divided its operations into the following reportable segments:
Aircraft maintenance, repair, and overhaul; Aircraft Brokerage; 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.
Page 78
F-18
Selected information by business segment is presented in the following tables
for the years ended December 31, 2006 and December 31, 2005.
2006 2005 2004
($millions) ($millions) ($millions)
Segment sales:
Aircraft maintenance 24.331 19.135 17.220
Aircraft trading 3.223 13.551 7.941
Part sales 11.216 10.684 6.546
Other 2.354 2.153 1.002
Sub Total 41.124 45.223 32.709
Elimination of intersegment sales -6.582 -4.294 -1.858
Total consolidated sales 34.542 41.229 30.851
Operating income:
Aircraft maintenance 4.554 2.232 3.270
Aircraft trading .033 3.531 .936
Part sales 2.429 2.783 1.703
Other 1.585 1.625 .534
Sub total 8.601 10.171 6.443
Selling, general, administrative expense -8.547 -7.834 -4.827
Penalties -.012 -.001 -.296
Other, net -.465 -.004 .971
Share of Jetglobal net income (aircraft trading) 1.809 1.111
Consolidated earnings before taxes 1.213 3.489 2.291
Interest income by segment
Aircraft maintenance .029
Aircraft trading .011
Part sales
Corporate .036 .246 .085
Total interest income .076 .246 .085
Page 79
F-19
Interest expense by segment
Aircraft maintenance .059
Aircraft trading .083
Part sales .005
Corporate .440 .387 .329
Total interest expense .587 .387 .329
Depreciation and amortization by segment
Aircraft maintenance 409,779 330,334 411,286
Aircraft brokerage
Part sales
Corporate 335,308 321,900 77,056
Total 745,087 652,194 488,342
Net asset values:
Aircraft maintenance 9,658,216 7,154,108 6,633,504
Aircraft trading 2,129,816 1,224,600
Part sales 6,541,517 8,649,250 2,099,485
Corporate 10,908,506 7,918,367 3,025,023
Total 29,238,055 24,946,325 11,758,012
Capital expenditures:
Aircraft maintenance 320,495 344,824 1,080,173
Aircraft brokerage
Part sales
Corporate 160,236 155,003 307,897
Total 480,731 499,827 1,388,070
Page 80
F-20
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:
Year Year Year
Ended Ended Ended
December 31, 2006 December 31, 2005 December 31, 2004
----------------- ----------------- -----------------
Dollars Dollars Dollars
Angola 54,232 62,028
Australia 1,700 97,741
Brazil 5,100
Canada 75 688 577
Cambodia 73,041
Columbia 24,904 3,946
Ecuador 2,207,564
Germany 1,220 28,025 51,520
Guam 2,170,778
Hong Kong 890
Indonesia 835
Ireland 224,141
Israel 25
Italy 955 62,357 72,883
Jordan 2,032,460 2,468,915 4,063,944
Korea 154,010
Lebanon 290,088 264,681
Malawi 111,000 868,943
Mexico 6,942,499 2,810,753 1,443,626
Nigeria 308,755
Pakistan 68,000 382,795 6,510,001
Peru 19,600
Philippines 230,916
Romania 27,000
Scotland 30,969
South Africa 17,345
Spain 32,600 2,200
Tunisia 4,130
UAE 111,848 9,191,462 18,600
United Kingdom 98,383 61,654 55,888
Venezuela 39,704 31,532
TOTALS 10,201,352 16,845,250 16,753,220
Page 81
F-21
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 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 December 31, 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 4,627,404
aircraft
Reimbursement payments -688,722
Expenses paid on behalf of Jetglobal 510,053
Share of 2005 net loss -157,874
Payment of earnings share to Global -300,000
Distribution of Aircraft -861,539
Share of 2006 income 1,808,745
Balance at December 31, 2006 6,063,067
Consolidated retained earnings at December 31, 2006, include $1,350,871 of
undistributed earnings of Jetglobal.
The December 31, 2006 balance sheet of Jetglobal has assets of $17,319,00 and
liabilities of $3,118,939. The December 31, 2005 balance sheet of Jetglobal had
assets of $15,067,310 and $76,055 liabilities.
During 2005, Jetglobal had a sale rescinded due to a customer canceling a sales
agreement. This sale was guaranteed by Jetglobal's other partner, BCI. This
other partner and the Company entered into an agreement in 2005 wherein Global
sold its interest in the four aircraft that were part of the 2005 rescinded
transaction to its Jetglobal partner, BCI, at a price of $1,957,692 and a profit
of $1,268,970. The cost for the aircraft was the original JetGlobal acquisition
cost. Global transferred all of its rights in the four aircraft from JetGlobal
to BCI. Because the aircraft were sold to the controlling owner, BCI, the sale
was effectively accounted for by Jetglobal as a distribution of the aircraft to
the controlling owner. In 2005, this transaction was classified as a component
of the Company's equity in the net income of Jetglobal. However, it was a
transaction between the two joint venture partners and is now classified as such
in the 2005 financial statements.
Management has decided to transfer the ownership interest in the Jetglobal to
BCI in consideration for cash and assets towards settlement. The parties are now
drafting an agreement wherein it is anticipated that BCI will pay the Company
cash plus transfer, free and clear, ownership to the Company of enough aircraft
out of the Jetglobal assets to settle in full all amounts due the Company for
services provided to BCI and from the Company's ownership in Jetglobal. A final
agreement and settlement has not been reached between the companies at this
time.
6. INVENTORY
Inventories consisted of the following:
2006 2005
---------- ----------
Maintenance Hardware $1,030,465 $ 604,983
Parts for Resale $6,554,455 5,525,109
Aircraft & Engine 267,771 450,000
---------- ----------
$7,852,691 $6,580,092
Page 82
F-22
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.
7. PROPERTIES AND EQUIPMENT
2006 2005
---------- ----------
Gross Asset Values
Land and improvements $ 25,094 $ 25,094
Buildings and improvements 201,080 190,479
Vehicles 78,161 79,028
Machinery and equipment 2,058,291 2,018,995
Computers and software 332,755 306,164
Other office equipment 112,638 59,568
Equipment under capital lease 305,219 4,999
---------- ----------
Subtotal 3,113,238 2,684,327
Less accumulated depreciation 1,592,201 1,042,186
---------- ----------
Property and equipment, Net $1,521,037 $1,642,141
========== ==========
During 2006 and 2005, depreciation expense was $582,710 and $489,818
respectively.
Property, plant and equipment include gross assets acquired under capital leases
of $4,999 and $305,219 at December 31, 2005 and September 30, 2006,
respectively. Related amortization, which is included in accumulated
depreciation, was $500 and $24,385 at December 31, 2005 and December 31, 2006,
respectively. Capital leases to acquire machinery and equipment totaled
($235,670) and to acquire other office equipment totaled ($69,549) at December
31, 2006. Amortization of assets under capital leases is included in
depreciation expense.
8. LEASES AND CAPITAL LEASES
Global's wholly owned subsidiary, Hamilton Aerospace Technologies, Inc. ("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. Mexican
operations require the use of operational and office facilities. These
properties are covered by a use agreement and that agreement can be terminated
at any time with 60 days notice. Below is a table showing the total of lease
commitments at December 31, 2006.
Page 83
F-23
Operating Leases
Min Lease Min Lease Min Lease Min Lease Min Lease Min Lease TOTALS
Payments Payments Payments Payments Payments Payments
2006 2007 2008 2009 2010 2011
--------- --------- --------- --------- --------- --------- ------
$ $ $ $ $ $ $
--------- --------- --------- --------- --------- --------- ------
Premises 6901 S. 315,621.27 79,557.10 392,178.37
Park
A/C storage area
adjacent to 6901
S Park 43,030.00 43,030.00
Office space 6451
S. Country Club 9,071.61 38,279.10 39,627.94 41,006.42 42,435.56 36,384.85 206,805.48
Premises 6900 S.
Park 87,903.70 87,903.7
Inventory storage
7001 S Park 209,184.00 52,728.00 261,912.00
Premises Tijuana
Mexico 172,245.98 172,245.98
Offices Tijuana
Mexico 27,250.01 27,250.01
Total Operating
Lease Commitments 864,306 170,564 39,627 41,006 42,435 36,384 1,191,325
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.
Capital Leases
Min Lease Min Lease Min Lease Min Lease Min Lease Min Lease TOTALS
Payments Payments Payments Payments Payments Payments
2006 2007 2008 2009 2010 2011
--------- --------- --------- --------- --------- --------- ------
$ $ $ $ $ $ $
--------- --------- --------- --------- --------- --------- ------
Telephone systems 6,331.64 15,699.48 15,699.48 15,699.48 15,699.48 9,367.84 78,497.40
Office equipment 1,845.24 2,817.24 2,817.24 1,732.62 9,212.34
A/C maintenance
equipment 24,362.30 58,469.52 58,469.52 58,469.52 58,469.52 34,107.22 292,347.60
Total Capital
Lease Commitments 32,539.18 76,986.24 76,986.24 75,901.62 74,169.00 43,475.06 380,057.34
Present Value of 27,698 53,247 58,337 62,922 66,970 36,042 305,218
Capital Lease
Commitments
Page 84
F-24
9. SHAREHOLDERS' EQUITY
On May 13, 2004, the Company's Board of Directors granted 900,000 compensatory
stock options under the 2002 Compensatory Stock Option Plan at an option price
of $0.17 per share. The value at measurement date for theses shares was $.23 and
an expense for the $.06 increment, ($54,000), has been included basis in
selling, general and administrative expense on the accompanying statement of
operation.
On July 29, 2004, the Company's board of Directors awarded options to purchase
50,000 shares each to 2 new Directors as incentive compensation under the 2003
Employee Stock Compensation Plan. The option price is $0.20 per share, as the
Company valued these services at $100,000. The value at measurement date for
theses shares was $.23 and an expense for the $.03 increment, ($3,000), has been
included basis in selling, general and administrative expense on the
accompanying statement of operation.
During the third quarter of 2004, the Company finalized an agreement to award
400,000 shares of common stock under the 2003 Employee Stock Compensation Plan
of the Company for professional services to be provided over a two-year period.
The effective date of this transaction was May 13, 2004. The Board of Directors
determined that the fair value of these shares on the date of grant was $92,000.
The resulting prepaid expense is being expensed on a monthly basis during the
two-year term of the contract. And is included in selling, general and
administrative expense on the accompanying statement of operation.
On July 12, 2004 the Company's Board of Directors approved granting of 330,000
shares of stock to key employees under the 2002 Compensatory Stock Option Plan
in conjunction with various employment agreements. The shares will vest after
two years according to the terms of the employee agreements. A monthly expense
is being charged to selling, general and administrative expense over the
two-year period at the rate of 1/24 of $198,000 and is included in selling,
general and administrative expense on the accompanying statement of operation.
In January 2005, 50,000 options, issued as compensation for outside consultancy
services, were exercised at the option price of $.30 per share.
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.
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.
On November 23, 2005, 60,000 shares were issued to employees pursuant to 2004
employment agreements.
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 will vest in 2006 and $80,000 will be 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.
Page 85
F-25
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.
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.
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.
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 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
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.
Page 86
F-26
Share value on Measurement Date Vesting Date
Common Shares 39,587,807
Issued and
Outstanding at
December 31, 2005
Unconverted
Warrants Issued:
@ $0.68 .50 300,000
@ $1.36 .50 7,740,000
@ $0.52 .65 104,111
@ $1.00 .65 1,040,866
@ $1.36 .65 1,137,020
Subtotal 10,321,997
Options Issued:
@ $0.17 .23 900,000
@$1.03 1.03 30,000
Subtotal 930,000
Awards of stock
pending under
employment
contracts
1/01/2007 10,000
6/01/2007 10,000
6/05/2007 62,500
7/01/2007 20,000
12/01/2007 10,000
12/05/2007 62,500
6/01/2008 10,000
6/05/2008 62,500
7/01/2008 20,000
12/01/2008 10,000
12/05/2008 62,500
6/05/2009 62,500
12/01/2009 10,000
Subtotal 412,500
Total 51,252,304
Page 87
F-27
SUMMARY OF EQUITY COMPENSATION STOCK-OPTION PLANS
TOTAL SHARES ISSUED AVAILABLE
PLAN NAME
2002 Compensatory Stock Option Plan 3,000,000 1,035,000 1,965,000
2003 Employee Stock Compensation Plan 5,000,000 4,657,500 342,500
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 September
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 year 30,000 $1.03 Exercisable on grant
date
Exercised year None
Forfeited year None
Outstanding at 930,000 $0.1977 Exercisable on grant
12/31/2006 date
Options exercisable at 930,000 $0.1977
year end
Weighted average fair $1.09
value of options
granted during the year
The aggregate remaining contractual lives in years for the 900,000 and 30,000
options outstanding and exercisable on December 31, 2006 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, 2006. This amount changes based on the fair market value
of Global's stock. The total intrinsic value of options outstanding as of
December 31, 2006 was $783,300. The total intrinsic value of options exercisable
on December 31, 2006 was $783,300. There were no options exercised during the
year ended December 31, 2006. The Company issues new shares of common stock upon
the exercise of stock options.
Page 88
F-28
At December 31, 2006, 1,965,000 shares were available for future grants under
the Company's 2002 Compensatory Stock Option Plan and 342,500 shares were
available for future grants under the Company's 2003 Employee Stock Option Plan.
At December 31, 2006, the Company had approximately $729,000 of total
unamortized compensation expense, net of estimated forfeitures, related to stock
option plans that will be recognized over the weighted average period of 2.47
years.
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.
2005
-----------------------------------------------------
Weighted Average
Exercise Price
--------------
Options outstanding at 1,050,000 $0.179 Exercisable on grant
beginning of year date
Granted during year None
Exercised during year 50,000 $0.30
Cancelled during year 100,000 $0.20
Forfeited during year None
Outstanding at 900,000 $0.17 Exercisable on grant
12/31/2005 date
Options exercisable at 900,000 $0.17
year-end
Weighted average fair $0
value of options
granted during the year
10. 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 Guidance Credit portion of the agreement
has expired and no longer exists. 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 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. The term of the Line of 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 the Line of Credit shall be due on the expiration
date.
Page 89
F-29
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. 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 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 December 31, 2006 was $4,814,397.30.
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 $5,000,000 at December 31, 2006 subject to the
borrowing base.
At December 31, 2006, the Company was in compliance with the quick ratio
(defined as cash, liquid cash equivalents and accounts receivable, divided by
current liabilities) covenant of the loan agreement. The quick ratio is to be at
least .60 to 1. At December 31, 2006 the ratio for the Company was .65 to 1.
11. RELATED PARTY TRANSACTIONS
BCI Aircraft Leasing, Inc.
BCI Aircraft Leasing, Inc., Global's partner in Jetglobal, see Note 6, accounted
for 16.6% of Company revenue during 2006 and 4% during 2005. The account
receivable from BCI at December 31, 2006 was $1,827,481.90 and at December 31,
2005 was $141,591.86.
Jetglobal, LLC accounted for 7.2% of the Company's revenue in 2006. The total
amount due to the Company from Jetglobal was $1,093,316.19. December 31, 2005
balance was $90.00.
BCI Jet, a BCI controlled company, accounted for 3.8% of the Company's revenue
in 2006. BCI Jet owed the Company $1,300,000 at December 31, 2006. BCI Jet had
no balance due at December 31, 2005.
During 2005, Jetglobal had a sale rescinded due to a customer canceling a sales
agreement. This sale was guaranteed by Jetglobal's other partner BCI. In
settlement 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 its share of lost earnings. As a result, BCI and the Company entered
into a settlement agreement for $1,957,692. The Company recorded the settlement
as a gain for $1,268,970 and reduced its investment in Jetglobal for $688,722,
which represents the Company's interest in the aircraft at the acquisition cost
of Jetglobal.
12. CONTRACTS IN PROGRESS
At December 31, 2006 and December 31, 2005, costs and estimated earnings in
excess of billings and billings in excess of costs and estimated earnings on
uncompleted contracts consist of the following:
2006 2005
----------- -----------
Costs incurred on uncompleted contracts $ 1,486,387 $ 1,072,582
Profit earned to date 1,156,235
521,378
----------- -----------
$ 2,007,765 $ 2,228,817
Less: Billings to date (2,314,710) (2,252,275)
----------- -----------
($ 306,945) ($ 23,458)
Page 90
F-30
Included in the accompanying balance sheet at December 31, 2006 and 2005 under
the following caption:
Billings in excess of costs and estimated earnings on uncompleted contracts
2006 2005
--------- ---------
Billings in excess from above ($306,945) $ 23,458
Time and material earnings unbilled 82,899 0
--------- ---------
Net ($224,046) $ 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.
13. TRADE ACCOUNTS RECEIVABLE
As of December 31, 2006 and December 31, 2005, trade accounts receivable consist
of the following:
2006 2005 2004
----------- ----------- -----------
Contracts in progress $ 1,158,998 $ 769,322 $ 1,961,319
Completed contracts 7,185,118 4,274,731 2,858,045
----------- ----------- -----------
$ 8,344,116 $ 5,044,053 $ 4,819,364
Less: allowance for doubtful accounts (473,317) (292,507) (53,149)
----------- ----------- -----------
$ 7,870,799 $ 4,751,546 $ 4,766,215
Page 91
F-31
The amounts charged to the allowance for doubtful accounts are as follows for
the years ended December 31:
Balance at the Charged to Balance at the
Year Beginning of Year Expense Deductions End of Year
- ---- ----------------- ------- ---------- -----------
2004 $ 38,655 $ 14,494 $ 53,149
2005 $ 53,149 $437,208 $(197,850) $292,507
2006 $ 292,507 $337,508 $(156,689) $473,326
Deductions represent recovery of previously reserved amounts.
14. 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 was extended to December 20,
2006. At December 31, 2006, the note, plus interest, was outstanding in the
amount of $116,671. During January 2007, the note plus accrued interest was paid
in full.
During the 4th quarter of 2005, a note receivable in the amount of $600,000 was
issued to the Company by Avolar Aero Lineas S.A. de C.V. The due date of the
note was extended to June 30, 2007. The note bears interest at 6.5% per annum.
At December 31, 2006, the balance due plus interest was $339,186. This note is
not collateralized.
15. INCOME TAXES
The following table summarized components of income tax expense for the years
ended December 31, 2006, 2005 and 2004:
2006 2005 2004
-------- -------- --------
Current provision/(benefit) $211,382 $372,578 $ 0
Deferred provision/(benefit) $175,118 (6,400) 0
-------- -------- --------
$386,500 $366,178 $ 0
======== ======== ========
Page 92
F-32
Below is a reconciliation of the differences between the effective and statutory
rates as follows for the years ended December 31, 2006, 2005 and 2004:
2006 2005 2004
----------- ----------- -----------
Federal income tax expense (benefit) at statutory rate (34%) $ 412,355 $ 1,186,442 $ 855,000
State income tax expense (benefit) net of federal tax effect 84,654 174,476 81,000
Benefit of net operating loss carryover (951,200) (936,000)
Deferred income tax valuation allowance (57,000)
Permanent differences and other 31,145 (43,540)
Tax credits (84,654)
----------- ----------- -----------
Net income tax expense $ 386,500 $ 366,178 $ 0
=========== =========== ===========
Deferred tax assets and liabilities are determined based on the difference
between currently enacted tax rates. Deferred tax expense or benefit is the
result of the changes in deferred tax assets and liabilities.
Deferred income taxes arise principally from the temporary differences between
financial statement and income tax recognition of net operating losses.
The components of deferred taxes at December 31, 2006, 2005 and 2004 in the
accompanying balance sheet is summarized below:
2006 2005
-------- --------
Deferred tax assets
Allowance for bad debts $186,802 $117,000
Amortization of intangibles 164,069 102,000
Accrued vacation and compensation 85,413 46,000
Other 27,293
Deferred tax liabilities $463,577 $265,000
Depreciation 139,911 78,000
Investment in affiliate 368,185
Page 93
F-33
Deferred tax liabilities 508,096 78,000
Valuation allowance 0 (57,000)
--------- ---------
Deferred tax assets (liabilities), net $ (44,519) $ 130,000
========= =========
16. CONCENTRATION OF REVENUES
The Company's top four customers accounted for 52.4% of sales during the year
ended December 31, 2006. The Company's top four customers accounted for 37.6% of
sales during the year ended December 31, 2005 and 56% during the same period in
2004. 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 2006, 2005 and 2004 are listed in the table
below:
2006-Top Four Customers 2006- % Of 2005-Top Four 2005- % Of 2004-Top Four 2004- % Of
Revenues Customers Revenues Customers Revenues
-------- --------- -------- --------- --------
Customer H 18.4 Customer E 16.7 Customer A 21.3
Customer I 20.3 Customer C 8.3 Customer B 13.2
Customer J 7.2 Customer F 6.6 Customer C 11.7
Customer K 6.5 Customer G 6.0 Customer D 9.8
Top Four-2006 Total % 52.4 Top Four-2005 Total % 37.6 Top Four-2004 Total % 56
17. GAIN ON RENEGOTATION OF CONTRACTS
During the quarter ended March 31, 2004, an agreement between the Company and
Hamilton Aviation was negotiated that eliminated an accrued liability for rental
payments resulting in a gain of $88,000. During the first and second quarters of
2004 our World Jet, subsidiary successfully negotiated with creditors reductions
in some liabilities which resulted in gains totaling $449,338.
On July 8, 2004, the Estate Administrator, on behalf of Hamilton Aviation, Inc.,
accepted an offer by HAT calling for satisfaction of all of its obligations
under the May 6, 2004 Settlement Agreement by payment of a lump sum of $750,000
on or before September 6, 2004. HAT made this final lump sum payment and the
resulting elimination of accrued liabilities resulted in a gain of $607,194
recorded during the quarter ended September 30, 2004.
Page 94
F-34
Summarized below are the $ amounts recognized on renegotiation of contracts by
quarter and by operating unit:
Quarter Ended: Global Aircraft Hamilton Aerospace World Jet Consolidated
- -------------- --------------- ------------------ --------- ------------
March 31, 2004 $ 88,000 $ 224,654 $ 312,654
June 30, 2004 $ 224,654 $ 224,654
September 30, 2004 $ 607,194 $ 607,194
December 31, 2004 $ -0-
Totals for Year $ -0- $ 695,194 $ 449,308 $1,144,502
18. SUBSEQUENT EVENTS
On March 13, 2007, the Company announced that they have acquired a 20% ownership
interest in, and entered into an exclusive service agreement with, Global
Aircraft Leasing Partners ("GALP"). Concurrently, the Company entered into a
financial advisory services agreement with B. Riley & Co., Inc. ("B. Riley").
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. GACF and GALP have entered into a
strategic alliance wherein Global will acquire a 20% interest in GALP in
exchange for a capital contribution of $20,000, together with infrastructure,
industry expertise, management assistance, and other non-monetary contributions.
Global Aircraft will specifically not be required to invest capital in aircraft
acquired by GALP. Other members of GALP will include equity funding specialists
and aircraft leasing professionals. Global Aircraft and GALP have also agreed
that Global will have first right of refusal for all aircraft maintenance,
aircraft parts and technical consulting requirements GALP may have as a result
of its aircraft acquisition and leasing activities. Global expects that its
strategic partnership with GALP will have a positive effect upon the volume of
its MRO and parts sales businesses.
Additionally, GALP has entered into an agreement with B. Riley wherein GALP will
provide the equity portion for GALP aircraft acquisitions, while B. Riley will
assist in securing the debt portion of the financing for those acquisitions. B.
Riley has also agreed to assist Global in obtaining an expanded operating credit
facility as well as a $25,000,000 credit facility for Global to pursue its own
aircraft trading opportunities.
Subsequent to December 231, 2006, the Company entered into an agreement to sell
a 49% interest in one of its subsidiaries, World Jet. The Company entered into a
letter of intent with the buyer in April 2007 for a sales price of approximately
$6,000,000.
On March 13, 2007 the Company also announced that Ian Herman would continue his
duties as Chairman of the Company, while John Sawyer, President of Global, will
be assuming the title of CEO. Mr. Herman advised the Company that he would be
devoting the majority of his time to the development of the start-up aircraft
leasing company, Global Aircraft Leasing Partners, LLC (GALP). The Company's
Board of Directors has ratified Mr. Sawyer's appointment as CEO, the strategic
alliance with GALP, and the engagement of B. Riley
Avolar's increasing fleet size resulted in increasing receivables due Hamilton
Aerospace. At the same time, Avolar's past due receivables increased
significantly. In order to protect the Company's financial status, late in
February 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 Hamilton
Aerospace. By the end of March 2007, Avolar had made progress reducing the
amount owed Hamilton Aerospace, but Avolar is not in full compliance with the
terms of its payment schedule agreed to with Hamilton Aerospace. Avolar has
stated its intention to bring its accounts current with Hamilton Aerospace and
World Jet and renew its maintenance and support agreements with both companies.
However, in view of these recent developments, it is unlikely that the income
and profit contributions from Avolar to Hamilton Aerospace and World Jet in 2007
will reach the amounts previously indicated by Management.
Page 95
F-35
By the end of the fourth quarter 2006 and into the first quarter 2007 the past
due amounts due Hamilton Aerospace 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. The parties are now drafting language wherein BCI
will pay the Company cash plus transfer, free and clear, ownership to the
Company of enough aircraft out of the Jetglobal assets to settle in full all
amounts due the Company for services provided to BCI and from the Company's
ownership in Jetglobal. Although BCI is presently cooperating with the Company
to resolve these issues equitably, a final agreement and settlement has not at
his time been reached between the companies.
Combination of slow payment by Avolar and BCI/Jetglobal has caused Global
Aircraft Solutions to have liquidity issues.
SELECTED QUARTERLY FINANCIAL DATA
Selected Quarterly Financial Data
(in thousands except per share amounts, unaudited)
- -----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarterly Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
Net revenue
2006 $11,509 $10,199 $7,904 $4,930
2005 $8,652 $8,829 $15,462 $8,285
Gross Profit
2006 $3,973 $2,431 $2,148 $49
2005 $2,298 $2,399 $3,241 $2.233
Net Income- Before Taxes
2006 $1,903 $1,444 $359 -$2,493
2005 $658 $682 $955 $1,195
Net Income-After Taxes
2006 $1,123 $1,055 $233 -$1,585
2005 $658 $682 $661 $1,122
Net Income per common share - basic, continuing operations
2006 $0.03 $0.03 $0.01 -$0.05
2005 $0.02 $0.02 $0.02 $0.03
Net Income per common share - diluted, continuing operations
2006 $0.03 $0.03 $0.01 -$0.05
2005 $0.02 $0.02 $0.02 $0.03
- ------------------------------------------------------------------------------------------------------------------
Page 96
F-36
TABLE OF CONTENTS
GLOBAL AIRCRAFT SOLUTIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
QUARTER AND SIX MONTHS ENDED JUNE 30, 2007
CONSOLIDATED BALANCE SHEETS F-37 & F-38
CONSOLIDATED STATEMENT OF OPERATIONS F-39
CONSOLIDATED STATEMENT OF CHANGE IN STOCKHOLDER'S EQUITY F-40 & F-41
CONSOLIDATED STATEMENT OF CASH FLOWS F-42 & F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-44 - F-59
Page 97
F-37
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
(unaudited)
ASSETS
2007 2006
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 1,574 $ 104,440
Accounts receivable, net 7,982,236 7,870,799
Notes receivable 348,857 455,859
Due from equity investee partner 3,618,461 3,946,414
Inventory 14,871,236 7,852,691
Restricted funds 65,500 65,500
Deferred income taxes 299,508 299,508
Other current assets 137,006 191,114
----------- -----------
TOTAL CURRENT ASSETS $27,324,378 $20,786,325
Property, plant and equipment, net 1,271,842 1,521,037
Equity in net assets of and advances to affiliates -- 6,063,067
Goodwill 38,992 38,992
Other assets 95,691 64,855
----------- -----------
TOTAL ASSETS $28,730,903 $28,474,276
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 98
F-38
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
2007 2006
------------ ------------
CURRENT LIABILITIES
Notes payable $ 5,682,145 $ 5,101,568
Note payable - related party 800,000 --
Accounts payable - trade 2,919,915 5,001,567
Customer deposits 616,742 541,878
Billings in excess of costs and estimated
earnings on contracts in progress, net 28,765 224,046
Accrued liabilities 526,501 493,404
Income taxes payable 991,471 735,466
Current maturities - capital lease obligations 59,144 53,247
------------ ------------
TOTAL CURRENT LIABILITIES $ 11,624,683 $ 12,151,176
LONG-TERM LIABILITIES
Capitalized lease obligations $ 202,778 $ 224,867
Deferred tax liability 344,027 344,027
------------ ------------
TOTAL LONG-TERM LIABILITIES $ 546,805 $ 568,894
------------ ------------
TOTAL LIABILITIES $ 12,171,488 $ 12,720,070
============ ============
STOCKHOLDERS' EQUITY
Common stock, $.001 par value, 100,000,000 shares authorized
40,441,301 and 39,967,807 shares issued 2007 and 2006 and
40,061,301 and 39,587,807 shares outstanding 2007 and 2006 $ 40,440 $ 39,967
Additional paid-in capital 13,114,587 12,723,213
Deferred compensation (62,033) --
Contributed capital 620,289 620,289
Retained earnings 2,846,132 2,370,737
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ 16,559,415 $ 15,754,206
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,730,903 $ 28,474,276
============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 99
F-39
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Statements of Operations
For the Three and Six Months ended June 30, 2007 and 2006
(unaudited)
Three Months Three Months Six Months Six Months
ended June ended June ended June ended June
30, 2007 30, 2006 30, 2007 30, 2006
------------ ------------ ------------ ------------
Sales
Sales, maintenance, repair, overhaul $ 2,742,659 $ 7,201,734 $ 8,276,990 $ 13,522,520
Sales, aircraft trading 7,850,000 650,000 7,900,000 3,223,000
Sales, parts 594,800 1,164,575 1,226,468 2,954,940
Sales, other (13,569) 1,182,342 432 2,006,914
------------ ------------ ------------ ------------
Total sales $ 11,173,890 $ 10,198,651 $ 17,402,890 $ 21,707,374
Cost of sales
Cost of sales, maintenance, repair, overhaul $ (2,207,074) $ (5,042,828) $ (5,958,354) $ (9,549,252)
Cost of sales, aircraft trading (6,846,000) (1,574,485) (6,846,234) (3,255,624)
Cost of sales, parts (254,825) (745,232) (628,834) (1,956,078)
Cost of sales, other (405,500) (435) (542,500)
------------ ------------ ------------ ------------
Total cost of sales $ (9,307,899) $ (7,768,045) $(13,433,857) $(15,303,454)
------------ ------------ ------------ ------------
Gross profit $ 1,865,991 $ 2,430,606 $ 3,969,033 $ 6,403,920
Selling, general and administrative expense (1,528,706) (1,839,789) (3,128,191) (3,810,252)
Penalties (11,171) (11,171)
------------ ------------ ------------ ------------
Income from operations $ 337,285 $ 579,646 $ 840,842 $ 2,582,497
Other income (expense):
Interest income $ 177,848 $ 24,368 $ 184,291 $ 54,725
Interest expense (378,889) (147,194) (510,489) (231,868)
Legal settlement (100,000)
Miscellaneous expense (116)
Miscellaneous income 52,746 18,113 74,745 18,605
Equity in income of unconsolidated affiliate 968,993 214,800 923,121
Gain of sale of interest in unconsolidated
affiliate 27,210 27,210
------------ ------------ ------------ ------------
Net income, before taxes $ 216,200 $ 1,443,926 $ 731,399 $ 3,346,964
Provision for income taxes (75,670) (388,550) (256,004) (1,168,187)
------------ ------------ ------------ ------------
Net income $ 140,530 $ 1,055,376 $ 475,395 $ 2,178,777
============ ============ ============ ============
Net profit per share, Basic 2007 2nd Qtr 34,779,327 $ 0.00 $ 0.03 $ 0.01 $ 0.06
shares, Year to date 39,719,669 shares; 2006 2nd Qtr
39,011,179 shares, Year to date 38,829 760 shares.
Net profit (loss) per share, Fully diluted 2007 2nd
Qtr 35,894,478 shares, Year to date 40,783,188
shares; 2006 2nd Qtr 40,733,176 shares, Year to date
41,106,236 shares. $ 0.00 $ 0.03 $ 0.01 $ 0.05
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
Page 100
F-40
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Statement of Changes in Stockholders' Equity
For the Year Ended December 31, 2006 and the Six Months Ended June 30, 2007
(unaudited)
Additional Contributed Deferred Retained Stockholder
Shares Paid-in Capital Capital Compensation Earnings Equity
------ --------------- ------- ------------ -------- ------
Balance 38,618,215 $38,998 $11,824,683 $620,289 $- $1,544,429 $14,028,399
December 31,
2005
Exercise of 387,092 387 95,767 96,154
warrants
Share-based
payments to
directors 30,000 30 73,470 73,500
Stock issued to
employees for
compensation 552,500 552 581,214 581,766
Tax effects of
share-based
payments 148,079 148,079
Net income 826,308 826,308
Balance 39,587,807 $39,967 $12,723,213 $620,289 $- $2,370,737 $115,754,206
December 31,
2006
1st Quarter
Exercise of
warrants,
(non-cash) 48,494 48 (48) 0
Vesting of
stock based
Compensation
to employees 50,703 50,703
Share-based
payments to
directors 10,000 10 7,695 7,705
Page 101
F-41
2nd Quarter
Stock issued to
employees for
compensation 340,000 340 204,670 205,010
Vesting of
stock based
Compensation
to employees
and directors 48,179 48,179
Stock 75 80,175 (62,033) 18,217
(restricted)
issued to 3rd
parties for
current and
future services 75,000
Net income, 475,395 475,395
first six
months 2007
Balance June
30, 2007 40,061,301 $40,440 $13,114,587 $620,289 $(62,033) $2,846,132 $16,559,415
The accompanying notes are an integral part of these condensed consolidated financial statements.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
Page 102
F-42
GLOBAL AIRCRAFT SOLUTIONS, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2007 and 2006
(unaudited)
2007 2006
---- ----
Cash flow from operating activities:
Net Profit $ 475,395 $ 2,178,777
Adjustments to reconcile net profit to net cash
used in operating activities:
Depreciation 292,787 271,655
Amortization 81,189
Allowance for Doubtful Accounts (91,907)
Equity in income of unconsolidated affiliate (214,800) (923,121)
(Loss)Gain on disposal of fixed assets (50,000) 13,785
Gain on sale of interest in unconsolidated
affiliate (27,210)
Stock based compensation expense 329,814 310,108
Changes in Assets and Liabilities:
Accounts receivable (1,060,910) (5,534,175)
Prepaid expenses 130,905 60,280
Inventory 131,453 210,699
Deposits (911)
Other non-current assets (36,293)
Accounts payable-trade (2,174,399) (3,800,551)
Customer deposits 494,939 69,193
Billings in excess of cost and estimated
Earnings on contracts in progress, net (195,281) 883,167
Income tax payable 256,005 1,321,184
Accrued liabilities 33,098 195,645
Net cash used in operating activities (1,579,115) (4,790,365)
Cash flows from investing activities:
Purchase of property, plant and equipment (32,237) (101,267)
Notes receivable 116,672 973,452
Non-consolidated affiliate 48,973 1,385,722
(investment)/receipt
Net cash provided by investing activities 133,408 2,257,907
Page 103
F-43
Cash flows from financing activities:
Proceeds from issuance of common stock 96,154
Proceeds from bank loans 57,603 3,166,794
Repayment of bank loans (919,604)
Payments on capital lease obligations (27,548)
Proceeds from note payable 1,250,000
Proceeds from note payable, related party 800,000
Payments on notes payable (727,544)
Other financing activities, net (9,670) (2,480)
Net cash provided by financing activities 1,342,841 2,340,864
Net decrease in cash and cash equivalents (102,866) (191,594)
Cash and cash equivalents at beginning of 104,440 368,013
period
Cash and cash equivalents at end of period $ 1,574 $ 176,419
Significant non-cash investing activity:
During 2007, the company sold its investment in Jetflobal for six aircraft
valued at $8,650,000 and other considerations. See Note 5.
Interest paid for the three and six months ended June 30, 2007 was $375,579 and
502,236, respectively. Interest paid for the three and six months ended June 30,
2006 was $129,692 and $193,807, respectively. Taxes paid during the six months
ended June 30, 2007 and 2006 were $0.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
Page 104
F-44
GLOBAL AIRCRAFT SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. 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" of
"Global". HAT and Johnstone were acquired by Global on May 2, 2002 in a
transaction accounted for as a reverse merger and recapitalization. Johnstone is
currently inactive.
All material transactions and accounts with the subsidiaries have been
eliminated from the consolidated financial statements.
Management has transferred its ownership interest in Jetglobal, LLC, an entity
in which the Company had a 30% ownership interest, to BCI Aircraft Leasing, the
other partner in Jetglobal, LLC in consideration for aircraft inventory and a
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.
3. ORGANIZATIONS AND NATURE OF OPERATIONS
On March 13, 2007, the Company entered into an exclusive service agreement with,
Global Aircraft Leasing Partners ("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. Global and GALP originally entered into a strategic alliance wherein
Global would acquire a 20% interest in GALP in exchange for a capital
contribution of $20,000, together with infrastructure, industry expertise,
management assistance, and other non-monetary contributions. At June 30, 2007,
negotiations were still being conducted to establish an operating agreement for
GALP, as well as to make final determination as to the Company's percentage of
interest, which may be finalized at either the initial 20% or at 40%, depending
on the result of those negotiations. The Company had not made any capital
contribution as of June 30, 2007 and consequently was not a participating member
of GALP during the period covered by these financial statements. Global will
specifically not be required to invest capital in aircraft acquired by GALP.
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.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statements
The Condensed Consolidated Financial Statements have been prepared by the
Company without audit. These condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The Condensed Consolidated
Balance Sheet at December 31, 2006, which was derived from financial statements
audited by Moss Adams, LLP, independent public accountants, as indicated on
their report for the year ended December 31, 2006 (not included). In the opinion
of the Company, the accompanying financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position of the Company for the six months ended, June 30, 2007 and
2006 and cash flows for the six months ended June 30, 2007 and 2006. However,
these operating results are not necessarily indicative of the results expected
for the full fiscal year. The condensed consolidated financial statements should
be read in conjunction with the notes to the consolidated financial statements
contained in our annual report on Form 10-K for the fiscal year ended December
31, 2006.
Page 105
F-45
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.
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, 2006 and June 30, 2007
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,
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.
All parts are shipped FOB shipping point and 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.
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 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 the three and six month second months, ended June 30
of 2007 and 2006 are as follows:
For the Six Months ended June 30, 2007
--------------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share Amount
------------------ -------------------- ----------------
Net Income $475,395
Basic EPS
Income available to common stockholders $475,395 39,719,669 $0.01
Warrants 69,105
Options 724,138
Unvested employment agreement shares 270,276
Diluted EPS
Income available to common stockholders and
assumed conversions $475,395 40,783,188 $0.01
Page 106
F-46
For the Quarter ended June 30, 2007
--------------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share Amount
------------------ -------------------- ----------------
Net Income $140,530
Basic EPS
Income available to common stockholders $140,530 34,779,327 $0.004
Warrants 10,865
Options 681,429
Unvested employment agreement shares 422,857
Diluted EPS
Income available to common stockholders and $140,530 35,894,478
assumed conversions $0.004
For the Six Months ended June 30, 2006
---------------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share 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
Unvested employment agreement shares 320,000
Diluted EPS
Income available to common stockholders and
assumed conversions $2,178,777 41,106,236 $0.05
For the Quarter ended June 30, 2006
----------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share 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
Unvested employment agreement shares 370,000
Diluted EPS
Income available to common stockholders + assumed $1,055,376 40,733,176 $0.03
conversions
Page 107
F-47
Share value Vesting Date Antidilutive
on warrants,
Measurement options,
Date pending
employment
shares at
June 30, 2007
- --------------------------------------------------------------------------------
Unconverted
Warrants Issued:
- --------------------------------------------------------------------------------
@ $0.68 .50 Vested 300,000
@ $1.36 .50 Vested 7,740,000 7,740,000
@ $0.52 .65 Vested 8,919
@ $1.00 .65 Vested 1,040,866 1,040,866
@ $1.36 .65 Vested 1,137,020 1,137,020
Subtotal 10,226,805
Options Issued:
@ $0.17 .23 Vested 900,000
@ $1.03 1.03 Vested 30,000 30,000
@ $1.05 1.03 10,000 10,000
Subtotal 940,000
Awards of stock
pending under
employment
contracts
2007 100,000
2008 200,000
2009 95,000
2010 60,000
Subtotal 455,000
Total 11,621,805 9,957,886
Page 108
F-48
Equity in Net Assets and Advances to Affiliates
Until June 29, 2007, the 30% interest in Jetgobal, LLC was accounted for using
the equity method since the Company did not control Jetglobal, LLC, but over
which it did exert significant influence. The investment is recorded at cost
plus advances and the Company's share of earning less distributions and the
Company's share of losses. The Company considers whether future fair value of it
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 have been recorded to estimated fair value.
All significant intercompany profits and balances have been eliminated.
Recently Issued Accounting Pronouncements
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 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
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 and
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.
4. SEGMENT INFORMATION
The company has divided its operations into the following reportable segments:
(i)Aircraft maintenance, repair, and overhaul; (ii)Aircraft brokerage; and
(iii)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.
Page 109
F-49
Selected information by business segment is presented in the following tables
for the three and six months ended June 30, 2007 and June 30, 2006.
Three months ended Three months ended Six months ended Six months ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
($millions) ($millions) ($millions) ($millions)
Segment sales:
Aircraft maintenance 2.743 7.202 8.277 13.523
Aircraft trading 7.850 .650 7.900 3.223
Part sales 1.385 3.242 3.513 6.227
Other -.014 1.182 2.007
Sub Total 11.964 12.276 19.690 24.980
Elimination of intersegment sales -.790 -2.077 -2.287 -3.273
Total consolidated sales 11.174 10.199 17.403 21.707
Operating income:
Aircraft maintenance .536 1.813 2.319 3.428
Aircraft trading 1.004 -.924 1.054 -.032
Part sales .340 .765 .598 1.544
Other -.014 777 -.002 1.464
Sub total 1.866 2.431 3.969 6.404
Selling, general, administrative -1.529 -1.842 -3.128 -3.810
expense
Penalties
Other, net -.148 -.114 -.352 .170
Share of Jetglobal net income .969 .215 .923
(aircraft trading)
Gain on sale of interest in Jetglobal .027 .027
Consolidated earnings (loss) before taxes .216 1.444 .731 3.347
Interest income by segment
Aircraft maintenance .173 .008 .174 .028
Aircraft trading .007 .007
Part sales
Corporate .005 .009 .010 .020
Total interest income .178 .024 .184 .055
Interest expense by segment
Aircraft maintenance .262 .008 .287 .010
Aircraft trading
Part sales .007 .001 .008 .001
Corporate .110 .138 .216 .221
Total interest expense .379 .147 .511 .232
Page 110
F-50
Three months ended Three months ended Six months ended Six months ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
($millions) ($millions) ($millions) ($millions)
Depreciation and amortization by
segment
Aircraft maintenance .104 .097 .215 .189
Aircraft brokerage
Part sales
Corporate .039 .079 .078 .164
Total .143 .176 .293 .353
Net asset values:
Aircraft maintenance 7.790 7.808 7.790 7.808
Aircraft trading 9.022 3.422 9.022 3.422
Part sales 6.767 9.113 6.767 9.113
Corporate 5.152 8.161 5.152 8.161
Total 28.731 28.504 28.731 28.504
Capital expenditures:
Aircraft maintenance .009 .076
Aircraft brokerage
Part sales
Corporate .021 .018 .043 .025
Total .021 .027 .043 .101
Page 111
F-51
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. 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. 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:
Six Months Six Months
Ended Ended
June 30, 2007 June 30, 2006
------------- -------------
Angola $ 63,524 $ 26,880
Belgium 21,534
Hong Kong 30
Israel 42,057
Italy 891
Jordan 2,032,460
Korea 154,010
Lebanon 19,845 6,403
Malawi 111,000
Mexico 289,741 2,136,979
Pakistan 285,020 68,000
Philippines 128,936
Spain 1,100
UAE 44,369
Ukraine 6,560
United Kingdom 4,260 98,383
TOTALS $ 776,940 $ 4,765,042
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 responsible for 25% of the
costs and expenses associated with Jetglobal including any business
transactions. Management had 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, 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 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.) At June 30, 2007, 5 aircraft,
valued at $7,150,000, had been transferred. Due from investee partner at June
30, 2007 is $3,618,461. The gain on this transaction, recorded during the second
quarter of 2007 is $27,210.
As of June 30, 2007, the balance in equity in net assets and advances to
affiliates was zero.
Page 112
F-52
6. INVENTORY
Inventories consisted of the following:
June 30, 2007 December 31, 2006
------------- -----------------
Maintenance hardware $ 887,840 $ 1,030,465
Parts for resale 6,448,022 6,554,455
Aircraft & engines 7,535,374 267,771
----------- -----------
14,871,236 $ 7,852,691
=========== ===========
Management reviews listed inventory items to determine whether there are slow
moving or obsolete items on an annual basis. At June 30, 2007, it was
management's determination that the carrying value of the inventory items, after
adjustment for inventory write down, is appropriate and that there were no items
requiring an allowance because the carrying value exceeds net realizable value.
The significant increase in inventory value was due to the receipt of aircraft
upon disposal, by the Company, of its interest in Jetglobal (see Note 5).
7. SHAREHOLDERS' EQUITY
Options
On March 9, 2007 there were options for 10,000 shares, at an option price of
$1.05, 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 with the monthly stock-prices as variable from May 2002, the
call option value of these options was calculated to be $.77. $7,706 was
expensed during the first quarter of 2007 relative to these options. In
connection with the adoption of SFAS 123R 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 4.76%, Expected life of 2.5
years, Dividend rate of 0% and Expected volatility of 128.79%. There were no
options granted during the second quarter of 2007.
Stock
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.
On March 29, 2007, 10,000 shares of common stock were issued under the terms of
a Director's agreement. The value of the shares had been fully expensed when
earned (prior to issuance).
On May 15, 2007, 210,000 shares of common stock were issued. These shares
included 10,000 shares of common stock that were issued pursuant to a 2006
employment agreement. The stock-based compensation was fully expensed at
issuance (measurement date) issued at $1.23 per share. 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 $.73 each, resulting in expense in the amount of $146,000 during the second
quarter of 2007.
On May 25, 2007, 20,000 shares of common stock were issued 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.
Page 113
F-53
On June 4, 2007, the company issued 100,000 shares of common stock 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 has
been 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 were issued
pursuant to vesting under a 2006 employment agreement. The stock had been
expensed fully at issuance (measurement date).
SUMMARY OF EQUITY COMPENSATION STOCK-OPTION PLANS
TOTAL SHARES ISSUED AVAILABLE
PLAN NAME
2002 Compensatory Stock Option Plan 3,000,000 1,045,000 1,955,000
2003 Employee Stock Compensation Plan 5,000,000 4,867,500 132,500
Stock-based Compensation Disclosure
Stock issued under plans to employees was issued at the value of the stock at
the measurement date. All outstanding options were exercisable at grant date.
Those options issued to employees that were not immediately exercised remained
outstanding at June 30, 2007 and are summarized below:
June 30, 2007
-------------------------------------------------------------
Weighted Average
Exercise Price
--------------
Options outstanding at 930,000 $0.198 Exercisable on grant
beginning of year date
Granted during quarter 1 10,000 $1.05 Exercisable on grant
date
Granted during quarter 2 None
Exercised during quarter None
Forfeited during quarter None
Outstanding at 6/30/2007 940,000 $.207 Exercisable on grant
date
Options exercisable at 940,000 $.207
6/30/2007
Weighted average fair $1.05
value of options
granted during the
quarters 1 & 2
Page 114
F-54
The aggregate remaining contractual lives in years for the 900,000, 30,000 and
10,000 options outstanding and exercisable on June 30, 2007 was 1.772, 3.761 and
4.690, respectively.
At June 30, 2007, 1,955,000 shares were available for future grants under the
Company's 2002 Compensatory Stock Option Plan and 132,500 shares were available
for future grants under the Company's 2003 Employee Stock Option Plan.
June 30, 2006
-------------------------------------------------------------
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
Cancelled 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
6/30/2006
Weighted average fair None
value of options
granted during the
quarters 1& 2
8. NOTES PAYABLE
On December 9, 2005, Global, HAT 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. The Guidance Credit portion of the
agreement has expired and no longer exists. 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 June 30, 2007 the applicable interest rate was 8.32%
per annum. 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. The term of the Line of
Credit expires on October 31, 2007 and the entire outstanding principal balance,
all accrued and unpaid interest, and all other sums due and payable under the
Line of 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 receivable as
defined in the Loan Agreement and 50% of the net book value of all Eligible
Inventory as defined in the Loan 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 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.
Page 115
F-55
The balance due of the Line of Credit at June 30, 2007 was $4,872,000.
Originally the Line of Credit also secured a Letter of Credit for $128,000,
which was issued to Tucson Airport Authority as part of the lease agreement for
the HAT facility. This Letter of Credit expired during the second quarter of
2007, (See Note 16, Subsequent Events). The total available credit facility is
$5,000,000 at June 30, 2007 subject to the borrowing base.
As of June 30, 2007, the Company was not in compliance with certain covenants of
loan agreement, as amended October 15, 2005, with M&I Bank. On July 6, 2006, the
Company entered into a subordinated loan agreement with ComVest Capital, LLC..
Under the loan agreement, the Company was originally indebted to the Lender in
the principal amount of $2,800,000. The principal amount of the agreement was
originally 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 yet materialize, the company has repaid $2,700,000 of the
loan amount and has made an agreement to repay the balance of $44,750 during
November of 2006. The interest rate during the extended period will be 20%. This
loan, including accrued interest, was paid in full during June of 2007.
On March 15, 2007, the Company entered into a secured promissory note agreement
with Ardennes Value Fund, a related party due to the Company's planned GALP
participation. The principal amount of the note is $200,000 with simple interest
at a rate of 15% per annum. Required payments are interest only for the first
two months beginning April 15, 2007 and all remaining interest and principal is
due on June 15, 2007. This note was paid in full on June 26, 2007.
During the 2nd quarter of 2007, the Company entered into a short-term note
agreement in the amount of $350,000 with Armando and Herminia Rios. The note
specified interest at $10,000 per week. This note was paid in full in July of
2007.
On June 21, 2007, the company secured a line of credit with the Frank and Maxine
Smith Family Trust in the amount of $1,000,000. At June 30, 2007, $300,000 had
been received under this agreement. The terms of the line of credit include a
$55,000 set-up fee and simple interest on the unpaid balance at 15% per annum.
The note is all due and payable November 20, 2007. John B. Sawyer is guarantor
on the line of credit.
On June 30, 2007, the company entered into a note agreement with Jeffrey Ervine,
a related party pursuant to the planned GALP partnership. The principal amount
of the note was $800,000 with simple interest at 12% per annum plus a fee of
$80,000. The term of the note is six months.
During the second quarter of 2007, the Company received $100,000 from Raymon C.
Flores ("Flores"). On July 17, 2007, a note for $300,000 was entered into by the
Company and Flores. The Company received an additional $200,000 during July,
2007. The interest on the note is payable at $8,000 per week and the unsecured
note is due October 27, 2007. Prior to the formal agreement on July 17, 2007,
the Company had agreed to pay interest on the $100,000 received during the
second quarter of 2007 at a rate of $4,000 per week.
8. RELATED PARTY TRANSACTIONS
BCI Aircraft Leasing, Inc.
BCI Aircraft Leasing, Inc., Global's former partner in Jetglobal, see Note 5,
accounted for 14.5% and 25% of Company revenue during the first half of 2007 and
2006, respectively and accounted for 16.6% of Company revenue during the year
ended December 31, 2006. The account receivable from BCI at June 30, 2007 and
2006 was $1,931,631 and $1,463,726, respectively and at December 31, 2006 was
$1,827,481.
Jetglobal, LLC accounted for less than 1% of the Company's revenue during the
first half of 2007. Jetglobal, LLC accounted for 7.2% of the Company's revenue
in 2006. As a result of the partnership settlement discussed in Note 5, the
Company had no accounts receivable due from Jetglobal at June 30, 2007. BCI Jet,
a BCI controlled company, accounted for 0% of the Company's revenue in the first
quarter of 2007 and 3.8% of the Company's revenue in 2006. BCI Jet had no
account receivable balance at June 30, 2007 and had owed the Company $1,300,000
at December 31, 2006, which was satisfied as part of the partnership settlement
discussed in Note 5.
Page 116
F-56
GALP
GALP purchased an aircraft from Global in the amount of $7,850,000 during the
second quarter of 2007, which represents 45.5% of the Company's 2007 revenue. At
June 30, 2007, the Company had receivables in the amount of $1,078,113 from
GALP, which represents 13.5% of the total Company accounts receivable balances.
Also see notes with Ardennes Value Fund and Ervine under Note 8 above.
9. CONTRACTS IN PROGRESS
At June 30, 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:
2007 2006
----------- -----------
Costs incurred on uncompleted contracts $ 908,516 $ 1,486,387
Profit earned to date 777,049 521,378
----------- -----------
$ 1,685,565 $ 2,007,765
Less: Billings to date (1,860,516) (2,314,710)
----------- -----------
$ (174,951) $ (306,945)
=========== ===========
Included in the accompanying balance sheet at June 30, 2007 and December 31,
2006 under the following caption: Billings in excess of costs and estimated
earnings on uncompleted contracts
2007 2006
--------- ---------
Billings in excess from above $(174,951) $(306,945)
Time and material earnings unbilled 146,186 82,899
--------- ---------
Net $ (28,765) $(224,046)
========= =========
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.
Page 117
F-57
52- TRADE ACCOUNTS RECEIVABLE
As of March 31, 2007 and December 31, 2006, trade accounts receivable consist of
the following:
2007 2006
----------- -----------
Contracts in progress $ 677,633 $ 1,158,998
Completed contracts 7,776,313
7,185,118
----------- -----------
$ 8,453,946 $ 8,344,116
Less: allowance for doubtful accounts (471,710) (473,317)
----------- -----------
$ 7,982,236 $ 7,870,799
=========== ===========
There was no bad debt expense charged to the allowance for doubtful accounts
during the first and second quarters of 2007
12. NOTES RECEIVABLE
During the 4th quarter of 2005, a note receivable in the amount of $600,000 was
issued to the Company by Avolar Aero Lineas S.A. de C.V. The due date of the
note was extended to June 30, 2007. The note bears interest at 6.5% per annum.
At June 30, 2007, the balance due including interest was $348,857. This note is
not collateralized.
13. CONCENTRATION OF REVENUES
The Company's top four customers accounted for 80.3% and 54.1% of sales during
the 1st half of 2007 and 2006, respectively. The Company's top four customers
accounted for 52.4% of sales during the year ended December 31, 2006. Three
customers accounted for 69.9% of the Company's accounts receivable at June 30,
2007. Three customers accounted for 63.8% of the Company's accounts receivable
at December 31, 2006. 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. It should be noted that in
any single quarter, due to the length of the typical repair job, percentages
will normally be significantly higher than on an annual basis. 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, referenced above, for the 1st half of 2007 and
2006 and the year 2006 are listed in the table below:
1st Half of 2007 1st Half of 2007 1st Half of 2006 1st Half of 2006-Top Four 2006- % of
- -Top Four Customers -% of Revenues -Top Four Customers 2006 -% of Revenues Customers Revenues
- ------------------- -------------- ------------------- ------------------- --------- --------
Customer G 45.5 Customer B 24.5 Customer A 20.3
Customer A 15.4 Customer E 10.5 Customer B 18.4
Customer B 14.5 Customer A 9.8 Customer C 7.2
Customer F 4.9 Customer H 9.3 Customer D 6.5
Top Four- 1st Half 80.3 Top Four- 1st Half 54.1 Top Four-2006 52.4
of 2007 Total % of 2006 Total % Total %
Page 118
F-58
14. COMMITMENTS AND CONTINGENCIES
On June 29, 2004, the Company initiated a lawsuit against Corwin Foster and Jane
Doe Foster, husband and wife, and Seajay Holdings, LLC a Michigan Limited
Liability Company (the "Defendants") in the United States District Court for the
District of Arizona requesting entry of a judgment for the return of 1,500,000
shares of common stock. Global and HAT have asserted claims that Corwin Foster
(who is the sole shareholder and president of Seajay Holdings) and Seajay
Holdings acquired 1,500,000 shares of common stock of Global as part of a Stock
Exchange Agreement without consideration for the receipt of such common stock.
The Company is pursuing the return of these shares. This lawsuit emanates from a
stock exchange agreement of April 2002 whereby Old Mission Assessment ("OMAC")
agreed to provide HAT financing and capital for its newly established business.
OMAC and its officers Corwin Foster and others, entered into two debenture
related agreements on April 15, 2002 whereby OMAC agreed to pay to HAT the sum
of $1,500,000 under each debenture agreement on or before July 15, 2002. In
consideration of this agreement HAT agreed to provide to various investing
parties, including Corwin Foster's entity Seajay Holdings, shares of stock of
HAT. On May 2, 2002, Global acquired HAT in a stock exchange thereby entitling
the investing parties, including Corwin Foster's entity Seajay Holdings, to
Global stock in consideration for the $3,000,000 investment. Seajay Holdings
acquired 1,500,000 shares of common stock of Global pursuant to this
transaction. Although Global stock was issued to the investors, including Corwin
Foster's entity Seajay Holdings, HAT/Global only received $400,535 of the agreed
upon $3,000,000 to be paid pursuant to the debenture agreements. Since payment
in full was never received by Global for the shares of common stock issued as
consideration for the debenture agreements, Global was able to secure the return
of all common stock issued in connection with the debenture agreements except
the 1,500,000 shares of common stock issued to Corwin Foster's entity Seajay
Holdings. Global has agreed to return the $400,535.00 of the agreed upon
$3,000,000.00 received pursuant to the debenture agreements. This sum was
released from escrow and paid to United Pay Phone, an investor in OMAC, pursuant
to an agreed upon order of court.
Although Global has made repeated demands upon Corwin Foster and Seajay Holdings
to return the 1,500,000 shares of common stock, Corwin Foster and Seajay
Holdings have failed and refused to return such stock. As a consequence of
Corwin Foster's and Seajay Holdings failure to return the common stock received,
Global initiated legal proceedings for damages in the amount of no less than
$1,000,000 plus interest and fees; the return of the 1,500,000 shares of common
stock; and punitive damages in the amount of $10,000,000.
On or about July 24, 2006 which was far beyond the procedurally acceptable time
within which to file a counterclaim and without the required leave of court,
Corwin Foster filed a counterclaim against Global, HAT, Hamilton Aviation, Ian
Herman, Gordon Hamilton, John Sawyer, Ronald Clark, Frank Hooper, United
Payphone, Financial Capital, Interwest Transfer and the law offices of Tharpe
Howell alleging fraud, unjust enrichment, breach of contract and constructive
trust.
All of these claims are categorically denied and Global has filed a motion to
strike this counterclaim based upon the above referenced defects.
Global's Motion for Summary Judgment was dismissed in June 2007 and the matter
is expected to proceed to trial in early 2008.
On June 6, 2007, HAT was served with a civil complaint filed by Petro Energy
Corporation in the Superior Court of California. The Complaint alleges that
Petro Energy and HAT entered into a fuel services agreement and that HAT has
failed to pay a total of $155,177 pursuant to the terms of the fuel services
agreement. The Complaint further alleges that John Sawyer and HAT also owe Petro
Energy $60,000 for fuel services provided to Falcon Air and $17.5 million for
fuel services provided to Avolar Airlines.
The $60,000 claim was paid by Falcon Air to Petro Energy on June 20, 2007 and is
no longer at issue.
The basis of Petro Energy's claims against HAT and John Sawyer for services
Petro Energy provided to Avolar is that John Sawyer, as president of HAT,
induced Petro Energy to contract with Avolar and that as a consequence of this
inducement, John Sawyer and HAT are responsible to Petro Energy for Avolar's
unpaid fuel invoices. Notwithstanding the fact that the Petro Energy contract is
solely with Avolar and does not involve John Sawyer or HAT either as a
contracting party or guarantor, Petro Energy alleges that John Sawyer and HAT
are responsible for payment of Avolar's invoices owed to Petro Energy.
Page 119
F-59
HAT filed an answer to the complaint denying all the allegations set forth
therein and the matter is currently pending. The claim for $155,177 is a general
non-material incidental claim incurred in the ordinary course of business which
Management believes will be resolved with out any material effect on Global's
financial position or liquidity. Management of the Company believes that the
$17.5 million claim against HAT and John Sawyer is totally without merit and
believes the eventual outcome will not have a material effect on Global's
financial position or liquidity.
15. SUBSEQUENT EVENTS
On July 3, 2007, M&I Bank issued a new letter of credit in the amount of
$128,000, secured by a certificate of deposit in the same amount. This letter of
credit to Tucson Airport Authority is a lease requirement for the HAT facility.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
Page 120
F-60
TABLE OF CONTENTS
JETGLOBAL, LLC
FINANCIAL STATEMENTS
FISCAL YEARS ENDED DECEMBER 31, 2005 & 2006
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT F-61
BALANCE SHEETS F-62
STATEMENT OF OPERATIONS F-63
STATEMENT OF MEMBERS EQUITY F-64
CONSOLIDATEDSTATEMENT OF CASH FLOWS F-65
NOTES TO FINANCIAL STATEMENTS F-66 - F-70
Page 121
F-61
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 estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, 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 16, 2007
Scottsdale, Arizona
Page 122
F-62
JETGLOBAL, LLC
--------------
BALANCE SHEET
December 31, 2006 and December 31, 2005
ASSETS
2006 2005
------------ ------------
CURRENT ASSETS
Accounts receivable $ 830,445 $ --
Inventory 16,234,615 9,578,842
Deposits 350,000 5,488,468
Prepaid insurance 103,950
------------ ------------
TOTAL CURRENT ASSETS $ 17,519,010 $ 15,067,310
------------ ------------
TOTAL ASSETS $ 17,519,010 $ 15,067,310
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Notes payable - short term $ 1,427,189 $ --
Accounts payable - trade 800,434 76,055
Due to related parties 1,091,316
Commitments and contingencies
------------ ------------
TOTAL CURRENT LIABILITIES $ 3,318,939 $ 76,055
------------ ------------
TOTAL LIABILITIES $ 3,318,939 $ 76,055
MEMBERS' EQUITY
BCI Aircraft Leasing 3,596,247 11,156,444
Global Aircraft Solutions 5,100,918 4,361,056
BCI Aircraft Leasing Retained Earnings (Loss) 3,852,034 (368,372)
Global Aircraft Solutions Retained Earnings (Loss) 1,650,872 (157,873)
------------ ------------
TOTAL MEMBERS' EQUITY $ 14,200,071 $ 14,991,255
------------ ------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 17,519,010 $ 15,067,310
============ ============
The accompanying notes are an integral part of these financial statements.
Page 123
F-63
JETGLOBAL, LLC
--------------
STATEMENT OF OPERATIONS
For the Years ended December 31, 2006 and
the Period from Inception (August 26,
2005) to December 31, 2005
From Inception
(August 26, 2005)
To
December 31,
2006 2005
Revenue
Net aircraft sales $ 12,429,860 $
Net aircraft leases 1,893,232
------------ ------------
Total revenue $ 14,323,092
Cost of sales (7,150,356)
------------ ------------
Gross profit 7,172,736
Selling, general and administrative expense (1,012,979) (526,245)
------------ ------------
Gain /(loss) from operations 6,159,757
Other income (expense):
Interest expense (130,606)
------------ ------------
$ 6,029,151 $ (526,245)
Net income/(loss)
============ ============
The accompanying notes are an integral part of these financial statements.
Page 124
F-64
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
BCI GLOBAL TOTAL
Members' equity August 26, 2005 0 0 0
Capital contributions $ 15,423,750 $ 4,576,440 $ 20,000,190
Distributions (3,621,152) (861,538) (4,482,690)
Other payments (646,154) 646,154
Net loss (368,372) (157,873) (526,245)
------------ ------------ ------------
------------ ------------ ------------
Members' Equity, December 31, 2005 $ 10,788,072 $ 4,203,183 $ 14,991,255
Capital contributions 4,287,451 2,258,612 6,546,063
Distributions (11,066,398) (300,000) (11,366,398)
Net profit 4,220,406 1,808,745 6,029,151
------------ ------------ ------------
Members' Equity, December 31, 2006 $ 7,448,281 $ 6,751,790 $ 14,200,071
============ ============ ============
The accompanying notes are an integral part of these financial statements.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
Page 125
F-65
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
From Inception
(August 26, 2005) to
2006 December 31, 2005
Cash flows from operating activities:
Net income (loss) $ 6,029,151 $ (526,245)
Adjustments to reconcile net profit to net cash 0 0
provided (used) by operating activities:
Changes in Assets and Liabilities:
Accounts receivable (830,445)
Prepaid expenses (103,950)
Inventory (2,028,843) (9,578,842)
Deposits (350,000) (5,488,468)
Accounts payable-trade 1,815,695 76,055
------------ ------------
Net cash provided by/(used for) operating activities 4,531,608 (15,517,500)
------------ ------------
Cash flows from investing activities:
Net cash used for investing activities 0 0
------------ ------------
Cash flows from financing activities:
Cash in by partners 4,546,064 20,000,190
Cash out by partners (10,504,861) (175,000)
Funds received on notes payable 4,257,000
Payments made on notes payable (2,829,811)
------------ ------------
Net cash provided by (used for) financing activities (4,531,608) 19,825,190
------------ ------------
Net increase in cash and cash equivalents 0 0
Cash and cash equivalents at beginning of period 0 0
Cash and cash equivalents at end of period $ 0 $ 0
Supplemental schedule of non-cash financing activities
Aircraft inventory distributed to members $ 861,538 $ 4,307,690
Interest paid for the year ended December 31, 2006 was $130,606. No interest was
paid for the year ended December 31, 2005.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 126
F-66
JETGLOBAL, LLC
--------------
NOTES TO FINANCIAL STATEMENTS
December 31, 2006 and 2005
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.
Page 127
F-67
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.
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F-68
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:
December 31, December 31,
2006 2005
N301DL 737-200 861,538
N302DL 737-200 861,538
N303DL 737-200 861,538
N304DL 737-200 861,538
M305DL 737-200 861,538
N306DL 737-200 861,538
N307DL 737-200 861,538 861,538
N308DL 737-200 861,538
N309DL 737-200 861,538
N314DL 737-200 861,539
N316DL 737-200 861,539 861,538
N317DL 737-200 861,539 861,358
N318DL 737-200 861,539 861,538
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F-69
N320DL 737-200 861,538
N321DL 737-200 861,538
N322DL 737-200 861,538
N323DL 737-200 775,000 775,000
N326DL 737-200 861,539
N327DL 737-200 861,538
N328DL 737-200 861,538
N329DL 737-200 861,539
N330DL 737-200 861,539
N332DL 737-200 525,000 525,000
N334DL 737-200 525,000
N382DL 737-200
N937AS MD80 1,150,000
----------------- ---------------
$ 16,234,615 $9,578,842
================= ===============
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.
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F-70
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:
75%/25% of total Due from/(Due to)
Cash In/ Cash Out Member
----------------- ------
BCI Aircraft Leasing 3,596,247 6,522,874 (2,926,627)
Cash In/Out
Global Aircraft 5,100,918 2,174,291 2,926,627
Solutions Cash In/Out
Total Cash in/Out 8,697,165
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 canceling a sales
agreement. This sale was guaranteed by BCI. In settlement 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%.
Page 131
Until May 28, 2008, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.