Related Party and Similar Transactions

9 Months Ended

Sep. 30, 2012

Related Party and Similar Transactions

Related Party and Similar Transactions

9.  Related Party and Similar Transactions

Island Air:  Charles F. Willis, IV, our CEO and Chairman of our Board of Directors and the owner of approximately 31% of our common stock, owns Hawaii Island Air, Inc., a Delaware Corporation (“Island Air”). The independent members of our Board of Directors approve transactions between the Company and Island Air. When Mr. Willis acquired Island Air in 2004, the net book value of the assets leased by the Company to Island Air prior to his acquisition was $14.8 million. Shortly thereafter, the Company leased an aircraft already in its portfolio to Island Air, increasing assets under lease to $16.9 million. As of September 30, 2012, Island Air leased two DeHaviland DHC-8-100 aircraft and six spare engines from the Company.  The aircraft and engines on lease to Island Air had a net book value of $2.4 million at September 30, 2012.

Beginning in 2006, Island Air experienced cash flow difficulties, which affected their payments to the Company, due to a fare war commenced by a competitor, their dependence on tourism which had suffered from the difficult economic environment as well as volatile fuel prices. As a result, the Company granted lease rent deferrals which were accounted for as a reduction in lease revenue in the applicable periods. Because of the question regarding collectability of amounts due under these leases, lease rent revenue for these leases was recorded on a cash basis until such time as collectability was reasonably assured.  Effective as of May 3, 2011 the Company entered into a Settlement Agreement with Island Air that was contingent upon Island Air obtaining similar concessions from their other major creditors, which Island Air obtained.  Under the settlement, the Company forgave $1.8 million of overdue rent and late charges, representing approximately 65% of the $2.9 million then due to us from Island Air and Island Air agreed to pay the remaining $1.1 million as follows: $0.1 million on signing and $1.0 million over 60 months at 5% interest.  A note receivable in the amount of $1.0 million and offsetting reserve were established with revenue being recorded as cash is collected, with $0.14 million received in the nine months ended September 30, 2012. As of September 30, 2012, Island Air is one month in arrears and the principal amount owing under the note is $0.7 million.

Effective January 2, 2011, the Company converted the operating leases with Island Air to a finance lease, with a principal amount of $7.0 million which included bargain purchase options for the equipment at the end of the lease term.  However, for accounting purposes, due to the past experience with this lessee, the finance lease is being accounted for as an operating lease with the assets under lease remaining on the balance sheet and lease rent revenue being recorded as cash is received.  Island Air paid its monthly lease payments from the inception date of the finance lease through April 2012 in the aggregate amount of $1.9 million.

On September 28, 2012, through a lease amendment, Island Air exercised its purchase option for one of the airframes under the finance lease, sold it to an unrelated third party for $0.64 million, and paid the proceeds from that sale to the Company, which were applied to satisfy $0.60 million in past due rents under the finance lease with the remaining proceeds applied to the principal owing under the finance lease. For accounting purposes, the Company applied $0.1 million of the payment to the net book value of the sold assets and removed it from the books. The remaining $0.54 million will be recognized as lease rent revenue on a straight-line basis over the remaining term of the lease agreement. As of September 30, 2012, the principal amount owing under the finance lease was $5.0 million. Island Air has an agreement with the same third-party to sell the remaining two airframes covered by the finance lease in 2013, which sales would further reduce the amount owing under the finance lease by $1.4 million. Any payments received from the sale of these airframes will be accounted for as a recovery of the net book value of the airframe with any excess recorded as lease rent revenue over the remaining lease term.

On October 24, 2012 the Company purchased one DeHaviland DHC-8-100 aircraft from Island Air for $2.3 million and leased it back to Island Air under an operating lease for twenty four months at a monthly rent of $46,800 per month plus maintenance reserves.  In connection with this transaction, Mr. Willis made a capital contribution of a $0.65 million airframe to Island Air.

On November 8, 2012 the Company entered into an agreement with Island Air for the re-purchase of five engines covered by the finance lease. The agreement provides that on delivery of these engines by Island Air in compliance with the terms of the agreement, the Company will purchase such engines for an aggregate purchase price of $1.0 million and apply the net purchase price to Island Air’s obligations to the Company, reducing the principal amount owing under the finance lease. Following the sale of the five engines and the remaining two airframes, the balance owing by Island Air under the finance lease will be $2.6 million with the assets under lease having a net book value of $0.6 million.

Including the recent sale and leaseback and following Island Air’s sale of the five engines to us and its contemplated sale of the remaining two airframes to an unrelated third-party described above, the net book value of assets under lease to Island Air would be $2.9 million.

J.T. Power: The Company entered into two Consignment Agreements dated January 22, 2008 and November 17, 2008, with J.T. Power, LLC (“J.T. Power”), an entity whose sole shareholder, Austin Willis, is the son of our Chief Executive Officer, and directly and indirectly, a shareholder and a Director of the Company. According to the terms of the Consignment Agreement, J.T. Power was responsible to market and sell parts from the teardown of four engines with a book value of $5.2 million. During the nine months ended September 30, 2012, sales of consigned parts were $14,700. Under these agreements, J.T. Power provided a minimum guarantee of net consignment proceeds of $4.0 million as of February 22, 2012. Based on current consignment proceeds, J.T. Power was obligated to pay $1.3 million under the guarantee in February 2012. On March 7, 2012, this guarantee was restructured as follows - quarterly payments of $45,000 over five years at an interest rate of 6% with a balloon payment at the end of this five year term. The Agreement provides an option to skip one quarterly payment and apply it to the balloon payment at an interest rate of 12%.  The quarterly payment of $45,000 was received for the period ended June 30, 2012 and September 30, 2012.

On July 31, 2009, the Company entered into Consignment Agreements with J.T. Power, without guaranties of consignment proceeds, in which they are responsible to market and sell parts from the teardown of one engine with a book value of $23,000. During the nine months ended September 30, 2012, sales of consigned parts were $54,200.

On July 27, 2006, the Company entered into an Aircraft Engine Agency Agreement with J.T. Power, in which the Company will, on a non-exclusive basis, provides engine lease opportunities with respect to available spare engines at J.T. Power. J.T. Power will pay the Company a fee based on a percentage of the rent collected by J.T. Power for the duration of the lease including renewals thereof. The Company earned no revenue during the nine months ended September 30, 2012 under this program.