UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form 10-K





x        ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the fiscal year ended December 31, 2009





o        TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For
the transition period from __________ to __________





Commission
File Number: 001-33884




GULFSTREAM
      INTERNATIONAL GROUP, INC.(Exact name of registrant as
      specified in its charter)




Delaware
            
            20-3973956(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)





3201
Griffin Road, 4th
Floor, Fort Lauderdale, Florida 33312


(Address
of principal executive offices, including zip code)





Registrant’s
telephone number, including area code:


(954)
985-1500





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock of $0.01 par value per share
            
            NYSE
      Amex Stock Exchange





Securities
registered pursuant to Section 12(g) of the Act: None


________________





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes   ̈    No 
þ





Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  Yes   ̈    No 
þ





Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  þ      No 
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈    No 
þ





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. 
Yes   ̈    No 
þ




Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer”
and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large accelerated
      filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
              (Do not
      check if a smaller reporting company)
            o
            Smaller reporting
      company
            þ





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).  Yes  ̈
    No þ





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $6,244,756 as of June 30,
2009.





As of
March 31, 2010, 3,795,061 shares of the registrant’s common stock, par value
$0.01 per share, were issued and outstanding.





Documents
Incorporated by Reference: None.













GULFSTREAM
INTERNATIONAL GROUP, INC.





2009
FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





PagePART IItem 1.
            Business.
            
            
            4Item 1A.
            Risk
      Factors.
            
            
            14Item 1B.
            Unresolved
      Staff Comments.
            
            
            28Item 2.
            Properties.
            
            
            28Item 3.
            Legal
      Proceedings.
            
            
            29Item 4.
            Submission
      of Matters to a Vote of Security Holders.
            
            
            29PART IIItem 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
            
            
            30Item 6.
            Selected
      Financial Data.
            
            
            33Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
            
            
            36Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk.
            
            
            47Item 8.
            Financial
      Statements and Supplementary Data.
            
            
            49Item 9.
            Changes
      and Disagreements With Accountants on Accounting and Financial
      Disclosure.
            
            
            74Item 9A.
            Controls
      and Procedures.
            
            
            74Item 9B.
            Other
      Information.
            
            
            75PART
      IIIItem 10.
            Directors,
      Executive Officers and Corporate Governance.
            
            
            76Item 11.
            Executive
      Compensation.
            
            
            79Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
            
            
            91Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.
            
            
            93Item
      14.
            Principal
      Accounting Fees and Services.
            
            
            95PART
      IVItem
      15.
            Exhibits,
      Financial Statement Schedules.
            
            
            97Signatures
            
            
            102





2




PART I





Cautionary
Statement Concerning Forward-Looking Statements





Our representatives and we may from
time to time make written or oral statements that are "forward-looking,"
including statements contained in this Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission, reports to our stockholders
and news releases. All statements that express expectations, estimates,
forecasts or projections are forward-looking statements within the meaning of
the Act. In addition, other written or oral statements which constitute
forward-looking statements may be made by us or on our behalf. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
"projects," "forecasts," "may," "should," variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve risks,
uncertainties and assumptions which are difficult to predict. These risks may relate to,
without limitation:





·
            our
      business strategy;





●
            our
      value proposition;





●
            the
      market opportunity for our services, including expected demand for our
      services;





●
            information
      regarding the replacement, deployment, acquisition and financing of
      certain numbers and types of aircraft, and projected expenses associated
      therewith;




●
            costs
      of compliance with FAA regulations, Department of Homeland Security
      regulations and other rules and acts of
  Congress;




●
            the
      ability to pass taxes, fuel costs, inflation, and various expense to our
      customers;




●
            certain
      projected financial obligations;




●
            our
      estimates regarding our capital
requirements;




●
            any
      of our other plans, objectives, expectations and intentions contained in
      this report that are not historical
facts;




●
            changing
      external competitive, business, budgeting, fuel supply, weather or
      economic conditions;




●
            changes
      in our relationships with employees or code share
  partners;





●
            availability
      and cost of funds for financing new aircraft and our ability to profitably
      manage our existing fleet;





●
            adverse
      reaction and publicity that might result from any
    accidents;





●
            the
      impact of current or future laws and government investigations and
      regulations affecting the airline industry and our
    operations;





●
            additional
      terrorist attacks; and





●
            consumer
      unwillingness to incur greater costs for
  flights.





Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in or suggested by such forward-looking statements. We undertake no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the factors described herein and in other documents we file from time to
time with the Securities and Exchange Commission, including our Quarterly
Reports on Form 10-Q, Annual Reports on Form 10-K, and any Current Reports on
Form 8-K filed by us.





3


ITEM 1.BUSINESS.





Overview of Our
Business





Gulfstream
International Group, Inc. is a holding company that operates two independent
subsidiaries: Gulfstream International Airlines, Inc. (“Gulfstream” or “the
Airline”) and Gulfstream Training Academy, Inc. (the “Academy”). References to
“Company” “we,” “our,” and “us,” refer to Gulfstream International Group, Inc.
and either or both of Gulfstream or the Academy.





Gulfstream
is a commercial airline currently operating 147 scheduled flights per day,
serving nine destinations in Florida, ten destinations in the Bahamas, and five
destinations from Continental Airline’s Cleveland hub under the Department of
Transportation’s Essential Air Service Program. Our fleet consists of 23 B1900D,
19-seat, turbo-prop aircraft. Operating from our headquarters in Fort
Lauderdale, Florida, Gulfstream was the sixteenth largest regional airline group
in the U.S. in 2008 in terms of number of passengers flown, according to the
Regional Airline Association. We operate under a principal code share and
alliance agreement with Continental Airlines. We are also party to code share
agreements with United and Copa Airlines of Panama. In addition to the daily
scheduled flights, Gulfstream also offers frequent charter flights within our
geographic operating region, including licensed flights to Cuba.





The
Academy provides flight training services to fully-licensed commercial pilots.
The Academy’s principal program is our First Officer Program, which allows
participants to obtain a Second-In-Command type rating in approximately four
months. Following receipt of this rating, pilots fly between 250 and 400 hours
performing first officer duties at Gulfstream. By attending the Academy, pilots
are able to enhance their ability to secure a permanent position with a
commercial airline. The Academy’s graduates are typically hired by various
regional airlines, including Gulfstream. In 2009 and 2008, 42 and 59 pilots,
respectively, entered the First Officer Program.





History





Our
business was started by Thomas L. Cooper with the formation of Gulfstream in
1988. Gulfstream began as an airline offering on-demand charter service
utilizing nine-passenger, piston-powered aircraft. In 1990, we initiated
scheduled commercial service by offering flights from Miami to several locations
in the Bahamas. In 1994, after introducing turbo-prop aircraft, we signed our
first code share agreement with United Airlines and expanded our routes in both
Florida and the Bahamas. Since 1994, we have signed a series of code share
agreements with our current code share partners.





Gulfstream
first entered into a code share and alliance agreement with Continental, our
principal alliance partner, in 1997. Gulfstream and Continental have amended the
agreement on several occasions, most recently in March of 2006, which amendment
included an extension of the term to 2012. Prior to our acquisition of
Gulfstream, Continental assisted Gulfstream from time to time with financial
transactions and aircraft acquisitions, and today holds a warrant to purchase
10% of Gulfstream’s outstanding shares.





In
December 2005, Gulfstream International Group, Inc. was incorporated in Delaware
by a group of investors as Gulfstream Acquisition Group, Inc., and changed its
name to Gulfstream International Group, Inc. on June 13, 2007. We were
formed to acquire Gulfstream and the Academy. In March 2006, we acquired
approximately 89% of G-Air Holdings Corp., Inc. (“G-Air”), which owned
approximately 95% of Gulfstream at that time, and 100% of the Academy, which
held the remaining 5% of Gulfstream. Subsequently, we acquired the remaining 11%
of G-Air. Following these transactions, we are the sole owner of Gulfstream and
the Academy, subject to Continental’s warrant to purchase 10% of the outstanding
shares of Gulfstream’s common stock.





Our Competitive
Strengths





·  Long-standing code share agreements
with multiple major airlines. Gulfstream has code share agreements with
Continental and United. We have been a partner with each of these airlines for
more than five years. Recently, our code share agreement with Continental was
extended through 2012. We believe that utilizing such agreements enhances our
ability to generate revenue from both local and connecting traffic. We also
believe that through our alliances, we are able to control costs by contracting
for reservations, ground handling and other services at lower costs. In
addition, these code share relationships allow us to offer our passengers easy
booking through reservation systems maintained by our code share partners and
the benefits of associated frequent flier programs.




4




·  Well positioned in the Bahamas
market. We are a leading carrier to the Bahamas and serve more
destinations in the Bahamas than any other U.S. airline. We maintain our own
facilities and employees at all ten of our destinations in the Bahamas and we
enjoy a close cooperative relationship with Bahamian business and tourism
officials. We believe that our focus on the Bahamian market allows us to
identify new market opportunities and develop those opportunities more
efficiently than new market entrants.





·  Diverse route network and
utilization of small aircraft. We have connecting hubs in several key
Florida cities, daily charter flights to Cuba, and flights from Continental
Airline’s Cleveland hub to five smaller cities in Pennsylvania, New York, and
West Virginia. This network enables us to establish multiple flight crew and
maintenance bases that reduce overall operating costs and enhance operational
reliability. The size and scale of this operation create practical barriers to
entry for new entrants and increases our ability to shift capacity according to
seasonal and business-versus-leisure demand patterns. Additionally, the
relatively small size and efficiency of our turboprop aircraft combine to
produce trip costs that are substantially lower than operators flying larger and
more expensive jet aircraft.





·  We offer reliable, quality
service. We have been consistently among the highest-ranked regional
airlines in the country in terms of reliability. For 2009, our on-time
performance was 79.5%, compared to the 79.6% average on-time performance
reported by the Department of Transportation for all reporting airlines.
Gulfstream has received the FAA Diamond Award, the highest level of recognition
for maintenance training, for 13 consecutive years, including 2009.





·  The Academy has a unique first officer program. We
believe the Academy has established a strong reputation for quality instruction.
We offer our students the opportunity to accumulate flight hours with an airline
regulated under Part 121 of the FAA regulations, sometimes referred to as Part
121 flight hours. Many airlines require pilot applicants to have a certain
number of Part 121 flight hours or equivalent experience and so our students
enhance their hiring prospects with regional airlines through our first officer
program. In addition, the Academy provides Gulfstream with a reliable and
cost-effective source of first officers and pilots.





Our Strategy





Our
business strategy is to utilize small-capacity aircraft to target markets that
are unserved or underserved by competing airlines. Small capacity aircraft allow
for lower costs per flight, and enable us to operate profitably with fewer
passengers per flight than airlines operating larger equipment.





·  Utilize turboprop aircraft to
selectively expand the number of markets we serve. We use 19-passenger
turboprop aircraft. Turboprop aircraft offer substantially lower acquisition
costs than regional jet aircraft and, in addition, tend to be more fuel
efficient than other aircraft. We believe this allows us to provide service on
short, lower volume routes and achieve attractive margins, in contrast to
airlines that have focused their fleets on larger regional jet aircraft,
increasingly in the 70- to 90-seat category. The efficiencies associated with
turboprop aircraft are more pronounced on short haul routes such as ours.
Additionally, turboprop aircraft have the ability to operate out of airports
with runways that are too short for certain regional jets.










·  Use of alliance and code share
agreements. Utilizing our alliance and code share agreements enhances our
ability to generate revenue for both local and connecting traffic. By having
multiple code share partners, we are able to increase our revenue per flight by
accessing several sources of connecting passengers relative to what would be
available within a single code share partnership arrangement. This is
particularly true given that our main connecting airports are not hubs for any
of our code share partners. These agreements also provide the opportunity to
contract for services at lower costs, as well as to gain access to airport and
other facilities, relative to what we would be able to do
independently.





Further, we believe that by providing
high quality service under our code share partnerships with multiple airlines in
existing markets, our opportunities for expanding the scope of our relationship
with those carriers may be greater.




5




·  Increase enrollment at the
Academy. We seek to increase enrollment at the Academy through
implementation of various marketing initiatives. We believe we can enhance
enrollment by increasing cooperation with other regional airlines and primary
flight training centers in order to produce higher levels of applicant
referrals. We also encourage enrollment by developing closer integration with
accredited higher education institutions offering two- and four-year degrees.
Additionally, we seek to attract prospective First Officer candidates from
different sources by offering training services to other regional air carriers
operating similar aircraft types. We also continuously seek to assist
prospective candidates in obtaining tuition financing from third party
sources.





Gulfstream International
Airlines





Markets
Served





Gulfstream
serves a number of short distance, low volume routes in Florida and the Bahamas,
and offers flights from Continental Airline’s Cleveland hub to five small cities
in Pennsylvania, New York and West Virginia. We offer more Bahamian destinations
with more scheduled daily flights than any other U.S. carrier. Further,
Gulfstream is the sole provider of scheduled service on a number of our routes.
Gulfstream’s current route maps are depicted below.











6









As of
December 31, 2009, we provided non-stop service in 31 city pairs. We believe
that we are the highest-frequency service provider in 26 of these 31 city pairs.
We tailor our flight schedules to individual market demands in order to optimize
both profitability and the number of connecting passengers to and from our code
share partners. In 2009, our average fare was $144 and our average flight length
was 216 miles.





All of
our flights are marketed as Continental. In addition, certain flights are also
marketed through our other code share partners. We estimate that over 65% of our
passengers are derived from local “point to point” traffic within Florida and
the Bahamas. The balance of our passengers are derived from connecting traffic
from our code-share partners and other carriers destined primarily for the
Bahamas. Continental is our largest connecting partner, with 24% of our
passengers connecting to and from Continental flights.





Gulfstream
currently leases an average of one Boeing 737-400 daily round
trip   under charter agreements associated with our Cuba
operations and two to three daily round trip flights to Andros Island under an
agreement with a government subcontractor. In addition, Gulfstream operates
on-demand charters for various customers throughout the year.





Code Share
Agreements





Continental Code Share
Agreement





Our
primary alliance partner is Continental. Pursuant to an amended and restated
alliance agreement with Continental dated March 14, 2006, which we refer to as
the Continental code share agreement, Gulfstream displays the Continental “CO”
designator code on all of our flights marketed to the public. Our customers may
participate in Continental’s One Pass frequent flyer program.





Under
this agreement, we pay Continental for various services, including ticketing,
reservations, revenue accounting, and various levels of airport services. We
also incur fees for computerized reservation system transactions and
participation in Continental’s frequent flyer program.




7




Gulfstream
receives all of the revenue generated by “local,” or non-connecting, passengers
flown, and a portion of the total revenue from passengers connecting to or from
Continental. Continental sets all prices for connecting markets, and Gulfstream
sets prices for our local markets. Approximately 24% of our passengers are from
connecting Continental flights.





The term
of this agreement will continue through at least May 3, 2012, unless earlier
terminated for cause. Cause is defined to include:




·
            breach
      of any material provision of the agreement that is not cured within a
      60-day period;


·
              suspension
      or revocation of our authority to operate as an airline, either in whole
      or with respect to the CO-designated
flights;


·
              citation
      by any government authority for significant noncompliance with any
      material marketing or operation law, rule or regulation with respect to a
      CO-designated flight;


·
            the
      filing of a petition in bankruptcy by or against
  us;


·
            our
      failure to maintain required insurance
coverage;


·
            our
      failure to maintain any of our aircraft in an airworthy
      condition;


·
              our
      failure to conduct operations in accordance with standards, rules and
      regulations promulgated by any government authority;
  or


·
              except
      as otherwise agreed by us and Continental, a completion factor by us of
      less than 95% during any 21 day period or 50% during any three day period
      with respect to Continental flights operated by us (including in such
      calculations all flights canceled less than one week prior to the date of
      its scheduled operation and excluding flights not completed due to weather
      or ATC).





In
addition, Continental may terminate the agreement immediately if there is a
change of control, as defined in the agreement, of Gulfstream without
Continental’s prior written consent.





Continental
has not executed its right to appoint an individual to Gulfstream’s board of
directors. It also has the right to observe the Company’s board meetings.
Continental may also receive our audited financial statements, inspect our
books, accounts and records and audit our operational procedures.





Gulfstream
and Continental have agreed to indemnify each other for any damages arising out
of either party’s acts or omissions related to the agreement. Specifically,
Gulfstream has agreed to indemnify Continental for any losses arising from our
possession and use of Continental’s tickets, boarding passes and other
materials, including, but not limited, to lost or forged tickets.





With
certain exceptions, we are required to obtain Continental’s consent to enter
into additional airline code share agreements. We have also agreed to limit
utilization of the United Airlines designator code to specific numbers of
flights and between specific cities.





In
addition to our long-term principal alliance with Continental, we have the
following code share agreements:





United Airlines Code Share
Agreement





We
entered into a code share agreement with United in 1994, which has been amended
several times, most recently in October of 2006. We provide code share
operations with United to and from Tampa, Orlando, Fort Lauderdale, Miami,
Tallahassee, Pensacola, Key West, and Freeport, and Marsh Harbor, and North
Eleuthera, and Nassau, in the North Bahamas. Approximately 4% of our passengers
are from connecting United flights.  The agreement may be cancelled
upon 180 days’ written notice, unless either party breaches the agreement, in
which case it may be terminated upon shorter notice.





Revenue
sharing formulas for proration of revenue are set forth in a separate prorate
agreement, which is amended or replaced bi-annually. Our passengers may also
participate in the United frequent flyer program.





Northwest Airlines Code Share
Agreement





Gulfstream
entered into a code share agreement and related prorate agreement, each dated
February 11, 2000, with Northwest. On May 15th 2009
Gulfstream and Northwest executed an agreement to terminate its code-share
agreement.  Approximately 1% of our passengers were from connecting
Northwest flights.


8


Copa Code Share
Agreement





We
entered into a code share agreement on July 1, 2005 with Copa Airlines, to
permit us to use the “CM” designator code on Gulfstream’s flights from Miami to
Orlando, Tampa and Key West. The agreement requires us to provide certain
minimal operational standards. Copa Airlines, a Continental alliance partner,
handles reservation services for passengers of CM-designated flights, as it
would for all other Copa Airlines flights, through the Continental reservation
system and provides check-in and ticketing services. We receive a standard
prorated amount for each passenger we fly on a CM-designated flight. To date,
this has not been a material source of our revenue.





Marketing





Under our
code share agreement, Continental provides all reservations and related services
for sales and marketing for CO-designated flights. United and Copa Airlines are
responsible for reservations of connecting passengers marketed under their
respective codes.




We are
responsible for the scheduling of all of our flights and are also responsible
for setting prices and managing revenue for our local passengers. Local
passengers are passengers whose itinerary is not constructed using a single fare
over multiple flight segments. Our code share partners are responsible for
setting prices and managing revenue for our connecting passengers. We retain all
of the revenue associated with our local passengers and a portion of the revenue
associated with connecting passengers pursuant to revenue sharing agreements
with our code share partners.





Flight
Equipment





Our fleet
currently consists of B1900D aircraft. The average age of our B1900D fleet is 15
years. The B1900D aircraft is a 19-seat, twin engine turbo prop that has a
pressurized, stand-up cabin, and cruises at 300 miles per hour. It is ideal for
short trips, and its lower operating costs make it much more economical than
larger mid-sized aircraft for the frequent, short flights that we operate. We
lease 23 B1900Ds under agreements that expire in 2010 and 2011; however, at our
option, we can extend 15 of these leases. We also have the option to purchase up
to 21 of these aircraft.





In
December 2004, we purchased seven EMB-120 aircraft from Atlantic Southeast
Airlines. In March of 2007, we purchased an additional EMB-120, which entered
into revenue service in December 2007.  These aircraft were operated until
September and October 2008, when all eight aircraft were sold.





We
believe that our B1900D aircraft fleet is well suited for the markets we serve.
Our turbo-prop aircraft allow us to operate short distance sectors efficiently
and achieve break-even revenues at lower levels than larger jet aircraft. This
allows us to operate more flights per day and target smaller markets, which we
believe provides us with a key advantage at non-hub airports. In addition, by
operating only one aircraft type (since October, 2008), we are able to
simplify our maintenance training, documentation, parts inventory and achieve
lower overall operating costs. The B1900D aircraft are no longer being
manufactured and there is a limited supply of used aircraft of this
type.





Training and
Aircraft Maintenance





Airframe
maintenance performed on our aircraft can be divided into two general
categories: line maintenance and heavy maintenance. Line maintenance consists of
routine, scheduled maintenance checks, including pre-flight, daily and overnight
checks, and any diagnostics and routine repairs. Heavy maintenance consists of
more complex inspections and overhauls, and servicing of the aircraft. Most of
our line maintenance and heavy maintenance is performed by our own highly
experienced technicians at our hangar in Fort Lauderdale. Parts and supply
inventories are primarily maintained in Fort Lauderdale and, in smaller amounts,
at our locations in Miami, Tampa and West Palm Beach in Florida, and Dubois,
Pennsylvania. Some line maintenance is also carried out at other locations in
Florida by employees or third-party contractors. Maintenance checks are
performed in accordance with the guidelines established by the aircraft
manufacturer. These checks are based on the number of hours or calendar months
flown by each individual aircraft.





We employ
over approximately 140 or 24% of our total employees, as maintenance
professionals, including engineers, supervisors, technicians and mechanics and
their support staff, who perform airframe maintenance in accordance with
maintenance programs that are established by the manufacturer and approved and
certified by international aviation authorities. Every mechanic is trained in
manufacturer-specified procedures and goes through our rigorous in-house
training program. Each of our mechanics is licensed by the Federal Aviation
Authority (“FAA”). Our safety and maintenance procedures are reviewed and
periodically audited by the FAA. We have received the FAA Diamond Award, the
highest level of recognition for maintenance training, for 13 consecutive years,
including 2009.





9





We have
agreements for maintaining our engines, propellers, landing gears and avionics
with FAA certified third-party contractors. Our engines are maintained under a
long-term agreement with a third party provider, which provides for engine
maintenance under a fleet management program.





Pricing and
Revenue Management





We
believe effective revenue management, particularly during peak periods,
contributes to our strong operating performance. We are responsible for setting
prices in local markets and our code share partners are responsible for setting
prices in connecting markets. We try to maximize the overall revenue of our
flights by utilizing certain revenue management policies. Our revenue management
systems and procedures enable us to understand markets, anticipate customer
demand and respond quickly to revenue enhancement opportunities.





The
number of seats offered at each fare is established through a continual process
of forecasting and analysis. Generally, past booking history and seasonal trends
are used to forecast anticipated demand. These historical forecasts are combined
with current bookings, upcoming events, competitive pressures and other factors
to establish a mix of fares designed to maximize revenue. This allows us to
balance loads and capture more revenue from existing capacity.





Seasonality





Our
business is subject to substantial seasonality, primarily due to leisure and
holiday travel patterns, particularly in the Bahamas. Traditionally, we
experience the strongest demand from February to July, and the weakest demand
from August to October, during which period we typically suffer operating
losses. As a result, our operating results for a quarterly period are not
necessarily indicative of operating results for an entire year, and historical
operating results are not necessarily indicative of future operating results.
Our results of operations generally reflect this seasonality. Our operating
results are also impacted by numerous other cycles and factors that are not
necessarily seasonal.





Government
Regulation





All
interstate air carriers, including Gulfstream, are subject to regulation by the
Department of Transportation (“DOT”), the FAA and other governmental agencies.
Regulations promulgated by the DOT primarily relate to economic aspects of air
service. The FAA requires operating, air worthiness and other certificates and
certain record-keeping procedures. FAA approval is required for personnel who
engage in flight, maintenance or operating activities and flight training and
retraining programs. Generally, governmental agencies enforce their regulations
through certifications, which are necessary for the continued operations of
Gulfstream, and proceedings, which can result in civil or criminal penalties or
revocation of operating authority. The FAA can also issue maintenance directives
and other mandatory orders relating to, among other things, grounding of
aircraft, inspection of aircraft, installation of new safety-related items and
the mandatory removal and replacement of aircraft parts.





We
believe Gulfstream is operating in compliance with FAA regulations and holds all
necessary operating and airworthiness certificates and licenses. We incur
substantial costs in maintaining current certifications and otherwise complying
with the laws, rules and regulations to which Gulfstream is subject. Our flight
operations, maintenance programs, record keeping and training programs are
conducted under FAA-approved procedures. We do not operate at any airports where
the FAA has restricted landing slots.





All air
carriers are required to comply with federal laws and regulations pertaining to
noise abatement and engine emissions. All air carriers are also subject to
certain provisions of the Federal Communications Act of 1934, as amended,
because of their extensive use of radio and other communication facilities.
Gulfstream is also subject to certain other federal and state laws relating to
protection of the environment, labor relations and equal employment opportunity.
We believe that Gulfstream is in compliance in all material respects with these
laws and regulations.





Safety and
Security





We are
committed to the safety and security of our passengers and employees. Since the
September 11, 2001 terrorist attacks, Gulfstream has taken many steps, both
voluntarily and as mandated by governmental agencies, to increase the safety and
security of our operations. Some of the safety and security measures we have
taken, along with our code share partners, include: establishing a Safety and
Security Committee of the Board of Directors, aircraft security and
surveillance, positive bag matching procedures and enhanced passenger and
baggage screening and search procedures. We are committed to complying with
future safety and security requirements.





10





Charter
Services





Gulfstream
Air Charter, Inc. (“GAC”), a related company which is owned by Thomas L. Cooper,
operates licensed charter flights between Miami and Havana. GAC is licensed by
the Office of Foreign Assets Control of the U.S. Department of the Treasury as a
carrier and travel service provider for charter air transportation between
designated U.S. and Cuban airports.





Pursuant
to a services agreement between Gulfstream and GAC, Gulfstream provides use of
its aircraft and flight crews at the option of GAC, as well as Gulfstream’s
name, insurance, and service personnel, including passenger, ground handling,
security, and administrative. Gulfstream also maintains the financial records
for GAC. Gulfstream receives 75% of the operating profit generated by GAC’s
Cuban charter operation.





In June
2006, Gulfstream began charter services under a long-term subcontract with
Computer Sciences Corporation to operate daily flights between West Palm Beach
and Andros Town, Bahamas. This contract provides for approximately two to three
daily round trips and had an initial period of 21 months from inception, with
extensions up to an additional 12 years. The latest 3-year extension was signed
on April 1, 2008. The contract is structured as a fixed-fee arrangement, with
adjustments for market fuel prices. It further specifies performance standards,
as well as bonus payments for exceeding those standards. As part of this
agreement, Gulfstream leases two B1900D aircraft from Computer Sciences
Corporation to support the contract.





In
preparation for this operation, Gulfstream obtained certification from the
Commercial Airline Review Board of the U.S. Department of Defense (“DOD”).
Having this certification could have the effect of increasing the number of
opportunities for Gulfstream to provide additional charter flights to the
DOD.





Gulfstream
also provides on-demand passenger charter services based on aircraft
availability.





The Academy





The
Academy offers training programs for pilots holding commercial, multi-engine,
and instrument certifications. Pilots with these ratings are qualified to fly
commercial aircraft but seek to improve their marketability by accumulating
additional training and flying time. The Academy enhances our student’s career
prospects by providing them with the training and experience necessary to obtain
pilot positions with commercial airlines.





Traditionally,
pilots can work as flight instructors for up to two years to gain this
additional training and flying time. The Academy offers an alternative to this
traditional means of gathering additional flight experience. By enrolling in the
Academy, students are able to more quickly accumulate the qualifications
demanded by the commercial airlines. A number of U.S. airlines accept Academy
graduates with a lower total flight time than these airlines require of other
newly hired pilots, reflecting the value they place on the Academy’s training.
The Academy graduates have also experienced a high success rate in completing
training at airlines, which translates into cost savings for the
airlines.





The
principal program offered by the Academy is the First Officer Program, which is
a comprehensive program designed to prepare pilots for their commercial airline
careers. The program entails a “train to proficiency” concept, typically
resulting in well over 500 hours of training time, including ground school,
simulator time and observation flights. This first portion of the program can be
completed in three months. The second portion of the program involves up to 400
hours of FAA Regulation Part 121 commercial airline flight hours as a First
Officer at Gulfstream. FAA Regulation Part 121 established operating standards
and is the principal operating regulation applicable to all major US airlines.
Gulfstream relies on the Academy as its preferred source of pilots, and nearly
all of our permanent pilots are graduates of the First Officer
Program.





The
Academy also provides training services to Gulfstream. While the Academy holds a
FAA Part 142 certificate, enabling us to operate a flight training center on
behalf of other airlines, we presently do not provide any training services to
other airlines.





As of
December 31, 2009 the Academy employed five full-time flight and ground
instructors. The Academy’s instructors have, on average, been providing training
for approximately 12 years each and have cumulatively amassed in excess of
68,000 actual flight hours. The Academy enrolled 59 and 42 students in 2008 and
2009, respectively. The Company estimates that 95% were or will be hired by
airlines after graduation, including those hired by Gulfstream.




11




The
Academy’s training facility in Fort Lauderdale has several ground school
classrooms, a series of flight training devices used for procedural training and
cockpit familiarization, as well as two non-motion flight simulators, one of
which is for B1900D aircraft training. The Academy contracts for full-motion
flight simulators at facilities in Orlando, Florida





Ground Operations





In the
Bahamas, we lease ticket counters, check-in and boarding and other facilities
and Gulfstream’s employees provide substantially all of the operations
services.





In Key
West, Florida, we lease our facilities and Gulfstream’s employees provide
operations services. At all other Florida airports, Gulfstream contracts out all
or a portion of our ground operations. From time to time, Gulfstream reviews
these arrangements and evaluates the most economical operations
structure.





In the
markets we serve from Continental’s Cleveland hub, we lease ticket counters,
check-in and boarding and other facilities, and Gulfstream’s employees provide
substantially all of the operations services. We also lease gate and ramp space
in Dubois and Franklin, Pennsylvania, as well as a 20,000 square foot hangar in
Dubois.





Insurance





We
maintain insurance policies that we believe are of types customary in the
industry and in amounts we believe are adequate to protect against material
loss. These policies principally provide coverage for public liability,
passenger liability, baggage and cargo liability, property damage, including
coverage for loss or damage to our flight equipment, and workers’ compensation
insurance. We cannot assure, however, that the amount of insurance we carry will
be sufficient to protect us from a material loss.





Environmental
Matters





We are
subject to various federal, state, local and foreign laws and regulations
relating to environmental protection matters. These laws and regulations govern
such matters as environmental reporting, storage and disposal of materials and
chemicals and aircraft noise. We are, and expect in the future to be, involved
in environmental matters and conditions at, or related to, our properties, but
we do not expect the resolution of any such matters to have a material adverse
effect on the Company’s operations. We are not currently subject to any material
environmental cleanup orders or actions imposed by regulatory authorities. We
are not aware of any active material environmental investigations related to our
assets or properties.





Raw Materials and
Energy





Fuel
costs are a major component of our operating expenses. We contract with World
Fuel Services to provide approximately half of our fuel, principally for
international destinations. Most of our domestic fuel consumption is provided by
Continental. The following chart summarizes our fuel consumption and
costs:





Years
      Ended December 31,2008
            
            
            2009Gallons
      consumed, in thousands
            
            
            8,479
            
            
            
            6,182Total
      cost, in thousands (1)
            
            $
            28,452
            
            
            $
            12,375Average
      price per gallon  (2)
            
            $
            3.36
            
            
            $
            2.00Percent
      of airline revenue (3)
            
            
            29.6
            %
            
            
            16.3
            %





(1) 
Total cost excludes into-plane service fees.


(2) 
Average price per gallon excludes into-plane service fees.


(3) 
Includes into-plane service fees.




12




Fuel
costs are extremely volatile, as they are subject to many global economic and
geopolitical factors that we can neither control nor accurately predict.
Significant increases in fuel costs would have a material adverse effect on our
operating results.





We
purchase bonded fuel for our international flights on a purchase-order basis
from World Fuel Services, which are exempt from federal excise taxes. Therefore,
our fuel costs may not be directly comparable to costs incurred by other
airlines. Gulfstream has, from time to time, implemented limited fuel cost
management programs in the form of pre-ordering of specific quantities of fuel
at specific locations at then-market rates. These cost management programs have
not had a material impact on our financial results.





In the
past, we have not experienced difficulties with fuel availability and we
currently expect to be able to obtain fuel at prevailing market prices in
quantities sufficient to meet our future needs. Pursuant to our contract flying
arrangements with our code share partners, we bear the economic risk of fuel
price fluctuations.





Gulfstream
was a party to derivative instruments for the purpose of hedging the risks of
increases in jet fuel prices through February 2009 covering approximately 20% of
its estimated fuel usage. These fuel hedge contracts were established effective
September 1, 2008 as a requirement of a financing completed at that
time.





Gulfstream
recognized a loss on settled hedges of $337,000 for 2009.   We are not a
party to any derivative or other arrangements designed to hedge against or
manage the risk of an increase in fuel prices subsequent to February
2009.





Trademarks and Trade
Names





Our
flights are operated under the names of our code share partners, including
Continental, United Airlines, and Copa Airlines. Because we do not operate
scheduled flights under our trade names, we have not registered any Airline
trademarks or trade names.





Employee and Labor
Relations





As of
December 31, 2009, we had 604 full time employees, of which 592 were employed by
Gulfstream and 12 were employed by the Academy. Of the 592 employees of
Gulfstream, 139 are union employees.





As of
December 31, 2009, Gulfstream employed the following:




ClassificationPilots
      and First Officers
            
            
            139Station
      personnel
            
            
            220Maintenance
      personnel
            
            
            142Administrative
      and sales personnel
            
            
            37Management
            
            
            8Other
      flight operations
            
            
            46Total
      employees
            
            
            592





Gulfstream’s
tenured pilots are represented under a collective bargaining agreement with the
Teamsters Union. A new agreement was ratified by the members in June 2006 and
continued through June 2009. The Company is currently negotiating the collective
bargaining agreement renewal with the Teamsters Union. Currently, no other
employees are represented by unions. We have never experienced a work stoppage
and no labor disputes, strikes or labor disturbances are currently pending or
threatened against us. We believe we have good relations with our union
employees at each of our facilities. During 2009, we reduced the number of
Pilots and First Officers by approximately 30 employees as a result of declining
demand and the 2008 sale of our eight Embraer aircraft.





As of
December 31, 2009, the Academy employed 7 full-time administrative employees and
4 full-time flight and ground instructors. None of our Academy employees are
represented by labor unions.


13




ITEM 1A. Risk FACTORS.





An
investment in our common stock is risky. You should carefully consider the
following risks, as well as the other information contained in this Form 10-K,
before investing. If any of the following risks actually occurs, our business,
business prospects, financial condition, cash flow and results of operations
could be materially and adversely affected. In this case, the trading price of
our common stock could decline, and you might lose part or all of your
investment.  We may amend or supplement the risk factors described below
from time to time by other reports we file with the SEC in the
future.




Risks
Related To Our Industry


If
the global economic downturn continues or worsens, our revenues and
profitability could decline further.





Consumer
demand for our products and services is closely linked to the performance of the
general economy and is sensitive to business and personal discretionary spending
levels. Declines in consumer demand due to adverse general economic conditions,
risks affecting or reducing travel patterns, lower consumer confidence or
adverse political conditions can lower our revenues and
profitability.  Our business is also linked to cycles in the general
economy and consumer discretionary spending. As a result, changes in consumer
demand and general business cycles can subject and have subjected our revenues
to significant volatility.





Accordingly,
the current global economic downturn has led to a significant decline in demand
for our services, which has lowered our revenues and negatively affected our
profitability. For the year ended December 31, 2009, compared to the year ended
December 31, 2008, our total revenues decreased by $18.0 million.





We
anticipate that recovery of demand for our services will lag an improvement in
economic conditions. We cannot predict how severe or prolonged the global
economic downturn will be. Furthermore, current global economic conditions have
significantly impacted consumer confidence and behavior and, as a result,
historical marketing information that we have collected may be less effective as
a means of predicting future demand and operating results. We cannot assure you
that we will be able to increase our revenues at the same rate at which they
have recently declined, even after the current downturn ends. An extended period
of economic weakness would likely have a further adverse impact on our revenues,
and financial position, and we my be unable to fund continued operations or
meet our financial obligations.





The airline
industry is unpredictable.





The
airline industry has experienced tremendous challenges in recent years and will
likely remain volatile for the foreseeable future. Among other factors, the
financial challenges faced by major carriers, including Delta Airlines, United
Airlines and Northwest Airlines, and increased hostilities in the Middle East
and other regions have significantly affected, and are likely to continue to
affect, the U.S. airline industry. These conditions have resulted in declines
and shifts in passenger demand, increased insurance costs, volatile fuel prices,
increased government regulations and tightened credit markets, all of which have
affected, and will continue to affect, the operations and financial condition of
participants in the industry, including us, major carriers (including our code
share partners), competitors and aircraft manufacturers. These industry
developments raise substantial risks and uncertainties which will affect us,
major carriers (including our code share partners), competitors and aircraft
manufacturers in ways that we currently are unable to predict.





The airline
industry is subject to the impact of terrorist activities or
warnings.





The
terrorist attacks of September 11, 2001 and their aftermath negatively impacted
the airline industry in general, including our operations. In particular, the
primary effects experienced by the airline industry included a substantial loss
of passenger traffic and revenue. While airline passenger traffic and revenue
have recovered since the terrorist attacks of September 11, 2001, additional
terrorist attacks could have a similar or even more pronounced effect. Even if
additional terrorist attacks are not launched against the airline industry,
there will be lasting consequences of the September 11, 2001 attacks, including
increased security and insurance costs, increased concerns about future
terrorist attacks, increased government regulation and airport delays due to
heightened security. Additional terrorist attacks or warnings of such attacks,
and increased hostilities or prolonged military involvement in the Middle East
or other regions, could negatively impact the airline industry, and result in
decreased passenger traffic and yields, increased flight delays or cancellations
associated with new government mandates, as well as increased security, fuel and
other costs. There can be no assurance that these events will not harm the
airline industry generally or our operations or financial condition in
particular.




14





Our operations
may be adversely impacted by increased security measures mandated by regulatory
authorities.





Because
of significantly higher security and other costs incurred by airports since
September 11, 2001, many airports significantly increased their rates and
charges to air carriers, including us, and may do so again in the future. On
November 19, 2001, the U.S. Congress passed, and the President signed into law,
the Aviation and Transportation Security Act, also referred to as the Aviation
Security Act. This law federalized substantially all aspects of civil aviation
security and created the Transportation Security Administration (“TSA”) to which
the security responsibilities previously held by the Federal Aviation
Administration (“FAA”) were transitioned. The TSA is an agency of the Department
of Homeland Security. The Department of Homeland Security and the TSA and other
agencies within the Department of Homeland Security have implemented numerous
security measures, including the passing of the Aviation Security Act, that
affect airline operations and costs, and are likely to implement additional
measures in the future. The Department of Homeland Security has announced
greater use of passenger data for evaluating security measures to be taken with
respect to individual passengers, expanded use of federal air marshals on
flights (thus displacing revenue passengers), investigating a requirement to
install aircraft security systems (such as active devices on commercial aircraft
as countermeasures against portable surface to air missiles) and expanded cargo
and baggage screening. Funding for airline and airport security required under
the Aviation Security Act is provided in part by a $2.50 per segment passenger
security fee for flights departing from the U.S., subject to a $10 per roundtrip
cap; however, airlines are responsible for costs incurred to meet security
requirements beyond those provided by the TSA. There is no assurance this fee
will not be raised in the future as the TSA’s costs exceed the revenue it
receives from these fees. We could also be adversely affected by any
implementation of stricter security measures by the Bahamian government. Fees
paid to the TSA are approximately 9 months in arrears which could adversely
impact the airline due to a suspension or revocation of the airlines eligibility
for licenses, permits, or privileges. We cannot provide assurance that
additional security requirements or security-related fees enacted in the future
will not adversely affect us financially.





The airline
industry is heavily regulated.





All
interstate airlines are subject to regulation by the Department of
Transportation (the “DOT”), the FAA and other governmental agencies. Regulations
promulgated by the DOT primarily relate to economic aspects of air service. The
FAA requires operating, air worthiness and other certificates; approval of
personnel who may engage in flight, maintenance or operation activities; record
keeping procedures in accordance with FAA requirements; and FAA approval of
flight training and retraining programs. We cannot predict whether we will be
able to comply with all present and future laws, rules, regulations and
certification requirements or that the cost of continued compliance will not
have a material adverse effect on our operations. We incur substantial costs in
maintaining our certifications and otherwise complying with the laws, rules and
regulations to which we are subject. A decision by the FAA to ground, or require
time-consuming inspections of, or maintenance on, all or any of our aircraft for
any reason may have a material adverse effect on our operations. In addition to
state and federal regulation, airports and municipalities enact rules and
regulations that affect our operations. From time to time, various airports
throughout the country have considered limiting the use of smaller aircraft,
such as our aircraft, at such airports. The imposition of any limits on the use
of our aircraft at any airport at which we operate could have a material adverse
effect on our operations. Because we operate only one type of aircraft and have
our operations centered at Fort Lauderdale Airport, we are particularly
susceptible to any such limitations.





The FAA may
change its method of collecting revenues.





The FAA
funds its operations largely through a tax levied on all users of the system
based on ticket sales as well as a tax on fuel. As the airline industry changes,
the trust fund that provides funding for the FAA’s capital accounts and all or
some portion of its operations has experienced an increase in its costs without
a corresponding rise in its revenue such that in its fiscal 2004, the FAA’s
costs exceeded its revenues by more than $4 billion. Further, the existing
authority for the current FAA taxing system expired on September 30, 2007. After
almost two years of short-term extensions and continuing resolutions, the
Subcommittee on Aviation of the House Committee on Transportation and
Infrastructure is presently conducting hearings concerning the FAA. The
committee is hoping to have a long-term funding law in place this year. At times
during this reauthorization process, eliminating or amending the current tax
system and implementing user fees have been discussed that could cause us to
incur potentially significant additional expenses. There can be no assurance
that the final version of the FAA reauthorization bill would exempt small
commercial aircraft such as those operated by Gulfstream from these new charges.
If such a user fee or tax rate increase is implemented, we may not be able to
pass this increased expense on to our customers. Such an expense could have a
material adverse impact on our ability to conduct business.


15





A Senate
draft version of the FAA Reauthorization Bill has proposed a $25 per-flight fee
be charged on all flights, regardless of aircraft size. The recently passed
House version of the Bill does not include such a fee.




The airline
industry is characterized by low profit margins and high fixed
costs.





The
airline industry is characterized generally by low profit margins and high fixed
costs, primarily for personnel, debt service and rent. The expenses of an
aircraft flight do not vary significantly with the number of passengers carried
and, as a result, a relatively small change in the number of passengers or in
pricing could have a disproportionate effect on an airline’s operating and
financial results. Accordingly, a minor shortfall in our expected revenue levels
could harm our business.





The airline
industry is highly competitive.





In
general, the airline industry is highly competitive. Gulfstream not only
competes with other regional airlines, some of which are owned by or operated as
code share partners of major airlines, but we also face competition from low
cost carriers and network airlines on many of our routes. One of our primary
competitors in the Bahamas market, Bahamasair, is owned by the government of the
Bahamas and receives substantial subsidies to fund operating losses. The receipt
of these subsidies may reduce the airline’s requirement to take necessary
actions to improve profitability, including raising prices to offset fuel costs.
Gulfstream also competes with alternative forms of transportation, such as
charter aircraft, automobiles, commercial and private boats and
trains.





Barriers
to entry in most of Gulfstream’s markets are limited, and some of its
competitors are larger and have significantly greater financial and other
resources. Moreover, federal deregulation of the industry allows competitors to
rapidly enter markets and to quickly discount and restructure fares. The airline
industry is particularly susceptible to price discounting because airlines incur
only nominal costs to provide service to passengers occupying otherwise unsold
seats.




Risks
Related To Our Business


We have
substantial fixed obligations.





As of
December 31, 2009, we had $6.3 million of long-term debt and related warrant
liabilities. In addition, we have lease payments of approximately $5.7 million
per year on our fleet of 23 B1900D aircraft, as well as restructured creditor
obligations of $4.2 million for the return of engines borrowed from the lessor,
and other matters, payable over the next several years.





On
February 11, 2010, the Company received a notice of default (the “Default
Notice”) from Raytheon Aircraft Credit Corporation (“RACC”), the Company’s
principal aircraft lessor, pursuant to which RACC notified the Company that the
Company is in default of the payment of certain obligations under Airliner
Operating Lease Agreements, each dated August 7, 2003, and amended on
August 2, 2005, and March 15, 2006 (the “Lease Agreements”), by and
between the Company and RACC, pursuant to which the Company currently leases
from RACC twenty-one (21) Beech 1900D Airliners. The default resulted as a
result of the Company’s failure to make its scheduled lease payments for the
month of February. Accordingly, RACC demanded that the Company make such
payments on or before February 19, 2010. The failure to make such payment
would have given RACC the right to terminate the Lease Agreements, thereby
prohibiting the Company from using such airplanes. Also pursuant to the Default
Notice, RACC claimed that the Company is in default in make certain other
payments under a separate agreement dated as of December 19, 2008 by and
the Company and RACC (the “December Agreement”), which defaults are also
considered to be defaults under the Lease Agreements. RACC indicated in the
Default Notice that if the Company made the required payments under the Lease
Agreements by February 19, 2010, it is prepared to discuss the manner in
which the Company can cure or otherwise address the December Agreement
defaults.





On
February 19, 2010, the Company made the required payment to RACC which
allowed it to continue operating the airplanes covered by the Lease Agreements.
In addition, on February 19, 2010, RACC advised the Company that it would
forebear from exercising any of its rights under the December Agreement or
the Lease Agreements, provided, that the Company remains current in payment of
future lease payments and provides RACC over the next two months with a mutually
acceptable debt and financial restructuring plan that provides for a feasible
basis to enable the Company to continue to meet its ongoing financial
obligations under the Lease Agreement and commence to repay amounts due under
the December Agreement. Although the Company believes that it will be able
to establish a plan that is acceptable to RACC, there can be no assurance that
the Company will be able to do so, or will not otherwise default in future
payments under the Lease Agreements.




16




On February 26, 2010, the Company and
Shelter Island entered into a Forbearance Agreement and Amendment to Debenture
(the “Forbearance Agreement”) which reduced the Company’s potential liability
under the put option from $3,000,000 to $1,050,000 and rescheduled certain
principal and interest payments under the Debenture (as defined below) to reduce
near-term liquidity requirements.





Under the terms of Forbearance
Agreement, Shelter Island agreed to forbear from exercising its rights and
remedies under the Shelter Island Agreement until the occurrence of (a) the
failure by the Company to comply with the terms, covenants and agreements of the
Forbearance Agreement; and (b) the occurrence of any event of default under the
Debenture or the Shelter Island Purchase Agreement (collectively, a “Termination
Event”).  One of the covenants to be performed by the Company under
the Forbearance Agreement is the obligation of the Company to raise an
additional $1.5 million of debt or equity financing by March 26, 2010,
subsequently changed to March 31, 2010, or otherwise satisfy Shelter Island
that the Company has adequate liquidity and working capital. Shelter Island
confirmed on March 31, 2010 that the Company complied with this covenant based
primarily on the first closing under a Series A Convertible Preferred Stock
Purchase Agreement.





Pursuant to the Forbearance Agreement
the parties amended the Debenture, as follows (i) the Company shall pay interest
on the outstanding principal amount monthly in cash, commencing March 31, 2010;
(ii) the Company shall pay monthly installments on the outstanding principal
amount commencing April 30, 2010 and on the last trading day of each month
thereafter until the August 31, 2011 maturity date of the Debenture; and (iii)
the Company may prepay all or any portion of the outstanding principal amount of
the Debenture together with a premium equal to 5% of outstanding principal
amount being prepaid; provided that, if such prepayment is made in 2011, there
shall be no premium applicable.  The Company, each of its
subsidiaries and Shelter Island also entered into an Omnibus Amendment to the
Guaranty Agreements pursuant to which, without limitation, the parties agreed to
amend the existing guarantees to include the repayment of the Shelter Island
Note (see below).





Shelter Island currently holds a first
priority lien and security interest on all of the assets of the Company and its
subsidiaries.  Under the terms of the Intercreditor Agreement, Shelter
Island agreed to subordinate its first priority lien on the accounts receivable
of the Company and its subsidiaries and the proceeds thereof, to the lien
granted to the Investors under the Security Agreement with TBI to the extent of
the deferred principal and accrued interest under the Notes.  Shelter
Island retained its first priority security interest in all of the other assets
and properties of the Company and its subsidiaries.





As consideration for its financial
accommodations, the Company paid Shelter Island an additional $250,000 as a
forbearance fee, by delivering a $250,000 promissory note (the “Shelter Island
Note”) due on the earlier of (i) August 31, 2011, and (ii) the date the
Debenture is permitted or required to be paid in accordance with its
terms.  The Shelter Island Note accrues interest at a rate of 9% per
annum and is payable in cash on a monthly basis beginning on February 26,
2011.





The
Shelter Island Agreement contains Events of Default, which if not waived by the
lender, would entitle the lender to accelerate the due date of the Senior
Debenture. See Note 20 “Subsequent Events”. The company anticipates not
achieving the “minimum quarterly EBITDA” Events of Default and therefore at
December 31, 2009, the Company classified all future debenture payments as a
short term balance sheet liability.





Although
the Company believes that its revenues and liquidity will improve, the Company
is also actively seeking short-term debt financing to meet its near-term
liquidity requirements and to allow sufficient time to increase its equity
capital base to support long-term growth opportunities. The Company has received
non-binding proposals for additional debt financing which it is seeking to
consummate. In addition, the Company has engaged an investment banking firm to
assist the Company in connection with equity financing efforts.





These
near-term financing transactions and payment deferrals are essential due to our
current liquidity level and several additional factors, including a seasonal
business slowdown that is typical in September and October, the ongoing
risk posed by a relatively weak economy, the potential for continued volatility
in the price of jet fuel, a negotiated settlement of the civil penalty proposed
by the Federal Aviation Administration, and scheduled repayments of debt and
restructured creditor obligations over the next two years.





We can
make no assurance that our near-term efforts to improve liquidity or to obtain a
longer-term growth-oriented equity financing will be completed successfully, or
that alternative sources of capital will be available under terms acceptable to
us, or at all. If an additional financing is not completed in the near-term, we
would experience an immediate and significant liquidity shortfall, and would be
unable to fund operations or meet our financial obligations.




17




Our
debentures and warrants create additional risks and
obligations.





In
September 2008, we consummated a financing in which we issued debentures for
$5.1 million (the “Senior Debentures”) and warrants to purchase 578,870 shares
of common stock (the “Senior Warrants”) to Shelter Island Opportunity Fund, LLC.
As a result of this financing, we face additional risks and uncertainties,
including those relating to the floating interest rate on the Senior Debentures,
the financial covenants of the Senior Debentures, the repayment of the Senior
Debentures and the repurchase of the Senior Warrants.





The
Senior Debentures bear interest at the higher of (i) a floating rate of prime
plus 4% or (ii) a fixed rate of 11%. A significant increase in the prime rate
could cause our interest expense to increase and might impair our ability to
service this debt. In addition, the Senior Debentures subject the Company to
certain covenants, (See Note
20 Subsequent Events) including covenants that we have (i) consolidated
minimum quarterly EBITDA starting in the quarter ending December 31, 2008, (ii)
six month EBITDA averages starting in the six months ending June 30, 2011, (iii)
minimum monthly accounts receivable balance of $3.5 million, and (iv) minimum
monthly cash balance of $750,000. If we are not able to comply with these
covenants, we would be in default under the Senior Debentures and the holder
could elect to accelerate our repayment obligation. On September 30, 2008, we
were in violation of the covenant to maintain a minimum monthly accounts
receivable balance of $3.5 million, with an accounts receivable balance on such
date of $3.1 million. For the quarters ended December 31, 2008, and
2009, we were in violation of the covenant for consolidated minimum
quarterly EBITDA. Shelter Island Opportunity Fund, LLC granted one-time waivers
with respect to non-compliance with these financial covenants. The company
anticipates not achieving the “minimum quarterly EBITDA” in future
periods and therefore at December 31, 2009, the Company classified all
future debenture payments as a current liability.





On February 26, 2010, the Company and
Shelter Island entered into a Forbearance Agreement and Amendment to Debenture
(the “Forbearance Agreement”) which reduced the Company’s potential liability
under the put option from $3,000,000 to $1,050,000 and rescheduled certain
principal and interest payments under the Debenture (as defined below) to reduce
near-term liquidity requirements.





The
Senior Debentures require monthly payments in accordance with the Forbearance
Agreement of principal ranging from $25,000 to $250,000 beginning on April 30,
2010, with the remaining principal amount of $1,554,000 due upon maturity. In
addition, the holder of the Senior Warrants may, at its option, require us to
repurchase the common stock issued upon exercise of the warrant for $1,050,000
at any time after the earlier of the repayment in full of the Senior Debentures
or September 2011, until August 2014.









Pursuant to the Forbearance Agreement
the parties amended the Debenture, as follows (i) the Company shall pay interest
on the outstanding principal amount monthly in cash, commencing March 31, 2010;
(ii) the Company shall pay monthly installments on the outstanding principal
amount commencing April 30, 2010 and on the last trading day of each month
thereafter until the August 31, 2011 maturity date of the Debenture; and (iii)
the Company may prepay all or any portion of the outstanding principal amount of
the Debenture together with a premium equal to 5% of outstanding principal
amount being prepaid; provided that, if such prepayment is made in 2011, there
shall be no premium applicable.  The Company, each of its
subsidiaries and Shelter Island also entered into an Omnibus Amendment to the
Guaranty Agreements pursuant to which, without limitation, the parties agreed to
amend the existing guarantees to include the repayment of the Shelter Island
Note.





Shelter Island currently holds a first
priority lien and security interest on all of the assets of the Company and its
subsidiaries.  Under the terms of the Intercreditor Agreement, Shelter
Island agreed to subordinate its first priority lien on the accounts receivable
of the Company and its subsidiaries and the proceeds thereof, to the lien
granted to the Investors under the Security Agreement with TBI to the extent of
the deferred principal and accrued interest under the Notes.  Shelter
Island retained its first priority security interest in all of the other assets
and properties of the Company and its subsidiaries.




18




As contemplated in the original warrant
to purchase Common Stock issued to Shelter Island on August 31, 2008 (the
“Original Warrant”), on February 26, 2010 the Company divided the Original
Warrant into (a) a warrant in the form of the Original Warrant initially
exercisable into 70,000 shares of Common Stock (the “Put Warrant”); and (b) a
warrant in the form of the Original Warrant (the “Remaining Warrant”, and
together with the Put Warrant, the "Divided Warrants") such that the aggregate
number of shares of Common Stock of Company that are initially exercisable under
the Divided Warrants (inclusive of the 70,000 Shares of Common Stock initially
issuable under the Put Warrant) shall equal, in the aggregate, 15% of the
fully-diluted shares of Company Common Stock issued and outstanding immediately
following consummation of the transactions contemplated under the Forbearance
Agreement and the Purchase Agreements, after giving pro-forma effect to the
conversion into Common Stock of all Company convertible securities and the
exercise of all Company options and warrants, including the Warrants issued to
the Investors.  As a result of consummation of the above transactions
with Shelter Island and the TBI Investors, the aggregate number of shares
issuable upon conversion of the Divided Warrant is 914,189 shares of Company
Common Stock.





The Company and Shelter Island also
entered into an Amendment to the Put Option Agreement (the “Put Option
Amendment”) dated as of August 31, 2008 under which, among other things, the
exercise price applicable for all the put shares under the put option was
reduced from $3,000,000 to $1,050,000, or $15.00 per share.





As consideration for its financial
accommodations, the Company paid Shelter Island an additional $250,000 as a
forbearance fee, by delivering a $250,000 promissory note (the “Shelter Island
Note”) due on the earlier of (i) August 31, 2011, and (ii) the date the
Debenture is permitted or required to be paid in accordance with its
terms.  The Shelter Island Note accrues interest at a rate of 9% per
annum and is payable in cash on a monthly basis beginning on February 26,
2011.





The
Senior Debentures and the repurchase obligation associated with the Senior
Warrants represent significant obligations for us and we may not be able to make
all of the required payments. We may not have sufficient liquidity to make such
payments or repurchase, or such payments or repurchase may significantly impair
our liquidity.





On
October 7, 2009, we entered into a Note Purchase Agreement with
Gulfstream Funding II, LLC, pursuant to which we borrowed approximately $1.5
million on a subordinated basis.  The interest rate on the loans is
12% per annum.  The outstanding principal amount and all accrued and
unpaid interest thereon are due on or prior to January 15,
2010.  On January 15, 2010, the Company and the Lender agreed to
enter into one or more definitive agreements to extend the maturity date of the
Note and to provide for the conversion of the outstanding principal amount of
the Note and all accrued and unpaid interest thereon (collectively, the “Debt”)
into preferred stock of the Company at current market prices. These loans
represent significant obligations for us and we may not be able to make all of
the required payments. We may not have sufficient liquidity to make such
payments, or such payments may significantly impair our liquidity.




We would be
adversely affected by the loss of key personnel.





Our
success is dependent upon the continued services of our management team. Our
executives have substantial experience and expertise in our business and have
made significant contributions to our growth and success. The loss of one of our
executives or any other key employees (including the senior management team of
the Airline and the Academy) could adversely affect our business, financial
condition or results of operations. We do not maintain key-man life insurance on
our management team.





Expansion of
operations could result in operating losses.





We are
actively seeking opportunities to grow by adding new routes, aircraft, alliance
partners, or by acquiring other regional airlines. These opportunities will
likely include operating in areas away from our current Florida base. For
example, we redeployed certain assets to profitable routes by initiating service
in September 2008 between Continental’s Cleveland hub and five smaller cities in
Pennsylvania, New York and West Virginia in conjunction with Essential Air
Service routes awarded by the Department of Transportation. Similar material
increases in the scope or scale of our operations could lead to integration
difficulties, which could result in short and/or long-term operating
losses.




19




If we fail to
maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud and, as a result, our
business could be harmed and current and potential stockholders could lose
confidence in us, which could cause our stock price to fall.





We are
required to perform the system and process evaluation and testing (and any
necessary remediation) required to comply with the management certification
requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Auditor
attestation requirements of management’s assessment will first apply to us for
our fiscal year ending December 31, 2010. As a result, we expect to incur
substantial additional expenses and diversion of management’s time. We cannot be
certain as to the timing of completion of our evaluation, testing and
remediation actions or their effect on our operations since there is limited
precedent available by which to measure compliance adequacy. If we are not able
to implement the requirements of Section 404 in a timely manner or with adequate
compliance, we may not be able to accurately report our financial results or
prevent fraud and might be subject to sanctions or investigation by regulatory
authorities such as the SEC or the NYSE Amex. Any such action could harm our
business or investors’ confidence in us, and could cause our stock price to
fall.




Risks
Related To Gulfstream




Gulfstream is
dependent on our code share relationships.





Gulfstream depends on relationships
created by code share agreements with Continental, and United for a
significant portion of our revenues. Additionally, virtually all of our “local,”
or non-connecting, traffic is booked through Continental’s reservation system.
Any material modification to, or termination of, our code share agreements with
any of these partners could have a material adverse effect on our financial
condition and the results of operations. Each of the code share agreements
contains a number of grounds for termination by our partners, including failure
to meet specified performance levels. Further, these agreements limit our
ability to enter into code share agreements with other airlines.





Gulfstream’s code share partners may
expand their direct operation of regional jets, thus limiting the expansion of
our relationships with them. A decision by any of Gulfstream’s code share
partners to phase out Gulfstream’s contract-based code share relationships or
enter into similar agreements with one or more of Gulfstream’s competitors could
have a material adverse effect on Gulfstream’s business, financial condition or
results of operations.





Also, our code share partners may be
restricted in increasing the level of business that they conduct with
Gulfstream, thereby limiting our growth. Union scope clauses at major airlines
may limit or prohibit certain types of code share operations, including those by
Gulfstream.





Gulfstream is
dependent on the financial strength of our code share
partners.





Gulfstream
is directly affected by the financial and operating strength of its code share
partners. In the event of a decrease in the financial or operational strength of
any of the code share partners, such partner may be unable to make the payments
due to Gulfstream under the code share agreement. It is possible that if any of
the code share partners file for bankruptcy, Gulfstream’s code share agreement
with such partner may not be assumed in bankruptcy and could be modified or
terminated. United Airlines, has recently emerged from Chapter 11
reorganization. There was no impact to the code share agreement as a result of
this reorganization.





We operate our
code share relationships as revenue-sharing arrangements.





Under the
revenue sharing, or pro rate, arrangements that we have in place with our code
share partners, we bear substantially all costs associated with our flights.
Because we are responsible for such costs, factors such as rising fuel costs,
increases in operating expenses and decreases in ticket prices or passenger
loads could cause our profits to decrease and could have a material adverse
effect on our financial condition or results of operations.





The availability
of additional and/or replacement code share partners is limited and airline
strategic consolidations could have an impact on operations in ways yet to be
determined.





The
airline industry has undergone substantial consolidation, including the recent
merger of Delta Airlines and Northwest, and it may in the future undergo
additional consolidation. Other developments include domestic and international
code share alliances between major carriers, such as the “SkyTeam Alliance,”
that currently includes Delta Airlines, Continental and Northwest, among others,
and the “Star Alliance,” that currently includes United Airlines and US Airways,
among others, and which Continental joined effective in October 2009. Any
additional consolidation or significant alliance activity within the airline
industry could limit the number of potential partners with whom Gulfstream could
enter into code share relationships and materially adversely affect our
relationship with our current code share partners.




20




There is
no assurance that our relationship with our code share partners would survive in
the event that any such code share partner merges with another
airline.





Similarly,
the bankruptcy or reorganization of one or more of our competitors may result in
rapid changes to the identity of our competitors in particular markets, a
substantial reduction in the operating costs of our competitors or the entry of
new competitors into some or all of the markets we serve. We are unable to
predict exactly what effect, if any, changes in the strategic landscape might
have on our business, financial condition and results of
operations.





There are
constraints on our ability to establish new operations to provide airline
service to major airlines other than our code share
partners.





Our code
share agreement with Continental requires that we seek their consent prior to
establishing new code share agreements, subject to limited exceptions, as well
as prior to acquiring another regional carrier. In the absence of such consent,
we would have to establish a new operating subsidiary, separate from Gulfstream,
which would require a substantial expenditure of management time and Company
resources.




Fluctuations in
fuel costs could adversely affect our operating expenses and
results.





Aircraft
fuel consumes a significant portion of our airline revenue (29.6% for 2008 and
16.3% for 2009). The price of aircraft fuel is unpredictable and has increased
significantly in recent periods based on events outside of our control,
including geopolitical developments, regional production patterns, environmental
concerns and financial speculation. Because of the effect of these events on the
price and availability of aircraft fuel, the cost and future availability of
fuel cannot be predicted with any degree of certainty. We cannot assure you
increases in the price of fuel can be offset by higher revenue. We carry limited
fuel inventory and we rely heavily on our fuel suppliers. We cannot assure you
we will always have access to adequate supplies of fuel in the event of
shortages or other disruptions in the fuel supply. Price escalations or
reductions in the supply of aircraft fuel will increase our operating expenses
and could cause our operating results and net income to decline. Additionally,
price escalations or reductions in the supply of aircraft fuel could result in
the curtailment of our service. Some of our competitors may be better positioned
to obtain fuel in the event of a shortage.





Our business is
subject to substantial seasonal and cyclical volatility.





Gulfstream’s
business is subject to substantial seasonality, primarily due to leisure and
holiday travel patterns, particularly in the Bahamas. Traditionally, we
experience the strongest demand from February to July, and the weakest demand
from August to October, during which period we typically suffer operating
losses. As a result, our operating results for a quarterly period are not
necessarily indicative of operating results for an entire year, and historical
operating results are not necessarily indicative of future operating results.
Our results of operations generally reflect this seasonality. Our operating
results are also impacted by numerous other cycles and factors that are not
necessarily seasonal. These factors include the extent and nature of fare
changes and competition from other airlines, changing levels of operations,
national and international events, fuel prices and general economic conditions,
including inflation. Because a substantial portion of both personal and business
airline travel is discretionary, the industry tends to experience adverse
financial results in general economic downturns.




21




Any inability to
acquire and maintain additional compatible aircraft or engines would increase
our operating costs and could harm our profitability.





Our fleet
currently consists of 23 B1900D turboprop aircraft, each equipped with two
engines. Although our management believes there is an adequate supply of such
aircraft and engines available at reasonable prices and terms to meet our
current needs, we are unable to predict how long these conditions will continue.
Any increase in demand for these aircraft or engines could restrict our ability
to obtain additional aircraft, engines and spare parts. Because the aircraft we
operate are not in active production, we may be unable to obtain additional
suitable aircraft, engines or spare parts on satisfactory terms or at the time
needed for our operations or for the implementation of our growth plan. Further,
as fuel costs increase or remain at elevated levels, the demand for highly
fuel-efficient turboprop aircraft may also increase. This increase in demand
could cause a shortage in the supply of reasonably priced turboprop aircraft.
Such a decrease could adversely affect our ability to expand our fleet or to
replace outdated aircraft, which in turn could hinder our growth or reduce our
revenues.





Maintenance
expenses for Gulfstream’s fleet could increase.





Gulfstream’s
fleet consists of aircraft that were delivered from 1994 to 1996. As the age of
our aircraft increases, additional resources may be required to sustain their
reliability levels. There can be no assurance that such additional resources
will not be material.





Any inability to
extend the lease terms of our existing aircraft or obtain financing for
additional aircraft could adversely affect our operations.





We
finance our aircraft through operating lease financing. Most of our existing
fleet of B1900Ds is leased from the manufacturer pursuant to lease agreements
that expires in 2010. We have the option to extend the leases for up to 15
aircraft from six to 24 months after the expiration period; however, there can
be no assurance that this lease agreement can be extended further on reasonable
terms. If we are unable to extend these leases, we also have the option to
purchase up to 21 of these aircraft; however, we may not be able to secure
financing on acceptable terms, if at all. Further, the B1900D is not currently
produced by their manufacturers and there is currently a limited supply of these
aircraft. If we are unable to obtain replacement aircraft on economically
reasonable terms, our business could be materially adversely
affected.





The airline
industry has been subject to a number of strikes which could adversely affect
our business.





The
airline industry has been negatively impacted by a number of labor strikes. Any
new collective bargaining agreement entered into by other regional carriers may
result in higher industry wages and add increased pressure on Gulfstream to
increase the wages and benefits of our employees. Furthermore, since each of
Gulfstream’s code share partners is a significant source of revenue, any labor
disruption or labor strike by the employees of any one of Gulfstream’s code
share partners could have a material adverse effect on our financial condition
or results of operations.





Competitors or
new market entrants may introduce smaller aircraft or direct hub flights, which
could reduce our competitive advantage.





We
operate relatively small aircraft on short flight routes, which enables us to
maintain a low cost structure, giving us a competitive advantage over other
airlines. If new market entrants or existing competitors were to introduce
smaller aircraft into the marketplace, their costs may be lower than ours,
allowing them to gain a competitive advantage. In addition, competitors could
introduce new direct flights from their hubs to our key cities which could
reduce the competitiveness of our Florida connecting points.





Gulfstream flies
and depends upon only one aircraft type, and would be adversely affected if the
FAA were to ground our fleet.





Gulfstream’s
fleet consists of 23 B1900D turboprop aircraft. The FAA requires operating, air
worthiness and other certificates; approval of personnel who may engage in
flight, maintenance or operation activities; record keeping procedures in
accordance with FAA requirements; and FAA approval of flight training and
retraining programs. We cannot predict whether we will be able to comply with
all present and future laws, rules, regulations and certification requirements
or that the cost of continued compliance will not have a material adverse effect
on our operations. We incur substantial costs in maintaining our current
certifications and otherwise complying with the laws, rules and regulations to
which we are subject. A decision by the FAA to ground or require additional
time-consuming inspections of or maintenance on the B1900D aircraft for any
reason may have a material adverse effect on the operations of
Gulfstream.




22




Gulfstream is at
risk of losses and adverse publicity stemming from any accident involving our
aircraft.





While
Gulfstream has never had a fatal crash over our history, it is possible that one
or more of our aircraft may crash or be involved in an accident in the future,
causing death or injury to individual air travelers and our employees and
destroying the aircraft. An accident or incident involving one of Gulfstream’s
aircraft could involve significant potential claims of injured passengers and
others, as well as repair or replacement of a damaged aircraft and our
consequential temporary or permanent loss of service. In the event of an
accident, our liability insurance may not be adequate to offset the exposure to
potential claims and we may be forced to bear substantial losses from the
accident. Substantial claims resulting from an accident in excess of related
insurance coverage would harm our operational and financial results. Moreover,
any aircraft accident or incident, even if fully insured, could cause a public
perception that Gulfstream’s operations are less safe or reliable than other
airlines, which could result in a material reduction in passenger
revenues.





If Gulfstream is
forced to relocate our Fort Lauderdale maintenance base, we may not be able to
operate as successfully.





The lease
for Gulfstream’s principal maintenance facility, located at Hollywood-Fort
Lauderdale International Airport (FLL), expires at the end of May 2010. We are
presently in negotiations with Broward County for a lease at a nearby existing
site at FLL.  Broward County has been considering for some time an
improvement to FLL that will eventually result in a teardown of Gulfstream’s
maintenance hangar and require Gulfstream to seek an alternate location for a
successor maintenance hangar on the airfield. If Gulfstream is forced to
relocate its Fort Lauderdale maintenance operations, it may be prohibitively
expensive to relocate and/or construct a maintenance hangar. Gulfstream may not
be able to operate as efficiently or successfully from any other location. In
addition, it is possible that Gulfstream would be unable to secure a suitable
alternative location for our maintenance hangar. Were this to occur, we may be
forced to outsource our airplane maintenance for a period of time, which would
substantially increase our maintenance costs and cause us significant
operational disruptions.





Hurricanes and
other adverse weather conditions could adversely affect Gulfstream’s
business.





Our
routes in Florida and the Bahamas are particularly susceptible to the impact of
hurricanes. In the event that a hurricane threatened one of our departure
locations, we may be forced to cancel flights and/or relocate our fleet, either
of which would cause us to lose revenues. Related storm damage could also affect
telecommunications capability, causing interruptions to our operations. A
hurricane could cause markets such as the Florida Keys and the Bahamas to
sustain severe damage to their tourist destinations and thus cause a longer-term
decrease in the number of persons traveling on our routes.





Additionally,
during periods of fog, ice, low temperatures, hurricanes, storms or other
adverse weather conditions, flights may be cancelled or significantly delayed. A
significant interruption or disruption in service due to adverse weather or
otherwise, could result in the cancellation or delay of a significant portion of
Gulfstream’s flights and, as a result, could have a severe impact on our
business, operations and financial performance.





Gulfstream may
experience labor disruptions or an increase in labor costs.





All of
Gulfstream’s permanent pilots are represented by International Brotherhood of
Teamsters Airline Division Local 747, commonly known as the Teamsters. Our
collective bargaining agreement with our pilots became subject to amendment in
July 2009 and negotiations are currently in process. Although we have never had
a work interruption or stoppage and we believe our relations with our union and
non-union employees are generally good, Gulfstream is subject to risks of work
interruption or stoppage and/or may incur additional administrative expenses
associated with union representation of our employees. Any sustained work
stoppages could adversely affect Gulfstream’s ability to fulfill our obligations
under our code share agreements and could have a material adverse effect on our
financial condition and results of operations.





Additionally,
labor costs constitute a significant percentage of our total operating costs.
Our labor costs constitute approximately 27% of our 2009 total operating costs.
Any new collective bargaining agreements entered into by other airlines may also
result in higher industry wages and increased pressure on us to increase the
wages and benefits of our employees. Future agreements with our employees’
unions may be on terms that are not economically as attractive as our current
agreements nor comparable to agreements entered into by our competitors. Any
future agreements may increase our labor costs or otherwise adversely affect us.
Additionally, we cannot assure you that the compensation rates that we have
assumed will correctly reflect the market for our non-union employees, or that
there will not be future unionization of our currently nonunionized groups,
which could adversely affect our costs.




23




Our business is
heavily dependent on the Bahamas markets and a reduction in demand for air
travel to this market would harm our business.





Almost
half of our scheduled flights have the Bahamas as either their destination or
origin and our revenue is linked primarily to the number of tourists and other
passengers traveling to and from the Bahamas. Bahamian tourism levels are
affected by, among other things, the political and economic climate in the
Bahamas’ main tourism markets, the availability of hotel accommodations,
promotional spending by competing destinations, the popularity of the Bahamas as
a tourist destination relative to other vacation options, and other global
factors, including natural disasters or negative publicity due to safety and
security. No assurance can be given that the level of passenger traffic to the
Bahamas will not decline in the future. A decline in the level of Bahamas
passenger traffic could have a material adverse effect on our results of
operations and financial condition.





The current
regulation of travel to Cuba is subject to political conditions and a change in
the current restrictions could impair our ability to provide flights or minimize
our competitive advantage.





Pursuant
to a services agreement that we have entered into with GAC, we may provide the
use of our aircraft, flight crews and other services to GAC for its operation of
charter flights to Cuba, in exchange for which we receive 75% of the operating
profit generated by such charter flights. GAC’s flights to Cuba depend on
political conditions prevailing from time to time in Cuba and the United States.
Currently, GAC is one of a limited number of operators who provide flights from
the United States to Cuba. If relations between the United States and Cuba
worsen, these flights may be prohibited entirely and we may lose significant
revenues due to GAC’s inability to operate these flights. Conversely, if
relations between the United States and Cuba significantly improve, demand for
access to Cuba could increase dramatically, causing the market for flights from
the United States to Cuba to be flooded with new entrants. In either scenario,
our business, financial condition and results of operations could be materially
and negatively affected.





Our
business operations in Cuba are subject to a number of U.S. federal laws and
regulations, including restrictions imposed by the Foreign Corrupt Practices Act
(FCPA) as well as trade sanctions administered by the Office of Foreign Assets
Control (OFAC) and the Commerce Department. The FCPA is intended to prohibit
bribery of foreign officials or parties and requires public companies in the
United States to keep books and records that accurately and fairly reflect those
companies’ transactions. OFAC and the Commerce Department administer and enforce
economic and trade sanctions based on U.S. foreign policy and national security
goals against targeted foreign states, organizations and individuals, including
Cuba.





If we
fail to comply with these laws and regulations, we could be exposed to claims
for damages, financial penalties, reputational harm, incarceration of our
employees or restrictions on our operation of flights to and from Cuba. These
restrictions could increase our costs of operations, reduce our profits or cause
us to forgo development opportunities that would otherwise support our
growth.





Cuba’s status as
a state sponsor of terrorism could impact the sustainability and growth of the
Company’s flights to Cuba.





Cuba is
listed as a state sponsor of terrorism by the U.S. Department of State, and as
such, GAC’s flights to Cuba are subject to any restrictions that may be imposed
as a result of such designation. GAC could be subjected to regulations and
requirements that could increase its costs of operating flights to Cuba,
restrict the number or manner of flights it operates to Cuba or prohibit such
flights entirely. The Company’s business, financial condition and results of
operations could be materially and negatively affected by further restrictions,
or prohibitions, on doing business in Cuba as a country designated as a state
sponsor of terrorism.





We rely on third
parties to provide us with facilities and services that are integral to our
business and can be withdrawn on short notice.





We have
entered into agreements with third-party contractors, including other airlines,
to provide certain facilities and services required for our operations, such as
certain maintenance, ground handling, baggage services and ticket counter space.
We will likely need to enter into similar agreements in any new markets we
decide to serve. All of these agreements are subject to termination upon short
notice. The loss or expiration of these contracts, the loss of FAA certification
by our outside maintenance providers or any inability to renew our contracts or
negotiate contracts with other providers at comparable rates could harm our
business. Our reliance upon others to provide essential services on our behalf
also gives us less control over costs and over the efficiency, timeliness and
quality of contract services.




24




Aviation
insurance is a critical safeguard of our financial condition and it might become
difficult to obtain adequate insurance at a reasonable rate in the
future.





We
believe that our insurance policies are of types customary in the industry and
in amounts we believe are adequate to protect us against material loss. It is
possible, however, that the amount of insurance we carry will not be sufficient
to protect us from material loss. Some aviation insurance could become
unavailable, available only for reduced amounts of coverage, or available only
at substantially higher rates, which could result in our failing to comply with
the levels of insurance coverage required by our code share agreements, our
other contractual agreements or applicable government regulations. Additionally,
war risk coverage or other insurance might cease to be available to our vendors
or might only be available for reduced amounts of coverage.





Adverse
litigation judgments or settlements resulting from legal proceedings in which we
may be involved in the normal course of our business could reduce our profits or
limit our ability to operate our business.





In the normal course of our business,
we are often involved in various legal proceedings. The outcome of these
proceedings cannot be predicted. If any of these proceedings were to be
determined adversely to us or a settlement involving a payment of a material sum
of money were to occur, there could be a material adverse effect on our
financial condition and results of operations. Additionally, we could become the
subject of future claims by third parties, our employees, our investors or
regulators. Any significant adverse litigation judgments or settlements would
reduce our profits and could limit our ability to operate our
business.




Risks
Related To the Academy





A decrease in
demand for regional airline pilots could adversely impact the Academy’s ability
to attract and retain students.





We
believe that the employment of our graduates is essential to our ability to
attract and retain students. In the event that regional airline industry demand
for pilots decreases significantly, it would have a detrimental impact on the
ability of our graduates to gain employment, which could have an adverse effect
on enrollment.





The value of the
Academy could be diminished if other airlines lower their required minimum
flight hours.





Academy
students are pilots who hold commercial, multi-engine and instrument ratings who
are qualified to operate commercial flights but who seek to enhance their
marketability by logging additional training and flight hours. The Academy
offers pilots the opportunity to log flight hours more quickly than the
traditional time-building method of flight instructing. If the airlines who hire
Academy graduates were to reduce the number of logged hours that they require
new pilots to have, the value of the Academy could be diminished and the Academy
could suffer decreased enrollment and a loss of revenues.





The inability to
finance tuition costs could adversely affect the Academy’s
enrollment.





Most of
our students depend upon some form of third-party financing to finance part or
all of the cost of tuition. This type of financing is only available from
limited sources. The inability of prospective students to obtain third-party
financing could adversely affect our ability to attract and retain
students.





Workplace error
by graduates of the Academy could expose us to legal action.





Many of
the pilots that graduate from the Academy are ultimately employed by airlines
other than Gulfstream. In the event of an accident caused by one of the
graduates of the Academy, it is possible that the Academy could be named as a
defendant in any lawsuit that may arise. There can be no assurance that our
insurance policy will be adequate to cover the potential losses from any such
claims.




25




Risks
Related To Our Common Stock





We
do not pay cash dividends on our capital stock, and we do not anticipate paying
any cash dividends in the future.





We have
never paid cash dividends on our capital stock and do not have current plans to
do so. Instead, we will likely retain our future earnings to fund the
development and growth of our business. As a result, capital appreciation, if
any, of our common stock will likely be your sole source of gain for the
foreseeable future.





Our
certificate of incorporation and bylaws, and Delaware law contain provisions
that could discourage a takeover.





Our
certificate of incorporation and bylaws and Delaware law contain provisions that
might enable our management to resist a takeover.  As described in
“Description of Capital Stock — Anti-Takeover Provisions of Delaware Law and
Charter Provisions”, these provisions may:





·
            discourage,
      delay or prevent a change in the control of our company or a change in our
      management;


·
            adversely
      affect the voting power of holders of common stock;
  and


·
            limit
      the price that investors might be willing to pay in the future for shares
      of our common stock.





Reports
published by securities or industry analysts, including projections in those
reports that exceed our actual results, could adversely affect our stock price
and trading volume.





We
currently expect securities research analysts, including those affiliated with
our underwriters, will establish and publish their own quarterly projections for
our business. These projections may vary widely from one another and may not
accurately predict the results we actually achieve. Our stock price may decline
if our actual results do not match securities research analysts’ projections.
Similarly, if one or more of the analysts who writes reports on us downgrades
our stock or publishes inaccurate or unfavorable research about our business,
our stock price could decline. If one or more of these analysts ceases coverage
of our company or fails to publish reports on us regularly, our stock price or
trading volume could decline. While we expect securities research analyst
coverage, if no securities or industry analysts commence coverage of our
company, the trading price for our stock and the trading volume could
decline.





The issuance of a
substantial number of shares of our common stock will dilute our current
stockholders and may depress the market price of our common stock and make it
difficult for us to raise capital.





As a
result of issuing the Senior Warrants and the Junior Warrants in September 2008,
we may be required to issue an additional 1,999,606 shares of our common stock,
representing 31.6% of the outstanding equity as of April 14,2010.
 This is in addition to the October 2009 conversion of the Junior
Debentures into 578,342 shares of our common stock.  Further, both the
Senior and Junior Warrants include adjustment provisions that could require us
to issue a greater number of shares under certain circumstances.





The
shares issued upon exercise of the Senior and Junior Warrants represent a
significant percentage of our presently outstanding common stock and the
issuance of such shares would result in dilution to our current stockholders and
could cause the market price of our common stock to decline.





Potential
investors could be prohibited from investing, or choose not to invest, in our
common stock because we provide services to a company that operates flights to
Cuba.





Cuba has
been identified as a state sponsor of terrorism by the U.S. Department of State.
Some potential investors, including certain pension funds or trust funds, may be
prohibited from investing, or may choose not to invest, in companies that do
business with or in countries designated as sponsors of terrorism. Additionally,
unrestricted potential investors may choose not to invest in our common stock
based solely or in part on the fact that we provide services to GAC, a company
that operates flights to Cuba. The exclusion of such investors may limit the
market for shares of our common stock or negatively impact the further
development of an active trading market for our common stock.





Our
common stock has only been publicly traded for a short period of time, and the
price of our common stock could fluctuate substantially, possibly resulting in
class action securities litigation.





Before
our initial public offering in December 2007, there had been no public market
for shares of our common stock.  For the last three months, the average
daily trading volume of our common stock has been approximately 11,000 shares.
An active public trading market may not develop or, if developed, may not be
sustained.




26




The stock
market in general and airlines in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the
operating performance of the underlying businesses. In addition, the airline
industry recently experienced a period of significant disruption characterized
by the bankruptcy, failure, collapse or sale of various financial institutions,
which led to increased volatility in securities prices and a significant level
of intervention from the U.S. and other governments in securities markets. These
broad market and industry factors may seriously harm the market price of our
common stock, regardless of our actual operating performance.





In
addition to the risks described in this section, several factors that could
cause the price of our common stock in the public market to fluctuate
significantly include, among others, the following:




·
            quarterly variations in our operating results compared to market
      expectations; ·
              announcements of new services or products or significant price
      reductions by us or our competitors;
 ·
              size of the public float;


·
            stock price performance of our
  competitors; ·
              fluctuations in stock market prices and
  volumes;
 ·
              default on our indebtedness or changes to our
      liquidity;
 ·
              changes in senior management or key
  personnel; ·
                changes in financial estimates by securities
      analysts;
 ·
                negative earnings or other announcements by us or other
      airlines;
 ·
                downgrades in our credit ratings or the credit ratings of our
      competitors; ·
                  issuances of capital stock;
and
 ·
                  global economic, legal and regulatory factors unrelated to our
      performance.


Because
of the low trading volume, our stock price is subject to greater
volatility.  Securities class action litigation has often been
instituted against companies following periods of volatility in the overall
market and in the market price of a company’s securities. This litigation, if
instituted against us, could result in substantial costs, reduce our profits,
divert our management’s attention and resources and harm our
business.





We
are not in compliance with NYSE Amex continued listing standards.





Our
common stock is listed for trading on the NYSE Amex, which is the successor to
the American Stock Exchange (the “Exchange”).  The Exchange requires listed
companies to meet certain continued listing standards.  These standards
include specified minimum stockholders equity thresholds when an issuer sustains
net losses over a number of years.  We have not met the threshold set forth
in Section 1003(a) of the Exchange’s Company Guide because, for the 2008 fiscal
year, we have stockholder’s equity of less than $2 million and losses from
continuing operations and/or net losses in two out of our three most recent
fiscal years.  As a result, we have received a notice from the Exchange
that we have not met this continued listing requirement.





The NYSE
Amex staff has accepted the plan that we submitted to achieve and sustain
compliance with all of the NYSE Amex’s listing requirements (the “Plan”),
including a time frame for regaining compliance with Section 1003(a)(i) of the
Company Guide within 18 months or by November 12, 2010 (the “Plan Period”). We
will be able to continue our listing during the Plan Period, during which time
we will be subject to periodic review to determine if we are making progress
consistent with the Plan. If we are not in compliance with all the continued
listing standards of the NYSE Amex Company Guide by November 12, 2010, or if we
do not make progress consistent with the Plan during the Plan Period, we may be
subject to delisting proceedings. We may appeal a Staff determination to
initiate delisting proceedings.





As part
of our efforts to achieve and sustain compliance with the Plan, we agreed to
convert the Junior Debentures to common stock at a reduced conversion price of
$1.975 per share.  This was approved by our stockholders on October
20, 2009.





In the
event our common stock was delisted by the Exchange, we would be in breach of a
covenant of our loan and security agreement with Shelter Island Opportunity
Fund, LLC, and, in the absence of a waiver, the maturity of our secured original
issue discount debenture could be accelerated.





27




The
liability of our officers and directors is limited.





Our
certificate of incorporation limits the liability of directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:





·
            any
      breach of their duty of loyalty to the corporation or its
      stockholders;


·
            acts
      or omissions not in good faith or which involve intentional misconduct or
      a knowing violation of law;


·
            unlawful
      payments of dividends or unlawful stock repurchases or redemptions;
      or


·
            any
      transaction from which the director derived an improper personal
      benefit.





This
limitation of liability does not apply to liabilities arising under the federal
securities laws and does not affect the availability of equitable remedies such
as injunctive relief or rescission.





Our
certificate of incorporation and bylaws also provide that we will indemnify our
directors, officers, employees and agents for damages arising in connection with
their actions in such capacities, subject to certain limitations as set forth in
the bylaws.





There is
no pending litigation or proceeding involving any of our directors, officers,
employees or agents where indemnification will be required or permitted. We are
not aware of any pending or threatened litigation or proceeding that might
result in a claim for indemnification.





ITEM
1B. UNRESOLVED STAFF COMMENTS.





None.





ITEM
2. PROPERTIES.





We
currently lease all of our facilities, including our corporate headquarters and
largest space (other than hanger and ramp space) near the Fort
Lauderdale-Hollywood International Airport.  We lease ticket counter space,
gate space and operations space at various airports throughout our system, most
of which are not under long-term leases.





Our
principal facilities and facilities that we lease under long-term leases, and
their primary uses and segments are as follows:




Location
            
            Square
      Feet
            
            Use
            
            SegmentFort
      Lauderdale, Florida
            
            12,600
            
            Headquarters,
      Operations
            
            Gulfstream,
      AcademyFort
      Lauderdale, Florida
            
            3,750
            
            Training
      Facility
            
            AcademyFort
      Lauderdale-Hollywood International Airport, Florida
            
            249,000
            
            Hanger
      and Ramp Space
            
            GulfstreamFort
      Lauderdale, Florida
            
            8,000
            
            Warehouse,
      Storage and Shop
            
            GulfstreamMiami
      International Airport
            
            1,050
            
            Cuba
      Operations
            
            GulfstreamTampa
      International Airport
            
            7,613
            
            Gate
      and Ramp Space
            
            GulfstreamVenango
      Regional Airport
            
            684
            
            Gate
      and Ramp Space
            
            GulfstreamDubois
      Regional Airport
            
            1,133
            
            Gate
      and Ramp Space
            
            GulfstreamDubois
      Regional Airport
            
            20,000
            
            Hangar
            
            Gulfstream





We believe that our principal
facilities and facilities that we lease are adequate to meet our current needs.
Our principal facilities and facilities that we lease are in good condition and
are sufficient to conduct our operations. We do not intend to materially
renovate, improve, or develop properties. We are not subject to competitive
conditions for property and currently have no facility property to insure. We
have no policy with respect to investments in real estate or interests in real
estate and no policy with respect to investments in real estate mortgages.
Further, we have no policy with respect to investments in securities of or
interests in persons primarily engaged in real estate activities.




28




ITEM 3. LEGAL
PROCEEDINGS.





On May 7, 2009, the Federal Aviation
Administration (the “FAA”) notified the Company that it was seeking a proposed
civil penalty of $1,310,000 against the Company for alleged non-compliance with
respect to certain record keeping requirements, and regulatory requirements
relating to the use of certain replacement parts. The Company has begun an
informal conference with the FAA, which is a settlement process prescribed by
statute that authorizes the FAA to accept and consider relevant information in
order to compromise proposed civil penalties. We have submitted information,
evidence and supporting documentation for consideration by the FAA demonstrating
that certain alleged violations of the regulations did not occur, or
demonstrating why the facts and circumstances in this case do not warrant the
proposed civil penalty sought by the FAA. We believe that information submitted
by us to the FAA through the informal conference process may result in a
significant reduction in the civil penalty initially proposed in this matter,
and the Company remains in discussions with the FAA over the terms of the
settlement. The FAA has since indicated that, unless the mattersare settled, it
could propose additional civil penalties based on additional inspections
conducted by the agency in 2009 as part of its routine surveillance of air
carriers. If a compromised settlement of the matters is not successful, the FAA,
through a U.S Attorney, may initiate a civil action for the full amount of the
proposed civil penalty as prescribed by law.





In January 2006, a former salesman
of the Academy formed a business that the Company believes competes directly
with the Academy for student pilots. Thereafter, the former President of the
Academy resigned his position at the Academy and the Company believes he became
affiliated with the alleged competing business. The Academy has initiated a
lawsuit against these former employees, alleging violation of non-competition
and fiduciary obligations. The defendants, including the Academy’s former
President, subsequently filed a counterclaim against the Academy based upon lost
earnings and breach of contract.





The
Academy and the sole remaining defendant have agreed to submit to binding
arbitration which is to be held no later than May 1st,
2010 pursuant to the Court’s Order Referring Case to Binding Arbitration entered
on February 16, 2010.





From time
to time, we are a party to litigation or other legal proceedings that we
consider to be a part of the ordinary course of our business. We are not
involved currently in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations. We may become involved in material legal proceedings
in the future.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.


Our 2009 Annual Meeting of Stockholders
was held on October 20, 2009 in Fort Lauderdale, Florida at 11:00 a.m.
local time.





There
were present in person or by proxy 2,333,152 shares of our common stock, of a
total of 2,959,600 shares of common stock entitled to vote as of the record date
of September 8, 2009.





The
number of shares voted in favor of the election of the following nominees for
director is set forth opposite each nominee’s name:





Nominee
            
            Number
      of SharesThomas
      A. McFall
            
            2,310,952David
      F. Hackett
            
            2,314,818Gary
      P. Arnold
            
            2,314,743Gary
      L. Fishman
            
            2,314,952Barry
      S. Lutin
            
            2,314,943Richard
      R. Schreiber
            
            2,314,743





The
following six additional proposals were presented to our shareholders and
adopted:





The
proposal to amend the Company's Stock Incentive Plan to increase the number
of shares of common stock that may be issued under the plan from 350,000 to
650,000 received 2,167,483 votes in favor.





The
proposal to amend the Company's certificate of incorporation to authorize the
issuance of up to 5,000,000 shares of preferred stock received 2,250,503
votes in favor.





The
proposal to authorize the potential issuance of up to 1,500,000 shares of
preferred stock which may be convertible into shares of common stock at a price
per share not less than 75% of the greater of the market price or book value per
share received 2,229,358 votes in favor.





The
proposal to ratify the issuance of the junior subordinated debenture, which is
convertible into common stock at a price of $3.00 per share, received 2,239,578
votes in favor.





The
proposal to approve a reduction in the price at which the outstanding junior
subordinated debenture is convertible into common stock from $3.00 per share to
$1.98 per share received 2,225,433 votes in favor.





The
proposal to appoint Cherry, Bekaert & Holland, L.L.P as the Company's
independent auditors for 2009 received 2,307,652
votes in favor.


29





PART II





ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.





Market
Information





Our
common stock has been traded on the NYSE Amex (formerly, the American Stock
Exchange) under the symbol “GIA” since December 14, 2007.  The below table
sets forth the high and low closing prices of our common stock for the periods
indicated and reported by the NYSE Amex. The prices set forth below represent
inter-dealer quotations, without retail markup, markdown or commission and may
not be reflective of actual transactions.





High
            
            
            LowYear
      Ended December 31, 2009:Fourth
      Quarter
            
            $
            1.80
            
            
            $
            1.28Third
      Quarter
            
            $
            2.19
            
            
            $
            1.67Second
      Quarter
            
            $
            4.60
            
            
            $
            1.66First
      Quarter
            
            $
            2.66
            
            
            $
            1.40Year
      Ended December 31, 2008:Fourth
      Quarter
            
            $
            3.27
            
            
            $
            1.00Third
      Quarter
            
            $
            3.75
            
            
            $
            0.75Second
      Quarter
            
            $
            5.25
            
            
            $
            2.09First
      Quarter
            
            $
            9.04
            
            
            $
            4.51





As of
March 31, 2010, 3,795,061 shares of our common stock, par value $0.01 per share,
were issued and outstanding. As of March 31, 2010, there were approximately 53
stockholders of record of our common stock, although we believe that there are a
significantly larger number of beneficial owners of our common stock.  On
April 12, 2010, the last reported sale price of our common stock on the NYSE
Amex Exchange was $1.25





Dividends





We have
not paid cash dividends on our capital stock and we do not anticipate paying any
cash dividends in the future.  We anticipate that we will retain any
earnings to support operations and to finance the growth and development of our
business.  Additionally, we are party to general agreements that limit our
ability to pay dividends.  Under our credit facilities, we and our
subsidiaries are prohibited from declaring dividends without the consent of our
lender.  Gulfstream is permitted under its primary aircraft lease agreement
to pay dividends only if its average cash position after paying the dividend
would equal or exceed $4,000,000 over the prior twelve month period.  In
addition, in the event that Gulfstream declares a dividend, Gulfstream has an
obligation under the warrant held by Continental to pay Continental cash in an
amount equal to what Continental would have been entitled to had it exercised
its warrant immediately prior to such dividend.  Any future determination
relating to our dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including future earnings,
capital requirements, financial conditions, future prospects and other factors
that the board of directors may deem relevant.





Recent
Sales of Unregistered Securities





On November 18, 2009, the Company
issued 23,333 shares of common stock to Shelter Island Opportunity Fund, LLC
(“Shelter Island”) as consideration for Shelter Island’s agreement to waive the
Company’s non-compliance with certain minimum quarterly EBITDA and monthly cash
balance covenants for September 30, 2009 as set forth in the Securities Purchase
Agreement between Shelter Island and the Company.  The shares
represent $35,000 divided by the $1.50 closing price of the Company’s common
stock on November 18, 2009.





On January 29, 2010, the Company
consummated the first closing under a Unit Purchase Agreement (the “Purchase
Agreement”) with seven accredited investors (the “Investors”) pursuant to which
the Company sold to the Investors units of its securities (the “Units”)
consisting of (i) one share (the “Shares”) of common stock of the Company, par
value $0.01 per share (the “Common Stock”); and (ii) warrants to purchase
three-quarters of a share of Common Stock (the “Warrants”), at a per Unit
purchase price of $1.40 for aggregate gross proceeds of $327,300 (the
“Offering”). Upon completion of the first closing of the Offering, the Company
sold to the Investors an aggregate of 233,786 Shares and Warrants to purchase an
aggregate of 175,339 shares of Common Stock.




30




The Warrants expire on July 29, 2013
and are exercisable into shares of Common Stock beginning on July 29, 2010 at an
exercise price equal to $3.00 per share, subject to adjustment as set forth in
the Warrants.





In
connection with the first closing of the Offering, the Company paid/issued the
placement agent (i) cash commissions in the amount of 9% of the total purchase
price received by the Company in the first closing; (ii) a non-accountable
expense allowance equal to 2% of the total purchase price received by the
Company in the first closing; and (iii) Warrants to purchase 18,703 shares of
Common Stock, which represents 8% of the aggregate amount of Shares sold as part
of the Units in the first closing.





On February 26, 2010, the Company
completed a $1,000,000 debt financing pursuant to purchase agreements for senior
secured notes and warrants (the “Purchase Agreements”) with accredited investors
and/or qualified institutional purchasers (the “Investors”) pursuant to which
the Company sold to the Investors (i) 12% Senior Secured Notes due December 31,
2010 in an aggregate principal amount of $1,000,000 (the “Notes”); and (ii)
warrants, exercisable at $1.22 per share (subject to customary anti-dilution
adjustments) and expiring February 28, 2015 (the “Warrants”), to purchase an
aggregate of 409,827 of shares of the Company’s common stock (the “Common
Stock”).  The number of Warrants issued to each Investor was
determined by dividing (a) 50% of the principal amount of the Notes purchased by
the Investors, by (b) the Exercise Price (as defined below) of the Warrants (the
“Offering”).  However, if the Notes are not prepaid by the Company in
full by June 30, 2010, then the shares of Common Stock issuable upon exercise of
the Warrants (the “Warrant Shares”) would represent 100% of the original
$1,000,000 principal amount of the Notes divided by the Exercise Price.
Accordingly, if the Notes are not paid in full by June 30, 2010, assuming no
anti-dilution adjustments to the Warrant Shares or the Exercise Price, the
aggregate of 409,827 Warrant Shares would increase to 819,654 Warrant
Shares.





In
connection with the closing of the February 26, 2010 Purchase Agreements, the
Company issued to the placement agent, (i) a $50,000 Note (identical to the
Investors’ Notes) and a Warrant to purchase 20,491 Warrant Shares, which
represents 5% of the total principal amount of the Notes and Warrants sold in
the Offering; and (ii) a separate Warrant to purchase 40,982 shares of Common
Stock, which represents 10% of the number of Warrant Shares issuable to
Investors under the Warrants.





On February 26, 2010, the Company and
Shelter Island entered into a Forbearance Agreement and Amendment to Debenture
(the “Forbearance Agreement”) which reduced the Company’s potential liability
under the put option from $3,000,000 to $1,050,000 and rescheduled certain
principal and interest payments under the Debenture (as defined below) to reduce
near-term liquidity requirements. As consideration for its financial
accommodations, the Company paid Shelter Island an additional $250,000 as a
forbearance fee, by delivering a $250,000 promissory note (the “Shelter Island
Note”) due on the earlier of (i) August 31, 2011, and (ii) the date the
Debenture is permitted or required to be paid in accordance with its
terms.  The Shelter Island Note accrues interest at a rate of 9% per
annum and is payable in cash on a monthly basis beginning on February 26,
2011.





Pursuant to the Forbearance Agreement
the parties amended the secured original issue discount debenture due August 31,
2011 issued to Shelter Island (the “Debenture”), as follows (i) the Company
shall pay interest on the outstanding principal amount monthly in cash,
commencing March 31, 2010; (ii) the Company shall pay monthly installments on
the outstanding principal amount commencing April 30, 2010 and on the last
trading day of each month thereafter until the August 31, 2011 maturity date of
the Debenture; and (iii) the Company may prepay all or any portion of the
outstanding principal amount of the Debenture together with a premium equal to
5% of outstanding principal amount being prepaid; provided that, if such
prepayment is made in 2011, there shall be no premium
applicable.  The Company, each of its subsidiaries and Shelter
Island also entered into an Omnibus Amendment to the Guaranty Agreements
pursuant to which, without limitation, the parties agreed to amend the existing
guarantees to include the repayment of the Shelter Island Note.





In connection with the Forbearance
Agreement and as contemplated in the original warrant to purchase Common Stock
issued to Shelter Island on August 31, 2008 (the “Original Warrant”), on
February 26, 2010 the Company divided the Original Warrant into (a) a warrant in
the form of the Original Warrant initially exercisable into 70,000 shares of
Common Stock (the “Put Warrant”); and (b) a warrant in the form of the Original
Warrant (the “Remaining Warrant”, and together with the Put Warrant, the
"Divided Warrants") such that the aggregate number of shares of Common Stock of
Company that are initially exercisable under the Divided Warrants (inclusive of
the 70,000 Shares of Common Stock initially issuable under the Put Warrant)
shall equal, in the aggregate, 15% of the fully-diluted shares of Company Common
Stock issued and outstanding immediately following consummation of the
transactions contemplated under the Forbearance Agreement and the Purchase
Agreements, after giving pro-forma effect to the conversion into Common Stock of
all Company convertible securities and the exercise of all Company options and
warrants, including the Warrants issued to the Investors.  As a result
of consummation of the above transactions with Shelter Island and the TBI
Investors, the aggregate number of shares issuable upon conversion of the
Divided Warrant is 917,646  shares of Company Common
Stock.




31




The Company and Shelter Island also
entered into an Amendment to the Put Option Agreement (the “Put Option
Amendment”) dated as of August 31, 2008 under which, among other things, the
exercise price applicable for all the put shares under the put option was
reduced from $3,000,000 to $1,050,000, or $15.00 per share.





On March 31, 2010, the Company
consummated the first closing under a Series A Convertible Preferred Stock
Purchase Agreement (the “Purchase Agreement”) with 17 accredited investors (the
“Investors”) pursuant to which the Company sold to the Investors (i) an
aggregate of 118,500 shares of Series A Convertible Preferred Stock, par value
$0.001 and stated value $10.00 per share (the “Preferred Shares”),
convertible into 1,185,000 shares of common stock of the Company, par value
$0.01 per share (the “Common Stock”); and (ii) 5-year warrants to purchase an
aggregate of 592,500 shares of Common Stock (the “Warrants”), representing 50%
of the number of shares of Common Stock issuable upon conversion of the
Preferred Shares, for aggregate gross proceeds of $1,043,000 (the “Offering”).
The Warrants expire on March 31, 2013 and are exercisable into shares of Common
Stock at an exercise price equal to $1.75 per share, subject to adjustment as
set forth in the Warrants.





Pursuant to the Certificate of
Designation, Preferences and Rights of the Series A Convertible Preferred Stock
of the Company which was filed with the State of Delaware on March 31, 2010 (the
“Certificate of Designation”), each Preferred Share is convertible into 10
shares of Common Stock. In addition, the Preferred Shares pay an annual dividend
at the rate of 12% per annum, payable quarterly, on the last business day of
each December, March, June and September (each a “Dividend Payment Date”),
payable on each Dividend Payment Date as follows: (i) 60% of each quarterly
dividend (based on an annual rate of 7% per annum) shall be payable in cash, and
(ii) 40% of each quarterly dividend (based on an annual rate of 5% per annum)
shall be payable either in cash, or at the sole option of the Company, in
additional shares of Common Stock, calculated for such purposes by dividing the
amount of the quarterly dividend then payable by 100% of the market price of the
Common Stock on such Dividend Payment Date.  Unless previously
converted into Common Stock, all Preferred Shares outstanding on the earlier to
occur of (a) the date on which the average of the market prices of the Common
Stock for any 20 consecutive trading days shall be $2.00 or higher, or (b) 5
years from the Preferred Shares issuance date, shall be automatically converted
into Common Stock at the Conversion Price then in effect.





In addition, on March 31, 2010, 4 of
the 7 purchasers of the Company’s units consisting of one share of Common Stock
(the “Shares”), and warrants to purchase three-quarters of a share of Common
Stock (the “Prior Warrants”) which was consummated on January 29, 2010 (the
“Prior Offering”), entered into a letter agreement with the Company (the
“Exchange Agreement”) pursuant to which such purchasers agreed to exchange their
Shares and Prior Warrants for Preferred Shares and Warrants, under the same
terms and conditions applicable to Investors in the Offering.  Such
purchasers also agreed that the Company shall have no further obligations or
liabilities in connection with the transaction documents executed and delivered
with respect to the Prior Offering, including, without limitation, the Unit
Purchase Agreement, the Registration Rights Agreement and the Prior Warrant,
each dated as of January 29, 2010, and each of which are terminated in any and
all respects.





In connection with the first closing of
the Offering, the Company paid/issued the placement agent (i) cash commissions
in the amount of 9% of the total purchase price received by the Company in the
first closing; (ii) a non-accountable expense allowance equal to 2% of the total
purchase price received by the Company in the first closing; and (iii) Warrants
to purchase 114,730 shares of Common Stock, which represents 11% of the total
purchase price received by the Company in the first closing.





We believe that all of the above
offerings and sales were deemed to be exempt under Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors, business associates of the Company or executive officers of the
Company, and transfer was restricted by the Company in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.




32





Repurchase
of Equity Securities





We do not
have any programs to repurchase shares of our common stock and no such
repurchases were made during the quarter ended December 31, 2009.





Equity Compensation Plan Information





The
following table presents information as of December 31, 2009 with respect to
compensation plans under which equity securities were authorized for
issuance.





Plan category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options
              (a)
            
            
            Weighted average
              exercise price of
              outstanding options
              (b)
            
            
            Number of securities
                  remaining available for
                  future issuance under
                  equity compensation plans
                  (excluding securities
                  reflected in column(a))
                  (c)Equity
      compensation plans approved by security holdersAmended
      and Restated Stock Incentive Plan (1)
            
            
            650,000
            
            
            $
            3.81
            
            
            
            301,676Equity
      compensation plans not approved by security holders
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-Total
            
            
            650,000
            
            
            $
            3.81
            
            
            
            301,676





(1)  On
May 1, 2009 and October 20, 2009, the board of directors and the Company’s
shareholders, respectively, authorized the amended and restated stock incentive
plan for purposes of increasing the number of shares of common stock that may be
issued under the plan from 350,000 to 650,000.  Other than as set
forth above, we do not have any stock option, bonus, profit sharing, pension or
similar plan with the exception of a tax deferred savings plan with a
discretionary profit sharing component which qualifies under Section 401(k) of
the Internal Revenue Code.





Item 6. Selected Financial
Data.





The following selected historical and
pro forma financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
following this section and our financial statements and related notes included
in this annual report.





The following table sets forth selected
financial data as of and for the years ended December 31, 2008 and 2009. The
selected financial data as of and for the years ended December 31, 2008 and 2009
were derived from our audited financial statements. Our audited financial
statements as of December 31, 2008 and 2009 are included below under Item 8 of
this Form 10-K.  The historical results are not necessarily indicative of
the operating results to be expected in any future period.


33
  Twelve
      Months Ended Dec. 31,2008
                
                
                2009
                
                
                %
      Change(In
      thousands, except share and per share data)RevenueAirline
      passenger revenue
                
                $
                88,527
                
                
                $
                59,753
                
                
                
                -32.5%Essential
      air service revenue
                
                
                2,512
                
                
                
                8,302
                
                
                
                230.5%Academy,
      charter and other  revenue
                
                
                14,217
                
                
                
                19,249
                
                
                
                35.4%Total
      Revenue
                
                
                105,256
                
                
                
                87,304
                
                
                
                -17.1%Operating
      ExpensesFlight
      operations
                
                
                12,859
                
                
                
                15,005
                
                
                
                16.7%Aircraft
      fuel
                
                
                30,350
                
                
                
                13,918
                
                
                
                -54.1%Aircraft
      rent
                
                
                5,911
                
                
                
                6,093
                
                
                
                3.1%Maintenance
                
                
                24,478
                
                
                
                21,625
                
                
                
                -11.7%Passenger
      service
                
                
                21,759
                
                
                
                19,352
                
                
                
                -11.1%Promotion
      & sales
                
                
                6,623
                
                
                
                4,986
                
                
                
                -24.7%General
      and administrative
                
                
                7,110
                
                
                
                7,351
                
                
                
                3.4%Depreciation
      and amortization
                
                
                2,754
                
                
                
                1,218
                
                
                
                -55.8%Loss
      on sale of equipment
                
                
                4,754
                
                
                
                -
                
                
                
                -100.0%Intangible
      asset impairment
                
                
                2,703
                
                
                
                680
                
                
                
                -74.8%Operating
      Expenses
                
                
                119,301
                
                
                
                90,228
                
                
                
                -24.4%Income
      (loss) from operations
                
                
                (14,045
                )
                
                
                (2,924
                )
                
                
                -79.2%Non-Operating
      Income and (Expense)Interest
      (expense)
                
                
                (1,306
                )
                
                
                (2,330
                )
                
                
                78.4%Other
      income (expense)
                
                
                43
                
                
                
                (265
                )
                
                
                -716.3%Non-Operating
      Income and (Expense)
                
                
                (1,263
                )
                
                
                (2,595
                )
                
                
                105.5%Income
      (loss) before taxes
                
                
                (15,308
                )
                
                
                (5,519
                )
                
                
                -63.9%Provision
      (benefit) for income taxes
                
                
                (509
                )
                
                
                2,032
                
                
                
                -499.2%Net
      income (loss)
                
                $
                (14,799
                )
                
                $
                (7,551
                )
                
                
                -49.0%Earnings
      per Share:Basic
                
                $
                (5.00
                )
                
                $
                (2.45
                )Diluted
                
                $
                (5.00
                )
                
                $
                (2.45
                )Shares
      used in computing net income (loss) per share:Basic
                
                
                2,957
                
                
                
                3,076Diluted
                
                
                2,957
                
                
                
                3,076
  34
  Operating Statistics.
  Twelve
      Months Ended Dec. 31,2008
              
              
              
              2009
              
              
              %
      ChangeAnnual
      Operating Statistics :Available
      seat miles (000's) (1)
              
              
              227,386
              
              
              
              165,853
              
              
              
              -27.1
              %Revenue
      passenger miles (000's) (2)
              
              
              127,092
              
              
              
              89,757
              
              
              
              -29.4
              %Revenue
      passengers carried
              
              
              629,563
              
              
              
              415,867
              
              
              
              -33.9
              %Departures
      flown
              
              
              56,598
              
              
              
              43,114
              
              
              
              -23.8
              %Passenger
      load factor (3)
              
              
              55.9
              %
              
              
              54.1
              %
              
              
              -3.2
              %Average
      yield per revenue passenger mile (4)
              
              $
              0.70
              
              
              $
              0.67
              
              
              
              -4.3
              %Revenue
      per available seat miles (5)
              
              $
              0.39
              
              
              $
              0.36
              
              
              
              -7.5
              %Operating
      costs per available seat mile (6)
              
              $
              0.49
              
              
              $
              0.48
              
              
              
              -3.5
              %Fuel
      cost per available  passenger miles (9)
              
              $
              0.13
              
              
              $
              0.08
              
              
              
              -37.1
              %Average
      passenger fare (7)
              
              $
              140.62
              
              
              $
              143.68
              
              
              
              2.2
              %Average
      passenger trip length (miles) (8)
              
              
              202
              
              
              
              216
              
              
              
              6.9
              %Aircraft
      in service (end of period)
              
              
              23
              
              
              
              23
              
              
              
              0.0
              %Fuel
      cost per gallon (incl taxes)
              
              $
              3.36
              
              
              $
              2.00
              
              
              
              -40.5
              %




1.  “Available
seat miles” or “ASMs” represent the number of seats available for passengers in
scheduled flights multiplied by the number of scheduled miles those seats are
flown.


2.   “Revenue
passenger miles” or “RPMs” represent the number of miles flown by revenue
passengers.


3.
“Passenger load factor” represents the percentage of seats filled by revenue
passengers and is calculated by dividing revenue passenger miles by available
seat miles.


4.
“Average yield per revenue passenger mile” represents the average passenger
revenue received for each mile a revenue passenger is carried.


5.
“Revenue per available seat mile” or “RASM” represents the average total
operating revenue received for each available seat mile.


6.
“Operating cost per available seat mile” represents operating expenses divided
by available seat miles.


7.
“Average passenger fare” represents passenger revenue divided by the number of
revenue passengers carried.


8.
“Average passenger trip length” represents revenue passenger miles divided by
the number of revenue passengers carried.


9. “Fuel
cost per available seat mile” represents fuel cost divided by the number of
available seat miles.





The following table sets forth other
major financial data:





As
      of December 31,(In
      thousands)
            
            2008
            
            
            2009Working
      Capital
            
            $
            (8,245
            )
            
            $
            (14,621
            )Property
      and Equipment, net
            
            
            2,793
            
            
            
            2,697Total
      Assets
            
            
            19,370
            
            
            
            14,778Long-Term
      Debt, net of current portion
            
            
            2,850
            
            
            
            -Total
      Stockholders' Equity (Deficit)
            
            $
            (4,665
            )
            
            $
            (10,939
            )


35


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR RESULTS OF
OPERATIONS.





WE URGE YOU TO READ THE FOLLOWING
DISCUSSION IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES THERETO BEGINNING ON PAGE F-1. THIS DISCUSSION MAY CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS,
INCLUDING BUT NOT LIMITED TO THE RISKS AND UNCERTAINTIES DISCUSSED UNDER THE
HEADING “RISK FACTORS” IN THIS FORM 10-K AND IN OUR OTHER
FILINGS WITH THE SEC. IN ADDITION, SEE “CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING
STATEMENTS” SET FORTH
IN THIS REPORT.





Overview





We operate a scheduled airline,
scheduled and on-demand charter services, and a flight training academy for
commercial pilots.





Our most
significant market opportunity relates to the fact that we currently operate in
and have targeted future expansion in unserved and underserved short haul
markets, which is a growing opportunity for two principal reasons. Many smaller
markets are being abandoned by major carriers, as they shift their focus
increasingly to international markets and away from domestic markets and hubs.
In addition, many smaller markets are also being abandoned by regional airlines,
as they continue to gravitate toward larger jet aircraft in the 70-100 seat
range, and away from smaller markets that utilize turboprop aircraft. As a
result, we continue to seek opportunities to grow in the expanding number of
smaller underserved or unserved markets that are suitable for our fleet of
small-capacity aircraft.





Our most significant
challenges relate to:




·
            securing
      capital to improve liquidity, fund growth opportunities, and acquire our
      fleet of twenty-one (21) leased
aircraft;


·
            volatility
      in the price of aircraft fuel;


·
            a
      weakened economic environment; and


·
            securing
      cost-effective maintenance resources, as the average age of our aircraft
      fleet increases.





Current
Developments





For the
year ended December 31, 2009, we generated less cash flow from operations
than initially projected at the beginning of the year due to lower revenue and
higher fuel costs than forecasted. From October 2008 to December
31, 2009, we also repaid over $4.4 million of debt and
restructured creditor obligations.





During
the second-half of 2009, Gulfstream experienced significant deterioration in its
revenue environment, which, combined with rising fuel costs, resulted in greater
than anticipated losses and pressure on its liquidity outlook.  While
part of the revenue weakness was the result of recessionary economic conditions,
the situation was made particularly acute by new low-fare competition in certain
of our markets.





With an
increasingly weakened balance sheet, Gulfstream found it necessary to attract
new capital beginning in the fourth quarter of 2009. With liquidity needs
becoming more urgent, in January 2010 the airline found itself in an
unsustainable financial situation.  As such, the Company retained
Berger Singerman and Mesirow Financial Advisors to assist in its restructuring
and financing activities.  Although the Company believes that its
revenue and liquidity will improve in future periods, the Company continued to
actively seek short-term financing to meet its near-term liquidity requirements
and to allow sufficient time to significantly increase its equity capital base
to support long-term growth opportunities, as well as the purchase of its
twenty-one (21) aircraft leased from Raytheon Aircraft Credit
Corporation.





These
near-term financing transactions and restructuring efforts, which are described
in detail below in Management’s Discussion and Analysis
of Financial Condition or Results of Operations,Liquidity and Capital
Resources, are essential due to our current liquidity position, as well
as several additional factors, including a highly seasonal business, the ongoing
risk posed by a relatively weak economy, the potential for continued volatility
in the price of jet fuel, proposed by the Federal Aviation Administration
the necessity for funds to satisfy or compromise civil penalties, and scheduled
payments of debt and restructured creditor obligations over the next two
years.




36




We can
make no assurance that our efforts to improve liquidity or to obtain longer-term
growth-oriented equity financing will be completed successfully, that we will
have adequate funds to satisfy or compromise the civil penalties proposed by the
FAA or that alternative sources of capital will be available to us. If
additional equity capital is not available in the next several months, we would
likely experience a significant liquidity shortfall before the end of 2010, and
would be unable to fund continued operations or meet our financial
obligations.




Results
of Operations





Comparative
Results for the Years Ended December 31, 2008 and 2009





The following table sets forth our
financial results for the years ended December 31, 2008 and
2009:




Twelve
      Months Ended December 312008
                  
                  
                  2009
                  
                  
                  %
      ChangeRevenueAirline
      passenger revenue
                  
                  $
                  88,527
                  
                  
                  $
                  59,753
                  
                  
                  
                  -32.5%Essential
      air service revenue
                  
                  
                  2,512
                  
                  
                  
                  8,302
                  
                  
                  
                  230.5%Academy,
      charter and other revenue
                  
                  
                  14,217
                  
                  
                  
                  19,249
                  
                  
                  
                  35.4%Total
      Revenue
                  
                  
                  105,256
                  
                  
                  
                  87,304
                  
                  
                  
                  -17.1%Operating
      ExpensesFlight
      operations
                  
                  
                  12,859
                  
                  
                  
                  15,005
                  
                  
                  
                  16.7%Aircraft
      fuel
                  
                  
                  30,350
                  
                  
                  
                  13,918
                  
                  
                  
                  -54.1%Aircraft
      rent
                  
                  
                  5,911
                  
                  
                  
                  6,093
                  
                  
                  
                  3.1%Maintenance
                  
                  
                  24,478
                  
                  
                  
                  21,625
                  
                  
                  
                  -11.7%Passenger
      service
                  
                  
                  21,759
                  
                  
                  
                  19,352
                  
                  
                  
                  -11.1%Promotion
      & sales
                  
                  
                  6,623
                  
                  
                  
                  4,986
                  
                  
                  
                  -24.7%General
      and administrative
                  
                  
                  7,110
                  
                  
                  
                  7,351
                  
                  
                  
                  3.4%Depreciation
      and amortization
                  
                  
                  2,754
                  
                  
                  
                  1,218
                  
                  
                  
                  -55.8%Impairment
      charge on assets held for sale
                  
                  
                  4,754
                  
                  
                  
                  -
                  
                  
                  
                  -100.0%Goodwill
      impairment
                  
                  
                  2,703
                  
                  
                  
                  680Total
      Operating Expenses
                  
                  
                  119,301
                  
                  
                  
                  90,228
                  
                  
                  
                  -24.4%Income
      (loss) from operations
                  
                  
                  (14,045
                  )
                  
                  
                  (2,924
                  )
                  
                  
                  -79.2%Non-operating
      Income and (Expense)Interest
      expense
                  
                  
                  (1,306
                  )
                  
                  
                  (2,330
                  )
                  
                  
                  78.4%Other income (expense)
                  
                  
                  43
                  
                  
                  
                  (265
                  )
                  
                  
                  -716.3%(1,263
                  )
                  
                  
                  (2,595
                  )
                  
                  
                  1.05%Income
      (loss) before taxesProvision
      (benefit) for income taxes
                  
                  
                  (15,308
                  )
                  
                  
                  (5,519
                  )
                  
                  
                  -63.9%Net
      income (loss)
                  
                  
                  (509
                  )
                  
                  
                  2,032
                  
                  
                  
                  -499.2%$
                  (14,799
                  )
                  
                  $
                  (7,551
                  )
                  
                  
                  -49%
 Operating
Statistics.
  Twelve
      Months Ended December 312008
                
                
                2009
                
                
                %
      ChangeAnnual
      Operating Statistics (unaudited):Available
      seat miles (000's) (1)
                
                
                227,386
                
                
                
                165,853
                
                
                
                -27
                %Revenue
      passenger miles (000's) (2)
                
                
                127,092
                
                
                
                89,757
                
                
                
                -29
                %Revenue
      passengers carried
                
                
                629,563
                
                
                
                415,867
                
                
                
                -34
                %Departures
      flown
                
                
                56,598
                
                
                
                43,114
                
                
                
                -24
                %Passenger
      load factor (3)
                
                
                55.9
                %
                
                
                54.1
                %
                
                
                -3
                %Average
      yield per revenue passenger mile (4)
                
                $
                0.70
                
                
                $
                0.67
                
                
                
                -4
                %Revenue
      per available seat miles (5)
                
                $
                0.39
                
                
                $
                0.36
                
                
                
                -7
                %Operating
      costs per available seat mile (6)
                
                $
                0.49
                
                
                $
                0.48
                
                
                
                -3
                %Fuel
      cost per available seat mile (9)
                
                $
                0.13
                
                
                $
                0.08
                
                
                
                -37
                %Average
      passenger fare (7)
                
                $
                140.62
                
                
                $
                143.68
                
                
                
                2
                %Average
      passenger trip length (miles) (8)
                
                
                202
                
                
                
                216
                
                
                
                7
                %Aircraft
      in service (end of period)
                
                
                23
                
                
                
                23
                
                
                
                0
                %Fuel
      cost per gallon (incl taxes & fees)
                
                $
                3.36
                
                
                $
                2.00
                
                
                
                -40
                %





1.  “Available
seat miles” or “ASMs” represent the number of seats available for passengers in
scheduled flights multiplied by the number of scheduled miles those seats are
flown.


37


2.  “Revenue
passenger miles” or “RPMs” represent the number of miles flown by revenue
passengers.


3.
“Passenger load factor” represents the percentage of seats filled by revenue
passengers and is calculated by dividing revenue passenger miles by available
seat miles.


4.
“Average yield per revenue passenger mile” represents the average passenger
revenue received for each mile a revenue passenger is carried.


5.
“Revenue per available seat mile” or “RASM” represents the average total
operating revenue received for each available seat mile.


6.
“Operating cost per available seat mile” represents operating expenses divided
by available seat miles.


7.
“Average passenger fare” represents passenger revenue divided by the number of
revenue passengers carried.


8.
“Average passenger trip length” represents revenue passenger miles divided by
the number of revenue passengers carried.


9. “Fuel
cost per available seat mile” represents fuel cost divided by the number of
available seat miles.





Net Income and
Operating Income





The Net loss for the year ended
December 31, 2009 was $7.5 million compared to a net loss of $14.8
million for the year ended December 31, 2008.





Our Net loss in 2009 was affected by
two significant non-cash charges; (1) a trade name impairment pre-tax charge of
$0.7 million related to the Academy; and (2) a valuation allowance of $2.0
million related to the write-down of the reported value of the deferred tax
asset.  In terms of operations, our Net loss in 2009 was also
significantly affected by significantly lower demand of 29% as measured by
Revenue passenger miles.





Our Net loss in 2008 was affected by
two significant non-cash charges; (1) a goodwill impairment pre-tax charge of
$2.7 million related to the Academy; and (2) a valuation allowance of $4.0
million related to the write-down of deferred tax assets. In terms of
operations, our net loss in 2008 was also significantly affected by the
unprecedented rise in fuel prices during 2008, as well as a charge of
$4.8 million related to loss on the sale of its fleet of eight Embraer
aircraft and increased maintenance expenses related to engine overhaul expenses
for the Embraer aircraft.





The year-over-year improvement in
operating results for the year ended December 31, 2009 was primarily
attributable to lower fuel prices, and to a lesser degree, capacity reductions
and cost controls compared to last year. Additionally, in 2008, the Airline
incurred a charge of $4.8 million related to loss on the sale of its fleet
of eight Embraer aircraft. The following table identifies the operating profit
or loss from each of our respective operating components:




(In
      thousands)
              
              Year
      Ended December 31,2008
              
              
              2009Airline
      and charter
              
              $
              (6,944
              )
              
              $
              3,084Academy
              
              
              (3,063
              )
              
              
              (886
              )Total
      income (loss) from operations
              
              
              (10,007
              )
              
              
              2,198Less:
      General and administrative
              
              
              4,038
              
              
              
              5,122Consolidated
      income (loss) from operations
              
              $
              (14,045
              )
              
              $
              (2,924
              )





Loss on Sale of
its Fleet of Eight Embraer Aircraft.  During the third and
fourth quarters of 2008, we completed the sale of our fleet of eight Embraer
Brasilia aircraft for a total gross purchase price of $12.8 million. As a result
of these sales, we raised cash of approximately $5.1 million, net of expenses
and the repayment of $7.2 million of senior bank debt during July 2008. As a
result of these transactions, the Company recognized a pre-tax loss of $4.8
million during 2008.





Impairment
Charges. We review for the impairment of identifiable intangible assets
at least annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable in accordance with the
provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. Our Goodwill
of $5,094,000 and Trade name for $0.7 million was recorded in connection with
the acquisition of the Academy and consisted of the excess of cost over the fair
value of net assets acquired.





Operating profits and cash flows of the
Academy in 2008 were lower than expected due to the negative impact on student
enrollment caused by industry-wide capacity reductions and pilot furloughs due
to high fuel prices and a declining economy. Given these circumstances, the
remaining goodwill value was eliminated by recognition of an impairment charge
of $2.7 million in the Consolidated Statement of Operations for the year ended
December 31, 2008. In 2009, due to 3 consecutive years of operating losses and
continued low student enrollment demand due to the ongoing recessionary impact
on the airline industry the trade name value was eliminated by recognition of an
impairment charge of $0.7 million in the Consolidated Statement of Operations
for the year ended December 31, 2009.




38




Revenue.  Total
revenue declined 17% to $87.3 million in 2009 from $105.3 million in 2008. The
overall revenue decrease was due principally to a 27 % capacity reduction in
2009 that led to a 33% decline in passenger revenue during 2009, offset by an
increase $4.2 million of charter revenue during 2008 resulting from the
increased Cuba charter revenues associated with the relaxation of travel
restrictions for Cuban Americans by the U.S. Government. The following table
identifies the revenue contribution from each of our respective operating
components:


(In
      thousands)
              
              Year
      Ended December 31,2008
              
              
              2009
              
              
              %
      ChangeRevenueAirline
      passenger revenue
              
              $
              88,527
              
              
              $
              59,753
              
              
              
              -32.5%Essential
      Air Service
              
              
              2,512
              
              
              
              8,302
              
              
              
              230.5%Charter,
      Academy and other  revenue
              
              
              14,217
              
              
              
              19,249
              
              
              
              35.4%Total
      Revenue
              
              $
              105,256
              
              
              $
              87,304
              
              
              
              -17.1%





Airline Passenger
Revenue.  Airline passenger revenue decreased 32.5% for 2009
compared to 2008.  This decrease was primarily attributable to a 34%
decrease in the number of passengers carried, partially offset by a 2% increase
in average fares.  Unit revenue, or revenue per available seat mile,
for 2009 declined 4% from 2008. The passenger revenue declines are primarily due
to capacity reductions implemented in October 2008 to align capacity more
closely with declining demand due to a weakened economy.





The decline in airline passenger
revenue was partially offset by an increase of $5.8 million of Essential
Air Service revenue from the Department of Transportation for the full year of
2009 as compared to the October 2008 initiation of five new routes from
Continental Airline’s Cleveland hub in.





We reduced our available seat mile
capacity for 2009 by 27% compared to 2008. Our average passenger fare increased
during 2009 to $143.68 from $140.62 during 2008. The increased fares and the
excess baggage fees (included in Charter and other revenue) helped to offset
reduced revenue passengers carried.





Charters, Other
Revenue and Academy.  Charter and other revenue increased 50%
to $17.2 million for 2009 from $11.5 million for 2008. Revenue from the Cuba
charter was $12.2 million for 2009 compared to $8.0 million for 2008 resulting
from the relaxation of travel restrictions for Cuban Americans by the U.S.
government.





Academy revenue decreased 25% for 2009
compared to 2008.  The decrease was due to lower pilot attrition rates at
the Airline that resulted in a decline in intercompany revenue charged to
Gulfstream for pilot training, as well as fewer commercial pilot students due to
a contraction of demand for pilots within the airline industry.





Airline Operating
Expenses. The following table presents the Airline’s operating expenses,
before general and administrative expenses and the elimination of intercompany
expenses, for 2008 and 2009:


Airline Operating
      ExpensesTwelve
      Months Ended December 31,
              
              
              Percentage
      of Airline Revenue(In
      thousands)
              
              2008
              
              
              2009
              
              
              Percent
      Change
              
              
              2008
              
              
              2009Flight
      operations
              
              $
              14,556
              
              
              $
              15,636
              
              
              
              7.4%
              
              
              
              14.2%
              
              
              
              18.3%Aircraft
      fuel
              
              
              30,350
              
              
              
              13,918
              
              
              
              -54.1%
              
              
              
              29.6%
              
              
              
              16.3%Aircraft
      rent
              
              
              5,911
              
              
              
              6,093
              
              
              
              3.1%
              
              
              
              5.8%
              
              
              
              7.1%Maintenance
              
              
              24,478
              
              
              
              21,625
              
              
              
              -11.7%
              
              
              
              23.9%
              
              
              
              25.4%Passenger
      service
              
              
              21,759
              
              
              
              19,352
              
              
              
              -11.1%
              
              
              
              21.2%
              
              
              
              22.7%Promotion
      & sales
              
              
              6,623
              
              
              
              4,986
              
              
              
              -24.7%
              
              
              
              6.5%
              
              
              
              5.8%Depreciation
      and amortization
              
              
              2,754
              
              
              
              1,218
              
              
              
              -55.8%
              
              
              
              2.7%
              
              
              
              1.4%Loss
      on sale of prop. & equip.
              
              
              4,754
              
              
              
              -
              
              
              NM
              
              
              
              4.6%
              
              
              
              0.0%$
              111,185
              
              
              $
              82,828
              
              
              
              -25.5%
              
              
              
              108.4%
              
              
              
              97.1%


39




Flight
Operations. Major components of flight operations expense include pilot,
flight attendant and other operations personnel compensation, pilot training
expenses and wet-lease (aircraft, crews, and fuel) costs for charter
flights.  Flight operations expenses for 2009 increased by 7% to $15.6
million compared to $14.6 million for 2008.





Wet lease costs attributable to
Charters increased $2.9 million. The remaining flight operations costs declined
primarily due to capacity reductions instituted during 2008 in conjunction with
the sale of the Embraer aircraft





Aircraft Fuel.The average price per gallon for jet fuel for the year ended
December 31, 2009 was $2.00, compared to $3.36


for the
year ended December 31, 2008 as a result of favorable commodity market
conditions. Fuel declined as a percent of airline revenue to 16.3% for 2009
from 29.6% for 2008.





Aircraft
Rent. Aircraft rent is related to the lease costs associated with our 23
Beech 1900D aircraft. Aircraft rent for the March 2009 quarter included an
additional expense of $203,000 associated with a lease provision obligating the
Company to repay past aircraft rent concessions, if future jet fuel prices
declined below a certain threshold. The maximum cumulative adjustment of this
lease provision was $312,000, all of which has been recognized as of December
31, 2009. Aircraft rent expense for 2008 included lease expense for 27 aircraft
for a portion of the year..





Maintenance.
Major components of maintenance expense include compensation, repair parts and
materials, and expenses incurred from third party service providers required to
maintain our aircraft engines and other flight equipment. Maintenance expense
decreased 12% to $21.6 million for 2009 compared to $24.5 million for 2008. The
decrease in maintenance and repairs expense in the year ended December 31, 2009
was primarily attributable the capacity reductions instituted during 2008
primarily due to the sale of the Embraer aircraft offset by additional
maintenance expenses associated with the Cleveland hub, which began operation in
October 2008 and expenses associated with enhanced maintenance
operations.





Passenger
Service. Major components of passenger service expense include ground
handling services, airport counter and gate rentals, compensation paid to
airport employees, passenger liability insurance, security and miscellaneous
passenger-related expenses.Passenger service
expense decreased 11% to $19.4 million for the year ended December 31, 2009
compared to $21.8 million for the year ended December 31, 2008 and was primarily
attributable to capacity reductions, reduced flights at certain higher-cost
airports, as well as lower interrupted trip expenses. These lower expenses were
partially offset by higher passenger service costs for our Cuba charter
operation.





Promotion and
Sales. Major components of promotion and sales expense include credit
card and travel agent commissions, frequent flyer program costs and reservation
system fees. Promotion and sales expense declined 24.7% to $5.0 million for the
year ended December 31, 2009 compared to $6.6 million for 2008, due primarily to
a 34% decline in passengers compared to the same period last year





Depreciation and
amortization expense. Depreciation and amortization expense decreased to
$1.5 million for the year ended December 31, 2009 from $2.8 million for 2008.
This decrease was primarily due to the sale of our fleet of eight Embraer
aircraft during the third quarter of 2008.





General and
Administrative and Academy Operating Expense.Our general and
administrative expenses include the expenses of the Academy, as set forth in the
following table:




Consolidated
      general and administrativeTwelve
      Months Ended Dec. 31,
              
              
              Percent(In
      thousands)
              
              2008
              
              
              2009
              
              
              ChangeGeneral
      and administrative expenses
              
              $
              4,038
              
              
              $
              5,122
              
              
              
              26.8%Academy
      expenses
              
              
              3,072
              
              
              
              2,229
              
              
              
              -27.4%Consolidated
      general and administrative
              
              $
              7,110
              
              
              $
              7,351
              
              
              
              3.4%
  General and administrative expenses,
excluding Academy expenses, increased 26.8% to $5.1 million for the year ended
December 31, 2009 compared to $4.0 million for 2008. Most of these increases
were attributable to public-company expenses, including Sarbanes-Oxley
compliance and the recognition of a loss contingency related to an FAA proposed
civil penalty, as well as related expenses for legal and consulting
services.




40




Academy expenses decreased by 27.4% to
$2.2 million for the year ended December 31, 2009 compared to $3.1 million for
2008, primarily due to lower expenses associated with fewer
students.





Non-Operating
Income and Expense





Interest expense increased to $2.3 for
the year ended December 31, 2009 compared to $1.3 for the year ended December
31, 2008. The increase was primarily due to interest expense, debt discount and
issuance expenses related to the $6.1 million of debentures issued in
September 2008.





Other non-operating expense increased
$260,000 due to amortization of the discount associated with the derivative
warrant liability related to the Senior secured debenture.





Income
Taxes





The Company's net deferred tax assets
before valuation allowance as of December 31, 2009 totaled $8.1 million, most of
which relates to net operating losses that expire in various years through 2029. The net
deferred tax asset amount of $2.0 million included in the balance sheet as of
December 31, 2008 was fully reserved of December 31, 2009. The Company
increased the valuation allowance during 2009 based on both the uncertain
economic environment and the Company’s current liquidity position.





Liquidity
and Capital Resources





Overview





Liquidity refers to the liquid
financial assets available to fund our business operations and financial
obligations. These liquid financial assets consist of cash as well as short-term
investments. As of December 31, 2009, our cash and cash equivalents balance was
$2.3 million, and we had a negative working capital of $13.1 million. As of
December 31, 2008, our cash and cash equivalents balance was $3.2 million,
and we had a negative working capital of $8.2 million.





For the
year ended December 31, 2009, we generated less cash flow from operations
than initially projected at the beginning of the year due to lower revenue and
higher fuel costs than forecasted. From October 2008 to December
31, 2009, we also repaid over $4.4 million of debt and
restructured creditor obligations.





During
the second-half of 2009, Gulfstream experienced significant deterioration in its
revenue environment, which, combined with rising fuel costs, resulted in greater
than anticipated losses and pressure on its liquidity outlook.  While
part of the revenue weakness was the result of recessionary economic conditions,
the situation was made particularly acute by new low-fare competition in certain
of our markets.





With an
increasingly weakened balance sheet, Gulfstream found it necessary to attract
new capital beginning in the fourth quarter of 2009. With liquidity needs
becoming more urgent, in January 2010 the airline found itself in an
unsustainable financial situation.  As such, the Company retained
Berger Singerman and Mesirow Financial Advisors to assist in its restructuring
and financing activities.  Although the Company believes that its
revenue and liquidity will improve in future periods, the Company continued to
actively seek short-term financing to meet its near-term liquidity requirements
and to allow sufficient time to significantly increase its equity capital base
to support long-term growth opportunities, as well as the purchase of its
twenty-one (21) aircraft leased from Raytheon Aircraft Credit
Corporation.





These
near-term financing transactions and restructuring efforts, which are described
below, are essential due to our current liquidity position, as well as several
additional factors, including a highly seasonal business, the ongoing risk posed
by a relatively weak economy, the potential for continued volatility in the
price of jet fuel, the necessity for funds to satisfy or compromise civil
penalties proposed by the Federal Aviation Administration, and scheduled
payments of debt and restructured creditor obligations over the next two
years.




41




We can
make no assurance that our efforts to improve liquidity or to obtain longer-term
growth-oriented equity financing will be completed successfully, that we will
have adequate funds to satisfy or compromise the civil penalties proposed by the
FAA or that alternative sources of capital will be available to us. If
additional equity capital is not available in the next several months, we would
likely experience a significant liquidity shortfall before the end of 2010, and
would be unable to fund continued operations or meet our financial
obligations.





Conversion of $1 million Subordinated
Convertible Debenture




At the
October 20, 2009 Annual Meeting of shareholders, the Company’s shareholders
approved a reduction in the conversion price to $1.975 from $3.00 relating to
the $1 million Subordinated Convertible Debenture issued to Gulfstream
Funding I, LLC in September 2008. The conversion to equity of the debenture and
accrued interest expense was effective on October 20, 2009 and resulted in
the issuance of 578,342 shares of the company’s common stock.





Issuance
of $1.5 million of Subordinated Notes




On
October 7, 2009, the Company issued a subordinated note to Gulfstream
Funding II, LLC (“GF II”) for $1.5 million that matured on January 15,
2010 and bore interest at 12%. On January 15, 2010, the Company and GF II
agreed to enter into one or more definitive agreements to extend the maturity
date of the Note and to provide for the conversion of the outstanding principal
amount of the Note and all accrued and unpaid interest thereon (collectively,
the “Debt”) into preferred stock of the Company at current market prices. Upon
the execution of such agreements by the Company and GF II, the Company will file
a Current Report on Form 8-K disclosing the transaction and including such
agreements as exhibits.  In addition, GF II waived any event of
default, which would have occurred due to the Company’s failure to repay the
Debt on the maturity date.





Sale
of Units of Common Stock and Warrants




On
January 29, 2010, the Company consummated the closing under a Unit Purchase
Agreement with seven accredited investors (the “Investors”) pursuant to which
the Company sold to the Investors units of its securities (the “Units”)
consisting of (i) one share of common stock of the Company, par value $0.01 per
share (the “Common Stock”); and (ii) warrants to purchase three-quarters of a
share of Common Stock (the “Warrants”), at a per Unit purchase price of $1.40
for aggregate gross proceeds of $327,300. Upon completion of the closing, the
Company sold to the Investors an aggregate of 233,786 shares
of  Common Stock and Warrants to purchase an aggregate of 175,339
shares of Common Stock.





Forbearance
Agreement with Raytheon Aircraft Credit Corporation




On
February 11, 2010, Gulfstream received a notice of default (the “Default
Notice”) from Raytheon Aircraft Credit Corporation (“RACC”), Gulfstream’s
principal aircraft lessor, pursuant to which RACC notified Gulfstream that it
was in default of the payment of certain obligations under Airliner Operating
Lease Agreements, each dated August 7, 2003, and amended on August 2,
2005, and March 15, 2006 (the “Lease Agreements”), by and between
Gulfstream and RACC, pursuant to which Gulfstream currently leases from RACC
twenty-one (21) Beech 1900D aircraft. The default resulted from Gulfstream’s
failure to make its scheduled lease payments for the month of February 2010.
Accordingly, RACC demanded that Gulfstream make such payments on or before
February 19, 2010. The failure to make such payment would have given RACC
the right to terminate the Lease Agreements, thereby
prohibiting  Gulfstream from using the leased aircraft. Also pursuant
to the Default Notice, RACC claimed that Gulfstream is in default in certain
other payments under a separate agreement dated as of December 19, 2008 by
and between Gulfstream and RACC (the “December  Agreement”), which defaults
are also considered to be defaults under the Lease Agreements. RACC indicated in
the Default Notice that if Gulfstream made the required payments under the Lease
Agreements by February 19, 2010, it is prepared to discuss the manner in
which the Company can cure or otherwise address the December Agreement
defaults.




On February 19, 2010, Gulfstream
made the required payment to RACC, which allowed it to continue operating the
aircraft covered by the Lease Agreements. In addition, on February 19,
2010, RACC advised Gulfstream that it would forebear from exercising any of its
rights under the December Agreement or the Lease Agreements, provided that
Gulfstream remains current in payment of future lease payments and provides RACC
by April 20, 2010 with a mutually acceptable debt and financial restructuring
plan that provides for a feasible basis to enable Gulfstream to continue to meet
its ongoing financial obligations under the Lease Agreement and commence to
repay restructured amounts due under the December Agreement, which
presently amount to approximately $3 million. We are also engaged in related
restructuring discussions with Pratt & Whitney Canada with respect to
approximately $2.5 million of past-due creditor obligations. See Note (9) Engine Return Liability and the
Restructuring of Other Obligations, for background information regarding
this matter.




42




Although we believe that we will be
able to establish a plan that is acceptable to RACC and Pratt & Whitney
Canada regarding the restructuring of current obligations, there can be no
assurance that we will be able to do so, or will not otherwise default in future
payments under the RACC Lease Agreements or the Pratt & Whitney
Agreement.





Issuance
of $1.0 million of Senior Secured Notes and Warrants




On
February 26, 2010, the Company completed a $1,000,000 debt financing pursuant to
purchase agreements for senior secured notes and warrants with accredited
investors and/or qualified institutional purchasers (the “Investors”) pursuant
to which the Company sold to the Investors (i) 12% Senior Secured Notes due
December 31, 2010 in an aggregate principal amount of $1,000,000 (the “Notes”);
and (ii) warrants, exercisable at $1.22 per share (the “Exercise Price”)
(subject to customary anti-dilution adjustments) and expiring February 28, 2015
(the “Warrants”), to purchase an aggregate of 409,827 of shares of the Company’s
common stock (the “Common Stock”).  The number of Warrants issued to
each Investor was determined by dividing (a) 50% of the principal amount of the
Notes purchased by the Investors, by (b) the Exercise Price of the
Warrants.  However, if the Notes are not prepaid by the Company in
full by June 30, 2010, then the shares of Common Stock issuable upon exercise of
the Warrants (the “Warrant Shares”) would represent 100% of the original
$1,000,000 principal amount of the Notes divided by the Exercise Price.
Accordingly, if the Notes are not paid in full by June 30, 2010, assuming no
anti-dilution adjustments to the Warrant Shares or the Exercise Price, the
aggregate of 409,827 Warrant Shares would increase to 819,654 Warrant
Shares.





Forbearance
Agreement with Shelter Island Opportunity Fund and Amendment to
Debenture




In August
2008, the Company obtained an original $5,100,000 debt financing with Shelter
Island Opportunity Fund LLC (“Shelter Island”) pursuant to a securities purchase
agreement (the “Shelter Island Agreement”) and a secured original issue discount
debenture due August 31, 2011 (the “Debenture”) of which $3,659,000 was
outstanding as of February 26, 2010.   As part of such financing,
the Company granted Shelter Island a first priority lien and security interest
on all of the assets and properties of the Company and its subsidiaries, issued
certain warrants to Shelter Island and granted Shelter Island a right to “put”
the warrants to the Company for $3,000,000. In December 2009 and January 2010,
Shelter Island agreed to defer the December and January interest payments under
the Debenture.





On
February 26, 2010, the Company and Shelter Island entered into a Forbearance
Agreement and Amendment to Debenture (the “Forbearance Agreement”) which reduced
the Company’s potential liability under the put option from $3,000,000 to
$1,050,000 and rescheduled certain principal and interest payments under the
Debenture to reduce near-term liquidity requirements.





Under the
terms of the Forbearance Agreement, Shelter Island agreed to forbear from
exercising its rights and remedies under the Shelter Island Agreement until the
occurrence of (a) the failure by the Company to comply with the terms, covenants
and agreements of the Forbearance Agreement; and (b) the occurrence of any event
of default under the Debenture or the Shelter Island Agreement (collectively, a
“Termination Event”).  One of the covenants to be performed by the
Company under the Forbearance Agreement is the obligation of the Company to
raise an additional $1.5 million of debt or equity financing by March 26, 2010,
subsequently changed to March 31, 2010, or otherwise satisfy Shelter Island that
the Company has adequate liquidity and working capital. Shelter Island confirmed
on March 31, 2010 that the Company complied with this covenant based primarily
on the first closing under a Series A Convertible Preferred Stock Purchase
Agreement described below under the heading, Sale of up to $2.5 million of
Convertible Preferred Stock and Warrants.





Pursuant
to the Forbearance Agreement the parties amended the Debenture, as follows (i)
the Company shall pay interest on the outstanding principal amount monthly in
cash, commencing March 31, 2010; (ii) the Company shall pay monthly installments
on the outstanding principal amount commencing April 30, 2010 and on the last
trading day of each month thereafter until the August 31, 2011 maturity date of
the Debenture; and (iii) the Company may prepay all or any portion of the
outstanding principal amount of the Debenture together with a premium equal to
5% of outstanding principal amount being prepaid; provided that, if such
prepayment is made in 2011, there shall be no premium
applicable.  The Company, each of its subsidiaries and Shelter
Island also entered into an Omnibus Amendment to the Guaranty Agreements
pursuant to which, without limitation, the parties agreed to amend the existing
guarantees to include the repayment of the Shelter Island Note.




43




As
indicated above, Shelter Island currently holds a first priority lien and
security interest on all of the assets of the Company and its
subsidiaries.  Under the terms of the Intercreditor Agreement, Shelter
Island agreed to subordinate its first priority lien on the accounts receivable
of the Company and its subsidiaries and the proceeds thereof, to the lien
granted to the Investors under the Security Agreement with TBI to the extent of
the deferred principal and accrued interest under the Notes.  Shelter
Island retained its first priority security interest in all of the other assets
and properties of the Company and its subsidiaries.





As
contemplated in the original warrant to purchase Common Stock issued to Shelter
Island on August 31, 2008 (the “Original Warrant”), on February 26, 2010 the
Company divided the Original Warrant into (a) a warrant in the form of the
Original Warrant initially exercisable into 70,000 shares of Common Stock (the
“Put Warrant”); and (b) a warrant in the form of the Original Warrant (the
“Remaining Warrant”, and together with the Put Warrant, the "Divided Warrants")
such that the aggregate number of shares of Common Stock of Company that are
initially exercisable under the Divided Warrants (inclusive of the 70,000 Shares
of Common Stock initially issuable under the Put Warrant) shall equal, in the
aggregate, 15% of the fully-diluted shares of Company Common Stock issued and
outstanding immediately following consummation of the transactions contemplated
under the Forbearance Agreement and the TBI Purchase Agreement, after giving
pro-forma effect to the conversion into Common Stock of all Company convertible
securities and the exercise of all Company granted options and warrants,
including the Warrants issued to the Investors.  As a result of
consummation of the above transactions with Shelter Island and the TBI
Investors, the aggregate number of shares issuable upon conversion of the
Divided Warrant is 914,189 shares of Company Common Stock.





The
Company and Shelter Island also entered into an Amendment to the Put Option
Agreement (the “Put Option Amendment”) dated as of August 31, 2008 under which,
among other things, the exercise price applicable for all the put shares under
the put option was reduced from $3,000,000 to $1,050,000, or $15.00 per
share.





As
consideration for its financial accommodations, the Company paid Shelter Island
an additional $250,000 as a forbearance fee, by delivering a $250,000 promissory
note (the “Shelter Island Note”) due on the earlier of (i) August 31, 2011, and
(ii) the date the Debenture is permitted or required to be paid in accordance
with its terms.  The Shelter Island Note accrues interest at a rate of
9% per annum and is payable in cash on a monthly basis beginning on February 26,
2011.





Sale
of up to $2.5 million of Convertible Preferred Stock and Warrants




On March
31, 2010, Gulfstream International Group, Inc. consummated the first closing
under a Series A Convertible Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with 17 accredited investors (the “Investors”) pursuant to which the
Company sold to the Investors (i) an aggregate of 118,500 shares of Series A
Convertible Preferred Stock, par value $0.001 and stated value $10.00 per share
(the “Preferred Shares”), convertible into 1,185,000 shares of common stock of
the Company, par value $0.01 per share (the “Common Stock”); and (ii) 5-year
warrants to purchase an aggregate of 592,500 shares of Common Stock (the
“Warrants”), representing 50% of the number of shares of Common Stock issuable
upon conversion of the Preferred Shares, for aggregate gross proceeds of
$1,043,000 (the “Offering”). The Warrants expire on March 31, 2013 and are
exercisable into shares of Common Stock at an exercise price equal to $1.75 per
share, subject to adjustment as set forth in the Warrants.





Pursuant
to the Certificate of Designation, Preferences and Rights of the Series A
Convertible Preferred Stock of the Company which was filed with the State of
Delaware on March 31, 2010 (the “Certificate of Designation”), each Preferred
Share is convertible into 10 shares of Common Stock. In addition, the Preferred
Shares pay an annual dividend at the rate of 12% per annum, payable quarterly,
on the last business day of each December, March, June and September (each a
“Dividend Payment Date”), payable on each Dividend Payment Date as follows: (i)
60% of each quarterly dividend (based on an annual rate of 7% per annum) shall
be payable in cash, and (ii) 40% of each quarterly dividend (based on an annual
rate of 5% per annum) shall be payable either in cash, or at the sole option of
the Company, in additional shares of Common Stock, calculated for such purposes
by dividing the amount of the quarterly dividend then payable by 100% of the
market price of the Common Stock on such Dividend Payment
Date.  Unless previously converted into Common Stock, all Preferred
Shares outstanding on the earlier to occur of (a) the date on which the average
of the market prices of the Common Stock for any 20 consecutive trading days
shall be $2.00 or higher, or (b) 5 years from the Preferred Shares issuance
date, shall be automatically converted into Common Stock at the Conversion Price
then in effect.





In
addition, on March 31, 2010, 4 of the 7 purchasers of the Company’s units
consisting of one share of Common Stock (the “Shares”), and warrants to purchase
three-quarters of a share of Common Stock (the “Prior Warrants”) which was
consummated on January 29, 2010 (the “Prior Offering”) and described above under
the heading,Sale of Units of Common Stock and
Warrants, entered into a letter agreement with the Company (the “Exchange
Agreement”) pursuant to which such purchasers agreed to exchange their Shares
and Prior Warrants for Preferred Shares and Warrants, under the same terms and
conditions applicable to Investors in the Offering.  Such purchasers
also agreed that the Company shall have no further obligations or liabilities in
connection with the transaction documents executed and delivered with respect to
the Prior Offering, including, without limitation, the Unit Purchase Agreement,
the Registration Rights Agreement and the Prior Warrant, each dated as of
January 29, 2010, and each of which are terminated in any and all respects.
SeeNote (20) Subsequent
Events, Sale of Units of Common Stock and Warrants.




44




On March
31, 2010, the Company and the Investors entered into a Registration Rights
Agreement under which the Company is obligated to file a registration statement
(the “Registration Statement”) with the Securities and Exchange Commission (the
“SEC”) registering the shares of Common Stock issuable upon conversion of the
Preferred Shares and upon exercise of the Warrants for resale by the Investors
on or prior to April 30, 2010 (the “Filing Date”).  In addition, the
Company agreed to use its best efforts to cause the SEC to declare the
Registration Statement effective by the earlier of (i) 150 days following the
Filing Date; and (ii) 180 days following the Filing Date if the SEC conducts a
full review of the Registration Statement.





In
connection with the first closing of the Offering, the Company paid/issued the
placement agent (i) cash commissions in the amount of 9% of the total purchase
price received by the Company in the first closing; (ii) a non-accountable
expense allowance equal to 2% of the total purchase price received by the
Company in the first closing; and (iii) Warrants to purchase 114,730 shares of
Common Stock, which represents 11% of the total purchase price received by the
Company in the first closing.





The following table summarizes key cash
flow information for the years ended December 31, 2008 and 2009:


Twelve
      Months Ended December 31,Cash
      Flow Data:
              
              2008
              
              
              2009(in
      thousands)Cash
      Flow Provided by (used in):Operating
      Activities
              
              $
              (8,447
              )
              
              $
              (718
              )Investing
      Activities
              
              
              10,484
              
              
              
              (836
              )Financing
      Activities
              
              
              (2,760
              )
              
              
              599Net
      increase (decrease) in cash and cash equivalents
              
              $
              (723
              )
              
              $
              (955
              )


Operating
activities





Cash used in operating activities was
$0.7 million for the year ended December 31, 2009. During this period, cash
was used for payments of the Senior debenture and to creditors for restructured
obligations that reduced our accounts payable - restructured by
$0.7 million and our engine return liability by $1.7 million and to
fund the operating loss.





Cash used in operating activities was
$8.4 million for the year ended December 31, 2008. During this period, cash was
used primarily to fund the operating loss, which was significantly impacted by
substantial increases in jet fuel costs and increased maintenance expenses
related primarily to our fleet of eight Embraer Brasilia aircraft.





Investing
activities





Cash used in investing activities for
the year ended December 31, 2009 was $0.8 million and was primarily due to
acquisition of aircraft equipment.





Cash provided by investing activities
for the year ended December 31, 2008 was $10.5 million and primarily resulted
from the sale of our fleet of eight Embraer Brasilia aircraft during the third
quarter of 2008.





Financing
activities





Cash provided by financing activities
for the year ended December 31, 2009 was primarily due to the consummation
of a Note Purchase Agreement for $1.46 million but partially offset by
payments of $1.2 million on its Senior Debentures





Cash used by financing activities for
the year ended December 31, 2008 included debt repayments of $8.7 million,
including aircraft financing for aircraft sold in 2008. but offset by
$6.1 million of face value from the issuance of debentures, and
$0.9 million of net proceeds from the sale to the underwriter of
over-allotment shares associated with our initial public offering in
December 2007.





45




Debt
and Other Contractual Obligations





Maintenance
Hangar Lease at Hollywood-Fort Lauderdale Airport





We
perform our airplane maintenance and repairs primarily at our maintenance hangar
located at Hollywood-Fort Lauderdale Airport. The lease for Gulfstream’s
principal maintenance facility expires at the end of May 2010. Broward County
has been considering for some time an improvement to FLL that will eventually
result in a teardown of Gulfstream’s maintenance hangar and require Gulfstream
to seek an alternate location for a successor maintenance hangar on the
airfield. We are presently in negotiations with Broward County for a lease at a
nearby existing site at FLL.





Off-Balance
Sheet Arrangements





We do not have any off balance sheet
arrangements that are reasonably likely to have a current or future effect on
our financial condition, revenues, results of operations, or liquidity or
capital expenditures.





Seasonality





Gulfstream’s business is subject to
substantial seasonality, primarily due to leisure and holiday travel patterns,
particularly in the Bahamas. We experience the strongest demand from
February to July, and the weakest demand from August to December,
during which period we typically incur operating losses. As a result, our
operating results for a quarterly period are not necessarily indicative of
operating results for an entire year, and historical operating results are not
necessarily indicative of future operating results.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.


Our
market risks relate primarily to changes in aircraft fuel costs and in interest
rates.





Aircraft
Fuel. In the past, we have not experienced difficulties with fuel
availability and we currently expect to be able to obtain fuel at prevailing
market prices in quantities sufficient to meet our future needs. Pursuant to our
contract flying arrangements with our code share partners, we will bear the
economic risk of fuel price fluctuations.





We were a
party to derivative instruments for the purpose of hedging the risks of
increases in jet fuel prices through February 2009 covering approximately
20% of our estimated fuel usage. These fuel hedge contracts were established
effective September 1, 2008.





We
recognized a loss of $337,000 for the March 2009 quarter to settle
unfavorable fuel hedge contracts that terminated in February 2009. Since
February 28, 2009, we are not a party to any derivative or other
arrangement designed to hedge against or manage the risk of an increase in fuel
prices. Accordingly, our statements of operations and cash flows after that date
will be affected by changes in the price and availability of fuel.





Interest
Rates. The rate of interest of our senior debentures is based on the
higher of 11%, or prime plus 4%, which currently equates to 7.25%. Therefore,
our statement of operations and our cash flows are not exposed to moderate
changes in interest rates, unless the prime rate increases to more than twice
its present rate.





46





ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.




The
information set forth below should be read together with Management’s Discussion
and Analysis of Financial Condition and Results of Operations appearing
herein.




Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders of Gulfstream International Group,
Inc.:





We have
audited the accompanying consolidated balance sheets of Gulfstream International
Group, Inc. as of December 31, 2008 and 2009 and the related consolidated
statements of operations, changes in stockholders’ equity (deficit) and cash
flows for the years then ended.  These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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 audits 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 audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008 and 2009 and the results of operations and cash flows for the years
then  ended, in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Notes 1, 20 and 21. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





/s/
Cherry, Bekaert & Holland, L.L.P.





Cherry,
Bekaert & Holland, L.L.P.


April 14,
2010


47
  GULFSTREAM
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands)  As
      of December 31,2008
                
                
                2009AssetsCurrent
      AssetsCash
      and cash equivalents
                
                $
                3,215
                
                
                $
                2,260Accounts
      receivable, net
                
                
                4,205
                
                
                
                3,426Expendable
      parts and aircraft  fuel
                
                
                1,194
                
                
                
                1,210Prepaid
      expenses
                
                
                648
                
                
                
                1,135Total
      Current Assets
                
                
                9,262
                
                
                
                8,031Property
      and EquipmentFlight
      equipment
                
                
                3,366
                
                
                
                3,809Other
      property and equipment
                
                
                1,373
                
                
                
                1,546Less
      accumulated depreciation
                
                
                (1,946
                )
                
                
                (2,658
                )Total
      Property and Equipment
                
                
                2,793
                
                
                
                2,697Intangible
      assets, net
                
                
                3,778
                
                
                
                2,837Deferred
      tax assets
                
                
                2,032
                
                
                
                -Other
      assets
                
                
                1,505
                
                
                
                1,213Total
      Assets
                
                $
                19,370
                
                
                $
                14,778Liabilities
      and Stockholders' Equity (Deficit)Current
      LiabilitiesAccounts
      payable and accrued expenses
                
                $
                9,566
                
                
                $
                12,694Accounts
      payable - restructured, current portion
                
                
                2,761
                
                
                
                2,606Long-term
      debt, current portion
                
                
                529
                
                
                
                3,864Engine
      return liability, current portion
                
                
                2,432
                
                
                
                1,168Air
      traffic liability
                
                
                1,491
                
                
                
                1,391Deferred
      tuition revenue
                
                
                728
                
                
                
                929Total
      Current Liabilities
                
                
                17,507
                
                
                
                22,652Long
      Term LiabilitiesAccounts
      payable, restructured, net of current portion
                
                
                988
                
                
                
                426Long-term
      debt, net of current portion
                
                
                2,850
                
                
                
                -Engine
      return liability, net of current portion
                
                
                461
                
                
                
                -Warrant
      liability
                
                
                2,229
                
                
                
                2,639Total
      Liabilities
                
                
                24,035
                
                
                
                25,717Stockholders'
      Equity (Deficit)Common
      stock
                
                
                30
                
                
                
                36Additional
      paid-in capital
                
                
                13,088
                
                
                
                14,236Common
      stock warrants
                
                
                252
                
                
                
                61Accumulated
      deficit
                
                
                (17,721
                )
                
                
                (25,272
                )Accumulated
      other comprehensive loss
                
                
                (314
                )
                
                
                -Total
      Stockholders' Equity (Deficit)
                
                
                (4,665
                )
                
                
                (10,939
                )Total
      Liabilities & Stockholders' Equity (Deficit)
                
                $
                19,370
                
                
                $
                14,778
 The
accompanying notes are an integral part of these consolidated financial
statements
  48
  GULFSTREAM
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (In thousands, except per share
data)
 Years
      Ended December 31,2008
                
                
                2009Operating
      RevenuesPassenger
      revenue
                
                $
                88,526
                
                
                $
                59,753Academy,
      charter and other revenue
                
                
                16,730
                
                
                
                27,551Total
      Operating Revenues
                
                
                105,256
                
                
                
                87,304Operating
      ExpensesFlight
      operations
                
                
                12,859
                
                
                
                15,005Aircraft
      fuel
                
                
                30,350
                
                
                
                13,918Maintenance
                
                
                24,478
                
                
                
                21,625Passenger
      and traffic service
                
                
                21,759
                
                
                
                19,352Aircraft
      rent
                
                
                5,911
                
                
                
                6,093Promotion
      and sales
                
                
                6,623
                
                
                
                4,986General
      and administrative
                
                
                7,110
                
                
                
                7,351Depreciation
      and amortization
                
                
                2,754
                
                
                
                1,218Intangible
      asset impairment
                
                
                2,703
                
                
                
                680Loss
      on sale of equipment
                
                
                4,754
                
                
                
                -Total
      Operating Expenses
                
                
                119,301
                
                
                
                90,228Operating
      profit (loss)
                
                
                (14,045
                )
                
                
                (2,924
                )Non-operating
      (expense) incomeInterest
      expense
                
                
                (1,306
                )
                
                
                (2,332
                )Interest
      income
                
                
                38
                
                
                
                2Loss
      on extinguishment of debt
                
                
                -
                
                
                
                -Other
      (expense) income
                
                
                5
                
                
                
                (265
                )Total
      non-operating (expense) income
                
                
                (1,263
                )
                
                
                (2,595
                )Profit
      (loss) before income tax provision (benefit)
                
                
                (15,308
                )
                
                
                (5,519
                )Income
      tax provision (benefit)
                
                
                (509
                )
                
                
                2,032Net
      profit (loss)
                
                $
                (14,799
                )
                
                $
                (7,551
                )Net
      Income (Loss) per share:Basic
                
                $
                (5.00
                )
                
                $
                (2.45
                )Diluted
                
                $
                (5.00
                )
                
                $
                (2.45
                )Shares
      used in calculating net income (loss) per share:Basic
                
                
                2,957
                
                
                
                3,076Diluted
                
                
                2,957
                
                
                
                3,076
 The
accompanying notes are an integral part of these consolidated financial
statements
  49
  GULFSTREAM INTERNATIONAL GROUP, INC.
AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS (In
thousands)


Years
      Ended December 31,2008
                
                
                2009Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (14,799
                )
                
                $
                (7,551
                )Adjustment
      to reconcile net income (loss) to net cashprovided
      by (used in) operating activities:Impairment
      charge on assets held for sale
                
                
                4,754
                
                
                
                -Depreciation
      and amortization
                
                
                2,754
                
                
                
                1,218Impairment
      of intangible assets
                
                
                2,703
                
                
                
                680Deferred
      income tax provision (benefit)
                
                
                (524
                )
                
                
                2,032Amortization
      of deferred finance costs
                
                
                713
                
                
                
                1,284Stock-based
      compensation
                
                
                50
                
                
                
                101Write-off
      of unamortized overhaul costs
                
                
                573
                
                
                
                -Amortization
      of warrant discount
                
                
                69
                
                
                
                258Provision
      for bad debts
                
                
                6
                
                
                
                28Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
                
                
                (1,301
                )
                
                
                751Decrease
      (increase) in expendable parts and fuel
                
                
                (303
                )
                
                
                (16
                )Decrease
      (increase) in prepaid expense
                
                
                (109
                )
                
                
                (487
                )Decrease
      (increase) in due from affiliates
                
                
                640
                
                
                
                -Decrease
      (increase) in other assets
                
                
                (763
                )
                
                
                1Increase
      (decrease) in accounts payable and accrued expenses
                
                
                (6,303
                )
                
                
                3,324Increase
      (decrease) in accounts payable - restructured
                
                
                3,918
                
                
                
                (717
                )Increase
      (decrease) in deferred revenue
                
                
                541
                
                
                
                101Increase
      (decrease) in engine return liability
                
                
                (1,066
                )
                
                
                (1,725
                )Net
      cash provided by (used in) operating activities
                
                
                (8,447
                )
                
                
                (718
                )Cash
      flows from (used in) investing activities:Acquisition
      of property and equipment
                
                
                (1,427
                )
                
                
                (836
                )Net
      Proceeds from sale of equipment
                
                
                11,911
                
                
                
                -Net
      cash provided by (used in) investing activities
                
                
                10,484
                
                
                
                (836
                )Cash
      flows from (used in) financing activities:Unrealized
      loss on fuel hedge contracts
                
                
                (314
                )
                
                
                314Proceeds
      from borrowings
                
                
                6,100
                
                
                
                1,460Repayments
      of debt
                
                
                (9,352
                )
                
                
                (1,175
                )Proceeds
      from issuance of common stock
                
                
                806
                
                
                
                -Net
      cash provided by (used in) financing activities
                
                
                (2,760
                )
                
                
                599Net
      increase (decrease) in cash and cash equivalents
                
                
                (723
                )
                
                
                (955
                )Cash,
      beginning of period
                
                
                3,938
                
                
                
                3,215Cash,
      end of period
                
                $
                3,215
                
                
                $
                2,260Supplemental
      disclosure of cash flow information:Cash
      paid during the period for interest
                
                $
                500
                
                
                $
                -Cash
      paid during the period for income taxes
                
                
                -
                
                
                
                -
  Supplemental
      disclosure of non-cash investing and financing
  activities:1]
      The Company reclassified a warrant of $191 from equity to a warrant
      liability at its fair value during 2009.2]
      The Company converted the junior debenture to equity. The debt and
      associated accrued interest net of unamortized costs resulted in an
      increase to Additional paid-in capital of $1018. See Note 11 - Long Term
      Debt3]
      In connection with the issuance of debentures in 2008, the Company issued
      warrants with a discounted net present value of $2,3514]
      In 2009, long term debt was reclassifed as disclosed in Note 11- Long Term
      Debt
 The
accompanying notes are an integral part of these consolidated financial
statements.
  50
  GULFSTREAM
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
   CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 Twelve
Months Ended December 31, 2008 and 2009 (In
thousands)
 Common
      Stock
                
                
                Additional Paid-in
                
                
                Common Stock
                
                
                Accumulated Other
                
                
                Retained
      EarningsNumber of
      Shares
                
                
                Amount
                
                
                Capital
                
                
                Warrants
                
                
                Comprehensive
      Loss
                
                
                (Deficit)
                
                
                TotalBalance
      December 31, 2007
                
                
                2,840
                
                
                $
                28
                
                
                $
                12,234
                
                
                $
                61
                
                
                $
                -
                
                
                $
                (2,922
                )
                
                $
                9,401Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (14,799
                )
                
                
                (14,799
                )Change
      in fair value of fuel hedge contracts
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (314
                )
                
                
                
                
                
                
                (314
                )Issuance
      of common stock upon exercise by underwriter of overallotment option, net
      of costs
                
                
                120
                
                
                
                2
                
                
                
                804
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                806Share
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                50
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                50Issuance
      of warrants to debenture holders
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                191
                
                
                
                -
                
                
                
                -
                
                
                
                191Balance
      December 31, 2008
                
                
                2,960
                
                
                $
                30
                
                
                $
                13,088
                
                
                $
                252
                
                
                $
                (314
                )
                
                $
                (17,721
                )
                
                $
                (4,665
                )Net
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (7,551
                )
                
                
                (7,551
                )Conversion
      of Subordinated Debt and Accrued Interest, net of deferred costs to Common
      Stock
                
                
                573
                
                
                
                6
                
                
                
                1,012
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,018Change
      in fair value of fuel hedge contracts
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                314
                
                
                
                -
                
                
                
                314Share
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                101
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                101Reclassification
      of debenture holders warrants to liabilities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (191
                )
                
                
                -
                
                
                
                -
                
                
                
                (191
                )Issuance
      of Common stock to debenture holders
                
                
                23
                
                
                
                -
                
                
                
                35
                
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                35Balance
      December 31, 2009
                
                
                3,556
                
                
                $
                36
                
                
                $
                14,236
                
                
                $
                61
                
                
                $
                -
                
                
                $
                (25,272
                )
                
                $
                (10,939
                )
  The
accompanying notes are an integral part of these consolidated financial
statements.
 51





GULFSTREAM
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(1)  Nature
of Operations and Summary of Significant Accounting Policies




Basis
of Presentation




Gulfstream International Group, Inc.
was incorporated in Delaware in December 2005 as Gulfstream Acquisition Group,
Inc., and changed its name to Gulfstream International Group, Inc. in June
2007.  References to “the Company,” “we,” “our,” and “us,” refer to
Gulfstream International Group, Inc. and either or both of Gulfstream or the
Academy. We were formed for the purpose of acquiringGulfstream
International Airlines, Inc. (“Gulfstream”), a wholly-owned subsidiary G-Air
Holdings Corp., Inc. (“G-Air”), and Gulfstream Training Academy, Inc.
(“Academy”), collectively referred to as the “Company”.




Gulfstream Air Charter, Inc. (“GAC”), a
related company which is owned by Thomas L. Cooper, operates charter flights
between Miami and Havana.  GAC is licensed by the Office of Foreign
Assets Control of the U. S. Department of the Treasury as a carrier and travel
service provider for charter air transportation between designated U. S. and
Cuban airports.




Pursuant to a services agreement
between Gulfstream and GAC dated August 8, 2003 and amended on March 14, 2006,
Gulfstream provides use of its aircraft, flight crews, the Gulfstream name,
insurance, and other personnel, including passenger, ground handling, security,
and administrative. Gulfstream also maintains the financial records for GAC. The
agreement restricts the right of the owner of GAC to transfer the stock of GAC
to anyone except the Company and any sales to the Company of GAC stock would be
at a nominal price. The results of the Cuba charter business are consolidated as
a variable interest entity for the years ended December 31, 2009 and December
31, 2008 pursuant to the requirements of generally accepted accounting
principles in the United States (“U.S. GAAP”)




All intercompany accounts and
transactions have been eliminated in the consolidated financial
statements.




In
connection with the preparation of the consolidated financial statements and in
accordance with the recently issued guidance by the FASB, the company evaluated
subsequent events after the balance sheet date through April 14,
2010.




Company
Operations




Gulfstream is a regional air carrier
providing scheduled passenger service to numerous destinations in Florida and
the Bahamas.  Gulfstream also provides scheduled passenger service
between Continental’s Cleveland hub and five smaller cities in Pennsylvania,
West Virginia and New York in conjunction with Essential Air Service Routes
awarded by the Department of Transportation. As of December 31, 2009, Gulfstream
operated a fleet of twenty-three 19-seat Beechcraft “1900 Turboprop” passenger
aircraft.  Gulfstream was incorporated in the state of Florida in
November of 1988, and operated initially as an “on-demand” charter airline
serving the South Florida area, Cuba and the Bahamas.  Following the
Department of Transportation’s (“DOT”) approval, Gulfstream began scheduled
flight service in December of 1990.




In January of 1997, Gulfstream signed a
comprehensive five-year Alliance Agreement with Continental Airlines
(“Continental”) to act as their “Continental Connection” in Florida and the
Bahamas effective April 6, 1997.  Under the terms of this agreement,
Continental handles all reservations, ticketing and collections for Gulfstream
and all flights appear as Continental flight numbers.  Gulfstream
receives passengers connecting from Continental hubs in Newark, Cleveland and
Houston.  The agreement with Continental was amended and extended in
December 1999, August 2003 and March 2006. The March 2006 amendment provides
that the term will expire no sooner than November 3, 2011.  After such
date, the Company or Continental may terminate the agreement, with or without
cause, upon one hundred eighty (180) days written notice. Gulfstream currently
also has alliance agreements with United Airlines and Copa
Airlines.




The Academy was incorporated in March
1997, under the laws of the State of Florida and operates as a flight training
academy in Fort Lauderdale, Florida.  The Academy provides flight
training services to licensed commercial pilots. The Academy’s principal program
is its First Officer Program, which allows participants to qualify as a FAA
Regulations Part 121 airline pilot in four months.  Following
qualification, students spend 250 hours flying as a FAA Regulations Part 121
first officer at Gulfstream.  By attending the Academy, students are
able to enhance their ability to secure a permanent position with a commercial
airline.  The Academy’s graduates are typically hired by various
regional airlines, including Gulfstream.





52




Earnings
Per Share




Basic net income per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period presented.  Diluted net loss per share
reflects the potential dilution that could occur from common stock issuable
through stock based compensation including stock options, restricted stock
awards, warrants and other convertible securities, as well as warrants issued by
Gulfstream.




Year
      ended December 31,2008
              
              
              2009Net
      loss
              
              $
              (14,799,000
              )
              
              $
              (7,551,000
              )Effect
      of GIA warrants
              
              
              -
              
              
              
              -Net
      loss - diluted
              
              $
              (14,799,000
              )
              
              $
              (7,551,000
              )Weighted
      average of shares outstanding - basic and diluted
              
              
              2,957,000
              
              
              
              3,124,000Loss
      per common share:Basic
              
              $
              (5.00
              )
              
              $
              (2.45
              )Diluted
              
              $
              (5.00
              )
              
              $
              (2.45
              )





In 2008
and 2009, there were 1,577,000 and 744,000 shares respectively, attributable to
stock options and warrants that have been excluded from the weighted average
shares outstanding because the effect on losses per share would have been
anti-dilutive.




Use
of Estimates




The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America 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.




Cash
and Cash Equivalents




The Company considers all highly liquid
investments with a maturity of three months or less to be cash
equivalents.  Cash equivalents consist of a money market
account.




At various times during the year, the
Company may maintain cash balances in excess of the amount insured by the
Federal Deposit Insurance Corporation (FDIC).  Effective October 2008
through December 2009, banks were able to elect to participate in the FDIC
“Transaction Account Guarantee Program”. For participating banks certain
accounts are fully guaranteed by the FDIC through June 30, 2010. The exposure to
the Company is solely dependent upon daily bank balances, the respective
strength of the financial institutions and the level of the FDIC
insurance.  At December 31, 2008 and December 31, 2009, amounts in
excess of the then current FDIC limits totaled approximately $0 and $1.7,
million respectively.




Accounts
Receivable




Trade receivables and other receivables
are carried at their estimated collectible amounts.  Trade credit is
generally extended on a short-term basis; thus trade receivables do not bear
interest.  Trade accounts receivable are periodically evaluated for
collectability based on past credit history with customers and their current
financial position.




Expendable
Parts and Fuel




Expendable parts and aircraft fuel are
carried at cost and recorded in a current asset account.  Expendable
parts and fuel are charged to expense as they are used.




Property
and Equipment




Flight equipment and other property and
equipment are stated at cost.  Depreciation is being provided on the
straight-line method over the estimated useful lives of the related assets as
follows:  Airframes years; flight simulators – five to seven years;
baggage handling, ground support, etc. - five to seven years; office equipment,
fixtures and equipment - five years; computer equipment and software – three
years; leasehold improvements - five years; and vehicles – three to five years.
Residual values estimated for airframes and aircraft rotable parts are 20
percent of cost.


53




Long-Lived
and Intangible Assets




Identifiable intangible assets are
amortized using the straight-line method over the period of expected benefit,
unless they were determined to have indefinite lives.




Long-lived assets and intangible assets
subject to amortization to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
be impaired.   The Company records an impairment loss if the
undiscounted future cash flows are found to be less than the carrying amount of
the asset.  If an impairment loss has occurred, a charge is recorded
to reduce the carrying amount of the asset to fair value.  Long-lived
and intangible assets that are to be disposed of which are subject to
amortization are reported at the lower of carrying amount or fair value less
cost to sell.




Intangible assets that have indefinite
useful lives are not amortized, but are tested at least annually for impairment,
or if circumstances change that will more likely than not reduce the fair value
of the reporting unit below its carrying amount.





There was
no impairment recognized during 2008 for long-lived and identifiable intangible
assets. During 2009, as a result of net operating losses for the 3 years
including 2009 and the uncertain economic performance in future periods the
Academy recognized an impairment of the full value of the trade name of
$680,000.




Goodwill




Goodwill consists of the excess of cost
of an acquired entity over the fair value of the net assets
acquired.  Goodwill is not amortized, but is tested at least annually
for impairment, or if circumstances change that will more likely than not reduce
the fair value of the reporting unit below its carrying amount.  As
more fully described in Note 4, during the year ended December 31, 2008, the
Company recorded an impairment charge of $2.7 million, related to
goodwill.




Fair
Value of Financial Instruments




The carrying amounts of financial
instruments including cash, accounts receivable, accounts payable and accrued
expenses approximate fair value as of December 31, 2008 and 2009, as a
result of the relatively short maturity.  The Company believes the
carrying amount of its long-term senior and subordinated debt approximate fair
value based upon the interest rates for these instruments being near current
market rates. Derivatives are valued at fair value.




Maintenance
and Repair Costs




The Company accounts for major overhaul
costs using the direct expense method for leased aircraft and the built-in
overhaul method for aircraft it owned.




Gulfstream operates under an
FAA-approved continuous inspection and maintenance program. Routine maintenance
and repairs are charged to operations as incurred. We account for major engine
maintenance activities for our Beechcraft 1900D leased aircraft on the direct
expense method. Under this method, major engine maintenance is performed under a
long-term contract with a third party vendor, whereby monthly payments are made
on the basis of hours flown and are charged to expense as incurred.




In 2008, major engine maintenance for
our Embraer 120 Brasilia owned aircraft was based on the built-in overhaul
method.  The built-in overhaul method is based on segregation of the
aircraft costs into those that should be depreciated over the useful life of the
aircraft and those that require overhaul at periodic intervals. Thus, the
estimated cost of the overhaul component included in the purchase price was
allocated separately from the cost of the airframe. The initial overhaul
component was determined based on estimated flying hours remaining to
overhaul.  These capitalized overhaul components are amortized based
on the ratio of monthly hours flown to estimated hours remaining to
overhaul.  When major overhaul expenses are incurred, any unamortized
balances are charged to current operating expense and the cost of the new
overhaul is capitalized and amortized in the same manner.  During
2008, the Embraer 120 Brasilia were sold. See Note 3Property and
Equipment.




Revenue
Recognition




Passenger revenue associated with
airline tickets is recognized when transportation service is provided or when
the ticket expires, rather than when a ticket is sold.




54




Tickets
expire one year from the date of issue.  The Company is required to
charge certain taxes and fees on these tickets.  These taxes and fees
include U.S. federal transportation taxes, federal security charges, airport
passenger facility charges and foreign arrival and departure
taxes.  These taxes and fees are legal assessments on the
customer.  As we have a legal obligation to act as a collection agent
with respect to these taxes and fees, these amounts are not included in
passenger revenue.  These taxes and fees are recorded as a liability
when the amounts are collected and the liability is relieved when payments are
made to the applicable government agency or operating carrier.




The amounts associated with passenger
tickets sold by the Company are included in the consolidated balance sheet as
air traffic liability until the transportation service is
provided.  Those passenger tickets used during each period are
specifically identified and included in the results of operations for the
periods in which travel is completed.Charter revenue, excess baggage fees, and
miscellaneous revenue are recognized when transportation service is provided.
Enrollment fee revenue is based upon actual training hours used by the students
of our pilot training academy.  The remaining unused hours represent
deferred tuition revenue.




Frequent
Flyer Awards




In connection with its several code
share agreements, Gulfstream participates in the respective frequent flyer
programs of its code share partners.  However, our code share partners
are responsible for the overall administration and costs of the
program.




Passengers on our airline, who are also
participants in the frequent flyer programs of our code share partners, can earn
mileage credits in those programs for travel on our airline. Gulfstream incurs
costs from its code share partners for mileage credit earned by these passengers
in accordance with rates specified in the respective code share
agreements.




In addition, participants in these
frequent flyer programs may use mileage accumulated in those programs to obtain
free trips on one of Gulfstream’s flights.  Gulfstream receives
revenue from its code share partners for travel awards redeemed by its
participants on the Airline’s flight segments in accordance with rates specified
in the respective code share agreements.




Debt
Issue Expenses and Discounts




Debt issue expenses and discounts are
amortized using the effective interest method over the term of the respective
financial instrument.




Income
Taxes




Federal, state and local income taxes
are calculated and recorded on the current period's activity in accordance with
the tax laws and regulations that are in effect.  Deferred tax assets
and liabilities are recorded for the expected future tax consequences of events
that have been included in the consolidated financial statements or tax return.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. The differences relate primarily to reserve
or provisional accounts, depreciation and amortization, and deferred
revenues.




The Company also recognizes a deferred
tax asset for the expected value of the future tax benefit recognized as a
result of its net operating losses.




A deferred tax asset valuation
allowance is established when it is more likely than not that all or some
portion of the deferred tax assets will not be realized.  The net
deferred income tax assets, after reducing the deferred tax assets by the
valuation allowance, represent the income tax benefits that are expected to be
realized.




Stock-Based
Compensation




New, modified and unvested share
based payment transactions with employees, such as stock options and restricted
stock, are measured at fair value on the grant date and recognized as
compensation expense over the vesting period.




See Note (13) Stock Options for a
description of the Company’s Stock Incentive Plan, and information regarding
stock options granted during 2009.




55




Recently
Issued Accounting Pronouncements




In June
2009, the Financial Accounting Standards Board ("FASB") issued ASC 810
(originally issued as SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)". Among other items, ASC 810 responds to concerns about the application of
certain key provisions of FIN 46(R), including those regarding the transparency
of the involvement with variable interest entities. ASC 810 is effective for
calendar year companies beginning on January 1, 2010. The Company does not
believe the adoption of ASC 810 will have a significant impact on its financial
position, results of operations, cash flows, or disclosures.





On
September 23, 2009, the FASB ratified Emerging Issues Task Force Issue No. 08-1,
"Revenue Arrangements with Multiple Deliverables" (EITF 08-1). EITF 08-1 updates
the current guidance pertaining to multiple-element revenue arrangements
included in ASC Subtopic 605-25, which originated primarily from EITF 00-21,
also titled "Revenue Arrangements with Multiple Deliverables." EITF 08-1 will be
effective for annual reporting periods beginning January 1, 2011 for
calendar-year entities. The Company utilizes the accounting guidance provided in
"Revenue Arrangements with Multiple De1iverables" in the timing of recognition
of revenue associated with frequent flyer credits with business partners. The
Company does not believe the adoption of ASC605-25 will have a significant
impact on its consolidated financial statements





The
Company adopted new accounting guidance related to its accounting for certain
warrants. The new guidance clarifies the determination of whether an instrument
or an embedded feature is indexed to an entity’s own stock, which would qualify
as a scope exception under U.S. GAAP accounting for derivative instruments and
hedging activities. Accordingly, the warrant was reclassified from equity to a
liability and is valued at its fair value.




(2)  Accounts
Receivable





At December 31, 2008 and 2009,
receivables consisted primarily of ticket sales. These amounts are reflected on
the balance sheet, net of an allowance for doubtful accounts of $28,000 and
$54,000 at December 31, 2008 and 2009, respectively.





As a result of the code sharing
agreements disclosed in Note 1, Gulfstream has a significant concentration of
its revenue and receivables with Continental.  Accounts receivable
from Continental as of December 31, 2008 and 2009 amounted to $1,850,000 and
$1,360,000, or 41% and 40% of our total accounts receivable,
respectively.




(3)  Property
and Equipment




Property and equipment consisted of the
following at December 31, 2008 and 2009 (in thousands):




2008
              
              
              2009Aircraft
              
              $
              300
              
              
              $
              300Aircraft
      rotable parts
              
              
              1,787
              
              
              
              1,956Flight
      equipment
              
              
              1,280
              
              
              
              1,553Ground
      equipment
              
              
              783
              
              
              
              902Computer
      equipment and software
              
              
              123
              
              
              
              142Office
      equipment
              
              
              71
              
              
              
              100Leasehold
      improvements
              
              
              244
              
              
              
              246Vehicles
              
              
              151
              
              
              
              1554,739
              
              
              
              5,354Less:
      accumulated depreciation
              
              
              1,946
              
              
              
              2,658Property
      and equipment, net
              
              $
              2,793
              
              
              $
              2,696





On June
26, 2008, Gulfstream entered into an Aircraft Purchase and Sale Agreement (the
“Agreement”) to sell seven of Gulfstream’s total of eight Embraer EMB-120ER
aircraft, including the two Pratt & Whitney PW118 engines installed on each
aircraft, for a total gross purchase price of $12,250,000. The eighth aircraft
was sold to a separate party, including the two Pratt & Whitney PW118
engines installed on the aircraft, for a total gross purchase price for
$565,000. As a result of these transactions, the Company recognized a loss of
$4.8 million during the year ended December 31, 2008.




Depreciation and amortization of
property and equipment amounted to $2,454,000 and $874,000 for 2008 and 2009,
respectively.





56




(4)  Goodwill




Goodwill
of $5.1 million was recorded in connection with the acquisition of the Academy
and consisted of the excess of cost over the fair value of net assets acquired,
(See Note 1Nature of Operations and Summary of
Significant Accounting Policies) and was written down to $2.7 million
prior to 2008. In 2008, an unprecedented rise in jet fuel prices and declining
economic conditions caused a negative impact on airline travel. The contraction
of the airline industry and the furlough of some commercial airline pilots
caused a significant reduction in the demand for services provided by the
Academy. As a result, the fair value of the Academy’s goodwill at December 31,
2008 was estimated based on the present value of expected future cash flows, and
the carrying amount of the Academy goodwill was determined to exceed its fair
value. Therefore, an impairment charge of $2.7 million for the remainder of the
Academy goodwill was recognized in the Consolidated Statement of Operations for
the year ended December 31, 2008.




(5)  Intangible
Assets




Identifiable intangible assets are
amortized using the straight-line method over the period of expected benefit,
unless they were determined to have indefinite lives.




The Company has deemed the operating
certificate to have an indefinite useful life.  An airline must have
an operating certificate to provide air service of any
kind.  Gulfstream’s certificate was issued under Part 121 of Federal
Air Regulations (“FAR’s”) as written and enforced by the FAA.  Once a
certificate is issued, it is retained indefinitely as long as Gulfstream
complies with various FAA standards including crew training and rest
requirements, maintenance and inspection programs, safety equipment, security
procedures, etc.  It is Gulfstream’s intent to maintain such FAA
standards in order to retain its certificate indefinitely.




The Company has also deemed the
Academy’s trademark to have an indefinite useful life. Factors indicating
potential impairment include, but are not limited to, significant decreases in
the market value of the long-lived assets, a significant change in the condition
of the long-lived assets and operating cash flow losses associated with the use
of the long-lived assets.  The Academy’s operations have produced
operating losses in the 3 years ending December 31, 2009.  Management
believes that the operating cash flow losses associated with the use of this
long-lived asset, do not support the value of the trade name and therefore it
was recognized as an impairment charge during 2009.




The
following table sets forth the components of intangible assets as of December
31, 2008 and 2009 (in thousands):




January
      1,
                
                Year
      ended December 31,Useful
      life
                
                2008
                
                Impairment
                
                Amortization
                
                
                2008
                
                
                Impairment
                
                
                Amortization
                
                
                2009GIA
      Affiliation Agreement with Continental
                74
      months
                
                $
                1,143
                
                
                
                $
                (275
                )
                
                $
                868
                
                
                
                
                
                $
                (261
                )
                
                $
                607GIA
      FAR 121 Operating Certificate
                Indefinite
                
                
                2,230
                
                
                
                
                
                
                
                $
                2,230
                
                
                
                
                
                
                
                
                
                $
                2,230Gulfstream
      Training Academy Tradename
                Indefinite
                
                
                680
                
                
                
                
                
                
                
                $
                680
                
                
                $
                (680
                )
                
                
                
                
                
                $
                -$
                4,053
                
                $                   
                    -
                
                $
                (275
                )
                
                $
                3,778
                
                
                $
                (680
                )
                
                $
                (261
                )
                
                $
                2,837
  Accumulated
amortization was $1,002 as of December 31, 2009.  Estimated
amortizationexpense for the years ending December 31, is as follows (in
thousands):
  2010
                
                
                2612011
                
                
                2612012
                
                
                852013$
                607
 57
  (6)
Other Assets
 
 Other assets at
December 31, 2008 and 2009 are comprised of the following (in
thousands):
 
 2008
                  
                  
                  2009Deferred
      debt costs
                  
                  $
                  628
                  
                  
                  $
                  390Deposits
                  
                  
                  575
                  
                  
                  
                  544Licenses
      and operating rights
                  
                  
                  283
                  
                  
                  
                  258Other
      assets
                  
                  
                  19
                  
                  
                  
                  21Total
      other assets
                  
                  $
                  1,505
                  
                  
                  $
                  1,213
 
 (7)  Accounts
Payable and Accrued Liabilities
 
 Accounts payable and accrued
liabilities at December 31, 2008 and 2009 are comprised of the following (in
thousands):
 
 2008
                  
                  
                  2009Accounts
      payable
                  
                  $
                  5,134
                  
                  
                  $
                  7,449Accrued
      payroll and payroll burden
                  
                  
                  453
                  
                  
                  
                  502Accrued
      vacation
                  
                  
                  781
                  
                  
                  
                  904Accrued
      taxes
                  
                  
                  623
                  
                  
                  
                  663Accrued
      fuel
                  
                  
                  621
                  
                  
                  
                  1,295Accrued
      leases
                  
                  
                  386
                  
                  
                  
                  360Accrued
      workers compensation
                  
                  
                  21
                  
                  
                  
                  109Accrued
      interest
                  
                  
                  40
                  
                  
                  
                  35Accrued
      audit and legal fees
                  
                  
                  60
                  
                  
                  
                  181Accrued
      Government Security expense
                  
                  
                  56
                  
                  
                  
                  427Accrued
      customer reservation system fees
                  
                  
                  188
                  
                  
                  
                  174Other
      current liabilities
                  
                  
                  1,175
                  
                  
                  
                  510Total
      accounts payable and accrued liabilities
                  
                  $
                  9,566
                  
                  
                  $
                  12,694
 (8)  Fuel Hedge
  
 
    
  (9)   Engine Return Liability and the Restructuring of
Other Obligations
  
  58
 
 
 
 On December 19, 2008, Gulfstream
entered into a restructuring agreement (the “Agreement”) with RACC, as well as
an amended engine maintenance agreement with P&W (the “P&W Agreement”). Pursuant to the Agreement,
Gulfstream agreed to:
 
 (a) Make payments totaling $535,469 by
June 2009, which were made, to RACC for costs and expenses to bring Loaner
Engines that Gulfstream had previously returned to RACC into compliance with
return conditions.
 
 (b) Return to RACC seven of the Loaner
Engines, with the remainder to be returned no later than August 6,
2010.
 
 (c) Make payments for the cost of
repairing and overhauling all 14 engines in the total amount of $2,100,000. They
were to be made in six installments beginning with a payment of $400,000 on
April 30, 2009 and ending with a payment of $100,000 on June 30,
2010.  The Company made aggregate payments of $875,000 during 2009,
and currently owes $1,225,000.
 
 (d) Make quarterly payments to RACC in
an amount equal to 25% of Gulfstream’s excess cash balance in payment for
$700,000 of costs and expenses associated with bringing into compliance with
return conditions four additional leased aircraft and eight engines previously
returned. Following satisfaction of such costs and expenses, the excess cash
payments will be applied, in an amount not to exceed $5,000,000, as a credit to
reduce Gulfstream’s obligations to satisfy end-of-lease return conditions and
then to all other obligations and indebtedness owed to RACC, including past-due
aircraft lease obligations totaling $1,113,000. During 2009 Gulfstream paid
$40,000 pursuant to this provision.
 
 (e) Entered into an amended engine
maintenance agreement with P&W that covers past-due obligations and future
work on the fleet’s engines and the seven remaining Loaner Engines,
and
 
 (f) Established terms of repayment of
indebtedness owing to two other creditors of Gulfstream, which are required by
RACC to be on terms that are no more favorable than the repayment amounts to
RACC set forth in documentation supporting the Agreement. See the following
section “Payment Arrangements with Other Creditors”.
 
 The Agreement provides for certain
events of default. See Note
(20) Subsequent Events, Forbearance Agreement with Raytheon Aircraft Credit
Corporation, for further discussion of the current status of this
matter.
 
 Pratt
& Whitney Payments
 
 The amended P&W Agreement dated
December 1, 2008 is effective from September 1, 2008 through August 31, 2011.
The Agreement required Gulfstream to pay $1,000,000 for past-due obligations,
for which payments were completed by March 2009. In addition, Gulfstream is
obligated to pay a rate per engine flight hour throughout the three years of the
contract, of which $6.78 per engine flight hour is applied to the repayment of
past-due obligations totaling $1,583,000. Beginning in September 2009, the
Company was unable to make the certain weekly payments to P&W per the
amended agreement. As of December 31, 2009, Gulfstream owed P&W $772,000 for
previously restructured rate-based obligations, as well as $829,000 for unpaid
weekly payments. See Note (20)
Subsequent Events, Forbearance Agreement with Raytheon Aircraft Credit
Corporation, for further discussion of the current status of this
matter.
 
 Payment
Arrangements with Other Creditors.
 
 The Agreement requires that the terms
of repayment of indebtedness owing to two other creditors of Gulfstream shall be
on terms that are no more favorable than the repayment terms applicable to RACC.
As such, Gulfstream will repay $376,000 and $326,000, respectively, to two other
creditors in equal monthly installments over 36 months beginning February
2009.  As of December 31, 2009, the aggregate debt owed to these
creditors was $487,000.
 
 59
 
 The
Company did not recognize a gain or loss on restructuring of these
agreements.  The difference between the payments specified by the
terms and the carrying amount of the obligations at the date of the
restructuring has been treated as interest expense.  This interest
expense of $474,889 is being recognized ratably over the period between
restructuring and maturity. For the period ended December 31, 2008 and December
31 2009, the Airline recognized interest expense of $60,000 and $244,000,
respectively. A portion of the obligation, $1,113,000 owed to RACC for past-due
aircraft rent, is payable under a free-cash flow formula as described in the
Agreement.  However, the Agreement provides that the lessor has the
right to demand payment of this balance at its sole discretion and accordingly,
this liability has been classified as current in the accompanying balance
sheet.
 
 (10)   Capital
Transactions
 
 Continental
Warrant
 
 On August 8, 2003, Gulfstream issued a
warrant to Continental to acquire 20% of Gulfstream’s common stock at a cost of
$.001 per share.  The warrant expires on December 31,
2015.  Simultaneous with the acquisition of the stock of G-Air and the
Academy on March 14, 2006, Gulfstream paid $2 million to Continental in return
for a reduction from 20% to 10% in the percentage of Gulfstream common stock it
could purchase based on exercise of the warrant.
 
 The warrant contains certain
anti-dilution and cash dividend provisions that would be effected as if the
warrant had been previously exercised by Continental.  The warrant
also provides for net issue exercise by Continental in lieu of cash payment, as
well as providing a call option to Gulfstream to repurchase the warrant prior to
expiration at aggregate purchase prices ranging between $5.5 million and $7.5
million. The fair value of the warrants at the date of issue is included in
additional paid-in capital in the accompanying consolidated balance
sheets.
 
 Warrants
issued in conjunction with Senior Debentures and Junior
Debentures
 
 Senior
Debentures
 
 st
 
 On
February 26, 2010, the Company and Shelter Island entered into a Forbearance
Agreement and Amendment to Debenture (the “Forbearance Agreement”) which reduced
the Company’s potential liability under the put option from $3,000,000 to
$1,050,000.  Pursuant to the Forbearance Agreement, the original
warrant for 578,870 was divided into (a) a warrant in the form of the original
warrant initially exercisable into 70,000 shares of Common Stock (the “Put
Warrant”); and (b) a warrant in the form of the original warrant (the “Remaining
Warrant”, and together with the Put Warrant, the "Divided Warrants") such that
the aggregate number of shares of Common Stock of Company that are initially
exercisable under the Divided Warrants (inclusive of the 70,000 Shares of Common
Stock initially issuable under the Put Warrant) shall equal, in the aggregate,
15% of the fully-diluted shares of Company Common Stock issued and outstanding
immediately following consummation of the transactions contemplated under the
Forbearance Agreement and the Purchase Agreements, after giving pro-forma effect
to the conversion into Common Stock of all Company convertible securities and
the exercise of all Company options and warrants, including the Warrants issued
to the Investors.  As a result of consummation of the above
transaction with Shelter Island, the aggregate number of shares issuable upon
conversion of the Divided Warrant is 906,206 shares of Company Common Stock.
See Note (20), Subsequent
Eventsfor further discussion of the Forbearance
Agreement.
 
 The Company classified the warrants as
of December 31, 2008 as a liability and recorded an initial value of $2,160,000.
The warrant liability is revalued at the end of each reporting period with the
change in value reported on the Consolidated Statement of Operations. As of
December 31, 2008 and December 31, 2009, the value is $2,229,000 and $2,638,000.
The fair value of the Senior Warrants at the time of issuance was determined
based on the present value of the Company’s guaranteed repurchase price of
$3,000,000 for the shares of stock underlying the Senior
Warrants.
 
 60
 
 In
addition, the Company issued a warrant to the placement agent for the Senior
Debenture transaction (the “Agent Warrant”) to purchase 119,000 shares of the
Company’s common stock at an exercise price of $3.20 per share.  The Agent
Warrant expires on the third anniversary of the transaction closing date.
 The Agent Warrant is subject to anti-dilution adjustment to the exercise
price for future issuances of common stock at a price that is less than the
$3.20 exercise price of this warrant.  The fair value of the Agent Warrant
of $41,000 was determined using the Black-Scholes option pricing
model.
 
 Junior
Debentures
 
 In September 2008, Gulfstream sold to
Gulfstream Funding, LLC (the Holder), $1.0 million in aggregate principal amount
of junior subordinated debentures (the “Junior Debentures”) and a warrant to
purchase 225,000 shares of Gulfstream’s common stock (the “Junior
Warrant”).  The Junior Warrant was exercisable at an exercise price of
$3.20 per share. The Junior Warrant was exercisable through September 16, 2014.
The warrant will be subject to an anti-dilution adjustment for certain future
issuances or deemed issuances of common stock at a price per share of less than
$3.20.
 
 For financial reporting purposes, the
Company recorded a discount of $150,000 to reflect the fair value of the Junior
Warrant issued. The fair value was determined using the Black-Scholes option
pricing model.  Transaction related fees and expenses totaling $35,000
were deferred.  The discount and deferred debt costs were being amortized
over the 38 month term of the Junior Debenture. The Junior Debenture was
convertible into shares of the Company’s common stock at a conversion price of
$3.00 per share. In October, 2009, the Company reduced the conversion price to
the then current fair market value of the Common Stock of $1.975 per share. The
Company subsequently entered into an agreement with Junior Debenture holders and
on October 20, 2009 converted the Junior Debenture and accrued interest
expense into 578,342 shares of the company’s common stock. Upon conversion of
the Junior Debentures, the number of shares issuable under the Junior Warrant
decreased by 58,333 to 166,667.  The following table summarizes
information concerning warrants outstanding:
 
 Warrants
      Issued with 2008Senior
      Subordinated Debt
                  
                  
                  Jr.
      SubordinatedDebtWarrants
      Issuedwith
      2006Subordinated
      Debt
                  
                  
                  Warrants
      Issuedwith
      InitialPublic
      Offering
                  
                  
                  Shelter
      Island
                  
                  
                  Agent
                  
                  
                  Gulfstream
      Funding, LLCOutstanding
      at January 1, 2008
                  
                  
                  46,340
                  
                  
                  
                  64,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  578,870
                  
                  
                  
                  118,750
                  
                  
                  
                  225,000Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2008
                  
                  
                  46,340
                  
                  
                  
                  64,000
                  
                  
                  
                  578,870
                  
                  
                  
                  118,750
                  
                  
                  
                  225,000Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (58,333
                  )Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at December 31, 2009
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  166,667Average
      Exercise Price
                  
                  $
                  5.00
                  
                  
                  $
                  9.60
                  
                  
                  $
                  -
                  
                  
                  $
                  3.20
                  
                  
                  $
                  3.20Exercisable
      at December 31, 2008
                  
                  
                  46,340
                  
                  
                  
                  64,000
                  
                  
                  
                  578,870
                  
                  
                  
                  118,750
                  
                  
                  
                  225,000Exercisable
      at December 31, 2009
                  
                  
                  46,340
                  
                  
                  
                  64,000
                  
                  
                  
                  578,870
                  
                  
                  
                  118,750
                  
                  
                  
                  166,667
 
 61
  (11)  Long-Term
Debt
 
 At December 31, 2008 and 2009,
long-term debt consisted of the following:
 
 2008
                  
                  
                  2009(in
      thousands)Secured
      Senior Debentures; net of debt and discount costs associated with the loan
      of $1,284 and secured by all the company's assets and guaranteed by its
      subsidiaries. The Debentures bear interest at an annual rate of the higher
      of (i) the sum of the pri
                  
                  $
                  2,516
                  
                  
                  $
                  2,376Junior
      Subordinated Debenture; net of debt and discount costs associated with the
      loan of $141. Interest is 12.00% per annum.  The debenture
      converted to Equity in October, 2009. See note 10 "Capital Transactions"
      for further disclosures.
                  
                  
                  859
                  
                  
                  
                  -Subordinated
      Promissory Note; including interest accrued at 12.00% per
      annum.  The maturity date of this note is January 15, 2010. See
      note 20 subsequent events for further disclosures.
                  
                  
                  -
                  
                  
                  $
                  1,488Various
      other notes payable secured by vehicles
                  
                  
                  3
                  
                  
                  
                  -$
                  3,378
                  
                  
                  $
                  3,864Less
      current portion, net of discount and deferred costs
                  
                  
                  529
                  
                  
                  
                  -Total
      Long-term Debt
                  
                  $
                  2,849
                  
                  
                  $
                  3,864
 
 Senior
Debentures
 
 In September 2008, the Company raised
gross proceeds of $5.1 million from the issuance of a secured original issue
discount debenture (the “Senior Debenture”) and warrants to purchase shares of
the Company’s common stock (the “Senior Warrants”). See Note 10 Capital
Transactions.
 
 The transaction was effected pursuant
to a Securities Purchase Agreement (the "Agreement") between the Company and the
lender. The Company received proceeds of $4.1 million net of debt discount and
transaction costs. The net proceeds were used for general corporate purposes and
payment of principal and interest outstanding under the Company’s revolving
credit line. Other significant terms under the Agreement include the
following:
 
 ·
                The
      Company may prepay all or any portion of the balance due together with a
      payment equal to 5% of the amount being
prepaid.
 ·
                Gulfstream
      is subject to certain covenants, including covenants that it have (i)
      consolidated minimum quarterly EBITDA starting in the quarter ending
      December 31, 2008, (ii) six month EBITDA averages starting in the six
      months ending June 30, 2011, (iii) minimum monthly accounts receivable
      balances of $3.5 million, and (iv) minimum monthly cash balances of
      $750,000. The Company was not in compliance with the minimum quarterly
      EBITDA covenant for the quarter ending December 31, 2008. The Company
      obtained a waiver on March 19, 2009 from the lender relating to violation
      of the covenant for consolidated minimum quarterly EBITDA for the quarter
      ended December 31, 2008.  Further the Company was not in
      compliance in the quarters ended September 30, 2009 and December 31, 2009.
      See Note 20 “Subsequent
      Events”
 ·
                The
      Company was required to provide a minimum fuel hedge for a time period of
      no less than six months equivalent to the product of 20% of the forecasted
      monthly fuel usage (in gallons) times the number of months utilized in the
      contract. See Note 8
      “Fuel Hedge”
 ·
                The
      Senior Debenture contains Events of Default, which if not waived by the
      lender, would entitle the lender to accelerate the due date of the Senior
      Debenture. See Note 20
      “Subsequent Events”. The company anticipates it will fail to
      achieve the minimum quarterly EBITDA requirement which is one of the
      Events of Default. Therefore at December 31, 2009 the Company has
      classified all future debenture payments as a short term liability on the
      balance sheet.
 
 For financial reporting purposes, the
Company recorded a discount of $2.2 million to reflect the value of the warrants
issued and $350,000 to reflect the original issue discount.  In addition,
the Company incurred finder’s fees and other related fees and expenses in
connection with this transaction totaling $664,000.See Note (20) Subsequent
Events.
 
 62
 
 Junior
Debenture
 
 In September 2008, the Company issued a
$1,000,000 12% junior subordinated debenture (the “Junior Debenture”) and a
warrant to purchase up to 225,000 shares of the Company’s common stock (the
“Junior Warrant”) to an entity in which members of the Board of Directors of the
Company own a minority interest.  The Junior Debenture is payable in a lump
sum payment due at maturity on November 2011.  Interest is payable at
$50,000 annually plus excess interest accrued but unpaid is due at the end of
the 24th and
36th
month and at maturity. The timing of payment of interest on the junior
debentures in accordance with the above schedule is subject to restrictions
contained in the restructuring agreement with RACC, whereby interest payments on
the junior debentures cannot be made until all payment obligations to RACC are
completed.
 
 The Junior Debenture was convertible
into shares of the Company’s common stock at a conversion price of $3.00 per
share. In October 2009, the Company reduced the conversion price to the then
current fair market value of the Common Stock of $1.975 per share. On
October 20, 2009, the $1 million convertible debenture and the related
interest costs were converted into 578,342 shares of the company’s common
stock.
 
 (12)  Lease
Obligations
 
 Aircraft
Leases
 
 Gulfstream leases twenty-three (23)
aircraft. Two aircraft are leased pursuant to a contract to provide charter
services that is renewable every two years, and requires monthly lease payments
of $17,000 each. Twenty-one (21) aircraft are leased under various
non-cancelable operating lease agreements that require monthly payments of
$21,000 each.  The lease agreements expire in August
2010.  Gulfstream has the option to extend each of these individual
lease agreements for an additional term of at least six (6) months, but no more
than twenty-four (24) months.  Gulfstream is limited to extending no
more than fifteen (15) leases for a duration of more than twelve (12)
months.  It is required to make contingent payments to the lessor
beginning August 1, 2006, and ending on the earlier of the end of the lease
terms or at a time when the cumulative contingent payments equal
$315,000.  The contingent payments are computed based upon fuel costs
per gallon being below specified amounts.   In 2008 and 2009,
contingent payments were made such that the maximum cumulative payment level has
been achieved.
 
 Facility
Leases
 
 Gulfstream leases office and hangar
space for its headquarters, airport facilities and certain other equipment under
non-cancelable operating leases expiring at various dates through December 31,
2025.
 
 During August 2005, Gulfstream and the
Academy entered into building facility lease agreements with a related
corporation controlled by the major stockholders of G-Air.  The
agreements called for both companies to occupy their facilities beginning
January 1, 2006 and ending December 31, 2025.  Rental payments made by
Gulfstream and the Academy, respectively, in 2008 were $220,000 and $202,000 and
in 2009 were $198,000 and $208,000.
 
 At December 31, 2009, the total future
minimum rental commitments under all the above operating leases are as follows
(in thousands):
 
 2010
                  
                  
                  4,9342011
                  
                  
                  3632012
                  
                  
                  3442013
                  
                  
                  3542014
                  
                  
                  365Thereafter
                  
                  
                  4,009$
                  10,369
 
 For 2008 and 2009, lease expense under
these operating leases was $8,057,000, and $7,652,000
respectively.
 
 (13)   Stock
Options
 
 Our Stock Incentive Plan (“Plan”) was
adopted by the board of directors of Gulfstream and approved by our stockholders
in 2006. It was further amended in 2009. The 2009 amendment increased the
authorized number of shares in the plan from 350,000 to 650,000 as the plan had
less than 1% of its shares available for future grants.
 
 63
 
 Our Plan
provides for the granting of incentive stock options, non-incentive stock
options, stock appreciation rights, or other stock-based awards to those of our
employees, directors or consultants who are selected by members of a committee
comprised of members of our board of directors’ compensation committee (the
“Committee”). On the date of the grant, the exercise price must equal at least
100% of the fair market value in the case of incentive stock options, or 110% of
the fair market value with respect to optionees who own at least 10% of the
total combined voting power of all classes of stock. The plan authorizes
650,000 shares of our common stock to be issued under the plan. The
Committee administers the plan.
 
 The fair value of each stock option
granted is estimated on the date of the grant using the Black-Scholes option
pricing model.  The Company uses an estimated forfeiture rate of 0%
due to limited experience with historical employee forfeitures.  The
Black-Scholes option pricing model also requires assumptions for risk free
interest rates, dividend rate, stock volatility and expected life of an option
grant.  The risk free interest rate is based on the U.S. Treasury Bill
rate with a maturity based on the expected life of the options. Dividend rates
are based on the Company's dividend history.  The stock volatility
factor is based on the NYSE Amex Exchange Airline Stock
Index.  Expected life is determined using the “simplified method”
permitted by Staff Accounting Bulletin No. 107 of the Securities and
Exchange Commission, since the Company does not have sufficient historical
expected life experience.  The fair value of each option grant is
recognized as compensation expense over the vesting period of the option on a
straight line basis.
 
 The
following table shows the assumptions used and weighted average fair value for
grants in the year ended December 31, 2009. There were no options granted in the
year ended December 31, 2008:
 2009Expected
      annual dividend rate
                  
                  
                  0.0
                  %Risk-free
      interest rate
                  
                  
                  1.18-1.58
                  %Average
      expected life (years)
                  
                  
                  6Expected
      volatility of common stock
                  
                  
                  45.10
                  %Forfeiture
      rate
                  
                  
                  0.0
                  %Weighted
      average fair value of option grants
                  
                  $
                  0.88
 
 The following table summarizes
information about stock option transactions for the years ended December 31,
2008 and 2009:
 
 2008
                    
                    
                    2009Number
      of Options
                    
                    
                    Weighted-
      Average Exercise Price
                    
                    
                    Number
      of Options
                    
                    
                    Weighted-
      Average Exercise Price
                    
                    
                    Weighted-
      Average Remaining Contractual Term (Years)
                    
                    
                    Aggregate
      Intrinsic ValueOutstanding
      at beginning of year
                    
                    
                    210,324
                    
                    
                    $
                    5.00
                    
                    
                    
                    210,324
                    
                    
                    $
                    5.00
                    
                    
                    
                    6.8
                    
                    
                    $
                    -Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    138,000
                    
                    
                    
                    2.00
                    
                    
                    
                    9.1
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at end of year
                    
                    
                    210,324
                    
                    
                    $
                    5.00
                    
                    
                    
                    348,324
                    
                    
                    $
                    3.81
                    
                    
                    
                    7.3
                    
                    
                    $
                    -Exercisable
      at December 31, 2009
                    
                    
                    
                    
                    
                    
                    
                    206,724
                    
                    
                    $
                    5.00
                    
                    
                    
                    6.8
                    
                    
                    $
                    -Exercisable
      at December 31, 2008
                    
                    
                    
                    
                    
                    
                    
                    149,124
                    
                    
                    $
                    5.00
                    
                    
                    
                    7.6
                    
                    
                    $
                    -
 
 64
  The
following table summarizes the status of non-vested stock options as of December
31, 2008 and 2009:
 
 Number
      of Shares
                  
                  
                  Weighted
      Average Grant-Date Fair ValueNon-vested
      shares as of January 1, 2008
                  
                  
                  81,600
                  
                  
                  $
                  2.44Granted
                  
                  
                  -
                  
                  
                  $
                  -Vested
                  
                  
                  (20,400
                  )
                  
                  $
                  2.28Cancelled
                  
                  
                  -
                  
                  
                  $
                  -Non-vested
      shares as of December 31, 2008
                  
                  
                  61,200
                  
                  
                  $
                  2.49Granted
                  
                  
                  138,000
                  
                  
                  $
                  0.88Vested
                  
                  
                  (57,600
                  )
                  
                  $
                  1.37Cancelled
                  
                  
                  -
                  
                  
                  $
                  -Non-vested
      shares as of December 31, 2009
                  
                  
                  141,600
                  
                  
                  $
                  2.49
 
 The
following table summarizes information about stock options outstanding at
December 31, 2009:
 
 Options
      Outstanding
                  
                  
                  Options
      ExercisableRange
      of Exercise Prices
                  
                  
                  Number
      Outstanding
                  
                  
                  Weighted
      Average Remaining Contractual Life (Years)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Number
      Exercisable
                  
                  
                  Weighted
      Average Exercise Price$
                  0.01
      to 10.00
                  
                  
                  
                  348,324
                  
                  
                  
                  7.3
                  
                  
                  $
                  3.81
                  
                  
                  
                  206,724
                  
                  
                  $
                  4.46
 
 The
Company recorded $50,000 and $101,000 of compensation expense for stock options
during the years ended December 31, 2008 and 2009 respectively. At December 31,
2009 there was a total of $116,785 of unrecognized compensation costs related to
non-vested stock-based compensation arrangements under the Plan. The cost is
expected to be recognized over a weighted average period of 2
years.
 
 As of December 31, 2009, an aggregate
of 650,000 shares of common stock are reserved for issuance under the Plan.
Stock option grants were outstanding for an aggregate of 348,324 shares of
stock, and 301,676 shares remained available for grant. Shares issued pursuant
to the Plan will be newly-issued and authorized shares of common stock, or
treasury shares.
 
 (14)  Defined
Contribution Plan
 
 Gulfstream sponsors a tax deferred
savings plan with a discretionary profit sharing component which qualifies under
Section 401(k) of the Internal Revenue Code.  The plan covers all
employees with the completion of a 1⁄4 year of service.  The eligible
participants are 100% vested in their contributions to the plan, and vest in
Company contributions 25% with less than one year of total service, 50% after
two years, 75% after three years, and 100% after four years of total service.
The plan allows for 25% matching by the Company of up to 4% of the eligible
participants’ compensation. During 2008 and 2009, the Company made matching
contributions totaling $49,000 and $34,000
respectively.


65
 
 (15)  Income
Taxes
 
 Loss before taxes and the current and
deferred tax provisions are as follows (in thousands):
 
 December
      31,
                
                
                December
      31,2008
                
                
                2009Income
      before taxes
                
                $
                (15,308
                )
                
                $
                (5,519
                )Current
      tax provision (benefit):Federal
                
                $
                -
                
                
                $
                -State
                
                
                -
                
                
                
                --
                
                
                
                -Deferred
      tax provision (benefit):Federal
                
                
                (460
                )
                
                
                1,831State
                
                
                (49
                )
                
                
                201(509
                )
                
                
                2,032Tax
      provision (benefit)
                
                $
                (509
                )
                
                $
                2,032
 
 The following is a reconciliation
between the federal statutory rate of 34% and the effective rate (in
thousands):
 
 December
      31,

                    2008
                
                
                December
      31,

                    2009Computed
      expected provision (benefit) atthe
      statutory rates
                
                $
                (5,205
                )
                
                
                34
                %
                
                $
                (1,877
                )
                
                
                34
                %Increases
      (decrease) in income taxesresulting
      from:Non-deductible
      items
                
                
                1,275
                
                
                
                -8
                %
                
                
                33
                
                
                
                -1
                %Timing
      differences
                
                
                774
                
                
                
                -5
                %
                
                
                55
                
                
                
                -1
                %State
      income tax, net of federal effect
                
                
                (460
                )
                
                
                3
                %
                
                
                (192
                )
                
                
                4
                %Effect
      of NOL and Sec 338 election
                
                
                (852
                )
                
                
                6
                %
                
                
                (80
                )
                
                
                1
                %Deferred
      Tax Valuation Allowance
                
                
                3,958
                
                
                
                -26
                %
                
                
                4,093
                
                
                
                -74
                %$
                (509
                )
                
                
                3
                %
                
                $
                2,032
                
                
                
                -37
                %
 
 The tax effects of temporary
differences that give rise to significant elements of deferred tax assets and
liabilities are as follows (in thousands):
 
 December
      31,2008
                
                
                December
      31,2009Deferred
      tax assets:Net
      operating loss carry forward
                
                $
                4,772
                
                
                $
                6,763Amortization
      of Intangible Assets
                
                
                166
                
                
                
                224Intangible
      asset impairment
                
                
                1,513
                
                
                
                1,623Allowance
      for Doubtful accounts
                
                
                11
                
                
                
                12Accrued
      reserves
                
                
                136
                
                
                
                19Compensation
      differences
                
                
                152
                
                
                
                194Valuation
      Allowance
                
                
                (3,958
                )
                
                
                (8,050
                )Non-current
      deferred tax assets
                
                
                2,792
                
                
                
                785Deferred
      tax liabilities:Accelerated
      depreciation and amortization
                
                
                593
                
                
                
                573Amortization
      of Operating Certificate
                
                
                167
                
                
                
                212Non-current
      deferred tax liabilities
                
                
                760
                
                
                
                785Net
      non-current deferred tax assets
                
                $
                2,032
                
                
                $
                -
 
 A valuation allowance offsets the net
deferred tax assets for which recovery is not considered more likely than
not.  A valuation allowance is evaluated considering positive and
negative evidence about whether the deferred tax assets will be
realized.  At the time of evaluation, the allowance can be either
increased or reduced.  A reduction could result in the complete
elimination of the allowance, if positive evidence indicates that the value of
the deferred tax assets is no longer impaired and the allowance is no longer
required. The Company's net operating loss carry forward as of December 31, 2008
was $12.7 million that expires in years up to 2028.
 
 66
 
 A
valuation allowance of $4.0 million was provided for the net operating loss
carry forward and other deferred tax assets as of December 31, 2008. We
determined that the rapidly declining economy, especially since the beginning of
the fourth quarter of 2008, had diminished our visibility regarding future
long-term profitability. As a result, we concluded that we would more likely
than not fail to realize the full benefit of such assets.
 
 The
valuation allowance was increased to $8.0 million as of December 31, 2009, or
100% of deferred tax assets. We determined that the ongoing net operating
losses, and the liquidity situation (See Note 21 Liquidity and Capital
Resources) has substantially increased the likelihood  of not
realizing the tax benefit of the deferred tax assets.
 
 As of December 31, 2009, we have not
recorded any provisions for accrued interest and penalties related to uncertain
tax positions. When applicable, we recognize interest and penalties related to
uncertain tax positions in general and administrative
expense.
 
 At December 31, 2009, tax years 2005
through 2008 remain open to examination, and possible adjustment, by the major
taxing jurisdictions to which we are subject through September
2012.
 
 (16)  Contingencies
 
 FAA Loss
Contingency
 
 On May 7, 2009, the Federal Aviation
Administration (the “FAA”) notified the Company that it was seeking a proposed
civil penalty of $1,310,000 against the Company for alleged non-compliance with
respect to certain record keeping requirements, and regulatory requirements
relating to the use of certain replacement parts.  The Company has
begun an informal conference with the FAA, which is a settlement process
prescribed by statute that authorizes the FAA to accept and consider relevant
information in order to compromise proposed civil penalties. We have submitted
information, evidence and supporting documentation for consideration by the FAA
demonstrating that certain alleged violations of the regulations did not occur,
or demonstrating why the facts and circumstances in this case do not warrant the
proposed civil penalty sought by the FAA. We believe that information submitted
by us to the FAA through the informal conference process may result in a
significant reduction in the civil penalty initially proposed in this matter and
the Company remains in discussions with the FAA over the terms of the
settlement. The FAA has since indicated that, unless the mattersare settled, it
could propose additional civil penalties based on additional inspections
conducted by the agency in 2009 as part of its routine surveillance of air
carriers. If a compromised settlement of the matters is not successful, the FAA,
through a U.S Attorney, may initiate a civil action for the full amount of the
proposed civil penalty as prescribed by law. The Company recognized a charge to
earnings in the June 2009 quarter that did not have a material impact on the
company’s financial position or results of operations.
 
 Other Contingencies
 
 In January 2006, a former salesman
of the Academy formed a business that the Company believes competes directly
with the Academy for student pilots. Thereafter, the former President of the
Academy resigned his position at the Academy and the Company believes he became
affiliated with the alleged competing business. The Academy has initiated a
lawsuit against these former employees, alleging violation of non-competition
and fiduciary obligations. The defendants, including the Academy’s former
President, subsequently filed a counterclaim against the Academy based upon lost
earnings and breach of contract.
 
 The Academy and the sole remaining
defendant have agreed to submit to binding arbitration which is to be held no
later than May 1st,
2010 pursuant to the Court’s Order Referring Case to Binding Arbitration entered
on February 16, 2010.
 
 The Company is involved in various
legal and regulatory proceedings arising in the ordinary course of
business.  While it is not feasible to predict or determine the
outcome of these proceedings, in the opinion of management, the amount of
ultimate liability with respect to legal proceedings and claims will not
materially affect the reported results of operations or the financial position
of the Company.
 
 (17)   Related-Party
Transactions
 
 Building
lease.The Company leases its
facilities for Gulfstream and the Academy from EYW Holdings, Inc., an
entitycontrolled
in part by Thomas L. Cooper and Thomas P. Cooper, an officer of Gulfstream. The
total amount of rental payments for these facilities during 2008 and 2009 was
$414,000 and $405,000, respectively. The amount of rent payable to EYW Holdings,
Inc. at December 31, 2008 and 2009 was $33,000 and $67,000
respectively.
 
 67
 
 Cuba Operations.Gulfstream Air
Charter, Inc. (“GAC”), a related company which is owned by Thomas L.
Cooper,operates
charter flights between Miami and Havana. GAC is licensed by the Office of
Foreign Assets Control of the U. S. Department of the Treasury as a carrier and
travel service provider for charter air transportation between designated U. S.
and Cuban airports.
  Pursuant
to a services agreement between Gulfstream and GAC dated August 8, 2003 and
amended on March 14, 2006, Gulfstream provides use of its aircraft, flight
crews, the Gulfstream name, insurance, and service personnel, including
passenger, ground handling, security, and administrative. Gulfstream also
maintains the financial records for GAC. Pursuant to the March 14, 2006 amended
agreement, Gulfstream receives 75% of the operating profit generated by GAC’s
operation. Prior to March 14, 2006, Gulfstream received all of the operating
profit generated up to a cumulative total of $1 million, and then 75%
thereafter.
  We
have consolidated the results of the Cuba charter business as a variable
interest entity for both the year ended December 31, 2008 and December 31,
2009.
  As
of December 31, 2008 and 2009, GAC owed Gulfstream $0 and $146,000 respectively,
pursuant to the services agreement.
  Other
Services
  The
Company leases equipment from entities controlled by Thomas L. Cooper, former
Chief Executive Officer of Gulfstream. The amounts paid for 2008 and 2009 were
approximately $41,000 each year.
 
 On
September 16, 2008, we consummated a financing in which we issued $5.1 million
of senior debentures (the “Senior Debentures”) and warrants to purchase 578,870
shares of common stock (the “Senior Warrants”) to Shelter Island Opportunity
Fund, LLC. On the same date, we issued a 12% subordinated convertible debenture
for $1.0 million (the “Junior Debenture”) and a warrant to purchase 225,000
shares of common stock (the “Junior Warrants”) to Gulfstream Funding I LLC, an
entity owned in part by Thomas A. McFall, a member of the Board of Directors,
and Douglas Hailey, a former member of the Board of Directors.
  At
the October 20, 2009 Annual Meeting of shareholders, the Company’s shareholders
approved a reduction in the conversion price to $1.975 from $3.00 relating to
the Junior Debenture issued to Gulfstream Funding I, LLC in September 2008. The
conversion to equity of the debenture and accrued interest expense was effective
on October 20, 2009 and resulted in the issuance of 578,342 shares of the
company’s common stock.
  The
Junior Warrants were originally exercisable through September 16, 2014 at an
exercise price of $3.20 per share. Upon conversion of the Junior Debenture, the
number of shares issuable under the Junior Warrants was decreased from 225,000
to 166,667, or a decrease of 58,333 shares. The Junior Warrants are subject to
anti-dilution adjustment for certain future issuances or deemed issuances of
Common Stock at a price per share of less than $3.20.
  On
October 7, 2009, the Company issued a subordinated note to Gulfstream Funding
II, LLC (“GF II”), an entity owned in part by Thomas A. McFall, a member of the
Board of Directors, and Douglas Hailey, a former member of the Board of
Directors, for $1.5 million that matured on January 15, 2010 and bore interest
at 12%. On January 15, 2010, the Company and GF II agreed to enter into one or
more definitive agreements to extend the maturity date of the Note and to
provide for the conversion of the outstanding principal amount of the Note and
all accrued and unpaid interest thereon (collectively, the “Debt”) into
preferred stock of the Company at current market prices. Upon the execution of
such agreements by the Company and GF II, the Company will file a Current Report
on Form 8 -K disclosing the transaction and including such agreements as
exhibits. In addition, GF II waived any event of default, which would have
occurred due to the Company’s failure to repay the Debt on the maturity
date.
 
 (18)  Segment
Information
 
 Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
 
 The Company has two reportable
segments: the airline and charter operation (the Airline) and the flight academy
(the Academy).  The accounting policies of the business segments are
the same as those described in Note (1).  Although the reportable
segments are business units that offer different services and are managed
separately, their activities are highly integrated.
 
 Virtually all of the Company’s
consolidated capital expenditures, depreciation and amortization, and interest
expense are attributable to Airline business segment. The following table
presents financial information for 2008 and 2009 by business segment (in
thousands):
 
 68
 
 2009
              
              Airline
      and Charter
              
              Academy
              
              
              Parent
              
              
              Intercompany
      Eliminations
              
              TotalOperating
      revenues
              
              $
              85,912
              
              
              $
              2,023
              
              
              $
              -
              
              
              $
              (631
              )
              
              $
              87,304Operating
      expenses:Intangible
      asset impairment
              
              
              -
              
              
              
              680
              
              
              
              -
              
              
              
              -
              
              
              
              680All
      other operating expenses
              
              
              87,263
              
              
              
              2,242
              
              
              
              674
              
              
              
              (631
              )
              
              
              89,548Total
      Operating Expenses
              
              
              87,263
              
              
              
              2,922
              
              
              
              674
              
              
              
              -
              
              
              
              90,228Loss
      from operations
              
              $
              (1,351
              )
              
              $
              (899
              )
              
              $
              (674
              )
              
              $
              -
              
              
              $
              (2,924
              )Net
      loss
              
              $
              (3,629
              )
              
              $
              (845
              )
              
              $
              (3,077
              )
              
              $
              -
              
              
              $
              (7,551
              )Depreciation
      and amortization
              
              $
              1,206
              
              
              $
              12
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,218Interest
      expense
              
              
              244
              
              
              
              1
              
              
              
              2,087
              
              
              
              -
              
              
              
              2,332Interest
      income
              
              
              2
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2Income
      tax provision
              
              
              687
              
              
              
              202
              
              
              
              1,143
              
              
              
              
              
              
              
              2,032Capital
      expenditures
              
              
              831
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              836Total
      assets
              
              
              9,424
              
              
              
              2,340
              
              
              
              15,593
              
              
              
              (12,579
              )
              
              
              14,7782008
              
              Airline
      andCharter
              
              
              FlightAcademy
              
              
              Parent
              
              
              IntercompanyEliminations
              
              TotalOperating
      revenues
              
              $
              104,144
              
              
              $
              2,712
              
              
              $
              97
              
              
              $
              (1,697
              )
              
              $
              105,256Operating
      expenses:Intangible
      asset impairment
              
              
              
              
              
              
              2,703
              
              
              
              
              
              
              
              
              
              
              
              2,703Loss
      on sale of equipment
              
              
              4,754
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,754All
      other operating expenses
              
              
              110,014
              
              
              
              3,085
              
              
              
              443
              
              
              
              (1,697
              )
              
              
              111,844Total
      Operating Expenses
              
              
              114,768
              
              
              
              5,788
              
              
              
              443
              
              
              
              (1,697
              )
              
              
              119,301Loss
      from operations
              
              $
              (10,624
              )
              
              $
              (3,075
              )
              
              $
              (346
              )
              
              $
              -
              
              
              $
              (14,045
              )Net
      loss
              
              $
              (11,322
              )
              
              $
              (3,000
              )
              
              $
              (477
              )
              
              $
              -
              
              
              $
              (14,799
              )Depreciation
      and amortization
              
              $
              2,742
              
              
              $
              12
              
              
              $
              -
              
              
              $
              -
              
              
              $
              2,754Interest
      expense
              
              
              737
              
              
              
              -
              
              
              
              569
              
              
              
              -
              
              
              
              1,306Interest
      income
              
              
              38
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              38Income
      tax benefit
              
              
              -
              
              
              
              -
              
              
              
              509
              
              
              
              -
              
              
              
              509Capital
      expenditures
              
              
              1,417
              
              
              
              9
              
              
              
              -
              
              
              
              -
              
              
              
              1,426Total
      assets
              
              
              15,325
              
              
              
              2,918
              
              
              
              16,827
              
              
              
              (15,700
              )
              
              
              19,370
 (19)   Selected
Quarterly Financial Data (Unaudited)
 The following table presents selected
quarterly unaudited financial data for each of the years ended December 31, 2008
and 2009 (in thousands):
 
 69
  First
                
                
                Second
                
                
                Third
                
                
                Fourth
                
                
                Total2009
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                YearRevenue
                
                $
                23,576
                
                
                $
                23,699
                
                
                $
                19,525
                
                
                $
                20,504
                
                
                $
                87,304Operating
      expenses
                
                
                21,756
                
                
                
                22,715
                
                
                
                22,473
                
                
                
                23,284
                
                
                
                90,228Operating
      income (loss)
                
                
                1,820
                
                
                
                984
                
                
                
                (2,948
                )
                
                
                (2,780
                )
                
                
                (2,924
                )Non-operating
      expenses
                
                
                (642
                )
                
                
                (610
                )
                
                
                (582
                )
                
                
                (761
                )
                
                
                (2,595
                )Pre-tax
      income (loss)
                
                
                1,178
                
                
                
                374
                
                
                
                (3,530
                )
                
                
                (3,541
                )
                
                
                (5,519
                )Income
      tax provision (benefit)
                
                
                448
                
                
                
                (1,859
                )
                
                
                -
                
                
                
                3,443
                
                
                
                2,032Net
      income (loss)
                
                $
                730
                
                
                $
                2,233
                
                
                $
                (3,530
                )
                
                $
                (6,984
                )
                
                $
                (7,551
                )
  First
                
                
                Second
                
                
                Third
                
                
                Fourth
                
                
                Total2008
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                YearRevenue
                
                $
                31,255
                
                
                $
                31,052
                
                
                $
                21,066
                
                
                $
                21,883
                
                
                $
                105,256Operating
      expenses
                
                
                33,187
                
                
                
                36,560
                
                
                
                25,484
                
                
                
                24,070
                
                
                
                119,301Operating
      income (loss)
                
                
                (1,932
                )
                
                
                (5,508
                )
                
                
                (4,418
                )
                
                
                (2,187
                )
                
                
                (14,045
                )Non-operating
      expenses
                
                
                (138
                )
                
                
                (156
                )
                
                
                (101
                )
                
                
                (868
                )
                
                
                (1,263
                )Pre-tax
      income (loss)
                
                
                (2,070
                )
                
                
                (5,664
                )
                
                
                (4,519
                )
                
                
                (3,055
                )
                
                
                (15,308
                )Income
      tax provision (benefit)
                
                
                (784
                )
                
                
                (2,119
                )
                
                
                (441
                )
                
                
                2,835
                
                
                
                (509
                )Net
      income (loss)
                
                $
                (1,286
                )
                
                $
                (3,545
                )
                
                $
                (4,078
                )
                
                $
                (5,890
                )
                
                $
                (14,799
                )
 
 (20)   Subsequent
Events
  Issuance
of $1.5 million of Subordinated Notes
  On
October 7, 2009, the Company issued a subordinated note to Gulfstream
Funding II, LLC (“GF II”) for $1.5 million that matured on January 15,
2010 and bore interest at 12%. On January 15, 2010, the Company and GF II
agreed to enter into one or more definitive agreements to extend the maturity
date of the Note and to provide for the conversion of the outstanding principal
amount of the Note and all accrued and unpaid interest thereon (collectively,
the “Debt”) into preferred stock of the Company at current market prices. Upon
the execution of such agreements by the Company and GF II, the Company will file
a Current Report on Form 8-K disclosing the transaction and including such
agreements as exhibits.  In addition, GF II waived any event of
default, which would have occurred due to the Company’s failure to repay the
Debt on the maturity date.
  Sale
of Units of Common Stock and Warrants
  On
January 29, 2010, the Company consummated the closing under a Unit Purchase
Agreement with seven accredited investors (the “Investors”) pursuant to which
the Company sold to the Investors units of its securities (the “Units”)
consisting of (i) one share of common stock of the Company, par value $0.01 per
share (the “Common Stock”); and (ii) warrants to purchase three-quarters of a
share of Common Stock (the “Warrants”), at a per Unit purchase price of $1.40
for aggregate gross proceeds of $327,300. Upon completion of the closing, the
Company sold to the Investors an aggregate of 233,786 shares of Common Stock and
Warrants to purchase an aggregate of 175,339 shares of Common
Stock.
  Forbearance
Agreement with Raytheon Aircraft Credit Corporation
  On
February 11, 2010, Gulfstream received a notice of default (the “Default
Notice”) from Raytheon Aircraft Credit Corporation (“RACC”), Gulfstream’s
principal aircraft lessor, pursuant to which RACC notified Gulfstream that it
was in default of the payment of certain obligations under Airliner Operating
Lease Agreements, each dated August 7, 2003, and amended on August 2,
2005, and March 15, 2006 (the “Lease Agreements”), by and between
Gulfstream and RACC, pursuant to which Gulfstream currently leases from RACC
twenty-one (21) Beech 1900D aircraft. The default resulted from Gulfstream’s
failure to make its scheduled lease payments for the month of February 2010.
Accordingly, RACC demanded that Gulfstream make such payments on or before
February 19, 2010. The failure to make such payment would have given RACC
the right to terminate the Lease Agreements, thereby prohibiting Gulfstream from
using the leased aircraft. Also pursuant to the Default Notice, RACC claimed
that Gulfstream is in default in certain other payments under a separate
agreement dated as of December 19, 2008 by and between Gulfstream and RACC
(the “December  Agreement”), which defaults are also considered to be
defaults under the Lease Agreements. RACC indicated in the Default Notice that
if Gulfstream made the required payments under the Lease Agreements by
February 19, 2010, it is prepared to discuss the manner in which the
Company can cure or otherwise address the December Agreement
defaults.
 
 70
 
 On
February 19, 2010, Gulfstream made the required payment to RACC, which
allowed it to continue operating the aircraft covered by the Lease Agreements.
In addition, on February 19, 2010, RACC advised Gulfstream that it would
forebear from exercising any of its rights under the December Agreement or
the Lease Agreements, provided that Gulfstream remains current in payment of
future lease payments and provides RACC by April 20, 2010 with a mutually
acceptable debt and financial restructuring plan that provides for a feasible
basis to enable Gulfstream to continue to meet its ongoing financial obligations
under the Lease Agreement and commence to repay restructured amounts due under
the December Agreement, which presently amount to approximately $3 million.
We are also engaged in related restructuring discussions with Pratt &
Whitney Canada with respect to approximately $2.5 million of past-due creditor
obligations. See Note (9)
Engine Return Liability and the Restructuring of Other Obligations, for
background information regarding this matter.
  Although we believe that we will be
able to establish a plan that is acceptable to RACC and Pratt & Whitney
Canada regarding the restructuring of current obligations, there can be no
assurance that we will be able to do so, or will not otherwise default in future
payments under the RACC Lease Agreements or the Pratt & Whitney
Agreement.
  Issuance
of $1.0 million of Senior Secured Notes and Warrants
  On
February 26, 2010, the Company completed a $1,000,000 debt financing pursuant to
purchase agreements for senior secured notes and warrants with accredited
investors and/or qualified institutional purchasers (the “Investors”) pursuant
to which the Company sold to the Investors (i) 12% Senior Secured Notes due
December 31, 2010 in an aggregate principal amount of $1,000,000 (the “Notes”);
and (ii) warrants, exercisable at $1.22 per share (the “Exercise Price”)
(subject to customary anti-dilution adjustments) and expiring February 28, 2015
(the “Warrants”), to purchase an aggregate of 409,827 of shares of the Company’s
common stock (the “Common Stock”).  The number of Warrants issued to
each Investor was determined by dividing (a) 50% of the principal amount of the
Notes purchased by the Investors, by (b) the Exercise Price of the
Warrants.  However, if the Notes are not prepaid by the Company in
full by June 30, 2010, then the shares of Common Stock issuable upon exercise of
the Warrants (the “Warrant Shares”) would represent 100% of the original
$1,000,000 principal amount of the Notes divided by the Exercise Price.
Accordingly, if the Notes are not paid in full by June 30, 2010, assuming no
anti-dilution adjustments to the Warrant Shares or the Exercise Price, the
aggregate of 409,827 Warrant Shares would increase to 819,654 Warrant
Shares.
  Forbearance
Agreement with Shelter Island Opportunity Fund and Amendment to
Debenture
  In August
2008, the Company obtained an original $5,100,000 debt financing with Shelter
Island Opportunity Fund LLC (“Shelter Island”) pursuant to a securities purchase
agreement (the “Shelter Island Agreement”) and a secured original issue discount
debenture due August 31, 2011 (the “Debenture”) of which $3,659,000 was
outstanding as of February 26, 2010.   As part of such financing,
the Company granted Shelter Island a first priority lien and security interest
on all of the assets and properties of the Company and its subsidiaries, issued
certain warrants to Shelter Island and granted Shelter Island a right to “put”
the warrants to the Company for $3,000,000. In December 2009 and January 2010,
Shelter Island agreed to defer the December and January interest payments under
the Debenture.
 
 On
February 26, 2010, the Company and Shelter Island entered into a Forbearance
Agreement and Amendment to Debenture (the “Forbearance Agreement”) which reduced
the Company’s potential liability under the put option from $3,000,000 to
$1,050,000 and rescheduled certain principal and interest payments under the
Debenture to reduce near-term liquidity requirements.
 
 Under the
terms of the Forbearance Agreement, Shelter Island agreed to forbear from
exercising its rights and remedies under the Shelter Island Agreement until the
occurrence of (a) the failure by the Company to comply with the terms, covenants
and agreements of the Forbearance Agreement; and (b) the occurrence of any event
of default under the Debenture or the Shelter Island Agreement (collectively, a
“Termination Event”).  One of the covenants to be performed by the
Company under the Forbearance Agreement is the obligation of the Company to
raise an additional $1.5 million of debt or equity financing by March 26, 2010,
subsequently changed to March 31, 2010, or otherwise satisfy Shelter Island that
the Company has adequate liquidity and working capital. Shelter Island confirmed
on March 31, 2010 that the Company complied with this covenant based primarily
on the first closing under a Series A Convertible Preferred Stock Purchase
Agreement described below under the heading, Sale of up to $2.5 million of
Convertible Preferred Stock and Warrants.
 
 Pursuant
to the Forbearance Agreement the parties amended the Debenture, as follows (i)
the Company shall pay interest on the outstanding principal amount monthly in
cash, commencing March 31, 2010; (ii) the Company shall pay monthly installments
on the outstanding principal amount commencing April 30, 2010 and on the last
trading day of each month thereafter until the August 31, 2011 maturity date of
the Debenture; and (iii) the Company may prepay all or any portion of the
outstanding principal amount of the Debenture together with a premium equal to
5% of outstanding principal amount being prepaid; provided that, if such
prepayment is made in 2011, there shall be no premium
applicable.  The Company, each of its subsidiaries and Shelter
Island also entered into an Omnibus Amendment to the Guaranty Agreements
pursuant to which, without limitation, the parties agreed to amend the existing
guarantees to include the repayment of the Shelter Island Note.
 
 71
 
 As
indicated above, Shelter Island currently holds a first priority lien and
security interest on all of the assets of the Company and its
subsidiaries.  Under the terms of the Intercreditor Agreement, Shelter
Island agreed to subordinate its first priority lien on the accounts receivable
of the Company and its subsidiaries and the proceeds thereof, to the lien
granted to the Investors under the Security Agreement with TBI to the extent of
the deferred principal and accrued interest under the Notes.  Shelter
Island retained its first priority security interest in all of the other assets
and properties of the Company and its subsidiaries.
 
 As
contemplated in the original warrant to purchase Common Stock issued to Shelter
Island on August 31, 2008 (the “Original Warrant”), on February 26, 2010 the
Company divided the Original Warrant into (a) a warrant in the form of the
Original Warrant initially exercisable into 70,000 shares of Common Stock (the
“Put Warrant”); and (b) a warrant in the form of the Original Warrant (the
“Remaining Warrant”, and together with the Put Warrant, the "Divided Warrants")
such that the aggregate number of shares of Common Stock of Company that are
initially exercisable under the Divided Warrants (inclusive of the 70,000 Shares
of Common Stock initially issuable under the Put Warrant) shall equal, in the
aggregate, 15% of the fully-diluted shares of Company Common Stock issued and
outstanding immediately following consummation of the transactions contemplated
under the Forbearance Agreement and the TBI Purchase Agreement, after giving
pro-forma effect to the conversion into Common Stock of all Company convertible
securities and the exercise of all Company granted options and warrants,
including the Warrants issued to the Investors.  As a result of
consummation of the above transactions with Shelter Island and the TBI
Investors, the aggregate number of shares issuable upon conversion of the
Divided Warrant is 914,189 shares of Company Common Stock.
 
 The
Company and Shelter Island also entered into an Amendment to the Put Option
Agreement (the “Put Option Amendment”) dated as of August 31, 2008 under which,
among other things, the exercise price applicable for all the put shares under
the put warrant was reduced from $3,000,000 to $1,050,000, or $15.00 per
share.
 
 As
consideration for its financial accommodations, the Company paid Shelter Island
an additional $250,000 as a forbearance fee, by delivering a $250,000 promissory
note (the “Shelter Island Note”) due on the earlier of (i) August 31, 2011, and
(ii) the date the Debenture is permitted or required to be paid in accordance
with its terms.  The Shelter Island Note accrues interest at a rate of
9% per annum and is payable in cash on a monthly basis beginning on February 26,
2011.
  Sale
of up to $2.5 million of Convertible Preferred Stock and Warrants
  On March
31, 2010, Gulfstream International Group, Inc. consummated the first closing
under a Series A Convertible Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with 17 accredited investors (the “Investors”) pursuant to which the
Company sold to the Investors (i) an aggregate of 118,500 shares of Series A
Convertible Preferred Stock, par value $0.001 and stated value $10.00 per share
(the “Preferred Shares”), convertible into 1,185,000 shares of common stock of
the Company, par value $0.01 per share (the “Common Stock”); and (ii) 5-year
warrants to purchase an aggregate of 592,500 shares of Common Stock (the
“Warrants”), representing 50% of the number of shares of Common Stock issuable
upon conversion of the Preferred Shares, for aggregate gross proceeds of
$1,043,000 (the “Offering”). The Warrants expire on March 31, 2013 and are
exercisable into shares of Common Stock at an exercise price equal to $1.75 per
share, subject to adjustment as set forth in the Warrants.
 
 Pursuant
to the Certificate of Designation, Preferences and Rights of the Series A
Convertible Preferred Stock of the Company which was filed with the State of
Delaware on March 31, 2010 (the “Certificate of Designation”), each Preferred
Share is convertible into 10 shares of Common Stock. In addition, the Preferred
Shares pay an annual dividend at the rate of 12% per annum, payable quarterly,
on the last business day of each December, March, June and September (each a
“Dividend Payment Date”), payable on each Dividend Payment Date as follows: (i)
60% of each quarterly dividend (based on an annual rate of 7% per annum) shall
be payable in cash, and (ii) 40% of each quarterly dividend (based on an annual
rate of 5% per annum) shall be payable either in cash, or at the sole option of
the Company, in additional shares of Common Stock, calculated for such purposes
by dividing the amount of the quarterly dividend then payable by 100% of the
market price of the Common Stock on such Dividend Payment
Date.  Unless previously converted into Common Stock, all Preferred
Shares outstanding on the earlier to occur of (a) the date on which the average
of the market prices of the Common Stock for any 20 consecutive trading days
shall be $2.00 or higher, or (b) 5 years from the Preferred Shares issuance
date, shall be automatically converted into Common Stock at the Conversion Price
then in effect.
 
 72
 
 In
addition, on March 31, 2010, 4 of the 7 purchasers of the Company’s units
consisting of one share of Common Stock (the “Shares”), and warrants to purchase
three-quarters of a share of Common Stock (the “Prior Warrants”) which was
consummated on January 29, 2010 (the “Prior Offering”) and described above under
the heading,Sale of Units of Common Stock and
Warrants, entered into a letter agreement with the Company (the “Exchange
Agreement”) pursuant to which such purchasers agreed to exchange their Shares
and Prior Warrants for Preferred Shares and Warrants, under the same terms and
conditions applicable to Investors in the Offering.  Such purchasers
also agreed that the Company shall have no further obligations or liabilities in
connection with the transaction documents executed and delivered with respect to
the Prior Offering, including, without limitation, the Unit Purchase Agreement,
the Registration Rights Agreement and the Prior Warrant, each dated as of
January 29, 2010, and each of which are terminated in any and all respects.
SeeNote (20) Subsequent
Events, Sale of Units of Common Stock and Warrants.
 
 On March
31, 2010, the Company and the Investors entered into a Registration Rights
Agreement under which the Company is obligated to file a registration statement
(the “Registration Statement”) with the Securities and Exchange Commission (the
“SEC”) registering the shares of Common Stock issuable upon conversion of the
Preferred Shares and upon exercise of the Warrants for resale by the Investors
on or prior to April 30, 2010 (the “Filing Date”).  In addition, the
Company agreed to use its best efforts to cause the SEC to declare the
Registration Statement effective by the earlier of (i) 150 days following the
Filing Date; and (ii) 180 days following the Filing Date if the SEC conducts a
full review of the Registration Statement.
 
 In
connection with the first closing of the Offering, the Company paid/issued the
placement agent (i) cash commissions in the amount of 9% of the total purchase
price received by the Company in the first closing; (ii) a non-accountable
expense allowance equal to 2% of the total purchase price received by the
Company in the first closing; and (iii) Warrants to purchase 114,730 shares of
Common Stock, which represents 11% of the total purchase price received by the
Company in the first closing.
  (21)   Liquidity
and Capital Resources
 
 For the
year ended December 31, 2009, we generated less cash flow from operations
than initially projected at the beginning of the year due to lower revenue and
higher fuel costs than forecasted. From October 2008 to December
31, 2009, we also repaid over $4.4 million of debt and
restructured creditor obligations.
 
 During
the second-half of 2009, Gulfstream experienced significant deterioration in its
revenue environment, which, combined with rising fuel costs, resulted in greater
than anticipated losses and pressure on its liquidity outlook.  While
part of the revenue weakness was the result of recessionary economic conditions,
the situation was made particularly acute by new low-fare competition in certain
of our markets.
 
 With an
increasingly weakened balance sheet, Gulfstream found it necessary to attract
new capital beginning in the fourth quarter of 2009. With liquidity needs
becoming more urgent, in January 2010 the airline found itself in an
unsustainable financial situation.  As such, the Company retained
Berger Singerman and Mesirow Financial Advisors to assist in its restructuring
and financing activities.  Although the Company believes that its
revenue and liquidity will improve in future periods, the Company continued to
actively seek short-term financing to meet its near-term liquidity requirements
and to allow sufficient time to significantly increase its equity capital base
to support long-term growth opportunities, as well as the purchase of its
twenty-one (21) aircraft leased from Raytheon Aircraft Credit
Corporation.
 
 These
near-term financing transactions and restructuring efforts are essential due to
our current liquidity position, as well as several additional factors, including
a highly seasonal business, the ongoing risk posed by a relatively weak economy,
the potential for continued volatility in the price of jet fuel, the
necesity for funds to satisfy or compromise civil penalties proposed by the
Federal Aviation Administration, and scheduled payments of debt and restructured
creditor obligations over the next two years.
 
 We can
make no assurance that our efforts to improve liquidity or to obtain longer-term
growth-oriented equity financing will be completed successfully, that we will
have adequate funds to satisfy or compromise the civil penalties proposed by the
FAA or that alternative sources of capital will be available to us. If
additional equity capital is not available in the next several months, we would
likely experience a significant liquidity shortfall before the end of 2010, and
would be unable to fund continued operations or meet our financial
obligations.
 
 73
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
 
 Rotenberg Meril Solomon Bertiger
& Guttilla, P.C.The firm of Rotenberg Meril Solomon Bertiger &
Guttilla, P.C. (“Rotenberg”) served as the Company’s independent registered
public accounting firm for the year ended December 31, 2007. On
January 6, 2009, the Company notified Rotenberg that effective
January 6, 2009 the Company decided to dismiss Rotenberg as the Company’s
independent registered public accounting firm. The decision to dismiss Rotenberg
was made and approved by the Audit Committee.
 
 The audit
reports of Rotenberg on the Company’s financial statements for the fiscal years
ended December 31, 2007 and 2006 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
 
 During
the two most recent fiscal years and the subsequent interim period through
January 6, 2009, the Company had no disagreements with Rotenberg on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved to their
satisfaction, would have caused Rotenberg to make reference to the subject
matter of the disagreement in connection with its reports. In addition, during
that time there were no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K).
 
 McKean, Paul, Chrycy, Fletcher &
Co.The firm of McKean, Paul, Chrycy, Fletcher & Co. (“McKean”)
served as the Company’s independent registered public accounting firm for the
year ended December 31, 2008. On April 14, 2009, McKean resigned as
the Company’s independent public accounting firm. McKean entered into an
agreement with Cherry, Bekaert & Holland, L.L.P., ("Cherry Bekaert")
pursuant to which McKean combined its operations with and certain of the
professional staff and partners of McKean joined Cherry Bekaert either as
employees or partners of Cherry Bekaert and continue to practice as members of
Cherry Bekaert. Concurrent with the resignation of McKean, the Company, through
and with the approval of its Audit Committee, engaged Cherry Bekaert, as the
Company’s independent public accounting firm.
 
 Prior to
engaging Cherry Bekaert, the Company did not consult with Cherry Bekaert
regarding the application of accounting principles to a specific completed or
contemplated transaction or regarding the type of audit opinion that might be
rendered by Cherry Bekaert on the Company’s financial statements, and Cherry
Bekaert did not provide any written or oral advice that was an important factor
considered by the Company in reaching a decision as to any such accounting,
auditing or financial reporting issue.
 
 The
report of McKean regarding the financial statements for the fiscal year ended
December 31, 2008 did not contain any adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During the year ended December 31, 2008 and during
the period from the end of the most recently completed fiscal year through
April 14, 2009, the date of resignation, there were no disagreements with
McKean on any manner of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreements, if not resolved
to the satisfaction of McKean would have caused it to make reference to such
disagreements in its reports.
 
 ITEM 9A. CONTROLS AND
PROCEDURES.
 
 (a) Evaluation of
Disclosure Controls and Procedures. Under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rule 13a-15(3) under the
Exchange Act as of December 31, 2009 (the “Evaluation Date”).  Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded as of the Evaluation Date that our disclosure controls and procedures
were effective such that the information relating to our company required to be
disclosed in our reports (i) is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and (ii) is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
 
 Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud.  A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met.  Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs.  Due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our company have
been detected.
 
 74
 
 (b) Changes in
internal controls. During the year ended December 31, 2009, there were no
changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule
15d-15 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
 
 Management’s Report on Internal
Control over Financial Reporting
 
 Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
for our company in accordance with as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is
designed to provide reasonable assurance regarding the (i) effectiveness and
efficiency of operations, (ii) reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, and (iii) compliance with applicable
laws and regulations. Our internal controls framework is based on the criteria
set forth in the Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
 
 Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 Management’s assessment of the
effectiveness of our internal control over financial reporting is as of the year
ended December 31, 2009. We believe that internal control over financial
reporting is effective.  We have not identified any material
weaknesses considering the nature and extent of our current operations or any
risks or errors in financial reporting under current operations.
 
 This annual report does not include an
attestation report of the Company’s registered accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission
 
 ITEM 9B. OTHER
INFORMATION.
 
 We do not have any information required
to be disclosed in a report on Form 8-K during the fourth quarter of 2009 that
was not reported.
 
 75
 PART III
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE
GOVERNANCE.
 
 Executive
Officers and Directors
 
 The
following table sets forth the name, age and position of each of the members of
our board of directors and executive officers as of the date of this
report:
 
 Name
              
              Age
              
              Position(s)Thomas
      A. McFall
              
              56
              
              Chairman
      of the Board and Senior Executive OfficerDavid
      F. Hackett
              
              48
              
              Chief
      Executive Officer and President, DirectorGary
      P. Arnold
              
              68
              
              DirectorGary
      L. Fishman
              
              63
              
              DirectorBarry
      S. Lutin
              
              65
              
              DirectorRichard
      R. Schreiber
              
              54
              
              DirectorRobert
      M. Brown
              
              62
              
              Chief
      Financial Officer
 
 Thomas
A. McFall, 56, Chairman of the Board and Senior Executive Officer
 
 Mr. McFall has served as Chairman
of the Board of Directors and Senior Executive Officer since March 2006.
Mr. McFall currently serves as Chairman of Weatherly Group LLC, a company
he co-founded in 2001. Mr. McFall has served as an executive and on the
board of directors of numerous companies, including Weatherstar Aviation.
Weatherstar Aviation was a New Jersey based aviation operator providing both
regularly scheduled and on demand charter flights under an FAA Part 135
certificate. Mr. McFall was President and CEO of Weatherstar Aviation from
its inception in 1987 until its sale in 1995. He is currently Chairman of
National Molding Corporation and Cattron Group International.
 
 David
F. Hackett, 48, Chief Executive Officer and President, Director
 
 Mr. Hackett has been Chief
Executive Officer and President of the Company since March 2006. Since
June 2003, Mr. Hackett has served as President of Gulfstream. From
January 2002 to June 2003, he was a financial and strategic consultant
to Newgate Associates, LLC. Mr. Hackett has over 20 years experience in the
airline industry, beginning with Continental in 1985, where he eventually served
as Director, Financial Planning and Analysis.
 
 Gary
P. Arnold, 68, Director
 
 Mr. Arnold has been a director
since November 2007. He has significant international and domestic
experience in the electronics industry in the areas of finance, strategic
planning and operations, and has been involved in numerous capital market
transactions. He spearheaded the turnaround at Tektronix Corp. where he was
chief financial officer from 1990 to 1992, and later served as Chairman and CEO
of Analogy, Inc., a provider of design automation software used in the
automotive industry from 1993 to 2000. Since 2000, Mr. Arnold has been a
private investor and currently serves on the boards of directors of National
Semiconductor Corp. (NYSE: NSM) and Orchids Paper Products Company (NYSE AMEX:
TIS). Mr. Arnold is a certified public accountant and he holds a B.S.
degree in Accounting from East Tennessee State University and a JD degree from
the University of Tennessee School of Law.
 
 Gary
L. Fishman, 63, Director
 
 Mr. Fishman has been a director
since January 2009. He has over 30 years of airline experience, having
held executive positions with Northwest Airlines, Continental Airlines and Trans
World Airlines in diverse areas including operations, planning and finance.
An officer of Northwest Airlines from 1995 to 2005, he held various
positions, including Vice President of Customer Service Planning and Security
(2002-2004) and Senior Vice President of Alliances (2004-2005). After his
retirement from Northwest Airlines, he served from 2005 through 2008 as Vice
President of Sales Operations at Ingenix, a division of UnitedHealth Group. He
is a graduate of the United States Naval Academy and served as an officer in the
US Navy from 1968 through 1973.
  76
 
 Barry
S. Lutin, 65, Director
 
 Mr. Lutin has been a director
since November 2007. He has been involved in the aviation industry for more
than forty years, serving in various senior positions responsible for
certification, operations and financial management for scheduled air operators.
Since December 2006, Mr. Lutin has been a Managing Director of Helion
Procopter Industries, a subsidiary of Anham Trading and Contracting, LLC of
Dubai. Also, since April 2002, Mr. Lutin has been President and CEO of
Capitol Rising, LLC. Between 1992 and 2002, Mr. Lutin served as a
management consultant and as President and Chief Operating Officer of Shuttle
America Corporation. From 1972 to 1992, Mr. Lutin served as Chairman and
CEO of Corporate Air, Inc., an FAA Part 135 scheduled cargo carrier. Currently
he serves as Chairman and director of Safe Passage International, a U.S.-based
security training software development company. Mr. Lutin is a licensed air
transport pilot with more than six thousand hours of flight
experience.
 
 Richard
R. Schreiber, 54, Director
 
 Mr. Schreiber has been a director
since March 2006. Since 1982, Mr. Schreiber has been a Partner with
Dimeling, Schreiber & Park, an investment firm in Philadelphia.
Mr. Schreiber is also employed by Itochu International, Inc. as Director,
Principal Investments. He has been on the board of directors of numerous private
companies (including New Piper Aircraft and McCall Pattern Company) and public
companies (including Wiser Oil Company and Chief Consolidated Mining).
Mr. Schreiber was previously a director of Business Express Airlines (a
large FAA Part 121 commuter airline), Aeris (a French airline) and Rocky
Mountain Helicopters (a large FAA Part 135 operation). Mr. Schreiber
received a bachelor’s degree in Economics from the Wharton School of the
University of Pennsylvania.
 
 Robert
M. Brown, 62, Chief Financial Officer
 
 Robert M. Brown has been our Chief
Financial Officer since January 2007. From April 2005 to
November 2006, Mr. Brown served as the Secretary, Treasurer and Chief
Financial Officer of BabyUniverse, Inc., an online retailer in the United States
of brand name baby, toddler, maternity and furniture products that is listed on
the Nasdaq Capital Market. From November 2002 to April 2005,
Mr. Brown was a private investor. Mr. Brown was the Chief Financial
Officer of Uno Restaurant Corporation from 1987 to 1997, and served as its
Executive Vice President-Development from 1997 to 2002. Uno Restaurant
Corporation is the operator and franchisor of a nationwide chain of
casual-dining restaurants and was publicly-traded on the New York Stock Exchange
through 2001. Mr. Brown held several accounting positions prior to 1987
with each of SCA Services, Inc., The Stanley Works, Saab-Scania, Inc. and Price
Waterhouse. Mr. Brown is a CPA certified in the State of Connecticut and
earned a B.S. degree in Accounting at Fairfield University.
 
 Board
of Directors
 
 All directors will hold office until
the next annual meeting of shareholders and until their successors have been
duly elected and qualified. Officers are elected by and serve at the discretion
of the Board of Directors.
 
 Role
of the Board of Directors
 
 Pursuant to Delaware law, our business,
property and affairs are managed under the direction of the Company’s board of
directors. The board has responsibility for establishing broad corporate
policies and for the overall performance and direction of the Company, but is
not involved in day-to-day operations. Members of the board keep informed of the
Company’s business by participating in board meetings, by reviewing analyses and
reports sent to them regularly, and through discussions with its executive
officers.
 
 Board
Committees
 
 The
Company established an Audit Committee consisting of Mr. Arnold, who chairs
the committee, and Messrs. Lutin and Schreiber, all of whom the Company
believes qualify as “independent directors” under NYSE Amex rules. The NYSE Amex
listing standards define “financially literate” as being able to read and
understand financial statements, including a company’s balance sheet, income
statement and cash flow statement. The Audit Committee is governed by a written
charter (available in the Corporate Governance section of the Company’s website
which can be accessed from the Company’s homepage at http//www.gulfstreamair.com
by selecting “Corporate Governance”), which must be reviewed and amended, if
necessary, on an annual basis.
 
 77
 
 Under the
charter, the Audit Committee is required to meet at least four times a year and
is responsible for reviewing the independence, qualifications and quality
control procedures of the Company’s independent auditors, and is responsible for
recommending the initial or continued retention, or a change in, the Company’s
independent auditors. In addition, the Audit Committee is required to review and
discuss with the Company’s management and independent auditors the financial
statements and annual and quarterly reports, as well as the quality and
effectiveness of the Company’s internal control procedures and critical
accounting policies. The Audit Committee’s charter also requires the Audit
Committee to review potential conflict of interest situations, including
transactions with related parties, and to discuss with the Company’s management
other matters related to the Company’s external and internal audit procedures.
The Audit Committee will adopt a pre-approval policy for the provision of audit
and non-audit services performed by the independent auditors. The Company
believes Mr. Arnold is a “financial expert” as defined under the Securities
and Exchange Act of 1934 and as required by the NYSE Amex.
 
 The
Company has also established a Compensation Committee consisting of
Mr. Lutin, who chairs the committee, and Messrs. Arnold and Schreiber,
all of whom the Company believes qualify as “independent directors” under NYSE
Amex rules. The Compensation Committee is governed by a written charter
(available in the Corporate Governance section of the Company’s Website which
can be accessed from the Company’s homepage at http://www.gulfstreamair.com
by selecting “Corporate Governance”). The Compensation Committee is responsible
for making recommendations to the Board of Directors regarding compensation
arrangements for the Company’s executive officers, including annual bonus
compensation, and consults with management regarding the Company’s compensation
policies and practices. The Compensation Committee also makes recommendations
concerning the adoption of any compensation plans in which management is
eligible to participate, including the granting of stock options or other
benefits under those plans.
 
 The Company has also established a
Nominating and Corporate Governance Committee consisting of Mr. Schreiber,
who chairs the committee, Mr. Arnold and Mr. Lutin, all of whom the
Company believes qualify as “independent directors” under the NYSE Amex rules.
The Nominating and Corporate Governance Committee is governed by a written
charter (available in the Corporate Governance section of the Company’s Website
which can be accessed from the Company’s homepage at http://wwwgulfstreamair.com
by selecting “Corporate Governance”). The Nominating and Corporate Governance
Committee submits to the Board of Directors a proposed slate of directors for
submission to the stockholders at the Company’s annual meeting, recommends
director candidates in view of pending additions, resignations or retirements,
develops criteria for the selection of directors, reviews suggested nominees
received from stockholders and reviews corporate governance policies and
recommends changes to the full Board of Directors.
 
 In 2009, the Company
established a Safety and Security Committee consisting of Mr. Fishman, who
chairs the committee, Mr. Hackett and Mr. Lutin. The Safety and Security
Committee will be governed by a written charter, which the board of directors
intends to adopt during fiscal 2010 (will be available in the Corporate
Governance section of the Company’s Website which can be accessed from the
Company’s homepage at http://www.gulfstreamair.com
by selecting “Corporate Governance”). The Safety and Security Committee is
responsible for ensuring that the Company is operating at the highest level of
safety and security by reviewing the Company's safety metrics, safety and
security standards and any material breaches of safety or security that may
occur. Also, it monitors and ensures corrective actions are being
taken.
 
 Advisory Board
 
 We do not
currently have an advisory board.
 
 Compensation
of the Board of Directors
 
 Directors
who are also our employees do not receive additional compensation for serving on
the Board. Non-employee directors are paid fees as noted in the “compensation of
directors”
table below. In addition, non-employee directors are entitled to receive options
under our stock incentive plan. All directors are reimbursed for their
reasonable expenses incurred in attending Board meetings.
 
 Director
Independence
 
 The
Company periodically reviews the independence of each director. Pursuant to this
review, the directors and officers of the Company, on an annual basis, are
required to complete and forward to the Corporate Secretary a detailed
questionnaire to determine if there are any transactions or relationships
between any of the directors or officers (including immediate family and
affiliates) and the Company. If any transactions or relationships exist, the
Company then considers whether such transactions or relationships are
inconsistent with a determination that the director is independent in accordance
with the listing standards of the NYSE Amex. Pursuant to this process, the Board
of Directors has determined that Messrs. Arnold, Fishman, Lutin and
Schreiber each qualify as independent directors.
 
 Compensation
Committee Interlocks and Insider Participation
 
 The Compensation Committee is comprised
of Mr. Lutin, Mr. Arnold and Mr. Schreiber, none of whom are
employees or current or former officers of the Company, and none of whom had any
relationship with the Company required to be disclosed under Item 13. of this
report. None of the Company’s Compensation Committee members and none of the
Company’s executive officers have a relationship that would constitute an
interlocking relationship with executive officers or directors of another entity
or insider participation in compensation decisions.
 
 78
 
 Family
Relationships
 
 There are
no family relationships among directors and executive officers.
 
 Involvement in Certain Legal
Proceedings.
 
 None of
our officers or directors have, during the last five years: (i) been
convicted in or is currently subject to a pending a criminal proceeding;
(ii) been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to any federal or state securities
or banking laws including, without limitation, in any way limiting involvement
in any business activity, or finding any violation with respect to such law, nor
(iii) has any bankruptcy petition been filed by or against the business of
which such person was an executive officer or a general partner, whether at the
time of the bankruptcy of for the two years prior thereto.
 
 Compliance with Section 16(a) of
the Exchange Act
 
 Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires our directors,
executive officers, and shareholders holding more than 10% of our outstanding
common stock, to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in beneficial ownership of our
common stock. Executive officers, directors and greater-than-10% shareholders
are required by SEC regulations to furnish us with copies of all
Section 16(a) reports they file. Based solely on review of the copies of
such reports furnished to us for the year ended December 31, 2009, the
Section 16(a) reports required to be filed by our executive officers,
directors and greater-than-10% shareholders were filed on a timely basis, except
that Gulfstream Funding, LLC purchased a convertible debenture on
September 19, 2008 that was reported on Form 4 on February 20,
2009 and Thomas A. McFall purchased 28,500 shares of Common Stock on
December 31, 2008 that was reported on Form 4 on January 6,
2009.
 
 Code of Ethics
 
 The
Company has a Code of Ethics and Business Conduct Policy (“Code of Ethics”) that
applies to all of its directors, officers, and employees, including its senior
financial officers. A copy of the Code of Ethics is available in the Corporate
Governance section of the Company’s website, which can be accessed from the
homepage at http://www.gulfstreamair.com
by selecting “Corporate Governance.” The Company will post any amendments to the
Code of Ethics in the same section of the Company’s website.
 
 Item 11. Executive
Compensation.
 
 Compensation
Discussion and Analysis
 
 This
section provides information regarding the compensation programs in place for
the Company’s President and Chief Executive Officer, Senior Vice President,
Legal Affairs, and Chief Financial Officer, who we refer to collectively as the
named executive officers. This section includes information regarding the
overall objectives of our compensation programs and each element of compensation
that we provide.
 
 The
compensation of our named executive officers is composed principally of a base
salary, a quarterly bonus in some instances, a discretionary annual bonus and
equity awards in the form of stock options. In addition, our named executive
officers are entitled to matching contributions to our 401(k) plan and certain
perquisites.
 
 Compensation
decisions are made by the board of directors, with significant input from
Mr. Hackett for compensation of his direct reports, including
Mr. Thomas P. Cooper, Mr. Stagias and Mr. Thomas L. Cooper. In
connection with the acquisition in March 2006, we adopted our Stock Incentive
Plan and entered into new employment agreements with Mr. Hackett and
Mr. Thomas L. Cooper.  In May 2009, we adopted our Amended and
Restated Stock Incentive Plan.
 
 Our
Compensation Committee, consisting of Mr. Lutin, who chairs the committee,
and Messrs. Arnold and Schreiber, have responsibility for establishing and
overseeing our compensation programs for our named executive
officers.
 
 79
 Objective of
Compensation
 
 Our primary goals with respect to
executive compensation are:
 ·  to
attract and retain the most talented and dedicated executives
possible;
 ·  to
acknowledge and reward individual contributions to the
Company; and
 ·  to encourage long-term value
creation by aligning executives’ interests with stockholders’
interests.
 
 To
achieve these goals, the board of directors intends to implement and maintain
compensation plans that tie a substantial portion of our named executive
officers’ overall compensation to revenue growth and equity appreciation. All of
our named executive officers have entered into employment agreements and their
compensation is based on the contractual obligations under those agreements. In
addition, we evaluate compensation on an ongoing basis and make adjustments as
we believe are necessary to fairly compensate our executives and to retain their
services.
 We do not
benchmark our compensation against that of others in our industry and we do not
engage compensation consultants to assist us in developing our compensation
arrangements.
 Establishing Executive
Compensation
 
 Role of the Compensation
Committee.  The Compensation Committee is responsible for the
compensation of the named executive officers. Its role is to review and approve
our compensation programs, policies and practices with respect to the named
executive officers. In consultation with the Chief Executive Officer, the
Compensation Committee evaluates the performance of the executive officers
following the end of each fiscal year. In connection with their evaluation, the
Compensation Committee reviews the recommendation of the Chief Executive Officer
in order to determine the base compensation for the executive officers for the
upcoming fiscal year in light of the objectives of our compensation
programs.
 Role of the Chief Executive
Officer.  The Chief Executive Officer assists the Compensation
Committee in reaching compensation decisions by developing recommended
compensation for the named executive officers other than himself. The Chief
Executive Officer meets with each named executive officer formally on an annual
basis to review past performance and to discuss performance objectives for the
following year. In connection with developing his recommendations for named
executive officer compensation, the Chief Executive Officer evaluates the
totality of each compensation package with consideration of a variety of
factors, including the executive officer’s performance, our financial
performance and his sense of the market for executive talent developed through
his personal experience, contacts in the airline industry and in the south
Florida region, publicly available information and our compensation goals. The
Chief Executive Officer may also consult informally with the Compensation
Committee prior to presenting his recommendations to the Compensation Committee
for their review and discussion to ensure that his recommendations will best
reflect our compensation objectives. By the time the Chief Executive Officer
presents his recommendations to the Compensation Committee, the Compensation
Committee has already provided informal feedback and therefore the Compensation
Committee generally only makes minor adjustments to the Chief Executive
Officer’s recommendations.
 
 Role of Employment
Agreements.  We consider employment agreements to be an
important part of recruiting and retaining qualified executive officers. Mr.
Hackett and Mr. Cooper have entered into employment agreements with us. Our
employment agreements with these executive officers establish their initial base
compensation and on-going annual cash bonus as a percentage of a relevant
financial metric. Employment agreement terms also include severance and
change-in-control provisions. The Compensation Committee’s judgment is that
employment agreements are beneficial for us. These employment agreements are
described in further detail under “Agreements with Named Executive
Officers.”
 
 Elements of
Compensation
 
 We have
entered into employment agreements with Mr. Hackett and Mr. Cooper
addressing specific compensation arrangements in order to retain those executive
officers. Our employment agreement with Mr. Cooper predates the acquisition
and was left unchanged. The terms of these employment agreements were
individually developed based on a number of factors, including the particular
executive’s position, his scope of duties, his experience, his past performance,
our compensation goals and the market for executive talent.
 
 80
 
 We do not
benchmark our overall compensation arrangements, or any of the individual
elements of compensation, against the compensation arrangements of any other
company or group of companies. However, based on the knowledge and experience of
Mr. Hackett and the board of directors, we do consider the market for
executive talent in our industry and in our region as a way to improve our
ability to attract and retain talented executive officers.
 
 Executive
compensation consists of the following elements:
 
 Base Salary.  All
of our named executive officers are entitled to a base salary. We initially set
base salaries to attract talented executive officers to the Company. The base
salaries of existing named executive officers are reviewed on an ongoing basis,
and adjusted from time to time to realign salaries with market levels after
taking into account individual responsibilities, performance and
experience.
 The base
salary for each of the other named executive officers is recommended by the
Chief Executive Officer and approved by the Compensation Committee. In
determining appropriate levels of base compensation for the named executive
officers other than the Chief Executive Officer, the Chief Executive Officer
develops specific recommendations to review with the Compensation Committee. The
Chief Executive Officer considers the named executive officer’s individual
performance. The Compensation Committee annually reviews the recommendations of
the Chief Executive Officer. Typically, the Compensation Committee considers two
types of potential increases to the base salary of the named executive officers:
(1) “merit increases” based upon the named executive officer’s individual
performance, and (2) “market adjustments” based upon the Compensation
Committee’s opinion of the base compensation for similar
executives.
 Performance
Bonus.  We use two types of bonuses. The first are
non-discretionary bonuses based on the financial performance of the Company or
one of its businesses. The Compensation Committee believes that tying a bonus
payment primarily to financial metrics provides appropriate incentive to the
named executive officers contributes to the financial success of the
Company.
 
 The
second type of bonuses is discretionary bonuses, which the Compensation
Committee has the authority to award to any of our named executive officers.
Discretionary bonuses are intended to allow the Compensation Committee to reward
named executive officers for individual performance over the course of the
previous fiscal year independent of the Company’s financial performance. The
actual amount of discretionary bonus will be determined following a review of
each executive’s individual performance and contribution to our strategic goals
conducted after the end of each fiscal year. Our discretionary bonus is paid in
cash in a single installment in the first quarter following the completion of a
given fiscal year. The Compensation Committee has not fixed a maximum payout for
any executive officers’ discretionary bonus. In 2009, we did not award any
discretionary bonuses.
 
 Equity
Compensation.  We believe that positive long-term performance
is achieved through an ownership culture that encourages such performance by our
named executive officers through the use of stock and stock-based awards. The
Gulfstream International Group Amended and Restated Stock Incentive Plan (the
“Plan”) was established in March 2006, and amended and restated on Mary and
November 2009, to provide certain of our employees, including our named
executive officers, with incentives to help align those employees’ interests
with the interests of stockholders. The Plan permits the issuance of a variety
of equity-based awards, including tax qualified incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock and
restricted stock units, and other stock-based awards.
 
 The
Compensation Committee believes that the use of stock and stock-based awards
offers the best approach to achieving our compensation goal of aligning the
interests of our named executive officers with those of our stockholders. We
have not adopted stock ownership guidelines, and our Plan has provided an
important method for our named executive officers to acquire equity or
equity-linked interests in our Company. Through the growth we hope to achieve
and the size of our equity awards, we expect to provide a significant portion of
total compensation to our named executive officers through our Plan. Our
Compensation Committee is the administrator of the Plan.
 Although
our Plan permits us to issue a variety of different equity-based awards, since
adopting the Plan, we have only granted tax qualified incentive stock options.
Stock option grants reflect our desire to provide a meaningful equity incentive
for named executive officers to help us succeed over the long term. Stock
options provide for financial gain derived from the potential appreciation in
our stock price from the date the option is granted until the date that the
option is exercised. Our long term performance ultimately determines the value
of stock options, because gains recognized from stock option exercises are
entirely dependent on the long-term appreciation of our stock price. We expect
stock options to continue as a significant component of executive compensation
arrangements. In addition to the named executive officers, stock options have
been granted to our other executives who are in positions that are key to our
long-term success.
 
 81
 
 Stock
option grants are made at various times including at the commencement of
employment and, occasionally, following a significant change in job
responsibilities or to meet other special retention or performance objectives.
The Compensation Committee reviews and approves stock option awards to named
executive officers based upon its assessment of individual performance,
consideration of each executive’s existing long-term incentives, and retention
considerations. Periodic stock option grants are made at the discretion of the
Compensation Committee to eligible employees and, in appropriate circumstances,
the Compensation Committee considers the recommendations of Mr. Hackett,
our Chief Executive Officer, for grants to his direct
reports.
 
 Perquisites
and Other Compensation.
 
 Employee
benefits offered to named executive officers are designed to meet current and
future health and security needs for the named executive officers and their
families. Executive benefits are the same as those offered to all employees,
except that we pay medical insurance premiums in full for the named executive
officers enrolled in our medical benefit plan. The employee benefits offered to
all eligible employees include medical, dental and life insurance benefits,
flexible spending accounts for medical expense reimbursements, and a 401(k)
retirement savings plan that, include a partial Company match.
 
 The
401(k) retirement savings plan is a defined contribution plan under
Section 401(a) of the Internal Revenue Code. Employees may make pre-tax
contributions into the plan, expressed as a percentage of compensation, up to
prescribed IRS annual limits. We provide an employer matching contribution of
25% on the first 4% of employee pay contributed.
 Upon
retirement, each named executive officer is entitled to medical, dental and life
insurance plan continuation for 18 months under the federal and state COBRA
provisions at his or her election. In addition, the executive is entitled to
elect to receive distributions from our 401(k) retirement plan, under the terms
of that plan. Also any vested but unexercised stock options may be exercised for
a period of 60 days and three months, respectively, after
retirement.
 Other
Compensation.
 Our named executive officers who were
parties to employment agreements will continue to be parties to such employment
agreements in their current form until such time as the Compensation Committee
determines in its discretion that revisions to such employment agreements are
advisable. In addition, consistent with our compensation philosophy, we intend
to continue to maintain our current benefits and perquisites for our named
executive officers; however, the Compensation Committee in its discretion may
revise, amend or add to the officer’s executive benefits and perquisites if it
deems it advisable. We currently have no plans to change either the employment
agreements (except as required by law or as required to clarify the benefits to
which our named executive officers are entitled as set forth herein) or levels
of benefits and perquisites provided there under.
 
 Summary
Compensation Table
 
 The following table sets forth certain
information concerning the compensation of the chief executive officer and
certain of other executive officers of the Company whose aggregate cash
compensation exceeded $100,000 for each of the last two fiscal
years.
 
 Name
      and principal position
              
              Year
              
              Salary
              
              
              Bonus
      (1)
              
              
              Option

                Awards
      (2)
              
              
              Non-Equity
                Incentive
      Plan
                Compensation
              
              
              All
      Other
                Compensation
      (3)
              
              
              TotalDavid
      F. HackettChief
      Executive  Officer and President
              
              2009
              
              $
              170,000
              
              
              $
              27,091
              
              
              $
              6,496
              
              
              
              -
              
              
              $
              16,697
              
              
              $
              220,2842008
              
              $
              134,900
              
              
              $
              23,800
              
              
              
              -
              
              
              
              -
              
              
              $
              14,400
              
              
              $
              173,100Thomas P.
      CooperSenior Vice 
      President, Legal Affairs
              
              2009
              
              $
              100,000
              
              
              $
              4,553
              
              
              $
              5,113
              
              
              
              -
              
              
              $
              15,884
              
              
              $
              125,5502008
              
              $
              100,000
              
              
              $
              6,100
              
              
              $
              4,900
              
              
              
              -
              
              
              $
              13,600
              
              
              $
              124,670Robert
      M. Brown
              
              2009
              
              $
              150,000
              
              
              
              -
              
              
              $
              13,174
              
              
              
              -
              
              
              $
              11,179
              
              
              $
              161,179Chief
      Financial Officer
              
              2008
              
              $
              150,000
              
              
              
              -
              
              
              $
              14,600
              
              
              
              -
              
              
              $
              9,500
              
              
              $
              174,100
 
 ———————
 (1)  In
2008, Mr. Hackett received discretionary aggregate quarterly bonus payments
of $23,800.
  (2)  Reflects
options awarded under the Company’s Stock Incentive Plan. These options vest and
become exercisable in 20% increments starting on the grant date and 20% on each
anniversary of the grant date. These amounts represent the financial reporting
expense recognized by the Company in 2008 and 2009 in accordance with SFAS 123R,
and not the amounts that may be eventually realized by the named executive
officers.
 
 (3)  The
All Other Compensation column consists of items not properly reported in the
other columns of this table, and for each named executive officer includes
perquisites and other personal benefits. The amount for each named executive
officer includes health insurance premiums, 401(k) matching contributions, and
life insurance premiums.
 
 82
 
 Agreements
with Named Executive Officers
 
 David F. Hackett
 
 On March 14, 2006,
Mr. Hackett and the Gulfstream entered into an Executive Employment
Agreement, pursuant to which, among other things, Mr. Hackett is to serve
as President of Gulfstream for an initial term of two years, subject to
automatic one-year extensions absent mutual amendment of the terms or
termination by either party as set forth therein. Mr. Hackett is entitled
to a base salary of $170,000 (as increased to reflect increases in the consumer
price index and at the discretion of the Compensation Committee of Board of
Directors) and a bonus determined at the discretion of the Compensation
Committee.  In the event of Mr. Hackett’s death during the term
of the agreement, Mr. Hackett’s salary and any bonus will be paid to his
designated beneficiary, estate or other legal representative for six months
following his death. In the event of Mr. Hackett’s disability during the
term of the agreement, Mr. Hackett will be entitled to receive no less than
six months’ salary and any bonus following such disability. This disability
payment is in addition to other long-term disability benefits provided by the
Company to Mr. Hackett. For the purposes of this agreement, “disability” is
deemed to have occurred if Mr. Hackett is unable by reason of sickness,
disease or accident to substantially perform his duties under the agreement for
an aggregate of six months in any one-year period, or if he has a guardian of
his person or estate appointed by a court.
 
 Upon
termination of the agreement without “cause” by Gulfstream, Mr. Hackett
will be entitled to benefits for the remainder of the initial or then-current
renewal term of the agreement and compensation in the form of base salary and
incentive bonus payments for one year thereafter. For the purposes of this
agreement, “cause” is defined as (i) repeated failure or refusal to reasonably
cooperate with a governmental investigation of Gulfstream; (ii) willfully
committing or participating in any act or omission which constitutes willful
misconduct, fraud, misrepresentation, embezzlement or dishonesty that is
materially injurious to Gulfstream; (iii) committing or participating in any
other act or omission wantonly, willfully, recklessly or in a manner which was
grossly negligent that is materially injurious to the company, monetarily or
otherwise; (iv) engaging in a criminal enterprise involving moral turpitude; (v)
any crime resulting in a conviction, which constitutes a felony in the
jurisdiction involved (other than a motor vehicle felony that does not result in
his incarceration); (vi) any loss of any state or federal license required for
Mr. Hackett to perform his material duties or responsibilities for
Gulfstream; or (vii) any material breach of the employment agreement by
Mr. Hackett.
 
 Mr. Hackett
has the right to terminate the agreement upon 30 days notice for one year after
any change in control. The Company’s obligations to make payments to
Mr. Hackett following such a termination are described more fully below
under “Potential Payments Upon Termination or Change In Control”. Pursuant to
his employment agreement, Mr. Hackett agrees to a covenant not to compete
during the term of the agreement and for a period of one year thereafter in the
territory of Florida, the Bahamas and portions of Cuba. Mr. Hackett also
agrees to maintain the confidentiality of certain information in certain
circumstances.
 
 Thomas
P. Cooper
 On
August 7, 2003, Mr. Thomas P. Cooper and Gulfstream entered into an
Executive Employment Agreement, pursuant to which, among other things,
Mr. Cooper serves as Senior Vice President, Legal Affairs, or such other
position as the Board of Directors of Gulfstream determines, for an initial term
of three years, subject to automatic one-year extensions absent mutual amendment
of the terms or termination by either party as set forth therein.
Mr. Cooper is entitled to a base salary of $100,000 (as increased to
reflect increases in the consumer price index or at the discretion of the
Compensation Committee) and to a bonus equal to 1% of Gulfstream’s annual
pre-tax income which amount is paid quarterly on a trailing twelve month basis,
excluding non-recurring gains and losses.
 
 83
 
 In the
event of Mr. Cooper’s death during the term of the agreement;
Mr. Cooper’s salary and incentive bonus will be paid to his designated
beneficiary, estate or other legal representative for six months following his
death. In the event of Mr. Cooper’s disability during the term of the
agreement, Mr. Cooper will be entitled to receive no less than six months’
salary following such disability. This disability payment is in addition to
other long-term disability benefits provided by the Company to Mr. Cooper.
For the purposes of this agreement, “disability” is deemed to have occurred if
Mr. Cooper is unable by reason of sickness, disease or accident to
substantially perform his duties under the agreement for an aggregate of six
months in any one year period, or if he has a guardian of his person or estate
appointed by a court.
 
 Upon
termination of the agreement without “cause” by Gulfstream, Mr. Cooper will
be entitled to benefits for the remainder of the initial or then-current renewal
term of the agreement and base salary for one year plus one month for each year
of service with Gulfstream. For the purposes of this agreement, “cause” is
defined as (i) willfully committing or participating in any act or omission
which constitutes willful misconduct, fraud, misrepresentation, embezzlement or
dishonesty that is materially injurious to Gulfstream; (ii) committing or
participating in any other act or omission wantonly, willfully, recklessly or in
a manner which was grossly negligent that is materially injurious to the
company, monetarily or otherwise; (iii) engaging in a criminal enterprise
involving moral turpitude; (iv) any crime resulting in a conviction, which
constitutes a felony in the jurisdiction involved (other than a motor vehicle
felony that does not result in his incarceration); (v) any loss of any state or
federal license required for Mr. Cooper to perform his material duties or
responsibilities for Gulfstream; or (vi) any material breach of the employment
agreement by Mr. Cooper.
 
 Mr. Cooper
has the right to terminate the agreement upon 30 days notice for one year after
any change in control. The Company’s obligations to make payments to
Mr. Cooper following such a termination are described more fully below
under “—Potential Payments Upon Termination or Change In Control”. Pursuant to
his employment agreement, Mr. Cooper agrees to a covenant not to compete
during the term of the agreement and for a period of six months thereafter in
the territory of Florida and the Bahamas (unless terminated without cause by
Gulfstream, in which case the noncompetition obligations of Mr. Cooper will
end upon his termination). Mr. Cooper also agrees to maintain the
confidentiality of certain information in certain circumstances.
 
 Employee
Benefit Plans
 
 401(k) Plan.The Company
established a 401(k) retirement savings plan in 1996. Each of the Company’s
participating employees may contribute to the 401(k) plan, through payroll
deductions, up to 50% on a pre-tax basis of his or her compensation, subject to
limits imposed by federal law. Beginning on July 1, 2006, the Company
matched 25% of the first 4% contributed by participants. The Company may make
additional contributions to the 401(k) plan in amounts determined by its Board
of Directors. Employees may elect to invest their contributions in various
established mutual funds. All amounts contributed by employee participants are
fully vested at all times. The amounts matched by the Company are vested 25% in
the first year of employment, 50% in the second year of employment, 75% in the
third year of employment, and 100% in and after the fourth year of employment.
For the year ended December 31, 2009, administrative expenses paid to
third-party provider related to the Company’s 401(k) plan were approximately
$16,000.
 
 Stock
Incentive Plan
 
 The Plan.  The Plan
was adopted by its Board of Directors and approved by its stockholders in 2006.
The amended and restated plan was adopted by its Board of Directors and approved
by its stockholders in 2009. Such plan provides for the granting of incentive
stock options, non-incentive stock options, SARs, cash-based awards, or other
stock-based awards to employees, directors or consultants selected by the
Compensation Committee. The plan authorizes 650,000 shares of the Common Stock
to be issued under the plan. A detailed description of the Plan can be found
below under “Gulfstream International Group Stock Option Plan”.
 
 As of the
date of this report, the Company has only awarded options to certain of its
officers, employees and directors for an aggregate of 348,324 shares of such
Common Stock. None of the options awarded to date have been exercised. No
options were awarded in 2008. An aggregate of 60,000 options were awarded in
January 2009 to the named executive officers.
 
 84
  Outstanding
Equity Awards at Fiscal Year-End
 
 
 Option
      AwardsName
              
              Number
      of
                Securities
      Underlying Unexercised Options
                (#)
                Exercisable
              
              
              Number
      of
                Securities
      Underlying
                Unexercised
      Options
                (#)
                Un-exercisable
              
              
              Equity
      Incentive
                Plan
      Awards:
                Number
      of Securities
                Underlying
      Unexercised Unearned Options
                (#)
              
              
              Option
                Exercise
      Price
                ($)
              
              OptionExpirationDateDavid
      F. Hackett
              
              
              104,324
              
              
              
              ––
              
              
              
              ––
              
              
              $
              5.00
              
              May 31,
      20166,000
              
              
              
              24,000
              
              
              
              ––
              
              
              $
              2.00
              
              January
      19, 2019Robert.
      M. Brown
              
              
              18,000
              
              
              
              12,000
              
              
              
              ––
              
              
              $
              5.00
              
              January 26,
      20174,000
              
              
              
              16,000
              
              
              
              ––
              
              
              $
              2.00
              
              January
      19, 2019Thomas
      P. Cooper
              
              
              6,000
              
              
              
              4,000
              
              
              
              ––
              
              
              $
              5.00
              
              January 26,
      20172,000
              
              
              
              8,000
              
              
              
              ––
              
              
              $
              2.00
              
              January
      19, 2019
  Awards Granted. As of March
31, 2010, the Company has granted options to purchase 348,324shares and 301,676
shares remain available for future awards under the Plan, or approximately 46.4%
of the 650,000 total shares reserved. The table below sets forth the number of
shares subject to awards which have been granted through March 31, 2010 to (i)
individual named executive officers, (ii) named executive officers as a group,
(iii) all current directors who are not named executive officers, and (iv) all
employees, including officers who are not named executive officers, as a
group:
 
 Award
      Recipients
              
              Number
      of
                Shares
      AwardedNamed
      executive officers:David
      F. Hackett
              
              
              134,324Robert
      M. Brown
              
              
              50,000Thomas
      P. Cooper
              
              
              20,000Executive
      Officers As a Group
              
              
              204,324All
      other employees, as a group:
              
              
              104,000Current
      Directors who are not named executive officers:Thomas
      A. McFall
              
              
              10,000Gary
      P. Arnold
              
              
              4,000Gary
      L. Fishman
              
              
              2,000Barry
      S. Lutin
              
              
              4,000Richard
      R. Schreiber
              
              
              2,000Total
              
              
              348,324
 
 85
 
 Potential
Payments upon Termination or Change-In-Control
 
 The named
executive officers are entitled to payments upon termination or
change-in-control as set forth in their respective employment agreements, with
the exception of Robert M. Brown. The Board of Directors provides payments to
named executive officers upon termination or change of control in order to give
them some degree of financial protection in the event of certain events
occurring. The payment to which each named executive officer is eligible is
roughly proportionate to such named executive officer’s level of total
compensation.
 
 
 Payments
Made Upon Termination
 
 In the
event that a named executive officer’s employment terminates for reasons of
voluntary termination, early retirement, involuntary not-for-cause termination,
termination following a change of control of the Company and in the event of
disability or death of the executive, he is entitled to receive amounts earned
during his term of employment. Such amounts include:
 
 ·
              quarterly
      bonus earned for any completed fiscal quarter for Mr. Thomas P.
      Cooper;
 ·
              vested
      options awarded under the Company’s Stock Incentive
  Plan;
 ·
              vested
      amounts contributed under the Company’s 401(k) plan;
  and
 ·
              pay
      in lieu of unused vacation.
 
 Payments
Made Upon Death or Disability
 
 In the
event of the death or disability of a named executive officer, each named
executive officer is entitled to certain benefits as described in their
employment agreements described above under “—Agreements with Named Executive
Officers.” The Company does not maintain a disability plan.
 
 Payments
Made Upon a Change in Control
 
 Change
in Control of the Company
 
 In the
event of a change in control of the Company, the Board of Directors or a
committee thereof may provide for accelerated vesting or termination of any
outstanding stock options issued under the Stock Incentive Plan in exchange for
a cash payment, or the issuance of substitute awards to substantially preserve
the terms of any option awards previously granted under the Stock Incentive
Plan. A description of the events giving rise to a “change in control” for
purposes of the Stock Incentive Plan is set forth below under “— The Gulfstream
International Group Stock Incentive Plan”.
 
 Change
in Control of Gulfstream
 
 Pursuant
to the employment agreements between the Company and each named executive
officer, with the exception of Robert Brown, the Company is obligated to make
certain payments to such executive if his employment is terminated following a
change in control of Gulfstream (as defined above) (other than termination by
Gulfstream for cause or by reason of death or disability) or if he terminates
his employment within one year after the occurrence of a change in control of
Gulfstream, as follows:
 
 ·
              continued
      payment of base salary and incentive bonus payments, in the case of
      Mr. Hackett one year following termination of the executive’s
      employment and in the case of Mr. Thomas P. Cooper one year following
      termination of executive’s employment plus one additional month for each
      year of service to the Company; and
 ·
              continued
      medical and life insurance benefits for the balance of the initial term of
      the applicable employment
agreement.
 
 Generally,
pursuant to the agreements, a “change in control” of Gulfstream means a change
in control (A) as set forth in Section 280G of the Internal Revenue Code;
or (B) of a nature that would be required to be reported in response to Item
2.01 of a current report on Form 8-K pursuant to Section 13 or 15(d)
of the Securities Exchange Act, as in effect on the date of the relevant
agreement, including upon any of the following:
 
 86
  ·
              any
      “person” (as such term is used in Section 13(d) and 14(d) of the
      Exchange Act) other than the executive is or becomes the “beneficial
      owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
      indirectly, of securities of the Company representing fifty percent
      (50%) or more of the combined voting power of the Company’s outstanding
      securities then having the right to vote as elections of
      directors;
 ·
              the
      individuals who at the effective date of the applicable employment
      agreement constitute the Board of Directors cease for any reason to
      constitute a majority thereof, unless the election, or nomination for
      election, of each new director was approved by a vote of at least
      two-thirds (2/3) of the directors then in office who were directors at the
      effective date of the applicable employment
  agreement;
 ·
              there
      is a failure to elect a majority of the Board of Directors from candidates
      nominated by management of the Company to the Board of Directors;
      or
 ·
              the
      business of Gulfstream for which the executive’s services are principally
      performed is disposed of by Gulfstream pursuant to a partial or complete
      liquidation of Gulfstream, a sale of assets (including stock of a
      subsidiary of Gulfstream) or
otherwise.
 
 A change
in control is deemed not to have occurred on either of the following
circumstances:
 
 ·
              where
      all or any portion of the stock of Gulfstream is offered through an
      initial or subsequent public offering;
and/or
 ·
              where
      the executive gives his explicit written waiver stating that for the
      purposes of the relevant portions of his employment agreement, a change in
      control shall not be deemed to have
occurred.
 
 In the
event that the executive’s employment is terminated for any reason other than
cause within one year following an “attempted change in control,” the executive
shall be entitled to the same benefits and compensation as though he was
terminated in the year following a change in control. An “attempted change in
control” is deemed to have occurred if any substantial attempt, accompanied by
significant work efforts and expenditures of money, is made to accomplish a
change in control, whether or not such attempt is made with the approval of a
majority of the Board of Directors.
 
 Gulfstream
International Group Stock Incentive Plan
 
 The
following is a summary of the Gulfstream International Group Stock Incentive
Plan (the “Plan”). This summary is qualified in its entirety by reference to the
complete text of the Plan.
 
 Purpose. The purpose of the
Plan is to provide the Company with a means to assist in recruiting, retaining
and rewarding certain employees, directors and consultants and to motivate such
individuals to exert their best efforts on behalf of the Company by providing
incentives through the granting of awards. By granting awards to such
individuals, the Company expects that the interests of the recipients will be
better aligned with the interests of the Company.
 
 Stock Subject to the Plan.
Currently a total of 650,000shares of Common Stock
may be issued under the Plan, subject to adjustments. The Company may use shares
held in treasury in lieu of authorized but unissued shares. If any award expires
or terminates, the shares subject to such award shall again be available for
purposes of the Plan. Any shares used by the participant as payment to satisfy a
purchase price related to an award, and any shares withheld by the Company to
satisfy an applicable tax-withholding obligation, shall again be available for
purposes of the Plan.
 
 Administration of the Plan.
The Plan is administered by the Compensation Committee, all of the members of
which are independent as required by law. The Compensation Committee has sole
discretion over determining individuals eligible to participate in the Plan and
the time or times at which awards will be granted and the number of shares, if
applicable, which will be granted under an award. Subject to certain
limitations, the Compensation Committee’s power and authority includes, but is
not limited to, the ability to interpret the plan, to establish rules and
regulations for carrying out the plan and to amend or rescind any rules
previously established, to determine the terms and provisions of the award
agreements and to make all other determinations necessary or advisable for the
administration of the plan.
 
 Eligible Persons. Any
employee or director, as well as consultant to the Company, who is selected by
the Compensation Committee is eligible to receive awards. The Compensation
Committee will consider such factors as it deems pertinent in selecting
participants and in determining the type and amount of their respective awards,
provided that incentive stock options may only be granted to
employees.
 
 Grant of Awards. The types of
awards that may be granted under the Plan are stock options (either incentive
stock options or non-qualified stock options), stock appreciation rights,
performance-based awards, as well as other stock-based awards and cash-based
awards?. Awards are evidenced by an agreement and an award recipient has no
rights as a stockholder with respect to any securities covered by an award until
the date the recipient becomes a holder of record of the Common
Stock.
 
 87
 
 On the
date of the grant, the exercise price must equal at least 100% of the fair
market value in the case of incentive stock options, or 110% of the fair market
value with respect to optionees who own at least 10% of the total combined
voting power of all classes of stock. The fair market value is determined by
computing the arithmetic mean of the high and low stock prices on a given
determination date. This price needs not be uniform for all recipients of
non-qualified stock options and must not be less than 100% of the fair market
value. The exercise price on the date of grant is determined by the Compensation
Committee in the case of non-qualified stock options. Options granted under the
plan will vest as provided by the Compensation Committee at the time of the
grant. The currently outstanding options vest 20% on the date of grant and then
ratably at 20% per year over the next four years. The options expire on the date
determined by the Compensation Committee but may not extend more than ten years
from the grant date. The Compensation Committee may provide for accelerated
vesting or termination in exchange for cash of any outstanding awards or the
issuance of substitute awards upon consummation of a “change in
control”.
 
 For
purposes of the Plan, a “change in control” is defined as (i) the purchase or
other acquisition (other than from the Company) by any person, entity or group
of persons, within the meaning of § 13(d) or § 14(d) of the Exchange Act
(excluding, for this purpose, the Company or its subsidiaries or any employee
benefit plan of the Company or its subsidiaries), of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
51% or more of either the outstanding shares of the Common Stock or the combined
voting power of the Company’s outstanding voting securities entitled to vote
generally in the election of directors, each as of the time the Stock Incentive
Plan was entered into; or (ii) individuals who constituted the Board of
Directors at the time the Stock Incentive Plan was entered into cease for any
reason to constitute at least a majority of the Board of Directors, except for
the election of any person who becomes a director subsequent to such date whose
election, or nomination for election by the Company’s stockholders, was approved
by a vote of at least a majority of the directors then comprising the incumbent
Board of Directors (other than an individual whose initial assumption of office
is in connection with an actual or threatened election contest relating to the
election of directors); or (iii) approval by the Company’s stockholders of a
reorganization, merger or consolidation, in each case with respect to which
persons who were the stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own more
than 50% of, respectively, the Common Stock and the combined voting power
entitled to vote generally in the election of directors of the reorganized,
merged or consolidated corporation’s then outstanding voting securities, or of a
liquidation or dissolution of the Company or of the sale of all or substantially
all of the assets of the Company.
 
 Stock
appreciation rights granted under the plan are subject to the same terms and
restrictions as the option grants and may be granted independent of, or in
connection with, the grant of options. The Compensation Committee determines the
exercise price of stock appreciation rights. A stock appreciation right granted
independent of an option entitles the participant to payment in an amount equal
to the excess of the fair market value of a share of the Common Stock on the
exercise date over the exercise price per share, times the number of stock
appreciation rights exercised. A stock appreciation right granted in connection
with an option entitles the participant to surrender an unexercised option and
to receive in exchange an amount equal to the excess of the fair market value of
a share of the Common Stock over the exercise price per share for the option,
times the number of shares covered by the option which is surrendered. Fair
market value is determined in the same manner as it is determined for
options.
 
 The
Compensation Committee may also grant awards of stock, restricted stock and
other awards valued in whole or in part by reference to the fair market value of
the Common Stock. These stock-based awards, in the discretion of the
Compensation Committee, may be, among other things, subject to completion of a
specified period of service, the occurrence of an event or the attainment of
performance objectives. Additionally, the Compensation Committee may grant
awards of cash, in values to be determined by the Compensation Committee. If any
awards are in excess of $1,000,000 such that Section 162(m) of the Internal
Revenue Code applies, the committee may, in its discretion, alter its
compensation practices to ensure that compensation deductions are
permitted.
 
 Awards
granted under the plan are generally not transferable by the participant except
by will or the laws of descent and distribution, and each award is exercisable,
during the lifetime of the participant, only by the participant or his or her
guardian or legal representative, unless permitted by the
committee.
 
 Amendment. The plan may be
amended, altered, suspended or terminated by the administrator at any time. The
Company may not alter the rights and obligations under any award granted before
amendment of the plan without the consent of the affected participant. Unless
terminated sooner, the plan will terminate automatically on February 28,
2016.
 
 88
 Federal
Income Tax Consequences of Awards
 
 The
following is a summary of the U.S. federal income tax consequences that
generally will arise with respect to awards granted under the plan and with
respect to the sale of Common Stock acquired under the plan. The federal tax
laws may change and the federal, state and local tax consequences for any
participant will depend upon his or her individual circumstances. The tax
consequences for any particular individual may be different.
 
 Incentive Stock Options. Some
options may constitute “incentive stock options” within the meaning of
Section 422 of the Code. If the Company grants an incentive stock option,
the recipient is not required to recognize income upon the grant of the
incentive stock option, and the Company will not be allowed to take a deduction.
Similarly, when a recipient exercises any incentive stock options, provided he
or she has not ceased to be an employee of the Company and all affiliates for
more than three months before the date of exercise, such employee will not be
required to recognize income, and the Company will not be allowed to take a
deduction. For purposes of the alternative minimum tax, however, the amount by
which the aggregate fair market value of Common Stock acquired on exercise of an
incentive stock option exceeds the exercise price of that option generally will
be an adjustment included in alternative minimum taxable income for the year in
which the incentive stock option is exercised. The Code imposes an alternative
minimum tax on a taxpayer whose tentative minimum tax, as defined in
Section 55(b) (1) of the Code, exceeds the taxpayer’s regular
tax.
 
 Additional
tax consequences will depend upon how long the recipient holds the shares of
Common Stock received after exercising the incentive stock options. If the
shares are held for more than two years from the date of grant and one year from
the date of exercise of the option, upon disposition of the shares, any gain
upon the subsequent sale of the Common Stock will be taxed as a long-term
capital gain or loss. If the recipient disposes of shares acquired upon exercise
of an incentive stock option which shares were held for two years or less from
the date of grant or one year or less from the date of exercise (“Disqualifying
Disposition”), the recipient generally will recognize ordinary income in the
year of the Disqualifying Disposition.
 
 To the
extent that a recipient recognizes ordinary income, the Company is allowed to
take a deduction. In addition, a recipient must recognize as short-term or
long-term capital gain, depending on whether the holding period for the shares
exceeds one year, any amount that is realized upon disposition of those shares
which exceeds the fair market value of those shares on the date of exercise of
the option.
 
 Non-Qualified Stock Options.
If a recipient receives a non-qualified stock option, he or she will not
recognize income at the time of the grant of the stock option, nor will the
Company be entitled to a deduction. However, such person will recognize ordinary
income upon the exercise of the non-qualified stock option. The amount of
ordinary income recognized equals the difference between (a) the fair market
value of the stock on the date of exercise and (b) the amount paid for the
stock. The Company will be entitled to a deduction in the same amount. The
ordinary income recognized will be subject to applicable tax withholding by the
Company. When the shares are sold, any difference between the sales price and
the basis (i.e., the amount paid for the stock plus the ordinary income
recognized) will be treated as a capital gain or loss, depending on the holding
period of the shares.
 
 Performance-Based Awards/Stock
Appreciation Rights. An award recipient generally will not recognize
taxable income upon the grant of performance-based awards or stock appreciation
rights. Instead, such person will recognize as ordinary income, and the Company
will have as a corresponding deduction, any cash delivered and the fair market
value of any Common Stock delivered in payment of an amount due under the
performance award or stock appreciation right. The ordinary income recognized
will be subject to applicable tax withholding.
 
 Upon
selling any Common Stock received by a recipient in payment of an amount due
under a performance award or stock appreciation right, such recipient generally
will recognize a capital gain or loss in an amount equal to the difference
between the sale price of the Common Stock and the tax basis in the Common
Stock, depending on the holding period for the shares.
 
 Other Stock-Based Awards and
Cash-Based Awards. The tax consequences associated with any other
stock-based award or cash-based award granted under the Plan will vary depending
on the specific terms of the award, including whether the award has a readily
ascertainable fair market value, whether or not the award is subject to
forfeiture provisions or restrictions on transfer, the nature of the property
under the award, the applicable holding period and the recipient’s tax
basis.
 
 Income Tax Rates on Capital Gain and
Ordinary Income.  Under current tax law, short-term capital gain and
ordinary income will be taxable at a maximum federal rate of 35%. Phaseouts of
personal exemptions and reductions of allowable itemized deductions at higher
levels of income may result in slightly higher effective tax rates. Ordinary
compensation income generally will also be subject to the Medicare tax and,
under certain circumstances, a social security tax. On the other hand, the
relevant long-term capital gain will be taxable at a maximum federal rate of
15%.
 
 89
 
 Effect of Section 162(m) of the
Code. Pursuant to Section 162(m) of the Code, the Company may not
deduct compensation of more than $1,000,000 that is paid in a taxable year to an
individual who, on the last day of the taxable year, is the Company’s chief
executive officer or among one of its four other highest compensated officers
for that year. The deduction limit, however, does not apply to certain types of
compensation, including qualified performance-based compensation. Compensation
attributable to incentive stock options and non-qualified stock options granted
under the Plan could be treated as qualified performance-based compensation and
therefore not be subject to the deduction limit. In addition, the Compensation
Committee may structure certain performance-based awards utilizing the
performance criteria set forth in the Plan so that payments under such awards
may likewise be treated as qualified performance-based
compensation.
 
 Compensation
of Directors
 
 The
Company uses a combination of cash and stock-based incentive compensation to
attract and retain qualified candidates to serve on the Board of Directors. In
setting director compensation, the Company considers the significant amount of
time that Directors expend in fulfilling their duties to the Company as well as
the skill level required by the Company with respect to members of the Board of
Directors.  Compensation for the Company’s directors in 2009 was as
follows:
 
 Name
              
              Fees
      Earned
                or
      Paid
                in
      Cash
              
              
              Stock
                Awards
              
              
              Option
      Awards
              
              
              Non-Equity
                Incentive
      Plan Compensation
              
              
              Nonqualified
                Deferred
                Compensation
                Earnings
              
              
              All
      Other Compensation
              
              
              TotalThomas
      A. McFall
              
              
              ––
              
              
              
              ––
              
              
              
              10,000
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––Gary
      P. Arnold
              
              $
              31,000
              
              
              
              ––
              
              
              
              4,000
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              $
              31,000Gary
      L. Fishman
              
              $
              28,000
              
              
              
              ––
              
              
              
              2,000
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              $
              28,000David
      F. Hackett(1)
              
              
              ––
              
              
              
              ––
              
              
              
              
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––Barry
      S. Lutin
              
              $
              34,000
              
              
              
              ––
              
              
              
              4,000
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              $
              34,000Richard
      R. Schreiber
              
              $
              31,000
              
              
              
              ––
              
              
              
              2,000
              
              
              
              ––
              
              
              
              ––
              
              
              
              ––
              
              
              $
              31,000
 ———————
 (1)  Mr. Hackett
is not compensated for his service as a director. The compensation of
Mr. Hackett as President and Chief Executive Officer is disclosed in the
Summary Compensation Table above.
 
 Following
the Company’s initial public offering in December 2007, each director
receives an annual fee of $20,000. Each director receives an additional $5,000
for each committee on which he serves as Chairman per year, $3,000 for each
committee on which he serves as a member (but not as a Chairman) per year and
$500 for each meeting such director attends that is not in conjunction with a
regularly scheduled meeting of the Board of Directors. The Company reimburses
members of the Board of Directors for travel related expenditures related to
their services to the Company. Each director will also be entitled to
participate in the Company’s Stock Incentive Plan. It is expected that new
directors will be granted options on the date that they begin service
exercisable at the then-current market value.
  Limitation
of Liability and Indemnification
 
 Our
certificate of incorporation limits the liability of directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:
 
 90
  ·
              any
      breach of their duty of loyalty to the corporation or its
      stockholders;
 ·
              acts
      or omissions not in good faith or which involve intentional misconduct or
      a knowing violation of law;
 ·
              unlawful
      payments of dividends or unlawful stock repurchases or redemptions;
      or
 ·
              any
      transaction from which the director derived an improper personal
      benefit.
 
 This
limitation of liability does not apply to liabilities arising under the federal
securities laws and does not affect the availability of equitable remedies such
as injunctive relief or rescission.
 
 Our
certificate of incorporation and bylaws also provide that we will indemnify our
directors, officers, employees and agents for damages arising in connection with
their actions in such capacities, subject to certain limitations as set forth in
the bylaws.
 
 There is no pending litigation or
proceeding involving any of our directors, officers, employees or agents where
indemnification will be required or permitted. We are not aware of any pending
or threatened litigation or proceeding that might result in a claim for
indemnification.
  ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
  The following tables set
forth certain information known to us with respect to beneficial ownership of
our Common Stock as of March 31, 2010,by:
 
 ·
              each
      person known by us to own beneficially more than 5% of the Company’s
      outstanding Common Stock;
 ·
              each
      of the Company’s directors;
 ·
              each
      named executive officer; and
 ·
              all
      of the Company’s directors and executive officers as a
    group.
 
 Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power over securities. The table below includes
the number of shares underlying options and warrants that are currently
exercisable or exercisable within 60 days of March 31, 2010. It is therefore
based on 3,795,061 shares of common stock outstanding as of March 31, 2010.
Shares of Common Stock subject to options and warrants that are currently
exercisable or exercisable within 60 days of March 31, 2010 are considered
outstanding and beneficially owned by the person holding the options or warrants
for the purposes of computing beneficial ownership of that person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. To our knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the shares set
forth opposite such person’s name. Except as otherwise indicated, the address of
each of the persons in this table is as follows: c/o Gulfstream International
Group, Inc., 3201 Griffin Road, 4th Floor, Ft. Lauderdale, Florida
33312.
 
 Beneficial
Owners of More Than Five Percent
 
 Name
      of Beneficial Owner
              
              Number
      of Shares Beneficially
              
              Percent
      Beneficially OwnedRobert
      F. Taglich (1)
                700
      New York Avenue
                Huntington, New York
      11743
              
              280,922
              
              7.28%Michael
      N. Taglich (2)
                700
      New York Avenue
                Huntington,
      New York 11743
              
              281,922
              
              7.31%
  91
   Shelter
      Island Opportunity Fund, LLC (3)
                One
      East 52nd Street, 6th Floor
                New
      York, NY 10022
              937,522
              24.70%Daniel
      H. Abramowitz (4)
                110
      North Washington Street, Suite 401
                Rockville,
      Maryland 20850
              231,350
              7.16%Craig
      Macnab (5)
                1860
      Summerland Ave.
                Winter Park,
      FL 32789
              300,000
              7.70%Bahama
      Investments Family (6)
                190
      Sykes Loop Drive
                Merritt
      Island, FL 32953
              300,000
              7.70%Glenn
      Richard Hicks Roth DCG&T (7)
                21 Tanfield
      Rd.
                Tiburon, CA
      92920
              213,000
              5.48%
  
 (1)  Includes
5,000 shares of Common Stock held by Tag/Kent Partnership. Mr. Taglich is a
partner of, and holds a 33.33% interest in, the Tag/Kent
Partnership.
 
 (2) 
 Includes 5,000 shares of Common Stock held by Tag/Kent Partnership. Mr.
Taglich is a partner of, and holds a 33.33% interest in, the Tag/Kent
Partnership.
 
 (3)   Consists
of warrants to purchase 914,189 shares of Common Stock at $0.0011 per share.
 (4) 
 Includes 40,000 shares of Common Stock held by Hillson Investments, LLC,
154,350 shares of Common Stock held by Hillson Partners LP, 35,000 shares of
Common Stock issuable under a warrant held by Hillson Partners LP and 2,000
shares of Common Stock issuable upon exercise of stock options granted under the
Stock Incentive Plan held by Mr. Abramowitz.
 
 (5)  
Consists of 200,000 of common stock issuable upon conversion of 20,000 shares of
preferred stock and warrants to purchase 100,000 shares of Common Stock at $1.75
per share.
 
 (6)   Consists
of 200,000 of common stock issuable upon conversion of 20,000 shares of
preferred stock and warrants to purchase 100,000 shares of Common Stock at $1.75
per share.
 
 (7)  
Consists of 142,000 of common stock issuable upon conversion of 14,200 shares of
preferred stock and warrants to purchase 71,000 shares of Common Stock at $1.75
per share
  Beneficial
Ownership of Directors, Director Nominees and Executive Officers
 
 Name
      of Beneficial Owner
              
              Number
      of Shares
                Beneficially
      Owned
              
              
              Percent
      Beneficially OwnedDavid
      F. Hackett (1)
              
              
              149,324
              
              
              
              3.9
              %Thomas
      A. McFall (2)
              
              
              93,300
              
              
              
              2.5
              %Gary
      P. Arnold (3)
              
              
              84,000
              
              
              
              2.2
              %Robert
      M. Brown (4)
              
              
              32,000
              
              
              
              *Thomas
      P. Cooper (5)
              
              
              25,000
              
              
              
              *Barry
      S. Lutin (6)
              
              
              4,000
              
              
              
              *Richard
      R. Schreiber (7)
              
              
              2,000
              
              
              
              *Gary
      L. Fishman (8)
              
              
              2,000
              
              
              
              *All
      directors and officers as a group
                (9
      persons)  (1)(2)(3)(4)(5)(6)(7)(8)
              
              
              391,624
              
              
              
              10.3
              %
 
 *Indicates
beneficial ownership of less than one percent.
 
 (1)  Includes
116,324 shares of Common Stock issuable upon exercise of stock options granted
under the Stock Incentive Plan held by Mr. Hackett.
 
 (2)  Includes
4,000 shares of Common Stock issuable upon exercise of stock options granted
under the Stock Incentive Plan held by Thomas A. McFall.
 
 (3)  Includes
4,000 shares of Common Stock issuable upon exercise of stock options granted
under the Stock Incentive Plan held by Mr. Arnold.
 
 (4)  Consists
of shares issuable upon exercise of stock options granted under the Stock
Incentive Plan held by Mr. Brown.
 
 92
 
 (5)  Includes
12,000 shares of Common Stock issuable upon exercise of stock options granted
under the Stock Incentive Plan held by Mr. Cooper.
 
 (6)  Consist
of shares issuable upon exercise of stock options granted under the Stock
Incentive Plan held by Mr. Lutin.
 
 (7)  Consists
of shares issuable upon exercise of stock options granted under the Stock
Incentive Plan held by Mr. Schreiber.
 
 (8)  Consist
of shares issuable upon exercise of stock options granted under the Stock
Incentive Plan held by Mr. Fishman.
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
 Since January 1, 2007, there has
not been, nor is there currently planned, any transaction or series of similar
transactions to which the Company was or is a party in which the amount involved
exceeds $120,000 and in which any director, executive officer or holder of more
than 5% of the Common Stock or any member of such persons immediate families had
or will have a direct or indirect material interest other than the transactions
described below.
 
 The
Nominating and Corporate Governance Committee has responsibility for
establishing and maintaining guidelines relating to any related party
transactions between the Company and any of its officers or directors. Under the
Company’s Code of Ethics (which can be accessed from its homepage at http://www.gulfstreamair.com
by selecting “Corporate Governance”), any conflict of interest between a
director or officer and the Company must be referred to the Nominating and
Corporate Governance Committee for approval. The Company intends to adopt
written guidelines for the Nominating and Corporate Governance Committee which
will set forth the requirements for review and approval of any related party
transactions.
 
 The
transactions reported in the following sections “Management Services Agreement,”
“Property Lease,” “Cuba Operations,” “Indemnification and Employment Agreements”
and “Other Services” were not entered into pursuant to a formal policy of the
Company regarding related party transactions. Each transaction below was entered
into prior to the Company’s initial public offering in
December 2007.
 
 Management
Services Agreement
 
 On
March 14, 2006, the Company entered into a management services agreement
with Weatherly Group, LLC, one of the entities which formed the Company for the
purpose of acquiring Gulfstream and the Academy. Under this agreement, Weatherly
Group agreed to provide advisory and management services to the Company in
consideration of an annual management fee of $200,000, payable monthly, and
financial advisory fees based on a formula if the Company merges with or
acquires another company. The agreement was terminated on May 27, 2008 and
there were no fees paid during 2008 or 2009.
 
 Property
Lease
 
 The
Company leases the Gulfstream and Academy headquarters from EYW Holdings, Inc.,
an entity controlled in part by Thomas L. Cooper, the former Chief Executive
Officer and current Chairman Emeritus of Gulfstream, and Thomas P. Cooper, an
officer of Gulfstream, for a combined rent of approximately $34,000 per month.
This corresponds to a price per square foot of approximately $24.29, which was
consistent with lease rates for comparable commercial space at the time this
arrangement was entered into.
 
 Cuba
Operations
 
 GAC, a
related company which is owned by Thomas L. Cooper, the former Chief Executive
Officer of Gulfstream, operates charter flights between Miami and
Havana.
 
 Pursuant
to a services agreement between Gulfstream and GAC dated August 8, 2003 and
amended on March 14, 2006, Gulfstream provides use of its aircraft, flight
crews, the Gulfstream name, insurance, and service personnel, including
passenger, ground handling, security, and administrative. Gulfstream also
maintains the financial records for GAC. Pursuant to the March 14, 2006
amended agreement, Gulfstream receives 75% of the operating profit generated by
GAC’s Cuban charter operation. Income provided under the services agreement
amounted to $425,000 and $1,491,000 for 2008 and 2009,
respectively.
 
 This
profit-sharing arrangement resulted from arms’ length negotiations with the
principal selling stockholder in connection with the Company’s acquisition of
Gulfstream and the Academy.
 
 93
 
 Debt
Financing
 
 On
September 16, 2008, we consummated a financing in which we issued $5.1 million
of senior debentures (the “Senior Debentures”) and warrants to purchase 578,870
shares of common stock (the “Senior Warrants”) to Shelter Island Opportunity
Fund, LLC.  On the same date, we issued a 12% subordinated convertible
debenture for $1.0 million (the “Junior Debenture”) and a warrant to purchase
225,000 shares of common stock (the “Junior Warrants”) to Gulfstream Funding I
LLC, an entity owned in part by Thomas A. McFall, a member of the Board of
Directors, and Douglas Hailey, a former member of the Board of
Directors.
 
 At the
October 20, 2009 Annual Meeting of shareholders, the Company’s shareholders
approved a reduction in the conversion price to $1.975 from $3.00 relating to
the Junior Debenture issued to Gulfstream Funding I, LLC in September 2008. The
conversion to equity of the debenture and accrued interest expense was effective
on October 20, 2009 and resulted in the issuance of 578,342 shares of the
company’s common stock.
 
 The
Junior Warrants were originally exercisable through September 16, 2014 at an
exercise price of $3.20 per share.  Upon conversion of the Junior
Debenture, the number of shares issuable under the Junior Warrants was decreased
from 225,000 to 166,667, or a decrease of 58,333 shares.  The Junior
Warrants are subject to anti-dilution adjustment for certain future issuances or
deemed issuances of Common Stock at a price per share of less than
$3.20.
 
 On
October 7, 2009, the Company issued a subordinated note to Gulfstream
Funding II, LLC (“GF II”), an entity owned in part by Thomas A. McFall, a member
of the Board of Directors, and Douglas Hailey, a former member of the Board of
Directors, for $1.5 million that matured on January 15, 2010 and bore
interest at 12%. On January 15, 2010, the Company and GF II agreed to enter
into one or more definitive agreements to extend the maturity date of the Note
and to provide for the conversion of the outstanding principal amount of the
Note and all accrued and unpaid interest thereon (collectively, the “Debt”) into
preferred stock of the Company at current market prices. Upon the execution of
such agreements by the Company and GF II, the Company will file a Current Report
on Form 8-K disclosing the transaction and including such agreements as
exhibits.  In addition, GF II waived any event of default, which would
have occurred due to the Company’s failure to repay the Debt on the maturity
date.
 
 Other
Services
 
 The
Company leases equipment from entities controlled by Thomas L. Cooper, former
Chief Executive Officer of Gulfstream. The amounts paid for 2008 and 2009 were
approximately $41,000 each year.
 
 Indemnification
and Employment Agreements
 
 The
Company’s bylaws provide that it may indemnify its directors, officers and
employees against claims arising in connection with their actions in such
capacities. The Company currently has a directors’ and officers’ liability
insurance policy that insures such persons against the costs of defense,
settlement or payment of a judgment under certain circumstances. The Company
believes that these indemnification and liability provisions are essential to
attracting and retaining qualified persons as officers and directors. The
Company has also entered into employment agreements with its named executive
officers. See “Executive Compensation–Agreements with Named Executive
Officers.”
 
 The
Company has entered into indemnification agreements with its directors and
executive officers. Under these agreements, the Company is required to indemnify
them against all expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred, in connection with any actual, or any
threatened, proceeding if any of them may be made a party because he or she is
or was one of the Company’s directors or officers. The Company is obligated to
pay these amounts only if the officer or director acted in good faith and in a
manner that he or she reasonably believed to be in or not opposed to the
Company’s best interests. With respect to any criminal proceeding, the Company
is obligated to pay these amounts only if the officer or director had no
reasonable cause to believe that his or her conduct was unlawful. The
indemnification agreements also set forth procedures that will apply in the
event of a claim for indemnification under such agreements.
 
 94
 
 In
addition, the Certificate provides that the liability of its directors for
monetary damages will be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware. Each director will continue to
be subject to liability for any breach of the director’s duty of loyalty, for
acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, for unlawful stock purchases or redemptions and for
any transaction from which the director derived an improper personal benefit.
This provision also does not affect a director’s responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
 
 Review, Approval and Ratification of
Related Party Transactions
 
 The
Nominating and Corporate Governance Committee has responsibility for
establishing and maintaining guidelines relating to any related party
transactions between the Company and any of its officers or directors. Under the
Company’s Code of Ethics (which can be accessed from its homepage at http://www.gulfstreamair.com
by selecting “Corporate Governance”), any conflict of interest between a
director or officer and the Company must be referred to the Nominating and
Corporate Governance Committee for approval. The Company intends to adopt
written guidelines for the Nominating and Corporate Governance Committee which
will set forth the requirements for review and approval of any related party
transactions.
 
 Director
Independence
 
 The
Company periodically reviews the independence of each director. Pursuant to this
review, the directors and officers of the Company, on an annual basis, are
required to complete and forward to the Corporate Secretary a detailed
questionnaire to determine if there are any transactions or relationships
between any of the directors or officers (including immediate family and
affiliates) and the Company. If any transactions or relationships exist, the
Company then considers whether such transactions or relationships are
inconsistent with a determination that the director is independent in accordance
with the listing standards of the NYSE Amex. Pursuant to this process, the Board
of Directors has determined that Messrs. Arnold, Fishman, Lutin and
Schreiber qualify as independent directors.
 
 Conflicts of
Interest
 
 Certain
potential conflicts of interest are inherent in the relationships between our
officers and directors of and us.
 
 Conflicts Relating to Officers and
Directors
 
 To date,
we do not believe that there are any conflicts of interest involving our
officers or directors.
 
 With
respect to transactions involving real or apparent conflicts of interest, we
have adopted policies and procedures which require that: (i) the fact of
the relationship or interest giving rise to the potential conflict be disclosed
or known to the directors who authorize or approve the transaction prior to such
authorization or approval, (ii) the transaction be approved by a majority
of our disinterested outside directors, and (iii) the transaction be fair
and reasonable to us at the time it is authorized or approved by our
directors.
 
 Item 14. Principal Accountant Fees and
Services.
 
 Appointment of
Auditors. Our Audit Committee and shareholders
selectedCherry, Bekaert
& Holland, L.L.P.as
our auditors for the year ended December 31, 2009.
 
 Audit Fees.The aggregate
fees for professional services rendered by McKean, Paul, Chrycy, Fletcher &
Co. for the audit of the Company’s financial statements included in the
Company’s annual report on Form 10-K for the year ended December 31,
2008 were approximately $203,000. The aggregate fees for professional services
rendered by Cherry, Bekaert & Holland, L.L.P. for the audit of the Company’s
financial statements included in the Company’s annual report on Form 10-K
for the year ended December 31, 2009 were approximately
$185,000.
 
 Audit-Related Fees.There
were no audit-related fees paid to, or services rendered by, McKean, Paul,
Chrycy, Fletcher & Co. or Cherry, Bekaert & Holland, L.L.P. in 2008. In
2009, fees paid to Cherry, Bekaert & Holland, L.L.P. for review of the
company’s Form 10-Q filings were approximately $56,000. Also fees paid to
Cherry, Bekaert & Holland, L.L.P to perform a review of the Company’s
internal controls to support management’s certification of the validity of its
internal controls were $36,265.
 
 95
 
 Tax Fees.The fees paid to
McKean, Paul, Chrycy, Fletcher & Co. for tax compliance or tax consulting
during 2008 were $36,926. The fees paid to Cherry, Bekaert & Holland, L.L.P.
for tax compliance or tax consulting during 2009 were $42,270.
 
 All Other Fees.There were no
other fees paid to, or services rendered by McKean, Paul, Chrycy, Fletcher &
Co. or Cherry, Bekaert & Holland, L.L.P. in 2008 and 2009.
 
 The
Company paid no audit fees, audit-related fees, tax fees or other fees to
Cherry, Bekaert & Holland, L.L.P. for services rendered in
2008.
 
 Policy Regarding Pre-Approval of
Services Provided by the Independent Auditors. The Audit Committee
Charter requires the committee’s pre-approval of all services, both audit and
permitted non-audit, to be performed for the Company by the independent
auditors. In determining whether proposed services are permissible, the
committee considers whether the provision of such services is compatible with
maintaining auditor independence. As part of its consideration of proposed
services, the committee may (i) consult with management as part of the
decision making process, but may not delegate this authority to management, and
(ii) delegate, from time to time, its authority to pre-approve such
services to one or more committee members, provided that any such approvals are
presented to the full committee at the next scheduled Audit Committee
meeting.
 
 The percentage
of hours expended on the principal accountant’s engagement to audit the
Company’s financial statements for the fiscal year ended December 31, 2009
that were attributable to work performed by persons other than the principal
accountant’s full-time, permanent employees was less than 50%.
 
 
 
 96
 
 PART
IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.
 (a)
Financial Statements and Schedules
 
 1. Financial
Statements
 
 The following financial statements are
filed as part of this report under Item 8 of Part II “Financial Statements and
Supplementary Data:
 
 A.           Consolidated
Balance Sheets as of December 31, 2009 and 2008.
 
 B.           Consolidated
Statements of Operations for the years ended of December 31, 2009 and
2008.
 
 C.           Consolidated
Statements of Cash Flows as of December 31, 2009 and 2008.
 
 D.           Consolidated
Statements of Stockholders’ Equity for the years ended of December 31, 2009 and
2008.
 
 2.Financial
Statement Schedules
 
 Financial statement schedules not
included herein have been omitted because they are either not required, not
applicable, or the information is otherwise included herein.
 
 (b)
Exhibits.
 EXHIBIT INDEX
 
 Exhibit No.
              
              Exhibit3.1
              
              Certificate
      of Incorporation of the Registrant, incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated November 9, 2007, exhibit
    3.13.2
              
              Bylaws
      of the Registrant, incorporated by reference to Gulfstream International
      Group, Inc. Form S-1 (File No. 333-144363) dated
      November 9, 2007, exhibit 3.34.1
              
              Specimen
      Stock Certificate, incorporated by reference to Gulfstream International
      Group, Inc. Form S-1 (File No. 333-144363) dated
      November 16, 2007, exhibit 4.14.2
              
              Form of
      Subordinated Debenture, incorporated by reference to Gulfstream
      International Group, Inc. Form S-1 (File No. 333-144363) dated
      July 5, 2007, exhibit 4.210.1
              
              Management
      Services Agreement, dated March 14, 2006, between Weatherly Group,
      LLC, and the Registrant, incorporated by reference to Gulfstream
      International Group, Inc. Form S-1 (File No. 333-144363) dated
      July 5, 2007, exhibit 10.110.2
              
              Lease
      Agreement dated August 1, 2005, by and between Gulfstream Training
      Academy, Inc. and EYW Holdings, Inc., as amended by First Amendment
      thereto dated as of April 17, 2006, incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
  10.210.3
              
              Lease
      Agreement dated August 1, 2005, by and between Gulfstream
      International Airlines, Inc. and EYW Holdings, Inc., as amended by First
      Amendment thereto dated as of March 22, 2006, incorporated by
      reference to Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
  10.310.4
              
              Code
      Share And Regulatory Cooperation Agreement dated as of April 21, 2003
      and as thereafter amended, by and between United Air Lines, Inc. and
      Gulfstream International Airlines, Inc. , incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated December 4, 2007, exhibit
    10.410.5
              
              Passenger
      Prorate Agreement dated as of October 1, 2006 and as thereafter
      amended, by and between United Air Lines, Inc. and Gulfstream
      International Airlines, Inc., incorporated by reference to Gulfstream
      International Group, Inc. Form S-1 (File No. 333-144363) dated
      December 4, 2007, exhibit 10.5
  97
  Exhibit No.
              
              Exhibit10.6
              
              Codeshare
      Agreement dated as of February 11, 2000 and as thereafter amended, by
      and between Northwest Airlines, Inc. and Gulfstream International
      Airlines, Inc. , incorporated by reference to Gulfstream International
      Group, Inc. Form S-1 (File No. 333-144363) dated
      December 4, 2007, exhibit 10.610.7
              
              Codeshare
      Agreement dated as of July 1, 2005, by and between Compania Panamenia
      De Aviacion, S.A. and Gulfstream International Airlines, Inc. ,
      incorporated by reference to Gulfstream International Group, Inc.
      Form S-1 (File No. 333-144363) dated December 4, 2007,
      exhibit 10.710.8
              
              Amended
      and Restated Alliance Agreement dated December 30, 1999 and as
      thereafter amended, by and between Continental Airlines, Inc. and
      Gulfstream International Airlines, Inc. , incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated December 4, 2007, exhibit
    10.810.9
              
              Form of
      Lease Agreement dated August 3, 2003 between Raytheon Aircraft Credit
      Corporation and Gulfstream International Airlines, Inc., as amended by
      Amendment Number One dated May 23, 2005 and Amendment dated
      August 2, 2005, incorporated by reference to Gulfstream International
      Group, Inc. Form S-1 (File No. 333-144363) dated
      December 4, 2007, exhibit 10.910.10
              
              Subcontract
      Agreement effective as of April 1, 2006 and as thereafter amended, by
      and between Gulfstream International Airlines, Inc. and Computer Sciences
      Corporation, incorporated by reference to Gulfstream International Group,
      Inc. Form S-1 (File No. 333-144363) dated December 4, 2007,
      exhibit 10.1010.11
              
              Business
      Lease Agreement dated May 14, 1999 between Richard Bulow and
      Gulfstream International Airlines, Inc., as amended by Amendment dated
      June 21, 2004, incorporated by reference to Gulfstream International
      Group, Inc. Form 10-K (File No. 001-33884) dated April 14, 2008, exhibit
      10.1110.12
              
              Form of
      Used Beechcraft 1900D Airliner Operating Lease Agreement dated
      June 8, 2006 between CSC Applied Technologies LLC and Gulfstream
      International Airlines, Inc., as amended by Consultant Agreement
      Modification dated July 20, 2006, incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated December 4, 2007, exhibit
      10.1210.13
              
              Lease
      Agreement dated as of July 20, 2000 between Miami-Dade County,
      Florida and Gulfstream International Airlines, Inc., incorporated by
      reference to Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated October 30, 2007, exhibit
      10.1310.14
              
              Building
      Lease dated June 1, 2004 between Broward County and Gulfstream
      International Airlines, Inc., incorporated by reference to Gulfstream
      International Group, Inc. Form S-1 (File No. 333-144363) dated
      October 30, 2007, exhibit 10.1410.15
              
              Lease
      Agreement dated as of June 18, 2002, by and between Blount Realty
      Partners, Ltd. and Gulfstream International Airlines, Inc., incorporated
      by reference to Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated October 30, 2007, exhibit
      10.1510.16
              
              Form of
      Aircraft Lease Agreement dated as of October 28, 2004 between
      Gulfstream International Airlines, Inc. and Mesa Airlines Inc.,
      incorporated by reference to Gulfstream International Group, Inc.
      Form S-1 (File No. 333-144363) dated December 4, 2007,
      exhibit 10.1610.17
              
              Lease
      dated August 1, 2006 between CSC Applied Technologies, LLC and
      Gulfstream International Airlines, Inc., incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated November 7, 2007, exhibit
      10.1710.18
              
              Agreement
      dated March 1, 2007 between Pratt & Whitney Canada Corp. and
      Gulfstream International Airlines, Inc., incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated December 4, 2007, exhibit
      10.1810.19
              
              Services
      Agreement dated August 8, 2003 and amended March 14, 2006
      between Gulfstream International Airlines, Inc. and Gulfstream Air
      Charter, Inc., incorporated by reference to Gulfstream International
      Group, Inc. Form S-1 (File No. 333-144363) dated
      October 30, 2007, exhibit 10.1910.20
              
              Agreement
      dated June 13, 2006 between Gulfstream International Airlines, Inc.
      and the Airline Division of The International Brotherhood of Teamsters
      Representing the Pilots of Gulfstream International Airlines, Inc.,
      incorporated by reference to Gulfstream International Group, Inc.
      Form S-1 (File No. 333-144363) dated October 30, 2007,
      exhibit 10.2010.21
              
              Loan
      Agreement dated August 15, 2006 between Wachovia Bank, National
      Association and Gulfstream International Airlines, Inc., incorporated by
      reference to Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
10.2110.22
              
              Loan
      Agreement dated as of December 29, 2005 between Gulfstream
      International Airlines, Inc., and Irwin Union Bank and Trust Company,
      incorporated by reference to Gulfstream International Group, Inc.
      Form S-1 (File No. 333-144363) dated July 5, 2007, exhibit
      10.22
  98
   Exhibit No.
              
              Exhibit10.23
              
              Gulfstream
      Acquisition Group, Inc. (predecessor to Gulfstream International Group,
      Inc.) Stock Incentive Plan, incorporated by reference to Gulfstream
      International Group, Inc. Form S-1 (File No. 333-144363) dated
      July 5, 2007, exhibit 10.2310.24
              
              Form of
      Stock Option Agreement under Gulfstream Acquisition Group, Inc.
      (predecessor to Gulfstream International Group, Inc.) Stock Incentive
      Plan, incorporated by reference to Gulfstream International Group, Inc.
      Form S-1 (File No. 333-144363) dated July 5, 2007, exhibit
      10.2410.25
              
              Employment
      Agreement dated March 14, 2006 between Thomas L. Cooper and
      Gulfstream International Airlines, Inc., incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
10.2510.26
              
              Employment
      Agreement dated March 14, 2006 between David F. Hackett and
      Gulfstream International Airlines, Inc., incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
10.2610.27
              
              Employment
      Agreement dated August 7, 2003 between Thomas P. Cooper and
      Gulfstream International Airlines, Inc., incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
10.2710.28
              
              Employment
      Agreement dated April 6, 2006 between Paul Stagias and Gulfstream
      Training Academy, Inc., incorporated by reference to Gulfstream
      International Group, Inc. Form S-1 (File No. 333-144363) dated
      July 5, 2007, exhibit 10.2810.29
              
              Form of
      Indemnification Agreement between the Registrant and each of its Directors
      and Officers, incorporated by reference to Gulfstream International Group,
      Inc. Form S-1 (File No. 333-144363) dated November 16,
      2007, exhibit 10.2910.30
              
              Form of
      Warrant issued in connection with the acquisition of Gulfstream
      International Airlines and Gulfstream Flight Academy, incorporated by
      reference to Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated July 5, 2007, exhibit
10.3010.31
              
              Amended
      and Restated Common Stock Purchase Warrant dated March 14, 2006
      issued by Gulfstream International Airlines, Inc. to Continental Airlines,
      Inc., incorporated by reference to Gulfstream International Group, Inc.
      Form S-1 (File No. 333-144363) dated November 7, 2007,
      exhibit 10.3110.32
              
              Form of
      Warrant issued to the Underwriters, incorporated by reference to
      Gulfstream International Group, Inc. Form S-1 (File
      No. 333-144363) dated November 16, 2007, exhibit
      10.3210.33
              
              Aircraft
      Purchase and Sale Agreement dated June 26, 2008 between the Company and
      Pimegal Consultants Ltd., incorporated by reference to Gulfstream
      International Group, Inc. Form 10-Q (File No. 001-33884) dated August 14,
      2008, exhibit 10.110.34
              
              Securities
      Purchase Agreement entered into on September 12, 2008, and effective on
      August 31, 2008, by and between Gulfstream International Group, Inc. and
      Shelter Island Opportunity Fund, LLC, incorporated by reference to
      Gulfstream International Group, Inc. Form 10-Q (File No. 001-33884) dated
      November 14, 2008, exhibit 10.110.35
              
              $5,100,000
      Secured Original Issue Discount Debenture entered into on September 19,
      2008, and effective on August 31, 2008, incorporated by reference to
      Gulfstream International Group, Inc. Form 10-Q (File No. 001-33884) dated
      November 14, 2008, exhibit 10.210.36
              
              Common
      Stock Purchase Warrant issued to Shelter Island Opportunity Fund, LLC,
      entered into on September 19, 2008, and effective on August 31, 2008,
      incorporated by reference to Gulfstream International Group, Inc. Form
      10-Q (File No. 001-33884) dated November 14, 2008, exhibit
      10.310.37
              
              Security
      Agreement entered into on September 19, 2008, and effective on August 31,
      2008, by and between Gulfstream International Group, Inc. and Shelter
      Island Opportunity Fund, LLC, incorporated by reference to Gulfstream
      International Group, Inc. Form 10-Q (File No. 001-33884) dated November
      14, 2008, exhibit 10.410.38
              
              Put
      Option Agreement entered into on September 19, 2008, and effective on
      August 31, 2008, by and between Gulfstream International Group, Inc. and
      Shelter Island Opportunity Fund, LLC, incorporated by reference to
      Gulfstream International Group, Inc. Form 10-Q (File No. 001-33884) dated
      November 14, 2008, exhibit 10.510.39
              
              Securities
      Purchase Agreement dated September 15, 2008, by and between Gulfstream
      International Group, Inc. and Gulfstream Funding, LLC, incorporated by
      reference to Gulfstream International Group, Inc. Form 10-Q (File No.
      001-33884) dated November 14, 2008, exhibit 10.610.40
              
              $1,000,000
      Junior Subordinated Debenture dated September 16, 2008, incorporated by
      reference to Gulfstream International Group, Inc. Form 10-Q (File No.
      001-33884) dated November 14, 2008, exhibit 10.710.41
              
              Common
      Stock Purchase Warrant issued to Gulfstream Funding, LLC, dated September
      16, 2008, incorporated by reference to Gulfstream International Group,
      Inc. Form 10-Q (File No. 001-33884) dated November 14, 2008, exhibit
      10.8
  99
   Exhibit
      No
              
              Exhibit10.42
              
              Letter
      Agreement Regarding Conversion of Debenture dated September 16, 2008, by
      and between Gulfstream International Group, Inc. and Gulfstream Funding,
      LLC, incorporated by reference to Gulfstream International Group, Inc.
      Form 10-Q (File No. 001-33884) dated November 14, 2008, exhibit
      10.910.43
              
              Agreement,
      dated December 19, 2008 by and between Gulfstream International Airlines,
      Inc. and Raytheon Aircraft Credit Corporation, incorporated by reference
      to Gulfstream International Group, Inc. Form 8-K (File No. 001-33884)
      dated December 23, 2008, exhibit 10.110.44
              
              Note
      Purchase Agreement dated as of October 7, 2009 by and between
      Gulfstream International Group, Inc. and Gulfstream Funding II, LLC,
      incorporated by reference to Gulfstream International Group, Inc. Form 8-K
      (File No. 001-33884) dated October 7, 2009, exhibit 10.1.10.45
              
              Subordinated
      Promissory Note of Gulfstream International Group, Inc. dated as of
      October 7, 2009 in favor of Gulfstream Funding II, LLC, incorporated
      by reference to Gulfstream International Group, Inc. Form 8-K (File No.
      001-33884) dated October 7, 2009, exhibit 10.2.10.46
              
              Form
      of Unit Purchase Agreement, incorporated by reference to Gulfstream
      International Group, Inc. Form 8-K (File No. 001-33884) dated January 29,
      2010, exhibit 10.1.10.47
              
              Form
      of Warrant, incorporated by reference to Gulfstream International Group,
      Inc. Form 8-K (File No. 001-33884) dated January 29, 2010, exhibit
      10.2.10.48
              
              Form
      of Registration Rights Agreement, incorporated by reference to Gulfstream
      International Group, Inc. Form 8-K (File No. 001-33884) dated January 29,
      2010, exhibit 10.3.10.49
              
              Form
      of Purchase Agreement for Senior Secured Notes and Warrants dated as of
      February 26, 2010, incorporated by reference to Gulfstream International
      Group, Inc. Form 8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
      10.1.10.50
              
              Form
      of 12% Senior Secured Note due December 31, 2010 issued on February 26,
      2010, incorporated by reference to Gulfstream International Group, Inc.
      Form 8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
      10.2.10.51
              
              Form
      of Warrant issued on February 26, 2010, incorporated by reference to
      Gulfstream International Group, Inc. Form 8-K/A (File No. 001-33884) dated
      March 5, 2010, exhibit 10.3.10.52
              
              Security
      Agreement dated as of February 26, 2010, incorporated by reference to
      Gulfstream International Group, Inc. Form 8-K/A (File No. 001-33884) dated
      March 5, 2010, exhibit 10.4.10.53
              
              Waiver,
      Consent and Intercreditor Agreement dated as of February 26, 2010,
      incorporated by reference to Gulfstream International Group, Inc. Form
      8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
    10.5.10.54
              
              Form
      of Registration Rights Agreement, incorporated by reference to Gulfstream
      International Group, Inc. Form 8-K/A (File No. 001-33884) dated March 5,
      2010, exhibit 10.6.10.55
              
              Forbearance
      Agreement and Amendment to Debenture dated as of February 26, 2010,
      incorporated by reference to Gulfstream International Group, Inc. Form
      8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
    10.7.10.56
              
              $250,000
      Promissory Note issued to Shelter Island Opportunity Fund, LLC on February
      26, 2010, incorporated by reference to Gulfstream International Group,
      Inc. Form 8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
      10.8.10.57
              
              Put
      Warrant issued to Shelter Island Opportunity Fund, LLC on February 26,
      2010, incorporated by reference to Gulfstream International Group, Inc.
      Form 8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
      10.9.10.58
              
              Remaining
      Warrant issued to Shelter Island Opportunity Fund, LLC on February 26,
      2010, incorporated by reference to Gulfstream International Group, Inc.
      Form 8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
      10.10.10.59
              
              Amendment
      to the Put Option Agreement dated as of February 26, 2010, incorporated by
      reference to Gulfstream International Group, Inc. Form 8-K/A (File No.
      001-33884) dated March 5, 2010, exhibit 10.11.10.60
              
              Omnibus
      Amendment to the Guaranty Agreements dated as of February 26, 2010,
      incorporated by reference to Gulfstream International Group, Inc. Form
      8-K/A (File No. 001-33884) dated March 5, 2010, exhibit
    10.12.10.61
              
              Form
      of Series A Convertible Preferred Stock Purchase Agreement, incorporated
      by reference to Gulfstream International Group, Inc. Form 8-K (File No.
      001-33884) dated April 5, 2010, exhibit 10.1.10.62
              
              Certificate
      of Designation, Preferences and Rights of the Series A Convertible
      Preferred Stock of Gulfstream International Group dated as of March 31,
      2010, incorporated by reference to Gulfstream International Group, Inc.
      Form 8-K (File No. 001-33884) dated April 5, 2010, exhibit
      10.2.
  100
  Exhibit
      No
              
              Exhibit10.63
              
              Form
      of Warrant, incorporated by reference to Gulfstream International Group,
      Inc. Form 8-K (File No. 001-33884) dated April 5, 2010, exhibit
      10.3.10.64
              
              Form
      of Registration Rights Agreement, incorporated by reference to Gulfstream
      International Group, Inc. Form 8-K (File No. 001-33884) dated April 5,
      2010, exhibit 10.4.10.65
              
              Form
      of Exchange Letter Agreement, incorporated by reference to Gulfstream
      International Group, Inc. Form 8-K (File No. 001-33884) dated April 5,
      2010, exhibit 10.5.11.1*
              
              Statement
      re computation of per share earnings16.1
              
              Letter
      of Rotenberg Meril Solomon Bertiger & Guttilla, P.C. dated January 6,
      2009, incorporated by reference to Gulfstream International Group, Inc.
      Form 8-K (File No. 001-33884)) dated January 8, 2009, exhibit
      16.121.1
      *
              
              List
      of Subsidiaries of the Registrant31.1
      *
              
              Certification
      Pursuant to Section 302(a) of the Sarbanes-Oxley Act of
      200231.2
      *
              
              Certification
      Pursuant to Section 302(a) of the Sarbanes-Oxley Act of
      200232.1
      *
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
    200232.2
      *
              
              Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002
 
 * Filed
herewith.
 
 101
 SIGNATURES
 
 Pursuant to the requirements of
Section 13 or 15(d) of the Exchange Act, the registrant has duly caused
this Form 10-K Annual Report to be signed on its behalf by the undersigned
on April 15, 2010, thereunto duly authorized.
 
 GULFSTREAM INTERNATIONAL GROUP,
      INC.By:
                /s/
      David F. HackettDavid
      F. HackettChief
      Executive Officer (Principal
                  Executive
      Officer)By:
                /s/
      Robert M. BrownRobert
      M. BrownChief
      Financial Officer (Principal

                  Financial
      and Accounting Officer)
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this Form 10-K
Annual Report has been signed by the following persons in the capacities and on
the dates indicated.
 
 SIGNATURE
              
              TITLE
              
              DATE/s/ David
      F. Hackett
                David
      F. Hackett
              
              Chief Executive Officer,
      President and
                Director (Principal Executive
                Officer)
              
              April
      15, 2010/s/ Robert
      M. Brown
                Robert
      M. Brown
              
              Chief Financial Officer
                (Principal Financial and Accounting Officer)
              
              April
      15, 2010/s/ Thomas
      A. McFall
                Thomas
      A. McFall
              
              Chairman
      of the Board of Directors and Senior Executive Officer
              
              April
      15, 2010/s/ Gary
      P. Arnold
                Gary
      P. Arnold
              
              Director
              
              April
      15, 2010/s/ Gary
      L. Fishman
                Gary
      L. Fishman
              
              Director
              
              April
      15, 2010/s/ Barry
      S. Lutin
                Barry
      S. Lutin
              
              Director
              
              April
      15, 2010/s/ Richard
      R. Schreiber
                Richard
      R. Schreiber
              
              Director
              
              April
      15, 2010
 
 102