World Fuel Services 2005 Annual Report Download - page 81

WORLD FUEL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
authorize Isthmian to enter into any agreement with Atlantic, nor did TOM request that Isthmian utilize Atlantic
to provide services on its behalf. We do not believe that Isthmian acted as TOM’s agent in its dealings with
Atlantic, and we do not believe TOM is responsible for any liabilities of Isthmian. We believe this suit is
completely without merit and we intend to vigorously defend the action.
In August 2005, TOM filed a lawsuit against Isthmian seeking damages of approximately $3.1 for breach of
contract and wrongful conversion of fuel owned by TOM. In September 2005, Isthmian filed a counterclaim
against TOM alleging that TOM is in breach of contract and seeking $5.0 million in damages. These actions are
pending in a Panamanian maritime court. We believe Isthmian’s suit against TOM is completely without merit
and we intend to vigorously defend the action.
We may not prevail in the legal proceedings described above and we cannot estimate our ultimate exposure
if we do not prevail. A ruling against us in certain of the proceedings described above could have a material
adverse effect on our financial condition and results of operations.
In addition to the matters described above, we are also involved in litigation and administrative proceedings
primarily arising in the normal course of our business. In the opinion of management, except as set forth above,
our liability, if any, under any other pending litigation or administrative proceedings, even if determined
adversely, would not materially affect our financial condition or results of operations.
6. Aviation Joint Venture
In 2000, we entered into a joint venture with Signature Flight Support Corporation through the acquisition
of a 50% equity interest in PAFCO from Signature. We paid Signature $1.0 million in cash and $2.5 million in
the form of a non-interest bearing note, payable over five years through January 2006. PAFCO markets aviation
fuel and related services. The non-interest bearing promissory note was discounted at 9% and the discount of
$0.6 million is being amortized as interest expense over a five-year term using the interest method.
In accordance with PAFCO’s operating agreement, we are entitled to 80% of the income from PAFCO’s
operations. The higher allocation percentage versus the ownership percentage is in consideration of the risks
assumed by us with respect to credit losses on PAFCO’s accounts receivable. PAFCO distributes its income to its
partners on a quarterly basis. We are required to purchase, without recourse, PAFCO’s accounts receivable that
are 120 days past due, subject to certain requirements. Net losses (including infrequent or unusual losses),
interest expense incurred by PAFCO, and any gain resulting from the liquidation of the joint venture will be
shared equally between Signature and us. For 2005, we purchase and wrote-off $0.1 million of PAFCO’s
accounts receivable.
For 2003, we recorded net earnings from the PAFCO aviation joint venture of $0.5 million, net of interest
expense of $0.1 million. These net earnings from aviation joint venture were included in other income (expense),
net in the accompanying consolidated statements of income. As of December 31, 2003, amounts due from
PAFCO of $0.3 million was included in prepaid expenses and other current assets in the accompanying
consolidated balance sheets.
Prior to January 2004, we used the equity method of accounting to record our share of the earnings and
losses of our aviation joint venture. In addition, the amortized interest expense on the non-interest bearing
promissory note was also included in net earnings from aviation joint venture. Effective January 2004, with the
implementation of the FIN No. 46, we consolidated PAFCO’s financial position and results of operations, after
elimination of all significant intercompany accounts, transactions and profits. As a result of the consolidation of
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