UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2005
OR
|_| 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: 333-56046
FBO AIR, INC.
(Exact name of Small Business Issuer as Specified in Its Charter)
Nevada 87-0617649
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Hangar Road
Avoca, PA 18641
(Address of principal executive offices)
(570) 457-3400
(Issuer's telephone number)
9087 E. Charter Oak
Scottsdale, AZ 85260
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) 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 |X| No |_|
As of August 21, 2005, the Registrant had 10,044,398 shares of its Common Stock,
$0.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format
Yes |_| No |X|
FBO AIR, INC.
Form 10-QSB
June 30, 2005
Index
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Page
----
Balance Sheet as of June 30, 2005 1
Statements of Operations for the three and six months ended
June 30, 2005 and 2004 2
Statements of Cash Flows for the six months ended
June 30, 2005 and 2004 3
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 28
ITEM 3. CONTROLS AND PROCEDURES 36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 38
ITEM 5. OTHER INFORMATION 43
ITEM 6. EXHIBITS 44
SIGNATURES 46
Part I - Financial Information
Item I - Condensed Consolidated Financial Statements (Unaudited)
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,581,097
Accounts receivable, net 883,503
Inventory 87,321
Prepaid expenses 88,823
-----------
Total current assets 2,640,744
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $20,900 702,936
OTHER ASSETS
Note receivable 350,000
Intangible assets 152,800
Goodwill 2,368,284
-----------
Total other assets 2,871,084
-----------
TOTAL ASSETS $ 6,214,764
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 886,176
Customer deposits and deferred revenue 181,044
Accrued expenses 123,425
Long-term debt - current portion 283,100
-----------
Total current liabilities 1,473,745
LONG-TERM LIABILITIES
Notes payable - other - less current portion 456,529
Senior secured notes Payable - net of discount of $1,104,442 391,882
-----------
Total long term liabilities 848,411
-----------
Total liabilities 2,322,156
MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK - net of discount of $3,890,025;
$0.001 par value; 1,000 shares authorized;
Series A Cumulative Convertible - 847 shares issued
and outstanding, with rights to a cumulative 8% dividend
payable quarterly; liquidation preference at stated value of
of $4,242,650 352,625
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; authorized 10,000,000;
none issued and outstanding --
Common stock - $.001 par value; authorized 100,000,000;
10,044,398 issued and outstanding 10,044
Deferred financing costs (1,754,651)
Additional paid-in capital 7,283,578
Accumulated deficit (1,998,988)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,539,983
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,214,764
===========
See notes to condensed consolidated financial statements.
1
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE $ 2,158,867 $ -- $ 2,158,867 $ --
COST OF SALES 1,430,546 -- 1,430,546 --
------------ ------------ ------------ ------------
GROSS PROFIT 728,321 -- 728,321 --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including $0, $57,024, $0 and
$69,227 for the compensatory element
of stock issuances, respectively) 1,190,865 227,900 1,406,192 257,332
------------ ------------ ------------ ------------
OPERATING LOSS (462,544) (227,900) (677,871) (257,332)
OTHER INCOME (EXPENSE)
INTEREST INCOME 3,360 -- 3,360 --
INTEREST EXPENSE (146,410) -- (154,208) --
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (143,050) -- (150,848) --
------------ ------------ ------------ ------------
NET LOSS $ (605,594) $ (227,900) $ (828,719) $ (257,332)
============ ============ ============ ============
Deemed dividend to preferred shareholders -
accretion of discount (352,625) -- (352,625) --
Amortization of Deferred Financing Costs (159,514) -- (159,514) --
Preferred stock dividend (84,630) -- (84,630) --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,202,363) $ (227,900) $ (1,425,488) $ (257,332)
============ ============ ============ ============
Basic and Diluted Loss Per
Common Share $ (0.12) $ (0.09) $ (0.18) $ (0.10)
============ ============ ============ ============
Weighted Average Common Shares
Basic and Diluted 10,044,397 2,678,218 8,079,317 2,646,797
============ ============ ============ ============
See notes to condensed consolidated financial statements.
2
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
For the six months ended June 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (828,719) $ (257,332)
----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 20,900 --
Amortization of debt discount 100,100 --
Compensatory element of stock issuances -- 69,227
Changes in operating assets and liabilities:
Accounts receivable (646,386) --
Inventory 43,383 --
Prepaid expenses (83,385) --
Due from stockholder 15,510 (14,510)
Accounts payable 555,508 --
Customer deposits and deferred revenue 67,339 --
Other accrued expenses 11,050 98,877
----------- -----------
TOTAL ADJUSTMENTS 84,019 153,594
----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES (744,700) (103,738)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable (350,000) --
Purchase of equipment (28,478) --
Acquisition of FBOs, less cash acquired of $167,329 (2,554,818) --
----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (2,933,296) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of convertible notes 20,000 130,000
Deferred financing costs (514,000) --
Proceeds from the Private placement 4,488,976 --
Proceeds from the Co-Investment 1,250,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,244,976 130,000
----------- -----------
NET INCREASE IN CASH 1,566,980 26,262
CASH AND CASH EQUIVALENTS - Beginning 14,117 --
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 1,581,097 $ 26,262
=========== ===========
See notes to condensed consolidated financial statements.
3
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS, CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
For the six months ended June 30,
2005 2004
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ -- $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash investing and financing activities:
Convertible Notes converted to common stock $ 400,000 $ --
=========== ===========
Advances from affiliates converted to equity $ -- $ 94,818
=========== ===========
Notes issued for acquisitions $ 672,948 $ --
=========== ===========
See notes to condensed consolidated financial statements.
4
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to
Form 10-QSB. Accordingly, they do not include all of the information and
disclosures required for annual financial statements. These financial
statements should be read in conjunction with the financial statements and
related footnotes included in the FBO Air, Inc. and Subsidiaries (the
"Company") annual report on Form 10-KSB for the year ended December 31,
2004 filed on March 29, 2005.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to make the Company's financial
position as of June 30, 2005 and the results of operations and statements
of cash flows for the periods shown not misleading have been included.
On March 31, 2005, the Company completed the acquisition of two operating
companies. Accordingly, the Company is no longer considered a development
stage entity.
The results of operations for the six-month period ended June 30, 2005 are
not necessarily indicative of the results to be expected for the full year
ended December 31, 2005.
NOTE 2 - Business, Reverse Merger and Acquisitions
Effective August 20, 2004, Shadows Bend Development, Inc. ("Shadows
Bend"), a Nevada publicly-traded company with no active business, entered
into a merger transaction with FBO Air, Inc. ("FBO Air"), a privately-held
Arizona corporation. Upon completion of the merger transaction, Shadows
Bend changed its name to FBO Air, Inc. and the original FBO Air
shareholders owned 75% of the outstanding common stock of the Company.
Accordingly, this transaction has been accounted for as a reverse merger
with FBO Air as the acquirer of Shadows Bend. The reverse merger was
accounted for as a recapitalization of FBO Air and the stockholders'
equity of FBO Air was retroactively restated to its inception on January
17, 2003.
FBO Air was formed on January 17, 2003 (date of inception) as a
proprietorship to acquire and operate fixed base operators. On January 2,
2004, FBO Air was incorporated in the State of Arizona. Fixed base
operators are the primary providers of services to general aviation
aircraft operators. The Company's business strategy is to purchase and
consolidate fixed base operators in the secondary and tertiary markets
located within the United States.
5
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 2 - Business, Reverse Merger and Acquisitions, continued
On March 31, 2005, FBO Air formed FBO Air-Wilkes-Barre, a wholly owned
subsidiary formed for the purpose of acquiring the stock of a fixed base
operator (See Note 5).
On March 31, 2005, FBO Air-Garden City, a wholly owned subsidiary of FBO
Air, acquired certain operating assets of a fixed base operator located in
Garden City, Kansas, pursuant to an asset purchase agreement dated March
31, 2005 (See Note 6).
The acquisitions of the two operating companies were made as of March 31,
2005, the last day of the prior quarterly period. Accordingly, the
operating results from these two companies for the three months ended June
30, 2005 are provided to report within condensed consolidated statements
of operations.
NOTE 3 - Going Concern and Management's Plans
On April 15, 2005, FBO Air closed on its final round of financing in its
March and April 2005 private offering, raising gross cash proceeds of
approximately $4,490,000. Simultaneously, FBO Air raised $1,250,000 in a
related private offering. Until the March and April 2005 offering funding,
the Company's primary source of operating funds since inception had been
provided by its founding shareholders and through a convertible note
financing. There is no assurance that FBO Air will be able to raise the
additional funds sufficient to enable the Company to fully complete its
development activities, attain profitable operations or continue as a
going concern.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of June 30, 2005, the Company
had working capital and cash of approximately $1,167,000 and $1,581,000,
respectively. On March 31, 2005, the Company completed the acquisition of
two fixed based operator companies and became an operating company,
generating revenues of approximately $2,200,000 for the three months ended
June 30, 2005. The Company has incurred losses since inception,
representing , in the aggregate, operating losses of approximately
$2,102,000 for the period from January 17, 2003 (date of inception)
through June 30, 2005. Certain of these conditions raise substantial doubt
about the Company's ability to continue as a going concern. The
accompanying financial statements do not reflect the possible effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
6
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of FBO Air and
its wholly-owned subsidiaries FBO Garden City and FBO Wilkes-Barre. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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
For purposes of the condensed consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Concentrations of Credit Risk
Cash: The Company maintains its cash with various financial institutions,
which exceed federally insured limits throughout the period. At June 30,
2005, the Company had cash on deposit of approximately $1,392,000 in
excess of federally insured limits.
Accounts Receivable: The Company's extends credit to large and mid-side
companies for flight related services. The Company has concentrations of
credit risk in that 80% of the balance of accounts receivable at any time
may be made up of less than ten customers. The Company does not generally
require collateral or other security to support customer receivables.
Accounts receivable are carried at their estimated collectible amounts.
Accounts receivable are periodically evaluated for collectibility and the
allowance for doubtful accounts is adjusted accordingly. Management
determines collectibility based on their experience and knowledge of the
customers.
7
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Deferred Financing Costs
The costs incurred on March 31, 2005, April 8, 2005 and April 15, 2005 to
issue the senior notes payable, the convertible preferred stock and the
warrants have been capitalized and have been charged to equity as deferred
financing costs.
Inventory
Inventory consists primarily of aviation fuel and is stated at the lower
of cost or market determined by the first-in, first out method.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred; costs of major additions and betterments
are capitalized. When property and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Goodwill
In accordance with the requirements of Statement of Financial Accounting
Standards No. 141 ("SFAS No. 141"), "Business Combinations", the Company
recognized certain intangible assets acquired, primarily goodwill,
tradenames and customer relationships. In accordance with the provisions
of SFAS No. 142, "Goodwill and Other Intangible Assets", on a regular
basis, the Company performs impairment analysis of the carrying value of
goodwill and certain other intangible assets.
Depreciation
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets.
8
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Income Taxes
As of January 2, 2004 (date of incorporation), the Company accounts for
income taxes using the liability method as required by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109"). Under this method, deferred tax assets and liabilities are
determined based on differences between their financial reporting and tax
basis of assets and liabilities. The Company was not required to provide
for a provision for income taxes for the six months ended June 30, 2005,
as a result of net operating losses incurred during the period. As of June
30, 2005, the Company has available approximately $1,333,000 of net
operating losses ("NOL") available for income tax purposes that may be
carried forward to offset future taxable income, if any. These
carryforwards expire in various years through 2025. At June 30, 2004, the
Company has recorded a deferred tax asset of approximately $533,000, which
consists primarily of temporary differences relating to net operating
losses. The Company's deferred tax asset has been fully reserved by a
valuation allowance since realization of its benefit is uncertain. The
difference between the statutory rate of 35% and the Company's effective
tax rate of 0% is due to the increase in the valuation allowance of
approximately $213,000. The Company's ability to utilize its NOL
carryforwards may be subject to an annual limitation in future periods
pursuant to Section 382 of the Internal Revenue Code of 1986, as amended.
Fair Value of Financial Instruments
The reported amounts of our financial instruments, including accounts
payable and accrued liabilities, approximate their fair value due to their
short maturities. The carrying amounts of debt approximate fair value
since the debt agreements provide for interest rates that approximate
market.
9
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Stock Options
As permitted by FASB Statement No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), which establishes a fair value based method of
accounting for equity-based compensation plans, the Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") for recognizing equity-based compensation
expense for financial statement purposes. Under APB 25, no compensation
expense is recognized at the time of option grant if the exercise price of
the employee stock option is fixed and equals or exceeds the fair market
value of the underlying Common Stock on the date of grant and the number
of shares to be issued pursuant to the exercise of such options are known
and fixed at the grant date.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of FAS 123 and the Emerging Issues Task
Force in Issue No. 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or In Conjunction with
Selling, Goods or Services which require that such equity instruments are
recorded at their fair value on the measurement date, which is typically
the date the services are performed.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure ("FAS 148"). This
standard amends the disclosure requirements of FAS 123 for fiscal years
ending after December 15, 2002 to require prominent disclosure in both
annual and interim financial statements about the method used and the
impact on reported results. The Company follows the disclosure-only
provisions of FAS 123 which require disclosure of the pro forma effects on
net income (loss) as if the fair value method of accounting prescribed by
FAS 123 had been adopted, as well as certain other information.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option. Because the Company's employee
stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
10
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Net Loss Per Common Share
Basic net loss per common share is computed based on the weighted average
number of shares of common stock outstanding during the periods presented.
Common stock equivalents, consisting of options, warrants and convertible
preferred stock discussed in the notes to the financial statements, were
not included in the calculation of the diluted loss per share because
their inclusion would have had the effect of decreasing the loss per share
otherwise computed. The total shares issuable upon the exercise of stock
options and the convertible preferred stock as of June 30, 2005
approximated 19,957,000.
NOTE 5 - Acquisition of Tech Aviation, Inc.
On March 31, 2005, the Company purchased 100% of the stock of Tech
Aviation, Inc. ("Tech Aviation"), a fixed base operator conducting
business in the Northeast. Under the terms of the acquisition agreement,
the Company paid cash at closing of approximately $2,256,000, applied a
deposit of $10,000 and issued notes payable to the Tech Aviation
shareholders with a face value aggregating $500,000. The notes bear no
stated interest. The notes were discounted at a market interest rate of 5%
per annum and recorded at the net discounted value of $432,948. These
notes are to repaid with five annual payments aggregating $100,000
annually, beginning on March 31, 2006.
All assets and liabilities of Tech Aviation have been recorded in the
Company's condensed consolidated balance sheet at their fair values at the
date of acquisition. Identifiable intangible assets and goodwill relating
to the purchase approximated $1,958,000. Identifiable intangible assets
included trade names and customer relationships of $100,000 and $20,000,
respectively. Trade names and customer relationships have an indefinite
life. Trade names and customer relationships will not be amortized and
will be evaluated at least annually.
11
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Acquisition of Tech Aviation, Inc., continued
The following table details the allocation of the purchase price:
Fair Value
----------
Cash $ 167,329
Accounts receivable 237,117
Inventory 99,752
Prepaid expenses 52,331
Equipment 579,785
Intangible assets - trade names 100,000
Intangible assets - customer relationships 20,000
Goodwill 1,838,284
Accounts payable and accrued expenses (334,776)
Long term debt (60,681)
-----------
Total $ 2,699,141
===========
NOTE 6 - Acquisition of Central Plains Aviation, Inc.
On March 31, 2005, the Company purchased certain assets of Central Plains
Aviation, Inc. ("Central Plains"), a fixed base operator conducting
business in Kansas. Under the terms of the acquisition agreement, the
Company paid cash at closing of $466,000, and issued a note payable to the
Central Plains shareholder for $240,000. This note bears an interest rate
of 5% per annum, and is payable in 6 quarterly installments of
approximately $42,000 each, with the first installment due June 30, 2005.
The assets Central Plains have been recorded in the Company's condensed
consolidated balance sheet at their fair values at the date of
acquisition. Identifiable intangible assets and goodwill relating to the
purchase approximated $560,000. Identifiable intangible assets included
customer relationships of $30,000. The customer relationships have an
indefinite life. The customer relationships will not be amortized and will
be evaluated at least annually.
12
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - Acquisition of Central Plains Aviation, Inc., continued
The following table details the allocation of the purchase price:
Fair Value
----------
Inventory $ 30,952
Equipment 115,000
Intangible assets - customer relationships 30,000
Goodwill 530,000
--------
Total $705,952
========
The Company purchased the former Tech Aviation, Inc. and Central Plains,
Inc. on March 31, 2005, the last day of the quarterly reporting period
ending March 31, 2005. Therefore, the results from Tech Aviation, Inc. are
first reflected in the Company's results for the three months ended June
30, 2005.
13
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 6 - Acquisition of Central Plains Aviation, Inc., continued
The following table presents the unaudited pro forma combined results of
operations of the Company, Tech Aviation, Inc. and Central Plains, Inc.
for each of the three and six month periods ending June 30, 2005 and 2004,
as if they had been acquired at the beginning of each of the periods,
respectively:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Revenues:
Net sales $ 2,158,867 $ 1,957,540 $ 3,542,071 $ 3,364,424
Net loss (605,594) (61,522) (779,843) (77,970)
Basic net loss per
common share $ (0.12) $ (0.023) $ (0.097) $ (0.029)
Weighted average
common shares
outstanding - basic
and diluted 10,044,397 2,678,218 8,046,310 2,646,797
10,044,397 2,678,218 8,046,310 2,646,797
The pro forma combined results are not necessarily indicative of the
results that actually would have occurred if the acquisition had been
completed as of the beginning of the year 2004, nor are they necessarily
indicative of future consolidated results.
14
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - Inventory
Inventory consists primarily of aviation fuel, which the Company dispenses
to its customers.
NOTE 8 - Property and Equipment
Property and equipment as of June 30, 2005 consists of the following:
Estimated
Amount Useful Life
------ -----------
Aircraft $254,785 7 - 15 years
Vehicles 230,000 5 -7 years
Office Furniture and equipment 60,000 7 years
Tools and shop equipment 179,051 7 - 15 years
--------
Total $723,836
Less: accumulated depreciation (20,900)
--------
Property and equipment, net $702,936
========
Depreciation expense for the three and six month periods ended June 30,
2005 was approximately $21,000.
15
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - Notes Payable - Other
Notes payable - other, at June 30, 2005 consist of:
Outstanding Balance
-------------------
Notes payable to: at June 30, 2005
----------------- ----------------
Wilkes-Barre/Scranton International Airport, due
September 2007 $ 60,681
Sellers - Tech Aviation 438,948
Seller - Central Plains 240,000
---------
Subtotal 739,629
Less - current portion (283,100)
---------
Total - long term $ 456,529
=========
Aggregate annual maturities of long-term debt are as follows:
For the years
ending Total Acquistion Senior Notes
December 31 Amount Notes (See Note 11) Other
-------------------------- ---------------- -------------------- ------------------ -------------
2005 $242,357 $242,357 -- --
2006 224,947 164,266 -- $60,681
2007 1,582,708 86,384 $1,496,324 --
2008 90,703 90,703 -- --
2009 95,238 95,238 -- --
---------- -------- ---------- -------
Total $2,235,953 $678,948 $1,496,324 $60,681
========== ======== ========== =======
16
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - Convertible Notes
In April 2004, the Company entered into a convertible note agreement with
a group of investors ("Investors") to purchase five-year, 8% convertible
notes in the aggregate principal amount of $400,000 as follows: a)
$130,000 upon signing; b) $270,000 upon the later to occur of: 1) the
reverse merger transaction and 2) the acquisition of a fixed base operator
as defined in the agreement. The convertible notes were scheduled to
mature in April 2009, with interest payable quarterly, beginning with the
first interest payment, which was due December 1, 2004. During January
2005, the Company entered into an amendment of the agreement with the
holder of the convertible notes whereby the due date of the first interest
payment was deferred to the date of closing of the first fixed base
operator acquisition.
In April 2004, the Investors funded the sale of the initial $130,000 of
convertible notes under the agreement. During August 2004, October 2004,
November 2004, December 2004 and January 2005, the Investors waived one
provision under their agreement and funded the sale of $125,000, $45,000,
$40,000, $40,000 and $20,000, respectively, of convertible notes under the
agreement, representing funding of the full amount.
The Company has the option to pay interest in cash or shares of the Common
Stock. For the purpose of determining the number of shares to be issued in
payment of interest, such shares shall be valued at the average of their
fair market value during the five trading days preceding the interest
payment date. The notes plus accrued interest are convertible through the
maturity date into 40% (at the time of conversion), as defined in the
agreement, of the Company's outstanding shares of the Common Stock. In
addition, the holders have certain piggyback registration, tag along and
other rights as defined in the agreement. The Company is required to
maintain certain financial and other covenants.
On March 31, 2005, the holders converted the entire $400,000 in
convertible notes into 4,018,376 shares of the Common Stock.
17
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Private Placement
Private Offering
On March 31, April 8 and April 15, 2005 the Company issued $1,496,324 in
aggregate principal amount of Senior Secured Notes due March 31, 2008,
$2,992,660 (597 shares) of the Series A Convertible Preferred Stock (the
"Convertible Preferred Stock") and warrants to purchase an aggregate of
2,992,660 shares of the Common Stock. This closing resulted in proceeds of
$4,488,976.
In conjunction with this offering, the placement agent was paid cash fees
of $514,000 and was granted warrants to purchase approximately 1,297,000
shares of the Common Stock with a fair market value, using the Black
Scholes model, on date of issue of approximately $1,758,000. The total of
these fees have been capitalized and charged to equity as deferred
financing costs to be amortized over a three year period.
On March 31, 2005, the Company sold, in a related private placement, an
additional $1,250,000 (250 shares) of the Series A Convertible Preferred
Stock and warrants to purchase an aggregate of 625,000 shares of the
Common Stock. Of the total sold, $100,000 was received in advance from
investors during February 2005. The remaining amount was received in cash
at closing. The placement agent received neither cash nor warrant
compensation for this issue.
The Senior Secured Notes and the warrants issued to investors were
recorded at their pro-rata estimated fair value in relation to the
proceeds received on the date of issuance ($291,783 for the Senior Secured
Notes and $920,060 for the Warrants). The discount recorded for the Senior
Secured Notes will be accreted to interest expense over three years using
the effective interest method. Accretion of $100,100 was recorded during
the three months ended June 30, 2005. The Convertible Preferred Stock was
recorded at its stated value of $4,242,660, less the discount amount to
record the value of the beneficial conversion feature, as outlined below.
The terms of the securities issued on March 31, 2005 are described below:
18
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Private Placement, continued
Convertible Preferred Stock - Mandatorily Redeemable
During February 2005, the Company authorized the issuance of 1,000 shares
of preferred stock, designated as Series A Convertible Preferred Stock,
each share having a Stated Value ("Stated Value") of $5,000. These shares
provide for cumulative dividends at the annual rate of 8%, payable
quarterly and mature three years from the date of issue. The cumulative
dividend, at the option of the Company, may be paid either in cash or by
the issuance of additional shares of the Convertible Preferred Stock. The
holders of the Convertible Preferred Stock and the holders of the shares
of Common Stock shall vote as a single class, with the holders of the
Convertible Preferred Stock having the number of votes based upon the
formula for the conversion to Common Stock, as provided below. The holders
of the Convertible Preferred Stock have the right to elect one director to
the Company's Board of Directors or to have one observer at Board
meetings.
The Convertible Preferred Stock is convertible into shares of the
Company's Common Stock. The shares shall automatically convert upon (a)
the Company's realization of gross proceeds exceeding $5,000,000 from the
sale of equity securities (a "Qualified Follow-On Offering"), separate and
apart from the March and April 2005 Private Offering, or (b) at such time
as the traded price of the Company's Common Stock exceeds 2.5 times the
Initial Conversion Price ("Conversion Price"), and under both (a) and (b),
the shares subject to conversion are fully registered shares. At the
option of the holder, the shares, in whole or in part, may be converted at
any time.
19
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Private Placement, continued
Convertible Preferred Stock - Mandatorily Redeemable, continued
Subject to certain adjustments, as provided in the agreement, the
Conversion Price is $0.30 per share. Each share of Preferred Stock will
convert into that number of shares of Common Stock determined by dividing
the Stated Value of each share of Convertible Preferred Stock by the
Conversion Price. In the case of a mandatory conversion on account of a
Qualified Follow-on Offering, then at the option of the holder, the shares
shall be converted at (a) the Conversion Price, or (b) at the same price
that such securities are being sold in such Qualified Follow-On Offering,
with the holder, in this case, also receiving a premium of an additional
10% in the number of such shares. Under certain conditions whereupon the
Company sells shares of Common Stock at a price below the Conversion
Price, then the Conversion Price shall be reduced, as provided for in the
agreement.
On the third anniversary of the original date of issue of the Convertible
Preferred Stock, the Company shall redeem for cash all remaining
outstanding shares at a redemption price equal to the aggregate Stated
Value, plus all accrued and unpaid dividends.
In the event of a liquidation of the Company, the holders of the
Convertible Preferred Stock then outstanding will be entitled to receive
115% of the stated value of each share, plus any accrued and unpaid
dividends.
Beneficial Conversion Feature
Under the terms of the Convertible Preferred Stock, the holders may
convert these securities into Common Stock of the Company at a fixed price
of $0.30, subject to certain adjustments. At March 31, 2005, the date of
issuance, this fixed conversion price represents a discount to the market
value of the Company's Common Stock, which was a quoted price of $1.75 per
share. This difference in price is considered a benefit of the conversion
feature in the security. This benefit was calculated and its value
exceeded the face amount of the issued Convertible Preferred Stock. The
Company is required to record the value of this beneficial conversion
feature, but at an amount not greater than the face amount of the related
Convertible Preferred Stock. Accordingly, the Company has recorded this
beneficial conversion feature discount of $4,242,661 as a reduction to the
Convertible Preferred Stock and as a credit to additional paid in capital.
The beneficial conversion feature discount to the Convertible Preferred
Stock will be accreted to its stated value over a three-year period and
$352,625 in accretion of discount was recorded for the three month period
ended June 30, 2005.
20
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Private Placement, continued
Beneficial Conversion Feature, continued
Under a mandatory redemption provision, the Company is required to redeem
the Convertible Preferred Stock by March 31, 2008, if not already
converted by the holder into the Common Stock. The shares shall be
redeemed at their stated value of $5,000 per share. As of June 30, 2005,
dividends of $84,630 have been accrued on this Convertible Preferred
Stock.
The Company's Convertible Preferred Stock contains a feature that requires
the Company to redeem the shares that remain outstanding on March 30,
2008.
Warrants
On March 31, April 8 and April 15, 2005, the Company issued warrants to
purchase shares of the Company's common stock aggregating approximately
3,617,000 to investors and 1,296,000 to the placement agent. Each warrant
provides a five-year right to purchase a share of the Company's Common
Stock at the initial exercise price (the "Warrant Exercise Price") of
$0.60 per share, with such price and the number of shares to be adjusted
in the event of stock splits and certain other events, as provided in the
agreement, and upon the sale by the Company of additional equity
securities at a price below the Warrant Exercise Price. At the option of
the Company, the Warrants may be redeemed at any time, in whole, but not
in part, at a price of $0.01 per share provided that: (a) there is an
effective registration statement covering the resale of the Warrant
shares; (b) the volume weighted average closing price of the Common Stock
for the prior 20 trading days is not less than 250% of the Warrant
Exercise Price; and (c) the average daily trading volume of the Company's
Common Stock is not less than 200,000 shares per day during such 20-day
trading period.
21
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Private Placement, continued
Senior Secured Notes
The Senior Secured Notes issued on March 31, April 8 and April 15, 2005
carry a maturity date of three (3) years; bear interest at the rate of 10%
per annum, payable quarterly; are secured by the current and to be
acquired assets of the Company and its present and future subsidiaries;
and are subject to certain covenants of the Company.
NOTE 12 - Stockholders' Equity
On January 4, 2004 (date of incorporation), the Company capitalized the
deficit of $104,393 incurred for the period from January 17, 2003 (date of
inception) through December 31, 2003, during which time, prior to
incorporation, the Company operated as a proprietorship.
On January 4, 2004, amounts owed to affiliates of $94,818 were contributed
to additional paid-in capital.
During June 2004, the Company issued 1,906,250 shares of the Common Stock
as consideration for services performed by various individuals valued in
the aggregate amount of $69,227.
On August 20, 2004, the Company issued 1,504,397 shares in connection with
its reverse merger with Shadows Bend and the assumption of existing
Shadows Bend liabilities of $19,151. In connection therewith, Shadows
Bend's shareholders approved a 1 for 4 reverse stock split, increased the
authorized common shares to 100,000,000 and authorized 10,000,000 shares
of preferred stock.
Stock Options
During September 2004, the Board of Directors granted options to purchase
an aggregate of 150,000 shares, 25,000 to each of the four independent
directors and 50,000 to a consultant/shareholder of the Company. These
options have an exercise price of $0.01 per share and expire four years
from the date of grant. These options vest at date of grant. Options
granted to non-employees are accounted for under SFAS No. 123, whereby
compensation measurement of equity awards is based on their fair value.
The fair market value of these options estimated at the date of grant
using the Black-Scholes option pricing model was not deemed material.
22
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 12 - Stockholders' Equity
Effective April 1, 2005, the Board of Directors granted options to
purchase an aggregate of 750,000 shares of the Common Stock. An option
expiring March 31, 2010 to purchase 250,000 shares of the Common Stock was
granted to each of (i) Robert J. Ettinger, who was elected as a Vice
Chairman of the Board and the Chief Operating Officer of the Company; (ii)
Jeffrey M. Trenk, who was elected as a Vice Chairman of the Board and the
Executive Vice President of Business Development of the Company and (iii)
Ronald J. Ricciardi, the President and Chief Executive Officer of the
Company.
NOTE 13 - Employee Benefit Plan
FBO Air - Wilkes-Barre maintains a 401(K) plan covering substantially all
employees, which requires Company contributions equal to 25% of each
participant's contribution of up to 4% of salary. The Company's
contributions to this plan totaled $1,280 for the three months ended June
30, 2005.
NOTE 14 - Commitments and Contingencies
Operating Leases
The Company leases facilities from the City of Garden City, Kansas.
Effective on April 1, 2005 and in conjunction with the Company's purchase
of the fixed base operator assets in Garden City, Kansas, the Company
executed a new lease which provides for: (a) a ten-year lease term
expiring March 31, 2015, with two five-year renewal periods; (b) a base
rent of $1,550 and $1,750 per month for years one through five and years
six through ten of the lease, respectively. In addition a fuel flowage fee
of $.06 per gallon of fuel received by the Company will be due monthly.
The fuel flowage fee is to be reviewed annually by the Garden City
Regional Airport, the City of Garden City, and the Company.
23
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 14 - Commitments and Contingencies, continued
The Company leases its operating facility under the terms of a Fixed Base
Operator's Lease and Operating Agreement with the Wilkes-Barre/Scranton
International Airport. The agreement is for an initial term of ten years
with two five-year renewal periods. The agreement requires payment of
monthly rents of $6,250 plus additional payments based on certain of the
Company's revenues. These include per-gallon fees for certain fuel sales
and commissions on landing, parking, tie-down and other types of fees
charged by the company to its aviation customers.
In May 2004, the Company entered into a non-cancelable operating lease of
an automobile for a Company officer, expiring on August 3, 2008. Future
minimum lease payments under this operating lease at June 30, 2005 are as
follows:
Years Ended June 30: Amount
--------------------------------------------
2006 $ 5,640
2007 5,640
2008 2,350
--------
$ 13,630
========
The Company leases refueling trucks and airplanes. The refueling trucks
lease on a month-to-month basis. As of June 30, 2005, the refueling truck
lease requires monthly rental payments of $4,351. Several airplane leases
require monthly rental payments based upon the number of hours the planes
are used.
24
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 14 - Commitments and Contingencies, continued
Proposed Acquisitions
The Company has negotiated and issued letters of intent for two potential
FBO acquisitions and a memorandum of understanding regarding charter
operations: 1) An FBO located in the southern region of the country,
requiring a combination of cash, stock, and notes totaling approximately
$2.8 million. In addition, the Company has issued a memorandum of
understanding with a charter operator in the northeast region of the
country in which the two organizations would share resources and
capabilities under a strategic alliance that may lead to a more formal
relationship and/or transaction. There can be no assurance that any or all
of these acquisitions will be consummated.
During May 2005, Company made a secured six-month loan in the amount of
$350,000 to the FBO located in the southern region of the country
("Maker"), as discussed above. The secured note bears interest at 10% per
annum and such interest only shall be paid quarterly, starting upon the
three month anniversary of the secured note. The secured note may be
prepaid at any time. The Company has been greated a security interest in
all tangible property, goods and accounts of the Maker. Further, the
Company has been granted an option to purchase the FBO owned by Maker,
such option to expire one year from date of grant of option. The Company
expects to apply this loan against a potential acquisition and therefore
has classified the loan as a non-current asset on the accompanying balance
sheet
Consulting Agreement
The Company entered into a six-month engagement agreement (the "Consulting
Agreement") with a financial advisor in April 2004, whereby the financial
advisor will provide advisory services for financial structuring and
planning, bridge financing, special situation transactional services and
private equity financing. The Consulting Agreement calls for an initial
fee of $15,000 plus $5,000 per month for six months, payable after the
closing of the first fixed base operator acquisition. Included in accounts
payable and accrued expenses at June 30, 2005 is an obligation of $45,000
pursuant to this Consulting Agreement.
25
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 14 - Commitments and Contingencies, continued
Employment Agreement
On March 31, 2005, the Board of Directors authorized execution of the
First Amendment effective April 1, 2005 (the "First Amendment") to the
employment agreement (the "Ricciardi Employment Agreement') for Ronald J.
Ricciardi, the Company's President and CEO. The First Amendment provides
that Mr. Ricciardi's employment under the Ricciardi Employment Agreement
is effective April 1, 2005 and will continue for three years thereafter
subject to automatic one-year renewals. The First Amendment increases his
base salary to $175,000. Mr. Ricciardi is to be granted an option each
April 1 during the initial term to purchase 250,000 shares of the Common
Stock, commencing April 1, 2005.
On March 31, 2005, the Company entered into an employment agreement dated
as of April 1, 2005 (the "Ettinger Employment Agreement") with Robert J.
Ettinger. Pursuant to the Ettinger Employment Agreement, Mr. Ettinger is
employed as the Chief Operating Officer of the Company and as the
President of its executive jet management group. He also is to serve as a
Vice Chairman of the Company. The term of the Ettinger Employment
Agreement is for three years, commencing April 1, 2005, and thereafter
automatically renews for additional one-year periods. Mr. Ettinger's base
annual salary is $150,000 and he is guaranteed an annual bonus payment of
$100,000, both the salary and the bonus payment to be paid in equal
monthly installments. In addition, he may receive an annual performance
bonus based on the Board's evaluation of the Company's (particularly the
Division's) performance and his performance. Mr. Ettinger is to be granted
an option each April 1 during the initial term to purchase 250,000 shares
of the Common Stock, commencing April 1, 2005.
On March 31, 2005, the Company elected Jeffrey M. Trenk as an officer of
the Company, terminated Mr. Trenk's consulting agreement and entered into
an employment agreement with Mr. Trenk dated April 1, 2005 (the "Jeffrey
Trenk Employment Agreement"). Pursuant to the Jeffrey Trenk Employment
Agreement, Mr. Trenk is employed as the Executive Vice President of
Business Development of the Company. He is also to serve as a Vice
Chairman of the Company. The term of the Jeffrey Trenk Employment
Agreement is for three years, commencing April 1, 2005, and thereafter
automatically renews for additional one-year periods Pursuant to Jeffrey
Trenk Employment Agreement, Mr. Trenk's base annual salary is $175,000. In
addition, he is eligible to receive annually an incentive bonus equal to
three percent of the Earnings Before Interest, Taxes, Depreciation, and
Amortization ("EBITDA") of the Company earned by meeting or exceeding the
annual plan for EBITDA developed by management and approved by the Board
annually. Mr. Trenk is to be granted an option each April 1 during the
initial term to purchase 250,000 shares of the common stock, commencing
April 1, 2005.
26
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 14 - Commitments and Contingencies, continued
Litigation
In early 2005, the Company was served with a complaint which names the
Company, among others, as a defendant in a suit brought by a broker
dealer, seeking approximately $100,000 in damages arising from Shadows
Bend canceling a stock certificate in the year 2002. Captioned
Institutional Capital Management, Inc. vs Michael W. Sciacchetano, et.
at., the suit is currently pending in the 215th Judicial District Court,
Harris County, Texas. On March 28, 2005, the Company filed a general
denial. Discovery is in the initial stages and trial is set for late
November 2005. The Company disputes the allegations and intends to
vigorously defend itself in this matter.
27
Item 2 - Management's Discussion and Analysis or Plan of Operation
Please read the following discussion together with the condensed financial
statements and related notes appearing elsewhere in this Report. This Item 2
contains forward-looking statements that involve risks and uncertainties.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. Actual results may
differ materially from those included in such forward-looking statements.
Factors which could cause actual results to differ materially include those set
forth at the end of this Item 2 of Part I under the heading "Cautionary
Statement For Forward Looking Statements", as well as those discussed elsewhere
in this Report. Unless otherwise specified or the context requires otherwise,
the terms "we", "us", "our", "FBO Air" and the "Company" refer to FBO Air, Inc.
OVERVIEW
On April 15, 2005 we completed a private offering and a related private
placement raising gross proceeds of $4,448,975 and $1,250,000, respectively.
Also on March 31, 2005, we completed two acquisitions of operating companies, in
conjunction with our acquisition growth strategy, and became an operating
company.
In the sections below, we have outlined our history, and we further explain our
financing and acquisition programs.
Our History
We completed a reverse merger transaction on August 20, 2004 with Shadows Bend
Development, Inc. ("Shadows Bend"), a Nevada corporation. Prior to the merger,
Shadows Bend had been pursuing a business plan to acquire, develop and operate
"specialty care" facilities designed to help people diagnosed with Alzheimer's
or other related illnesses. This business model was effectively abandoned in
December 2002. The directors and management of FBO Air, Inc. upon consummation
of the merger became the directors and management of Shadows Bend.
On August 20, 2004, we changed our corporate name to FBO Air, Inc. pursuant to
an Agreement and Plan of Merger, dated as of July 26, 2004, between Shadows Bend
and FBO Air, Inc. The merger agreement was approved by a written consent of
stockholders of Shadows Bend holding more than 50% of the outstanding shares of
Shadows Bend's common stock, $0.001 par value.
FBO Air was formed initially as a proprietorship on January 17, 2003. On January
2, 2004, FBO Air was incorporated in the State of Arizona.
For accounting purposes, FBO Air was the acquirer in the August 2004 reverse
merger transaction, and consequently the transaction is treated as a
recapitalization of the Company. FBO Air's financial statements are the
historical financial statements of the post-merger entity.
Our goal is to establish a national network of fixed based operators ("FBOs")
through purchasing and consolidating FBOs in the secondary and tertiary markets
within the United States. FBOs are the primary providers of services, such as
fueling, parking of aircraft, maintenance and repair, to general aviation
aircraft operators.
28
We believe that the fixed based operator industry is comprised of only three
major players. Each of these companies are pursuing strategies to consolidate
FBOs holdings in primary market locations. The balance of the industry, in our
opinion, is very highly fragmented and served by over 3,000 operators who own
FBOs and serve customers at one or more of the almost 3,400 airport facilities
across the country that have at least one paved 3,000-foot runway. The vast
majority of these independent operators are single location operators. These
operators are relatively unsophisticated, frequently under-capitalized, and, in
many instances, seek an exit strategy. It is these operators that are the prime
targets of the Company's consolidation strategy.
The Company believes that, as it obtains a national presence in the fixed base
operator business, it will be the beneficiary of better jet fuel purchasing
terms and may be able to secure favorable landing rights service contracts for
the several major fractional jet ownership companies. There can be no assurance
that we shall achieve any or all of these benefits.
Critical Accounting Policies
Discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States
for interim financial information. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the
amounts reported in the consolidated financial statements and the accompanying
notes. On an ongoing basis, we evaluate our estimates, including those related
to product returns, product and content development expenses, bad debts,
inventories, intangible assets, income taxes, contingencies and litigation. We
base our estimates on experience and on various assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The critical accounting policies which we believe affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements are included within the footnotes to the condensed consolidated
financial statements incorporated within Part I, Item 1 of this report.
Going Concern
The accompanying financial statements in Item 1 of Part I of this Report have
been prepared assuming that the Company will continue as a going concern. On
April 15, 2005, FBO Air closed on the third of three rounds of financing in a
private offering and a related private placement, raising gross cash proceeds of
approximately $5,700,000. Until the March 2005 and April 2005 offering and
private placement fundings, the Company's primary source of operating funds
since inception had been provided by its founding shareholders and through
convertible note financing. There is no assurance that FBO Air will be able to
raise the additional funds sufficient to enable the Company to fully complete
its development activities, attain profitable operations or continue as a going
concern. The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As of June 30, 2005, the Company
had working capital and cash of approximately $1,167,000 and $1,581,000,
respectively. On March 31, 2005, the Company completed the acquisition of two
fixed based operator companies and became an operating company, generating
revenues of approximately $2,100,000 for the three months ended June 30, 2005.
The Company has incurred losses since inception, representing , in the
aggregate, operating losses of approximately $1,400,000 for the period from
January 17, 2003 (date of inception) through June 30, 2005. Certain of these
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying condensed consolidated financial statements in
Item 1 of Part I of this Report do not reflect the possible effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
29
Proposed Acquisitions
The Company has negotiated and issued letters of intent for two potential FBO
acquisitions and a memorandum of understanding regarding charter operations: 1)
An FBO located in the southern region of the country, requiring cash at closing
of approximately $1,250,000; and 2) An FBO located in the southern region of the
country, requiring a combination of cash, stock, and notes totaling
approximately $2.8 million. In addition, the Company has issued a memorandum of
understanding with a charter operator in the northeast region of the country in
which the two organizations would share resources and capabilities under a
strategic alliance that may lead to a more formal relationship and/or
transaction. There can be no assurance that any or all of these acquisitions
will be consummated.
During May 2005, Company made a secured six-month loan in the amount of $350,000
to the FBO located in the southern region of the country ("Maker"), as
discussed above. The secured note bears interest at 10% per annum and such
interest only shall be paid quarterly, starting upon the three month anniversary
of the secured note. The secured note may be prepaid at any time. The Company
has been grated a security interest in all tangible property, goods and accounts
of the Maker. Further, the Company has been granted an option to purchase the
FBO owned by Maker, such option to expire one year from date of grant of option.
The Company expects to apply this loan against a potential acquisition and
therefore has classified the loan as a non-current asset on the accompanying
balance sheet
30
RESULTS OF OPERATIONS
The acquisitions of the two operating companies were made as of March 31, 2005.
As such, the Company has operating results to report only from April 1, 2005
through June 30, 2005. Prior to March 31, 2005, the Company was in the
development stage, and its operations consisted solely of the administrative
costs of organizing, raising capital and seeking and qualifying acquisition
targets consistent with the Company's growth strategy.
Reporting as an operating company beginning on April 1, 2005.
The Company's revenues and gross profit from flight based operations for the
three months ended June 30, 2005 were approximately $2,159,000 and $728,000,
respectively. Selling, general and administrative expenses were approximately
$1,191,000 for three months ended June 30, 2005, of which $680,000 was
attributable to the operating costs of the flight based operations and $511,000
was attributable to corporate administrative costs.
Corporate administrative costs were approximately $511,000 for the three months
ended June 30, 2005, an increase of $283,000 over the amount of $228,000 for the
three months ended June 30, 2004. This increase was primarily attributable to an
increase in salaries of approximately $143,000, for the additional Company
officers hired on March 31, 2005, and $63,000 attributable to accounting fees
related to new operations.
Corporate administrative costs were approximately $726,000 for the six months
ended June 30, 2005, an increase of $469,000 over the amount of $257,000 for the
six months ended June 30, 2005. This increase was primarily attributable to an
increase in salaries of approximately $188,000 for the additional Company
officers hired on March 31, 2005 and $144,000 attributable to accounting fees
related to new operations.
Interest expense for the three and six months ended June 30, 2005 was
approximately $146,000 and $154,000, respectively, versus interest expense of $0
and $0 for the three and six months ended June 30, 2004. This increase in
interest expense is primarily attributable to the costs of the $1,496,000 in
senior secured notes issued by the Company on March 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2005, FBO Air closed on its first round of financing in its private
offering, raising gross cash proceeds of approximately $3,200,000.
Simultaneously FBO Air raised $1,250,000 in a related private offering. FBO Air
raised additional funds of $1,200,000 and $90,000 in second and final rounds of
financing closed on April 8, 2005 and April 15, 2005, respectively. Until the
March 31 offering funding, the Company's primary source of operating funds since
inception had been provided by its founding shareholders and through convertible
note financing.
During the six months ended June 30, 2005, the Company had a net increase in
cash of approximately $1,567,000. The Company's sources and uses of funds during
this period were as follows:
31
Cash Used in Operating Activities. Net cash used in operating activities was
approximately $744,000. This was primarily driven by a net loss of $829,000 and
an increase in accounts receivable of $646,000, offset by an increase in
accounts payable $556,000, all attributable to the operations that were acquired
on March 31, 2005. For the six months ended June 30, 2004, net cash used in
operating activities was $104,000. This was attributable to a net loss of
$257,000 offset by an increase of $69,000 in the compensatory element of stock
issuances and an increase of $99,000 in the accounts payable and accrued
expenses.
Cash Used in Investing Activities. Net cash used in investing activities was
approximately $2,933,000. This was attributable primarily to FBO's purchase of
two fixed base operating companies for $2,555,000, representing an aggregate
cash purchase price of $2,722,000, less cash acquired of $167,000. In addition,
the Company invested $350,000 in a note receivable with a fixed base operator
who is a potential acquisition target of the Company.
On March 31, 2005, the Company purchased 100% of the stock of Tech Aviation,
Inc. ("Tech Aviation"), a fixed base operator conducting business in the
Northeast. Under the terms of the acquisition agreement, the Company paid cash
at closing of approximately $2,256,000, applied a deposit of $10,000 and issued
notes payable to the Tech Aviation shareholders aggregating a discounted value
of approximately $433,000. The terms of the notes provide for payments of
$100,000 payable annually for each of five years on the anniversary of the
closing. Interest on these notes was imputed at an annual rate of 5% per annum.
On March 31, 2005, the Company purchased certain assets of Central Plains
Aviation, Inc. ("Central Plains"), a fixed base operator conducting business in
Kansas. Under the terms of the acquisition agreement, the Company paid cash at
closing of $466,000, and issued a note payable to the Central Plains shareholder
for $240,000. This note matures in September 2006 and is payable in quarterly
installments beginning on March 31, 2005, bearing an interest rate of 5% per
annum.
Cash Provided by Financing Activities. Net cash provided by financing activities
was approximately $5,245,000, principally through the proceeds received on March
31, April 8, and April 15, 2005 from the issuance of $1,496,000 of senior
secured notes, the issuance of $4,243,000 of convertible preferred stock and the
issuance of warrants for the purchase 3,618,000 of the Company's common stock,
less issuance expenses paid in cash at closing of $514,000. During February
2005, the Company issued convertible notes of $20,000.
As of June 30, 2005, FBO Air had a working capital balance of approximately
$1,517,000. Our capital commitments involve our targeted acquisitions of fixed
base operators. The Company will proceed to make these acquisitions only in so
much as there is adequate investment and operating capital. This capital is
expected to be raised through the issue of additional debt and equity capital.
On March 31, April 8 and April 15, 2005, we issued Senior Secured Notes with a
face value of approximately $1,496,000, which are due in three years, on March
31, 2008; bear interest at the rate of 10% per annum; are payable quarterly, are
secured by the current and to be acquired assets of the Company and its present
and future subsidiaries; and are subject to certain covenants of the Company.
32
On March 31, April 8 and April 15, 2005, we sold approximately $4,243,000, or
847 shares, of our mandatorily redeemable Series A convertible preferred stock,
which was authorized during February 2005.
On March 31, April 8 and April 15, 2005, the Company issued warrants to purchase
shares of the Company's common stock aggregating approximately 3,618,000 to
investors and 1,296,000 to the placement agent. Each warrant provides a
five-year right to purchase a share of the Company's Common Stock at the initial
exercise price (the "Warrant Exercise Price") of $0.60 per share, with such
price and the number of shares to be adjusted in the event of stock splits and
certain other events, as provided in the agreement, and upon the sale by the
Company of additional equity securities at a price below the Warrant Exercise
Price. At the option of the Company, the Warrants may be redeemed at any time,
in whole, but not in part, at a price of $0.01 per share provided that: (a)
there is an effective registration statement covering the resale of the Warrant
shares; (b) the volume weighted average closing price of the Common Stock for
the prior 20 trading days is not less than 250% of the Warrant Exercise Price;
and (c) the average daily trading volume of the Company's Common Stock is not
less than 200,000 shares per day during such 20-day trading period.
In April 2004, the Company entered into a convertible note agreement with a
group of investors ("Investors") to purchase five-year, 8% convertible notes in
the aggregate principal amount of $400,000. In April 2004, the Investors funded
the sale of the initial $130,000 of convertible notes under the agreement.
During August 2004, October 2004, November 2004, December 2004 and January 2005,
the Investors waived one provision under their agreement and funded the sale of
$125,000, $45,000, $40,000, $40,000 and $20,000, respectively, of convertibe
notes under the agreement, representing funding of the full amount. On March 31,
2005, the holders converted the entire $400,000 in convertible notes into
4,018,376 shares of the Common Stock.
During February 2005, the Company authorized the issue of 1,000 shares of
preferred stock, designated as Series A Convertible Preferred Stock ("the
Convertible Preferred Stock"), each share having a Stated Value ("Stated Value")
of $5,000. These shares provide for cumulative dividends at the annual rate of
8%, payable quarterly and mature three years from the date of issue. The
cumulative dividend, at the option of the Company, may be paid either in cash or
by the issuance of additional shares of the Convertible Preferred Stock. The
holders of the Convertible Preferred Stock and the holders of the shares of
Common Stock shall vote as a single class, with the holders of the Convertible
Preferred Stock having the number of votes based upon the formula for the
conversion to Common Stock, as provided below. The holders of the Convertible
Preferred Stock have the right to elect one director to the Company's Board of
Directors or to have one observer at Board meetings.
The Convertible Preferred Stock is convertible into shares of the Company's
Common Stock. The shares shall automatically convert upon (a) the Company's
realization of gross proceeds exceeding $5,000,000 from the sale of equity
securities (a "Qualified Follow-On Offering"), separate and apart from the March
and April 2005 Private Offerings, or (b) at such time as the traded price of the
Company's Common Stock exceeds 2.5 times the Initial Conversion Price
("Conversion Price"), and under both (a) and (b), the shares subject to
conversion are fully registered shares. At the option of the holder, the shares,
in whole or in part, may be converted at any time.
Subject to certain adjustments, as provided in the agreement, the Conversion
Price is $0.30 per share. Each share of Preferred Stock will convert into that
number of shares of Common Stock determined by dividing the Stated Value of each
share of Convertible Preferred Stock by the Conversion Price. In the case of a
mandatory conversion on account of a Qualified Follow-on Offering, then at the
option of the holder, the shares shall be converted at (a) the Conversion Price
or (b) at the same price that such securities are being sold in such Qualified
Follow-On Offering, with the holder, in this case, also receiving a premium of
an additional 10% in the number of such shares. Under certain conditions
whereupon the Company sells shares of Common Stock at a price below the
Conversion Price, then the Conversion Price shall be reduced, as provided for in
the agreement.
33
On the third anniversary of the original date of issue of the Convertible
Preferred Stock, the Company shall redeem for cash all remaining outstanding
shares at a redemption price equal to the aggregate Stated Value, plus all
accrued and unpaid dividends.
In the event of a liquidation of the Company, the holders of the Convertible
Preferred Stock then outstanding will be entitled to receive 115% of the stated
value of each share, plus any accrued and unpaid dividends.
The Company's stock is traded on the OTC Bulletin Board ("OTCBB") under the
symbol FBOR. The OTCBB is a regulated quotation service that displays real-time
quotes, last-sale prices and volume information in over-the-counter ("OTC")
equity securities. Prior to December 21, 2004, the stock had been traded on the
Pink Sheets.
On the basis of the foregoing, and subject to the risk factors more fully
discussed below, we believe that based upon the cash on hand and resources
available, the Company will require additional debt or equity capital to fund
operations past the remainder of this calendar year.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
Statements contained in this "Management's Discussion and Analysis or Plan of
Operation" may contain information that includes or is based upon certain
"forward-looking statements" relating to our business. These forward-looking
statements represent management's current judgment and assumptions, and can be
identified by the fact that they do not relate strictly to historical or current
facts. Forward-looking statements are frequently accompanied by the use of such
words as "anticipates," "plans," "believes," "expects," "projects," "intends,"
and similar expressions. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors, including, while it is not
possible to predict or identify all such risks, uncertainties, and other
factors, those relating to:
o our ability to secure the additional financing adequate to execute
our business plan;
o our ability to identify, negotiate and complete the acquisition of
targeted operators, consistent with our business plan;
o existing or new competitors consolidating operators ahead of the
Company;
o we may be unable to attract new personnel, which would adversely
affect implementation of our overall business strategy.
o the success of our investor relations program to create and sustain
interest and liquidity in our stock, which is currently thinly
traded on the OTCBB;
34
Any one of these or other risks, uncertainties, other factors, or any
inaccurate assumptions may cause actual results to be materially different from
those described herein or elsewhere by us. We caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
they were made. Certain of these risks, uncertainties, and other factors may be
described in greater detail in our filings from time to time with the Securities
and Exchange Commission, which we strongly urge you to read and consider.
Subsequent written and oral forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth above and elsewhere in our reports filed with
the Securities and Exchange Commission. We expressly disclaim any intent or
obligation to update any forward-looking statements.
35
Item 3 - Controls and Procedures
The Company's principal executive officer, who is also the acting principal
financial officer, has evaluated the effectiveness of the Company's "disclosure
controls and procedures," as such term is defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this Quarterly Report on Form 10-QSB. The evaluation process, including the
inherent limitations on the effectiveness of such controls and procedures is
more fully discussed below. Based upon his evaluation, the principal executive
officer, who is also the acting principal financial officer, has concluded that
the Company's disclosure controls and procedures, although containing a material
weakness, were effective.
This material weakness is the lack of the necessary corporate accounting
resources. On March 31, 2005, the Company completed the first two acquisitions
of its business plan. The Company has limited accounting personnel and is
currently building its accounting infrastructure. In the meantime, the Company
employs a financial consultant who works closely with the Company's Chief
Executive Officer and other senior managers of the organization to gather the
required information and to prepare the periodic financial statement and public
filings. Reliance on these limited resources impairs our ability to provide for
segregation of duties and the ability to ensure consistently complete and
accurate financial reporting, as well as disclosure controls and procedures. Our
Company's Chief Executive Officer has concluded that the disclosure controls and
procedures are effective, even though there is the foregoing material weakness.
This conclusion is based upon the following factors: (1) the broad business
experience of our Chief Executive Officer, (2) The effective utilization of a
senior level financial consultant and (3) the limited scope of our operations at
this early stage in the Company's development. The Company is currently seeking
to hire a qualified full time Chief Financial Officer. In addition, as the
Company grows, and as resources permit, we project that the new Chief Financial
Officer will hire such additional competent financial personnel to assist in the
segregation of duties with respect to financial reporting, and Sarbanes-Oxley
Section 404 compliance.
We believe that, for the reasons described above, we will be able to improve our
financial reporting and disclosure controls and procedures and remedy the
material weakness identified above. Because of 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, will be or have been
detected.
Except as described above, there were no significant changes in our internal
controls over financial reporting that occurred during the quarter ended June
30, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
36
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. Our disclosure controls and procedures are designed to provide a
reasonable assurance of achieving their objectives and our Chief Executive
Officer has concluded that such controls and procedures are effective at the
"reasonable assurance" level.
37
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In early 2005, the Company was served with a complaint which names the Company,
among others, as a defendant in a suit brought by a broker dealer, seeking
approximately $100,000 in damages arising from Shadows Bend canceling a stock
certificate in the year 2002. Captioned Institutional Capital Management, Inc.
vs Michael W. Sciacchetano, et. at., the suit is currently pending in the 215th
Judicial District Court, Harris County, Texas. On March 28, 2005, the Company
filed a general denial. Discovery is in the initial stages and trial is set for
late November 2005. The Company disputes the allegations and intends to
vigorously defend itself in this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
1. Private Placement
(a) On March 31, April 8 and April 15, 2005, the Company sold 597 units (the
"Units"), each Unit consisting of: (i) a 10% Senior Secured Promissory Note due
March 31, 2008 (the "Secured Note") in the principal amount of $25,000; (ii) ten
shares of the Company's Series A Convertible Preferred Stock, $0.001 par value
(the "Convertible Preferred Stock"); and (iii) a warrant expiring March 30, 2010
(the "Investors Warrant") to purchase 50,000 shares of the Common Stock. As a
result of this closing, the Company issued on the Initial Closing Date $1,496 in
aggregate principal amount of the Secured Notes, 597 shares of the Convertible
Preferred Stock and Investor Warrants to purchase an aggregate of 2,992,652
shares of the Common Stock.
(b) There was no underwriter for the Units, although Laidlaw & Company (UK) Ltd.
("Laidlaw") acted as the non-exclusive placement agent for this private
placement (the "Offering") on a "reasonable efforts $3,000,000 all-or-none"
basis. The Offering was conditioned upon investors purchasing a minimum of 40
Units for an aggregate purchase price of $3,000,000.
(c) The Units were offered at $75,000 per Unit; however, the Company and Laidlaw
reserved the right to accept subscriptions for partial Units and did in fact do
so at the Initial Closing Date. As a result, the total offering price was
$4,488,975. There were no underwriting discounts or commissions. However,
Laidlaw is entitled to receive, at any Closing on or prior to the Final Closing
Date: (i) a cash fee of 10% of the gross proceeds delivered at each Closing and
(ii) a warrant expiring March 30, 2010 (the "Agent's Warrant") to purchase 10%
of the shares of the Common Stock underlying the shares of the Convertible
Preferred Stock and the Investors Warrants issued at each closing. The Agent's
Warrant is similar in terms to the Investor Warrant. As a result of the Closing,
the Company paid to Laidlaw a cash fee of $458,898 and issued to Laidlaw an
Agent's Warrant to purchase 1,296,816 shares of the Common Stock. The Company
also paid Laidlaw a non-accountable expense reimbursement of $35,000.
38
(d) The Company claims that the Offering was exempt from the registration
requirement of Section 5 of the Securities Act pursuant to the exemption of
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder as a transaction not involving a public offering. Each investor
represented to the Company that he, she or it was acquiring the Units, and,
unless registered under the Securities Act at that time, the shares of the
Common Stock issuable upon the conversions of the shares of the Convertible
Preferred Stock and the exercises of the Investor Warrants, for investment and
not with a view toward, or in connection with, any distribution of securities of
the Company (as the term "distributions" is contemplated under the Securities
Act). Laidlaw made a similar investment representation to the Company with
respect to the Agent's Warrant issued to it on the Initial Closing Date and the
shares of the Common Stock issuable upon the exercise thereof.
All of the shares of the Common Stock issuable upon conversions of shares of the
Convertible Preferred Stock and the exercises of the Investor Warrants and the
Agent's Warrants have been registered under the Securities Act for resale by the
holders in the Company's Registration Statement on Form SB-2, File No.
333-125811 (the "Registration Statement"), which was declared effective on
August 5, 2005.
(e) The following terms are applicable to the conversions of shares of the
Convertible Preferred Stock and the exercises of the Investor Warrants and the
Agent's Warrants:
(i) Convertible Preferred Stock - Optional Conversion. From time to time after
issuance a holder may convert a share of the Convertible Preferred Stock into
that number of shares of the Common Stock determined by dividing the Stated
Value of a share of the Convertible Preferred Stock ($5,000) by the Conversion
Price (the Initial Conversion Price is $.30 per share). Accordingly, subject to
the anti-dilution provisions described below in subsection (1)(e)(iv) of this
Item 3.02, a share of the Convertible Preferred Stock would be convertible into
16,666.666 shares of the Common Stock.
(ii) Convertible Preferred Stock - Mandatory Conversion. Shares of the
Convertible Preferred Stock shall automatically convert into shares of the
Common Stock upon the occurrence of one of the following events (a "Mandatory
Conversion Event"): (1) upon the sale by the Company of its equity securities
resulting in the receipt by the Company of no less than $5,000,000 in gross
proceeds, excluding the Offering, (a "Qualified Follow-On Offering") or at such
time as the closing bid price for the Common Stock has equaled or exceeded 2.5
times the Initial Conversion Price of $.30 (i.e., $.75) for a period of 20
consecutive trading days prior to the date of the Mandatory Conversion provided
that: (A) the Common Stock shall have traded no less than 200,000 shares per
trading day for no less than 20 consecutive trading days prior to the date of
the Mandatory Conversion and (B) the shares issued upon conversion are fully
registered for resale pursuant to an effective registration statement under the
Securities Act and are not subject to a lock-up agreement requested by the
Company, its underwriters or placement agents. In the event of a Mandatory
Conversion due to a Qualified Follow-On Offering, the holder may convert his,
her or its shares of the Convertible Preferred Stock into (x) shares of the
Common Stock at the Conversion Price in effect on the date of the Mandatory
Conversion Event or (y) the securities being sold in the Qualified Follow-On
Offering at the same price that such securities are being sold in such Qualified
Follow-On Offering, the purchase price therefor to be paid by the holder
converting the Stated Value and accrued but unpaid dividends on the shares of
the Convertible Preferred Stock so converted, but each holder who so converts
into such securities shall receive an additional ten percent of the identical
securities of the Qualified Follow-On Offering that such person converted into
in the Qualified Follow-On Offering.
39
(iii) The Investor Warrants and the Agent's Warrants will be exercisable at $.60
per share (the "Exercise Price") subject to certain adjustments, as defined in
the agreement.
(iv) Both the Conversion Price and the Exercise Price will be adjusted on a
weighted average basis for (1) all stock splits, dividends, recapitalization
terms, reclassifications, payments made to holders of the Common Stock and other
similar events and (2) the sale by the Company of additional equity securities
at a price below the Conversion Price or the Exercise Price, whichever is
applicable.
(f) Not applicable.
40
2. Co-Investment
(a) On March 31, 2005, the Company sold 25 units (the "Co-Investment Units"),
each Co-Investment Unit consisting of (1) ten shares of the Convertible
Preferred Stock and a warrant expiring March 30, 2010 (the "Co-Investor
Warrant") to purchase 50,000 shares of the Common Stock. As a result of this
closing, the Company issued an aggregate of 250 shares of the Convertible
Preferred Stock and Co-Investor Warrants to purchase an aggregate of 625,000
shares of the Common Stock.
(b) There was no underwriter for the Co-Investor Units. The Co-Investors had
agreed to make the purchase if the Company sold at least the minimum amount in
the Offering. The sale of the Co-Investor Units is not credited against the
minimum or maximum amounts to be sold in the Offering. The Co-Investors were all
"accredited investors (as such term is defined in Rule 501(a) of Regulation D
under Securities Act).
(c) The Co-Investor Units were offered at $50,000 per Co-Investor Unit; however,
the Company reserved the right to accept subscription for partial Co-Investor
Units and did in fact do so at the Initial Closing Date. The total offering
price was $1,250,000. There were no underwriting discounts or commissions and
Laidlaw received no compensation for the sale of the Co-Investor Units.
(d) The Company claims that the sales of the Co-Investor Units were exempt from
the registration requirement of Section 5 of the Securities Act pursuant to the
exemption of Section 4(2) of the Securities Act as transactions not involving a
public offering. Each Co-Investor represented to the Company that he or it was
acquiring the Co-Investor Units, and, unless registered under the Securities Act
at that time, the shares of the Common Stock issuable upon the conversions of
the shares of the Convertible Preferred Stock and the exercises of the
Co-Investor Warrants, for investment and not with a view toward, or in
connection with, any distribution of securities of the Company (as the term
"distribution" is contemplated under the Securities Act).
All of the shares issuable upon conversions of shares of the Convertible
Preferred Stock and the exercises of the Co-Investor Warrants have been
registered under the Securities Act for resale by the holders in the
Registration Statement.
(e) The Co-Investor Warrants are similar in terms to the Investor Warrants.
(f) Not applicable.
3. Convertible Notes
(a) On March 31, 2005, the Company issued an aggregate of 4,018,376 shares of
the Common Stock upon the conversion of the Company's 8% Convertible Notes due
April 15, 2009 (the "Convertible Notes") in the principal amount of $400,000.
(b) There was no underwriter in connection with the conversion of the
Convertible Notes. All of the holders who or which converted the Convertible
Notes were "accredited investors" (as such term is defined in Rule 501(a) of
Regulation D under the Securities Act) and were either the purchasers of the
Convertible Notes in the private placement of FBO Air which closed on April 16,
2004 or their assignee. As previously reported, upon the Merger, the Company
assumed FBO Air's obligations under the Convertible Notes.
41
(c) The Company received no cash upon the conversion of the Convertible Notes,
having received $400,000 in drawdowns with respect to the Convertible Notes.
(d) The Company claims that the issuances of the shares of the Common Stock were
exempt from the registration requirement of Section 5 of the Securities Act
pursuant to the exemption of Section 4(2) of the Securities Act as transactions
not involving a public offering. Each of the holders of the Convertible Notes
represented to the Company that he or it was acquiring the shares of the Common
Stock for investment and not with a view toward, or in connection with, any
distribution of securities of the Company (as the term "distribution" is
contemplated under the Securities Act).
All 4,018,376 shares of the Common Stock were registered under the Securities
Act for resale by the holders in the Registration Statement.
(e) The Convertible Notes were converted into 40%, as defined therein, of the
Company's outstanding shares of the Common Stock prior to giving effect to the
Offering.
(f) Not applicable
4. Option Grants
(a) Effective on April 1, 2005, the Board of Directors granted options to
purchase an aggregate of 750,000 shares of the Common Stock.
(b) There were no underwriters. An option expiring March 31, 2010 to purchase
250,000 shares of the Common Stock was granted to each of (i) Robert J.
Ettinger, who was elected as a Vice Chairman of the Board and the Chief
Operating Officer of the Company; (ii) Jeffrey M. Trenk, who was elected as a
Vice Chairman of the Board and the Executive Vice President of Business
Development of the Company and (iii) Ronald J. Ricciardi, the President and
Chief Executive Officer of the Company.
(c) The options were not issued for cash and there were no underwriting
discounts or commissions. As indicated in subsection (b) above, these options
were issued in consideration of the services to the performed for the Company by
these three principal officers of the Company.
(d) The Company claims that the grants of these options were exempt from the
registration requirement of Section 5 of the Securities Act pursuant to the
exemption of Section 4 (2) of the Securities Act as transactions not involving a
public offering. Each of the optionees represented to the Company that he was
acquiring the options, and, if not registered under the Securities Act at the
time, the shares of the Common Stock issuable upon the exercise of the option,
for investment, and not with a view toward, or in connection with, a
distribution (as the term "distribution" is contemplated under the Securities
Act).
(e) Each of the options is exercisable at $1.60 per share, the market price on
April 1, 2005. Each option is exercisable, from time to time in its entirely or
in part, until March 31, 2010.
(f) Not applicable.
42
Item 5. Other Information
none.
43
Item 6. Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
2 Agreement and Plan of Merger dated as of July 26, 2004 by and
between the Company and FBO Air, Inc, an Arizona Corporation
(without schedules).(4)
3.1 Certificate of Amendment to the Company's Certificate of
Incorporation filed on July 30, 2004.(4)
3(i)(1) Copy of Certificate of Designations. (1)
4.1 Form of 10% Senior Secured Promissory Note due March 31, 2008.
(2)
4.2 Form of Investor Warrant. (2)
4.3 Copy of General Security Agreement dated as of June 30, 2005.
(2)
4.4 Form of Co-Investor Registration Rights Agreement (without
schedule or exhibit). (2)
4.5 Form of Co-Investor Registration Rights Agreement (without
schedule or exhibit). (2)
10.1 Copy of Employment Agreement dated as of April 1, 2005 by and
between Robert J. Ettinger and the Company. (2)
10.2 Copy of Business Development Agreement dated as of January 2,
2004 by and between Jeffrey M. Trenk and the Company. (3)
10.3 Copy of Employment Agreement dated as of April 1, 2005 between
Jeffrey M. Trenk and the Company. (2)
10.4 Copy of Employment Agreement dated as of January 2, 2004 by
and between Ronald J. Ricciardi and the Company. (3)
10.5 Copy of First Amendment effective April 1, 2005 to the
Ricciardi Employment Agreement. (2)
10.6 Copy of Asset Purchase Agreement dated March 31, 2005 among
FBO Air - Garden City and Jon A. Crotts .(2)
10.7 Copy of Employment Agreement between FBO Air - Garden City,
Inc. and Jon A. Crotts. (2)
- ----------
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2004 filed on March 29, 2005.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 6, 2005.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on October 5, 2004.
(4) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 27, 2004.
(5) Incorporated by reference to the Company's Current Report on Form 8-K/A
filed on November 4, 2004.
(6) Filed herewith.
44
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.8 Copy of Stock Purchase Agreement dated March 31, 2005 between
Tech Aviation Source, Ronald D. Ertley, Frank E. Paczewski,
and FBO Air Wilkes-Barre, Inc. (2)
10.9 Copy of Employment Agreement dated March 31, 2005 between Tech
Aviation Service, Inc, and Frank E. Paczewski (2)
10.10 Copy of Convertible Loan Agreement dated April 16, 2004 among
the Company and the investors mentioned in Schedule A (8)
10.11 Copy of the Letter Agreement dated as of July 26, 2004 to the
Convertible Loan Agreement filed as Exhibit 10.10 herein (5)
10.12 Form of Convertible Notes due April 15, 2009. (4)
10.13 Copy of Letter Agreement dated October 21, 2004 amending the
Convertible Notes, the form of which is filed as Exhibit 10.6.
(5)
31.1 Officer's Certification Pursuant to Rule 13a-14(a) under the
Securities Exchange Act. (6)
32.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of
2002. (6)
45
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 22, 2005 FBO AIR, INC.
By: /s/ Ronald J. Ricciardi
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Ronald J. Ricciardi
Chief Executive Officer
(acting principal financial officer)
46