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 QUARTERLY PERIOD ENDED SEPTEMBER 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) 414-1400
(Issuer's telephone number)
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|_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes |_| No|X|
As of November 16, 2005, the Registrant had 12,377,732 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
September 30, 2005
Index
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Page
----
Balance Sheet as of September 30, 2005 1
Statements of Operations for the three and nine months ended
September 30, 2005 and 2004 2
Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 3
Notes to Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS 32
ITEM 3. CONTROLS AND PROCEDURES 41
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 46
ITEM 5. OTHER INFORMATION 46
ITEM 6. EXHIBITS 47
SIGNATURES 49
EXHIBIT 31.1
EXHIBIT 32.1
Part I - Financial Information
Item I - Condensed Consolidated Financial Statements (Unaudited)
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 1,002,365
Accounts receivable, net 3,961,686
Inventory 184,848
Prepaid expenses and other current assets 198,637
------------
Total current assets 5,347,536
PROPERTY, PLANT AND EQUIPMENT, net
of accumulated depreciation of $42,200 1,185,188
OTHER ASSETS
Deposits 29,000
Note receivable 350,000
Intangible assets 996,000
Goodwill 4,144,135
------------
Total other assets 5,519,135
------------
TOTAL ASSETS $ 12,051,859
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 3,825,183
Customer deposits 591,209
Accrued expenses 621,019
Accrued interest and dividends 249,155
Term loan - related party, net of discount of $31,565 1,468,435
Long-term debt - current portion 380,780
------------
Total current liabilities 7,135,781
LONG-TERM LIABILITIES
Notes payable - other - less current portion 426,535
Senior secured notes payable - net of discount of $1,003,242 493,082
------------
Total long-term liabilities 919,617
------------
Total liabilities 8,055,398
MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK - net of discount of $3,533,525;
$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 $4,242,650 709,125
------------
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;
12,377,732 issued and outstanding 12,377
Deferred financing costs (1,593,835)
Additional paid-in capital 7,944,279
Accumulated deficit (3,075,485)
------------
TOTAL STOCKHOLDERS' EQUITY 3,287,336
------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 12,051,859
============
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 nine months ended
September 30, September 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
REVENUE $ 3,406,201 $ -- $ 5,565,068 $ --
COST OF SALES 2,416,422 -- 3,858,543 --
------------ ------------ ------------ ------------
GROSS PROFIT 989,779 -- 1,706,525 --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including $0, $57,024, $0 and
$69,227 for the compensatory element
of stock issuances, respectively) 1,324,646 142,007 2,722,063 397,202
------------ ------------ ------------ ------------
OPERATING LOSS (334,867) (142,007) (1,015,538) (397,202)
OTHER INCOME (EXPENSE)
INTEREST INCOME 8,832 -- 12,192 --
INTEREST EXPENSE (147,785) (3,991) (298,993) (6,128)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (138,953) (3,991) (286,801) (6,128)
------------ ------------ ------------ ------------
NET LOSS $ (473,820) $ (145,998) $ (1,302,339) $ (403,330)
============ ============ ============ ============
Deemed dividend to preferred shareholders -
accretion of discount (356,500) -- (709,125) --
Amortization of Deferred Financing Costs (160,616) -- (320,330) --
Preferred stock dividend (85,560) -- (170,190) --
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (1,076,496) $ (145,998) $ (2,501,984) $ (403,330)
============ ============ ============ ============
Basic and Diluted Loss Per
Common Share $ (0.11) $ (0.03) $ (0.28) $ (0.11)
============ ============ ============ ============
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 10,247,297 5,191,892 8,802,754 3,508,311
============ ============ ============ ============
See notes to condensed consolidated financial statements.
2
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
For the nine months ended
September 30,
2005 2004
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,302,339) $ (403,330)
----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 73,968 --
Amortization of debt discount 201,300 --
Compensatory element of stock issuances -- 69,227
Changes in operating assets and liabilities:
Accounts receivable (651,544) --
Inventory 2,726 --
Prepaid expenses and other current assets (109,658) (1,891)
Deposits (27,500) --
Due from stockholder 15,510 (14,510)
Accounts payable (506,549) 146,191
Customer deposits 472,791 --
Accrued interest and dividends 78,963 --
Accrued expenses 418,484 --
----------- -----------
TOTAL ADJUSTMENTS (31,509) 199,017
----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES (1,333,848) (204,313)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Note receivable (350,000) --
Purchase of equipment (97,225) --
Acquisition of Airborne (1,400,000) --
Acquisition of FBOs, less cash acquired of $167,329 (2,554,816) --
----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (4,402,041) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of convertible notes 20,000 255,000
Repayment of notes (26,602) --
Deferred financing costs (508,235) --
Proceeds from the issuance of term loan 1,500,000 --
Proceeds from the Private placement 4,488,974 --
Proceeds from the Co-Investment 1,250,000 --
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 6,724,137 255,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 988,248 50,687
CASH AND CASH EQUIVALENTS - Beginning 14,117 --
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 1,002,365 $ 50,687
=========== ===========
See notes to condensed consolidated financial statements.
3
FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS, CONTINUED
(Unaudited)
- --------------------------------------------------------------------------------
For the nine months ended
September 30,
---------------------------
2005 2004
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for:
Interest $ 3,000 $ --
============ ============
Income taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Convertible Notes converted to common stock $ 400,000 $ --
============ ============
Accrued liabilities assumed in the merger $ -- $ 19,151
============ ============
Advances from affiliates converted to equity $ -- $ 94,818
============ ============
Notes issued for acquisitions $ 672,948 $ --
============ ============
Common stock issued for acquisition $ 630,000 $ --
============ ============
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 September 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 and, on September 23, 2005, the Company acquired one other
operating company. Accordingly, the Company is no longer considered a
development stage entity.
The results of operations for the nine-month period ended September 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 in Avoca, Pennsylvania (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 5).
On September 23, 2005, FBO Air acquired the stock of a fixed based
operator, located in Elmira, New York, with an emphasis on the chartering
and management of aircraft (See Note 5).
The acquisitions of the first two operating companies were made as of
March 31, 2005, the last day of the quarterly period ending March 31,
2005. Accordingly, the operating results for the six months ended
September 30, 2005 from these first two operating companies are presented
within these condensed consolidated statements of operations.
The acquisition of the Elmira location was made as of September 23, 2005.
These statements reflect operating results from this acquisition for the
period September 24, 2005 through September 30, 2005.
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. On September 23, 2005, FBO Air raised $1,500,000
through the issuance of a 180-day term note, the funds from which were
substantially applied to fund the acquisition of the Elmira location.
Until the March and April 2005 offering funding, the Company's primary
source of operating funds since inception had been provided by its
founding stockholders 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 attain profitable operations or
continue as a going concern.
6
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 3 - Going Concern and Management's Plans, continued
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As of September 30, 2005, the
Company had cash of approximately $1,000,000 and had a working capital
deficiency of approximately $1,788,000. The Company generated revenues of
approximately $5,500,000 for the nine months ended September 30, 2005. The
Company has incurred losses since inception, representing, in the
aggregate, operating losses of approximately $1,700,000 for the period
from January 17, 2003 (date of inception) through September 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.
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, FBO Wilkes-Barre and, for a
period in September, Airborne. 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.
7
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Concentrations of Credit Risk
Cash: The Company maintains its cash with various financial institutions,
which exceed federally insured limits throughout the period. At September
30, 2005, the Company had cash on deposit of approximately $1,283,802 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.
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.
8
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Revenue Recognition
Revenue for the sales of products is recognized at the time products are
delivered to customers. Revenue for services is recognized at the time the
services are performed and provided to customers. The sources of revenue
are recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed and determinable and collectibility is
probable. In addition, service revenue is recognized when the services are
rendered.
Customer Deposits
Customer deposits consist of amounts that customers are required to remit
in advance to the Company in order to secure payment for future purchases
and services.
Depreciation
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets.
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 nine months ended September 30,
2005, as a result of net operating losses incurred during the period. As
of September 30, 2005, the Company has available approximately $1,754,000
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 September 30, 2005,
the Company has recorded a deferred tax asset of approximately $702,000,
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 $381,000. 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 Based Compensation/Stock Options
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS 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.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure" ("SFAS 148"). This standard amended the disclosure
requirements of SFAS 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 SFAS 123 which require
disclosure of the pro-forma effects on net income (loss) as if the fair
value method of accounting prescribed by SFAS 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.
Under APB 25, no stock-based employee compensation expense relating to the
Company's stock option plans was reflected in net loss, as all options
granted under its plans had an exercise price equal to or less than the
market value of the underlying Common Stock on the date of grant.
10
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used:
Three and nine
months ended
September 30,
2005
-------------
Dividend yield 0%
Expected volatility 55%
Risk-free interest rate 3.8%
Expected lives 2.0 years
The weighted average fair value of the options on the date of grant, using
the fair value based method, for the three and nine months ended September
30, 2005 was $0.27 and $0.07, respectively, and for the three and nine
months ended September 30, 2004 was $0 and $0, respectively.
The following table illustrates the effect on net loss had the Company
applied the open fair value recognition method under the provisions of
SFAS No. 123.
(All numbers in 000's Three Months Ended Nine Months Ended
except per share data.) September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net loss applicable to
common stockholders,as
reported $ (1,076) $ (146) $ (2,502) $ (403)
Deduct: total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects, if any
21 -0- 41 -0-
-------- -------- -------- --------
Pro-forma net loss $ (1,097) $ (146) $ (2,543) $ (403)
======== ======== ======== ========
Net loss per share
applicable to common
stockholders - basic and
diluted:
As reported $ (0.11) $ (0.03) $ (0.28) $ (0.11)
-------- -------- -------- --------
Pro forma $ (0.11) $ (0.03) $ (0.28) $ (0.11)
======== ======== ======== ========
11
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, warrants and the convertible preferred stock as of September 30,
2005 were 21,406,678.
Recently Issued Accounting Pronouncements
On September 28, 2005, the FASB ratified the following consensus reached
in EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature"): a) The issuance of convertible
debt with a beneficial conversion feature results in a basis difference in
applying FASB Statement of Financial Accounting Standards SFAS No. 109,
Accounting for Income Taxes. Recognition of such a feature effectively
creates a debt instrument and a separate equity instrument for book
purposes, whereas the convertible debt is treated entirely as a debt
instrument for income tax purposes. b) The resulting basis difference
should be deemed a temporary difference because it will result in a
taxable amount when the recorded amount of the liability is recovered or
settled. c) Recognition of deferred taxes for the temporary difference
should be reported as an adjustment to additional paid-in capital. This
consensus is effective in the first interim or annual reporting period
commencing after December 15, 2005, with early application permitted. The
effect of applying the consensus should be accounted for retroactively to
all debt instruments containing a beneficial conversion feature that are
subject to EITF Issue 00-27 , "Application of Issue No. 98-5 to Certain
Convertible Debt Instruments" (and thus is applicable to debt instruments
converted or extinguished in prior periods but which are still presented
in the financial statements). The adoption of this pronouncement is not
expected to have a material impact on the Company's financial statements.
12
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Recently Issued Accounting Pronouncements, continued
In May 2005, SFAS No. 154, "Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20, Accounting Changes and FASB Statement
No. 3" was issued which, among other things, changes the accounting and
reporting requirements for a change in accounting principle and provides
guidance on error corrections. SFAS No. 154 requires retrospective
application to prior period financial statements of a voluntary change in
accounting principle unless impracticable to determine the period-specific
effects or cumulative effect of the change, and restatement with respect
to the reporting of error corrections. SFAS No. 154 applies to all
voluntary changes in accounting principles, and to changes required by an
accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS No. 154 also
requires that a change in method of depreciation or amortization for
long-lived, non-financial assets be accounted for as a change in
accounting estimate that is effected by a change in accounting principle.
SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. At this time,
adoption of SFAS No. 154 is not expected to significantly impact the
Company's financial statements or future results of operations.
In October 2004, the FASB ratified the consensus reached in EITF Issue No.
04-8, "The Effect of Contingently Convertible Instruments on Diluted
Earnings per Share." The EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt,
contingently convertible preferred stock, and other such securities should
be included in diluted earnings per share (if dilutive) regardless of
whether the market price trigger has been met. The consensus became
effective for reporting periods ending after December 15, 2004. The
adoption of this pronouncement did not have a material effect on the
Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153, Exchanges Of Non-monetary Assets - An Amendment Of APB
No. 29 ("SFAS 153"). SFAS 153 amends APB No. 29 to eliminate the exception
of non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do not
have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expect to change
significantly as a result of the exchange. SFAS 153 and APB No. 29 do not
apply to the acquisition of non-monetary assets or services on issuance of
the capital stock of an entity. Currently, the Company has not had any
exchanges of non-monetary assets within the meaning of SFAS 153 and
adoption of SFAS 153 has had no effect on the Company's financial position
or results of operations.
13
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 4 - Summary of Significant Accounting Policies, continued
Recently Issued Accounting Pronouncements, continued In December 2004, the
Financial Accounting Standards Board ("FASB") issued its final standard on
accounting for share-based payments ("SBP"), FASB Statement No. 123R
(revised 2004), Share-Based Payment. The statement requires companies to
expense the value of employee stock options and similar awards. Under FAS
123R, SBP awards result in a cost that will be measured at fair value on
the awards' grant date, based on the estimated number of awards that are
expected to vest. Compensation cost for awards that vest would not be
reversed if the awards expire without being exercised. The effective date
for public companies that file as small business issuers is for quarterly
or annual periods beginning after December 15, 2005, and applied to all
outstanding and unvested SBP awards at a company's adoption. Management
does not anticipate that this statement will have a significant impact on
the Company's consolidated financial statements.
In June 2005, the EITF reached consensus on Isuue No. 05-6, "Determining
the Amortization Period for Leashold Improvements ("EITF 05-6"). EITF 05-6
provides guidance on determining the amortization period for leashold
improvements acquired in a business combination or acquired subsequent to
lease inception. The guidance in EITF 05-6 will be applied prospectively
and is effective for periods beginning after June 30, 2005. EITF 05-6 is
not expected to have a material effect on our consolidated financial
position or results of operations.
In September 2005, the EITF reached consensus on, Issue No. 05-7,
"Accounting for Modifications to Conversion Options Embedded In Debt
instruments beginning in the first interim or annual reporting period
beginning after December 15, 2005. Early application of this guidance is
permitted in periods for which financial statements have not yet been
issued. The disclosures required by Statement 154 should be made excluding
those disclosures that require the effects of retroactive application.
EITF No. 05-7 is not expected to have material effect on our consolidated
financial position.
NOTE 5 - Acquisitions
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.
14
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Acquisitions, 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
===========
The Company purchased the former Tech Aviation on March 31, 2005, the last
day of the quarterly reporting period ending March 31, 2005. Therefore,
the results of Tech Aviation from April 1, 2005 through September 30, 2005
are first reflected in the Company's results for the three and nine months
ended September 30, 2005.
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 six quarterly installments of
approximately $42,000 each, with the first installment due June 30, 2005.
The Central Plains assets 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.
15
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Acquisitions, 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 Central Plains on March 31, 2005, the
last day of the quarterly reporting period ending March 31, 2005.
Therefore, the results of Central Plains from April 1, 2005 through
September 30, 2005 are first reflected in the Company's results for the
three and nine months ended September 30, 2005.
Acquisition of Airborne, Inc.
On September 23, 2005, the Company purchased 100% of the stock of
Airborne, Inc. ("Airborne"), a fixed base operator conducting business in
the Northeast. Under the terms of the acquisition agreement, the Company
paid cash of $1,400,000 and issued 2,333,334 shares of common stock valued
at $630,000 at closing aggregating $2,030,000.
The acquisition was funded by a note payable with a face value of
$1,500,000 which matures in 180 days from September 23, 2005. The annual
interest rate is 4.25% until the initial maturity date, however the
Company can extend the maturity date to September 23, 2006 with an
interest rate of 9.25% per annum. Airborne granted the holder a security
interest in its accounts receivable, all of its deposit accounts, all
monies now and hereafter in the possession or under the control of
Airborne or the Company and all products and proceeds of the foregoing
personal property. The Company's chairman of the board and an affiliate of
one of its other directors are the members of the holder's entity.
In conjunction with the issuance of the term note, the Company also issued
five-year warrants to purchase a total of 1,200,000 shares of the
Company's Common Stock at an exercise price of $0.60 per share. The
Company allocated $35,000 of the aggregate proceeds from the term notes to
the warrants as original issuance discount, which represented the relative
fair value of the warrants at the date of issuance, and was amortizing the
discount to interest expense over the life of the term notes. The amount
amortized to interest expense for the three and nine months ended
September 30, 2005 was approximately $1,500 (See Note 10).
16
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Acquisitions, continued
All assets and liabilities of Airborne 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 $2,625,851. Identifiable intangible assets included
the trade name, customer relationships and non-compete agreements of
$320,000, $320,000 and $210,000, respectively. Trade name has an
indefinite life. Customer relationships and the non-compete agreements
will be amortized over their estimated life, which is approximately three
years.
The following table details the allocation of the purchase price:
Fair Value
-----------
Accounts receivable $ 3,073,025
Inventory 56,870
Prepaid expenses 33,980
Equipment 458,278
Deposits 1,500
Intangible assets - trade name 320,000
Intangible assets - customer relationships 320,000
Intangible assets - non-compete agreements 210,000
Goodwill 1,775,851
Accounts payable and accrued expenses (4,119,216)
Debt (100,288)
-----------
Total $ 2,030,000
===========
17
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 5 - Acquisitions, continued
Pro forma
The following table presents the unaudited pro forma combined results of
operations of the Company, Tech Aviation, Central Plains, and Airborne for
each of the three and nine-month periods ending September 30, 2005 and
2004, as if they had been acquired at the beginning of each of the
periods, respectively:
Three months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues:
Net sales $ 6,375,602 $ 4,350,762 $ 16,781,312 $ 10,243,133
Net loss (491,086) (184,324) (1,249,151) (139,411)
Basic net loss per common
share $ (0.04) $ (0.02) $ (0.11) $ (0.02)
Weighted average of
common shares outstanding
- basic and diluted 12,580,631 7,525,226 11,136,088 5,841,645
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.
NOTE 6 - Inventory
Inventory consists primarily of aviation fuel, which the Company dispenses
to its customers.
18
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 7 - Property and Equipment
Property and equipment as of September 30, 2005 consists of the following:
Estimated
Amount Useful Life
------------ ------------
Aircraft $ 564,785 7 - 15 years
Vehicles 230,000 5 -7 years
Office furniture and equipment 221,627 7 years
Tools and shop equipment 210,976 7 - 15 years
------------
Total $ 1,227,388
Less: accumulated depreciation (42,200)
------------
Property and equipment, net $ 1,185,188
============
Depreciation expense for the three and nine-month periods ended September
30, 2005 was approximately $21,000 and $ 42,000, respectively.
NOTE 8 - Notes Payable - Other
Notes payable - other, at September 30, 2005 consist of:
Outstanding
Balance at
Notes payable to: September 30, 2005
----------------------------- ----------------
Wilkes-Barre/Scranton
International Airport,
due September 2007 $ 60,681
Banks - Airborne (See Note 5) 100,454
Sellers - Tech Aviation 444,948
Seller - Central Plains 201,232
----------------
Subtotal 807,315
Less - current portion (380,780)
----------------
Total - long term $ 426,535
================
19
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 8 - Notes Payable - Other, continued
Aggregate annual maturities of long-term debt are as follows:
For the years ending Total Acquisition
December 31 Amount Notes Other
- ------------------------ -------------- ------------ -----------
2005 $ 78,996 $ 78,996 --
2006 361,724 200,755 $ 160,969
2007 82,270 82,270 --
2008 86,384 86,384 --
2009 197,941 197,941 --
-------------- ------------ ------------
Total 807,315 $ 646,346 $ 160,969
============ ============
Less:
Current portion 380,780
------------
Long-term portion $ 426,535
============
The Company issued a note payable with a face amount of $1,500,000 and a warrant
for the purchase of 1,200,000 shares (See Note 5).
NOTE 9 - 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.
20
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 9 - Convertible Notes, continued
The Company had 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 were to 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 were 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 had certain piggyback registration, tag along and
other rights as defined in the agreement. The Company was 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 Common Stock.
NOTE 10 - 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 approximately $508,000 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.
21
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - Private Placement, continued
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 $100,200 and $201,300 was
recorded during the three and nine months ended September 30, 2005,
respectively. 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:
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") for a period of 20
consecutive trading days and during such period the trading volume each
day has exceeded 200,000 shares, 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.
22
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - 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 approximately $4,243,000 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 $356,500 and $709,125 in accretion of discount was
recorded for the three and nine-months periods ended September 30, 2005,
respectively.
23
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - 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 September 30,
2005, dividends of $170,190 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.
24
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 10 - Private Placement, continued
Warrants, continued On September 23, 2005, the Company issued warrants to
purchase shares of the Company's Common Stock totaling 1,200,000 to a
Lender in conjunction with the issuance of a term note. These warrants
were issued to an entity owned by the Company chairman and an affiliate of
another director. 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.
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 11 - 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 Common Stock as
consideration for services performed by various individuals valued in the
aggregate amount of $69,227.
25
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 11 - Stockholders' Equity, continued
On August 20, 2004, the Company issued 1,504,397 shares of Common Stock 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.
On September 23, 2005, the Company issued 2,333,334 shares of Common Stock
at $0.27 per share with a total value of $630,000 in connection with the
purchase of Airborne.
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.
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. These options are exercisable at $1.60 per share, the closing
sales price on April 1, 2005 and vest immediately at date of grant.
Effective September 23, 2005, the Board of Directors granted to John Dow,
employed in the office of Chief Executive of Airborne, an option to
purchase 250,000 shares of the Common Stock, expiring September 23, 2010.
The option is exercisable at $0.33 per share, the closing sales price on
September 22 and vests immediately at date of grant.
NOTE 12 - 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 approximately $4,500 and $3,000 for the
three and nine months ended September 30, 2005.
26
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - 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.
The Company leases a 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.
The Company leases its facilities in Elmira, New York from an officer of
the Company and a related party. The terms are 15 years (subject to
renewals at the option of Airborne at least 60 days prior to the
expiration of the term). The annual rent will be $160,582, payable in
advance in equal monthly installments of $13,382. Beginning on the fifth
anniversary of the commencement date of the lease, and annually each year
thereafter, the annual rent shall increase or decrease by the increase or
decrease in the Consumer Index Price. The Company has paid a $25,000
security deposit with respect to this lease.
The Company leases refueling trucks and airplanes. The refueling trucks
lease on a month-to-month basis. As of September 30, 2005, the refueling
truck lease requires monthly rental payments of approximately $6,000.
Several airplane leases require monthly rental payments based upon the
number of hours that the planes are used.
27
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - Commitments and Contingencies, continued
Proposed Acquisitions
The Company has negotiated and issued a letter of intent for the potential
purchase of a FBO located in the southern region of the country, requiring
a combination of cash, stock, and notes totaling approximately $2.8
million. There can be no assurance that this acquisition 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 granted 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 accrued
expenses at September 30, 2005 is an obligation of $45,000 pursuant to
this Consulting Agreement.
28
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - Commitments and Contingencies, continued
Employment Agreements
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
was effective April 1, 2005 and will continue for three years thereafter
subject to automatic one-year renewals. The First Amendment increased 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.
29
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - Commitments and Contingencies, continued
Employment Agreements, continued
On September 23, 2005, the Company entered into an employment agreement
dated as of September 23, 2005 (the "Dow Employment Agreement") with John
Dow. Pursuant to the Dow Employment Agreement, Mr. Dow is employed in the
office of Chief Executive of Airborne. The term of the agreement is for
three years, commencing September 23, 2005, and thereafter automatically
renews for additional one-year periods. Mr. Dow's base annual salary is
$150,000. In addition, he may receive an annual performance bonus based on
the Board's evaluation of Airborne's performance and his performance. Mr.
Dow is to be granted an option each September 23 during the initial term
to purchase 250,000 shares of the Common Stock, commencing September 23,
2005.
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.
al., 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 February
2006. The Company disputes the allegations and intends to vigorously
defend itself in this matter.
On May 19, 2005, New World Aviation, Inc. ("New World") instituted an
action in the Supreme Court of the State of New York, County of New York,
captioned "New World Aviation, Inc., Plaintiff, against Robert J.
Ettinger, individually, and FBO Air, Inc., Defendants." Since April 1,
2005, Mr. Ettinger has been a Vice Chairman of the Board and the Chief
Operating Officer of the Company and, since March 31, 2005, a director of
the Company. Until March 25, 2005, when he resigned, Mr. Ettinger had
served as President (since October 15, 1998) of New World. In its amended
complaint New World is seeking (a) to enjoin the Defendants from
soliciting New World's clients and employees allegedly using the
confidential information which Mr. Ettinger learned in his "high-level
position with New World" and (b) damages in an amount to be determined at
trial against Mr. Ettinger for his alleged breach of fiduciary duties to
New World. On June 20, 2005, the Company answered the complaint, asserting
as affirmative defenses that (a) New World had forced Mr. Ettinger's
resignation by reneging on its promise to pay him a bonus for 2004, (b)
New World has unclean hands, (c) the identity of actual and potential New
World clients is available from publicly available records, (d) any
putative damages sustained by New World were caused by New World and third
parties and (2) New World's claims are barred by the statute of fraud. Mr.
Ettinger also filed a counterclaim against New World for $25,000 relating
to the 2004 bonus, to which New World has asserted five affirmative
defenses.
30
FBO AIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 13 - Commitments and Contingencies, continued
Litigation, continued
On September 6, 2005, the court denied New World's motion for preliminary
injunctive relief, which sought to bar the Company from soliciting New
World's customers or employees. The court also denied the Company's motion
for summary judgment. Despite such denial, based on the opinion of Wachtel
& Masyr, LLP, its trial counsel, the Company is the opinion that the
likelihood of an adverse judgment against the Company or Mr. Ettinger is
remote.
31
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. On September 23, 2005, we completed our third acquisition funded in
part through the issuance of debt of $1,500,000 and the issuance of common stock
valued at $630,000.
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.
32
OVERVIEW - continued
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.
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, in our opinion, 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.
33
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 total
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. On September 23, 2005, the Company
raised an additional $1,500,000 through the issuance of a term loan and
warrants. There is no assurance that FBO Air will be able to raise the
additional funds sufficient to enable the Company to 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 September 30, 2005, the Company had negative working capital of
$1,788,245, and cash and cash equivalents balance of $1,002,365. On March 31,
2005, the Company completed the acquisition of two fixed based operator
companies and became an operating company, generating revenues of approximately
$5,565,000 during the nine months ended September 30, 2005. The Company has
incurred losses since inception, representing, in the aggregate, operating
losses of approximately $1,900,000 for the period from January 17, 2003 (date of
inception) through September 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.
Proposed Acquisitions
The Company has negotiated and issued a letter of intent for the potential
purchase of a FBO located in the southern region of the country, requiring a
combination of cash, stock, and notes totaling approximately $2.8 million. There
can be no assurance that this acquisition 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
granted 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.
34
RESULTS OF OPERATIONS
The acquisitions of the two operating companies were made as of March 31, 2005.
On September 23, 2005, the Company completed the acquisition of the stock of
Airborne, Inc. ("Airborne"), its third operating company acquisition. As such,
the Company has operating results to report only from April 1, 2005 through
September 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 began on April 1, 2005.
The Company's revenues and gross profit from fixed based operations for the
three months ended September 30, 2005 were approximately $3,406,201 and
$989,779, respectively. Selling, general and administrative expenses were
approximately $1,324,646 for the three months ended September 30, 2005, of which
$900,374 was attributable to the operating costs of the fixed based operations
and $424,272 was attributable to corporate administrative costs.
The Company's revenues and gross profit from operations for the nine months
ended September 30, 2005 were $5,565,068 and $1,706,525, respectively. Selling,
general and administrative expenses were $2,722,063 for the nine months ended
September 30, 2005, of which $1,571,417 was attributable to the costs of
operations and $1,150,646 was attributable to corporate administrative costs.
For the three months ended September 30, 2005, the gross profit margin was 29%,
as compared to 31% for the nine months ended September 30, 2005. This decline in
the gross profit margin percentage of 2% is attributable, partly to a shift in
product mix and partly to an increase in fuel costs.
Corporate administrative costs were $424,272 for the three months ended
September 30, 2005, an increase of $282,265 over the amount of $142,007 for the
three months ended September 30, 2004. This increase was primarily attributable
to an increase in salaries of approximately $117,000 for the additional Company
officers hired on March 31, 2005 and $52,000 attributable to professional fees
related to new operations.
Corporate administrative costs were approximately $1,150,646 for the nine months
ended September 30, 2005, an increase of $1,008,639 over the amount of $142,007
for the nine months ended September 30, 2004. This increase was primarily
attributable to an increase in salaries of approximately $305,000 for the
additional Company officers hired on March 31, 2005 and $159,000 attributable to
professional fees related to new operations.
Interest expense for the three and nine months ended September 30, 2005 was
$147,785 and $298,993, respectively, versus interest expense of $3,991 and
$6,128 for the three and nine months ended September 30, 2004. This increase in
interest expense is primarily attributable to the interest related to the
$1,496,000 in senior secured notes issued by the Company on March 31, 2005.
35
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.
On September 23, 2005, the Company issued a note payable with a face value of
$1,500,000 which matures in 180 days from September 23, 2005. The Company can
extend the maturity date to September 23, 2006. Airborne granted the holder a
security interest in its accounts receivable, all of its deposit accounts, all
monies now and hereafter in the possession or under the control of Airborne or
the Company and all products and proceeds of the foregoing personal property.
The Company's chairman of the board and an entity owned by one of its other
directors are members of the holder's entity.
During the nine months ended September 30, 2005, the Company had a net increase
in cash and cash equivalents of $988,248. The Company's sources and uses of
funds during this period were as follows:
Cash Used in Operating Activities. Net cash used in operating activities was
$1,333,848. This was primarily driven by a net loss of $1,302,339, an increase
in accounts receivable of $651,544, and a decrease in accounts payable $506,549.
Net cash used in operations was reduced by the effect of increases in customer
deposits of $472,791 and accrued expenses of $418,484. These changes in cash
used in operating activities are all attributable to the operations that were
acquired on March 31, 2005 and September 23, 2005. For the nine months ended
September 30, 2004, net cash used in operating activities was $204,313. This was
attributable to a net loss of $403,330 offset by approximately $69,000 in the
compensatory element of stock issuances and an increase of $146,191 in the
accounts payable.
Cash Used in Investing Activities. Net cash used in investing activities was
approximately $4,402,000. This was attributable primarily to FBO Air's purchase
of two fixed base operating companies on March 31, 2005 for $2,555,000 and on
September 23, 2005, the purchase of a fixed base operator with an emphasis on
the chartering and management of aircraft, requiring cash of $1,400,000. In
addition, the Company invested $350,000 in a secured note receivable with a
fixed base operator who is a potential acquisition target of the Company
("Maker"). 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
granted 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.
36
LIQUIDITY AND CAPITAL RESOURCES - continued
On March 31, 2005, the Company purchased 100% of the common 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.
On September 23, 2005, the Company purchased 100% of the stock of Airborne a
fixed base operator with an emphasis on the chartering and management of
aircraft conducting business in the Northeast. Under the terms of the
acquisition agreement, the Company paid cash of $1,400,000 and issued 2,333,334
shares of common stock valued at $630,000 at closing aggregating $2,030,000.
Cash Provided by Financing Activities. Net cash provided by financing activities
was $6,724,137. On March 31, April 8, and April 15, 2005, we received net funds
aggregating approximately $5,231,000 through our private placement consisting of
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 $508,000. During February 2005, we issued convertible notes of
$20,000. On September 22, 2005, we raised $1,500,000 through the issuance of
term loans and warrants.
As of September 30, 2005, FBO Air had a working capital deficiency of
approximately $1,788,245.
The Company issued a note payable with a face value of $1,500,000 which matures
in 180 days from September 23, 2005. The annual interest rate is 4.25% until the
initial maturity date, however the Company can extend the maturity date to
September 23, 2006 with an interest rate of 9.25% per annum. Airborne granted
the holder a security interest in its accounts receivable, all of its deposit
accounts, all monies now and hereafter in the possession or under the control of
Airborne or the Company and all products and proceeds of the foregoing personal
property. The Company's chairman of the board and an entity owned by one of its
other directors are members of the holder's entity.
37
LIQUIDITY AND CAPITAL RESOURCES - continued
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.
On March 31, April 8 and April 15, 2005, we sold approximately $4,243,000, or
846 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 convertible
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.
38
LIQUIDITY AND CAPITAL RESOURCES - continued
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.
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.
39
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;
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.
40
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 and on September 23, 2005, we completed the third
acquisition. 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
September 30, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
41
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.
42
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
February 2006. The Company disputes the allegations and intends to vigorously
defend itself in this matter.
On May 19, 2005, New World Aviation, Inc. ("New World") instituted an action in
the Supreme Court of the State of New York, County of New York, captioned "New
World Aviation, Inc., Plaintiff, against Robert J. Ettinger, individually, and
FBO Air, Inc., Defendants." Since April 1, 2005, Mr. Ettinger has been a Vice
Chairman of the Board and the Chief Operating Officer of the Company and, since
March 31, 2005, a director of the Company. Until March 25, 2005, when he
resigned, Mr. Ettinger had served as President (since October 15, 1998) of New
World. In its amended complaint New World is seeking (a) to enjoin the
Defendants from soliciting New World's clients and employees allegedly using the
confidential information which Mr. Ettinger learned in his "high-level position
with New World" and (b) damages in an amount to be determined at trial against
Mr. Ettinger for his alleged breach of fiduciary duties to New World. On June
20, 2005, the Company answered the complaint, asserting as affirmative defenses
that (a) New World had forced Mr. Ettinger's resignation by reneging on its
promise to pay him a bonus for 2004, (b) New World has unclean hands, (c) the
identity of actual and potential New World clients is available from publicly
available records, (d) any putative damages sustained by New World were caused
by New World and third parties and (2) New World's claims are barred by the
statute of fraud. Mr. Ettinger also filed a counterclaim against New World for
$25,000 relating to the 2004 bonus, to which New World has asserted five
affirmative defenses.
On September 6, 2005, the court denied New World's motion for preliminary
injunctive relief, which sought to bar the Company from soliciting New World's
customers or employees. The court also denied the Company's motion for summary
judgment. Despite such denial, based on the opinion of Wachtel & Masyr, LLP, its
trial counsel, the Company is of the opinion that the likelihood of an adverse
judgment against the Company or Mr. Ettinger is remote.
43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
1. Option Grant
(a) On September 23, 2005, the Board of Directors granted an option to purchase
250,000 shares of the Common Stock.
(b) There were no underwriters. An option to purchase 250,000 shares of the
Common Stock was granted to John H. Dow pursuant to his employment agreement
with Airborne and the Company.
(c) The option was not issued for cash and there were no underwriting discounts
or commissions. As indicated in subsection (b) above, the option was issued in
consideration of the services to be performed under the Dow Employment Agreement
for the Company and its subsidiaries by this officer of Airborne.
(d) The Company claims that the grant of this option 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 as a transaction not involving a
public offering. The optionee represented to the Company that he was acquiring
the option, 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) The option is exercisable at $.33 per share, the closing sales price on
September 22, 2005. The option is exercisable, from time to time in its entirety
or in part, until September 22, 2010. The option will be made subject to the
Company's stock option plan when adopted.
(f) Not applicable.
2. Lender's Warrant
(a) On September 23, 2005, the Company issued a warrant expiring September 22,
2010 (the "Lender's Warrant") to purchase 1,200,000 shares of the Common Stock.
A copy of the Lender's Warrant is filed as Exhibit 4.6 to this Report and is
incorporated herein.
(b) There was no underwriter with respect to the issuance of the Lender's
Warrant. The Lender's Warrant was issued to Airport Capital, LLC (i.e., the
Lender).
(c) The Lender's Warrant was issued in consideration of the Lender making a loan
of $1,500,000 to the Company.
(d) The Company claims that the issuance of the Lender's Warrant 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 as a transaction not involving a
public offering. The Lender represented to the Company that it was acquiring the
Lender's Warrant, and, unless registered under the Securities Act at the time of
exercise, the shares of the Common Stock issuable upon the exercise of the
Lender's Warrant, 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).
44
(e) The Lender's Warrant will be exercisable at $.60 per share (the "Exercise
Price") subject to adjustment. The Exercise Price will be adjusted on a weighted
average basis for (i) all stock splits, dividends, recapitalizations,
reclassifications, payments made to holders of the Common Stock and other
similar events and (ii) the sale by the Company of additional equity securities
at a price below the Exercise Price, whichever is applicable. These
anti-dilution provisions are the same as were contained in the warrants included
in units sold to investors in the Company's private placement closed in March
and April of 2005. The form of these investor warrants is filed (by
incorporation by reference) as Exhibit 4.2 to this Report and is incorporated
herein by this reference.
(f) Not applicable.
45
Item 4. Submission of Matters to a Vote of Security Holders
In connection with the previously reported acquisition of the outstanding
shares of Airborne, Inc., which closed on September 23, 2005, the Company was
required to secure the consents from the holders of at least 50.1% of the
outstanding shares of the Company's Series A Convertible Preferred Stock, $0.001
par value (the "Series A Preferred Stock"), to consummating the acquisition. The
Company obtained the consents from the holders of 435 shares of the Series A
Preferred Stock, or 50.3% of the 846 outstanding shares.
Item 5. Other Information
none.
46
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
(then named Shadows Bend Development, Inc.) and FBO Air, Inc, an Arizona
Corporation (without schedules). (1)
- ----------------------- -----------------------------------------------------------------------------------
3.1 Certificate of Amendment to the Company's Certificate of Incorporation filed on
July 30, 2004. (1)
- ----------------------- -----------------------------------------------------------------------------------
3(i)(1) Copy of the Certificate of Designations. (2)
- ----------------------- -----------------------------------------------------------------------------------
4.1 Form of 10% Senior Secured Promissory Note due March 31, 2008 or April 8, 2008.
(3)
- ----------------------- -----------------------------------------------------------------------------------
4.2 Form of Investor Warrant. (3)
- ----------------------- -----------------------------------------------------------------------------------
4.3 Copy of General Security Agreement dated as of June 30, 2005. (3)
- ----------------------- -----------------------------------------------------------------------------------
4.4 Registration Rights Agreement (without schedule or exhibit). (3)
- ----------------------- -----------------------------------------------------------------------------------
4.5 Form of Co-Investor Registration Rights Agreement (without schedule or exhibit).
(3)
- ----------------------- -----------------------------------------------------------------------------------
4.6 Copy of Warrant expiring September 22, 2010. (4)
- ----------------------- -----------------------------------------------------------------------------------
10.1 Copy of Employment Agreement dated as of April 1, 2005 by and between Robert J.
Ettinger and the Company. (3)
- ----------------------- -----------------------------------------------------------------------------------
10.2 Copy of Business Development Agreement dated as of January 2, 2004 by and between
Jeffrey M. Trenk and the Company (as the successor by merger to FBO Air, Inc., an
Arizona corporation). (5)
- ----------------------- -----------------------------------------------------------------------------------
10.3 Copy of Employment Agreement dated as of April 1, 2005 between Jeffrey M. Trenk
and the Company. (3)
- ----------------------- -----------------------------------------------------------------------------------
10.4 Copy of Employment Agreement dated as of January 2, 2004 by and between Ronald J.
Ricciardi and the Company (as the successor by merger to FBO Air, Inc., an
Arizona corporation). (5)
- ----------------------- -----------------------------------------------------------------------------------
10.5 Copy of First Amendment effective April 1, 2005 to the Ricciardi Employment
Agreement, a copy of which is filed as Exhibit 10.4. (3)
- ----------------------- -----------------------------------------------------------------------------------
10.6 Copy of Asset Purchase Agreement dated March 31, 2005 among FBO Air - Garden City
and John A. Crotts. (3)
- ----------------------- -----------------------------------------------------------------------------------
47
- ----------------------- -----------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
- ----------------------- -----------------------------------------------------------------------------------
Exhibit No. Description of Exhibit
- ----------------------- -----------------------------------------------------------------------------------
10.7 Copy of Employment Agreement between FBO Air - Garden City, Inc. and John A.
Crotts. (3)
- ----------------------- -----------------------------------------------------------------------------------
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. (3)
- ----------------------- -----------------------------------------------------------------------------------
10.9 Copy of Employment Agreement dated March 31, 2005 between Tech Aviation Service,
Inc, and Frank E. Paczewski. (3)
- ----------------------- -----------------------------------------------------------------------------------
10.10 Copy of Convertible Loan Agreement dated April 16, 2004 among the Company and the
investors mentioned in Schedule A. (1)
- ----------------------- -----------------------------------------------------------------------------------
10.11 Copy of the Letter Agreement dated as of July 26, 2004 to the Convertible Loan
Agreement, a copy of which is filed as Exhibit 10.10. (6)
- ----------------------- -----------------------------------------------------------------------------------
10.12 Form of Convertible Notes due April 15, 2009. (1)
- ----------------------- -----------------------------------------------------------------------------------
10.13 Copy of Letter Agreement dated October 21, 2004 amending the Convertible Notes,
the form of which is filed as Exhibit 10.12. (6)
- ----------------------- -----------------------------------------------------------------------------------
10.14 Copy of Stock Purchase Agreement Dated as of September 22, 2005 by and among
Airborne, Inc., John H. Dow, Daphne Dow and the Company (without a schedule or
exhibit). (7)
- ----------------------- -----------------------------------------------------------------------------------
10.15 Copy of Employment Agreement dated as of September 23, 2005 among John Dow,
Airborne, Inc. and the Company. (7)
- ----------------------- -----------------------------------------------------------------------------------
10.16 Copy of Lease dated as of September 23, 2005 between John H. Dow and Daphne Dow,
as the Landlord, and Airborne, Inc., as the Tenant. (7)
- ----------------------- -----------------------------------------------------------------------------------
10.17 Copy of Term Loan Agreement dated as of September 23, 2005 by and among the
Company, Airborne, Inc., and Airport Capital, LLC. (7)
- ----------------------- -----------------------------------------------------------------------------------
31.1 Officer's Certification Pursuant to Rule 13a-14(a) under the Securities Exchange
Act. (8)
- ----------------------- -----------------------------------------------------------------------------------
32.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (8)
- ----------------------- -----------------------------------------------------------------------------------
- ----------
Footnotes:
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed on August 27, 2004.
(2) 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.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
filed on April 6, 2005.
(4) Incorporated by reference to the Company's Current Report on Form 8-K/A
filed on November 3, 2005.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
filed on October 5, 2004.
(6) Incorporated by reference to the Company's Current Report on Form 8-K/A
filed on November 4, 2004.
(7) Incorporated by reference to the Company's Current Report on Form 8-K
filed on September 28, 2005.
(8) Filed herewith.
48
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: November 21, 2005 FBO AIR, INC.
By: /s/ Ronald J. Ricciardi
-----------------------------------
Ronald J. Ricciardi
Chief Executive Officer
(acting principal financial officer)
49