10QSB 1 v018964-10qsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2005 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _______________ to ________________ COMMISSION FILE NUMBER: 333-56046 FBO AIR, INC. (Exact name of Small Business Issuer as Specified in Its Charter) Nevada 87-0617649 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 Hangar Road Avoca, PA 18641 (Address of principal executive offices) (570) 457-3400 (Issuer's telephone number) 9087 E. Charter Oak Scottsdale, AZ 85260 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No As of May 20, the Registrant had 10,044,397 shares of its Common Stock, $0.001 par value, issued and outstanding. Transitional Small Business Disclosure Format |_| Yes |X| No FBO AIR, INC. Form 10-QSB March 31, 2005 Index PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited) Page Balance Sheet as of March 31, 2005 (unaudited) 1 Statements of Operations for the three months ended March 31, 2005 and 2004 (unaudited) 2 Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited) 3 Notes to Financial Statements (unaudited) 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 25 ITEM 3. CONTROLS AND PROCEDURES 32 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 34 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 34 ITEM 5. OTHER INFORMATION 38 ITEM 6. EXHIBITS 40 SIGNATURES 42 Part I - Financial Information Item I - Condensed Financial Statements (Unaudited) FBO AIR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET March 31, 2005 -------------------------------------------------------------------------------- (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,426,750 Accounts receivable, net 237,118 Inventory 130,704 Prepaid expenses 53,000 Due from stockholder 13,010 ----------- Total current assets 1,860,582 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $0 694,785 OTHER ASSETS Intangible assets 153,100 Goodwill 2,368,284 ----------- Total other assets 2,521,384 ----------- TOTAL ASSETS $ 5,076,751 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 645,669 Long-term debt - current portion 236,357 ----------- Total current liabilities 882,026 LONG-TERM LIABILITIES Notes Payable - other - less current portion 497,272 Senior Notes Payable - net of discount of $858,392 207,933 ----------- Total long term liabilities 705,205 ----------- TOTAL LIABILITIES 1,587,231 MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK - net of discount of $3,382,650 $0.001 par value; 1,000 shares authorized; Series A Cumulative Convertible - 676 shares issued and outstanding; with rights to a cumulative 8% dividend; payable quarterly; liquidation at stated value of $3,382,650 -- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock - $.001 par value; authorized 9,999,000; none issued and outstanding -- Common stock - $.001 par value; authorized 100,000,000; 10,044,397 issued and outstanding 10,044 Deferred financing costs (1,391,443) Additional paid-in capital 5,667,544 Accumulated deficit (796,625) ----------- TOTAL STOCKHOLDERS' EQUITY 3,489,520 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,076,751 =========== See notes to consolidated financial statements. 1 FBO AIR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -------------------------------------------------------------------------------- For the three months ended March 31, 2005 2004 ----------- ----------- REVENUE $ -- $ -- ----------- ----------- EXPENSES General and administrative expenses 215,327 17,228 Compensatory element of stock issuances (for general and administrative expenses) -- 12,203 ----------- ----------- TOTAL EXPENSES 215,327 29,431 ----------- ----------- OPERATING LOSS (215,327) (29,431) INTEREST EXPENSE 7,798 -- ----------- ----------- NET LOSS $ (223,125) $ (29,431) =========== =========== Net loss applicable to common stockholders $ (223,125) $ (29,431) Basic and Diluted Loss Per Common Share $ (0.04) $ (0.01) =========== =========== Weighted Average Common Shares Basic and Diluted 6,070,066 2,615,375 =========== =========== See notes to consolidated financial statements. 2 FBO AIR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) --------------------------------------------------------------------------------
For the three months ended March 31, 2005 2004 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (223,125) $ (29,431) ----------- ----------- Adjustments to reconcile net loss to net cash used in operating activities: Compensatory element of stock issuances -- 12,203 Changes in operating assets and liabilities: Due from stockholder (2,500) -- Prepaid insurance (2,000) -- Accounts payable and accrued expenses 111,101 17,228 ----------- ----------- TOTAL ADJUSTMENTS 106,601 29,431 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES (116,524) -- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of FBOs, less cash acquired of $167,329 (2,554,818) -- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (2,554,818) -- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the sale of convertible notes 20,000 -- Deferred financing costs (385,000) -- Proceeds from the Private placement 3,198,975 -- Proceeds from the Co-Investment 1,250,000 -- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 4,083,975 -- ----------- ----------- NET INCREASE IN CASH 1,412,633 -- CASH AND CASH EQUIVALENTS - Beginning 14,117 -- ----------- ----------- CASH AND CASH EQUIVALENTS - Ending $ 1,426,750 $ -- =========== ===========
See notes to consolidated financial statements. 3 FBO AIR, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (Unaudited) -------------------------------------------------------------------------------- For the three months ended March 31, 2005 2004 ---- ---- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the periods for: Interest $ -- $ -- ========= ======== Income taxes $ -- $ -- ========= ======== Non-cash investing and financing activities: Convertible Notes converted to common stock $ 400,000 $ -- ========= ======== Advances from affiliates converted to equity $ -- $ 94,818 ========= ======== Notes issued for acquisitions $ 672,948 $ -- ========= ======== See notes to 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 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 March 31, 2005 and the results of operations and statements of cash flows for the periods shown not misleading have been included. On March 31, 2005, the Company completed the acquisition of two operating companies. Accordingly, the Company is no longer considered a development stage entity. The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year ended December 31, 2005. NOTE 2 - Business, Reverse Merger and Acquisitions Effective August 20, 2004, Shadows Bend Development, Inc. ("Shadows Bend"), a Nevada publicly-traded company with no active business, entered into a merger transaction with FBO Air, Inc. ("FBO Air"), a privately-held Arizona corporation. Upon completion of the merger transaction, Shadows Bend changed its name to FBO Air, Inc. and the original FBO Air shareholders owned 75% of the outstanding common stock of the Company. Accordingly, this transaction has been accounted for as a reverse merger with FBO Air as the acquirer of Shadows Bend. The reverse merger was accounted for as a recapitalization of FBO Air and the stockholders' equity of FBO Air was retroactively restated to its inception on January 17, 2003. FBO Air was formed on January 17, 2003 (date of inception) as a proprietorship to acquire and operate fixed base operators. On January 2, 2004, FBO Air was incorporated in the State of Arizona. Fixed base operators are the primary providers of services to general aviation aircraft operators. The Company's business strategy is to purchase and consolidate fixed base operators in the secondary and tertiary markets located within the United States. 5 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 2 - Business, Reverse Merger and Acquisitions, continued On March 31, 2005, FBO Air formed FBO Air-Wilkes-Barre, a wholly owned subsidiary formed for the purpose of acquiring the stock of a fixed base operator (See Note 5). On March 31, 2005, FBO Air-Garden City, a wholly owned subsidiary of FBO Air, acquired certain operating assets of a fixed base operator located in Garden City, Kansas, pursuant to an asset purchase agreement dated March 31, 2005 (See Note 6). The acquisitions of the two operating companies were made as of March 31, 2005, the last day of the quarterly period. Accordingly, there are no operating results from these two companies to report within the condensed consolidated statements of operations. NOTE 3 - Going Concern and Management's Plans 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 dated 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 a convertible note financing. There is no assurance that FBO Air will be able to raise the additional funds sufficient to enable the Company to fully complete its development activities, attain profitable operations or continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2005, the Company had working capital of approximately $979,000, had no revenues and incurred operating losses of approximately $900,000 during the period from January 17, 2003 (date of inception) through March 31, 2005. 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 and FBO Wilkes-Barre. All significant intercompany accounts and transactions have been eliminated in consolidation. 6 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies, continued 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. Deferred Financing Costs The costs incurred on March 31, 2005 to issue the senior notes payable, the convertible preferred stock and the warrants have been capitalized and have been charged to equity as deferred financing costs. Inventory Inventory consists primarily of aviation fuel and is stated at the lower of cost or market determined by the first-in, first out method. Property and Equipment Property and equipment is stated at cost. Maintenance and repairs are charged to expense as incurred; costs of major additions and betterments are capitalized. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in income. Goodwill In accordance with the requirements of Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations", the Company recognized certain intangible assets acquired, primarily goodwill, tradenames and customer relationships. In accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", on a regular basis, the Company performs impairment analysis of the carrying value of goodwill and certain other intangible assets. Depreciation Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. 7 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies, continued Income Taxes As of January 2, 2004 (date of incorporation), the Company accounts for income taxes using the liability method as required by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under this method, deferred tax assets and liabilities are determined based on differences between their financial reporting and tax basis of assets and liabilities. The Company was not required to provide for a provision for income taxes for the three months ended March 31, 2005, as a result of net operating losses incurred during the period. As of March 31, 2005, the Company has available approximately $800,000 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 December 31, 2004, the Company has a deferred tax asset of approximately $320,000, 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 $120,000. 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. Accounts Receivable 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. 8 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 4 - Summary of Significant Accounting Policies, continued Stock Options As permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair value based method of accounting for equity-based compensation plans, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") for recognizing equity-based compensation expense for financial statement purposes. Under APB 25, no compensation expense is recognized at the time of option grant if the exercise price of the employee stock option is fixed and equals or exceeds the fair market value of the underlying Common Stock on the date of grant and the number of shares to be issued pursuant to the exercise of such options are known and fixed at the grant date. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of FAS 123 and the Emerging Issues Task Force in Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services which require that such equity instruments are recorded at their fair value on the measurement date, which is typically the date the services are performed. In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure ("FAS 148"). This standard amends the disclosure requirements of FAS 123 for fiscal years ending after December 15, 2002 to require prominent disclosure in both annual and interim financial statements about the method used and the impact on reported results. The Company follows the disclosure-only provisions of FAS 123 which require disclosure of the pro forma effects on net income (loss) as if the fair value method of accounting prescribed by FAS 123 had been adopted, as well as certain other information. Option valuation models require the input of highly subjective assumptions including the expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 9 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 notes discussed in the notes to the financial statements, were not included in the calculation of the diluted loss per share because their inclusion would have had the effect of decreasing the loss per share otherwise computed. The total shares issuable upon the exercise of stock options and the convertible notes as of March 31, 2005 approximated 15,857,000. NOTE 5 - Acquisition of Tech Aviation, Inc. On March 31, 2005, the Company purchased 100% of the stock of Tech Aviation, Inc. ("Tech Aviation"), a fixed base operator conducting business in the Northeast. Under the terms of the acquisition agreement, the Company paid cash at closing of approximately $2,256,000, applied a deposit of $10,000 and issued notes payable to the Tech Aviation shareholders with a face value aggregating $500,000. The notes bear no stated interest. The notes were discounted at a market interest rate of 5% per annum and recorded at the net discounted value of $432,948. These notes are to repaid with five annual payments aggregating $100,000 annually, beginning on March 31, 2006. All assets and liabilities of Tech Aviation have been recorded in the Company's condensed consolidated balance sheet at their fair values at the date of acquisition. Identifiable intangible assets and goodwill relating to the purchase approximated $1,958,000. Identifiable intangible assets included trade names and customer relationships of $100,000 and $20,000, respectively. Trade names and customer relationships have an indefinite life. Trade names and customer relationships will not be amortized and will be evaluated at least annually. 10 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 5 - Acquisition of Tech Aviation, Inc., continued The following table details the allocation of the purchase price: Fair Value ---------- Cash $167,329 Accounts receivable 237,117 Inventory 99,752 Prepaid expenses 52,331 Equipment 579,785 Intangible assets - trade names 100,000 Intangible assets - customer relationships 20,000 Goodwill 1,838,284 Accounts payable and accrued expenses (334,776) Long term debt (60,681) ---------- Total $2,699,141 ========== NOTE 6 - Acquisition of Central Plains Aviation, Inc. On March 31, 2005, the Company purchased certain assets of Central Plains Aviation, Inc. ("Central Plains"), a fixed base operator conducting business in Kansas. Under the terms of the acquisition agreement, the Company paid cash at closing of $466,000, and issued a note payable to the Central Plains shareholder for $240,000. This note bears an interest rate of 5% per annum, and is payable in 6 quarterly installments of approximately $42,000, each with the first installment due June 30, 2005. The assets Central Plains have been recorded in the Company's condensed consolidated balance sheet at their fair values at the date of acquisition. Identifiable intangible assets and goodwill relating to the purchase approximated $560,000. Identifiable intangible assets included customer relationships of $30,000. The customer relationships have an indefinite life. The customer relationships will not be amortized and will be evaluated at least annually. 11 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 6 - Acquisition of Central Plains Aviation, Inc., continued The following table details the allocation of the purchase price: Fair Value ---------- Inventory $30,952 Equipment 115,000 Intangible assets - customer relationships 30,000 Goodwill 530,000 -------- Total $705,952 ======== The Company purchased Tech Aviation, Inc. and Central Plains, Inc. on March 31, 2005, the last day of the quarterly reporting period ending March 31, 2005. Therefore, there are no results from Tech Aviation, Inc. reflected in the results for the three months ended March 31, 2005. The following table presents the unaudited pro forma combined results of operations of the Company, Tech Aviation, Inc. and Central Plains, Inc. for each of the three-month periods ending March 31, 2005 and 2004, as if they had been acquired at the beginning of the quarters ended March 31, 2005 and 2004, respectively:
Proforma Combined at Proforma Combined March 31, 2005 at March 31, 2004 -------------------- ----------------- Revenues: Net sales $1,383,204 $1,406,884 Net loss (174,249) (16,447) Basic net loss per common share $(0.029) $(0.001) Weighted average common shares outstanding - basic and diluted 6,070,666 2,615,375
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. 12 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 7 - Inventory Inventory consists primarily of aviation fuel, which the Company dispenses to its customers. NOTE 8 - Property and Equipment All property and equipment at March 31, 2005 was acquired on March 31, 2005 and consists of the following: Estimated Amount Useful Life -------- ------------ Aircraft $254,785 7 - 15 years Vehicles 230,000 5 -7 years Office Furniture and equipment 60,000 7 years Tools and shop equipment 150,000 7 - 15 years -------- Total $694,785 Less: accumulated depreciation -- -------- Property and equipment, net $694,785 ======== Depreciation expense for the three-month periods ended March 31, 2005 and 2004 was $0. 13 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 9 - Notes Payable - Other Notes payable - other, at March 31, 2005 consist of: Outstanding Balance at Notes payable to: March 31, 2005 ----------------- ---------------------- Wilkes-Barre/Scranton International Airport, due September 2007 $ 60,681 Sellers - Tech Aviation 432,948 Seller - Central Plains 240,000 -------- Subtotal 733,629 Less - current portion (236,357) -------- Total - long term $ 497,272 ========= Aggregate annual maturities of long-term debt are as follows:
For years Total Acquistion Senior Notes ending March 31, Amount Notes (See Note 11) Other ----------------------- ---------- ---------- ---------- ---------- 2006 $ 236,357 $ 236,357 -- -- 2007 224,947 164,266 -- $ 60,681 2008 1,152,709 86,384 $1,066,325 -- 2009 90,703 90,703 -- -- 2010 95,238 95,238 -- ---------- ---------- ---------- ---------- Total $1,799,954 $ 672,948 $1,066,325 $ 60,681 ========== ========== ========== ==========
NOTE 10 - Convertible Notes In April 2004, the Company entered into a convertible note agreement with a group of investors ("Investors") to purchase five-year, 8% convertible notes in the aggregate principal amount of $400,000 as follows: a) $130,000 upon signing; b) $270,000 upon the later to occur of: 1) the reverse merger transaction and 2) the acquisition of a fixed base operator as defined in the agreement. The convertible notes were scheduled to mature in April 2009, with interest payable quarterly, beginning with the first interest payment, which was due December 1, 2004. During January 2005, the Company entered into an amendment of the agreement with the holder of the convertible notes whereby the due date of the first interest payment was deferred to the date of closing of the first fixed base operator acquisition. 14 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 10 - Convertible Notes, continued In April 2004, the Investors funded the sale of the initial $130,000 of convertible notes under the agreement. During August 2004, October 2004, November 2004, December 2004 and January 2005, the Investors waived one provision under their agreement and funded the sale of $125,000, $45,000, $40,000, $40,000 and $20,000, respectively of convertible notes under the agreement, representing funding of the full amount. The Company has the option to pay interest in cash or shares of the Common Stock. For the purpose of determining the number of shares to be issued in payment of interest, such shares shall be valued at the average of their fair market value during the five trading days preceding the interest payment date. The notes plus accrued interest are convertible through the maturity date into 40% (at the time of conversion), as defined in the agreement, of the Company's outstanding shares of the Common Stock. In addition, the holders have certain piggyback registration, tag along and other rights as defined in the agreement. The Company is required to maintain certain financial and other covenants. On March 31, 2005, the holders converted the entire $400,000 in convertible notes into 4,018,375 shares of the Common Stock. NOTE 11 - Private Placement Private Offering On March 31, 2005 the Company issued $1,066,325 in aggregate principal amount of Senior Notes due March 31, 2008, $2,132,651 (426 shares) of the Series A Convertible Preferred Stock (the "Convertible Preferred Stock") and warrants to purchase an aggregate of 2,132,651 shares of the Common Stock. This closing resulted in proceeds of $3,198,975. In conjunction with this offering, the placement agent was paid cash fees of $385,000 and was granted warrants to purchase approximately 924,000 shares of the Common Stock with a fair market value, using the Black Scholes model, on date of issue of approximately $1,253,000. The total of these fees, plus $10,000 in fees that were accrued at closing, 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. 15 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 11 - Private Placement, continued The Senior 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 ($207,993 for the Senior Notes and $693,020 for the Warrants). The discount recorded for the Senior Notes will be accreted to interest expense over three years using the effective interest method. There was no accretion during the three months ended March 31, 2005. The Convertible Preferred Stock was recorded at its stated value of $3,382,650, 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 2005 Private Offering, or (b) at such time as the traded price of the Company's Common Stock exceeds 2.5 times the Initial Conversion Price ("Conversion Price"), and under both (a) and (b), the shares subject to conversion are fully registered shares. At the option of the holder, the shares, in whole or in part, may be converted at any time. 16 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 11 - Private Placement, 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 $3,382,650 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. 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 March 31, 2005, there are no dividends in arrears on this Convertible Preferred Stock. 17 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 11 - Private Placement, continued The Company's Convertible Preferred Stock contains a feature that requires the Company to redeem the instrument for the shares that remain outstanding, on March 30, 2008. Accordingly, as of March 31, 2005, the Company's Convertible Preferred Stock is classified in the accompanying Condensed Consolidated Balance Sheet as a liability, shares subject to mandatory redemption, in accordance with Statement of Financial Accounting Standards No. 150: Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, issued in May of 2003. Warrants On March 31, 2005, the Company issued warrants to purchase shares of the Company's common stock aggregating approximately 2,758,000 to investors and 924,000 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. 18 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 11 - Private Placement, continued Senior Notes The Senior Notes issued on March 31, 2005 carry a maturity date of three (3) years; bear interest at the rate of 10% per annum, payable quarterly; are secured by the current and to be acquired assets of the Company and its present and future subsidiaries; and are subject to certain covenants of the Company. NOTE 12 - Stockholders' Equity On January 4, 2004 (date of incorporation), the Company capitalized the deficit of $104,393 incurred for the period from January 17, 2003 (date of inception) through December 31, 2003, during which time, prior to incorporation, the Company operated as a proprietorship. On January 4, 2004, amounts owed to affiliates of $94,818 were converted into additional paid-in capital. During June 2004, the Company issued 1,906,250 shares of the Common Stock as consideration for services performed by various individuals valued in the aggregate amount of $69,227. On August 20, 2004, the Company issued 1,504,397 shares in connection with its reverse merger with Shadows Bend and the assumption of existing Shadows Bend liabilities of $19,151. In connection therewith, Shadows Bend's shareholders approved a 1 for 4 reverse stock split, increased the authorized common shares to 100,000,000 and authorized 10,000,000 shares of preferred stock. Stock Options During September 2004, the Board of Directors granted options to purchase an aggregate of 150,000 shares, 25,000 to each of the four independent directors and 50,000 to a consultant/shareholder of the Company. These options have an exercise price of $0.01 per share and expire four years from the date of grant. 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. 19 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 12 - Stockholders' Equity Effective April 1, 2005, the Board of Directors granted options to purchase an aggregate of 750,000 shares of the Common Stock. An option expiring March 31, 2010 to purchase 250,000 shares of the Common Stock was granted to each of (i) Robert J. Ettinger, who was elected as a Vice Chairman of the Board and the Chief Operating Officer of the Company; (ii) Jeffrey M. Trenk, who was elected as a Vice Chairman of the Board and the Executive Vice President of Business Development of the Company and (iii) Ronald J. Ricciardi, the President and Chief Executive Officer of the Company. NOTE 13 - Employee Benefit Plan FBO Air - Wilkes-Barre maintains a 401(K) plan covering substantially all employees, which requires Company contributions equal to 25% of each participant's contribution of up to 4% of salary. NOTE 14 - Commitments and Contingencies Operating Leases The Company leases facilities from the City of Garden City, Kansas. Effective on April 1, 2005 and in conjunction with the Company's purchase of the fixed base operator assets in Garden City, Kansas, the Company executed a new lease which provides for: (a) a ten-year lease term expiring March 31, 2015, with two five year renewal periods; (b) a base rent of $1,550 and $1,750 per month for years one through five and years six through ten of the lease, respectively. In addition a fuel flowage fee of $.06 per gallon of fuel received by the Company will be due monthly. The fuel flowage fee is to be reviewed annually by the Garden City Regional Airport, the City of Garden City, and the Company. 20 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 14 - Commitments and Contingencies, continued The Company leases its operating facility under the terms of a Fixed Base Operator's Lease and Operating agreement with the Wilkes-Barre/Scranton International Airport. The agreement is for an initial term of ten years with two five-year renewal periods. The agreement requires payment of monthly rents of $6,250 plus additional payments based on certain of the Company's revenues. These include per-gallon fees for certain fuel sales and commissions on landing, parking, tie-down and other types of fees charged by the company to its aviation customers. In May 2004, the Company entered into a non-cancelable operating lease of an automobile for a Company officer, expiring on August 3, 2008. Future minimum lease payments under this operating lease at March 31, 2005 are as follows: Years Ended March 31: Amount --------------------- ------- 2006 $5,640 2007 5,640 2008 3,760 ------- $15,040 ======= The Company leases refueling trucks and airplanes. The refueling trucks lease on a month-to-month basis. As of March 31, 2005, the refueling truck lease requires monthly rental payments of $4,351. Several airplane leases require monthly rental payments based upon the number of hours the planes are used. 21 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 14 - Commitments and Contingencies, continued Proposed Acquisitions The Company has negotiated and issued letters of intent for two potential fixed base operator acquisitions and a memorandum of understanding regarding charter operations: 1) A fixed base operator located in the southern region of the country, requiring cash at closing of approximately $1,250,000; and 2) A fixed base operator located in the southern region of the country, requiring a combination of cash, stock, and notes totaling approximately $2.8 million. In addition, the Company has issued a memorandum of understanding with a charter operator in the northeast region of the country in which the two organizations would share resources and capabilities under a strategic alliance that may lead to a more formal relationship and/or transaction. There can be no assurance that any or all of these acquisitions will be consummated. Consulting Agreement The Company entered into a six-month engagement agreement (the "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 agreement calls for an initial fee of $15,000 plus $5,000 per month for six months, payable after the closing of the first fixed base operator acquisition. Included in accounts payable and accrued expenses at March 31, 2005 is an obligation of $45,000 pursuant to this agreement. 22 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 14 - Commitments and Contingencies, continued Employment Agreement On March 31, 2005, the Board of Directors authorized execution of the First Amendment effective April 1, 2005 (the "First Amendment") to the employment agreement (the "Ricciardi Employment Agreement') for Mr. Ronald J. Ricciardi, the Company's President and CEO. The First Amendment provides that Mr. Ricciardi's employment under the Ricciardi Employment Agreement is effective April 1, 2005 and will continue for three years thereafter subject to automatic one-year renewals. The First Amendment increases his base salary to $175,000. Mr. Ricciardi is to be granted an option each April 1 during the initial term to purchase 250,000 shares of the Common Stock, commencing April 1, 2005 On March 31, 2005, the Company entered into an employment agreement dated as of April 1, 2005 (the "Ettinger Employment Agreement") with Robert J. Ettinger. Pursuant to the Ettinger Employment Agreement, Mr. Ettinger is employed as the Chief Operating Officer of the Company and as the President of its Big Bird Division. 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 Mr. Jeffrey 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. 23 FBO AIR, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- NOTE 14 - Commitments and Contingencies, continued Litigation In early 2005, the Company was served with a complaint which names the Company, among others, as a defendant in a suit brought by a broker dealer, seeking approximately $100,000 in damages arising from Shadows Bend canceling a stock certificate in the year 2002. Captioned Institutional Capital Management, Inc. vs Michael W. Sciacchetano, et. at., the suit is currently pending in the 215th Judicial District Court, Harris County, Texas. On March 28, 2005, the Company filed a general denial. The Company disputes the allegations and intends to vigorously defend itself in this matter. Claims The Company entered into a business relationship to operate an aircraft with Raintree Express ("Raintree") for charter flights. Due to mechanical problems, the Company was never able to achieve full reimbursement for its costs of operation and maintenance and there remains approximately $22,000 in charges unpaid. Raintree has demanded damages in excess of $75,000 because of the failure to operate the plan "in accordance with the agreement" which was never executed. The Company retains possession of the aircraft pending payment of its charges, claiming a common law artisan's lien against the aircraft. Raintree has commenced an action in Monroe County, Pennsylvania, by filing and serving a Writ of Summons. In the opinion of the Company's litigation attorney, there is an appropriate objection as to venue in Monroe County and a good defense as to any claims for damages which might be made by Raintree, and the defense of the artisan's liens to replevin. NOTE 15 - Subsequent Events Private Placement - Second and Final Closing On April 8 and April 15, 2005 (the "Second and Final Closing Dates"), the Company issued additional Secured Notes in the aggregate principal amounts of $399,999 due March 31, 2008 and $30,000 due March 31, 2008, $800,001 (160 shares) and $60,000 (12 shares) of the Convertible Preferred Stock and Warrants to purchase on aggregate of 800,001 and 60,000 shares of the Common Stock, respectively. The placement agent was paid cash issuance expenses of $120,000 and $9,000 for the April 8 and April 15, 2005 closings, respectively. Due from Stockholder Effective May 23, 2005, the stockholder has repaid all amounts due to the Company. 24 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 March 31, 2005 we completed the first round in a private placement, raising gross proceeds of $4,448,975. Also on March 31, 2005, we completed two acquisitions of operating companies, in conjunction with our acquisition growth strategy, and became an operating company. In the sections below, we have outlined our history, and we further explain our financing and acquisition programs. Our History We completed a reverse merger transaction on August 20, 2004 with Shadows Bend Development, Inc. ("Shadows Bend"), a Nevada corporation. Prior to the merger, Shadows Bend had been pursuing a business plan to acquire, develop and operate "specialty care" facilities designed to help people diagnosed with Alzheimer's or other related illnesses. This business model was effectively abandoned in December 2002. The directors and management of FBO Air, Inc. upon consummation of the merger became the directors and management of Shadows Bend. On August 20, 2004, we changed our corporate name to FBO Air, Inc. pursuant pursuant to an Agreement and Plan of Merger, dated as of July 26, 2004, between Shadows Bend and FBO Air, Inc. The merger agreement was approved by a written consent of stockholders of Shadows Bend holding more than 50% of the outstanding shares of Shadows Bend's common stock, $0.001 par value. FBO Air was formed initially as a proprietorship on January 17, 2003. On January 2, 2004, FBO Air was incorporated in the State of Arizona. For accounting purposes, FBO Air was the acquirer in the August 2004 reverse merger transaction, and consequently the transaction is treated as a recapitalization of the Company. FBO Air's financial statements are the historical financial statements of the post-merger entity. Our goal is to establish a national network of fixed based operators ("FBOs") through purchasing and consolidating FBOs in the secondary and tertiary markets within the United States. FBOs are the primary providers of services, such as fueling, parking of aircraft, maintenance and repair, to general aviation aircraft operators. 25 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 is very highly fragmented and served by over 3,000 operators who own FBOs and serve customers at one or more of the almost 3,400 airport facilities across the country that have at least one paved 3,000-foot runway. The vast majority of these independent operators are single location operators. These operators are relatively unsophisticated, frequently under-capitalized, and, in many instances, seek an exit strategy. It is these operators that are the prime targets of the Company's consolidation strategy. The Company believes that, as it obtains a national presence in the fixed base operator business, it will be the beneficiary of better jet fuel purchasing terms and may be able to secure favorable landing rights service contracts for the several major fractional jet ownership companies. There can be no assurance that we shall achieve any or all of these benefits. Critical Accounting Policies Discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts reported in the consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to product returns, product and content development expenses, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on experience and on various assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies which we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements are included within the footnotes to the condensed consolidated financial statements incorporated within Part I, Item 1 of this report. Going Concern The accompanying financial statements in Item 1 of Part I of this Report have been prepared assuming that the Company will continue as a going concern. On March 31, 2005, FBO Air closed on its first round of financing in a private offering and a related private placement, raising gross cash proceeds of approximately $4,448,000. FBO Air raised additional funds of $1,200,000 and $90,000 in second and final rounds of financing dated 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. There is no assurance that FBO Air will be able to raise the additional funds sufficient to enable the Company to fully complete its development activities, attain profitable operations or continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As of March 31, 2005, the Company had working capital of approximately $979,000, had no revenues and incurred operating losses during the period from January 17, 2003 (date 26 of inception) through March 31, 2005. 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 letters of intent for two potential FBO acquisitions and a memorandum of understanding regarding charter operations: 1) An FBO located in the southern region of the country, requiring cash at closing of approximately $1,250,000; and 2) An FBO located in the southern region of the country, requiring a combination of cash, stock, and notes totaling approximately $2.8 million. In addition, the Company has issued a memorandum of understanding with a charter operator in the northeast region of the country in which the two organizations would share resources and capabilities under a strategic alliance that may lead to a more formal relationship and/or transaction. There can be no assurance that any or all of these acquisitions will be consummated. 27 RESULTS OF OPERATIONS COMPARISON OF 3 MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004 There were no revenues in the three months ended March 31, 2005 and 2004. The acquisitions of the two operating companies were made as of March 31, 2005, the last day of the quarterly period. Accordingly, there are no operating results from these two companies to report within the condensed consolidated statements of operations in Item 1 of Part I of this Report. General and administrative expenses increased approximately $198,000, or 1,150%, to approximately $215,000 for the three months ended March 31, 2005 compared to $17,000 for the prior year. This increase was mainly due to the additional costs for professional fees incurred for conducting due diligence regarding potential acquisitions, arranging for financing and for preparing the Company's financial reports and public filings with the Securities and Exchange Commission. Accordingly, accounting fees have increased by approximately $50,000 to $53,000, consulting fees for market development were incurred of approximately $16,000, legal fees have increased approximately $39,000 to $48,000 and financial consulting fees were incurred of approximately $16,000. The increase was also associated with the compensation of our President of approximately $31,000, versus $0 in the prior year. Interest expense for the three months ended March 31, 2005 of approximately $8,000 consisted of the financing costs related to the costs of borrowing under the convertible notes agreement. There was no interest expense for the three months ended March 31, 2004. 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 dated April 8, 2005, and April 15, 2005, respectively. Until the March 31 offering funding, the Company's primary source of operating funds since inception had been provided by its founding shareholders and through convertible note financing. During the three months ended March 31, 2005, the Company had a net increase in cash of approximately $1,413,000. During the three months ended March 31, 2005, FBO Air was in its development stage and during which time the Company's operations were limited to seeking financing and conducting due diligence for acquisition targets, and as such, there was no cash. The Company's sources and uses of funds were as follows: Cash Used in Operating Activities. Net cash used in operating activities was approximately $117,000. This was primarily driven by a net loss of $223,000 offset by the an increase in accounts payable and accrued expenses of $111,000. For the three months ended March 31, 2004, net cash used in operating activities was $0. This was attributable to a net loss of $29,000 offset by an increase of $12,000 in the compensatory element of stock issuances and an increase of $17,000 in the accounts payable and accrued expenses. Cash Used in Investing Activities. Net cash used in investing activities was approximately $2,555,000. This was attributable to FBO's purchase of two fixed base operating companies, representing an aggregate cash purchase price of $2,722,000, less cash acquired of $167,000. 28 On March 31, 2005, the Company purchased 100% of the stock of Tech Aviation, Inc. ("Tech Aviation"), a fixed base operator conducting business in the Northeast. Under the terms of the acquisition agreement, the Company paid cash at closing of approximately $2,256,000, applied a deposit of $10,000 and issued notes payable to the Tech Aviation shareholders aggregating a discounted value of approximately $433,000. The terms of the notes provide for payments of $100,000 payable annually for each of five years on the anniversary of the closing. Interest on these notes was imputed at an annual rate of 5% per annum. On March 31, 2005, the Company purchased certain assets of Central Plains Aviation, Inc. ("Central Plains"), a fixed base operator conducting business in Kansas. Under the terms of the acquisition agreement, the Company paid cash at closing of $466,000, and issued a note payable to the Central Plains shareholder for $240,000. This note matures in September 2006 and is payable in quarterly installments beginning on June 30, 2005, bearing an interest rate of 5% per annum. Cash Provided by Financing Activities. Net cash provided by financing activities was approximately $4,084,000, principally through the proceeds received on March 31, 2005 from the issuance of $1,066,000 of senior notes, the issuance of $3,383,000 of convertible preferred stock and the issuance of warrants for the purchase 2,758,000 of the Company's common stock, less issuance expenses paid in cash at closing of $385,000. During February 2005, the Company issued convertible notes of $20,000. As of March 31, 2005, FBO Air had a working capital balance of approximately $979,000. FBO raised additional funds of $1,200,000 and $90,000 in second and final rounds of financing dated April 8, 2005, and April 15, 2005, respectively. Our capital commitments involve our targeted acquisitions of fixed base operators. The Company will proceed to make these acquisitions only in so much as there is adequate investment and operating capital. This capital is expected to be raised through the issue of additional debt and equity capital. On March 31, 2005, we issued Senior Notes with a face value of approximately $1,066,000, 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, 2005, we issued approximately $3,383,000, or 676 shares, of our mandatorily redeemable Series A convertible preferred stock, which was authorized during February 2005. On March 31, 2005, the Company issued warrants to purchase shares of the Company's common stock aggregating approximately 2,758,000 to investors and 924,000 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 29 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. On March 31, 2005, the holders converted the entire $400,000 in convertible notes into 4,018,375 shares of the Common Stock. During February 2005, the Company authorized the issue of 1,000 shares of preferred stock, designated as Series A Convertible Preferred Stock ("the Convertible Preferred Stock"), each share having a Stated Value ("Stated Value") of $5,000. These shares provide for cumulative dividends at the annual rate of 8%, payable quarterly and mature three years from the date of issue. The cumulative dividend, at the option of the Company, may be paid either in cash or by the issuance of additional shares of the Convertible Preferred Stock. The holders of the Convertible Preferred Stock and the holders of the shares of Common Stock shall vote as a single class, with the holders of the Convertible Preferred Stock having the number of votes based upon the formula for the conversion to Common Stock, as provided below. The holders of the Convertible Preferred Stock have the right to elect one director to the Company's Board of Directors or to have one observer at Board meetings. The Convertible Preferred Stock is convertible into shares of the Company's Common Stock. The shares shall automatically convert upon (a) the Company's realization of gross proceeds exceeding $5,000,000 from the sale of equity securities (a "Qualified Follow-On Offering"), separate and apart from the March 2005 Private Offering, or (b) at such time as the traded price of the Company's Common Stock exceeds 2.5 times the Initial Conversion Price ("Conversion Price"), and under both (a) and (b), the shares subject to conversion are fully registered shares. At the option of the holder, the shares, in whole or in part, may be converted at any time. 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. 30 In the event of a liquidation of the Company, the holders of the Convertible Preferred Stock then outstanding will be entitled to receive 115% of the stated value of each share, plus any accrued and unpaid dividends. The Company's stock is traded on the OTC Bulletin Board ("OTCBB") under the symbol FBOR. The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter ("OTC") equity securities. Prior to December 21, 2004, the stock had been traded on the Pink Sheets. On the basis of the foregoing, and subject to the risk factors more fully discussed below, we believe that based upon the cash on hand and resources available, the Company will require additional debt or equity capital to fund operations past the remainder of this calendar year. CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS Statements contained in this "Management's Discussion and Analysis or Plan of Operation" may contain information that includes or is based upon certain "forward-looking statements" relating to our business. These forward-looking statements represent management's current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as "anticipates," "plans," "believes," "expects," "projects," "intends," and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, while it is not possible to predict or identify all such risks, uncertainties, and other factors, those relating to: o our ability to secure the additional financing adequate to execute our business plan; o our ability to identify, negotiate and complete the acquisition of targeted operators, consistent with our business plan; o existing or new competitors consolidating operators ahead of the Company; o we may be unable to attract new personnel, which would adversely affect implementation of our overall business strategy. o the success of our investor relations program to create and sustain interest and liquidity in our stock, which is currently thinly traded on the OTCBB; 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. 31 Item 3 - Controls and Procedures The Company's principal executive officer, who is also the acting principal financial officer, has evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-QSB. The evaluation process, including the inherent limitations on the effectiveness of such controls and procedures is more fully discussed below. Based upon his evaluation, the principal executive officer, who is also the acting principal financial officer, has concluded that the Company's disclosure controls and procedures, although containing a material weakness, were effective. This material weakness is the lack of the necessary corporate accounting resources. On March 31, 2005, the Company completed the first two acquisitions of its business plan. The Company has limited accounting personnel and is currently building its accounting infrastructure. In the meantime, the Company employs a financial consultant who works closely with the Company's Chief Executive Officer and other senior managers of the organization to gather the required information and to prepare the periodic financial statement and public filings. Reliance on these limited resources impairs our ability to provide for segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures. Our Company's Chief Executive Officer has concluded that the disclosure controls and procedures are effective, even though there is a 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 March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 32 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. 33 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. The Company disputes the allegations and intends to vigorously defend itself in this matter. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 1. Private Placement (a) On March 31, 2005 (the "Initial Closing Date"), the Company sold 42.65295 units (the "Units"), each Unit consisting of: (i) a 10% Senior Secured Promissory Note due March 31, 2008 (the "Secured Note") in the principal amount of $25,000; (ii) ten shares of the Company's Series A Convertible Preferred Stock, $0.001 par value (the "Convertible Preferred Stock"); and (iii) a warrant expiring March 30, 2010 (the "Investors Warrant") to purchase 50,000 shares of the Common Stock. As a result of this closing, the Company issued on the Initial Closing Date $1,066,325 in aggregate principal amount of the Secured Notes, 426 shares of the Convertible Preferred Stock and Investor Warrants to purchase an aggregate of 2,132,651 shares of the Common Stock. (b) There was no underwriter for the Units, although Laidlaw & Company (UK) Ltd. ("Laidlaw") acted as the non-exclusive placement agent for this private placement (the "Offering") on a "reasonable efforts $3,000,000 all-or-none" basis. The Offering was conditioned upon investors purchasing a minimum of 40 Units for an aggregate purchase price of $3,000,000. (c) The Units were offered at $75,000 per Unit; however, the Company and Laidlaw reserved the right to accept subscriptions for partial Units and did in fact do so at the Initial Closing Date. As a result, the total offering price on the Initial Closing Date was $3,198,975. There were no underwriting discounts or commissions. However, Laidlaw is entitled to receive, at any Closing on or prior to the Final Closing Date: (i) a cash fee of 10% of the gross proceeds delivered at each Closing and (ii) a warrant expiring March 30, 2010 (the "Agent's Warrant") to purchase 10% of the shares of the Common Stock underlying the shares of the Convertible Preferred Stock and the Investors Warrants issued at each closing. The Agent's Warrant is similar in terms to the Investor Warrant. As a result of the Closing on the Initial Closing Date, the Company paid to Laidlaw a cash fee of $319,898 and issued to Laidlaw an Agent's Warrant to purchase 924,148 shares of the Common Stock. The Company also paid Laidlaw a non-accountable expense reimbursement of $35,000. (d) The Company claims that the Offering was exempt from the registration requirement of Section 5 of the Securities Act pursuant to the exemption of Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder as a transaction not involving a public offering. Each investor represented to the Company that he, she or it was acquiring the Units, and, unless registered under the Securities Act at that time, the shares of the Common Stock issuable upon the conversions of the shares of the Convertible Preferred Stock and the exercises of the Investor Warrants, for investment and not with a view toward, or in connection with, any distribution of securities of the Company (as the term "distributions" is contemplated under the Securities Act). Laidlaw made a similar investment representation to the Company with respect to the Agent's Warrant issued to it on the 34 Initial Closing Date and the shares of the Common Stock issuable upon the exercise thereof. (e) The following terms are applicable to the conversions of shares of the Convertible Preferred Stock and the exercises of the Investor Warrants and the Agent's Warrants: (i) Convertible Preferred Stock - Optional Conversion. From time to time after issuance a holder may convert a share of the Convertible Preferred Stock into that number of shares of the Common Stock determined by dividing the Stated Value of a share of the Convertible Preferred Stock ($5,000) by the Conversion Price (the Initial Conversion Price is $.30 per share). Accordingly, subject to the anti-dilution provisions described below in subsection (1)(e)(iv) of this Item 3.02, a share of the Convertible Preferred Stock would be convertible into 16,666.666 shares of the Common Stock. (ii) Convertible Preferred Stock - Mandatory Conversion. Shares of the Convertible Preferred Stock shall automatically convert into shares of the Common Stock upon the occurrence of one of the following events (a "Mandatory Conversion Event"): (1) upon the sale by the Company of its equity securities resulting in the receipt by the Company of no less than $5,000,000 in gross proceeds, excluding the Offering, (a "Qualified Follow-On Offering") or at such time as the closing bid price for the Common Stock has equaled or exceeded 2.5 times the Initial Conversion Price of $.30 (i.e., $.75) for a period of 20 consecutive trading days prior to the date of the Mandatory Conversion provided that: (A) the Common Stock shall have traded no less than 200,000 shares per trading day for no less than 20 consecutive trading days prior to the date of the Mandatory Conversion and (B) the shares issued upon conversion are fully registered for resale pursuant to an effective registration statement under the Securities Act and are not subject to a lock-up agreement requested by the Company, its underwriters or placement agents. In the event of a Mandatory Conversion due to a Qualified Follow-On Offering, the holder may convert his, her or its shares of the Convertible Preferred Stock into (x) shares of the Common Stock at the Conversion Price in effect on the date of the Mandatory Conversion Event or (y) the securities being sold in the Qualified Follow-On Offering at the same price that such securities are being sold in such Qualified Follow-On Offering, the purchase price therefor to be paid by the holder converting the Stated Value and accrued but unpaid dividends on the shares of the Convertible Preferred Stock so converted, but each holder who so converts into such securities shall receive an additional ten percent of the identical securities of the Qualified Follow-On Offering that such person converted into in the Qualified Follow-On Offering. (iii) The Investor Warrants and the Agent's Warrants will be exercisable at $.60 per share (the "Exercise Price") subject to adjustment as provided in subsection (1)(e)(iv) of this Item 3.02. (iv) Both the Conversion Price and the Exercise Price will be adjusted on a weighted average basis for (1) all stock splits, dividends, recapitalization terms, reclassifications, payments made to holders of the Common Stock and other similar events and (2) the sale by the Company of additional equity securities at a price below the Conversion Price or the Exercise Price, whichever is applicable. (f) Not applicable. 35 2. Co-Investment (a) On the Initial Closing Date, the Company sold 25 units (the "Co-Investment Units"), each Co-Investment Unit consisting of (1) ten shares of the Convertible Preferred Stock and a warrant expiring March 30, 2010 (the "Co-Investor Warrant") to purchase 50,000 shares of the Common Stock. As a result of this closing, the Company issued an aggregate of 250 shares of the Convertible Preferred Stock and Co-Investor Warrants to purchase an aggregate of 625,000 shares of the Common Stock. (b) There was no underwriter for the Co-Investor Units. The Co-Investors had agreed to make the purchase if the Company sold at least the minimum amount in the Offering. The sale of the Co-Investor Units is not credited against the minimum or maximum amounts to be sold in the Offering. The Co-Investors were all "accredited investors (as such term is defined in Rule 501(a) of Regulation D under Securities Act). (c) The Co-Investor Units were offered at $50,000 per Co-Investor Unit; however, the Company reserved the right to accept subscription for partial Co-Investor Units and did in fact do so at the Initial Closing Date. The total offering price was $1,250,000. There were no underwriting discounts or commissions and Laidlaw received no compensation for the sale of the Co-Investor Units. (d) The Company claims that the sales of the Co-Investor Units were exempt from the registration requirement of Section 5 of the Securities Act pursuant to the exemption of Section 4(2) of the Securities Act as transactions not involving a public offering. Each Co-Investor represented to the Company that he or it was acquiring the Co-Investor Units, and, unless registered under the Securities Act at that time, the shares of the Common Stock issuable upon the conversions of the shares of the Convertible Preferred Stock and the exercises of the Co-Investor Warrants, for investment and not with a view toward, or in connection with, any distribution of securities of the Company (as the term "distribution" is contemplated under the Securities Act). (e) The Co-Investor Warrants are similar in terms to the Investor Warrants. (f) Not applicable. 3. Convertible Notes (a) On the Initial Closing Date, the Company issued an aggregate of 4,018,375 shares of the Common Stock upon the conversion of the Company's 8% Convertible Notes due April 15, 2009 (the "Convertible Notes") in the principal amount of $400,000. (b) There was no underwriter in connection with the conversion of the Convertible Notes. All of the holders who or which converted the Convertible Notes were "accredited investors" (as such term is defined in Rule 501(a) of Regulation D under the Securities Act) and were either the purchasers of the Convertible Notes in the private placement of FBO Air which closed on April 16, 2004 or their assignees. As previously reported, upon the Merger, the Company assumed FBO Air's obligations under the Convertible Notes. (c) The Company received no cash upon the conversion of the Convertible Notes, having received $400,000 in drawdowns with respect to the Convertible Notes. 36 (d) The Company claims that the issuances of the shares of the Common Stock were exempt from the registration requirement of Section 5 of the Securities Act pursuant to the exemption of Section 4(2) of the Securities Act as transactions not involving a public offering. Each of the holders of the Convertible Notes represented to the Company that he or it was acquiring the shares of the Common Stock for investment and not with a view toward, or in connection with, any distribution of securities of the Company (as the term "distribution" is contemplated under the Securities Act). (e) The Convertible Notes were converted into 40%, as defined therein, of the Company's outstanding shares of the Common Stock prior to giving effect to the Offering. (f) Not applicable 4. Option Grants (a) Effective on April 1, 2005, the Board of Directors granted options to purchase an aggregate of 750,000 shares of the Common Stock. (b) There were no underwriters. An option expiring March 31, 2010 to purchase 250,000 shares of the Common Stock was granted to each of (i) Robert J. Ettinger, who was elected as a Vice Chairman of the Board and the Chief Operating Officer of the Company; (ii) Jeffrey M. Trenk, who was elected as a Vice Chairman of the Board and the Executive Vice President of Business Development of the Company and (iii) Ronald J. Ricciardi, the President and Chief Executive Officer of the Company. (c) The options were not issued for cash and there were no underwriting discounts or commissions. As indicated in subsection (b) above, these options were issued in consideration of the services to the performed for the Company by these three principal officers of the Company. (d) The Company claims that the grants of these options were exempt from the registration requirement of Section 5 of the Securities Act pursuant to the exemption of Section 4 (2) of the Securities Act as transactions not involving a public offering. Each of the optionees represented to the Company that he was acquiring the options, and, if not registered under the Securities Act at the time, the shares of the Common Stock issuable upon the exercise of the option, for investment, and not with a view toward, or in connection with, a distribution (as the term "distribution" is contemplated under the Securities Act). (e) Each of the options is exercisable at $1.60 per share, the market price on April 1, 2005. Each option is exercisable, from time to time in its entirely or in part, until March 31, 2010. (f) Not applicable. 37 Item 5. Other Information. (a) The Company previously announced an agreement with Robert Cumming to become Chief Financial Officer. The agreement would become effective upon the achievement of certain criteria. The agreement was not, and is not, in effect at this time. By mutual consent, the parties have ageed to cancel the agreement. (b) On March 31, 2005, the Board of Directors of the Company authorized 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 Big Bird Division. 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 unless either party gives written notice not to extend the term not less than 90 days prior to the then next upcoming expiration date. The Company may terminate the employment for Cause (as defined) in which event the Company is only obligated to the date of termination. In addition Mr. Ettinger may terminate his employment for Good Reason (as defined) or in the event of a Change in Control (as defined). If either such termination occurs, the Ettinger Employment Agreement specifies the Company's further obligations. Pursuant to the Ettinger Employment Agreement, Mr. Ettinger's base annual salary is $150,000, subject to such increases as the Board may authorize from time to time thereafter, 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. Among the other fringe benefits, the Ettinger Employment Agreement obligates the Company to maintain a term life insurance policy on Mr. Ettinger's life in the amount of $1,000,000, with one half of the proceeds on his death to go to his designated beneficiary or beneficiaries and one half to the Company. (c) As previously reported, the Company had entered into a Business Development Agreement dated as of January 2, 2004 (the "Consulting Agreement") with Jeffrey M. Trenk, a founder of FBO Air, Inc., an Arizona corporation ("FBO Air"), which, as previously reported, was merged (the "Merger") on August 20, 2004 with and into the Company (then named Shadows Bend Development, Inc. ("Shadows Bend")). The Consulting Agreement was with FBO Air, but, as a result of the Merger, FBO Air's obligations thereunder were assumed by the Company. The Consulting Agreement, by its terms, never became effective, although Mr. Trenk rendered services and received certain cash compensation. In addition, as previously reported, he was granted an option expiring September 29, 2009 to purchase 50,000 shares of the Common Stock at $.01 per share, there being no market price for the Common Stock at that time. With Mr. Trenk's election on March 31, 2005 as an officer of the Company, the Board of Directors authorized termination of the Consulting Agreement, effective March 31, 2005, and execution of an employment agreement dated as of April 1, 2005 (the "Jeffrey Trenk Employment Agreement") with him. 38 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 unless either party gives written notice not to extend the term not less than 90 days prior to the then next upcoming expiration date. The Company may terminate the employment for Cause (as defined) in which event the Company is only obligated to the date of termination. In addition Mr. Trenk may terminate his employment for Good Reason (as defined) or in the event of a Change in Control (as defined). The termination and benefits upon termination in the Jeffrey Trenk Employment Agreement are similar to those in the Ettinger Employment Agreement. Pursuant to Trenk Employment Agreement, Mr. Trenk's base annual salary is $175,000, subject to such increases as the Board may authorize from time to time thereafter. In addition, he is eligible to receive annually an incentive bonus equal to three percent of the EBITDA of the Company earned by meeting or exceeding the annual plan for EBITDA developed by management and approved by the Board annually. Pursuant to the Employment Agreement, Mr. Trenk is also entitled to similar life insurance coverage and options as described above for the Ettinger Employment Agreement. (d) As previously reported, the Company had entered into an employment agreement dated as of January 2, 2004 (the "Ricciardi Employment Agreement") with Ronald J. Ricciardi as the President and Chief Executive Officer of the Company. The Ricciardi Employment Agreement was originally with FBO Air, but was assumed by the Company as a result of the Merger. On March 31, 2005, the Board of Directors authorized execution of the First Amendment effective April 1, 2005 (the "First Amendment") to the Ricciardi Employment Agreement. The First Amendment provides that Mr. Ricciardi's employment under the Ricciardi Employment Agreement is effective April 1, 2005 and will continue for three years thereafter subject to automatic one-year renewals as described for Messrs. Ettinger and Trenk above. The First Amendment increases his base salary to $175,000, subject to such further increases as the Board may authorize from time to time thereafter. The First Amendment also provides for option grants similar to those provided in the Ettinger Employment Agreement and in the Jeffrey Trenk Employment Agreement. 39 Item 6. Exhibits. Exhibit No. Description of Exhibit ----------- ---------------------- 2 Agreement and Plan of Merger dated as of July 26, 2004 by and between the Company and FBO (without schedules).((4)) 3.1 Certificate of Amendment to the Company's Certificate of Incorporation filed on July 30, 2004.(4) 3(i)(1) Copy of Certificate of Designations. (1) 4.1 Form of 10% Senior Secured Promissory Note due March 31, 2008. (2) 4.2 Form of Investor Warrant. (2) 4.3 Copy of General Security Agreement dated as of March 31, 2005. (2) 4.4 Form of Co-Investor Registration Rights Agreement (without schedule or exhibit). (2) 4.5 Form of Co-Investor Registration Rights Agreement (without schedule or exhibit). (2) 5 Copy of Employment Agreement dated as of April 1, 2005 by and between Robert J. Ettinger and the Company. (2) 6 Copy of Business Development Agreement dated as of January 2, 2004 by and between Jeffrey M. Trenk and the Company. (3) 7 Copy of Employment Agreement dated as of April 1, 2005 between Jeffrey M. Trenk and the Company. (2) 8 Copy of Employment Agreement dated as of January 2, 2004 by and between Ronald J. Ricciardi and the Company. (3) 9 Copy of First Amendment effective April 1, 2005 to the Ricciardi Employment Agreement. (2) 10.1 Copy of asset purchase agreement dated March 31, 2005 between FBO Air - Garden City and Jon A. Crotts .((2)) 10.2 Copy of employment agreement between FBO Air - Garden City, Inc. and Jon A. Crotts. (2) 10.4 Employment agreement dated March 31, 2005 -------- (1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on March 29, 2005(.) (2) Incorporated by reference to the Company's Current Report on Form 8-K filed on April 6, 2005. 40 10.5 Employment Agreement dated as of January 2, 2004 by and between Ronald J. Ricciardi and the Company.(3) 10.6 Business Development Agreement dated as of January 2, 2004 by and between Jeffrey M. Trenk and the Company.(3) 10.10 Form of Convertible Notes due April 15, 2009. (4) 10.11 Copy of Letter Agreement dated October 21, 2004 amending the Convertible Notes, the form of which is filed as Exhibit 10.6. (5) 31.1 Officer's Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act. (6) 32.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (6) -------- (3) Incorporated by reverence to the Company's Current Report on Form 8-K filed on October 5, 2004. (4) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 27, 2004. (5) Incorporated by reference to the Company's Current Report on Form 8-K/A filed on November 4, 2004 (6) Filed herewith 41 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: May 23, 2005 FBO AIR, INC. By: /s/ Ronald J. Ricciardi ----------------------------------- Ronald J. Ricciardi Chief Executive Officer (acting principal financial officer) 42