10KSB/A 1 v019414_10ksb-a.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 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 (I.R.S. Employer of incorporation or organization) Identification No.) 9087 E. Charter Oak Scottsdale, AZ 85260 (Address of principal executive offices) (480) -634-6565 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-KSB/A or any amendment to this Form 10-KSB/A. [XX] State issuer's revenues for its most recent fiscal year: $0 Aggregate market value of the voting stock held by non-affiliates based on the weighted average sale price for such stock on the ten trading days preceding March 27, 2005: $647,005 As of March 22, 2005, the Registrant had 6,026,022 shares of its Common Stock, $0.001 par value, issued and outstanding. Transitional Small Business Disclosure Format Yes |_| No |X| FBO AIR, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE) FORM 10-KSB EXPLANATORY STATEMENT We are filing this Amendment No. 1 on Form 10-KSB/A to provide a conformed signature on the Report of Independent Registered Public Accounting Firm in Item 7 and to provide additional information concerning our disclosure controls and procedures in Item 8A. As a result of the changes to Item 8A, we are filing also new Certifications as Exhibits 31.1 and 32.1. Item 6, although there is no change, is included here at the request of the SEC staff. There have been no other changes to this document. PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONDITION AND RESULTS OF OPERATIONS Summary Financial Information The summary financial data set forth below is derived from and should be read in conjunction with the consolidated financial statements, including the notes thereto, filed as part of this Form 10-KSB. Year Ended Year Ended Consolidated Statement December 31, December 31, of Operations Data: 2004 2003 (in thousands, except for share and per share data) Revenues $ 0 $ 0 Net Loss - common shares $ (573) $ (104) Net loss per common share $ (.14) $ (.04) Weighted average number of shares - basic and deleted 4,136,013 2,615,375 December 31, Balance Sheet Data: 2004 Working capital (deficiency) $ (166) Total assets $ 46 Total liabilities $ 579 Stockholders' (deficiency) $ (533) Forward-looking Statements This Report on Form 10-KSB contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Report, including without limitation, the statements under "General," "Marketing and Sales," "Liquidity and Capital Resources" and "Plan of Operation" are forward-looking statements. The Company cautions that forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors herein identified. Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements ("Cautionary Statements") include delays in product development, competitive products and pricing, general economic conditions, risks of intellectual property litigation, product demand and industry capacity, new product development, commercialization of new technologies, the Company's ability to raise additional capital, the Company's ability to obtain the various approvals and permits for the land development and the risk factors detailed from time to time in the Company's Annual Report on Form 10-KSB and other materials filed with the Securities and Exchange Commission ("SEC"). A-1 All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. (a) Plan of Operation (1) The Company's business strategy is to purchase and consolidate FBOs in the secondary and tertiary markets located within the United States. In this market, the Company would provide FBO services such as fueling, parking of aircraft, maintenance and repair, to general aviation aircraft operators. The Company's primary source of operating funds since inception has been provided by its shareholders and convertible note financing. In April 2004, we entered into a convertible note agreement with a group of investors to purchase five-year, 8% convertible notes in the aggregate principal amount of $400,000. Through March 22, 2005, the investors have allowed us to draw down the total available amount $400,000 against this agreement. (i) The Company requires additional cash to finance the purchases of the FBOs and is in the process of seeking to raise a minimum of $3 million through a private placement. Under terms of this offering and upon successful completion of the minimum amount, the Company shall have the capacity to consummate the first two acquisitions of fixed base operations in addition to having sufficient working capital for at least the next twelve months. Under the terms of this offering and successful completion of the maximum amount, the Company is expected to have the financial capacity to consummate the next two acquisitions. There can be no assurance that this private placement will be consummated or that the acquisition will be effected. (ii) As part of its plan to acquire fixed base operations in secondary and tertiary markets across the country, the Company has developed a database of potential target acquisitions. This database was compiled through publicly available and industry-specific information as well as from direct contact with hundreds of individual owners of FBOs. (iii) In connection with its anticipated transactions, the Company will acquire plant and equipment related to the aviation industry such as fuel vehicles, aircraft movement vehicles, and tools and supplies for the maintenance of aircraft. After each acquisition, a capital expenditure plan and budget would be established for each location, a portion of which would inevitably go toward additional plant and equipment. In connection therewith, the Company has negotiated and issued letters of intent for four potential FBO acquisitions: 1) An FBO located in Garden City, Kansas, requiring cash at closing of approximately $435,000 and the issuance of a 5% note for approximately $240,000 to be paid out over 18 months; 2) An FBO located in the northeast region of the country, acquiring the stock of the company with a combination of cash and debt totaling approximately $2,800,000; 3) An FBO located in the southern region of the country, requiring cash at closing of approximately $1,250,000; and 4) A flight school, including certain aircraft, located in the southwest region of the country, requiring a combination of cash and notes totaling approximately $2,495,000. Completion of these acquisitions is subject to customary closing conditions including the raising of capital. (iv) In connection with its anticipated transactions, the number of employees in the Company will change significantly. In the first two anticipated acquisitions, the employee count would grow to over 50 people, including full-time and part-time headcount. Subsequent transactions would add employees in numbers ranging from 5 - 60 people per acquisition. A-2 (b) Private Offering The Company is seeking to offer units in a private placement pursuant to Rule 506 of Regulation D under the Securities Act (the "Private Offering"). Each such unit in the Private Offering will consist of: 1. A Note (a) in the principal amount of $25,000; (b) with a maturity date of three (3) years; (c) bearing interest at the rate of 10% per annum payable quarterly in arrears; (d) secured by the current and to be acquired assets of the Company and its present and future subsidiaries; and (d) subject to certain covenants of the Company; 2. $50,000 in face amount of shares of the Convertible Preferred Stock, and 3. A five-year Warrant to purchase 50,000 shares of the Common Stock at the initial exercise price (the "Warrant Exercise Price") of $0.60 per share, with the Warrant Exercise 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 under the Securities Act 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. The foregoing description of the Company's contemplated private placement is not an offer by the Company of any securities and such offer may be made only in compliance with Regulation D under the Securities Act. There can be no assurance that the Private Offering will be consummated or that, if consummated, it will be on the terms described. Co-Investment Offering In addition, if the minimum units of the Private Offering are sold, the Company intends to offer to other investors an additional $1,250,000 in face amount of the Convertible Preferred Stock and to issue a five-year Warrant to purchase 625,000 shares of the Common Stock (the "Co-Investment"). The terms of the Convertible Preferred Stock and the Warrant are the same as those in the Private Offering. The Co-Investment will not be a part of the Private Offering. During February 2005, Co-Investors purchased for cash $100,000 of the Convertible Preferred Stock. There can be no assurance that they will purchase any additional securities. (c) Off-balance sheet arrangements The Company does not have any off-balance sheet arrangements. Critical Accounting Policies The Company's consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our consolidated financial statements. A-3 Our significant accounting policies are summarized in Note 3 of our consolidated financial statements. The Company currently has no critical accounting policies. Effects of New Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R "Shared Based Payment." This statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R addresses all forms of shared based payment ("SBP") awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest and will be reflected as compensation cost in the historical financial statements. This statement is effective for public entities that file as small business issuers - as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company is in the process of evaluating whether the SFAS No. 123R will have a significant impact on the Company's overall results of operations or financial position. In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, otherwise, is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 in the third quarter of 2003. The adoption did not have an impact on the consolidated financial statements. In January 2003, as revised in December 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2004. The adoption of FIN 46 for provisions effective during 2003 did not have a material impact on the consolidated financial statements. In November 2004, the FASB ratified the release of Emerging Issue Task Force ("EITF") Issue No. 04-08 ("EITF 04-08"), "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share." EITF 04-08 reached a consensus that contingently convertible instruments, such as contingently convertible debt, contingently convertible preferred stock and other such securities should be reflected in diluted earnings per share (if dilutive) regardless of whether the market price trigger has been met. The consensus is effective for reporting periods ending after December 15, 2004. EITF 04-08 did not have a material impact on the consolidated financial statements. A-4 ITEM 7. FINANCIAL STATEMENTS The information required by this item is incorporated by reference to pages F-1 through F-19 of this Annual Report on Form 10-KSB/A. A-5 ITEM 8A. 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 Annual Report on Form 10-KSB. 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. At March 29, 2005, the Company's only full time employee, the Company's Chief Executive Officer, solely has the responsibility for receipts and disbursements. The Company employs a financial consultant to work closely with the Company's Chief Executive Officer 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 who is also the acting principal financial officer, has concluded that even though there is a material weakness, that the disclosure controls and procedures are effective, based upon the following: (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. In order to correct this deficiency, we had entered into an agreement with an executive that would become our full time Chief Financial Officer at such time as the Company has adequate financial resources and meets certain criteria. The agreement was not and is not, in effect at this time. By mutual consent, the parties have agreed to cancel the agreement. Accordingly, we are now seeking to hire a qualified 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 year ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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. However, we do not as yet have any operating businesses. A-6 PART III ITEM 13. EXHIBITS (a) Documents filed as part of this report. See index to Consolidated Financial Statements attached, which are filed as part of this report. (b) Description of 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).(1) -------------------------------------------------------------------------------- 3.1 Certificate of Amendment to the Company's Certificate of Incorporation filed on July 30, 2004.(1) -------------------------------------------------------------------------------- 3.1(a) Certificate of Designations.(5) -------------------------------------------------------------------------------- 10.1 Convertible Loan Agreement dated April 16, 2004 by and among FBO and the Investors named in Schedule A thereto.(1) -------------------------------------------------------------------------------- 10.2 Amendatory Agreement dated as of July 26, 2004 to the Convertible Loan Agreement filed as Exhibit 10.1. (2) -------------------------------------------------------------------------------- 10.3 Form of Convertible Note due April 15, 2009 issued pursuant to the Convertible Loan Agreement filed as Exhibit 10.1.(1) -------------------------------------------------------------------------------- 10.4 Letter Agreement dated October 21, 2004 amending the Convertible Notes, the form of which is filed as Exhibit 10.3.(2) -------------------------------------------------------------------------------- 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) -------------------------------------------------------------------------------- 10.7 Employment Agreement dated October 15, 2004 by and between W.R. "Robert" Cumming and the Company. (4) -------------------------------------------------------------------------------- 31.1 Officer's Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act. (5) -------------------------------------------------------------------------------- -------- (1) Incorporated by reference to the Company's Current Report on Form 8-K filed on August 27, 2005. (2) Incorporated by reference to the Company's Current Report on Form 8-K/A filed on November 4, 2004. (3) Incorporated by reference to the Company's Current Report on Form 8-K filed on October 5, 2004. (4) Incorporated by reference to the Company's Current Report on Form 10-KSB filed on November 22, 2005. (5) Filed as an Exhibit with this filing. A-7 -------------------------------------------------------------------------------- Exhibit No. Description of Exhibit -------------------------------------------------------------------------------- 32.1 Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.(5) -------------------------------------------------------------------------------- A-8 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) Table of Contents to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements Consolidated Balance Sheet as of December 31, 2004 F-3 Consolidated Statements of Operations For the Period from January 17, 2003 (Inception) to December 31, 2003, For the Year Ended December 31, 2004 and For the Period from January 17, 2003 (Inception) to December 31, 2004 F-4 Consolidated Statements of Stockholders' Deficiency For the period from January 17, 2003 (Inception) through December 31, 2004 F-5 Consolidated Statements of Cash Flows For the Period from January 17, 2003 (Inception) to December 31, 2003, For the Year Ended December 31, 2004 and For the Period from January 17, 2003 (Inception) to December 31, 2004 F-6 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders FBO Air, Inc. We have audited the accompanying consolidated balance sheet of FBO Air, Inc. and Subsidiary (a Development Stage Enterprise) as of December 31, 2004, and the related consolidated statement of operations, stockholders' deficiency, and cash flows for period from January 17, 2003 (inception) through December 31, 2003, the year ended December 31, 2004, and the period from January 17, 2003 (inception) through December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2004, and the consolidated results of its operations and its cash flows for period from January 17, 2003 (inception) through December 31, 2003, the year ended December 31, 2004, and the period from January 17, 2003 (inception) through December 31, 2004 in conformity with U.S. generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has no revenues and has incurred significant operating losses since inception, which raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Marcum & Kliegman, LLP ----------------------------------- Marcum & Kliegman, LLP New York, NY March 18, 2005 F-2 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) CONSOLIDATED BALANCE SHEET December 31, 2004 ASSETS CURRENT ASSETS Cash $ 14,117 Prepaid insurance 2,668 Due from stockholder 15,510 --------- Total current assets 32,295 OTHER ASSETS Deposit for acquisition 10,000 Option on lease of real estate, net 3,400 --------- Total other assets 13,400 --------- TOTAL ASSETS $ 45,695 ========= LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable and accrued expenses $ 198,693 LONG-TERM LIABILITIES Convertible notes 380,000 --------- TOTAL LIABILITIES 578,693 --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIENCY Preferred stock - $.001 par value; authorized 10,000,000; none issued and outstanding -- Common stock - $.001 par value; authorized 100,000,000; 6,026,022 issued and outstanding 6,026 Additional paid-in capital 34,475 Deficit accumulated during development stage (573,499) --------- TOTAL STOCKHOLDERS' DEFICIENCY (532,998) --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 45,695 ========= See notes to consolidated financial statements. F-3 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period For the Period from January 17, 2003 For the from January 17, 2003 (Inception) to Year Ended (Inception) to December 31, 2003 December 31, 2004 December 31, 2004 --------------------- --------------------- --------------------- REVENUE $ -- $ -- $ -- --------------------- --------------------- --------------------- EXPENSES General and administrative expenses 104,393 491,735 596,128 Compensatory element of stock issuances (for general and administrative expenses) -- 69,227 69,227 --------------------- --------------------- --------------------- TOTAL EXPENSES 104,393 560,962 665,355 --------------------- --------------------- --------------------- OPERATING LOSS (104,393) (560,962) (665,355) INTEREST EXPENSE -- 12,537 12,537 --------------------- --------------------- --------------------- NET LOSS $ (104,393) $ (573,499) $ (677,892) ===================== ===================== ===================== Basic and Diluted Loss Per Common Share $ (0.04) $ (0.14) ===================== ===================== Weighted Average Common Shares Basic and Diluted 2,615,375 4,136,013 ===================== =====================
See notes to consolidated financial statements. F-4 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY For the Period from January 17, 2003 (Inception) through December 31, 2004
Deficit Accumulated Additional During Total Common Stock Paid-in Development Stockholders' ----------------------------- Shares Amount Capital Stage Deficiency ------------- ------------- ------------- ------------- ------------- BALANCE - January 17, 2003 (Inception) 2,615,375 $ 2,616 $ (2,616) $ -- $ -- Net loss -- -- -- (104,393) (104,393) ------------- ------------- ------------- ------------- ------------- BALANCE - December 31, 2003 2,615,375 2,616 (2,616) (104,393) (104,393) Capitalization of deficit at time of incorporation -- -- (104,393) 104,393 -- Conversion of advances from affiliates - January 4, 2004 -- -- 94,818 -- 94,818 Common stock issued for services on June 27, 2004 at $.03 per share 1,906,250 1,906 67,321 -- 69,227 Common stock issued in connection with Shadows Bend reverse merger - August 20, 2004 1,504,397 1,504 (20,655) -- (19,151) Net loss -- -- -- (573,499) (573,499) ------------- ------------- ------------- ------------- ------------- BALANCE - December 31, 2004 6,026,022 $ 6,026 $ 34,475 $ (573,499) $ (532,998) ============= ============= ============= ============= =============
See notes to consolidated financial statements. F-5 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period For the Period from January 17, 2003 For the from January 17, 2003 (Inception)to Year Ended (Inception) to December 31, 2003 December31, 2004 December 31, 2004 --------------------- --------------------- --------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (104,393) $ (573,499) $ (677,892) --------------------- --------------------- --------------------- Adjustments to reconcile net loss to net cash used in operating activities: Compensatory element of stock issuances -- 69,227 69,227 Amortization of option on lease of real estate -- 200 200 Changes in operating assets and liabilities: Due from stockholder -- (15,510) (15,510) Prepaid insurance -- (2,668) (2,668) Accounts payable and accrued expenses 9,575 169,967 179,542 --------------------- --------------------- --------------------- TOTAL ADJUSTMENTS 9,575 221,216 230,791 --------------------- --------------------- --------------------- NET CASH USED IN OPERATING ACTIVITIES (94,818) (352,283) (447,101) --------------------- --------------------- --------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase deposit for acquisition -- (10,000) (10,000) Purchase of Option on lease of real estate -- (3,600) (3,600) --------------------- --------------------- --------------------- NET CASH USED IN INVESTING ACTIVITIES -- (13,600) (13,600) --------------------- --------------------- --------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the sale of convertible notes -- 380,000 380,000 Advances from affiliates 94,818 -- 94,818 --------------------- --------------------- --------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 94,818 380,000 474,818 --------------------- --------------------- --------------------- NET INCREASE IN CASH -- 14,117 14,117 CASH - Beginning -- -- -- --------------------- --------------------- --------------------- CASH - Ending $ -- $ 14,117 $ 14,117 ===================== ===================== =====================
See notes to consolidated financial statements. F-6 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Period For the Period from January 17, 2003 For the from January 17, 2003 (Inception)to Year Ended (Inception) to December 31, 2003 December31, 2004 December 31, 2004 --------------------- --------------------- --------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the periods for: Interest $ -- $ -- $ -- ===================== ===================== ===================== Income taxes $ -- $ -- $ -- ===================== ===================== ===================== Non-cash investing and financing activities: Accrued liabilities assumed in the merger $ -- $ 19,151 $ 19,151 ===================== ===================== ===================== Advances from affiliates converted to equity $ -- $ 94,818 $ 94,818 ===================== ===================== =====================
In connection with the Shadows Bend merger, liabilities assumed exceeded assets acquired by $19,151. See notes to consolidated financial statements. F-7 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - Nature of Operations and Basis of Presentation Nature of Operations FBO Air, Inc., a Development Stage Enterprise, ("FBO Air") was formed on January 17, 2003 (date of inception) as a proprietorship to acquire and operate fixed base operations. On January 2, 2004, FBO Air was incorporated in the State of Arizona. A fixed base operator ("FBO") is the primary provider of services to general aviation aircraft operators. FBO Air's business strategy is to purchase and consolidate FBOs in the secondary and tertiary markets located within the United States. Business and Reverse Merger Effective August 20, 2004, Shadows Bend Development, Inc. ("Shadows Bend"), a publicly-traded company with no active business, entered into a merger transaction with FBO Air, a privately-held Arizona corporation. Upon completion of the merger transaction, Shadows Bend changed its name to FBO Air, and the original FBO Air shareholders owned 75% of the outstanding shares of common stock of the Company. Accordingly, this transaction has been accounted for as a reverse merger with FBO Air as the acquirer, for accounting purposes, 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. The historical financial statements presented are those of FBO Air for all periods presented. In July 2004, FBO Air formed FBO Air - Garden City, Inc. ("FBO Garden City") so that in the future FBO Garden City, a wholly-owned subsidiary, may acquire the net assets and/or stock of a target FBO. Through December 31, 2004, FBO Garden City has not acquired an FBO. FBO Air and its wholly-owned subsidiary, FBO Air Garden City, are hereinafter referred to as the "Company." Basis of Presentation The Company is in the development stage and its efforts to date have been principally devoted to the organizational activities of raising capital, recruiting and hiring of key personnel, and identifying and screening of potential acquisitions. The accompanying financial statements have been prepared in accordance with Statement of Financial Accounting Standards No. 7, Development Stage Enterprises, since planned principal operations have not yet commenced. F-8 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - Going Concern and Management's Plans The Company's primary source of operating funds since inception has been provided by its shareholders and convertible note financing. The Company intends to raise additional capital through private debt and equity investors. The Company is currently a development stage enterprise and there is no assurance that these funds, if raised, will be sufficient to enable the Company to fully complete its development activities, attain profitable operations or continue as a going concern. As of December 31, 2004, the Company had stockholders' and working capital deficiencies of $532,998 and $166,398, respectively. The Company had no revenues and incurred an operating loss of $677,892 during the period from January 17, 2003 (date of inception) through December 31, 2004. Management has taken steps to improve the Company's liquidity. There can be no assurance that the Company will be successful in these endeavors and therefore may have to consider other alternatives. The Company has obtained an extension from the holders of its convertible notes to defer the start of interest payments until after the closing of the first FBO acquisition. In addition, the Company has minimized its overhead costs by limiting its full time employees to just one, the Company's President. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, there is substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern. NOTE 3 - Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of FBO Air and its wholly-owned subsidiary FBO Garden City. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the 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. F-9 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Summary of Significant Accounting Policies (continued) Deposits Deposits consists of advance payments made to secure contractual obligations of the Company. Option on Real Estate Lease The option on a real estate lease consists of a purchased right for a period of time to enter into a lease of real property. The option is amortized on a straight-line basis over the option period. Income Taxes The Company was a proprietorship for the period from January 17, 2003 through December 31, 2003. The proprietorship itself is not a taxpaying entity for purposes of Federal and State income taxes. Federal and State income taxes of the proprietor are computed on its total income from all sources. Accordingly, no provision for income taxes is made for the period from January 17, 2003 (date of inception) through December 31, 2003. Tax expense would not have been different had the Company been a tax paying entity. 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 year ended December 31, 2004, as a result of net operating losses incurred during the period. As of December 31, 2004, the Company has available approximately $500,000 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 2024. At December 31, 2004, the Company has a deferred tax asset of approximately $200,000, 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 $200,000. 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. F-10 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Summary of Significant Accounting Policies (continued) 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. 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. F-11 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - 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 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 December 31, 2004 and 2003 approximated 4,168,000 and 0, respectively. Effect of Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123R "Shared Based Payment." This statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R addresses all forms of shared based payment ("SBP") awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest and will be reflected as compensation cost in the historical financial statements. This statement is effective for public entities that file as small business issuers - as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company is in the process of evaluating whether the SFAS No. 123R will have a significant impact on the Company's overall results of operations or financial position. In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. It requires classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, otherwise, is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 in the third quarter of 2003. The adoption did not have an impact on the consolidated financial statements. F-12 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - Summary of Significant Accounting Policies (continued) Effect of Recent Accounting Pronouncements (continued) In January 2003, as revised in December 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2004. The adoption of FIN 46 for provisions effective during 2003 did not have a material impact on the consolidated financial statements. In November 2004, the FASB ratified the release of Emerging Issue Task Force ("EITF") Issue No. 04-08 ("EITF 04-08"), "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share." EITF 04-08 reached a consensus that contingently convertible instruments, such as contingently convertible debt, contingently convertible preferred stock and other such securities should be reflected in diluted earnings per share (if dilutive) regardless of whether the market price trigger has been met. The consensus is effective for reporting periods ending after December 15, 2004. EITF 04-08 did not have a material impact on the consolidated financial statements. NOTE 4 - Due from Stockholder As of December 31, 2004, the Company had advances due from a stockholder in the amount of $15,510 . NOTE 5 - Deposit for Acquisition In October 2004, the Company paid a sum of $10,000 as an earnest money deposit to the two principal stockholders of an FBO located in the northeast region of the country (See Note 8). This payment is to be applied to the total purchase price of approximately $2,800,000 and may be refunded under certain circumstances. F-13 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - 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 an FBO as defined in the agreement. The convertible notes mature 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 is deferred to the date of closing of the first FBO acquisition (See Note 9[A]). 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 and December 2004, the Investors waived one provision under their agreement and funded the sale of $125,000, $45,000, $40,000 and $40,000, respectively of convertible notes under the agreement (See Note 9[A]). 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%, 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. NOTE 7 - Stockholders' Deficiency 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. F-14 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 - Stockholders' Deficiency (continued) 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. NOTE 8 - Commitments and Contingencies Operating Lease In May 2004, the Company entered into a non-cancelable operating lease of an automobile for a Company officer expiring in August 3, 2008. Future minimum lease payments under this operating lease at December 31, 2004 are as follows: Years Ended December 31: Amount ------------------------------------------------------------ 2005 $ 5,640 2006 5,640 2007 3,290 --------- $14,570 ========= F-15 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Commitments and Contingencies (continued) Proposed Acquisitions The Company has negotiated and issued letters of intent for four potential FBO acquisitions: 1) An FBO located in Garden City, Kansas, requiring cash at closing of approximately $435,000 and the issuance of a 5% note for approximately $240,000 to be paid out over 18 months; 2) An FBO located in the northeast region of the country, acquiring the stock of the company with a combination of cash and debt totaling approximately $2,800,000; 3) An FBO located in the southern region of the country, requiring cash at closing of approximately $1,250,000; and 4) A flight school, including certain aircraft, located in the southwest region of the country, requiring a combination of cash and notes totaling approximately $2,495,000. Completion of these acquisitions is subject to customary closing conditions including the raising of capital. There can be no assurance that any or all of these acquisitions will be consummated. Consulting Agreements 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 FBO acquisition. Included in accounts payable and accrued expenses at December 31, 2004 is an obligation of $45,000 pursuant to this agreement. In January 2004, the Company entered into a three-year consulting agreement ("Consulting Agreement") with a stockholder to provide merger and acquisition advisory services, effective upon an acquisition. The agreement calls for annual consulting fees of $125,000, $150,000 and $200,000, respectively. For each year of the agreement the consultant shall be issued an option to purchase 50,000 shares of the Common Stock of the Company. As of December 31, 2004, the agreement was not in effect. In September 2004, in lieu of the stock option to be granted in the first year pursuant to the Consulting Agreement, the Board of Directors granted an option to purchase 50,000 shares of Common Stock exercisable at $.01 per share, which shall vest on September 30, 2005 and expire on September 29, 2008. F-16 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - Commitments and Contingencies, continued Employment Agreements In January 2004, the Company entered into a three-year employment agreement with its President and Chief Executive Officer, which will become effective upon the closing of an FBO acquisition and provides for an annual salary of $125,000, $150,000 and $200,000, respectively, plus an annual incentive bonus based upon the Company's Earnings Before Income Taxes, Depreciation and Amortization ("EBITDA"), as further defined in the agreement. In addition, the executive is entitled to receive an option to purchase shares of the Common Stock in an amount to be determined by the Board of Directors. As of December 31, 2004, the agreement was not in effect and no option has been granted. In October 2004, the Company entered into a three-year employment agreement with an executive to serve as its Chief Financial Officer and Executive Vice President. The executive's employment by the Company under this agreement shall commence in two weeks from the date of the initial FBO acquisition and the firm commitment and written agreement by the Board of Directors in securing no less than $20.0 million in debt and equity financing by the Company. This agreement provides for an annual salary of $125,000, $150,000 and $200,000, respectively, plus an annual incentive bonus upon the Company's EBITDA. In addition, the executive is entitled to receive an option to purchase at the listed price at the date of grant a total of 750,000 shares, with an option to purchase 250,000 shares to be granted by the Company on March 1 of each of the years 2005, 2006 and 2007. The options shall vest at the time of issuance and the executive shall have five years to acquire the stock from the date of issuance. As of December 31, 2004, the agreement was not in effect and no option has been granted. NOTE 9 - Subsequent Events [A] Convertible Notes During January 2005, the Investors waived one provision under their loan agreement and funded the sale of the remaining $20,000 convertible notes under the agreement. Also, during January 2005, the Company entered into an amendment of the agreement with the Investors whereby the due date of the first interest payment is deferred to the date of closing of the first FBO acquisition (see Note 6). F-17 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Subsequent Events, continued [B] Due from Stockholder During February 2005, a stockholder repaid advances totaling $2,500 (See Note 4). [C] Authorization of Series A Convertible Preferred 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 $10,000. 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 the 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 shares of the 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. The Convertible Preferred Stock is convertible into shares of the 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 a private placement in which the shares of the Convertible Preferred Stock are offered for sale, 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 in the event of stock splits and other events, as provided in the agreement, and upon the sale of additional equity securities at a price below the Conversion Price, 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. F-18 FBO AIR, INC. AND SUBSIDIARY (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - Subsequent Events, continued [C] Authorization of Series A Convertible Preferred Stock, continued 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 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. During February 2005, investors purchased for cash $100,000 of the Convertible Preferred Stock. [D] Seeking Financing The Company has agreed with a firm on a non-exclusive basis to seek financing. [E] 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 damages of approximately $100,000 arising from Shadows Bend's cancellation of a stock certificate in the year 2002, evidencing shares allegedly sold by the plaintiff for the account of a shareholder of Shadows Bend. The Company disputes the allegations, has engaged local trial counsel and intends to vigorously defend itself in this matter. F-19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to the report to be signed on its behalf by the undersigned, thereunto duly authorized. FBO Air, Inc. (Registrant) Date: June 1, 2005 By: /s/ Ronald J. Ricciardi ------------------------------------- Ronald J. Ricciardi, President and Chief Executive Officer (Principal Executive Officer and Principal Financial Officer) A-9