10KSB 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- ----------- Commission File No. 0-33239 STERLING EQUITY HOLDINGS, INC. ---------------------------------------------- (Name of Small Business Issuer in its charter) Nevada 88-0485488 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 Airport Freeway, Suite 370 Bedford, Texas 76022 ------------------------------------------------- (Address of principal executive offices)(Zip code) Issuer's telephone number, including area code: (817) 358-0551 Securities to be registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which each is registered ------------------- ------------------------------------------------- None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value ------------------------------ (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] No [X] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's revenues for the fiscal year ended December 31, 2003 were $1,231,921. The number of shares of the registrant's common stock, $.001 par value per share, outstanding as of October 1, 2004 was 39,655,068. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on October 1, 2004, based on the last sales price on the Pink Sheets as of such date, was approximately $1,437,750. DOCUMENTS INCORPORATED BY REFERENCE None Transition Small Business Disclosure Format: Yes [ ] No [X] TABLE OF CONTENTS Page ---- PART I ITEM 1. DESCRIPTION OF BUSINESS 1 ITEM 2. DESCRIPTION OF PROPERTY 6 ITEM 3. LEGAL PROCEEDINGS 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS 8 ITEM 7. FINANCIAL STATEMENTS 13 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 14 ITEM 8A. CONTROLS AND PROCEDURES 14 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 15 ITEM 10. EXECUTIVE COMPENSATION 16 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 17 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17 ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K 19 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 20 SIGNATURES FORWARD-LOOKING STATEMENTS This annual report on Form 10-KSB contains forward-looking statements within the meaning of the federal securities laws. These forwarding-looking statements include, without limitation, statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our properties and services, our intentions and strategies regarding future acquisitions and sales of properties and businesses, our intentions and strategies regarding the formation of strategic relationships, our beliefs regarding the future success of our properties and services, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs and expectations regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding revenues, our expectations regarding future growth and financial performance, our beliefs and expectations regarding the adequacy of our facilities, and our beliefs and expectations regarding our financial position, ability to finance operations and growth and the amount of financing necessary to support operations. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially. These risks and uncertainties include without limitation those identified in the section of this annual report on Form 10-KSB entitled "Factors That May Affect Future Results" below. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this annual report on Form 10-KSB. As used in this annual report on Form 10-KSB, unless the context otherwise requires, the terms "we," "us," "the Company," and "Sterling Holdings" refer to Sterling Equities Holdings, Inc., a Nevada corporation, and its subsidiaries and "BlueStar" refers to the Company prior to September 30, 2002. PART I ITEM 1. BUSINESS GENERAL Sterling Equities Holdings, Inc., originally incorporated under the name BlueStar Leasing, Inc., was formed in January 2001 and, following a series of acquisitions during 2002 and the sale of certain operations in 2003, is principally engaged in the business of acquiring, operating and holding equity interests in business entities primarily in the aviation and real estate industries. HISTORY AND DEVELOPMENT OF THE COMPANY BlueStar was originally formed as a "small ticket" regional leasing company working within select niche markets of vendors, small business owners and brokers. BlueStar was formed to provide a funding alternative to typical "credit scoring matrix" leasing companies for transactions that are slightly "outside the box" building a loyal customer base one lease at a time. BlueStar planned to establish a strong sales and marketing group specializing in bringing creative and flexible leasing and financing solutions to vendors, users of commercial equipment and small business owners with "bruised credit." BlueStar intended to fill the void that exists between the matrix lenders focusing on "A" credit ratings and the small business owner in need of capital for the acquisition of equipment needed to grow their business. Effective at the close of business on September 30, 2002, BlueStar completed an exchange (the "Exchange") pursuant to which BlueStar issued an aggregate of 5,638,334 shares of common stock in exchange for 100% of the outstanding shares of common stock of Sterling FBO Holdings, Inc. ("Sterling FBO"). Pursuant to the terms of the Exchange, each share of Sterling FBO common stock was exchangeable for one share of BlueStar common stock. As a result of the Exchange, Sterling FBO became a wholly owned subsidiary of BlueStar. Sterling FBO is a Nevada corporation formed in May 2002 to acquire own and operate private airport Fixed Base Operations ("FBOs") and income producing real estate. At the time of the Exchange, Sterling FBO owned 88.9% or greater interests in, and operated, four industrial office facilities located in Austin, Texas and leased to governmental agencies. Additionally, at the time of the Exchange, Sterling FBO was engaged in negotiations with certain affiliates to acquire additional properties and FBO operations, which negotiations resulted in the acquisitions, between October and December 2002, of interests in a retail shopping center and five FBOs. 1 In October 2002, the Company, through Sterling FBO, completed the acquisition of a 99% limited partnership interest in Commodore Plaza, Ltd. The Company issued an aggregate of 2,000,000 shares of common stock to acquire Commodore Plaza, Ltd. Commodore Plaza, Ltd. was acquired from Hugo Verhaeghe, Chaz Glace, Thomas Mathew and Sterling REIT, Inc., each of which may be deemed to be affiliates of the Company by reason of the holdings of common stock by those persons and entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling REIT, Inc. Commodore Plaza, Ltd. owns the Commodore Plaza Shopping Center in Gulfport, Mississippi that leases retail shopping space to various establishments on a net lease basis. On October 30, 2002, the Company, through Sterling FBO, completed the acquisition of a 100% ownership interest in both Greeley FBO, L.L.C. and Sterling Austin Aero,L.P. The Company issued an aggregate of 3,143,334 shares of common stock to acquire Greeley FBO and 2,166,666 shares of common stock to acquire Sterling Austin Aero. Both Greeley FBO and Sterling Austin Aero were acquired from Geld Fund II, LLC, Chasco Investments, Inc., Mathew Investment Partnership and Sterling REIT, Inc. Geld Fund II, LLC, Chasco Investments, Inc. and Sterling, REIT, Inc. may each be deemed to be affiliates of the Company by reason of the holdings of common stock by those entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling, REIT, Inc. Greeley FBO owned and operated a private airport facility under the name of Greeley-Weld Jet Center, in Greeley, Colorado. The center opened in 2000 and, during 2002, moved into a newly renovated facility, complete with a new terminal building, an 81,000-foot ramp and a 10,000-foot runway. On-site services include fueling, hangar space, tie down, Jet A, 100LL, Oxygen, GPU, pre-heating, de-icing and self serve 100LL. Sterling Austin Aero owned a private airport facility located in Austin, Texas and leased to Austin Aero FBO, Ltd. Constructed in 1999 at the new Austin Bergstrom International Airport (AUS), the FBO includes a 15,000 square foot terminal with boarding and waiting area, nine acres of ramp space, 65 tie-down spaces, five 14,000-square-foot hangars, exercise/workout room, pilots lounge, weather information system, flight planning room, showers, offices, secretarial services, fax machines and computers. On November 25 2002, the Company, through Sterling FBO, completed the acquisition of a 100% ownership interest in both Casper Jet Center, L.L.C., Austin Aero FBO, Ltd., and Sterling-Ft. Worth Jet Center, Ltd. The Company issued an aggregate of 3,723,894 shares of common stock to acquire Casper Jet Center, L.L.C., 4,355,554 shares of common stock to acquire Austin Aero FBO, Ltd., and 1,153,333 shares of common stock to acquire Sterling-Ft. Worth Jet Center, Ltd. Both Casper Jet Center, L.L.C. and Austin Aero FBO, Ltd. were acquired from Mathew Investment Partnership and Sterling, REIT, Inc. Sterling-Ft. Worth Jet Center, Ltd. was acquired from Mathew Investment Partnership, Sterling, REIT, Inc., and Geld Fund II, LLC. Mathew Investment Partnership, L.P., Geld Fund II, LLC., and Sterling REIT, Inc. may each be deemed to be affiliates of the Company by reason of the holdings of common stock by those entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling, REIT, Inc. Casper Jet Center, L.L.C. owned and operated a private airport facility in Casper, Wyoming. The recently renovated facility includes a large comfortable pilot lounge, conference room and offers essential pilot supplies at the professional customer service counter. Casper Jet Center is also a full service center for Cessna Aviation and Commander Aviation. Austin Aero FBO, Ltd. managed Sterling Austin Aero FBO, L.P., a private airport facility located in Austin, Texas. Sterling-Ft. Worth Jet Center, Ltd. owned a private airport facility located at Ft. Worth Meacham International Airport. The 162,000 square foot facility, managed by Ft. Worth Jet Center, Inc., offers hangar space, tie down services, Jet A and Avgas, computerized weather information, quick turn service, complete line service and the availability of aircraft cleaning services. 2 On December 30, 2002, the Company completed an exchange pursuant to which BlueStar issued an aggregate of 8,223,953 shares of common stock in exchange for 100% of the outstanding shares of common stock of Ft. Worth Jet Center, Inc. Ft. Worth Jet Center, Inc. was acquired from Mathew Investment Partnership, Sterling, REIT, Inc, and Geld Fund II, LLC, each of which may be deemed to be affiliates of the Company by reason of the holdings of common stock by those entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling REIT, Inc. Ft. Worth Jet Center, Inc., owned and operated a private airport facility in Tucson, Arizona, under the name of Gate One Tucson. On January 6 and February 7, 2003, the Company completed the sale of its FBO's in Fort Worth and Austin, Texas; Casper, Wyoming; Tucson, Arizona; and Greeley, Colorado for approximately $20,787,000 in cash and liquidation of debts and an "earn-out" of up to $6,000,000 in future revenues in excess of a specified base. Under the terms of the sale, the Company agreed to liquidate outstanding liabilities and obligations associated with the FBO operations and properties. Consequently, the Company creditors approximately $17,476,000, established an escrow fund of $589,000 to satisfy potential claims and obligations and deposited approximately $2,556,000 in the bank. In March 2003, the Company changed its name from BlueStar Leasing, Inc. to Sterling Equities Holdings, Inc. As a result of the Exchange, the acquisitions during 2002 and the subsequent sale of operating FBOs, the Company altered its business plan to focus on the acquisition, ownership and operation of income producing real estate with an emphasis on FBOs and leased properties. The Company terminated the equipment leasing operations originally conducted by BlueStar. Following the sale of FBO properties in 2003, operations during 2003 were limited to operation of the four state-leased properties and the Commodore Plaza property and ongoing efforts to acquire certain properties from Sterling REIT. On January 13, 2004, Ron F. Bearden resigned as Chairman and President of the Company and Thomas Mathew was appointed President, Treasurer and a director and Lloyd Shoppa was appointed Chairman, Secretary and a director of the Company. In conjunction with the change of management, the new management team began an investigation of circumstances and events at the Company following the sale of the FBO properties in 2003 with the intent of bringing all financial statements and SEC reports current and implementing various procedures and initiatives to improve internal controls and protect corporate assets. Initial results of the investigation conducted by the new management team indicated that $2,553,261 of funds of the Company had been advanced to Sterling REIT, Inc. at the direction of Lucky Srinivasan, a former officer of the Company, without proper authorization. The funds advanced to Sterling REIT were purportedly used to pay certain expenses of the Company and to pay certain expenses relating to properties of Sterling REIT that were to be transferred to the Company. Based on the initial findings of new management, the Company and Sterling REIT entered into a Settlement Agreement pursuant to which Sterling REIT delivered to the Company a Promissory Note evidencing the obligation of Sterling REIT to pay the amounts advanced by the Company and a Pledge Agreement, Security Agreement and multiple Deeds of Trust securing repayment of the note with substantially all of the assets of Sterling REIT. All amounts owed by Sterling REIT have been written off as bad debts. On January 20, 2004, the Company entered into a Settlement Agreement relating to the 2003 sale of FBO properties pursuant to which the $6 million earn-out was terminated and $350,000 was distributed to the Company in full settlement of the contingency escrow. Simultaneous with the appointment of the new management team, the Company relocated its executive offices to 1600 Airport Freeway, Suite 370, Bedford, Texas 76022, telephone number (817) 358-0551. 3 PROPERTIES As of December 31, 2003, we owned interests in five properties owned in fee simple. Four of our properties held at December 31, 2003 were located in Austin, Texas and were leased to agencies of the State of Texas. Under those leases, we receive fixed monthly rental payments and the tenants are responsible for payment of various operating costs of the property. All of our Austin leases specify a minimum amount of insurance coverage required to be carried by each tenant. We believe that the insurance policies required to be carried by the tenants will adequately cover the replacement cost of the properties and any personal liability losses, which the tenants may sustain. The following table summarizes, as of October 1, 2004, the principal terms and significant data regarding each of the leased properties in Austin, Texas:
4719 - 4735 4501 4405 Congress Springdale Springdale 4708 MLK ------------ ------------ ------------ ------------ Lease term (1) - Suite A 5 Yrs Vacant 5 Yrs 5 Yrs - Suite B NA 8 Yrs 5 Yrs NA - Suite C NA NA 5 Yrs NA - Warehouse NA NA NA 7 Yrs Expiration - primary term - Suite A 3/31/07 NA 1/31/07 7/31/07 - Suite B NA 1/31/04 1/31/07 NA - Suite C NA NA 1/31/07 NA - Warehouse NA NA NA 9/30/04 Renewal options NA NA NA NA Square footage - Suite A 6,695 4,663 16,475 12,000 - Suite B NA 7,945 10,975 NA - Suite C NA NA 16,470 NA - Warehouse NA NA NA 32,800 Base annual rental - Suite A $ 72,306 NA $135,852 $108,000 - Suite B NA $ 81,039 $ 80,432 NA - Suite C NA NA $107,573 NA - Warehouse NA NA NA $135,852 (1) Each of the leases includes a right on the part of the state tenant to terminate the lease based on budgetary restraints.
The fifth leased property held at December 31, 2003 is the Commodore Plaza Shopping Center located in Gulfport, Mississippi and leased to retail establishments. Under those leases, we receive fixed monthly rental payments and the tenants are responsible for payment of all property taxes, general liability insurance, utility expenses and maintenance of the interior of their space. All of the leases specify a minimum amount of insurance coverage required to be carried by each tenant in addition to the "all risks" insurance policy for 100% of the replacement value of the property. 4 The following table summarizes, as of October 1, 2004, the principal terms and significant data regarding each of the tenants of Commodore Plaza Shopping Center:
Mulberry Bush Mulberry Bush Clark Temp OfficeMax Michaels Maternity (addition) Service --------- -------- --------- -------- --------- Lease term 15 Yrs 10 Yrs 5 Yrs 5 Yrs Monthly Expiration - primary term 6/03 7/08 4/07 4/07 NA Renewal option 4 options - 4 options - 1 option - 1 option - 5 years each 5 years each 5 years 5 years NA Square footage 23,500 19,834 2,500 1,800 1,525 Base annual rental $246,750 $175,950 $35,000 $25,200 $18,306
DISCONTINUED OPERATIONS - SALE OF FBO OPERATIONS From their acquisition, between October and December 2002, and their sale in February 2003, we operated 5 FBO properties, consisting of 2 properties located in Texas, 1 property located in Colorado, 1 property located in Arizona and 1 property located in Wyoming. Each of the FBO properties consisted of physical improvements, generally consisting of offices, hangers and related improvements typically used in conducting airport operations, located on airport property and leased from the airport. Our FBO business included aviation fueling services, aircraft ground services and other aviation services. On February 27, 2003, we completed the sale of all of the assets and operations of our Sterling-Austin Aero, Sterling-Forth Worth Jet Center, Austin Aero FBO, Fort Worth Jet Center, Casper Jet Center and Greeley FBO subsidiaries, comprising all of our FBO properties and operations. The assets and operations sold consist principally of real estate, permits to conduct fixed base flight support operations for commercial, private, military and government aircraft, facilities improvements, equipment and related assets. The assets and operations were sold to Trajen Flight Support, L.P., an unaffiliated third party, for a total purchase price of $20.8 million plus an "earn-out" capped at $6 million based on jet fuel sales from the five defined FBO operations over the succeeding three years as compared to certain benchmarks. The purchase price was paid $11.5 million on January 6, 2003 with the balance being paid in full at closing on February 27, 2003. Pursuant to a Settlement Agreement entered into in January 2004, the earn-out provision relating to our sale to Trajen was terminated. OPERATING STRATEGY We intend to continue our business of operating and holding real properties for investment and may evaluate the acquisition of aviation related businesses. We will seek to acquire operating business that are aviation related including service businesses with the objective to own the business as a subsidiary or as an investment which can generate income under our management. While it is not a principal objective, we may from time to time acquire businesses for investment or development not in the aviation industry. Each potential acquisition and leasing transaction will be evaluated based on the ability to generate sufficient rates of return in excess of our cost of capital. Our objectives are: (1) to preserve and protect our capital by the acquisition of income producing businesses or improved real estate properties on an "all cash" basis or where favorable financing is available; (2) to purchase income-producing businesses and properties at prices that are below appraised values; (3) to obtain capital appreciation through increases in the value of our businesses and properties; and (4) to the extent that funds from operations are available for such purpose, to provide shareholders with cash distributions. There can be no assurance that such objectives can be attained. 5 PROPERTY MANAGEMENT The supervision of the operations of the properties is managed principally by management of our subsidiary, Sterling FBO. Because of the nature of our properties and the leases on those properties, necessary management functions are limited. If and when needed to supplement the efforts and capabilities of our management, we may retain third-party real estate professionals to provide leasing services in connection with identifying and qualifying prospective tenants, assist in the negotiation of leases, provide periodic financial statements, receive and deposit monthly lease payments, periodically verify tenant payments of real estate taxes and insurance coverage, and periodically inspect properties and tenant records where applicable. Third party real estate professionals, and affiliates providing services in lieu of such real estate professionals, will be compensated for administrative and management services in an amount not to exceed those fees which would be customarily charged in an arms-length transaction by others rendering similar services. The tenants are responsible, at their expense, for day-to-day on-site management and maintenance of the properties. FINANCING We have no specific guidelines relating to the manner in which we finance the acquisition and operation of businesses or properties. Management intends to seek out, evaluate and select the most favorable financing option available to acquire and operate properties, which options may include, among others: (1) use of available funds on hand; (2) conventional lenders; (3) seller financing; (4) institutional lending sources; and (5) joint venture or similar structures. Debt financing received will typically include the granting of a first lien on assets or a mortgage first lien position on properties financed and require compliance with a variety of standard borrowing covenants. COMPETITIVE CONDITIONS The properties we owned in Austin at December 31, 2003 are leased to various agencies of the State of Texas. While those state agencies are not subject to competition, upon the expiration of the leases those agencies may seek out other space to lease. The tenants of our other retail property in Mississippi have long-term leases with options to extend; upon expiration, other competing tenants will be sought. Similarly, properties that we may acquire in the future will be subject to risks affecting the tenants and risks that tenants will relocate at the end of the lease term. The real estate rental market in the markets in which we operate now and in the future are subject to fluctuations and are affected by local economic conditions. There will typically be a large number of comparable properties that compete with our properties for tenants. Many property owner/operators may be willing to lease space on terms significantly more favorable to tenants than are we in which case we may lose tenants. We attempt to mitigate competitive factors by acquiring properties with existing tenants that are financially sound and long-term leases. EMPLOYEES As of October 1, 2004, we employed one full-time employee/officer of the Company. Our current operations are limited to the acquisition, oversight, collection of lease payments and other administrative functions associated with the ownership of leased properties. In that regard, we may, from time to time retain consultants or part-time employees to provide services. ITEM 2. PROPERTIES As of December 31, 2003, we owned properties that are described more fully under Item 1. Business - Properties above. As of October 1, 2004, our principal offices are located at 1600 Airport Freeway, Suite 370, Bedford, Texas 76022. Those offices are leased from a third party pursuant to a short term lease at a monthly rent of approximately $1,200. Management believes that our facilities are adequate to support operations for the foreseeable future. 6 ITEM 3. LEGAL PROCEEDINGS The Company may from time to time be a party to lawsuits incidental to its business. With the change of management in 2004, the Company entered into a settlement with Sterling REIT pursuant to which Sterling REIT pledged substantially all of its assets as security for the repayment of $2,553,261 advanced made by the Company to Sterling REIT at the direction of Lucky Srinivasan, a former officer of the Company, but without proper authorization. The Company is continuing to evaluate potential claims it may have against Mr. Srinivasan. Additionally, the Company is evaluating other potential claims against former management personnel. Our subsidiary, Austin Aero FBO, Limited was party to a suit styled Travis ------ Central Appraisal District and Travis Appraisal Review Board v. Signature Flight -------------------------------------------------------------------------------- Support Corporation, et.al., originally filed in the 261st Judicial District ---------------------------- Court of Travis County, Texas and appealed to the Third Court of Appeals in Austin, Texas. The plaintiffs in the suit asserted that the defendants, including Austin Aero, were liable for property taxes relating to certain improvements constructed at Austin-Bergstrom Airport and used by the defendants pursuant to a lease of the facilities and operations of the improvements as part of fixed base operations of the airport. The defendants asserted that the facilities were exempt from property tax under an exemption covering property used as part of a public transportation facility owned by an incorporated city. The defendants were granted summary judgment at the trial court. The taxing authorities appealed the trial court's summary judgment. In September 2004, the appeals court affirmed the trial court's summary judgment in favor of the defendants, all claims against our subsidiary were dropped and funds escrowed to pay the contested taxes were released to us. Except as noted, we are not aware of any current, pending, or threatened litigation or proceedings that could have a material adverse effect on our results of operations, cash flows or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our common stock trades on the Pink Sheets under the symbol "SEQU". There is no established trading market in the Company's Common Stock and trading therein is sporadic. The last reported price of the Company's Common Stock, as of October 1, 2004, was $0.30. HOLDERS As of October 1, 2004, there were approximately 42 holders of record of the Company's common stock. DIVIDENDS The Company has not paid any cash dividends since its inception and presently anticipates that all earnings, if any, will be retained for development of the Company's business and that no dividends on the shares of Common Stock will be declared in the foreseeable future. Any future dividends will be subject to the discretion of the Company's Board of Directors and will depend upon, among other things, future earnings, the operating and financial condition of the Company, its capital requirements, general business conditions and other pertinent facts. Therefore, there can be no assurance that any dividends on the Common Stock will be paid in the future. 7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere in this Form 10-KSB. Except for the historical information contained herein, the discussion in this Form 10-KSB contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-KSB should be read as being applicable to all related forward statements wherever they appear in this Form 10-KSB. Our actual results could differ materially from those discussed here. HISTORY AND DEVELOPMENT OF COMPANY Sterling Equities Holdings, Inc., originally incorporated under the name BlueStar Leasing, Inc., was formed in January 2001 and, following a series of acquisitions during 2002 and the sale of certain operations in 2003, is principally engaged in the business of acquiring, operating and holding equity interests in business entities primarily in the aviation and real estate industries. BlueStar was formed as a "small ticket" regional leasing company. Effective at the close of business on September 30, 2002, BlueStar completed an exchange (the "Exchange") pursuant to which BlueStar issued an aggregate of 5,638,334 shares of common stock in exchange for 100% of the outstanding shares of common stock of Sterling FBO Holdings, Inc. ("Sterling FBO"). Pursuant to the terms of the Exchange, each share of Sterling FBO common stock was exchangeable for one share of BlueStar common stock. As a result of the Exchange, Sterling FBO became a wholly owned subsidiary of BlueStar. Sterling FBO is a Nevada corporation formed in May 2002 to acquire own and operate private airport Fixed Base Operations ("FBOs") and income producing real estate. At the time of the Exchange, Sterling FBO owned 88.9% or greater interests in, and operated, four industrial office facilities located in Austin, Texas and leased to governmental agencies. Additionally, at the time of the Exchange, Sterling FBO was engaged in negotiations with certain affiliates to acquire additional properties and FBO operations, which negotiations resulted in the acquisitions, between October and December 2002, of interests in a retail shopping center and six FBOs. In October 2002, the Company, through Sterling FBO, completed the acquisition of a 99% limited partnership interest in Commodore Plaza, Ltd. The Company issued an aggregate of 2,000,000 shares of common stock to acquire Commodore Plaza, Ltd. Commodore Plaza, Ltd. was acquired from Hugo Verhaeghe, Chaz Glace, Thomas Mathew and Sterling REIT, Inc., each of which may be deemed to be affiliates of the Company by reason of the holdings of common stock by those persons and entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling REIT, Inc. Commodore Plaza, Ltd. owns the Commodore Plaza Shopping Center in Gulfport, Mississippi that leases retail shopping space to various establishments on a net lease basis. On October 30, 2002, the Company, through Sterling FBO, completed the acquisition of a 100% ownership interest in both Greeley FBO, L.L.C. and Sterling Austin Aero, L.P. The Company issued an aggregate of 3,143,334 shares of common stock to acquire Greeley FBO and 2,166,666 shares of common stock to acquire Sterling Austin Aero. Both Greeley FBO and Sterling Austin Aero were acquired from Geld Fund II, LLC, Chasco Investments, Inc., Mathew Investment Partnership and Sterling REIT, Inc. Geld Fund II, LLC, Chasco Investments, Inc. and Sterling, REIT, Inc. may each be deemed to be affiliates of the Company by reason of the holdings of common stock by those entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling, REIT, Inc. Greeley FBO owned and operated a private airport facility under the name of Greeley-Weld Jet Center, in Greeley, Colorado. The center opened in 2000 and, during 2002, moved into a newly renovated facility, complete with a new terminal building, an 81,000-foot ramp and a 10,000-foot runway. On-site services include fueling, hangar space, tie down, Jet A, 100LL, Oxygen, GPU, pre-heating, de-icing and self serve 100LL. 8 Sterling Austin Aero owned a private airport facility located in Austin, Texas and leased to Austin Aero FBO, Ltd. Constructed in 1999 at the new Austin Bergstrom International Airport (AUS), the FBO includes a 15,000 square foot terminal with boarding and waiting area, nine acres of ramp space, 65 tie-down spaces, five 14,000-square-foot hangars, exercise/workout room, pilots lounge, weather information system, flight planning room, showers, offices, secretarial services, fax machines and computers. On November 25 2002, the Company, through Sterling FBO, completed the acquisition of a 100% ownership interest in both Casper Jet Center, L.L.C., Austin Aero FBO, Ltd., and Sterling-Ft. Worth Jet Center, Ltd. The Company issued an aggregate of 3,723,894 shares of common stock to acquire Casper Jet Center, L.L.C., 4,355,554 shares of common stock to acquire Austin Aero FBO, Ltd., and 1,153,333 shares of common stock to acquire Sterling-Ft. Worth Jet Center, Ltd. Both Casper Jet Center, L.L.C. and Austin Aero FBO, Ltd. were acquired from Mathew Investment Partnership and Sterling, REIT, Inc. Sterling-Ft. Worth Jet Center, Ltd. was acquired from Mathew Investment Partnership, Sterling, REIT, Inc., and Geld Fund II, LLC. Mathew Investment Partnership, L.P., Geld Fund II, LLC., and Sterling REIT, Inc. may each be deemed to be affiliates of the Company by reason of the holdings of common stock by those entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling, REIT, Inc. Casper Jet Center, L.L.C. owned and operated a private airport facility in Casper, Wyoming. The recently renovated facility includes a large comfortable pilot lounge, conference room and offers essential pilot supplies at the professional customer service counter. Casper Jet Center is also a full service center for Cessna Aviation and Commander Aviation. Austin Aero FBO, Ltd. managed Sterling Austin Aero FBO, L.P., a private airport facility located in Austin, Texas. Sterling-Ft. Worth Jet Center, Ltd. owned a private airport facility located at Ft. Worth Meacham International Airport. The 162,000 square foot facility, managed by Ft. Worth Jet Center, Inc., offers hangar space, tie down services, Jet A and Avgas, computerized weather information, quick turn service, complete line service and the availability of aircraft cleaning services. On December 30, 2002, the Company, through Sterling FBO, completed an exchange pursuant to which BlueStar issued an aggregate of 8,223,953 shares of common stock in exchange for 100% of the outstanding shares of common stock of Ft. Worth Jet Center, Inc. Ft. Worth Jet Center, Inc. was acquired from Mathew Investment Partnership, Sterling, REIT, Inc, and Geld Fund II, LLC, each of which may be deemed to be affiliates of the Company by reason of the holdings of common stock by those entities or affiliates of those entities and, with respect to Sterling REIT, Inc., by reason of the service of Ron F. Bearden as President of both the Company and Sterling REIT, Inc. Ft. Worth Jet Center, Inc., owned and operated a private airport facility in Tucson, Arizona, under the name of Gate One Tucson. On January 6 and February 7, 2003, the Company completed the sale of its FBO's in Fort Worth and Austin, Texas; Casper, Wyoming; Tucson, Arizona; and Greeley, Colorado for approximately $20,787,000 in cash and liquidation of debts and an "earn-out" of up to $6,000,000 in future revenues in excess of a specified base. Under the terms of the sale, the Company agreed to liquidate outstanding liabilities and obligations associated with the FBO operations and properties. Consequently, the Company creditors approximately $17,476,000, established an escrow fund of $589,000 to satisfy potential claims and obligations and deposited approximately $2,556,000 in the bank. In March 2003, the Company changed its name from BlueStar Leasing, Inc. to Sterling Equities Holdings, Inc. As a result of the Exchange, the acquisitions during 2002 and the subsequent sale of operating FBOs, the Company altered its business plan to focus on the acquisition, ownership and operation of income producing real estate with an emphasis on FBOs and net leased properties. The Company terminated the equipment leasing operations originally conducted by BlueStar. Following the sale of FBO properties in 2003, operations during 2003 were limited to operation of the four state-leased properties and the Commodore Plaza property and ongoing efforts to acquire certain properties from Sterling REIT. 9 On January 13, 2004, Ron F. Bearden resigned as Chairman and President of the Company and Thomas Mathew was appointed President, Treasurer and a director and Lloyd Shoppa was appointed Chairman, Secretary and a director of the Company. In conjunction with the change of management, the new management team began an investigation of circumstances and events at the Company following the sale of the FBO properties in 2003 with the intent of bringing all financial statements and SEC reports current and implementing various procedures and initiatives to improve internal controls and protect corporate assets. Initial results of the investigation conducted by the new management team indicated that $2,553,261 of funds of the Company had been advanced to Sterling REIT, Inc. at the direction of Lucky Srinivasan, a former officer of the Company, without proper authorization. The funds advanced to Sterling REIT were purportedly used to pay certain expenses of the Company and to pay certain expenses relating to properties of Sterling REIT that were to be transferred to the Company. Based on the initial findings of the new management team, the Company and Sterling REIT entered into a Settlement Agreement pursuant to which Sterling REIT delivered to the Company a Promissory Note evidencing the obligation of Sterling REIT to pay the amounts advanced by the Company and a Pledge Agreement, Security Agreement and multiple Deeds of Trust securing repayment of the note with substantially all of the assets of Sterling REIT. All amounts owed by Sterling REIT have been written off as bad debts. On January 20, 2004, the Company entered into a Settlement Agreement relating to the 2003 sale of FBO properties pursuant to which the $6 million earn-out was terminated and $350,000 was distributed to the Company in full settlement of the contingency escrow. The Exchange was accounted for as a recapitalization of the Company with Sterling FBO as the acquirer (a "reverse acquisition"). On this basis, the historical consolidated financial statements of BlueStar prior to September 25, 2002 are those of Sterling FBO and its subsidiaries and the historical shareholders' equity of BlueStar as of September 25, 2002 has been retroactively restated to reflect the equivalent number of shares of BlueStar issued for such acquisition. The acquisition of the various affiliated entities in the fourth quarter of 2002 has been accounted for as a purchase. PLAN OF OPERATIONS As a result of the Exchange, the acquisitions during 2002 and the subsequent sale of operating FBOs, the Company has altered its business plan to focus on the ownership and operation of income producing real estate with an emphasis on leased properties and evaluation of potential acquisitions of businesses operating in the aviation industry. Following the Exchange, the Company terminated BlueStar's equipment leasing operations. The Company intends to derive fixed monthly rental income from its existing properties, and properties acquired in the future, under leases wherein the tenant pays a negotiated portion of the operating costs of the property. The Company's leasing operations are expected to focus on office and other commercial properties. OVERVIEW OF OPERATIONS The Company's business during 2003 included operation of five properties under leases. The Company also operated five FBO properties offering aviation fueling services, aircraft ground services and other aviation services. As a result of the disposal of all FBO operations in 2003, all operating results relating to the FBO operations have been reclassified as discontinued operations and are reported as a single entry on the Statement of Operations. Leased properties held during 2003 consisted of four properties located in Austin, Texas each of which is leased to agencies of the State of Texas under leases in which the tenant pays a fixed monthly rental and a negotiated portion of the operating costs relating to the property. During 2003, the Company also owned one retail property in Gulfport, Mississippi, leased to multiple retail tenants on a "net lease" basis. 10 Revenues Revenues from operation of leased properties consist of fixed monthly rental payments. Costs and Expenses Our principal expenses associated with leased property operations in Austin are administrative expenses, real estate taxes, hazard insurance and maintenance. Additionally, we pay utilities and janitorial costs on selected properties. Because of the nature of net lease property operations of Commodore Plaza, we have no direct cost of revenues. CRITICAL ACCOUNTING POLICIES The following describes the critical accounting policies used in reporting our financial condition and results of operations. In some cases, accounting standards allow more than one alternative accounting method for reporting. In those cases, our reported results of operations would be different should we employ an alternative accounting method. Impairment of Long-Lived Assets We review all long-lived assets on a regular basis to determine if there has been impairment in the value of those assets. If, upon review, it is determined that the carrying value of those assets may not be recoverable, we will record a charge to earnings and reduce the value of the asset on the balance sheet to the amount determined to be recoverable. For purposes of evaluating recoverability of long-lived assets, the recoverability test is performed using undiscounted cash flows of the individual assets and consolidated undiscounted net cash flows for long-lived assets not identifiable to individual properties compared to the related carrying value. If the undiscounted operating income is less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each asset with its fair value. Fair value is generally based on a discounted cash flow analysis. Based on our review of our present operating properties and other long-lived assets, during the fiscal year ended December 31, 2003, we recorded no impairments of our long-lived assets. Revenue Recognition Rental income is recognized on a straight-line basis over the term of the lease. The Company establishes, on a current basis, an allowance for future potential tenant credit losses that may occur against this account. Amounts reflected as accounts receivable on the balance sheet are net of such allowance, if required. In establishing the allowance, the Company evaluates the ability of each tenant to make required rental payments. If the financial condition of a specific tenant were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances will be required. Based on our review of the ability of our tenants to pay required rental payments, no allowance for tenant credit losses were established as of December 31, 2003. RESULTS OF OPERATIONS As a result of the Exchange, results of operations reported for 2002 are those of Sterling FBO from the date of commencement of operations by Sterling FBO, September 25, 2002, to December 31, 2002. Revenues Revenues totaled $1,231,921 during 2003 as compared to $275,887 during 2002. All revenues were derived from the leases of the five properties owned and operated by the Company. The increase in rental revenues during 2003 was attributable to a full year of operations being reported in 2003 as compared to approximately three months of operations in 2002. Base rental amounts are fixed by contract subject to contractual escalation provisions and obligations of tenants to pay certain operating expenses associated with the properties. Estimated minimum rental payments to the Company are approximately $1,000,000 annually through 2006 and decrease thereafter. 11 Real Estate Operating Expenses Real estate operating expenses are costs associated with the ownership and operation of rental properties. Principal rental operating expenses consist of interest, taxes, depreciation, professional and consulting fees. Real estate operating expenses totaled $2,308,254 in 2003 as compared to $384,406 in 2002. The increase in real estate operating expenses in 2003 was primarily attributable to the operation of properties during the full year in 2003 as compared to approximately three months of operations in 2002. Additionally, real estate operating expenses include $556,829 of professional and consulting fees in 2003 as compared to $3,080 of professional and consulting fees in 2002, which increase was primarily attributable to non-recurring legal fees associated with certain disputes and transactions. Other Operating Expenses Other operating expenses related to bad debts, totaling $1,694,264 in 2003 and $699,342 in 2002, and merger and consulting expenses of $301,677 in 2002. Bad debt expense for the period related to funds advanced to Sterling REIT, an affiliated shareholder of the Company, in connection with the payment of certain expenses relating to properties to be transferred from Sterling REIT to the Company. The properties in question were never transferred to the Company. In 2004, pursuant to the terms of a Settlement Agreement, Sterling REIT pledged substantially all of its assets to the Company to secure repayment of amounts advanced by the Company. Based on an evaluation by management, all advances made to Sterling REIT at December 31, 2002 and 2003, respectively, were determined to be uncollectible. Merger and consulting expenses related to amounts paid in connection with proposed or actual acquisitions of properties and financing of those properties, a substantial of those expenses being amounts paid to related parties. Income Taxes A deferred income tax benefit of $811,290 in 2003 and $246,413 in 2002 was recorded reflecting the net operating losses for the periods. Discontinued Operations As a result of the sale of all FBO operations in 2003, all revenue and expenses relating to those operations has been reclassified as discontinued operations and is recorded, net of a gain arising from the sale, as a net amount. During 2003, we recorded a gain from discontinued operations of $3,301,494, including a gain on the sale of the FBO operations of $3,632,981. During 2002, we recorded a loss from our discontinued FBO operations of $104,102. We also recorded a tax provision of $1,339,144 in 2003 in connection with the discontinued operations and a tax benefit of $64,865 in 2002. LIQUIDITY AND CAPITAL RESOURCES Cash and Working Capital Position At December 31, 2003 we had a cash balance of $763,642 and a working capital deficit of $86,268 as compared to a cash balance of $475,845 and a working capital deficit of approximately $134,244 at December 31, 2002. The 2003 cash balance included $759,947 of restricted cash reserved pursuant to the terms of a $750,000 line of credit obtained by the Company. An additional $107,540 was held in escrow at December 31, 2003 by the lender for the Commodore Plaza Shopping Center. Subsequent to December 31, 2003, we entered into a settlement agreement relating to certain disputes arising in connection with the sale of the FBO properties. Pursuant to that settlement, we released to the purchaser of the FBO properties the amount in escrow other than $350,000 that we retained. Cash Flows Cash flows for the period from inception (September 25, 2002) to December 31, 2003, were derived from, or related to, the various acquisitions during the period as well as ongoing operations, investments and financing activities undertaken during the period and the 2003 sale of the FBO properties. 12 Operations used $2,381,533 of cash during 2003 and $17,930 of cash during 2002. The increase in cash used in operations during 2003 related primarily to a $1,613,884 increase in the loss from continuing operations before income taxes during 2003 as compared to 2002. Investing activities provided net cash of $1,369,819 during 2003 as compared to $128,411 provided during 2002. The increase in cash provided by investing activities related primarily to the receipt of net proceeds from the sale of discontinued operations of $2,142,566. Financing activities provided net cash of $539,564 during 2003 as compared to $365,364 provided during 2002. The increase in cash provided by financing activities related primarily to the receipt of $750,000 during 2003 from a line of credit facility. Long-Term Debt At December 31, 2003, the Company had long-term debt, consisting of real estate notes payable, of $9,675,300 as compared to $24,760,358 of long-term debt at December 31, 2002. The reduction in long-term debt during 2003 was attributable to the retirement of approximately $17,476,000 of debt and liabilities related to FBO assets held for sale. That debt and liabilities was paid in full upon the sale of the FBO assets in 2003. The long-term indebtedness at December 31, 2003 was comprised of one loan on four of the Company's properties and one loan on the fifth property, both of which are secured by first lien positions on the Company's real estate. Financial Commitments and Requirements The Company's principal financial commitments and requirements relate to funding operational deficits, if any, overhead and servicing debt on Company real estate. Our only material contractual obligations requiring determinable future payments on our part are our notes payable secured by real estate. Scheduled debt service payments on real estate notes, excluding debt relating to assets held for sale, at December 31, 2003 were as follows:
Payments due by period ------------------------------------------------------------------------------ Total 2004 2005 - 2006 2007 - 2008 Thereafter ---------- ------------ ------------ ----------- ---------- Long-term debt $9,954,452 $ 279,152 $ 5,777,444 $ 92,907 $3,804,949 ---------- ------------ ------------ ----------- ---------- Total $9,954,452 $ 279,152 $ 5,777,444 $ 92,907 $3,804,949 ---------- ------------ ------------ ----------- ----------
INFLATION Inflation has historically not had a material effect on our operations. Each of our leases includes escalation provisions based on cost-of-living increases. Accordingly, we believe inflation will not have a material effect on our future operations. ITEM 7. FINANCIAL STATEMENTS The financial statements, together with the independent auditors' report thereon of Thomas Leger & Co., L.L.P., appear beginning on page 22 of this report. 13 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In 2003, following the Exchange, our Board of Directors dismissed Chavez & Koch, CPA, Ltd. as the Company's independent accountants and selected Thomas Leger & Co., L.L.P. as the Company's new independent accountants. Chavez & Koch's report on the financial statements for the period from inception (January 31, 2001) to December 31, 2001 did not contain an adverse opinion or disclaimer, and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During our two most recent fiscal years and any subsequent interim period preceding the dismissal of Chavez & Koch, there were no disagreements with Chavez & Koch on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s) if not resolved to the satisfaction of Chavez & Koch, would have caused Chavez & Koch to make reference to the subject matter of the disagreement(s) in connection with its report. During the Company's two most recent fiscal years and any subsequent interim period preceding the dismissal of Chavez & Koch, there have been no reportable events of the type required to be disclosed by Item 304(a)(1)(v) of Regulation S-K. Prior to the engagement of Thomas Leger & Co., L.L.P., we did not consult with such firm regarding the application of accounting principles to a specific completed or contemplated transaction, or any matter that was either the subject of a disagreement or a reportable event. We also did not consult with Thomas Leger & Co., L.L.P. regarding the type of audit opinion which might be rendered on our financial statements and no oral or written report was provided by Thomas Leger & Co., L.L.P. ITEM 8A. CONTROLS AND PROCEDURES The Company has evaluated, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Accounting Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as that term is defined under Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934). Based upon this evaluation, the Chief Executive Officer and Chief Accounting Officer concluded that, as of the fiscal year ended December 31, 2003, except as described below, the disclosure controls and procedures were effective. During 2004, following a change in management and an internal review by new management, the Company determined that certain internal controls relating to the control of cash were inadequate. With the change in management, we have implemented certain procedures designed to properly control cash and authorization with respect to Company bank accounts. 14 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT The following table sets forth certain information regarding the directors and executive officers of the Company as of October 1, 2004. Name Age Position ---- --- -------- Thomas Mathew 46 President, Treasurer and Director Lloyd Shoppa 72 Chairman, Secretary and Director Ron F. Bearden 62 Director There are no family relationships among any of the directors or officers of the Company. BUSINESS EXPERIENCE Thomas Mathew has served as President, Treasurer and a director of the Company since February 2004. Since 1984, Mr. Mathew has operated Mathew Aviation Services, providing aircraft management, VIP air transportation and other aviation services. From 1994 to 2002, Mr. Mathew served as President and Chief Executive Officer of GateOne, Inc., and its predecessors, a five location fixed base operator (FBO). All of the FBO operations and assets of GateOne were transferred to the Company in 2002. Lloyd Shoppa has served as Chairman, Secretary and a director of the Company since February 2004. Since 1992, Mr. Shoppa has served as Chairman of Shoppa's Material Handling, a Toyota industrial equipment distributor. Since 1997, Mr. Shoppa has served as Chairman of Clean Air Flow, Inc., a manufacturer of emissions reduction products. Since 1985, Mr. Shoppa has also served as Chairman and a director of Shoppa Farm Supply. From 1964 to 1997, Mr. Shoppa served in various executive positions, including President and Vice-Chairman, with Bell Helicopter Textron, a worldwide manufacturer and distributor of helicopters. Since 2002, Mr. Shoppa has served on the East Bernard Community Development Board that is operated by Prosperity Bancshares, Inc. Ron F. Bearden has served as a director of the Company since the acquisition by the Company of Sterling FBO Holdings in September 2002 and served as Chairman, President and Chief Executive Officer of the Company from the acquisition of Sterling FBO Holdings until February 2004. From 1998 to February 2004, Mr. Bearden also served as President of Sterling REIT, Inc., a real estate investment and development company. For more than 5 years, Mr. Bearden has served as the principal officer of R.F. Bearden Associates, a management consulting firm. Since December 2003, Mr. Bearden has served as a principal of Old Capital Partners, L.P., a commercial real estate lender. TERM OF OFFICE The directors named above will serve until the next annual meeting of the Company's shareholders. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. COMMITTEES OF THE BOARD We do not presently maintain an audit committee, a compensation committee, a nomination committee or any other committees of our board of directors. Similarly, we do not have an "audit committee financial expert". At such time as our Board determines that the size and scope of our operations and our available financial resources warrant such, we expect to seek to add independent directors and to form committees to perform the functions of an audit committee, compensation committee and nominating committee. 15 CODES OF ETHICS The Board of Directors has adopted a Code of Business Ethics covering all of our officers, directors and employees. We require all employees to adhere to the Code of Business Ethics in addressing legal and ethical issues encountered in conducting their work. The Code of Business Ethics requires that our employees avoid conflicts of interest, comply with all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity and in the company's best interest. The Board of Directors has also adopted a separate Code of Business Ethics for the CEO and Senior Financial Officers. This Code of Ethics supplements our general Code of Business Ethics and is intended to promote honest and ethical conduct, full and accurate reporting, and compliance with laws as well as other matters. The Code of Business Ethics for the CEO and Senior Financial Officers is filed as an exhibit to this Annual Report on Form 10-KSB for the year ended December 31, 2003 and is available for review at the SEC's web site at www.sec.gov. ----------- COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT Under the securities laws of the United States, the Company's directors, its executive officers, and any person holding more than ten percent of the Company's Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates during fiscal year 2003. To the Company's knowledge, all of the filing requirements were satisfied on a timely basis in fiscal year 2003. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth information concerning cash and non-cash compensation paid or accrued for services in all capacities to the Company during the year ended December 31, 2003 of each person who served as the Company's Chief Executive Officer during fiscal 2003 and the next four most highly paid executive officers (the "Named Officers").
Long Term Annual Compensation Compensation Name and -------------------- --------------- Principal Position Year Salary($) Bonus($) Other ($) Stock Options(#) -------------------------- ---- -------- ---------- -------- ---------------- Ron F. Bearden (1)(2) 2003 117,500 - - - President and 2002 46,323 - 173,754 - Chief Executive Officer 2001 - - - - (1) Salary shown as paid or accrued for services of Mr. Bearden during 2002 and 2003 consisted of amounts paid to R.F. Bearden Associates, Inc. for services in connection with the Exchange. (2) Other compensation paid consisted of the market value of 3,000,000 shares of common stock issued in conjunction with services provided through R.F. Bearden Associates, Inc. relating to the formation of Sterling FBO Holdings and related services. Such shares were issued 1,500,000 to R.F. Bearden Associates, Inc. and 1,500,000 to Old Capitol Corp.
The Company currently pays no compensation for service of directors. The Company may consider payment of certain amounts to attract the services of independent directors. The Company, at October 1, 2004, had no employment agreements with any employees. The Company expects to enter into employment agreements with key employees, to implement comprehensive compensation arrangements with its officers and to adopt benefit plans in the future at the discretion of the Board of Directors to attract and retain officers and key employees. 16 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table is furnished as of October 1, 2004, to indicate beneficial ownership of shares of the Company's Common Stock by (1) each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's Common Stock, (2) each director and named officer of the Company, individually, and (3) all officers and directors of the Company as a group.
Name and address Number of shares of beneficial owner (1) beneficially owned Percent ----------------------------------------------- ------------------ -------- Sterling REIT, Inc. (2) 11,320,007 28.5% Thomas Mathew (3) 8,788,422 22.2% Hugo Verhaghe (4) 6,812,088 17.2% Charles Glace (5) 3,484,550 8.8% Lucky Srinivasan (6) 2,500,000 6.3% Ron F. Bearden (7) 1,500,000 3.8% Lloyd Shoppa 457,500 1.2% All officers and directors as a group (3 persons) 10,745,922 27.1% ------------------------ (1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of each person or group. (2) Ownership and control of Sterling REIT, Inc. is subject to disputed claims. Charles Glace is Chairman of Sterling REIT and may be deemed to control the shares held by Sterling REIT. All shares held by Sterling REIT have been pledged to the Company to secure repayment of advances to Sterling REIT totaling $2,553,261. (3) All shares are held of record by Mathew Investment Partnership. Address is 7401 Windswept Trail, Colleyville, TX 76034. (4) All shares are held of record by Geld Fund II LC. Address is 7705 Debbie Dr., Leander, Texas 78641. (5) All shares are held of record by Chasco Investments, Inc. Address is PO Box 1057, Round Rock, Texas 78680. (6) All shares are held of record by E Corp. Lucky Srinivasan holds voting and investment power with respect to the shares. (7) All shares are held of record by R.F. Bearden Associates, Inc. The sole shareholder of R.F. Bearden Associates, Inc. is Rebecca Bearden who is married to Ron F. Bearden, a director of the Company. Ron F. Bearden disclaims beneficial ownership of all shares held by R.F. Bearden Associates, Inc. Address is 2800 Post Oak Blvd., Suite 5260, Houston, Texas 77056.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and its subsidiary, Sterling FBO, have, from time to time, entered into transactions with various entities controlled by the Company's principal shareholders and/or by Ron F. Bearden. The principal shareholders of the Company include Sterling REIT, Inc., Chasco Investments, Inc., Geld Fund II, LLC, AM Pacific Group and Mathew Investment Partnership. Those entities may be deemed to be controlled by Hugo Verhaeghe, Charles Glace, Thomas Mathew, Lucky Srinivasan and Ron F. Bearden. All of our assets owned and operated during 2003 were acquired through the acquisition of various entities previously controlled by the referenced principal shareholders. Those acquisitions included the acquisition by the Company, pursuant to the Exchange, in September 2002 of Sterling FBO, including the four state leased properties, for 5,638,334 shares of common stock. As a result of the Exchange, each of the referenced shareholders became shareholders of the Company. 17 Following the Exchange, and pursuant to acquisitions planned to occur before the Exchange but which were deferred until following the Exchange, during 2002, the Company acquired the following interests in entities and/or properties from shareholders: - In October 2002, the Company acquired a 99% limited partnership interest in Commodore Plaza, Ltd. in exchange for 2,000,000 shares of common stock. Commodore Plaza, Ltd. was acquired from Hugo Verhaeghe, Charles Glace, Thomas Mathew and Sterling REIT, Inc. - In October 2002, the Company acquired a 100% ownership interest in both Greeley FBO, L.L.C. and Sterling Austin Aero, L.P. in exchange for 3,143,334 shares of common stock and 2,166,666 shares of common stock, respectively. Both Greeley FBO and Sterling Austin Aero were acquired from Geld Fund II, LLC, Chasco Investments, Inc., Mathew Investment Partnership and Sterling REIT, Inc. - In November 2002, the Company acquired a 100% ownership interest in Casper Jet Center, L.L.C., Austin Aero FBO, Ltd., and Sterling-Ft. Worth Jet Center, Ltd. The Company issued an aggregate of 3,723,894 shares of common stock to acquire Casper Jet Center, L.L.C., 4,355,554 shares of common stock to acquire Austin Aero FBO, Ltd., and 1,153,333 shares of common stock to acquire Sterling-Ft. Worth Jet Center, Ltd. Both Casper Jet Center, L.L.C. and Austin Aero FBO, Ltd. were acquired from Mathew Investment Partnership and Sterling, REIT, Inc. Sterling-Ft. Worth Jet Center, Ltd. was acquired from Mathew Investment Partnership, Sterling, REIT, Inc., and Geld Fund II, LLC. - In December 2002, the Company acquired 100% of the outstanding shares of common stock of Ft. Worth Jet Center, Inc. in exchange for 8,223,953 shares of common stock. Ft. Worth Jet Center, Inc. was acquired from Mathew Investment Partnership, Sterling, REIT, Inc, and Geld Fund II, LLC. Prior to the Company's acquisition of each of the referenced entities, Sterling REIT served as general partner or managing member of each of the entities. Ron F. Bearden served as President of both the Company and Sterling REIT during 2002. Prior to the Company's acquisition of the entities, Sterling REIT periodically received management and other fees in conjunction with, and from, those entities and received advances from and made advances to those entities. Net advances to Sterling REIT by the Company, including entities acquired by the Company, totaled $686,142 at December 31, 2002 and $1,693,151 at December 31, 2003. Subsequently, in 2004, pursuant to the terms of a Settlement Agreement, Sterling REIT pledged substantially all of its assets to the Company to secure repayment of amounts advanced by the Company. Based on an evaluation by management, all advances made to Sterling REIT at December 31, 2002 and 2003, respectively were determined to be uncollectible. Payments by the entities acquired by the Company, during 2002 but prior to acquisition of those entities by the Company, to persons or entities that are controlling persons of the Company following the acquisitions included:
Recipient Nature of Amounts Paid Amount ---------------- ------------------------------- ---------- AM Pacific Group Structure finance brokerage fee $192,000 AM Pacific Group Consulting fee 54,300 Sterling REIT Management fee 437,500 Sterling REIT Lease payments - Austin facility 489,292 Sterling REIT Other fees 124,853 Thomas Mathew Management fee 176,280 Hugo Verhaeghe Management fee 12,000
Management fees paid by the Company to Thomas Mathew totaled $7,500 during 2002 and $174,000 during 2003. During 2002, the Company issued 1,500,000 shares of common stock to R.F. Bearden Associates, Inc. and 1,500,000 shares to Old Capitol Club, Inc. in full payment of a $173,754 fee payable to R.F. Bearden Associates for management services of Ron F. Bearden, which amount is reflected in the compensation reported under Item 10 above. 18 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description of Exhibit ------- ---------------------- 2.1 Exchange Agreement dated June 1, 2002, by and among BlueStar Leasing, Inc. and Sterling FBO Holdings, Inc. (1) 2.2 Amendment to Exchange Agreement dated September 25, 2002 (1) 2.3 Exchange Agreement dated December 30, 2002, by and among BlueStar Leasing, Inc., Sterling FBO Holdings, Inc. and Ft. Worth Jet Center, Inc. (3) 2.4 Austin Aero FBO, Ltd. Asset Purchase Agreement, dated December 31, 2002, by and between Trajen Flight Support, LP, Austin Aero FBO, Limited and Sterling-Austin Aero L.P. (4) 2.5 Asset Purchase Agreement, dated February 26, 2003, by and between Trajen Flight Support, LP, Sterling FBO Holdings, Inc., Greeley FBO, L.L.C., Casper Jet Center, L.L.C., Fort Worth Jet Center, Inc., and Sterling-Fort Worth JC, LP. (4) 3.1 Articles of Incorporation (2) 3.2 Bylaws (2) 10.1 Settlement Agreement, dated January 14, 2004, between Sterling Equity Holdings, Inc. and Sterling REIT, Inc. (5) 10.2 Promissory Note, dated January 14, 2004, from Sterling REIT, Inc. to Sterling Equity Holdings, Inc. (5) 10.3 Pledge Agreement, dated January 14, 2004, from Sterling REIT, Inc. to Sterling Equity Holdings, Inc. (5) 10.4 Security Agreement, dated January 14, 2004, from Sterling REIT, Inc. in favor of Sterling Equity Holdings, Inc. (5) 14.1* Code of Ethics for CEO and Senior Financial Officers 21.1 List of subsidiaries (6) 31.1* Section 302 Certifications 32.1* Section 906 Certifications ------------------------ * Filed herewith. (1) Incorporated by reference to the respective exhibits filed with Registrant's Current Report on Form 8-K dated September 30, 2002. (2) Incorporated by reference to the respective exhibits filed with Registrant's Registration Statement on Form 10-SB filed October 10, 2001. (3) Incorporated by reference to the respective exhibits filed with Registrant's Current Report on Form 8-K dated December 30, 2002. (4) Incorporated by reference to the respective exhibits filed with the Registrant's Current Report on Form 8-K dated February 27, 2003. (5) Incorporated by reference to the respective exhibits filed with the Registrant's Current Report on Form 8-K dated January 13, 2004. (6) Incorporated by reference to the respective exhibits filed with the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2002. (b) Reports on Form 8-K None 19 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS The following table presents fees for professional audit services rendered by Thomas Leger & Co., L.L.P. for the audit of the Company's annual financial statements for the years ended December 31, 2003 and December 31, 2002 and fees billed for other services rendered by Thomas Leger & Co., L.L.P. during those periods.
FISCAL 2003 FISCAL 2002 ------------ ------------ Audit fees (1) $ 110,045 $ - Audit related fees - - Tax fees 5,925 - All other fees - - ------------ ------------ Total $ 115,970 $ - ============ ============ (1) Audit Fees consist of fees billed for professional services rendered for the audit of the Company's consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Thomas Leger & Co., L.L.P. in connection with statutory and regulatory filings or engagements.
POLICY ON PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF INDEPENDENT AUDITOR At such time, if ever, as we form an audit committee, we intend that the audit committee will establish a specific policy relating to pre-approval of all audit and non-audit services provided by our independent auditors. As we do not presently maintain an audit committee, no such policy has been adopted to date. 20 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STERLING EQUITY HOLDINGS, INC. By: /s/ Thomas Mathew Thomas Mathew President and Chief Executive Officer Dated: October 8, 2004 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Thomas Mathew President, Chief Executive Officer October 8, 2004 Thomas Mathew (Principal Executive Officer and Principal Financial and Accounting Officer) and Director /s/ Lloyd Shoppa Director October 8, 2004 Lloyd Shoppa Director October , 2004 ------------------ -- Ron F. Bearden 21 STERLING EQUITY HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheet as of December 31, 2003 F-3 Consolidated Statements of Operations for year ended December 31, 2003 and for the Period from Inception (September 25, 2002) to December 31, 2002 F-4 Consolidated Statement of Shareholders' Deficit for the Period from Inception (September 25, 2002) to December 31, 2003 F-5 Consolidated Statement of Cash Flows for the year ended December 31, 2003 and for the Period from Inception (September 25, 2002) to December 31, 2002 F-6 Notes to Consolidated Financial Statements F-7 - F-18 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Sterling Equity Holdings, Inc. Fort Worth, Texas We have audited the accompanying consolidated balance sheet of Sterling Equity Holdings, Inc. as of December 31, 2003 and the related consolidated statements of operations, shareholders' deficit, and cash flows for the year ended December 31, 2003 and for the period from inception (September 25, 2002) to December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sterling Equity Holdings, Inc. as of December 31, 2003 and the results of its operations and its cash flows for the year ended December 31,2003 and for the period from inception (September 25, 2002) to December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and has cash flow problems. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Thomas Leger & Co., L.L.P. Houston, Texas September 12, 2004 F-2
Sterling Equity Holdings, Inc. Consolidated Balance Sheet December 31, 2003 ----------------- ASSETS Investment in real estate Land, improvements and leaseholds $ 10,264,212 Accumulated depreciation (2,711,243) ----------------- Net 7,552,969 Land 1,389,420 ----------------- Net investment in real estate 8,942,389 Cash 3,695 Restricted cash 759,947 Accounts receivable 441,098 Prepaid expenses 42,921 Deferred financing - net of amortization of $79,643 175,054 Goodwill 908,523 Escrowed funds 107,540 ----------------- Total Assets $ 11,381,167 ================= LIABILITIES Accounts payable $ 191,233 Accrued expenses 438,008 Income taxes payable 253,000 Line of credit 750,000 Real estate notes payable 9,911,587 Other notes payable 42,665 ----------------- Total Liabilities 11,586,493 ----------------- SHAREHOLDERS' DEFICIT Preferred stock, par value $.001, authorized 5,000,000, none issued and outstanding - Common stock, par value $.001, authorized 70,000,000, 39,655,068 issued and outstanding 39,655 Additional paid-in capital 607,163 Accumulated deficit (852,144) ----------------- Total Shareholders' Deficit (205,326) ----------------- Total Liabilities and Shareholders' Deficit $ 11,381,167 =================
The accompanying footnotes are an integral part of these financial statements F-3
Sterling Equity Holdings, Inc. Consolidated Statements of Operations For the Year Ended December 31, 2003 and Period from Inception (September 25, 2002) through December 31, 2002 ------------------------------------------------------------------------ 2003 2002 ------------ ------------ Rental revenue $ 1,231,921 $ 275,887 ------------ ------------ Real estate operating expenses: Interest 725,114 145,303 Taxes 258,755 67,592 Depreciation and amortization 628,670 122,247 Repairs and maintenance 38,459 18,946 Utilities 18,763 6,637 Professional and consulting fees 556,829 3,080 Other 81,664 20,601 ------------ ------------ Total 2,308,254 384,406 Bad debt expense 1,694,264 699,342 Merger expense - 301,677 ------------ ------------ Total operating expenses and costs 4,002,518 1,385,425 ------------ ------------ Interest income 47,175 - ------------ ------------ Loss before income tax (2,723,422) (1,109,538) Benefit for income tax expense 811,290 246,413 ------------ ------------ Net loss from continuing operations (1,912,132) (863,125) ------------ ------------ Discontinued operations: Gain (loss) from discontinued operations, including gain of $3,632,981 from disposition 3,301,494 (104,102) (Provision) benefit for income tax expense (1,339,144) 64,865 ------------ ------------ Net gain (loss) from discontinued operations 1,962,350 (39,237) ------------ ------------ Net income (loss) $ 50,218 $ (902,362) ============ ============ Basic and diluted income (loss) per share: Loss from continuing operations $ (0.05) $ (0.04) Gain (loss) from discontinued operations 0.05 - ------------ ------------ Net income (loss) $ 0.00 $ (0.04) ============ ============ Basic and diluted weighted average shares 39,655,068 23,642,363 ============ ============
The accompanying footnotes are an integral part of these financial statements F-4
Sterling Equity Holdings, Inc. Consolidated Statements of Shareholders' Deficit Period from Inception (September 25, 2002) through December 31, 2003 -------------------------------------------------------------------- Common Stock Additional ------------ Paid-In Accumulated Shares Amount Capital Deficit Total ---------- ------- ---------- ---------- ---------- Balance December 31, 2001 6,250,000 $ 6,250 $ 818,750 $(741,895) $ 83,105 To record asset distribution - - (825,000) 741,895 (83,105) To record merger with Sterling FBO Holdings, Inc. and Fort Worth Jet Center, Inc. 30,405,068 30,405 439,659 - 470,064 To record shares issued for consulting services 3,000,000 3,000 173,754 - 176,754 To reflect consolidated loss for the period - - - (902,362) (902,362) ---------- ------- ---------- ---------- ---------- Balance December 31, 2002 39,655,068 39,655 607,163 (902,362) (255,544) To reflect consolidated income for the period - - - 50,218 50,218 ---------- ------- ---------- ---------- ---------- Balance December 31, 2003 39,655,068 $39,655 $ 607,163 $(852,144) $(205,326) ========== ======= ========== ========== ==========
The accompanying footnotes are an integral part of these financial statements F-5
Sterling Equity Holdings, Inc. Consolidated Statements of Cash Flows For the Year Ended December 31, 2003 and Period from Inception (September 25, 2002) through December 31, 2002 ------------------------- 2003 2002 ------------- ------------ OPERATING ACTIVITIES Net Income (loss) from operations $ 50,218 $ (902,362) Adjustments to reconcile net income to net net cash provided by operating activities: Depreciation and amortization 645,677 147,401 Common stock issued for services - 176,754 Expenses paid directly from new borrowings 140,801 - Gain from sale of discontinued operations (3,379,557) - Changes in operating assets and liabilities: Tenant and other receivables (375,094) 16,855 Prepaid expenses (20,937) 14,695 Related party (receivables) or payables - 94,653 Other assets 177,402 (307,822) Accounts payable, accrued expenses and other liabilities 379,957 741,896 ------------- ------------ Net cash used in operating activities (2,381,533) (17,930) INVESTING ACTIVITIES Net proceeds from sale of discontinued operations 2,142,566 - Certificate of deposit for security for line of credit (759,947) - Land, buildings and improvements (12,800) (1,598) Advances on construction in progress - (414,465) Cash of acquired entities - 544,474 ------------- ------------ Net cash provided by investing activities 1,369,819 128,411 ------------- ------------ FINANCING ACTIVITIES Proceeds from line of credit 750,000 - Proceeds from property notes payable - 487,160 Repayments of mortgage and other notes payable (210,436) (87,101) Deferred loan costs - (34,695) ------------- ------------ Net cash provided by financing activities 539,564 365,364 ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (472,150) 475,845 Cash and cash equivalents At beginning of period 475,845 - ------------- ------------ At end of period $ 3,695 $ 475,845 ============= ============ SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 522,222 $ 85,792 Income taxes paid - - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING Assets acquired Land, buildings and improvements of acquired companies $ - $15,388,523 Other assets of acquired companies - 997 Current assets - 1,688,271 Related party receivables - 841,743 Deferred loan costs - 505,057 Escrowed funds - 80,455 Deferred tax asset - 1,983,847 Goodwill - 6,521,766 Liabilities assumed Accounts payable and accrued expenses - 1,896,702 Mortgage notes and other notes payable - 24,643,892 Issuance of common stock - 470,065 Common stock issued for services - 176,754 Cash proceeds for sale of asset deposited into affiliate's bank account 363,620 - Proceeds from sale of assets 16,398,850 - Liabilities liquidated from proceeds from sale of assets (16,398,850) - Increase in notes payable 228,828 - Increase in loan costs 73,851 - New borrowings used to pay existing notes payable 5,741,172 - Decrease in goodwill 109,194 -
The accompanying footnotes are an integral part of these financial statements F-6 STERLING EQUITY HOLDINGS, INC. Notes to Consolidated Financial Statements December 31, 2003 1. - HISTORY AND DEVELOPMENT OF THE COMPANY Sterling Equity Holdings, Inc. (the "Company") was chartered as BlueStar Leasing, Inc. ("BLS") in January of 2001 and in March of 2003 the name was changed with a charter amendment. In July of 2002, the majority shareholders of BLS reached an agreement with the shareholders of Sterling FBO Holdings, Inc. ("SFBO"). The Company exchanged its stock with the shareholders of SFBO resulting in SFBO becoming a wholly owned subsidiary of the Company. SFBO, a Nevada corporation, was formed in May 2002 to acquire, own and operate income producing real estate and airplane service operations. The exchange, completed through a series of stock for stock exchanges between BLS and SFBO, commenced at the close of business on September 25, 2002 and was completed on December 30, 2002. At the time of the September 25, 2002 stock exchange, SFBO owned interests in, and operated, four office facilities that were leased to state governmental units located in Austin, Texas. SFBO acquired these interests from Sterling REIT, Inc., ("SRI") and other affiliated parties in exchange for shares of common stock. SBFO owns 100% interest in three of the office facilities and approximately 89% in one of the office facilities. These facilities are hereinafter referred to as the "Austin Properties". This acquisition was accounted for as a purchase and the operations for the four Austin Properties are included in the Consolidated Statement of Operations for the period from September 25, through December 31, 2002. Contemporaneously with that acquisition, SFBO exchanged 100% of its then outstanding common shares, on a share for share basis, for 5,638,334 common shares of BLS. In a series of transactions consummated during the period between October 30, 2002 and December 30, 2002, the Company exchanged shares of its common stock for a 100% interest that SFBO had acquired or exchanged common stock for outstanding stock of a corporation in five private aircraft flight service organizations and the real estate and operating licenses associated with each. Such service organizations are generally referred to as Fixed Base Operations or "FBO's." SFBO acquired these FBO's from SRI and affiliated shareholders for common stock in three planned separate transactions occurring in October, November and December of 2002. Those shareholders then immediately traded common shares, on a one for one basis, for common stock of BLS, except for the December 30, 2002 acquisition of operations in Ft. Worth, Texas. For the December 30, 2002 acquisition, the Company exchanged its stock for the outstanding stock of Ft. Worth Jet Center, Inc. resulting in it becoming a wholly owned subsidiary of the Company. The acquisition of the five FBO'S was treated as a purchase as of the various effective dates, with its assets and obligations recorded at their fair value, and their operations from the date of acquisition to December 31, 2002 is included in the Consolidated Statement of Operations. F-7 1. - HISTORY AND DEVELOPMENT OF THE COMPANY (CONTINUED) On October 28, 2002, the Company acquired Commodore Plaza, Ltd, a limited partnership for an aggregate of 2,000,000 shares of its common stock. Commodore Plaza, Ltd. was acquired from four shareholders, each of which may be deemed to be affiliates of the Company by reason of the holdings of common stock. Commodore Plaza, Ltd. owns the Commodore Plaza Shopping Center in Gulfport, Mississippi, which leases retail-shopping space to two major tenants and various small establishments on a net lease basis. The acquisition was accounted for as a purchase with its assets and obligations recorded at their fair value, and its operations from the date of acquisition through December 31, 2002 are included in the Consolidated Statement of Operations. 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Critical Accounting Policies - The Company believes that the following critical ----------------------------- accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Acquired Companies - The Company has fully implemented Statement of Financial ------------------- Accounting Standards No. 141 "Business Combinations". As required by that standard, all acquired companies and properties were accounted for utilizing the "purchase method" of accounting and the fair value of the assets received and obligations assumed was the valuation basis for recording these transactions. The assets acquired and the liabilities assumed were recorded at their fair values as of the closing dates of the transactions. Additionally, in accordance with the rules of the Securities and Exchange Commission, the recorded fair value was not in excess of the "cash cost" of assets acquired from affiliated parties. The acquired companies results of operations were included in the consolidated statement of operations from the closing date of their acquisition. Use of Estimates - The preparation of financial statements in conformity with ------------------ accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported 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. Discontinued Operations - In accordance with SFAS 144 "Accounting for the ------------------------ Impairment or Disposal of Long Lived Assets", effective for financial statements issued for fiscal years beginning after December 15, 2001, the results of operations and gain from the sale of the Company's FBO entities sold in 2003 are reflected in the consolidated statements of operations as "Loss from discontinued operations" for all periods presented and "Gain from sale of discontinued operations" for 2003. F-8 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Real Estate and Depreciation- Costs incurred for the acquisition, development, ------------------------------ construction and improvement of real properties, as well as significant renovations and betterments to the properties, are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation and amortization expense for the year ended December 31 2003 and for the period from inception (September 25, 2002) to December 31, 2002 is $453,730 and $103,562, respectively. Amounts included under the caption land, improvements and leaseholds on the consolidated balance sheet include the cost of the land fee interest, the land improvements, the leasehold improvements paid for tenants and are depreciated on the straight-line method over their estimated useful lives of 15 to 20 years. The Company's rental properties are individually evaluated for impairment when conditions exist that may indicate that it is probable that the sum of their expected future cash flows (over the anticipated holding period on an undiscounted basis) is less than its historical net cost carrying value. Upon determination that a permanent impairment has occurred, rental properties are reduced to their fair value. For properties to be disposed of, an impairment loss is recognized when the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the property measured at the time the Company has a commitment to sell the property and/or is actively marketing the property for sale. Subsequent to the date that a property is held for disposition, depreciation expense is not recorded. Cash and Cash Equivalents - The Company considers all liquid investments with ---------------------------- maturity of three months or less when purchased to be cash equivalents. Restricted Cash - Restricted cash consists of a certificate of deposit which ---------------- secures the line of credit. Escrowed Funds - Escrowed funds primarily consist of amounts held by lenders to --------------- provide for future real estate tax expenditures and tenant improvements. Rental Revenue Recognition - Rental revenue is recognized on a straight-line ---------------------------- basis over the term of the lease. The Company establishes, on a current basis, an allowance for future potential tenant credit losses that may occur against this account. The amount reflected on the balance sheet is net of such allowance, if required. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rental payments. If the financial condition of a specific tenant were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances will be required. F-9 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred Financing Costs - Deferred financing costs represent commitment fees, -------------------------- legal and other third party costs associated with obtaining commitments for financing which result in a closing of such financing. These costs are amortized over the terms of the respective agreements. Unamortized deferred financing costs are expensed when the associated debt is refinanced before maturity. Costs incurred in seeking financial transactions, which do not close, are expensed in the period incurred. The amortization of loan cost for the year ended December 31, 2003 and for the period from inception (September 25, 2002) to December 31, 2002 was $174,941 and $43,839, respectively. Goodwill - The Company has adopted Statement of Financial Accounting Standards -------- No. 142, "Goodwill and Other Intangible Assets." The adoption of FAS 142 requires an initial impairment assessment involving a comparison of the fair value of goodwill to current carrying value. Goodwill represents the excess of cost over the fair value of net assets acquired and is not amortized. The Company performs tests for impairment of goodwill annually or more frequently if events or circumstances indicate it may be impaired. Such tests include comparing the fair value of a reporting unit with its carrying value, including goodwill. Impairment assessments are performed pursuant to appropriate guidance. The Company's recorded goodwill is associated with the acquisition of the four office/facilities in Austin, Texas. This goodwill represents the difference between the net assets and liabilities acquired in exchange for Company stock. None of the recorded goodwill is deductible for tax purposes. Concentrations of Risk - Financial instruments that potentially subject the ------------------------ Company to concentrations of credit risk are primarily accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The allowance for non-collection of accounts receivable is based upon the expected collection of all accounts receivable. The Company does not rely on any one vendor or supplier for its raw materials and management believes that alternative suppliers are available that could provide for the Company's needs on comparable terms. The Company's four office and shop facilities in Austin, Texas are leased to various state of Texas governmental units. Such leases are subject to short-term cancellation upon the occurrence of adverse state budgetary reductions. Income Taxes - The Company recognizes deferred tax assets and liabilities for ------------- the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Temporary differences in financial and tax basis giving rise to deferred tax assets and liabilities include fixed assets, certain accrued liabilities and net operating loss carry forwards. The provision for income taxes includes the amount of income taxes for the year that would be paid by the Company without its net operating loss carry forwards, as determined by applying F-10 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the provisions of the current tax law to taxable income for the year; and the net change during the year in the Company's deferred tax assets and liabilities. In determining the amount of any valuation allowance required to offset deferred tax assets, an assessment is made that includes anticipating future income and determining the likelihood of realizing deferred tax assets. The carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income, which is based on estimates and assumptions. If these estimates and assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets, resulting in increased income tax expense. The Company continually reviews the adequacy of the valuation allowance and recognizes deferred tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. The utilization of the Company's net operating loss and tax credit carry forwards may be impaired or reduced under certain circumstances. Events which may affect the Company's ability to utilize these carry forwards include, but are not limited to, future profitability, or stock ownership changes as defined by Section 382 of the Internal Revenue Code. Advertising - Advertising costs are expensed as incurred and was $4,800 for the ----------- Company's fiscal period for 2002. The Company did not incur any advertising expense in 2003. Earnings Per Share - The Company presents "basic" earnings per share, which is -------------------- net income or loss available to shareholders divided by weighted average shares outstanding during the period, and "diluted" earnings per share, if required, which considers the impact of common stock equivalents. Consolidation and Basis of Presentation - The accompanying consolidated ------------------------------------------- financial statements include the accounts of the Company and subsidiaries. All significant intercompany balances and transactions have been eliminated. Going Concern - The Company's consolidated financial statements are prepared -------------- using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has suffered recurring losses from operations and is experiencing cash flow problems. This raises questions as to the ability of the Company to continue as a going concern. The Company plans to reduce expenses and is developing a strategy to provide sufficient capital through possible sale of assets and other means. F-11 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements - In January 2003, the FASB issued ---------------------------------- Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN No. 46") as superseded in December 2003 by FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities-an interpretation of ARB 51 (("FIN No. 46R"). FIN No. 46R requires the primary beneficiary of a variable interest entity ("VIE") to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A VIE is an entity in which the equity investors do not have a controlling interest, equity investors participate in losses or residual interests of the entity on a basis that differs from its ownership interest, or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. FIN No. 46R is applicable for the Company starting February 1, 2004. We do not expect the adoption of FIN No. 46R to have a material impact on our financial condition or results of operations. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments be classified as liabilities in balance sheets. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. The adoption of SFAS 150 did not impact our financial position, cash flows or results of operations. In December 2003, the SEC issued SAB 104. This staff accounting bulletin revises or rescinds certain sections of SAB 101, which gives interpretation guidance about revenue recognition. SAB 104 makes the interpretive guidance of SAB 101 consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 in the fourth quarter of fiscal 2003 did not impact our financial position, cash flows or results of operations. Reclassifications - The accompanying consolidated financial statements for the ----------------- prior year contain certain reclassifications to conform with current year presentation. 3. - SALE OF DISCONTINUED OPERATIONS On January 6 and February 27, 2003, the Company completed the sale of its FBO's in Fort Worth and Austin, Texas; Casper, Wyoming; Tucson, Arizona; and Greeley, Colorado for approximately $20,787,000 in cash and liquidation of debts and an "earn-out" of up to $6,000,000 in future revenues in excess of a specified base. Under the terms of the sale, the Company agreed to liquidate outstanding liabilities and obligations associated with the FBO operations and properties. Consequently, the Company paid creditors approximately $17,476,000, established an escrow fund of $589,000, to satisfy potential claims and obligations, and deposited approximately $2,556,000 in the bank. F-12 3. - SALE OF DISCONTINUED OPERATIONS (CONTINUED) On January 20, 2004, the Company and the purchaser entered into a "Settlement Agreement and Mutual Release" to resolve the disputes, lawsuits and arbitration demands arising out of the Purchase Agreements and the Escrow Agreement relating to the transaction for the sale and transfer of the FBO assets. Included in the settlement was the termination of the $6,000,000 "earn out", termination of the escrow fund of $589,000 by disbursing $350,000 to the Company in 2004 and various other matters. The sale resulted in a financial gain before income taxes of approximately $3,633,000, and a federal income tax gain of approximately $6,127,000. The financial gain on the sale of discontinued operations includes approximately $5,504,000 of goodwill. Following are the results of operations of acquired FBO's included in the Consolidated Statements of Operations for the year ended December 31, 2003 and for the period ended December 31, 2002.
December 31, ------------ 2003 2002 ------------ ---------- Revenues $ 1,593,111 $ 496,949 ------------ ---------- Costs and expenses Costs of revenues 1,012,934 294,581 General and administrative 911,664 306,470 ------------ ---------- Total expenses 1,924,598 601,051 ------------ ---------- Loss from discontinued operations before income taxes $ (331,487) $(104,102) ============ ==========
4. - RELATED PARTY TRANSACTIONS All of the Company's subsidiaries and acquired assets were, prior to their acquisition, owned and managed by one or more of the major shareholders of the Company's. Historically, all of the entities were partnerships or limited liability companies that passed their profits or losses through to the owners. The four Austin Properties had recorded liabilities and obligations greater than their recorded assets. This asset deficiency is recorded as an intangible asset and is included in the balance sheet as Goodwill for the four Austin Properties in the amount of $908,523. During the year ended December 31, 2003 and for the period from inception (September 25, 2002) to December 31, 2002, Sterling REIT, Inc., ("SRI"), a major shareholder, on behalf of the Company, received income from Austin buildings and paid the expenses and note payments for the same buildings. In addition, proceeds F-13 4. - RELATED PARTY TRANSACTIONS (CONTINUED) received from refinancing assets and cash was advanced to SRI by the Company. Expenses of the Company were paid by SRI on behalf of the Company. The net of these cash transactions amounted $1,693,151 and $686,142 for the year ended December 31, 2003 and for the period from inception (September 25, 2002) to December 31, 2002, respectively. These amounts were written off as bad debts by the Company (See Note 5 - Advance to a Principal Shareholder). The Company paid a management fee of $174,000 and $7,500 to a major shareholder and a consulting fee of $117,500 and $46,373 to another major shareholder during the year ended December 31, 2003 and for the period from inception (September 25, 2002) to December 31, 2002, respectively. At December 31, 2002, the Company had accounts receivable of $30,000 from a shareholder and payables of $50,500 due to two shareholders. The amounts were collected and paid in 2003. The Company's four Austin Properties were managed by SRI. SRI collected all lease payments, disburses all expenditures and served as the general partner to the limited partnerships that owned the properties prior to their transfer to the Company. Consequently, the business relationship has historically resulted in amounts due to or from the property owners and SRI. 5. - ADVANCES TO A PRINCIPAL SHAREHOLDER On January 13, 2004, new management and new board of directors were appointed. In conjunction with the change of management, the new management team began an investigation of circumstances and events at the Company with the intent of bringing all financial statements and SEC reports current and implementing various procedures and initiatives to improve internal controls and protect corporate assets. Initial results of the investigation conducted by the new management team indicated that during 2002 and 2003 substantial funds (in excess of $2,000,000) of the Company had been advanced to SRI. It appears that the funds were advanced without proper authorization. The funds advanced to SRI were purportedly used to pay certain expenses of the Company and to pay certain expenses relating to properties of SRI which were to be transferred to the Company. Based on the initial findings of the new management team, the Company and SRI entered into a Settlement Agreement pursuant to which SRI delivered to the Company a Promissory Note evidencing the obligation of SRI to pay the amounts advanced by the Company and a Pledge Agreement, Security Agreement and multiple Deeds of Trust securing repayment of the note with substantially all of the assets of SRI. F-14 5. - ADVANCES TO A PRINCIPAL SHAREHOLDER After further investigation, the new management team reached the conclusion that in all probability the Company would receive little, if any, money from SRI or the assets securing the repayment of the note discussed above. As a result of the investigation, the Company wrote off $699,342 for the period ended December 31, 2002 and $1,693,151 for the year ended December 31, 2003 of the receivable from Sterling REIT and a related entity. 6. - REAL ESTATE, OTHER NOTES PAYABLE AND LINE OF CREDIT Real Estate Notes Payable - The real estate notes payable, collateralized by the ------------------------- respective properties and assignment of leases, at December 31, 2003 and 2002 are as follows:
2003 2002 ----------- ----------- Property and Note Description ----------------------------- Commodore Plaza - Gulf Port, Mississippi first lien note dated October 28, 2002, with interest at 7.48%, monthly installments of $28,263 including principal and interest and due in full November 1, 2012 $ 4,013,588 $ 4,046,982 4405 Springdale - Austin, Texas First lien note with interest payable at not less than 7% for 3 years, then at Wall Street Journal prime rate plus 1% with monthly installments interest of $20,224 from including principal and interest - 2,146,349 4708 MLK - Austin, Texas First lien note with interest payable, initially, at 7.5%, adjusted annually to Wall Street Journal prime rate plus .75%, interest of 5.5% at December 31, 2002, with monthly installments of $12,435 including principal and interest - 1,733,971 4735 South Congress - Austin, Texas First lien note with interest payable, initially, at the lesser of the maximum allowable interest rate or 8.5%, interest of 8% at December 31, 2002, with monthly installments of $10,637 including principal and interest - 1,118,984 4501 Springdale - Austin, Texas First lien note with interest payable at the lesser of the maximum allowable interest rate or 6.5%, (rate at December 31, 2002) with monthly installments of $6,010 including principal and interest - 794,250 Four Austin Buildings First lien bearing interest at 5.5% with thirty-five Monthly installments of $41,067 including principal and interest starting July 5, 2003 and a final payment on March 27, 2006 5,897,999 - ------------- ----------- Total real estate notes $ 9,911,587 $ 9,840,537 ============= ===========
F-15 At December 31, 2003, the net carrying value of the properties collateralizing the real estate notes was $8,938,034. The four Austin building's note is guaranteed by shareholders of the Company. Other Notes Payable - An affiliate of the prior owner of Commodore Plaza loaned -------------------- the Company $122,374 that is being repaid out of the cash flow from the property's net rental income. The loan matured in April, 2003 with interest at 18% and has a balance owing of approximately $38,300 at December 31, 2003. In addition, the Company has two small installment notes with a balance of $4,365 at December 31, 2003. Principal Maturities - Combined aggregate principal maturities of real estate --------------------- and other notes payable, as of December 31, 2003, are as follows: Year Amount ---- --------- 2004 $ 279,152 2005 222,847 2006 5,554,597 2007 45,105 2008 47,802 Thereafter 3,804,949 --------- Total $ 9,954,452 ============ F-16 6. - REAL ESTATE, OTHER NOTES PAYABLE AND LINE OF CREDIT (CONTINUED) Line of Credit - The Company has a $750,000 line of credit which is due March 6, -------------- 2004 with interest at 4.25% and is secured by a certificate of deposit in the amount of $759,946, which is shown as restricted cash in the balance sheet. 7. - RENTAL INCOME The Company's Austin Properties and Commodore Plaza Shopping Center are the lessors to tenants under operating leases with expiration dates ranging from 2007 to 2013. The minimum rental amounts due under the leases for the Austin Properties are generally subject to an increase based on a percentage of the Consumer Price Index. Each of the leases for Austin Properties includes a right of the State tenants to terminate the lease based on budgetary constraints. The Commodore Plaza leases require that the tenants reimburse the Company for certain operating costs and real estate taxes. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at December 31, 2003 are as follows: Year Amount ------- ---------- 2004 $1,206,736 2005 1,046,742 2006 1,046,742 2007 620,720 2008 507,243 Thereafter 1,152,672 ----------- Total $5,580,855 =========== F-17 8. - INCOME TAXES The following table sets forth a reconciliation of the statutory federal income tax for the period ended December 31, 2002 and for the year ended December 31, 2003.
2003 2002 --------- ---------- Income (loss) before income taxes $578,073 $(902,362) ========= ========== Income tax computed at statutory rates $196,544 $(306,803) Increase in valuation allowance 56,309 - Utilization of prior year net operating loss 326,636 - Utilization of acquired deferred tax asset (54,315) - Other 2,680 (4,475) --------- ---------- Tax Provision (Benefit) $527,854 $(311,278) ========= ========== Current tax provision $253,000 $ - Deferred tax provision (Benefit) 274,854 (311,278) --------- ---------- Total tax provision (Benefit) $527,854 $(311,278) ========= ==========
The effects of the temporary differences between financial statement income and taxable income are recognized as a deferred tax asset and liability. Significant components of the deferred tax asset and liability as of December 31, 2003 are set out below. 2003 ------------- Deferred tax asset: Tax basis of assets greater than book $ 619,297 Valuation allowance (619,297) -------------- Deferred tax asset $ - =============== 9. - COMMITMENTS Legal Contingencies - The Company is subject to legal proceedings, claims and -------------------- liabilities that arise in the ordinary course of its business. The Company accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These accruals are adjusted as further information develops or circumstances change. At December 31, 2003 there are no known assertions, claims or legal actions pending. F-18