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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIESEXCHANGE ACT OF 1934
For the transition period from _____________to_________________
Commission File Number 1-8662
FLIGHTSERV.COM
(formerly Proactive Technologies, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
3343 PEACHTREE ROAD NE
SUITE 530
ATLANTA, GA 30326
(404) 869-2599
(Address of registrant's principal executive offices
including zip code and telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Check whether the issuer filed all reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of February
11, 2000: 31,297,281
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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FLIGHTSERV.COM
TABLE OF CONTENTS PAGE NO.
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet
December 31, 1999 and June 30, 1999 3
Consolidated Statements of Operations
For the Three and Six Months
Ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
For the Six Months Ended
December 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-11
ITEM 2 Management's Discussion and Analysis Of
Financial Condition and Results of Operations 11-15
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 15
ITEM 2 Changes in Securities 16
ITEM 3 Defaults Upon Senior Securities 16
ITEM 4 Submission of Matters to a Voice of Security Holders 16
ITEM 5 Other Information 16
ITEM 6 Exhibits and Reports on Form 8-K 16
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FLIGHTSERV.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
December 31, June 30,
1999 1999
------------ ----------
(unaudited)
Cash and cash equivalents $ 1,240 $ 3,486
Accounts and notes receivable 1,059 914
Net assets (liabilities) of discontinued operations (203) 123
Deferred costs and other assets 748 470
Predevelopment costs 1,100 1,085
Property and equipment, etc 8,871 8,414
-------- --------
Total assets $ 12,815 $ 14,492
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 7,772 $ 7,830
Accounts payable and accrued expenses 245 631
Accrued interest payable 711 862
-------- --------
Total liabilities 8,728 9,323
-------- --------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.04 par value, 60,000,000 share authorized,
31,297,281 and 30,543,235 issued and outstanding, respectively 1,271 1,264
Additional paid-in capital 44,534 18,090
Accumulated deficit (41,565) (13,853)
Treasury stock - at cost (484,930 and 1,050,000 shares, respectively) (153) (332)
-------- --------
Total shareholders' equity 4,087 5,169
-------- --------
Total liabilities and shareholders' equity $ 12,815 $ 14,492
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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FLIGHTSERV.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three Months Six Months
------------------------------ -------------------------------
1999 1998* 1999 1998*
------------ ------------ ------------ ------------
Revenue and other income:
Sales $ -- $ -- $ -- $ --
Other income 253 -- 526 --
------------ ------------ ------------ ------------
Total revenues 253 -- 526 --
------------ ------------ ------------ ------------
General and administrative expenses 1,311 72 2,211 117
Expenses related to issuance of stock options and warrants 15,298 -- 25,497 --
Depreciation and amortization 147 -- 289 --
Interest expense 162 -- 241 --
------------ ------------ ------------ ------------
Net loss before discontinued operations (16,665) (72) (27,712) (117)
Loss from discontinued operations -- (5,227) -- (5,530)
------------ ------------ ------------ ------------
Net loss $ (16,665) $ (5,299) $ (27,712) $ (5,647)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss per share before discontinued operations $ (.55) -- $ (.91) --
Discontinued operations -- $ (.33) -- $ (.35)
------------ ------------ ------------ ------------
Net loss $ (.55) $ (.33) $ (.91) $ (.35)
============ ============ ============ ============
Weighted average shares outstanding 30,551,431 15,970,474 30,547,333 15,970,474
============ ============ ============ ============
* Reclassified
The accompany notes are an integral part of these consolidated financial
statements.
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FLIGHTSERV.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
1999 1998*
-------- -------
Cash flows from operating activities:
Loss before discontinued operations $(27,712) $ (117)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 289 --
Expense related to issuance of stock options and warrants 25,497 --
Changes in operating assets and liabilities:
Accounts and notes receivables (145) --
Deferred costs and other assets (429) --
Accounts payable and accrued expenses (447) --
Accrued interest payable (151) --
-------- -------
Cash used in operating activities before discontinued operations (3,098) (117)
Discontinued operations, net 519 6,098
-------- -------
Net cash (used in) provided by operating activities (2,579) 5,981
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (594) --
Predevelopment costs (15) --
Investing activities of discontinued operations, net -- (22)
-------- -------
Net cash used in investing activities (609) (22)
-------- -------
Cash flows from financing activities:
Principal debt payments (58) --
Sale of common stock 1,000 --
Financing activities of discontinued operations, net -- (5,647)
-------- -------
Net cash provided by (used in) financing activities 942 (5,647)
-------- -------
Net (decrease) increase in cash and cash equivalents (2,246) 312
Cash and cash equivalents at beginning of period 3,486 100
-------- -------
Cash and cash equivalents at end of period $ 1,240 $ 412
======== =======
* Reclassified
The accompany notes are an integral part of these consolidated
financial statements.
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FLIGHTSERV.COM AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements include the operations of flightserv.com
("FSW") and its subsidiaries (collectively the "Company"). Since discontinuing
its residential real estate operations in fiscal 1999, the Company has been in
the development stage of a new Internet-based, private jet aviation services
business. All significant inter-company balances and transactions have been
climinated. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules of the Securities and
Exchange Commission. Certain prior period amounts have been reclassified to
conform to the current fiscal period presentation. In the opinion of management,
all adjustments considered necessary for a fair presentation of the financial
position of the Company as of December 31, 1999 and of the results of operations
for the periods presented have been included. The financial data at June 30,
1999 is derived from audited financial statements which are included in the
Company's Form 10-KSB and should be read in conjunction with the audited
financial statements and notes thereto. Interim results are not necessarily
indicative of results for the full year.
Cash and Cash Equivalents
The Company classifies as cash equivalents any investments which can be readily
converted to cash and have an original maturity of less than three months. At
times cash and cash equivalent balances at a limited number of banks and
financial institutions may exceed insurable amounts. The Company believes it
mitigates its risks by depositing cash or investing in cash equivalents in major
financial institutions.
Real Estate Investments
Real estate investments are recorded at the lower of cost or estimated fair
value. Development costs and real estate taxes are capitalized while development
is in progress. Depreciation commences at the time the Company begins collecting
rental income.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line basis over the assets' estimated
useful lives. Expenditures for maintenance and repairs are expensed as incurred
and expenditures for improvements which extend the useful life or add value to
the asset are capitalized.
Sales and disposals of assets are recorded by removing the related cost and
accumulated depreciation amounts with any resulting gain or loss reflected in
income.
Net Loss Per Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" which requires dual presentations of basic earnings per
share ("EPS") and diluted EPS.
Basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common shares outstanding and potentially dilutive shares
outstanding during the period. Options and warrants to purchase 19,960,000
shares of Common stock were outstanding at December 31, 1999. Outstanding
options and warrants could potentially dilute EPS in the future but have not
been included in the computation of diluted net loss per share in the December
1999 periods as the impact would have been
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antidilutive.
There were no options or warrants outstanding at December 31, 1998.
Income Taxes
The Company's income taxes are accounted for in accordance with the liability
method as provided under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Accordingly, deferred income taxes are recognized
for the tax consequences of differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any benefits
that, based on available evidence, are not expected to be realized.
The Company has incurred significant net operating losses ("NOL's") from both
its continuing and discontinued operations. Due to the substantial limitations
placed on the utilization of such NOL's following a change in control and the
uncertainties related to the Company's ability to generate taxable income from
it's continuing operations, no related deferred tax benefit for future periods
has been recorded.
The Company's 1996 and one of its subsidiary's 1994 and 1995 tax returns are
currently under examination by the Internal Revenue Service, but no reports have
yet been issued.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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.
NOTE 2. BUSINESS SEGMENTS
Private Jet Aviation Travel Services Business
Since April 1999 FSW has been developing an Internet-based, private jet aviation
travel services business including an Internet Web site. In the three and six
months ended December 31, 1999, FSW incurred approximately $1,175,000 and
$2,017,000, respectively, of general and administrative expense in connection
with development of this new business. The expense includes consulting fees in
the aviation industry, Internet operations, Web site development, marketing, and
business plan areas and other professional services. In addition, operating
expenses reflect warrants that FSW has issued to purchase its common stock in
return for consulting services and in connection with strategic vendor alliances
related to the private jet aviation travel services business.
At December 31, and June 30, 1999, FSW had capitalized $575,000 and $88,500,
respectively, in Internet Web site development costs.
Commercial Real Estate Investments
In fiscal 1999, the Company purchased an entity that owns two shopping center
properties in the Atlanta, Georgia area. The mortgage financing on the shopping
center properties includes an additional interest agreement which provides that
the lender receive 50% of the cash flow and of the excess of appraised value
over the mortgage loan balance at the time of any sale of the property. The
Company has recorded deferred debt discount cost and a corresponding accrued
interest liability to reflect the lenders allocation of the excess appraisal
value provided in the additional interest agreement. The deferred debt discount
is being amortized over the 36 month term of the mortgage loans.
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Stratos Inns Concept
In fiscal 1999, the Company purchased PDK Properties, Inc. ("PDK") which holds a
long-term ground lease at Dekalb-Peachtree Airport in Dekalb County, Georgia and
owns Stratos Inns, a hotel and hospitality business concept. The lease provides
for a 54 month development period and a 30 year lease term after a hotel is
constructed and opened.
The Company has completed a preliminary study for development of its first
Stratos Inn hotel and is evaluating its options in connection with PDK. At
December 31 and June 30, 1999, the Company's investment in predevelopment costs
of PDK was $1,100,000 and $1,085,000 respectively.
NOTE 3. DISCONTINUED OPERATIONS
Effective January 1, 1999 the Company discontinued its residential real estate
development operations. Residential real estate operations include developed
lots, undeveloped land, and equity investments in residential real estate
development companies, partnerships, and joint ventures. The December 1998
financial statement amounts have been reclassified to reflect the discontinued
operations. The Company has made certain estimates regarding the fair asset
values and costs to dispose of the remaining assets of the discontinued
operations.
In July 1999, the Company sold certain assets of discontinued operations with a
net carrying value of approximately $1,100,000 for cash to an outside third
party. In September 1999, the Company sold certain assets of discontinued
operations for approximately $3.2 million consisting of the assumption of $2.2
million of mortgage indebtedness and $1.0 million in notes receivable.
Following is a summary of the net assets (liabilities) of discontinued
operations (in thousands):
December 31, June 30,
1999 1999
------------ ---------
Real estate inventories $ 132 $ 4,596
Accounts and notes receivable 1,000 --
Investments in real estate equity securities -- 677
Notes and accrued interest payable (783) (4,450)
Estimated expenses and other liabilities (552) (700)
------- -------
$ (203) $ 123
======= =======
NOTE 4. ISSUANCE OF COMMON STOCK
As of January 18, 2000, the Company entered into common stock purchase
agreements (the "Purchase Agreements") with Acqua Wellington Value Fund, Ltd.,
("AWVF"), and Four Corners Capital, LLC, ("Four Corners" and, together with
AWVF, the "Investors"), which provide for an equity financing package consisting
of the sale of restricted common stock and warrants with total proceeds of up to
$59.7 million, assuming the Investors exercise all warrants.
Under the terms of the Purchase Agreements, the Investors agreed to purchase
from the Company, for an aggregate purchase price of $11 million, (i) 1,815,779
shares of common stock; (ii) warrants (the "Fixed Warrants") to purchase up to
2,641,135 shares of common stock at the purchase price of $6.058 per share; and
(iii) warrants (the "Variable Warrants") to purchase up to 3,342,684 shares of
common stock at a purchase price equal to the lesser of $9.772 per share or 90%
of the volume weighted average price of the common stock for the five trading
days prior to the exercise of the warrants. The Fixed Warrants and 1,980,851 of
the Variable Warrants expire 18 months after the date of issuance. The remaining
Variable Warrants expire five years after the date of issuance. The exercise of
660,976 of the Fixed Warrants and 495,732 of the Variable Warrants is subject to
prior stockholder approval. Pursuant to the Purchase Agreements, Four Corners
purchased 165,070 shares of restricted common stock for $1,000,000. The
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AWVF transaction is to be completed in two equal tranches. In the first tranche,
AWVF purchased for $5,000,000 825,354 shares of restricted common stock and
warrants to purchase up to 1,630,075 shares of common stock. The second tranche
for $5,000,000 is expected to close no later than February 29, 2000.
In addition, the Company, AWVF and Four Corners entered into a Registration
Rights Agreement pursuant to which the Company provided certain registration
rights to AWVF and Four Corners with respect to both the restricted common stock
and the shares underlying the warrants issued to the Investors under the
Purchase Agreements as well as shares and shares underlying certain options and
warrants previously issued to Four Corners. In the event that a registration
statement does not become effective within 120 days of January 18, 2000, the
exercise price for the Variable Warrants will be reduced by 10% and by an
additional 10% for each 30 day period thereafter until the registration
statement is declared effective.
The proceeds to the Company from the sales of common stock pursuant to the
Purchase Agreements will be reduced by investment banking fees, legal costs and
other related expenses.
In December 1999, the Company issued 400,000 shares of restricted common stock
from treasury to certain parties including a former director and a former
officer of the Company. The shares were issued pursuant to an agreement
resolving outstanding issues related to certain prior transactions involving the
Company's discontinued real estate operations which reduced the related asset
valuations by $193,000. In connection therewith, the Company entered into a
Registration Rights Agreement providing the holders of such shares with certain
registration rights.
In December, 1999, the Company issued 188,976 shares of common stock in
connection with the cashless exercise of 200,000 stock options with an exercise
price of $0.44.
NOTE 5. STOCK OPTIONS AND WARRANTS
In fiscal 1999 and the six months ended December 31, 1999, FSW issued
nonqualified stock options to purchase its common stock to directors, officers
and employees. The following table summarizes the stock options outstanding:
12/31/99 6/30/99
--------------------- --------------------
Option Option
Shares Price Shares Price
---------- ------ --------- ------
2,000,000 $0.44 2,000,000 $0.44
2,800,000 0.42 2,600,000 0.42
50,000 0.50 50,000 0.50
200,000 1.00 200,000 1.00
100,000 1.75 -- --
5,000,000 2.50 -- --
2,975,000 4.00 -- --
---------- ---------
13,125,000 4,850,000
========== =========
All of the outstanding options have a 10-year term and were fully vested at
December 31, 1999, except for 200,000 options with an exercise price of $1.00
and 50,000 with an exercise price of $1.75 that vest over a two year period. Of
the 13,125,000 options outstanding, 11,325,000 require stockholder approval.
In connection with its new private jet aviation travel services business, FSW
issued in fiscal 1999 and the six months ended December 31, 1999 warrants to
purchase its common stock in exchange for consulting and legal services and for
strategic vendor alliances provided by outside third parties. The following
table summarizes the outstanding warrants issued to outside third parties:
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12/31/99 6/30/99
--------------------- ---------------------
Option Option
Shares Price Shares Price
--------- ------ --------- ------
200,000 $0.42 200,000 $0.42
200,000 0.44 200,000 0.44
1,450,000 0.50 1,450,000 0.50
400,000 0.75 400,000 0.75
2,985,000 1.75 100,000 1.75
400,000 2.50 -- --
1,200,000 4.00 -- --
--------- ---------
6,835,000 2,350,000
========= =========
All of the warrants issued to date by FSW are vested, except for 50,000 warrants
at an exercise price of $.50 that vest over two years.
In January 2000, FSW issued 8,353,743 warrants to purchase its common stock at
per share exercise prices ranging from $2.00 to $9.77, including the warrants
issued in connection with the Purchase Agreements described in Note 4.
Following is a summary of certain information regarding the Company's
outstanding options and warrants:
Weighted Weighted
Average Average Remaining
Exercise Grant-date Contractual
Number Price Fair Value Life
---------- -------- ----------- ------------
Outstanding at 6/30/99 7,200,000 $0.37 -- --
----------
Grants during the period:
Exercise price equal to market 5,000,000 $2.50 $1.93 --
Exercise price below market 7,960,000 $2.85 $4.73 --
----------
Total granted 12,960,000 $2.71 -- --
----------
Exercised during the period 200,000 $ .44 -- --
----------
Outstanding at 12/31/99:
Exercisable at $.42 to $1.00 7,300,000 $0.47 -- 9.4 years
Exercisable at $1.75 to $2.50 8,485,000 $2.23 -- 9.6 years
Exercisable at $4.00 4,175,000 $4.00 -- 9.9 years
----------
Outstanding at 12/31/99 19,960,000 $1.94 -- --
----------
Exercisable at 12/31/99:
Exercisable at $.42 to $1.00 7,050,000 $0.46 -- --
Exercisable at $1.75 to $2.50 8,435,000 $2.23 -- --
Exercisable at $4.00 4,175,000 $4.00
----------
Exercisable at 12/31/99 19,660,000 $1.95 -- --
==========
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The Company accounts for options issued to employees under APB No. 25 and
options and warrants issued to non-employees under FASB No. 123. The following
information is based on estimating the fair value of grants under the above
plans based on the provisions of FASB No. 123. For the stock options issued to
employees, the fair value of each option has been estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5%, expected life for the options of
five years, no expected dividend yield and expected volatility of 100%. For the
options and warrants issued to non-employees, the fair value of each award has
been estimated using the same assumptions. The total compensation cost
recognized during the three and six months periods ended December 31, 1999 for
these awards was $15,298,000 and $25,497,000, respectively.
The Company's pro forma net loss and net loss per share for the six months ended
December 31 1999, assuming compensation cost was determined under FASB No. 123
for all options and warrants, would have been the following:
Net loss before discontinued operations $ (45,526,000)
Net loss from discontinued operations $ -
Net loss $ (45,526,000)
Net loss per share before discontinued operations $ (1.49)
Net loss per share from discontinued operations --
Net loss per share $ (1.49)
NOTE 6. RELATED PARTY TRANSACTIONS
At December 31, 1999, the Company holds a note receivable in the amount of
$587,000 due from an entity owned by a former officer of the Company. The note
is secured by residential real estate.
In connection with consulting services related to the Company's Internet-based,
private jet aviation travel service business provided by Mr. Bert Lance, the
father of the Company's President and Chief Executive Officer, the Company
granted in January 2000 warrants to purchase 1,000,000 shares of its common
stock to the Bert Lance Grantor Trust. The warrants have an exercise price of
$4.00 per share. In November 1999, the Company paid Mr. Bert Lance $50,000 in
consulting fees.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Effective January 1, 1999 the Company discontinued its residential real estate
development business. As a result, the statement of operations for the three and
six months ended December 31, 1999, reflects the operating loss of that business
as discontinued operations. The continuing operations include development of an
Internet-based private aviation travel services business, limited commercial
real estate operations, and other investments.
Results of Continuing Operations
The Company's revenues in the three and six months ended December 31, 1999 were
$253,000 and $526,000, respectively, represent lease income generated from the
Company's shopping centers acquired in fiscal 1999. All of the
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Company's revenues in the December 31, 1998 periods were generated by the
residential real estate development operations and have been reclassified to
discontinued operations.
General and administrative expenses in the three and six months ended December
31, 1999 were $1,311,000 and $2,211,000 respectively compared to $72,000 and
$117,000, respectively, in the comparable 1998 periods. These increases are due
to increased compensation costs, consulting and legal fees, travel, and other
costs associated with the development of the new Internet-based private aviation
travel services business.
In the three and six months ended December 31, 1999, the Company issued stock
options to officers and directors and warrants to outside third parties and
recognized $15,298,000 and $24,497,000, respectively of related non-cash
expense.
The Company's depreciation and amortization expense of $289,000 and interest
expense of $241,000 in the six months ended December 31, 1999 reflect the costs
of the shopping center operations acquired in January 1999.
Management expects revenues to increase significantly upon the implementation of
the Company's Internet-based, private jet aviation travel services business.
However, management expects to continue to incur losses in connection with the
development of its private jet aviation travel services business prior to
implementing the Web site and cannot be certain as to when this new business
will generate income.
Discontinued Operations
In the three and six months ended December 31, 1998, the Company incurred a loss
of $5,227,000 and $5,530,000, respectively, from its discontinued residential
real estate development operations.
Liquidity and Capital Resources
The net operating loss in the six months ended December 31, 1999 of $27,712,000
was partially offset by a $25,497,000 increase in paid-in capital related to the
issuance of stock options and warrants. Also, the Company sold common stock
($940,000, net) and issued treasury stock ($193,000) resulting in a $1,082,000
net decrease in stockholders' equity.
In the six months ended December 31, 1999, continuing operations used $3,098,000
of cash and the liquidation of certain assets of discontinued operations
generated $519,000 of cash. In addition, the Company expended $594,000 on
capitalized Web site software, furniture, and equipment.
The Company will continue to incur start up costs and operating expenses prior
to implementing its Web site. The Company's cash balance at December 31, 1999 is
$1,240,000 compared to $3,486,000 at June 30, 1999. In January 2000, the Company
entered common stock Purchase Agreements providing for the sale of common stock
and warrants for initial consideration of $11 million and the possibility of
total consideration of up to $59.7 million, if all warrants are exercised. Of
the initial consideration, $6,000,000 has been funded to-date, including
$1,000,000 as of December 31, 1999. The cash balance and funding from the
Purchase Agreements is adequate, in management's opinion, to complete the
implementation of the private jet aviation travel services business on the
Internet Web site and to meet working capital requirements to commence marketing
of the flightserv.com (TM) brand and begin to build market share. The Company's
need to raise additional capital to implement and maintain the private jet
aviation travel services business will depend upon, among other things, the
initial level of customer interest in the services offered on the Company's Web
site and the Company's ability to market the flightserv.com (TM) brand.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. The following discussion
highlights some of these risks and others are discussed elsewhere herein or in
other documents filed by the Company with the Securities and Exchange
Commission. In addition, statements in this quarterly
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report relating to matters that are not historical facts are forward-looking
statements based on management's belief and assumptions using currently
available information. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements
involve a number of risks and uncertainties, including, but not limited to those
set forth below.
General
FSW is in the process of developing an internet Web site to provide, as agent,
travel services to the private jet aviation marketplace. Based on information
published by the National Business Aviation Association, an industry group,
private aviation generates more than $51 billion in annual economic activity.
Private aviation aircraft are reported to carry over 145 million passengers per
year.
FSW intends through its Web site, www.flightserv.com, to distribute, as agent,
private charter services, lodging, personal and aircraft protection services,
ground transportation, concierge and other services. FSW will be compensated by
a commission or fee for its services from the service provider.
Supplier Agreements
Simultaneously with the development of the Web site, FSW has been negotiating
preferred partner agreements with suppliers of services to the private aviation
marketplace. Its strategy in selecting preferred partners is to contract with
premium service providers. To date, FSW has executed a preferred hospitality
agreement with the Ritz-Carlton Hotel Company, LLC, a leading provider of luxury
hotel rooms worldwide, and a Master Executive Protection Agreement with Vance
International, Inc., a leading provider of personal and asset protection
services. Under the agreement with Ritz-Carlton, member-users of the FSW Web
site will be able to reserve hotel accommodations with Ritz-Carlton through the
Web site and will be accorded Ritz-Carlton's "last room account" status,
providing added assurance of being able to obtain a confirmed reservation. Under
the agreement with Vance International, FSW is designated the exclusive private
aviation Internet distributor of Vance's worldwide personal and aircraft
protection services.
FSW is in the process of negotiating agreements with other service providers
including certified charter flight operators. Authority to operate charter
aircrafts is granted by the Federal Aviation Administration (the "FAA") and the
Department of Transportation of which the FAA is a part. FSW will serve as agent
for operators having certificates from the FAA under Part 135 of Title 14 of the
Code of Federal Regulations to provide such services. FSW will be dependent upon
certified charter operators to provide all flight services.
Web Site Development
FSW has a working model of its Web site which it is testing and refining as it
negotiates agreements with preferred suppliers. In addition to retaining Web
site developers, FSW has worked closely with legal and other advisers to comply
with all applicable legal and other requirements.
Marketing
FSW is currently evaluating the most effective methods to publicize its Web site
and attract users to the Web site. It is also seeking strategic partners who can
help publicize the Web site and attract customer traffic to it.
Availability of Services
FSW will not provide private aviation travel services directly but, instead,
will offer, as agent, services provided by independent vendors through its Web
site. As a result, the ability of FSW to enter into agreements, such as the
preferred provider agreements with Ritz-Carlton and Vance, and to otherwise
arrange for services to be available through its Web site is critical for the
success of its business. While multiple sources exist for the services to be
offered through the Web site, FSW will act only as an agent and have limited or
no control of the availability, actual delivery, or quality of the
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services offered to its member-users or the price offered for such services. In
addition, there is no guarantee that FSW will be able to enter into additional
preferred partnership agreements with other service providers. At this time, FSW
is negotiating contracts with certified charter providers and management
believes that certified charter operators will want to provide charter services
through the Web site. Failure to contract with certified charter operators would
have a material adverse effect on FSW.
Competition
The services to be offered by FSW are available directly from the providers and
through other channels including the Internet. Many of FSW's competitors have
financial resources substantially greater than FSW. FSW has contracted exclusive
or preferred Internet distribution rights with certain of service providers and
intends to seek such rights from other service providers, but there can be no
assurance that FSW will be able to obtain exclusive or preferred or rights in
the future.
Lack of Operating History/Expectation of Operating Losses
The Company has discontinued its residential real estate development business
and has not yet implemented its Web site. As a result, there is no meaningful
operating history upon which to base an evaluation of the Company's
Internet-based private aviation travel services business and prospects. The
Company incurred losses in fiscal 1999 and the first six months of fiscal 2000
and may continue to incur losses in the remainder of fiscal 2000 as the result
of the need to incur substantial marketing and promotion costs and systems and
development costs.
Dependence on the Internet and Development of Brand Name
The Company's future success depends upon the continued growth in the use of the
Internet generally and the active use of its Web site by private aviation
passengers to make flight reservations and arrange for other travel related
services. The Company believes that its Web site will be the first time both
charter flight reservations and other travel related services are offered
through one Web site and, therefore, it is impossible to predict the number of
existing private aviation passengers and the number of new private aviation
passengers that will use the Web site. The Company believes that broad
recognition and favorable consumer perception of the flightserv.com(TM) brand
name will be essential to attract existing and new private aviation passengers
to the Web site and that successful development of the flightserv.com(TM) brand
will depend on the success of the Company's marketing efforts, the breadth and
quality of the services available on the Web site, the successful completion of
transactions through the Web site and the ability of the Company to provide
adequate support and customer service. There is no assurance that the Company
will be able to adequately develop its brand name or otherwise attract a
sufficient number of Web site users.
Risk of System Failure/Lack of Capacity
The successful implementation and continued operation of the Web site will
depend upon communications hardware and computer hardware and software made
available by a third party and any interruptions in service caused by the
failure of these systems will be outside of the control of the Company. A system
failure that causes an interruption in service to the Web site or that results
in slower response times from the Web site could be disruptive to FSW's business
and could damage FSW's brand name and result in fewer visits to the Web site. In
addition, high volume could strain the capacity of the software or hardware used
in connection with the Web site resulting in slower response times or system
failures which could adversely affect sales and services.
Internet Security Issues
The secure transmission of confidential information over the Internet will be
important in maintaining user and vendor confidence in the Web site. The Company
will rely on encryption and authentication technology licensed from third
parties to effect secure transmission of confidential information including
confidential credit card information. However, there can be no assurance that
advances in computer capabilities or other developments will not result in
unauthorized
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persons obtaining access to confidential customer information in the Web site
exposing the Company to potential losses.
Management of Potential Growth
The Company is expected to expand its business after the implementation of the
Web site. This growth is expected to place significant demands on the Company's
management, operational, and financial resources. In order to manage expected
growth, the Company will be required to expand existing operations and to train,
manage and expand its employee base. Further, the Company's management will be
required to maintain relationships with various service providers and to
maintain control over the strategic direction of the Company. If the Company is
unable to manage growth effectively, the Company's business, results of
operations, and financial condition will be adversely affected.
Intellectual Property
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets, domain names and similar intellectual property as critical to its
success and relies on trademark and copyright law, trade secret protection and
confidentiality agreements to protect its intellectual property rights.
Nonetheless, there can be no assurance that the Company will be able to secure
significant protection for its intellectual property rights.
Government Regulation
Certain segments of the travel industry are regulated by the United States
Government and certain services offered by the Company are affected by such
regulations. The operators of charter flights upon whom the Company's service
depend are subject to rigorous and continuous certification requirements of the
FAA. The Company is also subject to regulations applicable to businesses
generally and laws or regulations directly applicable to the Internet.
While currently there are few laws directly applicable to the Internet, the
increase in Internet commerce may result in new laws or regulations relating to
Internet commerce including regulations regarding privacy, pricing and state and
local taxation which could affect the Company.
Volatility of Stock Price/Potential for Future Sales of Restricted Securities
The market price of the Company's common stock is highly volatile and is likely
to continue to be subject to wide fluctuations in response to factors including
the announcement by the Company of future partnership agreements or other
corporate developments, the limited number of freely tradable shares in public
hands, and the timing and successful implementation of the Web site.
Additionally, in recent years many companies with Internet related businesses
have experienced extreme price and volume fluctuations that have often been
unexplained by the operating performance of such companies. The Company's stock
price could also be negatively effected by the future sale of shares of
restricted common stock, including shares of restricted common stock underlying
options and warrants that have been issued by the Company. Approximately
22,000,000 issued and outstanding shares of the Company's common stock are
believed to be restricted securities as defined in Rule 144 promulgated under
the Securities Act of 1933. Rule 144 provides generally that restricted
securities must be held for one year prior to resale and provides certain
additional limitations on the volume of such shares that a beneficial owner may
sell in any three month period. Generally, non-affiliated owners may sell
restricted shares that have been held for at least two years without volume
limitations. In addition, the Company has issued warrants and options which, if
exercised, could result in up to an additional 28,313,743 shares of the
Company's common stock.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Company and its subsidiaries are involved from time to time in various
claims and legal actions in the ordinary course of business. In the opinion of
management, the Company and its subsidiaries are not party to any legal
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proceedings, the adverse outcome of which, would have any material adverse
effect on its business, its assets, or results of operations.
ITEM 2. CHANGES IN SECURITIES
The information in Notes 4 and 5 to the financial statements set forth
in Part I Item 1 hereof and in the Company's Current Report on Form 8-K
filed on January 28, 2000 is incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index of Exhibits
2.1 Common Stock Purchase Agreement dated as of January 18, 2000
between flightserv.com and Acqua Wellington Value Fund, Ltd.
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed January 28, 2000)
2.2 Common Stock Purchase Agreement dated as of January 18, 2000
between flightserv.com and Four Corners Capital, LLC
(incorporated herein by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed January 28, 2000)
4.1 Registration Rights Agreement dated as of January 18, 2000
between flightserv.com and Acqua Wellington Value Fund, Ltd.
and Four Corners Capital, LLC (incorporated herein by
reference to the Company's Current Report on Form 8-K filed
January 28, 2000)
4.2 Registration Rights Agreement between the Company and Langdon
Flowers, Jr., Langdon Flowers, Sr., and George McIntosh dated
December 31, 1999.
10.1 Form of Officer/Director Non-Qualified Option Agreement dated
December 2, 1999.
10.2 Schedule of Option Agreements.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
1) During the quarter ended December 31, 1999 - None
2) The Company filed the following report on Form 8-K
with the Securities and Exchange Commission on
January 28, 2000
(i) The Company's Current Report on Form 8-K filed with
the Securities and Exchange Commission reporting the
sales of common stock and warrants pursuant to
certain purchase agreements effective January 18,
2000.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
flightserv.com
(Registrant)
Date: February 14, 2000 By: /s/ William L. Wortman
---------------------------
William L. Wortman
Vice President and
Chief Financial Officer
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