1
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 March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to_________________
Commission File Number 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 May 12,
2000: 33,118,654
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 Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheet
March 31, 2000 and June 30, 1999 3
Condensed Consolidated Statements of
Operations For the Three and Nine Months
Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash
Flows For the Nine Months Ended
March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial 6-11
Statements
ITEM 2 Management's Discussion and Analysis Of
Financial Condition and Results of Operations 12-16
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 17
ITEM 2 Changes in Securities 17
ITEM 3 Defaults Upon Senior Securities 17
ITEM 4 Submission of Matters to a Voice of Security 17
Holders
ITEM 5 Other Information 17
ITEM 6 Exhibits and Reports on Form 8-K 17-18
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FLIGHTSERV.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
March 31, June 30,
2000 1999
-------- --------
(Unaudited)
Cash and cash equivalents $ 3,034 $ 3,486
Accounts and notes receivable 1,082 914
Net assets (liabilities) of discontinued operations (137) 123
Deferred costs and other assets 1,067 470
Predevelopment costs 1,163 1,085
Property and equipment, net 9,547 8,414
-------- --------
Total assets $ 15,756 $ 14,492
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 7,742 $ 7,830
Accounts payable and accrued expenses 461 631
Accrued interest payable 781 862
-------- --------
Total liabilities 8,984 9,323
-------- --------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.04 par value, 60,000,000 share authorized,
33,118,654 and 30,543,235 issued and outstanding, respectively 1,342 1,264
Additional paid-in capital 86,805 18,090
Accumulated deficit (81,238) (13,853)
Treasury stock - at cost (435,930 and 1,050,000 shares,
respectively) (137) (332)
-------- --------
Total shareholders' equity 6,772 5,169
-------- --------
Total liabilities and shareholders' equity $ 15,756 $ 14,492
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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FLIGHTSERV.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three Months Nine Months
------------------------------- -------------------------------
2000 1999* 2000 1999*
------------ ------------ ------------ ------------
Revenue and other income:
Sales $ -- $ -- $ -- $ --
Other income 306 -- 832 --
------------ ------------ ------------ ------------
Total revenues 306 -- 832 --
------------ ------------ ------------ ------------
General and administrative expenses 2,140 29 4,351 146
Expenses related to issuance of stock options and 37,453 -- 62,950 --
warrants
Depreciation and amortization 180 -- 469 --
Interest expense 206 -- 447 --
------------ ------------ ------------ ------------
Loss before discontinued operations (39,673) (29) (67,385) (146)
Loss from discontinued operations -- (2,609) -- (8,139)
------------ ------------ ------------ ------------
Net loss $ (39,673) $ (2,638) $ (67,385) $ (8,285)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss per share before discontinued operations $ (1.23) $ -- $ (2.17) $ (.01)
Discontinued operations -- (.12) -- (.38)
------------ ------------ ------------ ------------
Net loss $ (1.23) $ (.12) $ (2.17) $ (.39)
============ ============ ============ ============
Weighted average shares outstanding 32,216,782 21,394,586 31,124,357 21,394,586
============ ============ ============ ============
* Reclassified
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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FLIGHTSERV.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
2000 1999 *
-------- --------
Cash flows from operating activities:
Loss before discontinued operations $(67,385) $ (146)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 469 --
Expense related to issuance of stock options and warrants 62,950 --
Changes in operating assets and liabilities:
Accounts and notes receivables (168) --
Deferred costs and other assets (824) --
Accounts payable and accrued expenses (170) --
Accrued interest payable (81) --
-------- --------
Cash used in operating activities before discontinued
operations (5,209) (146)
Discontinued operations, net 453 10,191
-------- --------
Net cash (used in) provided by operating activities (4,756) 10,045
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,373) (17)
Predevelopment costs (78) (153)
Investing activities of discontinued operations, net -- (2,465)
-------- --------
Net cash used in investing activities (1,451) (2,635)
-------- --------
Cash flows from financing activities:
Principal debt payments (88) --
Sale of common stock 5,843 2,000
Financing activities of discontinued operations, net -- (8,691)
-------- --------
Net cash provided by (used in) financing activities 5,755 (6,691)
-------- --------
Net (decrease) increase in cash and cash equivalents (452) 719
Cash and cash equivalents at beginning of period 3,486 100
-------- --------
Cash and cash equivalents at end of period $ 3,034 $ 819
======== ========
* Reclassified
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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FLIGHTSERV.COM AND SUBSIDIARIES
NOTES TO THE CONDENSED 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
developing a new Internet-based, private jet aviation services business which
commenced operations on April 17, 2000. All significant inter-company balances
and transactions have been eliminated. 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 March, 2000 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 27,751,243 and
2,000,000 shares of Common stock were outstanding at March 31, 2000 and 1999,
respectively. Such 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 reported periods as the impact would have been antidilutive.
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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
Since April 1999 FSW has been developing a new business to provide Internet
access to private jet flights and related travel services. FSW launched its
Internet Web site and commenced charter flight reservations on March 9, 2000.
Charter flights booked by FSW began operating April 17, 2000. In the three and
nine months ended March 31, 2000, FSW incurred approximately $2,114,000 and
$4,131,000, 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 compensation costs related to 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 March 31, 2000 and June 30, 1999, FSW had capitalized $1,258,000 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 Inns hotel and is evaluating its options in connection with PDK. At
March 31, 2000 and June 30, 1999, the Company's investment in predevelopment
costs of PDK was $1,163,000 and $1,085,000 respectively.
Information related to business segments is as follows (in thousands):
Nine Months Ended March 31, 2000
-------------------------------------------------------------------
Private Jet
Aviation Shopping Stratos
Travel Services Centers Inns Total
--------------- ---------- -------- ---------
Revenues $ -- $ 832 $ -- $ 832
Net loss before discontinued operations (67,081) (304) -- (67,385)
Identifiable assets 5,883 8,847 1,163 15,893
Capital expenditures 1,373 -- 78 1,451
Depreciation and amortization 24 445 -- 469
Nine Months Ended March 31, 1999
-------------------------------------------------------------------
Private Jet
Aviation Shopping Stratos
Travel Services Centers Inns Total
--------------- ---------- -------- ---------
Revenues $ -- $ -- $ -- $ --
Net loss before discontinued operations (146) -- -- (146)
Identifiable assets 707 775 1,053 2,535
Capital expenditures 17 -- 153 170
Depreciation and amortization -- -- -- --
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 March 1999
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 a third party. In
September 1999, the Company sold certain assets of discontinued operations for
approximately $3.2 million consisting of $2.2 million of mortgage indebtedness
assumed by the buyer and $1.0 million in notes receivables.
Following is a summary of the net assets (liabilities) of discontinued
operations (in thousands):
March 31, June 30,
2000 1999
---------- --------
Real estate inventories $ 132 $ 4,596
Accounts and notes receivable 899 --
Investments in real estate equity securities -- 677
Notes and accrued interest payable (595) (4,450)
Estimated expenses and other liabilities (573) (700)
------- --------
$ (137) $ 123
======= ========
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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 provided for a private placement of restricted
common stock and warrants to purchase common stock to be completed in two
tranches.
As of January 18, 2000, Four Corners purchased from the Company, for an
aggregate purchase price of $1,000,000, (i) 165,070 shares of restricted common
stock, (ii) warrants (the "Four Corners Fixed Warrants") to purchase up to
1,485,638 shares of common stock at an exercise price of $6.058 per share and
(iii) warrants (the "Four Corners Variable Warrants") to purchase up to
1,238,030 shares of common stock at a per share exercise price equal to the
lesser of $9.772 (subject to adjustment by 10% if the shares underlying the
warrants are not registered within 120 days of the issuance of the warrants and
by 10% for each 30 day period thereafter) or 90% of the volume weighted average
price of the common stock for the five trading days prior to the date of the
exercise of the warrants. The Four Corners Fixed Warrants and 1,114,228 of the
Four Corners Variable Warrants expire 18 months after the date of issuance. The
remaining Four Corners Variable Warrants expire five years after the date of
issuance. The exercise of the Four Corners Fixed Warrants and the Four Corners
Variable Warrants are limited to 660,976 shares and 495,732 shares,
respectively, unless and until the exercise of such warrants is approved by the
Company's stockholders.
Under the terms of the AWVF Purchase Agreement, AWVF agreed to purchase from the
Company for aggregate consideration of $10,000,000 (i) 1,650,709 shares of
restricted common stock and (ii) warrants to purchase up to 3,260,151 shares of
restricted common stock. The AWVF Purchase Agreement required AWVF to complete
the acquisition of the common stock and warrants in two equal tranches. The
first tranche (the terms of which are described more fully below) for $5,000,000
closed simultaneously with the execution of the AWVF Purchase Agreement. The
second tranche was to have closed no later than February 29, 2000. AWVF has
failed to close the second tranche as required by the AWVF Purchase Agreement.
At the closing of the first tranche, AWVF purchased from the Company, for an
aggregate purchase price equal to $5,000,000, (i) 825,354 shares of restricted
common stock, (ii) warrants (the "AWVF Fixed Warrants") to purchase up to
577,748 shares of common stock at a purchase price equal to $6.058 per share and
(iii) warrants (the "AWVF Variable Warrants") to purchase up to 1,052,327 shares
of common stock at a purchase price equal to the lesser of $9.772 (subject to
the adjustment described above in respect to the Four Corners Variable Warrants)
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 AWVF Fixed
Warrants and 433,312 of the AWVF Variable Warrants expire 18 months after the
date of issuance. The remaining AWVF Variable Warrants expire five years after
the date of issuance.
In connection with the Purchase Agreements, the Company entered into a
Registration Rights Agreement. As a result of AWVF's breach of the AWVF Purchase
Agreement by failing to close the second tranche, no registration statement has
been filed.
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 188,976 shares of restricted common stock
in connection with the cashless exercise of 200,000 stock options with an
exercise price of $0.44.
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 March 2000, the Company sold 50,000 shares of restricted common stock from
treasury for $312,500 cash in a private placement transaction to a third party.
In March 2000, FSW issued to Vance International, Inc. 947,019 shares of common
stock in connection with the cashless exercise of 1,000,000 stock warrants with
an exercise price of $0.50.
The foregoing transactions were affected in reliance on the registration
exemption provided for by Section 4(2) of the Securities Act of 1933, as
amended, as sales by an issuer not involving a public offering.
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NOTE 5. STOCK OPTIONS AND WARRANTS
In fiscal 1999 and the nine months ended March 31, 2000, FSW issued nonqualified
stock options to purchase its common stock to directors, officers and employees.
The following table summarizes the stock options outstanding:
3/31/00 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
March 31, 2000, except for 200,000, 50,000 and 125,000 options with an exercise
price of $1.00, $1.75 and $4.00, respectively, that vest over a two year period
and 50,000 options with an excise price of $4.00 that vest over a one year
period. Of the options outstanding at March 31, 2000, 11,325,000 require
stockholder approval.
In connection with its new, private jet aviation travel services business, FSW
issued in fiscal 1999 and the nine months ended March 31, 2000 warrants to
purchase its common stock in exchange for consulting and legal services and for
strategic vendor alliances provided by outside third parties and in connection
with the Purchase Agreements described in Note 4.
The following table summarizes the outstanding warrants issued to outside third
parties:
3/31/00 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
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
1,000,000 2.00 -- --
400,000 2.50 -- --
5,100,000 4.00 -- --
2,063,386 6.06 -- --
2,290,357 9.77* -- --
----------- ----------
15,088,743 2,350,000
=========== ==========
* This option price is variable. See Note 4.
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.
The foregoing issuances of stock options and warrants were affected in reliance
on the registration exemption provided for by Section 4(2) of the Securities Act
of 1933, as amended, as sales by an issuer not involving a public offering.
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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 greater than market 2,290,357 $ 9.77 $ 6.00
Exercise price equal to market 5,000,000 $ 2.50 $ 1.93 --
Exercise price below market 14,923,386 $ 3.56 $ 5.74 --
----------
Total granted 22,213,743 $ 3.96 -- --
----------
Exercised during the period 1,200,000 $ .49 -- --
----------
Outstanding at 3/31/00:
Exercisable at $.42 to $1.00 6,300,000 $ 0.47 -- 9.0 years
Exercisable at $1.75 to $2.50 9,485,000 $ 2.20 -- 9.4 years
Exercisable at $4.00 to $6.06 10,138,386 $ 4.42 -- 9.7 years
Exercisable at $9.77 2,290,357 $ 9.77 -- 9.8 years
----------
Total outstanding 28,213,743 $ 3.23 -- --
----------
Exercisable at 3/31/00:
Exercisable at $.42 to $1.00 6,050,000 $ 0.45 -- --
Exercisable at $1.75 to $2.50 9,435,000 $ 2.21 -- --
Exercisable at $4.00 to $6.06 9,975,886 $ 4.43 -- --
Exercisable at $9.77 2,290,357 $ 9.77 -- --
----------
Total exercisable 27,751,243 $ 3.25 -- --
==========
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. The fair value of each warrant
has been estimated using the Black-Scholes option pricing model with weighted
average assumptions for risk-free interest rates, expected life for the
warrants, expected dividend yield, and expected stock market price volatility.
The total compensation cost recognized during the three and nine months periods
ended March 31, 2000 for these awards was $37,453,000 and $62,950,000,
respectively.
The Company's pro forma net loss and net loss per share for the nine months
ended March 31 2000, assuming compensation cost was determined under FASB No.
123 for all options and warrants, would have been the following:
NOTE 6. RELATED PARTY TRANSACTIONS
At March 31, 2000, 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 January, 2000, the Company advanced $150,000, and subsequent to March 1, 2000
an additional $125,000, in anticipation of an equity investment in a newly
formed entity that would acquire private jets for use in connection with flights
arranged through Private Seats(TM). The entity was formed and is controlled by
Four Corners and certain other related partners of the Company have had
discussions with respect to participating in the entity. As a result of the
breach by AWVF as described in Note 4 above and the Company's need to preserve
its capital for other purposes, the Company's current plans with respect to the
entity are being reconsidered.
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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
nine months ended March 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. On March 9, 2000, the Company
launched its Web site and announced its Private Seats(TM) program. Individual
travelers desiring to travel between designated cities can use the Web site to
determine if other travelers would like to make the same trip at approximately
the same time. Through the Web site, the Company acts as agent arranging for the
aircraft charter, confirming the flight to the traveler, collecting the fare and
paying the charter operator. The Company commenced its Private Seats(TM) program
on April 17, 2000 with flights between Atlanta, Georgia and the New York City
area.
Results of Continuing Operations
The Company's revenues in the three and nine months ended March 31, 2000 were
$306,000 and $832,000, respectively, representing lease income generated from
the Company's shopping centers acquired in fiscal 1999. All of the Company's
revenues in the March 31, 1999 period were generated by the residential real
estate development operations and have been reclassified to discontinued
operations.
General and administrative expenses in the three and nine months ended March 31,
2000 were $2,141,000 and $4,351,000 respectively compared to $29,000 and
$146,000, respectively, in the comparable 1999 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 jet
aviation travel services business.
In the three and nine months ended March 31, 2000, the Company issued stock
options to officers and directors and warrants to outside third parties and
recognized $37,453,000 and $62,950,000, respectively, of related non-cash
compensation expense.
The Company's depreciation and amortization expense of $469,000 and interest
expense of $447,000 in the nine months ended March 31, 2000 reflect primarily
the costs of the shopping center operations acquired in January 1999.
The Company began generating revenue from its private jet aviation travel
service business in April 2000 in connection with the launch of its Web site and
the commencement of its Private Seats(TM) service for flights between Atlanta,
Georgia and New York City. To date such revenues have been minimal. Management
believes revenues will increase in subsequent periods as the Company expands
this business into additional cities and markets its services to potential
customers. However, management expects to continue to incur losses in connection
with the development and implementation of its private jet aviation travel
services business and cannot be certain if or when this new business will
generate income.
Discontinued Operations
In the three and nine months ended March 31, 1999, the Company incurred losses
of $2,609,000 and $8,139,000, respectively, from its discontinued residential
real estate development operations.
Liquidity and Capital Resources
The net operating loss in the nine months ended March 31, 2000 of $67,655,000
was partially offset by a $63,220,000 increase in paid-in capital related to the
issuance of stock options and warrants. Also, the Company generated $5,843,000,
net from the sales of common stock and issued treasury stock valued at $195,000,
resulting in a $1,603,000 net increase in stockholders' equity.
In the nine months ended March 31, 2000, continuing operations used $5,210,000
of cash and the liquidation of certain assets of discontinued operations
generated $453,000 of cash. In addition, the Company expended $1,373,000 on
capitalized Web site software, furniture, and equipment.
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The Company will continue to incur operating losses as it implements and grows
its private jet aviation travel services business. The Company's current monthly
cash usage rate will increase as FSW adds employees and implements additional
marketing and advertising programs. The Company's cash balance at March 31, 2000
is $3,034,000 compared to $3,486,000 at June 30, 1999. Given current stock
market conditions, the Company does not expect that the warrants issued to Four
Corners and AWVF as part of the private placement transaction in January, 2000
will be exercised in the near future. While AWVF is obligated to close the
second tranche of the private placement which would result in the payment of an
additional $5,000,000 to the Company, AWVF has failed to close the second
tranche to date and the Company does not know when, or if, AWVF will fund the
second tranche. The Company is evaluating the most effective method of asserting
its rights against AWVF. As a result, the Company will likely require additional
debt or equity financing during the fiscal year ending June 30, 2001, with the
need for such financing and the timing of such need depending in large part on
the rate at which the revenues generated from the Company's private aviation
travel services business increase and the magnitude of the costs the Company
incurs in connection with growing its private aviation services business. There
can be no assurance that additional financing will be available when needed or,
if available, that it will be on terms favorable to the Company and its
stockholders. If Company is not successful in generating sufficient cash flow
from operations, or in raising additional capital when required in sufficient
amounts and on terms acceptable to the Company, these failures could have a
material adverse effect on the Company's business, results of operations and
financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of its then-current stockholders
would be diluted.
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 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.
FSW's Private Jet Services Business Has No Operating History
The Company has discontinued its residential real estate business and has just
made its Web site available to the public. As a result, there is no operating
history upon which to base an evaluation of its business and prospects. FSW's
chances of financial and operating success should be evaluated in view of the
risks, uncertainties, expenses, delays and difficulties associated with starting
a new business and, in particular, a business using new and unproven business
models. There is no assurance that FSW will be successful in the Internet-based,
private jet services market.
FSW Expects To Incur Operating Losses And There Can Be No Assurance That It Will
Achieve Or Sustain Profitability
At March 31, 2000 the Company had generated no revenue from its private jet
services business. FSW incurred operating losses in fiscal 1999 and expects to
incur operating losses in fiscal 2000 as the result of substantial marketing and
promotion costs, systems costs, consulting fees, and other development costs
associated with the launching of its Web site and Private Seats(TM) program. As
a result of these costs and uncertain revenue growth, there can be no assurance
that FSW will achieve or sustain profitability.
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Private Seats(TM) Is A Unique Product And There Can Be No Assurance That It Will
Be Successful
The use of the Internet to aggregate individual demand for private jet travel
between designated cities is a unique product which FSW has recently launched
and which it intends to expand over the next several months. To be successful,
FSW target customers -- professional business travelers -- will have to become
private jet passengers. While FSW believes that the advantages of private jet
travel, including the convenience of the air terminals, the comfort and safety
record of the planes and the ability of passengers to establish departure times
will be attractive to certain of its target customers, there can be no assurance
that Private Seats(TM) will attract a sufficient number of passengers to be
successful.
FSW Is Dependent On The Availability And Quality Of Charter Flight Operators and
Fixed-Base Operators
FSW does not intend to own or operate any aircraft and will be dependent upon
certified charter operators to provide all flight services. FSW will also be
dependent upon operators of the fixed-base ground terminals where passengers
will plane and deplane. The success of Private Seats(TM) will depend directly on
the ability of certified charter operators to provide quality service between
city pairs on a demand basis. Shortages in available charter aircraft could be
disruptive to FSWs business and could damage its brand name and result in fewer
customers. In addition, the quality of the services (including the reliability
and comfort of services at the airport and in flight) provided by the charter
operators and the fixed-base operators will be critical to the success of FSW's
business. While FSW intends to establish quality standards, its success will be
dependent on its ability to control the quality of services provided to its
customers on a day to day basis.
FSW Is Dependent On The Public Perception Of The Safety Of Private Jet Travel
Notwithstanding the safety record of private jet travel, FSW's ability to
attract customers to Private Seats(TM) is dependent on the public perception of
the safety of private jet travel. While the safety record of certified charter
private jet travel is superior to private aviation travel generally and
comparable to the safety record of commercial aircraft, the public may not
distinguish between different types of private aviation. As a result, if there
is an accident or other incident involving the private aviation industry
generally or a private charter operator that participates in the Private
Seats(TM) program, FSW's business may suffer from a temporary or permanent loss
of customers.
FSW's Business May Be Negatively Effected If The Cost Of Chartering Flights
Increases
FSW does not intend to own or operate any aircraft. However, FSW's agency fee
for a charter flight arranged through Private Seats(TM) will be equal to the
difference between the fares it collects, as agent, from individual passengers
and the fee charged by the charter operator for the flight. FSW plans to enter
into contracts with charter operators establishing charter fees which will be
fixed for limited periods of time. However, if the costs of operating charter
flights increase over time, the charter operators may increase the price of
chartering a flight. In that event, FSW will have to increase the price of each
seat or experience a reduced profit margin it receives from each flight. FSW
will have limited control over the cost of chartering flights which could
increase as a result of changes in operating costs (such as jet fuel, pilot
fees, airport fees or maintenance fees) or as a result of other factors such as
high demand for charter flights or general economic conditions. If charter costs
increase and, as a result, FSW increases the price of a seat purchased through
Private Seats(TM), it may lose customers to competitors, including the
commercial airlines.
FSW Is Dependent On Other Third Party Vendors
FSW does not plan to provide the other travel related services offered on its
Web site directly but, instead, will offer, as agent, such services provided by
independent vendors. As a result, FSW's ability to enter into agreements with
such vendors or to otherwise arrange for services to be available through its
Web site is critical to the success of its business. In addition, the quality of
the services provided through third parties is critical to the success of its
business. While FSW intends to establish quality standards, its success will be
dependent on its ability to control the quality of services provided to its
customers on a day to day basis.
FSW Is Dependent On The Internet And On The Development Its Brand Name
FSW's success depends on the continual growth of the use of the Internet
generally and the actual use of its Web site and Private Seats(TM) by its target
customers -- professional business travelers -- making charter flight
reservations and arranging for other travel related services. FSW's lack of
operating history makes it impossible to predict the number of existing
professional business travelers that will use its Web site and the Private
Seats(TM) program. The development of broad recognition and favorable consumer
perception of the flightserv.com(TM) and Private Seats(TM) brand names will be
essential to attract existing and new private aviation passengers to the
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Web site and will depend on the success of its marketing efforts, the breadth
and quality of flights arranged through Private Seats(TM), the breadth and
quality of the other services available on the Web site, the successful
completion of transactions through the Web site and FSW's ability to provide
adequate support and customer service to its customers. There is no assurance
that FSW will adequately develop the flightserv.com(TM) or Private Seats(TM)
brand names or otherwise attract a sufficient number of Web site users.
Computer System Failures Or Lack Of Capacity Could Disrupt The Business And
Damage FSW's Brand Name
FSW's successful implementation and continued operation of the Web site will
depend upon communications hardware and computer hardware and software provided
by third parties, and any interruptions in service caused by the failure of
these systems will be outside of FSW's control. 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 its
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 by the Web site
resulting in slower response times or failures which could adversely affect
FSW's business.
FSW May Face Difficulties Managing Its Growth
FSW expects that anticipated growth in connection with the launching of its Web
site and Private Seats(TM) will place significant demands on its management,
operation and financial resources. To manage this future growth, FSW needs to
improve its operational systems and expand, train and manage a growing employee
base. FSW will also need to maintain and expand our relationships with its
service providers. If FSW is unable to manage its growth effectively, its
business and financial condition will be adversely affected.
Loss Of Key Management Personnel Could Adversely Affect The Business
FSW's success depends primarily on the skills of its management team. Several of
its officers have joined the Company recently and many of its key personnel have
worked together for a relatively short time. The loss of one or more of our key
management personnel may adversely affect FSW's business and financial
condition.
Protecting Intellectual Property And Proprietary Information Is Necessary
FSW currently has a patent pending with respect to its Private Seats(TM) method
and system. While FSW believes that its pending patent application will result
in the issuance of a patent providing protection for its Private Seats(TM)
method and system, it is possible that the pending application may not result in
the issuance of a patent. Even if a patent is issued, the patent could be
successfully challenged by one or more parties, newly discovered prior art could
diminish the value of or invalidate the patent once issued, or current or future
competitors could devise new methods of competing with FSW's business that would
not be covered by the patent. In addition, while FSW's pending patent is
directed to a unique method and system, it may be possible for a competitor to
develop and utilize a business model that appears similar to Private Seats(TM),
but which has sufficient distinctions such that it does not fall within the
scope of FSW's pending patent.
In addition to seeking patent protection for FSW's Private Seats(TM) method and
system, FSW regards its copyrights, service marks, trademarks, trade secrets,
domain names and similar intellectual property as critical to its success and
rely on trademark and copyright law, trade secret protection and confidentiality
agreements to protect its intellectual property rights. Nonetheless, there can
be no assurance that FSW will be able to secure significant protection for its
intellectual property rights.
FSW Faces Significant Competition In Both The Commercial And Private Jet
Industry
The success of Private Seats(TM) will depend on FSW's ability to attract
frequent business and other first class travelers from commercial travel to
private air travel and to have them arrange such travel through Private
Seats(TM). Generally, commercial airlines have financial resources substantially
greater than FSW and may compete aggressively to retain these valuable
customers. In addition, even if FSW is successful in attracting new private jet
aviation passengers, existing or future charter operators may compete directly
with FSW for these customers.
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In addition, the other private aviation travel services to be offered by FSW are
available directly from the providers and through other channels, including the
Internet. Many of these competitors have financial resources substantially
greater than FSW. While FSW has obtained preferred Internet distribution rights
with certain service providers and intends to seek such rights from other
service providers, there can be no assurance that it will be able to obtain
exclusive or preferred rights in the future.
Government Regulation Of The Travel Industry Or The Internet Could Impact FSW's
Operations
Certain segments of the travel industry are regulated by the United States
Government and, while the Company is not currently required to be certified or
licensed under such regulation, certain services offered by the Company are
affected by such regulation. Charter flights operators, which FSW depends on,
are subject to vigorous and continuous certification requirements by the Federal
Aviation Administration ("FAA"). Changes in the regulatory framework for private
aviation travel could adversely affect FSW's business, operations and financial
condition.
In addition, while there are currently few laws or regulations directly
applicable to Internet commerce, the increase in Internet commerce could result
in new laws or regulations on such commerce including laws or regulations
regarding privacy, pricing and state or local taxation. Any such change could
adversely affect FSW's business, operations and financial condition.
FSW Maybe Unable To Meet Its Future Capital Requirements
Based on its current operating plans, FSW will need to raise additional working
capital in fiscal year 2001. If FSW raises additional funds by issuing
additional equity securities, the percentage ownership of our current
stockholders will be diluted. FSW currently does not have any binding
commitments for additional financing and cannot be certain that additional
financing will be available when and to the extent required or that, if
available, it will be on acceptable terms. In addition, future financings may be
affected by the market price of its Common Stock which has been volatile. If
adequate funds are not available on acceptable terms, FSW may not be able to
continue to fund its expansion or take other steps necessary to enhance its
business.
Internet Security Breaches Could Harm FSW's Business
The secure transmission of confidential information over the Internet will be
important in maintaining user and vendor confidence in FSW's Web site.
Significant or ongoing security breaches with respect to information transmitted
through FSW's Web site could cause it to lose customers. 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
persons obtaining access to confidential customer information in FSW's Web site.
In addition, prominent Web sites have been the victims of so-called "denial of
service" attacks by persons flooding the targeted web with such a high volume of
messages that access by legitimate users is effectively denied. If FSW was to
become a target of such an attack, it could adversely affect its business.
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 successful implementation and growth of the Private Seats(TM)
program. 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 21,000,000 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 the issuance of up to an additional 27,751,243 shares
of the Company's common stock.
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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
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 Warrant Certificate dated as of January 3, 2000 between
flightserv.com and Lazard Fieres & Co., LLC including
registration rights
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27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
During the quarter ended March 31, 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.
(ii) The Company's Current Report on Form 8-K files on
February 17, 2000 with the Securities and Exchange
Commission reporting the change in Company independent
public accountants effective February 14, 2000.
(iii) The Company's Current Report on Form 8-K filed on March
7, 2000 with the Securities and Exchange Commission
reporting the launch of the Company's Internet Web Site
and its Private Seats(TM) Program
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: May 15, 2000 By: /s/ William L. Wortman
------------------------------
William L. Wortman
Vice President and
Chief Financial Officer
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