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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 September 30, 1999
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
November 12, 1999: 30,543,235
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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FLIGHTSERV.COM
TABLE OF CONTENTS
<TABLE>
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Page No.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet
September 30, 1999 and June 30, 1999 3
Consolidated Statements of Income
For the Three Months
Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
For the Three Months Ended
September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations 10-14
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 15
EXHIBIT 27 Financial Data Schedule (for SEC use only)
</TABLE>
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FLIGHTSERV.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
1999 1999
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<S> <C> <C>
Cash and cash equivalents $ 2,127 $ 3,486
Accounts and notes receivable 1,036 914
Net assets (liabilities) of discontinued operations (368) 123
Deferred costs and other assets 593 470
Predevelopment costs 1,090 1,085
Property and equipment, net 8,632 8,414
-------- --------
Total assets $ 13,110 $ 14,492
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 7,801 $ 7,830
Accounts payable and accrued expenses 217 631
Accrued interest payable 771 862
-------- --------
Total liabilities 8,789 9,323
-------- --------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $.04 par value, 60,000,000 shares authorized,
30,543,235 issued and outstanding, 1,264 1,264
Additional paid-in capital 28,289 18,090
Retained (deficit) (24,900) (13,853)
Treasury stock - at cost (1,050,000 shares) (332) (332)
-------- --------
Total shareholders' equity 4,321 5,169
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Total liabilities and shareholders' equity $ 13,110 $ 14,492
======== ========
</TABLE>
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 MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998*
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<S> <C> <C>
Revenue and other income:
Sales $ -- $ --
Other income 273 --
------------ ------------
Total revenues 273 --
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General and administrative expenses 900 45
Expense related to issuance of stock options and warrants 10,199 --
Depreciation and amortization 142 --
Interest expense 79 --
------------ ------------
Loss before income taxes and discontinued operations (11,047) (45)
Income tax expense -- --
------------ ------------
Net loss before discontinued operations (11,047) (45)
Loss from discontinued operations -- (303)
------------ ------------
Net loss $ (11,047) $ (348)
============ ============
Basic and diluted loss per share:
Loss per share before discontinued operations $ (.36) $ --
Discontinued operations -- (.02)
------------ ------------
Net loss $ (.36) $ (.02)
============ ============
Weighted average shares outstanding 30,543,235 16,499,253
============ ============
</TABLE>
* Reclassified
The accompanying 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 THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998*
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<S> <C> <C>
Cash flows from operating activities:
Loss before discontinued operations $(11,047) $ (45)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 142 --
Expense related to issuance of stock options and warrants 10,199 --
Changes in operating assets and liabilities:
Accounts and notes receivables (122)
Deferred costs and other assets (199) --
Accounts payable and accrued expenses (414)
Accrued interest payable (91) --
-------- -----
Cash used by operating activities before discontinued operations (1,532) (45)
Discontinued operations, net 490 811
-------- -----
Net cash provided (used) by operating activities (1,042) 766
-------- -----
Cash flows from investing activities:
Purchase of property and equipment (283) --
Predevelopment costs (5) --
Investing activities of discontinued operations, net -- (14)
-------- -----
Net cash used by investing activities (288) (14)
-------- -----
Cash flows from financing activities:
Principal debt payments (29) --
Financing activities of discontinued operations, net -- (754)
-------- -----
Net cash used by financing activities (29) (754)
-------- -----
Net decrease in cash and cash equivalents (1,359) (2)
Cash and cash equivalents at beginning of period 3,486 100
-------- -----
Cash and cash equivalents at end of period $ 2,127 $ 98
======== =====
</TABLE>
* Reclassified
The accompanying 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 "Company"). All significant intercompany
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 September 30, 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 earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares outstanding and
potentially dilutive shares outstanding during the period. Options and warrants
to purchase 15,185,000 shares of Common Stock were outstanding at September 30,
1999. Outstanding option and warrants could potentially dilute basic earnings
per share in the future but have not been included in the computation of
diluted net loss per share in the September 1999 quarter as the impact would
have been antidilutive.
There were no options or warrants outstanding at September 30, 1998.
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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 its 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 Aviation Travel Services Business
Since April 1999 FSW has been developing an Internet-based, private aviation
travel services business including an Internet Web site. In the quarter ended
September 30, 1999, FSW incurred approximately $842,000 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, FSW has issued warrants to purchase its Common Stock for
consulting services and strategic vendor alliances related to the private
aviation travel services business.
At September 30 and June 30, 1999, FSW had capitalized $336,816 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.
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
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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
September 30 and June 30, 1999, the Company's investment in predevelopment
costs of PDK was $1,090,000 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 September
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. 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 of Discontinued Operations (in
thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
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<S> <C> <C>
Real estate inventories $ 132 $ 4,596
Accounts and notes receivable 1,000 --
Investments in real estate equity securities -- 677
Notes and accrued interest payable (763) (4,450)
Estimated expenses and other liabilities (737) (700)
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$ (368) $ 123
======= =======
</TABLE>
NOTE 4. STOCK OPTIONS AND WARRANTS
In fiscal 1999 and the quarter ended September 30, 1999, FSW issued
nonqualified stock options to purchase its Common Stock to directors, officers
and employees. The following table summarizes the stock options outstanding:
<TABLE>
<CAPTION>
9/30/99 6/30/99
------------------------ -------------------
Option Option
Shares Price Shares Price
--------- ------- --------- -------
<S> <C> <C> <C>
2,000,000 $ .44 2,000,000 $ .44
2,600,000 .42 2,600,000 .42
50,000 .50 50,000 .50
200,000 1.00 200,000 1.00
100,000 1.75 -- --
4,600,000 2.50 -- --
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9,550,000 4,850,000
========= =========
</TABLE>
No options were exercised in the quarter ended September 30, 1999. All of
the options have a 10-year term and
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were fully vested at September 30, 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.
In connection with its new private aviation travel services business FSW
issued 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:
<TABLE>
<CAPTION>
9/30/99 6/30/99
------------------------------- -----------------------------
Option Option
Shares Price Shares Price
---------- ------- --------- ------
<S> <C> <C> <C>
200,000 $ .42 200,000 $ .42
200,000 .44 200,000 .44
1,450,000 .50 1,450,000 .50
400,000 .75 400,000 .75
2,985,000 1.75 100,000 1.75
400,000 2.50 -- 2.50
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5,635,000 2,350,000
========== =========
</TABLE>
All of the warrants issued to date by FSW are exercisable, except for 50,000
warrants at an exercise price of $.50 that vest over two years.
Following is a summary of certain information regarding the Company's
options and warrants for the quarter ended September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Weighted Average
Average Average Remaining
Exercise Grant-date Contractual
Number Price Fair Value Life
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 7,200,000 $0.37 -- --
Grants during the year:
Exercise price equal to market 5,000,000 $2.50 $1.93 --
Exercise price below market 2,985,000 $1.75 $2.42 --
----------
Total granted during the period 7,985,000 $2.22 -- --
----------
Outstanding at end of period:
Exercisable at $.43 to $1.00 7,100,000 $0.48 -- 9.5 years
Exercisable at $1.75 to $2.50 8,085,000 $2.21 -- 9.8 years
----------
Outstanding at end of period 15,185,000 $1.40 -- --
----------
Exercisable at end of period:
Exercisable at $.43 to $1.00 6,850,000 $0.48 -- --
Exercisable at $1.75 to $2.50 8,035,000 $2.21 -- --
----------
Exercisable at end of period 14,885,000 $1.41 -- --
----------
Of the 9,550,000 options outstanding, 7,450,000 require shareholder approval.
</TABLE>
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 5
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 quarter ended September 1999 for these awards was
$10,199,000.
The Company's pro forma net loss and net loss per share for the quarter
ended September 30, 1999, assuming compensation cost was determined under FASB
No. 123 for all options and warrants, would have been the following:
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<TABLE>
<S> <C>
Net loss before discontinued operations $ (18,205,419)
Net loss from discontinued operations $ --
Net loss $ (18,205,419)
Net loss per share before discontinued operations $ (.60)
Net loss per share from discontinued operations --
Net loss per share $ (.60)
</TABLE>
NOTE 5. RELATED PARTY TRANSACTIONS
In September 1999, the Company purchased a note receivable in the amount of
$587,000 due from an entity affiliated with a former officer of the Company. The
note is secured by residential real estate.
At September 30 and June 30, 1999 Stonebridge has an account receivable of
$438,982 from an entity which is owned by the Company Chairman and his
children.
In connection with consulting services related to the Company's
Internet-based private aviation travel service business provided by Mr. Bert
Lance, the father of the Company's President and Chief Executive Officer, the
Company in fiscal 1999 granted warrants to purchase 400,000 shares of its
Common Stock to the Bert Lance Grantor Trust. In September 1999, the Company
granted an additional 600,000 warrants to the Bert Lance Grantor Trust. Of
these warrants, 400,000 have an exercise price of $.50 per share and 600,000 a
$1.75 per share exercise price.
ITEM 2. MANAGEMENT'S 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
quarter ended September 30, 1998 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 current quarter were $273,000 which represent
lease income generated from the Company's shopping centers acquired in fiscal
1999. All of the Company's revenues in the quarter ended September 30, 1998 were
generated by the residential real estate development operations and have been
reclassified to discontinued operations.
General and administrative expenses increased by $855,000 from $45,000 in
the quarter ended September 30, 1998 to $900,000 in the current quarter. This
increase is due to increased compensation costs, consulting and legal fees, and
other costs associated with the development of the new Internet-based, private
aviation travel services business.
In the quarter ended September 30, 1999, the Company issued stock options
to officers and directors and warrants to outside third parties and recognized
$10,199,000 of related non-cash expense.
The Company's depreciation and amortization expense of $142,000 and
interest expense of $79,000 in the quarter ended September 30, 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 aviation travel
services business. However, management expects to continue to incur losses in
connection
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with the development of its private aviation travel services business prior to
implementing the Web site and cannot be certain as to when the private aviation
travel services business will generate income.
Discontinued Operations
In the quarter ended September 30, 1998, the Company incurred a $303,000
loss from its discontinued residential real estate development operations.
Liquidity and Capital Resources
The net operating loss in the quarter ended September 30, 1999 of
$11,047,000 was partially offset by a $10,199,000 increase in paid-in capital
related to the issuance of stock options and warrants. As a result,
stockholders' equity decreased $848,000 in the quarter ended September 30,
1999.
In the quarter ended September 30, 1999, continuing operations used
$1,532,000 of cash and the liquidation of certain assets of discontinued
operations generated $490,000 of cash. In addition, the Company expended
$283,000 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 September 30,
1999 is $2,127,000 compared to $3,486,000 at June 30, 1999. This cash reserve
is adequate, in management's opinion, to complete the implementation of the
private aviation travel services business on the Internet Web site. The
Company's need to raise additional capital to implement and maintain the
private 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.
The Company is presently reviewing the potential impact of Year 2000
compliance issues with regard to its information and accounting systems and
business operations. The preliminary determination made by management is that
any costs, problems, or uncertainties associated with the potential
consequences of Year 2000 issues are not expected to have a material impact on
its future operations or financial condition, but the Company's Web site
business could be materially adversely effected if Year 2000 issues cause
disruptions in the systems of the Company's third party vendors or suppliers of
private aviation travel services.
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.
General
FSW is in the process of developing an internet Web site to provide, as
agent, travel services to the private 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 for its Web site, www.flightserv.com, to distribute private
charter services, lodging, personal and
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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 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 rights in
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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 has incurred losses in fiscal 1999 and the first quarter 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. Due to the lack of operating history of the Company's private aviation
travel services business, 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 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.
13
<PAGE> 14
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.
Year 2000
The Year 2000 issue relates to the risk that computer systems may not
properly recognize the Year 2000. While the Company believes, after consulting
with its Web site developer, that the systems being developed for its Web site
will be Year 2000 compliant, the Company relies on, and the Web site after it
is operational will rely on, information technology supplied by third parties.
In addition, the providers of private aviation travel services sold through the
Web site are dependent on their own information technology systems and their
third party vendors' systems. The Company will seek assurance from such
suppliers that their systems are Year 2000 compliant but there is no guarantee
that the Company, its third party vendors or the suppliers of the private
aviation services available on the Web site will not experience significant
Year 2000 issues. It is also possible that member-users' access to the Web site
might be disrupted as the result of Year 2000 issues. Any of these potential
Year 2000 issues could adversely 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 or shares underlying options and warrants that have
been issued by the Company. Approximately 20,000,000 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 securities without the volume
limitations, after the shares have been held for at least two years. In
addition, the Company has issued warrants and options which, if exercised,
could result in up to an additional 15,185,000 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
14
<PAGE> 15
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
Not Applicable
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
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K with the Securities
and Exchange Commission during the quarter ended September 30, 1999.
(i) The Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 15, 1999 reporting
the disposition of certain residential real estate assets of
the Company on June 30, 1999.
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: November 15, 1999 By: /s/ William L. Wortman
William L. Wortman
Vice President and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FLIGHTSERV.COM FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,127,000
<SECURITIES> 0
<RECEIVABLES> 1,036,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,800,000
<DEPRECIATION> 168,000
<TOTAL-ASSETS> 13,110,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,264,000
<OTHER-SE> 3,057,000
<TOTAL-LIABILITY-AND-EQUITY> 13,110,000
<SALES> 0
<TOTAL-REVENUES> 273,000
<CGS> 0
<TOTAL-COSTS> 11,320,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,000
<INCOME-PRETAX> (11,047,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,047,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,047,000)
<EPS-BASIC> (.36)
<EPS-DILUTED> 0
</TABLE>
