<PAGE> 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]
<PAGE> 2
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
2
<PAGE> 3
FLIGHTSERV.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
March 31, June 30,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
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
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE> 4
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)
<TABLE>
<CAPTION>
Three Months Nine Months
------------------------------- -------------------------------
2000 1999* 2000 1999*
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
FLIGHTSERV.COM AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999 *
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
* Reclassified
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE> 6
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.
6
<PAGE> 7
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.
7
<PAGE> 8
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):
<TABLE>
<CAPTION>
Nine Months Ended March 31, 2000
-------------------------------------------------------------------
Private Jet
Aviation Shopping Stratos
Travel Services Centers Inns Total
--------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1999
-------------------------------------------------------------------
Private Jet
Aviation Shopping Stratos
Travel Services Centers Inns Total
--------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ -- $ --
Net loss before discontinued operations (146) -- -- (146)
Identifiable assets 707 775 1,053 2,535
Capital expenditures 17 -- 153 170
Depreciation and amortization -- -- -- --
</TABLE>
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):
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---------- --------
<S> <C> <C>
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
======= ========
</TABLE>
8
<PAGE> 9
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.
9
<PAGE> 10
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:
<TABLE>
<CAPTION>
3/31/00 6/30/99
------------------- -----------------
Option Option
Shares Price Shares Price
---------- ------ -------- ------
<S> <C> <C> <C>
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
========== =========
</TABLE>
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:
<TABLE>
<CAPTION>
3/31/00 6/30/99
-------------------------- ---------------------
Option Option
Shares Price Shares Price
------------ ------- ---------- -------
<S> <C> <C> <C>
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
=========== ==========
</TABLE>
* 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.
10
<PAGE> 11
Following is a summary of certain information regarding the Company's
outstanding options and warrants:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average Remaining
Exercise Grant-date Contractual
Number Price Fair Value Life
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
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 -- --
==========
</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. 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.
11
<PAGE> 12
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.
12
<PAGE> 13
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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<PAGE> 14
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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<PAGE> 15
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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<PAGE> 16
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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<PAGE> 17
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
17
<PAGE> 18
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
18
<PAGE> 1
EXHIBIT 4.2
WARRANT CERTIFICATE
THE WARRANT REPRESENTED BY THIS CERTIFICATE (THE "WARRANT") HAS BEEN (I)
ACQUIRED FOR INVESTMENT AND (II) ISSUED AND SOLD IN RELIANCE UPON AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
APPLICABLE STATE SECURITIES LAWS. THE WARRANT, AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF, CANNOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED, OTHER THAN
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE ACT OR IN A TRANSACTION THAT IS
OTHERWISE IN COMPLIANCE WITH THE ACT AND PROVIDED THAT THE ISSUER HAS RECEIVED
EVIDENCE REASONABLY SATISFACTORY TO THE ISSUER OF COMPLIANCE WITH ALL
APPLICABLE STATE AND FEDERAL SECURITIES LAWS. THE ISSUER SHALL BE ENTITLED TO
RELY UPON AN OPINION OF COUNSEL SATISFACTORY TO IT WITH RESPECT TO COMPLIANCE
WITH SUCH LAWS.
JANUARY 3, 2000
VOID AFTER 5:00 P.M. EASTERN STANDARD TIME
ON JANUARY 3, 2007
(THE "EXPIRATION DATE")
FLIGHTSERV.COM
WARRANT CERTIFICATE
THIS CERTIFIES THAT, LAZARD FRERES & CO., LLC ("Holder"), is the owner
of a Warrant that, subject to the terms of this Warrant Certificate, entitles
the Holder to purchase up to Two Million (2,000,000) fully paid and
non-assessable shares (the "Shares") of the common stock, $0.04 par value per
share (the "Common Stock"), of FLIGHTSERV.COM, a Delaware corporation (the
"Company"), at the purchase price of four dollars ($4.00) per share (the
"Exercise Price") upon presentation and surrender of this Warrant Certificate
with the Form of Election to Purchase attached hereto, duly executed, at any
time prior to the Expiration Date.
1. REGISTRATION. The Warrant has been registered in a warrant
register (the "Warrant Register"). The Company shall treat the Holder of the
Warrant as set forth in the Warrant Register as the owner in fact thereof for
all purposes. The Company is not liable for any registration or transfer of any
Warrant that is registered or any Warrant that will become
<PAGE> 2
registered in the name of a fiduciary or its nominee unless the Company has
actual knowledge that a fiduciary or its nominee is committing a breach of
trust by requesting such registration or transfer or has actual knowledge of
such facts that its participation therein amounts to bad faith.
2. RIGHT TO PIGGYBACK. If the Company shall determine to
register any of its securities either for its own account or the account of a
security holder or holders exercising their respective demand registration
rights, other than a registration relating solely to employee benefit plans, or
a registration relating solely to a Rule 145 transaction, or a registration on
any registration form that does not permit secondary sales, the Company will:
(a) give to the Holder written notice thereof; and
(b) use its best efforts to include in such registration (and any
related filing or qualification under applicable blue sky
laws), except as set forth in Section 4 below, and in any
underwriting involved therein, all the securities granted
under this Warrant Certificate ("Unregistered Securities")
specified in a written request or requests, made by the
Holder and received by the Company within seven (7) days
after the written notice from the Company described in clause
(a) above is received by Holder or delivered by the Company.
Such written request may specify all or a part of the
Holder's Unregistered Securities granted but no less than 25%
of the Holder's Unregistered Securities.
Notwithstanding anything herein to the contrary, Holder is not
entitled to include the Unregistered Securities in any registration made by the
Company for the purpose of registering shares (including shares underlying
warrants) issued in connection with the private placement transactions arranged
by DC Investment Partners, LLC or their affiliates (including Four Corners
Capital, LLC).
3. RIGHT TO DEMAND. Upon written request of Holder that the
Company effect a registration with respect to not less than 50% of the
Unregistered Securities, the Company will use its best efforts to file a
registration statement within 60 days after receipt of such request and to
effect such registration promptly thereafter. Notwithstanding anything herein
to the contrary, (i) the Company shall have no obligation to take any action to
effect registration of the Unregistered Securities before the effective date of
the registration statement to be filed in connection with the financing
arrangement disclosed in the Company's Current Report of Form 8-K filed on
January 28, 2000 with the Securities and Exchange Commission and (ii) the
rights of Holder with respect to the registration of the Unregistered
Securities shall be subordinate to the registration rights of the Wendell
Starke Trust ("WST") and Godley-Morris Group, LLC ("GMG") with respect to
shares of the Company's Common Stock owned by WST and GMG as of the date
hereof. If, after receiving a request for registration of the Unregistered
Securities hereunder, the Company shall advise Holder in writing that in the
good faith judgment of its Board of Directors it would be significantly
detrimental to the Company or its Stockholders for a registration statement to
be filed in the near future on the grounds that such
2
<PAGE> 3
registration statement would require the premature disclosure of a material
pending transaction or event of the Company, then the Company's obligation to
use its best efforts to register the Unregistered Securities shall be deferred
for a period not to exceed 90 days from the date of the request. The Company
shall only be required to file one registration statement pursuant to this
Section 3.
4. UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to Section 2(a). In such event, the right of the Holder to
registration pursuant to this Section 4 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Unregistered Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting
shall (together with the Company and the other holders of securities of the
Company with registration rights to participate therein distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected by the Company.
Notwithstanding any other provision of this Section 4, if the
representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the representative may (subject to the limitations set forth
below) exclude all Unregistered Securities from, or limit the number of
Unregistered Securities to be included in, the registration and underwriting.
The Company shall so advise the Holder of securities if requesting
registration, and the number of shares of securities that are entitled to be
included in the registration and underwriting shall be allocated first to the
Company for securities being sold for its own account, second to WST and GMG
for shares being sold by them pursuant to the terms of existing registration
rights agreements between WST and GMG and the Company, and thereafter in
proportionate fractions to the number of shares presented by all stockholders
with equivalent registration rights. If any person does not agree to the terms
of any such underwriting, he shall be excluded therefrom by written notice from
the Company or the underwriter. Any Unregistered Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
If shares are so withdrawn from the registration and if the number of
shares of securities to be included in such registration was previously reduced
as a result of marketing factors, the Company shall then offer to all persons
who have retained the right to include securities in the registration the right
to include additional securities in the registration in an aggregate amount
equal to the number of shares so withdrawn, with such shares to be allocated
among the persons requesting additional inclusion in proportionate fractions to
the number of shares presented by all holders.
5. EXPENSES OF REGISTRATION; INDEMNIFICATION.
(a) All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Section 2, 3 and 4 hereof
shall be borne by the Company. All Selling Expenses relating to securities so
registered shall be borne by the
3
<PAGE> 4
Holder and other holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
(b) The Company will indemnify the Holder, and its officers,
directors, and agents and each person controlling the Holder within the meaning
of Section 15 of the Act, from and against all expenses, claims, losses,
damages and liabilities (including reasonable attorney's fees and defense
costs) ("Costs") arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other document relating to the registration of securities
hereunder (collectively the "Registration Documents"), or based on any omission
(or alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of any federal securities law or any state securities
law or any rule or regulation thereunder applicable to the Company. The Holder
will (if securities held by him are included in the registration), indemnify
the Company and each of its directors, officers and agents and each person who
controls the Company within the meaning of Section 15 of the Act, from and
against all Costs arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any Registration Document, or
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
to the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
Registration Document in reliance upon and in conformity with written
information furnished to the Company by Holder and stated to be specifically
for use therein. It is agreed that the indemnity agreements contained in this
section shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the indemnifying party (which consent shall not be unreasonably withheld).
6. TRANSFER OF WARRANT. The Warrant is transferable on the books
of the Company only upon delivery of the Warrant to the Company, duly endorsed
by the Holder or by its duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment or authority to
transfer. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or an official certified copy thereof, shall be
deposited with the Company. Should an executor, administrator, guardian or
other legal representative of a Holder effect such a transfer, then duly
authenticated evidence of its authority must be produced and may be required to
be deposited with the Company in its discretion. Upon any registration of
transfer, the Company agrees to deliver a new Warrant or Warrants to the
persons entitled thereto. Notwithstanding the foregoing, the Company has no
obligation to transfer the name of the Holder on its books to any person,
unless the Holder furnishes the Company evidence of compliance with the Act, in
accordance with the provisions of Section 13 hereof.
7. EXERCISE OF WARRANT. The rights represented by this Warrant
may be exercised by the Holder in whole or in part (but not as to a fractional
Share), by surrendering the Warrant to the Company or its duly authorized
agent, with the Form of Election to Purchase, a copy of which is attached
hereto, duly completed and signed, and upon paying to the Company
4
<PAGE> 5
the Exercise Price, as may be adjusted in accordance with the provisions of
Section 12 hereof, for the number of Shares for which this Warrant is
exercised. Payment of such Exercise Price may be made (a) in cash; (b) by
certified check, bank draft or drawn postal, express money order payable to the
order of flightserv.com; or (c) by reducing the actual number of Shares
issuable upon the exercise of this Warrant (as set forth on the Election to
Purchase) by the smallest number of whole shares of the Common Stock which,
when multiplied by the Closing Price per share of the Common Stock as of the
date this Warrant is exercised, is sufficient to satisfy the Exercise Price for
the number of Shares for which this Warrant is exercised. Upon the surrender of
this Warrant, payment of the Exercise Price as described above and payment of
all tax obligations as described in Section 9 below, the Company agrees to
cause to be issued and delivered with all reasonable dispatch to or upon the
written order of the registered Holder and (subject to receipt of evidence of
compliance with the Act in accordance with the provisions of Section 13 hereof)
in such name or names as such registered Holder may designate, a certificate or
certificates for the number of full Shares so purchased upon the exercise of
such Warrant, together with cash, as provided in Section 14 hereof, in respect
of any fractional Share otherwise issuable upon such surrender. Such
certificate or certificates shall be deemed to have been issued and any person
so designated to be named therein shall be deemed to have become a holder of
record of such Shares as of the date of surrender of this Warrant, payment of
the Exercise Price as described above and payment of all tax obligations as
described in Section 10 hereof; provided, however, that if, at the date of
surrender of this Warrant and payment of the Exercise Price and taxes the
transfer books for the Common Stock or other class of stock purchasable upon
the exercise of this Warrant shall be closed, the certificates for the Shares
for which this Warrant is exercised shall be issuable as of the date on which
such books shall next be opened (whether before, on or after the Expiration
Date) and until such date the Company shall be under no duty to deliver any
certificates for such Shares; and provided further, however, that the transfer
books shall not be closed at any one time for a period longer than twenty (20)
consecutive calendar days unless otherwise required by law.
8. NOTICES.
(a) Notice of Adjustment. Whenever the number of shares of Common
Stock for which this Warrant is exercisable shall be adjusted pursuant to
Section 12, the Company shall forthwith prepare a certificate to be executed by
the President or Chief Financial Officer of the Company setting forth, in
reasonable detail, the event requiring the adjustment, the method by which the
adjustment was calculated and describing the number of shares of Common Stock
for which this Warrant is exercisable after giving effect to such adjustment or
change. The Company shall promptly cause a signed copy of such certificate to
be delivered to the Holder. The Company shall keep at its principal office
copies of all such certificates and cause the same to be available for
inspection during normal business hours by the Holder of any prospective
purchaser of the Warrant designated by the Holder.
(b) Notice of Extraordinary Distributions. In the event that the
Company proposes to set a record date for the purpose of entitling holders of
its Common Stock to receive any dividend or other distribution of:
5
<PAGE> 6
(i) cash in an amount in excess of the previous regular
cash dividend, or
(ii) any evidences of its indebtedness, any shares of its
stock or any other securities or property of any
nature whatsoever, including any warrants or other
rights to subscribe for or purchase any evidences of
its indebtedness, any shares or its stock of any
other securities or property;
then the Company shall deliver to the Holder written notice of such proposed
dividend or distribution at least 10 days prior to such proposed record date. A
reclassification of Common Stock (other than a change in par value, or from par
value to no par value or from no par value to par value) into shares of Common
Stock and shares of any other class of stock shall be deemed a distribution by
the Company to the holders of its Common Stock of such shares of such other
class of stock within the meaning of this Section 8(b) and, if the outstanding
shares of Common Stock shall be changed into a larger of smaller number of
shares of Common Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of Section 12.
(c) Notice of Certain Mergers and Asset Dispositions. In the
event that the Company proposes to consolidate with or merge into another
corporation in a transaction in which the Common Stock will be changed or
converted into other securities, cash or property, or to sell, transfer or
otherwise dispose of all or substantially all of its property, assets or
business to another corporation or other entity, the Company shall deliver to
each Holder written notice of such proposed transactions at least 15 days prior
to the earlier of its consummation or the taking of any record of the holders
of its Common Stock for the purpose of determining their rights pursuant to
such transactions.
(d) Notice of Registration Statement. In the event that the
Company shall propose to file a registration statement under the Act with
respect to shares of Common Stock to be sold by the Company, it shall deliver
to each Holder (i) at least 10 days advance notice of its intention to file
such registration statement and the anticipated range of prices, if any, at
which the shares of Common Stock are proposed to be offered; (ii) prompt notice
of any change in such anticipated range of prices; and (iii) notice by 10:00
a.m., New York City time, on the day prior to the date on which the
registration statement is expected to become effective.
(e) Notice Procedures. Unless otherwise expressly provided for in
this Warrant, any notices or other communications required or permitted
hereunder shall be given in writing and shall be delivered personally, by
overnight delivery service or by registered or certified mail and shall be
deemed to have been given when so delivered personally, or one business day
after the date of deposit with such overnight courier or three business days
after the date mailed. All notices shall be addressed to the respective parties
as follows: if to Holder, to _____________________________________________; and
if to Company, to flightserv.com, 3343 Peachtree Road, N.E., Suite 530,
Atlanta, Georgia 30326, Attn: President or such other address as the party to
whom notice is to be given may have furnished to the other party in writing.
6
<PAGE> 7
9. PAYMENT OF TAXES. The Holder agrees to pay all documentary
stamp taxes (whether federal, state or local) attributable to the exercise of
this Warrant and the issuance of Shares upon such exercise by delivery of cash
or a certified check payable to the Company in the amount of all such taxes. In
addition, as a condition to the exercise of the Warrant, the Company may
require the Holder to pay or reimburse the Company for any taxes which the
Company determines are required to be withheld in connection with the grant or
any exercise of this Warrant. Such payment or reimbursement shall be in the
manner set forth in this Section 9.
10. MUTILATED OR MISSING WARRANTS. Should this Warrant be
mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue
and deliver in exchange and substitution for, and upon cancellation of, the
mutilated Warrant, or in lieu of and substitution for the lost, stolen or
destroyed Warrant, a new Warrant of like tenor representing an equivalent right
or interest. The Company shall issue and deliver such new Warrant only upon
receipt of evidence reasonably satisfactory to the Company, if requested, of
such loss, theft or destruction of such Warrant and a reasonable indemnity.
Applicants for such substitute Warrants also shall comply with such other
reasonable regulations and pay such other reasonable charges as the Company may
prescribe.
11. RESERVATION OF COMMON STOCK, ETC. The Board of Directors of
the Company has approved this Warrant and the Company has reserved (and will
continue to reserve until the earlier of the exercise of this Warrant or the
Expiration Date) out of the authorized and unissued shares of the Common Stock
a number of shares sufficient to provide for the exercise of the rights of
purchase represented by this Warrant. The transfer agent for the Common Stock
(the "Transfer Agent") and every subsequent Transfer Agent for any shares of
the Common Stock issuable upon the exercise of any of the rights of purchase
aforesaid are hereby irrevocably authorized and directed at all times until the
Expiration Date to reserve such number of authorized and unissued shares of the
Common Stock as shall be required for such purpose. The Company will supply
such Transfer Agent with duly executed stock certificates for such purposes.
Any Warrant surrendered in the exercise of the rights hereby evidenced shall be
cancelled, and such cancelled Warrant shall constitute sufficient evidence of
the number of Shares that have been issued upon the exercise of such Warrant.
No shares of Common Stock shall be subject to reservation concerning any
Warrant not exercised on or prior to the Expiration Date.
12. ADJUSTMENTS OF WARRANT PRICE AND NUMBER AND KIND OF SHARES.
The Exercise Price and the number and kind of securities purchasable upon the
exercise of this Warrant shall be subject to adjustment from time to time upon
the occurrence of the following events subsequent to the date hereof.
(a) In case the Company shall (i) pay a dividend in shares of its
capital stock or make a distribution in shares of its capital stock
(whether of the Common Stock or of any other class of capital stock),
(ii) subdivide its outstanding Common Stock into a greater number of
shares or (iii) combine its outstanding Common Stock into a smaller
number of shares, then the number of Shares (calculated immediately
prior to such change) shall be increased or decreased, as the case may
be, in direct proportion to the
7
<PAGE> 8
increase or decrease in the total number of shares of Common Stock of
the Company by reason of such change, and the Exercise Price of the
Shares after such change shall, in the case of an increase in the
number of shares of Common Stock, be proportionately reduced, and, in
case of a decrease in the total number of shares of Common Stock, be
proportionately increased. An adjustment made pursuant to this
Paragraph (a) of this Section 12 shall become effective immediately
after the record date for determining stockholders entitled to receive
such dividend or distribution in the case of a dividend or
distribution in shares of the Company's capital stock and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an
adjustment made pursuant to this Paragraph (a) of this Section 12, the
Holder shall become entitled to receive shares of two or more classes
of capital stock of the Company, the Board of Directors of the Company
(whose determination shall be conclusive) shall in good faith
determine the allocation of the adjusted exercise price between or
among shares of such classes of capital stock.
(b) Reorganization, Reclassification. If the Company shall effect
any reorganization or reclassification of its capital stock in
connection with which a Holder has not exercised this Warrant, then,
upon any exercise of this Warrant subsequent to the consummation
thereof, such Holder shall be entitled to receive, in lieu of the
Common Stock issuable upon exercise immediately prior to such
consummation, the highest amount of stock, other securities or
property (including cash) to which such Holder would have been
entitled upon such consummation if such Holder had exercised this
Warrant immediately prior thereto, all subject to further adjustments
thereafter as provided in this Section 12.
(c) No adjustment in the Exercise Price shall be required unless
and until such adjustments would require an increase or decrease of at
least five cents ($0.05) in such price; provided, however, that any
adjustments that by reason of this Paragraph (b) of this Section 12
are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this
Section 13 shall be made to the nearest cent or to the nearest whole
Share, as the case may be.
(d) If at any time as a result of any adjustment made pursuant to
Paragraph (a) of this Section 12, the Holder of this Warrant shall
become entitled to receive any shares of the Company's capital stock
other than Common Stock, then the number of such other shares
receivable upon exercise of this Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions concerning the Common
Stock contained in Paragraphs (a) through (c), inclusive, of this
Section 12.
(e) Irrespective of any adjustments in the Exercise Price or the
number or kind of Shares or shares of other capital stock of the
Company or of others purchasable upon exercise of this Warrant, any
warrants theretofore or thereafter issued may continue to express the
same price and number and kind of Shares or shares of other capital
stock of the Company as are stated in such warrants when initially
issued.
8
<PAGE> 9
13. REGISTRATION UNDER THE SECURITIES ACT OF 1933. Neither this
Warrant nor the Shares have been registered under the Act in reliance on
exemption from such registration requirements provided by Section 4(2) of the
Act and Regulation D promulgated thereunder, and under exemptions provided by
applicable state securities laws. The Holder, by its acceptance hereof,
covenants and agrees that it will not transfer or dispose of this Warrant or
any of the Shares except pursuant to (a) an effective registration statement
filed under the Act or (b) an opinion of counsel, reasonably satisfactory to
counsel for the Company, that an exemption from the registration requirements
under the Act and applicable state securities laws is available and otherwise
in accordance with the conditions set forth in Section 13 hereof.
14. FRACTIONAL INTERESTS. No fractional shares of the Common
Stock will be issued upon the exercise of this Warrant or any future Warrants
issued in replacement hereof, but in lieu thereof a cash payment will be made
to the Holder.
15. RIGHTS OF WARRANT HOLDERS. No Holder of this Warrant
Certificate shall be entitled to vote or receive dividends or be deemed the
Holder of Common Stock or any other securities of the Company that may at any
time be issuable upon the exercise hereof for any purpose, nor shall anything
contained herein be construed to confer upon the Holder hereof, as such, any of
the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue of stock, reclassification of stock,
change of par value, consolidation, merger, conveyance or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise, until this Warrant shall have been exercised and the Common Stock
purchasable upon the exercise hereof shall have become deliverable to such
Holder.
[Signatures Next Page]
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
under seal and delivered as of the date and year first written above.
FLIGHTSERV.COM
BY:
------------------------------------
PRESIDENT
[CORPORATE SEAL]
Attest:
------------------------------------
Secretary
10
<PAGE> 11
FORM OF ELECTION TO PURCHASE
TO: flightserv.com
3343 Peachtree Road, N.E.
Suite 530
Atlanta, Georgia 30326
Attention: President
Pursuant to the Warrant Certificate (herein called the "Certificate"),
dated as of January 3, 2000, granted by flightserv.com (the "Company") to
Lazard Freres & Co., LLC ("Lazard"), Lazard hereby gives notice that it elects
to exercise the warrant granted under the Certificate with respect to ______
shares of the common stock of the Company as of the date on which this notice
is delivered to the Company, and accordingly hereby agrees to purchase such
shares at the price and on the terms established under the Certificate. To the
extent payment is made by cash, check or shares of the Company's stock
previously owned by the Company, full payment for such shares is enclosed. Such
payment consists of:
__________ Cash
__________ Check
__________ shares of the Company's common stock, _______ of which
are previously owned.
Lazard hereby represents and warrants that it is purchasing such
shares for investment purposes only and not with a view to distribution or
resale.
Lazard hereby agrees that the warrant granted under the Certificate
shall be deemed to have been exercised to the extent specified in this notice
on the exercise date below the authorizing signature, and Lazard hereby
warrants that on such date this notice was delivered to the Company.
Sincerely,
-----------------------------
Title:
DATED:
------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FLIGHTSERV.COM FOR THE NINE MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,034,000
<SECURITIES> 0
<RECEIVABLES> 1,082,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,756,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,342,000
<OTHER-SE> 5,430,000
<TOTAL-LIABILITY-AND-EQUITY> 15,756,000
<SALES> 0
<TOTAL-REVENUES> 832,000
<CGS> 0
<TOTAL-COSTS> 68,217,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 447,000
<INCOME-PRETAX> (67,385,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (67,385,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,385,000)
<EPS-BASIC> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
