10QSB/A 1 g64637e10qsba.txt FLIGHTSERV.COM 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE 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 February 11, 2000: 31,297,281 Transitional Small Business Disclosure Format: Yes [ ] No [X] 2 FLIGHTSERV.COM
TABLE OF CONTENTS PAGE NO. -------- PART I FINANCIAL INFORMATION ITEM 1 Consolidated Financial Statements -As Restated (unaudited) Consolidated Balance Sheet December 31, 1999 and June 30, 1999 3 Consolidated Statements of Operations For the Three and Six Months Ended December 31, 1999 and 1998 4 Consolidated Statements of Cash Flows For the Six Months Ended December 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-10 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 14 ITEM 3 Defaults Upon Senior Securities 14 ITEM 4 Submission of Matters to a Voice of Security 14 Holders ITEM 5 Other Information 15 ITEM 6 Exhibits and Reports on Form 8-K 15
A-2 3 FLIGHTSERV.COM AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AS RESTATED SEE NOTE 7) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
December 31, June 30, 1999 1999 ------------ ---------- (unaudited) Cash and cash equivalents $ 1,240 $ 3,486 Accounts and notes receivable 1,059 914 Net assets (liabilities) of discontinued operations (203) 123 Deferred costs and other assets 748 470 Predevelopment costs 1,100 1,085 Property and equipment, etc 8,871 8,414 -------- -------- Total assets $ 12,815 $ 14,492 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 7,772 $ 7,830 Accounts payable and accrued expenses 245 631 Accrued interest payable 711 862 -------- -------- Total liabilities 8,728 9,323 -------- -------- Commitments and contingent liabilities Shareholders' equity: Common stock, $.04 par value, 60,000,000 share authorized, 31,297,281 and 30,543,235 issued and outstanding, respectively 1,271 1,264 Additional paid-in capital 30,064 18,090 Accumulated deficit (27,095) (13,853) Treasury stock - at cost (484,930 and 1,050,000 shares, (153) (332) respectively) -------- -------- Total shareholders' equity 4,087 5,169 -------- -------- Total liabilities and shareholders' equity $ 12,815 $ 14,492 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. A-3 4 FLIGHTSERV.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (AS RESTATED SEE NOTE 7) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three Months Six Months ------------------------------- ------------------------------- 1999 1998* 1999 1998* ------------ ------------ ------------ ------------ Revenue and other income: Sales $ -- $ -- $ -- $ -- Other income 253 -- 526 -- ------------ ------------ ------------ ------------ Total revenues 253 -- 526 -- ------------ ------------ ------------ ------------ General and administrative expenses 1,311 72 2,211 117 Expenses related to issuance of stock options and 3,296 -- 11,027 -- warrants Depreciation and amortization 147 -- 289 -- Interest expense 162 -- 241 -- ------------ ------------ ------------ ------------ Net loss before discontinued operations (4,663) (72) (13,242) (117) Loss from discontinued operations -- (5,227) -- (5,530) ------------ ------------ ------------ ------------ Net loss $ (4,663) $ (5,299) $ (13,242) $ (5,647) ============ ============ ============ ============ Basic and diluted net loss per share: Loss per share before discontinued operations $ (.15) -- $ (.43) -- Discontinued operations -- $ (.33) -- $ (.35) ------------ ------------ ------------ ------------ Net loss $ (.15) $ (.33) $ (.43) $ (.35) ============ ============ ============ ============ Weighted average shares outstanding 30,551,431 15,970,474 30,547,333 15,970,474 ============ ============ ============ ============
* Reclassified The accompany notes are an integral part of these consolidated financial statements. A-4 5 FLIGHTSERV.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (AS RESTATED SEE NOTE 7) (IN THOUSANDS)
1999 1998* ---------- --------- Cash flows from operating activities: Loss before discontinued operations $ (13,242) $ (117) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 289 -- Expense related to issuance of stock options and warrants 11,027 -- Changes in operating assets and liabilities: Accounts and notes receivables (145) -- Deferred costs and other assets (429) -- Accounts payable and accrued expenses (447) -- Accrued interest payable (151) -- -------- ------- Cash used in operating activities before discontinued operations (3,098) (117) Discontinued operations, net 519 6,098 -------- ------- Net cash (used in) provided by operating activities (2,579) 5,981 -------- ------- Cash flows from investing activities: Purchases of property and equipment (594) -- Predevelopment costs (15) -- Investing activities of discontinued operations, net -- (22) -------- ------- Net cash used in investing activities (609) (22) -------- ------- Cash flows from financing activities: Principal debt payments (58) -- Sale of common stock 1,000 -- Financing activities of discontinued operations, net -- (5,647) -------- ------- Net cash provided by (used in) financing activities 942 (5,647) -------- ------- Net (decrease) increase in cash and cash equivalents (2,246) 312 Cash and cash equivalents at beginning of period 3,486 100 -------- ------- Cash and cash equivalents at end of period $ 1,240 $ 412 ======== =======
* Reclassified The accompany notes are an integral part of these consolidated financial statements. A-5 6 FLIGHTSERV.COM AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These financial statements include the operations of flightserv.com ("FSW") and its subsidiaries (collectively the "Company"). Since discontinuing its residential real estate operations in fiscal 1999, the Company has been in the development stage of a new Internet-based, private jet aviation services business. All significant inter-company balances and transactions have been climinated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to the current fiscal period presentation. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position of the Company as of December 31, 1999 and of the results of operations for the periods presented have been included. The financial data at June 30, 1999 is derived from audited financial statements which are included in the Company's Form 10-KSB and should be read in conjunction with the audited financial statements and notes thereto. Interim results are not necessarily indicative of results for the full year. Cash and Cash Equivalents The Company classifies as cash equivalents any investments which can be readily converted to cash and have an original maturity of less than three months. At times cash and cash equivalent balances at a limited number of banks and financial institutions may exceed insurable amounts. The Company believes it mitigates its risks by depositing cash or investing in cash equivalents in major financial institutions. Real Estate Investments Real estate investments are recorded at the lower of cost or estimated fair value. Development costs and real estate taxes are capitalized while development is in progress. Depreciation commences at the time the Company begins collecting rental income. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line basis over the assets' estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred and expenditures for improvements which extend the useful life or add value to the asset are capitalized. Sales and disposals of assets are recorded by removing the related cost and accumulated depreciation amounts with any resulting gain or loss reflected in income. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share" which requires dual presentations of basic earnings per share ("EPS") and diluted EPS. Basic EPS is computed using the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding and potentially dilutive shares outstanding during the period. Options and warrants to purchase 8,635,000 shares of Common stock were outstanding at December 31, 1999. Outstanding options and warrants could potentially dilute EPS in the future but have not been included in the computation of diluted net loss per share in the December 1999 periods as the impact would have been antidilutive. There were no options or warrants outstanding at December 31, 1998. A-6 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 Business Since April 1999 FSW has been developing an Internet-based, private jet aviation travel services business including an Internet Web site. In the three and six months ended December 31, 1999, FSW incurred approximately $1,175,000 and $2,017,000, respectively, of general and administrative expense in connection with development of this new business. The expense includes consulting fees in the aviation industry, Internet operations, Web site development, marketing, and business plan areas and other professional services. In addition, operating expenses reflect warrants that FSW has issued to purchase its common stock in return for consulting services and in connection with strategic vendor alliances related to the private jet aviation travel services business. At December 31, and June 30, 1999, FSW had capitalized $575,000 and $88,500, respectively, in Internet Web site development costs. Commercial Real Estate Investments In fiscal 1999, the Company purchased an entity that owns two shopping center properties in the Atlanta, Georgia area. The mortgage financing on the shopping center properties includes an additional interest agreement which provides that the lender receive 50% of the cash flow and of the excess of appraised value over the mortgage loan balance at the time of any sale of the property. The Company has recorded deferred debt discount cost and a corresponding accrued interest liability to reflect the lenders allocation of the excess appraisal value provided in the additional interest agreement. The deferred debt discount is being amortized over the 36 month term of the mortgage loans. 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. A-7 8 The Company has completed a preliminary study for development of its first Stratos Inn hotel and is evaluating its options in connection with PDK. At December 31 and June 30, 1999, the Company's investment in predevelopment costs of PDK was $1,100,000 and $1,085,000 respectively. NOTE 3. DISCONTINUED OPERATIONS Effective January 1, 1999 the Company discontinued its residential real estate development operations. Residential real estate operations include developed lots, undeveloped land, and equity investments in residential real estate development companies, partnerships, and joint ventures. The December 1998 financial statement amounts have been reclassified to reflect the discontinued operations. The Company has made certain estimates regarding the fair asset values and costs to dispose of the remaining assets of the discontinued operations. In July 1999, the Company sold certain assets of discontinued operations with a net carrying value of approximately $1,100,000 for cash to an outside third party. In September 1999, the Company sold certain assets of discontinued operations for approximately $3.2 million consisting of the assumption of $2.2 million of mortgage indebtedness and $1.0 million in notes receivable. Following is a summary of the net assets (liabilities) of discontinued operations (in thousands):
December 31, June 30, 1999 1999 ------------ -------- Real estate inventories $ 132 $ 4,596 Accounts and notes receivable 1,000 -- Investments in real estate equity -- 677 securities Notes and accrued interest payable (783) (4,450) Estimated expenses and other liabilities (552) (700) ------- ------- $ (203) $ 123 ======= =======
NOTE 4. ISSUANCE OF COMMON STOCK As of January 18, 2000, the Company entered into common stock purchase agreements (the "Purchase Agreements") with Acqua Wellington Value Fund, Ltd., ("AWVF"), and Four Corners Capital, LLC, ("Four Corners" and, together with AWVF, the "Investors"), which provide for an equity financing package consisting of the sale of restricted common stock and warrants with total proceeds of up to $59.7 million, assuming the Investors exercise all warrants. Under the terms of the Purchase Agreements, the Investors agreed to purchase from the Company, for an aggregate purchase price of $11 million, (i) 1,815,779 shares of common stock; (ii) warrants (the "Fixed Warrants") to purchase up to 2,641,135 shares of common stock at the purchase price of $6.058 per share; and (iii) warrants (the "Variable Warrants") to purchase up to 3,342,684 shares of common stock at a purchase price equal to the lesser of $9.772 per share or 90% of the volume weighted average price of the common stock for the five trading days prior to the exercise of the warrants. The Fixed Warrants and 1,980,851 of the Variable Warrants expire 18 months after the date of issuance. The remaining Variable Warrants expire five years after the date of issuance. The exercise of 660,976 of the Fixed Warrants and 495,732 of the Variable Warrants is subject to prior stockholder approval. Pursuant to the Purchase Agreements, Four Corners purchased 165,070 shares of restricted common stock for $1,000,000. The AWVF transaction is to be completed in two equal tranches. In the first tranche, AWVF purchased for $5,000,000 825,354 shares of restricted common stock and warrants to purchase up to 1,630,075 shares of common stock. The second tranche for $5,000,000 is expected to close no later than February 29, 2000. In addition, the Company, AWVF and Four Corners entered into a Registration Rights Agreement pursuant to which the Company provided certain registration rights to AWVF and Four Corners with respect to both the restricted common stock and the shares underlying the warrants issued to the Investors under the Purchase Agreements as well as shares and shares underlying certain options and warrants previously issued to Four Corners. In the event that a registration statement does not become effective within 120 days of January 18, 2000, the exercise price for the Variable Warrants will be reduced by 10% and by an additional 10% for each 30 day period thereafter until the registration statement is declared effective. The proceeds to the Company from the sales of common stock pursuant to the Purchase Agreements will be reduced by investment banking fees, legal costs and other related expenses. A-8 9 In December 1999, the Company issued 400,000 shares of restricted common stock from treasury to certain parties including a former director and a former officer of the Company. The shares were issued pursuant to an agreement resolving outstanding issues related to certain prior transactions involving the Company's discontinued real estate operations which reduced the related asset valuations by $193,000. In connection therewith, the Company entered into a Registration Rights Agreement providing the holders of such shares with certain registration rights. In December, 1999, the Company issued 188,976 shares of common stock in connection with the cashless exercise of 200,000 stock options with an exercise price of $0.44. NOTE 5. STOCK OPTIONS AND WARRANTS In fiscal 1999, FSW issued nonqualified stock options to purchase 2,000,000 of its Common Stock at an exercise price of $0.44 per share to directors and certain officers. Options to purchase 200,000 shares were exercised in December 1999. The 1,800,000 options outstanding have a 10-year term and were fully vested at December 31, 1999. In connection with its new private jet aviation travel services business, FSW issued in fiscal 1999 and the six months ended December 31, 1999 warrants to purchase its Common Stock in exchange for consulting and legal services and for strategic vendor alliances provided by outside third parties. The following table summarizes the outstanding warrants issued to outside third parties:
12/31/99 6/30/99 ----------------------- ---------------------- Option Option Shares Price Shares Price --------- -------- ---------- ------- 200,000 $ 0.42 200,000 $ 0.42 200,000 0.44 200,000 0.44 1,450,000 0.50 1,450,000 0.50 400,000 0.75 400,000 0.75 2,985,000 1.75 100,000 1.75 400,000 2.50 -- -- 1,200,000 4.00 -- -- --------- --------- 6,835,000 2,350,000 ========= =========
All of the warrants issued to date by FSW are vested, except for 50,000 warrants at an exercise price of $.50 that vest over two years. In January 2000, FSW issued 8,353,743 warrants to purchase its common stock at per share exercise prices ranging from $2.00 to $9.77, including the warrants issued in connection with the Purchase Agreements described in Note 4. Following is a summary of certain information regarding the Company's outstanding options and warrants:
Weighted Weighted Average Average Remaining Exercise Grant-date Contractual Number Price Fair Value Life --------- -------- ---------- ----------- Outstanding at 6/30/99 4,350,000 $ .52 -- -- --------- Grants during the period: Exercise price equal to 400,000 $ 2.50 $ 1.82 -- market Exercise price below market 4,085,000 $ 2.41 $ 3.34 -- --------- Total granted 4,485,000 $ 2.42 -- -- --------- Exercised during the period 200,000 $ 0.44 -- -- --------- Outstanding at 12/31/99: Exercisable at $.42 to $1.00 4,050,000 $ 0.49 -- 9.2 years Exercisable at $1.75 to $2.50 3,385,000 $ 1.84 -- 9.7 years Exercisable at $4.00 1,200,000 $ 4.00 -- 9.7 years --------- Outstanding at 12/31/99 8,635,000 $ 1.45 -- -- ---------
A-9 10 The Company accounts for options issued to employees under APB No. 25 and options and warrants issued to nonemployees under FASB No. 123. Pro-forma information regarding FASB No. 123 is not presented because the stock options granted during the year ended June 30, 1999 were fully vested and there were no stock options issued during the six months ended December 31, 2000. For the options and warrants issued to non-employees, the fair value of each award has been estimated using the same assumptions. The total compensation cost recognized during the three and six months periods ended December 31, 1999 for these awards was $3,296,000 and $11,027,000, respectively. NOTE 6. RELATED PARTY TRANSACTIONS At December 31, 1999, the Company holds a note receivable in the amount of $587,000 due from an entity owned by a former officer of the Company. The note is secured by residential real estate. In connection with consulting services related to the Company's Internet-based, private jet aviation travel service business provided by Mr. Bert Lance, the father of the Company's President and Chief Executive Officer, the Company granted in January 2000 warrants to purchase 1,000,000 shares of its common stock to the Bert Lance Grantor Trust. The warrants have an exercise price of $4.00 per share. In November 1999, the Company paid Mr. Bert Lance $50,000 in consulting fees. NOTE 7. RESTATEMENT The Company has revised previously reported financial statements to reflect compensation expense which should not have been recorded in connection with granting certain stock options and warrants. At the July 11, 2000 Annual Meeting, the Company did not obtain shareholder approval related to 12,025,000 options to purchase its Common Stock previously proposed to be issued. As a result of shareholder approval not being obtained related to such stock options and warrants, the Company has restated its previously filed Form 10-Q. The following summarizes the revisions to the Consolidated Statements of Operations for the fiscal periods ended December 31, 1999 (in thousands, except per share data):
Three Months Ended Six Months Ended --------------------------- -------------------------- As Previously As As Previously As Reported Restated Reported Restated ------------- ----------- ------------- ---------- (Unaudited) Revenues $ 253 $ 253 $ 526 $ 526 Expenses related to the issuance of stock options and warrants (15,298) (3,296) (25,497) (11,027) Loss from continuing operations (16,665) (4,663) (27,712) (13,242) Net loss (16,665) (4,663) (27,712) (13,242) Basic and diluted net loss per share: Loss per share before discontinued operations (0.55) (0.15) (0.91) (0.43) Net loss per share (0.55) (0.15) (0.91) (0.43)
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview Effective January 1, 1999 the Company discontinued its residential real estate development business. As a result, the statement of operations for the three and six months ended December 31, 1999, reflects the operating loss of that business as discontinued operations. The continuing operations include development of an Internet-based private aviation travel services business, limited commercial real estate operations, and other investments. A-10 11 Results of Continuing Operations The Company's revenues in the three and six months ended December 31, 1999 were $253,000 and $526,000, respectively, represent lease income generated from the Company's shopping centers acquired in fiscal 1999. All of the Company's revenues in the December 31, 1998 periods were generated by the residential real estate development operations and have been reclassified to discontinued operations. General and administrative expenses in the three and six months ended December 31, 1999 were $1,311,000 and $2,211,000 respectively compared to $72,000 and $117,000, respectively, in the comparable 1998 periods. These increases are due to increased compensation costs, consulting and legal fees, travel, and other costs associated with the development of the new Internet-based private aviation travel services business. In the three and six months ended December 31, 1999, the Company issued stock options to officers and directors and warrants to outside third parties and recognized $15,298,000 and $24,497,000, respectively of related non-cash expense. The Company's depreciation and amortization expense of $289,000 and interest expense of $241,000 in the six months ended December 31, 1999 reflect the costs of the shopping center operations acquired in January 1999. Management expects revenues to increase significantly upon the implementation of the Company's Internet-based, private jet aviation travel services business. However, management expects to continue to incur losses in connection with the development of its private jet aviation travel services business prior to implementing the Web site and cannot be certain as to when this new business will generate income. Discontinued Operations In the three and six months ended December 31, 1998, the Company incurred a loss of $5,227,000 and $5,530,000, respectively, from its discontinued residential real estate development operations. Liquidity and Capital Resources The net operating loss in the six months ended December 31, 1999 of $13,242,000 was partially offset by a $11,027,000 increase in paid-in capital related to the issuance of stock options and warrants. Also, the Company sold common stock ($940,000, net) and issued treasury stock ($193,000) resulting in a $1,082,000 net decrease in stockholders' equity. In the six months ended December 31, 1999, continuing operations used $3,098,000 of cash and the liquidation of certain assets of discontinued operations generated $519,000 of cash. In addition, the Company expended $594,000 on capitalized Web site software, furniture, and equipment. The Company will continue to incur start up costs and operating expenses prior to implementing its Web site. The Company's cash balance at December 31, 1999 is $1,240,000 compared to $3,486,000 at June 30, 1999. In January 2000, the Company entered common stock Purchase Agreements providing for the sale of common stock and warrants for initial consideration of $11 million and the possibility of total consideration of up to $59.7 million, if all warrants are exercised. Of the initial consideration, $6,000,000 has been funded to-date, including $1,000,000 as of December 31, 1999. The cash balance and funding from the Purchase Agreements is adequate, in management's opinion, to complete the implementation of the private jet aviation travel services business on the Internet Web site and to meet working capital requirements to commence marketing of the flightserv.com (TM) brand and begin to build market share. The Company's need to raise additional capital to implement and maintain the private jet aviation travel services business will depend upon, among other things, the initial level of customer interest in the services offered on the Company's Web site and the Company's ability to market the flightserv.com (TM) brand. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS The Company's business, results of operations and financial condition are subject to many risks, including those set forth below. The following discussion highlights some of these risks and others are discussed elsewhere herein or in other documents filed by the Company with the Securities and Exchange Commission. In addition, statements in this quarterly 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 A-11 12 assurances that these expectations will prove to be correct. Such statements involve a number of risks and uncertainties, including, but not limited to those set forth below. General FSW is in the process of developing an internet Web site to provide, as agent, travel services to the private jet aviation marketplace. Based on information published by the National Business Aviation Association, an industry group, private aviation generates more than $51 billion in annual economic activity. Private aviation aircraft are reported to carry over 145 million passengers per year. FSW intends through its Web site, www.flightserv.com, to distribute, as agent, private charter services, lodging, personal and aircraft protection services, ground transportation, concierge and other services. FSW will be compensated by a commission or fee for its services from the service provider. Supplier Agreements Simultaneously with the development of the Web site, FSW has been negotiating preferred partner agreements with suppliers of services to the private aviation marketplace. Its strategy in selecting preferred partners is to contract with premium service providers. To date, FSW has executed a preferred hospitality agreement with the Ritz-Carlton Hotel Company, LLC, a leading provider of luxury hotel rooms worldwide, and a Master Executive Protection Agreement with Vance International, Inc., a leading provider of personal and asset protection services. Under the agreement with Ritz-Carlton, member-users of the FSW Web site will be able to reserve hotel accommodations with Ritz-Carlton through the Web site and will be accorded Ritz-Carlton's "last room account" status, providing added assurance of being able to obtain a confirmed reservation. Under the agreement with Vance International, FSW is designated the exclusive private aviation Internet distributor of Vance's worldwide personal and aircraft protection services. FSW is in the process of negotiating agreements with other service providers including certified charter flight operators. Authority to operate charter aircrafts is granted by the Federal Aviation Administration (the "FAA") and the Department of Transportation of which the FAA is a part. FSW will serve as agent for operators having certificates from the FAA under Part 135 of Title 14 of the Code of Federal Regulations to provide such services. FSW will be dependent upon certified charter operators to provide all flight services. Web Site Development FSW has a working model of its Web site which it is testing and refining as it negotiates agreements with preferred suppliers. In addition to retaining Web site developers, FSW has worked closely with legal and other advisers to comply with all applicable legal and other requirements. Marketing FSW is currently evaluating the most effective methods to publicize its Web site and attract users to the Web site. It is also seeking strategic partners who can help publicize the Web site and attract customer traffic to it. Availability of Services FSW will not provide private aviation travel services directly but, instead, will offer, as agent, services provided by independent vendors through its Web site. As a result, the ability of FSW to enter into agreements, such as the preferred provider agreements with Ritz-Carlton and Vance, and to otherwise arrange for services to be available through its Web site is critical for the success of its business. While multiple sources exist for the services to be offered through the Web site, FSW will act only as an agent and have limited or no control of the availability, actual delivery, or quality of the 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. A-12 13 Competition The services to be offered by FSW are available directly from the providers and through other channels including the Internet. Many of FSW's competitors have financial resources substantially greater than FSW. FSW has contracted exclusive or preferred Internet distribution rights with certain of service providers and intends to seek such rights from other service providers, but there can be no assurance that FSW will be able to obtain exclusive or preferred or rights in the future. Lack of Operating History/Expectation of Operating Losses The Company has discontinued its residential real estate development business and has not yet implemented its Web site. As a result, there is no meaningful operating history upon which to base an evaluation of the Company's Internet-based private aviation travel services business and prospects. The Company incurred losses in fiscal 1999 and the first six months of fiscal 2000 and may continue to incur losses in the remainder of fiscal 2000 as the result of the need to incur substantial marketing and promotion costs and systems and development costs. Dependence on the Internet and Development of Brand Name The Company's future success depends upon the continued growth in the use of the Internet generally and the active use of its Web site by private aviation passengers to make flight reservations and arrange for other travel related services. The Company believes that its Web site will be the first time both charter flight reservations and other travel related services are offered through one Web site and, therefore, it is impossible to predict the number of existing private aviation passengers and the number of new private aviation passengers that will use the Web site. The Company believes that broad recognition and favorable consumer perception of the flightserv.com(TM) brand name will be essential to attract existing and new private aviation passengers to the Web site and that successful development of the flightserv.com(TM) brand will depend on the success of the Company's marketing efforts, the breadth and quality of the services available on the Web site, the successful completion of transactions through the Web site and the ability of the Company to provide adequate support and customer service. There is no assurance that the Company will be able to adequately develop its brand name or otherwise attract a sufficient number of Web site users. Risk of System Failure/Lack of Capacity The successful implementation and continued operation of the Web site will depend upon communications hardware and computer hardware and software made available by a third party and any interruptions in service caused by the failure of these systems will be outside of the control of the Company. A system failure that causes an interruption in service to the Web site or that results in slower response times from the Web site could be disruptive to FSW's business and could damage FSW's brand name and result in fewer visits to the Web site. In addition, high volume could strain the capacity of the software or hardware used in connection with the Web site resulting in slower response times or system failures which could adversely affect sales and services. Internet Security Issues The secure transmission of confidential information over the Internet will be important in maintaining user and vendor confidence in the Web site. The Company will rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information including confidential credit card information. However, there can be no assurance that advances in computer capabilities or other developments will not result in unauthorized 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. A-13 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. Volatility of Stock Price/Potential for Future Sales of Restricted Securities The market price of the Company's common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors including the announcement by the Company of future partnership agreements or other corporate developments, the limited number of freely tradable shares in public hands, and the timing and successful implementation of the Web site. Additionally, in recent years many companies with Internet related businesses have experienced extreme price and volume fluctuations that have often been unexplained by the operating performance of such companies. The Company's stock price could also be negatively effected by the future sale of shares of restricted common stock, including shares of restricted common stock underlying options and warrants that have been issued by the Company. Approximately 22,000,000 issued and outstanding shares of the Company's common stock are believed to be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. Rule 144 provides generally that restricted securities must be held for one year prior to resale and provides certain additional limitations on the volume of such shares that a beneficial owner may sell in any three month period. Generally, non-affiliated owners may sell restricted shares that have been held for at least two years without volume limitations. In addition, the Company has issued warrants and options which, if exercised, could result in up to an additional 28,313,743 shares of the Company's common stock. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company and its subsidiaries are involved from time to time in various claims and legal actions in the ordinary course of business. In the opinion of management, the Company and its subsidiaries are not party to any legal 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 A-14 15 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and Index of Exhibits 2.1 Common Stock Purchase Agreement dated as of January 18, 2000 between flightserv.com and Acqua Wellington Value Fund, Ltd. (incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed January 28, 2000) 2.2 Common Stock Purchase Agreement dated as of January 18, 2000 between flightserv.com and Four Corners Capital, LLC (incorporated herein by reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed January 28, 2000) 4.1 Registration Rights Agreement dated as of January 18, 2000 between flightserv.com and Acqua Wellington Value Fund, Ltd. and Four Corners Capital, LLC (incorporated herein by reference to the Company's Current Report on Form 8-K filed January 28, 2000) 4.2 Registration Rights Agreement between the Company and Langdon Flowers, Jr., Langdon Flowers, Sr., and George McIntosh dated December 31, 1999.* 10.1 Form of Officer/Director Non-Qualified Option Agreement dated December 2, 1999.* 10.2 Schedule of Option Agreements.* 27 Financial Data Schedule (for SEC use only)* * Previously filed (b) Reports on Form 8-K 1) During the quarter ended December 31, 1999 - None 2) The Company filed the following report on Form 8-K with the Securities and Exchange Commission on January 28, 2000 (i) The Company's Current Report on Form 8-K filed with the Securities and Exchange Commission reporting the sales of common stock and warrants pursuant to certain purchase agreements effective January 18, 2000. A-15 16 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: October 11, 2000 By: /s/ William L. Wortman -------------------------- William L. Wortman Vice President and Chief Financial Officer A-16