-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OspiAvGkwjXaQBTPpFOrorxhL7XBIqkIn9RIbKrmN0FvdJOxBS4Uk9zkact18CR3 z426rvrul304ZAQhzIgR4g== 0000950144-99-013304.txt : 19991117 0000950144-99-013304.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950144-99-013304 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLIGHTSERV COM CENTRAL INDEX KEY: 0000722839 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 232265039 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-08662 FILM NUMBER: 99756098 BUSINESS ADDRESS: STREET 1: 3343 PEACHTREE ROAD N E STREET 2: SUITE 530 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 8508940018 MAIL ADDRESS: STREET 1: 2930 WELLINGTON CIRCLE SUITE 101 CITY: TALLAHASSEE STATE: FL ZIP: 32308 FORMER COMPANY: FORMER CONFORMED NAME: PROACTIVE TECHNOLOGIES INC DATE OF NAME CHANGE: 19950921 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE MEDICAL CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE MEDICAL CORP INC DATE OF NAME CHANGE: 19910103 10QSB 1 FLIGHTSERV.COM 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 September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission File Number 1-8662 FLIGHTSERV.COM (formerly Proactive Technologies, Inc.) (Exact name of registrant as specified in its charter) DELAWARE 23-2265039 (State of Incorporation) (IRS Employer Identification No.) 3343 PEACHTREE ROAD NE SUITE 530 ATLANTA, GA 30326 (404) 869-2599 (Address of registrant's principal executive offices including zip code and telephone number, including area code) Check whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check whether the issuer filed all reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The number of shares outstanding of the Registrant's Common Stock as of November 12, 1999: 30,543,235 Transitional Small Business Disclosure Format: Yes [ ] No [X] 1 2 FLIGHTSERV.COM TABLE OF CONTENTS
Page No. -------- PART I FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheet September 30, 1999 and June 30, 1999 3 Consolidated Statements of Income For the Three Months Ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows For the Three Months Ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-10 ITEM 2. Management's Discussion and Analysis Of Financial Condition and Results of Operations 10-14 PART II OTHER INFORMATION ITEM 1. Legal Proceedings 14 ITEM 2. Changes in Securities 15 ITEM 3. Defaults Upon Senior Securities 15 ITEM 4. Submission of Matters to a Vote of Security Holders 15 ITEM 5. Other Information 15 ITEM 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 15 EXHIBIT 27 Financial Data Schedule (for SEC use only)
2 3 FLIGHTSERV.COM AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS September 30, June 30, 1999 1999 ------------- -------- Cash and cash equivalents $ 2,127 $ 3,486 Accounts and notes receivable 1,036 914 Net assets (liabilities) of discontinued operations (368) 123 Deferred costs and other assets 593 470 Predevelopment costs 1,090 1,085 Property and equipment, net 8,632 8,414 -------- -------- Total assets $ 13,110 $ 14,492 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable $ 7,801 $ 7,830 Accounts payable and accrued expenses 217 631 Accrued interest payable 771 862 -------- -------- Total liabilities 8,789 9,323 -------- -------- Commitments and contingent liabilities Shareholders' equity: Common stock, $.04 par value, 60,000,000 shares authorized, 30,543,235 issued and outstanding, 1,264 1,264 Additional paid-in capital 28,289 18,090 Retained (deficit) (24,900) (13,853) Treasury stock - at cost (1,050,000 shares) (332) (332) -------- -------- Total shareholders' equity 4,321 5,169 -------- -------- Total liabilities and shareholders' equity $ 13,110 $ 14,492 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 FLIGHTSERV.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999 1998* ------------ ------------ Revenue and other income: Sales $ -- $ -- Other income 273 -- ------------ ------------ Total revenues 273 -- ------------ ------------ General and administrative expenses 900 45 Expense related to issuance of stock options and warrants 10,199 -- Depreciation and amortization 142 -- Interest expense 79 -- ------------ ------------ Loss before income taxes and discontinued operations (11,047) (45) Income tax expense -- -- ------------ ------------ Net loss before discontinued operations (11,047) (45) Loss from discontinued operations -- (303) ------------ ------------ Net loss $ (11,047) $ (348) ============ ============ Basic and diluted loss per share: Loss per share before discontinued operations $ (.36) $ -- Discontinued operations -- (.02) ------------ ------------ Net loss $ (.36) $ (.02) ============ ============ Weighted average shares outstanding 30,543,235 16,499,253 ============ ============
* Reclassified The accompanying notes are an integral part of these consolidated financial statements. 4 5 FLIGHTSERV.COM AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS)
1999 1998* -------- ------- Cash flows from operating activities: Loss before discontinued operations $(11,047) $ (45) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 142 -- Expense related to issuance of stock options and warrants 10,199 -- Changes in operating assets and liabilities: Accounts and notes receivables (122) Deferred costs and other assets (199) -- Accounts payable and accrued expenses (414) Accrued interest payable (91) -- -------- ----- Cash used by operating activities before discontinued operations (1,532) (45) Discontinued operations, net 490 811 -------- ----- Net cash provided (used) by operating activities (1,042) 766 -------- ----- Cash flows from investing activities: Purchase of property and equipment (283) -- Predevelopment costs (5) -- Investing activities of discontinued operations, net -- (14) -------- ----- Net cash used by investing activities (288) (14) -------- ----- Cash flows from financing activities: Principal debt payments (29) -- Financing activities of discontinued operations, net -- (754) -------- ----- Net cash used by financing activities (29) (754) -------- ----- Net decrease in cash and cash equivalents (1,359) (2) Cash and cash equivalents at beginning of period 3,486 100 -------- ----- Cash and cash equivalents at end of period $ 2,127 $ 98 ======== =====
* Reclassified The accompanying notes are an integral part of these consolidated financial statements. 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 "Company"). All significant intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the rules of the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to the current fiscal period presentation. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position of the Company as of September 30, 1999 and of the results of operations for the periods presented have been included. The financial data at June 30, 1999 is derived from audited financial statements which are included in the Company's Form 10-KSB and should be read in conjunction with the audited financial statements and notes thereto. Interim results are not necessarily indicative of results for the full year. Cash and Cash Equivalents The Company classifies as cash equivalents any investments which can be readily converted to cash and have an original maturity of less than three months. At times cash and cash equivalent balances at a limited number of banks and financial institutions may exceed insurable amounts. The Company believes it mitigates its risks by depositing cash or investing in cash equivalents in major financial institutions. Real Estate Investments Real estate investments are recorded at the lower of cost or estimated fair value. Development costs and real estate taxes are capitalized while development is in progress. Depreciation commences at the time the Company begins collecting rental income. Property, Plant and Equipment Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on the straight-line basis over the assets' estimated useful lives. Expenditures for maintenance and repairs are expensed as incurred and expenditures for improvements which extend the useful life or add value to the asset are capitalized. Sales and disposals of assets are recorded by removing the related cost and accumulated depreciation amounts with any resulting gain or loss reflected in income. Net Loss Per Share The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share" which requires dual presentations of basic earnings per share ("EPS") and diluted EPS. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and potentially dilutive shares outstanding during the period. Options and warrants to purchase 15,185,000 shares of Common Stock were outstanding at September 30, 1999. Outstanding option and warrants could potentially dilute basic earnings per share in the future but have not been included in the computation of diluted net loss per share in the September 1999 quarter as the impact would have been antidilutive. There were no options or warrants outstanding at September 30, 1998. 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 its continuing operations, no related deferred tax benefit for future periods has been recorded. The Company's 1996 and one of its subsidiary's 1994 and 1995 tax returns are currently under examination by the Internal Revenue Service, but no reports have yet been issued. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. BUSINESS SEGMENTS Private Aviation Travel Services Business Since April 1999 FSW has been developing an Internet-based, private aviation travel services business including an Internet Web site. In the quarter ended September 30, 1999, FSW incurred approximately $842,000 of general and administrative expense in connection with development of this new business. The expense includes consulting fees in the aviation industry, Internet operations, Web site development, marketing, and business plan areas and other professional services. In addition, FSW has issued warrants to purchase its Common Stock for consulting services and strategic vendor alliances related to the private aviation travel services business. At September 30 and June 30, 1999, FSW had capitalized $336,816 and $88,500, respectively, in Internet Web site development costs. Commercial Real Estate Investments In fiscal 1999, the Company purchased an entity that owns two shopping center properties in the Atlanta, Georgia area. The mortgage financing on the shopping center properties includes an additional interest agreement which provides that the lender receive 50% of the cash flow and of the excess of appraised value over the mortgage loan balance at the time of any sale of the property. The Company has recorded deferred debt discount cost and a corresponding accrued interest liability to reflect the lenders allocation of the excess appraisal value provided in the additional interest agreement. The deferred debt discount is being amortized over the 36 month term of the mortgage loans. Stratos Inns Concept In fiscal 1999, the Company purchased PDK Properties, Inc. ("PDK") which holds a long-term ground lease at Dekalb-Peachtree Airport in Dekalb County, Georgia and owns Stratos Inns, a hotel and hospitality business concept. The lease provides for a 54 month development period and a 30 year lease term after a hotel is constructed 7 8 and opened. The Company has completed a preliminary study for development of its first Stratos Inn hotel and is evaluating its options in connection with PDK. At September 30 and June 30, 1999, the Company's investment in predevelopment costs of PDK was $1,090,000 and $1,085,000 respectively. NOTE 3. DISCONTINUED OPERATIONS Effective January 1, 1999 the Company discontinued its residential real estate development operations. Residential real estate operations include developed lots, undeveloped land, and equity investments in residential real estate development companies, partnerships, and joint ventures. The September 1998 financial statement amounts have been reclassified to reflect the discontinued operations. The Company has made certain estimates regarding the fair asset values and costs to dispose of the remaining assets of the discontinued operations. In July 1999, the Company sold certain assets of discontinued operations with a net carrying value of approximately $1,100,000 for cash. In September 1999, the Company sold certain assets of discontinued operations for approximately $3.2 million consisting of the assumption of $2.2 million of mortgage indebtedness and $1.0 million in notes receivable. Following is a summary of the Net Assets of Discontinued Operations (in thousands):
September 30, June 30, 1999 1999 ------------- -------- Real estate inventories $ 132 $ 4,596 Accounts and notes receivable 1,000 -- Investments in real estate equity securities -- 677 Notes and accrued interest payable (763) (4,450) Estimated expenses and other liabilities (737) (700) ------- ------- $ (368) $ 123 ======= =======
NOTE 4. STOCK OPTIONS AND WARRANTS In fiscal 1999 and the quarter ended September 30, 1999, FSW issued nonqualified stock options to purchase its Common Stock to directors, officers and employees. The following table summarizes the stock options outstanding:
9/30/99 6/30/99 ------------------------ ------------------- Option Option Shares Price Shares Price --------- ------- --------- ------- 2,000,000 $ .44 2,000,000 $ .44 2,600,000 .42 2,600,000 .42 50,000 .50 50,000 .50 200,000 1.00 200,000 1.00 100,000 1.75 -- -- 4,600,000 2.50 -- -- --------- --------- 9,550,000 4,850,000 ========= =========
No options were exercised in the quarter ended September 30, 1999. All of the options have a 10-year term and 8 9 were fully vested at September 30, 1999, except for 200,000 options with an exercise price of $1.00 and 50,000 with an exercise price of $1.75 that vest over a two year period. In connection with its new private aviation travel services business FSW issued warrants to purchase its Common Stock in exchange for consulting and legal services and for strategic vendor alliances provided by outside third parties. The following table summarizes the outstanding warrants issued to outside third parties:
9/30/99 6/30/99 ------------------------------- ----------------------------- Option Option Shares Price Shares Price ---------- ------- --------- ------ 200,000 $ .42 200,000 $ .42 200,000 .44 200,000 .44 1,450,000 .50 1,450,000 .50 400,000 .75 400,000 .75 2,985,000 1.75 100,000 1.75 400,000 2.50 -- 2.50 ---------- --------- 5,635,000 2,350,000 ========== =========
All of the warrants issued to date by FSW are exercisable, except for 50,000 warrants at an exercise price of $.50 that vest over two years. Following is a summary of certain information regarding the Company's options and warrants for the quarter ended September 30, 1999:
Weighted Weighted Weighted Average Average Average Remaining Exercise Grant-date Contractual Number Price Fair Value Life --------- -------- ----------- ------------- Outstanding at beginning of period 7,200,000 $0.37 -- -- Grants during the year: Exercise price equal to market 5,000,000 $2.50 $1.93 -- Exercise price below market 2,985,000 $1.75 $2.42 -- ---------- Total granted during the period 7,985,000 $2.22 -- -- ---------- Outstanding at end of period: Exercisable at $.43 to $1.00 7,100,000 $0.48 -- 9.5 years Exercisable at $1.75 to $2.50 8,085,000 $2.21 -- 9.8 years ---------- Outstanding at end of period 15,185,000 $1.40 -- -- ---------- Exercisable at end of period: Exercisable at $.43 to $1.00 6,850,000 $0.48 -- -- Exercisable at $1.75 to $2.50 8,035,000 $2.21 -- -- ---------- Exercisable at end of period 14,885,000 $1.41 -- -- ---------- Of the 9,550,000 options outstanding, 7,450,000 require shareholder approval.
The Company accounts for options issued to employees under APB No. 25 and options and warrants issued to non-employees under FASB No. 123. The following information is based on estimating the fair value of grants under the above plans based on the provisions of FASB No. 123. For the stock options issued to employees, the fair value of each option has been estimated using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5%, expected life for the options of 5 years, no expected dividend yield and expected volatility of 100%. For the options and warrants issued to non-employees, the fair value of each award has been estimated using the same assumptions. The total compensation cost recognized during the quarter ended September 1999 for these awards was $10,199,000. The Company's pro forma net loss and net loss per share for the quarter ended September 30, 1999, assuming compensation cost was determined under FASB No. 123 for all options and warrants, would have been the following: 9 10 Net loss before discontinued operations $ (18,205,419) Net loss from discontinued operations $ -- Net loss $ (18,205,419) Net loss per share before discontinued operations $ (.60) Net loss per share from discontinued operations -- Net loss per share $ (.60)
NOTE 5. RELATED PARTY TRANSACTIONS In September 1999, the Company purchased a note receivable in the amount of $587,000 due from an entity affiliated with a former officer of the Company. The note is secured by residential real estate. At September 30 and June 30, 1999 Stonebridge has an account receivable of $438,982 from an entity which is owned by the Company Chairman and his children. In connection with consulting services related to the Company's Internet-based private aviation travel service business provided by Mr. Bert Lance, the father of the Company's President and Chief Executive Officer, the Company in fiscal 1999 granted warrants to purchase 400,000 shares of its Common Stock to the Bert Lance Grantor Trust. In September 1999, the Company granted an additional 600,000 warrants to the Bert Lance Grantor Trust. Of these warrants, 400,000 have an exercise price of $.50 per share and 600,000 a $1.75 per share exercise price. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview Effective January 1, 1999 the Company discontinued its residential real estate development business. As a result, the statement of operations for the quarter ended September 30, 1998 reflects the operating loss of that business as discontinued operations. The continuing operations include development of an Internet-based private aviation travel services business, limited commercial real estate operations, and other investments. Results of Continuing Operations The Company's revenues in the current quarter were $273,000 which represent lease income generated from the Company's shopping centers acquired in fiscal 1999. All of the Company's revenues in the quarter ended September 30, 1998 were generated by the residential real estate development operations and have been reclassified to discontinued operations. General and administrative expenses increased by $855,000 from $45,000 in the quarter ended September 30, 1998 to $900,000 in the current quarter. This increase is due to increased compensation costs, consulting and legal fees, and other costs associated with the development of the new Internet-based, private aviation travel services business. In the quarter ended September 30, 1999, the Company issued stock options to officers and directors and warrants to outside third parties and recognized $10,199,000 of related non-cash expense. The Company's depreciation and amortization expense of $142,000 and interest expense of $79,000 in the quarter ended September 30, 1999 reflect the costs of the shopping center operations acquired in January 1999. Management expects revenues to increase significantly upon the implementation of the Company's Internet-based, private aviation travel services business. However, management expects to continue to incur losses in connection 10 11 with the development of its private aviation travel services business prior to implementing the Web site and cannot be certain as to when the private aviation travel services business will generate income. Discontinued Operations In the quarter ended September 30, 1998, the Company incurred a $303,000 loss from its discontinued residential real estate development operations. Liquidity and Capital Resources The net operating loss in the quarter ended September 30, 1999 of $11,047,000 was partially offset by a $10,199,000 increase in paid-in capital related to the issuance of stock options and warrants. As a result, stockholders' equity decreased $848,000 in the quarter ended September 30, 1999. In the quarter ended September 30, 1999, continuing operations used $1,532,000 of cash and the liquidation of certain assets of discontinued operations generated $490,000 of cash. In addition, the Company expended $283,000 on capitalized Web site software, furniture, and equipment. The Company will continue to incur start up costs and operating expenses prior to implementing its Web site. The Company's cash balance at September 30, 1999 is $2,127,000 compared to $3,486,000 at June 30, 1999. This cash reserve is adequate, in management's opinion, to complete the implementation of the private aviation travel services business on the Internet Web site. The Company's need to raise additional capital to implement and maintain the private aviation travel services business will depend upon, among other things, the initial level of customer interest in the services offered on the Company's Web site and the Company's ability to market the flightserv.com (TM) brand. The Company is presently reviewing the potential impact of Year 2000 compliance issues with regard to its information and accounting systems and business operations. The preliminary determination made by management is that any costs, problems, or uncertainties associated with the potential consequences of Year 2000 issues are not expected to have a material impact on its future operations or financial condition, but the Company's Web site business could be materially adversely effected if Year 2000 issues cause disruptions in the systems of the Company's third party vendors or suppliers of private aviation travel services. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS The Company's business, results of operations and financial condition are subject to many risks, including those set forth below. The following discussion highlights some of these risks and others are discussed elsewhere herein or in other documents filed by the Company with the Securities and Exchange Commission. In addition, statements in this quarterly report relating to matters that are not historical facts are forward-looking statements based on management's belief and assumptions using currently available information. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements involve a number of risks and uncertainties, including, but not limited to those set forth below. General FSW is in the process of developing an internet Web site to provide, as agent, travel services to the private aviation marketplace. Based on information published by the National Business Aviation Association, an industry group, private aviation generates more than $51 billion in annual economic activity. Private aviation aircraft are reported to carry over 145 million passengers per year. FSW intends for its Web site, www.flightserv.com, to distribute private charter services, lodging, personal and 11 12 aircraft protection services, ground transportation, concierge and other services. FSW will be compensated by a commission or fee for its services from the service provider. Supplier Agreements Simultaneously with the development of the Web site, FSW has been negotiating preferred partner agreements with suppliers of services to the private aviation marketplace. Its strategy in selecting preferred partners is to contract with premium service providers. To date, FSW has executed a preferred hospitality agreement with the Ritz-Carlton Hotel Company, LLC, a leading provider of luxury hotel rooms worldwide, and a Master Executive Protection Agreement with Vance International, Inc., a leading provider of personal and asset protection services. Under the agreement with Ritz-Carlton, member-users of the FSW Web site will be able to reserve hotel accommodations with Ritz-Carlton through the Web site and will be accorded Ritz-Carlton's "last room account" status, providing added assurance of being able to obtain a confirmed reservation. Under the agreement with Vance International, FSW is designated the exclusive private aviation Internet distributor of Vance's worldwide personal and aircraft protection services. FSW is in the process of negotiating agreements with other service providers including certified charter flight operators. Authority to operate charter aircrafts is granted by the Federal Aviation Administration (the "FAA") and the Department of Transportation of which the FAA is a part. FSW will serve as agent for operators having certificates from the FAA under Part 135 of Title 14 of the Code of Federal Regulations to provide such services. FSW will be dependent upon certified charter operators to provide all flight services. Web Site Development FSW has a working model of its Web site which it is testing and refining as it negotiates agreements with preferred suppliers. In addition to retaining Web site developers, FSW has worked closely with legal and other advisers to comply with all applicable legal and other requirements. Marketing FSW is currently evaluating the most effective methods to publicize its Web site and attract users to the Web site. It is also seeking strategic partners who can help publicize the Web site and attract customer traffic to it. Availability of Services FSW will not provide private aviation travel services directly but, instead, will offer, as agent, services provided by independent vendors through its Web site. As a result, the ability of FSW to enter into agreements, such as the preferred provider agreements with Ritz-Carlton and Vance, and to otherwise arrange for services to be available through its Web site is critical for the success of its business. While multiple sources exist for the services to be offered through the Web site, FSW will act only as an agent and have limited or no control of the availability, actual delivery, or quality of the services offered to its member-users or the price offered for such services. In addition, there is no guarantee that FSW will be able to enter into additional preferred partnership agreements with other service providers. At this time, FSW is negotiating contracts with certified charter providers and management believes that certified charter operators will want to provide charter services through the Web site. Failure to contract with certified charter operators would have a material adverse effect on FSW. Competition The services to be offered by FSW are available directly from the providers and through other channels including the Internet. Many of FSW's competitors have financial resources substantially greater than FSW. FSW has contracted exclusive or preferred Internet distribution rights with certain of service providers and intends to seek such rights from other service providers, but there can be no assurance that FSW will be able to obtain exclusive or preferred rights in 12 13 the future. Lack of Operating History/Expectation of Operating Losses The Company has discontinued its residential real estate development business and has not yet implemented its Web site. As a result, there is no meaningful operating history upon which to base an evaluation of the Company's Internet-based private aviation travel services business and prospects. The Company has incurred losses in fiscal 1999 and the first quarter of fiscal 2000 and may continue to incur losses in the remainder of fiscal 2000 as the result of the need to incur substantial marketing and promotion costs and systems and development costs. Dependence on the Internet and Development of Brand Name The Company's future success depends upon the continued growth in the use of the Internet generally and the active use of its Web site by private aviation passengers to make flight reservations and arrange for other travel related services. Due to the lack of operating history of the Company's private aviation travel services business, it is impossible to predict the number of existing private aviation passengers and the number of new private aviation passengers that will use the Web site. The Company believes that broad recognition and favorable consumer perception of the flightserv.com(TM) brand name will be essential to attract existing and new private aviation passengers to the Web site and that successful development of the flightserv.com (TM) brand will depend on the success of the Company's marketing efforts, the breadth and quality of the services available on the Web site, the successful completion of transactions through the Web site and the ability of the Company to provide adequate support and customer service. There is no assurance that the Company will be able to adequately develop its brand name or otherwise attract a sufficient number of Web site users. Risk of System Failure/Lack of Capacity The successful implementation and continued operation of the Web site will depend upon communications hardware and computer hardware and software made available by a third party and any interruptions in service caused by the failure of these systems will be outside of the control of the Company. A system failure that causes an interruption in service to the Web site or that results in slower response times from the Web site could be disruptive to FSW's business and could damage FSW's brand name and result in fewer visits to the Web site. In addition, high volume could strain the capacity of the software or hardware used in connection with the Web site resulting in slower response times or system failures which could adversely affect sales and services. Internet Security Issues The secure transmission of confidential information over the Internet will be important in maintaining user and vendor confidence in the Web site. The Company will rely on encryption and authentication technology licensed from third parties to effect secure transmission of confidential information including confidential credit card information. However, there can be no assurance that advances in computer capabilities or other developments will not result in unauthorized persons obtaining access to confidential customer information in the Web site exposing the Company to potential losses. Management of Potential Growth The Company is expected to expand its business after the implementation of the Web site. This growth is expected to place significant demands on the Company's management, operational, and financial resources. In order to manage expected growth, the Company will be required to expand existing operations and to train, manage and expand its employee base. Further, the Company's management will be required to maintain relationships with various service providers and to maintain control over the strategic direction of the Company. If the Company is unable to manage growth effectively, the Company's business, results of operations, and financial condition will be adversely affected. 13 14 Intellectual Property The Company regards its copyrights, service marks, trademarks, trade dress, trade secrets, domain names and similar intellectual property as critical to its success and relies on trademark and copyright law, trade secret protection and confidentiality agreements to protect its intellectual property rights. Nonetheless, there can be no assurance that the Company will be able to secure significant protection for its intellectual property rights. Government Regulation Certain segments of the travel industry are regulated by the United States Government and certain services offered by the Company are affected by such regulations. The operators of charter flights upon whom the Company's service depend are subject to rigorous and continuous certification requirements of the FAA. The Company is also subject to regulations applicable to businesses generally and laws or regulations directly applicable to the Internet. While currently there are few laws directly applicable to the Internet, the increase in Internet commerce may result in new laws or regulations relating to Internet commerce including regulations regarding privacy, pricing and state and local taxation which could affect the Company. Year 2000 The Year 2000 issue relates to the risk that computer systems may not properly recognize the Year 2000. While the Company believes, after consulting with its Web site developer, that the systems being developed for its Web site will be Year 2000 compliant, the Company relies on, and the Web site after it is operational will rely on, information technology supplied by third parties. In addition, the providers of private aviation travel services sold through the Web site are dependent on their own information technology systems and their third party vendors' systems. The Company will seek assurance from such suppliers that their systems are Year 2000 compliant but there is no guarantee that the Company, its third party vendors or the suppliers of the private aviation services available on the Web site will not experience significant Year 2000 issues. It is also possible that member-users' access to the Web site might be disrupted as the result of Year 2000 issues. Any of these potential Year 2000 issues could adversely affect the Company Volatility of Stock Price/Potential for Future Sales of Restricted Securities The market price of the Company's Common Stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors including the announcement by the Company of future partnership agreements or other corporate developments, the limited number of freely tradable shares in public hands, and the timing and successful implementation of the Web site. Additionally, in recent years many companies with Internet related businesses have experienced extreme price and volume fluctuations that have often been unexplained by the operating performance of such companies. The Company's stock price could also be negatively effected by the future sale of shares of restricted Common stock or shares underlying options and warrants that have been issued by the Company. Approximately 20,000,000 issued and outstanding shares of the Company's Common Stock are believed to be restricted securities as defined in Rule 144 promulgated under the Securities Act of 1933. Rule 144 provides generally that restricted securities must be held for one year prior to resale and provides certain additional limitations on the volume of such shares that a beneficial owner may sell in any three month period. Generally, non-affiliated owners may sell restricted securities without the volume limitations, after the shares have been held for at least two years. In addition, the Company has issued warrants and options which, if exercised, could result in up to an additional 15,185,000 shares of the Company's Common Stock. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. The Company and its subsidiaries are involved from time to time in various claims and legal actions in the ordinary 14 15 course of business. In the opinion of management, the Company and its subsidiaries are not party to any legal proceedings, the adverse outcome of which, would have any material adverse effect on its business, its assets, or results of operations. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and Index of Exhibits 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K The Company filed the following report on Form 8-K with the Securities and Exchange Commission during the quarter ended September 30, 1999. (i) The Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 1999 reporting the disposition of certain residential real estate assets of the Company on June 30, 1999. SIGNATURE In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. flightserv.com (Registrant) Date: November 15, 1999 By: /s/ William L. Wortman William L. Wortman Vice President and Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF FLIGHTSERV.COM FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS JUN-30-1999 JUL-01-1999 SEP-30-1999 2,127,000 0 1,036,000 0 0 0 8,800,000 168,000 13,110,000 0 0 0 0 1,264,000 3,057,000 13,110,000 0 273,000 0 11,320,000 0 0 79,000 (11,047,000) 0 (11,047,000) 0 0 0 (11,047,000) (.36) 0
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