<PAGE>
As filed with the Securities and Exchange Commission on October 10, 2000
Registration No. 333-40352
--------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Aviation Group, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Texas 4512 75-2631373
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
700 North Pearl Street, Suite 2170
Dallas, Texas 75201
(214) 922-8100
(Address, including zip code and telephone
number, including area code, of
registrant's principal executive offices)
________________
With copies to:
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<S> <C> <C>
Daryl B. Robertson Bruce Czachor John H. Craig
Jenkens & Gilchrist, Shearman & Sterling Cassels, Brock & Blackwell LLP
A Professional Corporation Commerce Court West, Suite 4405 40 King Street West
1445 Ross Avenue, Suite 3200 199 Bay Street Toronto, Ontario
Dallas, Texas 75202-2799 Toronto, Ontario Canada M5H 3C2
(214) 855-4500 Canada M5L 1E8 (416) 869-5300
(416) 360-8484
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective and the satisfaction of all conditions to the closing of the
arrangement described in the joint proxy statement/prospectus forming part of
this registration statement.
_____________
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
_____________
CALCULATION OF ADDITIONAL REGISTRATION FEE
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<CAPTION>
====================================================================================================================
Title of Securities Amount To Be Proposed Maximum Proposed Maximum Amount of
To Be Registered Registered Offering Price Per Unit Aggregate Offering Registration Fee
Price
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 15,000,000 (1) $ 1.2812 (2) $19,218,000 (2) $ 5,073.55
per share
====================================================================================================================
</TABLE>
(1) Represents additional shares of common stock of the Registrant being
registered (i) 10,000,000 additional shares of which may be issued to the
shareholders of travelbyus.com ltd., an Ontario corporation, upon exchange
of the exchangeable shares issued in connection with the proposed
arrangement between the Registrant and travelbyus.com ltd.; and (ii)
5,000,000 additional shares of which may be issued pursuant to stock
options, warrants and convertible securities granted in exchange for
similar securities of travelbyus.com ltd. in accordance with the
arrangement agreement.
(2) Estimated solely for purposes of calculating the registration fee under
Rule 457(f)(1) based on the average of the high and low prices reported on
the Nasdaq SmallCap Market of $1.2812 for the Registrant's common stock on
October 2, 2000.
______________________________________
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
EXPLANATORY NOTE
This registration statement contains (i) a joint proxy statement/prospectus
relating to the business combination of travelbyus.com ltd., an Ontario
corporation, and Aviation Group, Inc., a Texas corporation, pursuant to an
arrangement under Ontario law, and (ii) a prospectus supplement to such joint
proxy statement/prospectus relating to an offer by Aviation Group, Inc. to
exchange 2,153 new shares of its Series C convertible preferred stock for 2,153
outstanding shares of its Series B preferred stock. The closing of the exchange
offer is conditional upon completion of the proposed arrangement. The prospectus
supplement will be attached to, and made a part of, the joint proxy
statement/prospectus and will be delivered only to the holders of the
outstanding Series B preferred stock.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 10, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING ANY OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
TRAVELBYUS.COM LTD. AVIATION GROUP, INC.
YOUR VOTE ON OUR PROPOSED BUSINESS COMBINATION IS VERY IMPORTANT
To the shareholders of Aviation Group and travelbyus.com:
travelbyus.com and Aviation Group have agreed to combine our businesses
through an arrangement under Ontario law. To complete the arrangement, we must
obtain the approval of our shareholders and the final approval of an Ontario
court.
When the arrangement is completed, travelbyus.com will become an indirect
subsidiary of Aviation Group. travelbyus.com shareholders will receive one
exchangeable share of travelbyus.com for each common share they currently own.
Every five exchangeable shares may be exchanged by the holder for one share of
Aviation Group common stock. Those exchangeable shares not previously exchanged
will be automatically exchanged into Aviation Group common stock on January 1,
2003, or earlier upon certain events.
Although Aviation Group will technically acquire travelbyus.com in the
arrangement, the arrangement will result in a change in control of Aviation
Group. When completed, we estimate that former travelbyus.com shareholders will
own directly or indirectly approximately 90.8 million shares, or 95%, of
Aviation Group's common stock. The arrangement is described in detail in this
booklet.
Aviation Group shareholders are also being asked to vote on additional
proposals relating to the arrangement and certain other proposals. Some of these
proposals are conditions to the completion of the arrangement. See "Other
travelbyus.com Special Meeting Proposal" and "Other Aviation Group Special
Meeting Proposals" in this booklet for detailed discussions of these other
proposals.
Aviation Group shareholders will vote at Aviation Group's special meeting
on October __, 2000, at 10:00 a.m., local time, at 700 North Pearl Street, Suite
2170, Dallas, Texas.
travelbyus.com shareholders will vote at travelbyus.com's special meeting
on October __, 2000, at 11:00 a.m., local time, at _____________________,
Toronto, Ontario, Canada.
The travelbyus.com board of directors recommends that travelbyus.com
shareholders vote for the arrangement proposal. The Aviation Group board of
directors recommends that Aviation Group shareholders vote for the arrangement
proposal and each of the other proposals.
You should consider carefully the Risk Factors beginning on page 20 of this
booklet.
Your vote is important, regardless of the number of shares you own. Please
vote as soon as possible to make sure that your shares are represented at the
special meeting. You may vote your shares by completing and returning the
enclosed proxy card. You may also cast your vote in person at the special
meeting.
Very truly yours,
___________________________________________ ________________________________
William Kerby, Chief Executive Officer Lee B. Sanders, Chairman
travelbyus.com ltd. Aviation Group, Inc.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
joint proxy statement/prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
This joint proxy statement/prospectus is dated ______________, 2000, and is
first being mailed to shareholders on or about _______________, 2000. This joint
proxy statement/prospectus also relates to the offer and sale by certain selling
shareholders of the shares of Aviation Group common stock they have a right to
obtain as a result of the arrangement.
<PAGE>
[Aviation Group logo]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER ___, 2000
To the shareholders of Aviation Group, Inc.:
You are hereby given Notice that a special meeting of shareholders of
Aviation Group, Inc., a Texas corporation, will be held on October ___, 2000,
beginning at 10:00 a.m., Dallas time, at Aviation Group's offices, 700 North
Pearl Street, Suite 2170, Dallas, Texas to vote on:
1. approval of a proposed arrangement pursuant to an arrangement
agreement with travelbyus.com ltd., an Ontario corporation;
2. approval of the amendment of our articles of incorporation in
connection with the arrangement to increase the number of shares of
our common stock authorized for issuance;
3. approval of the amendment of our articles of incorporation in
connection with the arrangement to change our name to travelbyus,
Inc.;
4. ratification, as required by Nasdaq rules, of warrants to purchase a
total of 500,000 shares of our common stock at $1.50 per share issued
to two of our executive officers;
5. ratification, as required by Nasdaq rules, of certain securities
issued or to be issued in connection with our acquisition of Global
Leisure Travel, Inc. and the related financing;
6. approval of the amendment to Aviation Group's 1997 Stock Option Plan;
7. ratification, as required by Nasdaq rules, of warrants to purchase a
total of 150,000 shares of our common stock issued to three of our
existing directors;
8. approval of the amendment of our articles of incorporation to effect a
one-for-five reverse split of our common stock; and
9. such other business, if any, as may properly be brought before the
meeting.
Only holders of our common stock as of September 28, 2000, our record date,
are entitled to notice of, and to vote at, this meeting or any adjournment of
the meeting. The list of shareholders entitled to vote will be available for
inspection by any shareholder at the offices of Aviation Group, 700 North Pearl
Street, Suite 2170, Dallas, Texas, for ten days prior to the meeting.
You are cordially invited to attend this meeting in person. If you cannot
attend, please sign and date the enclosed proxy and mail it in the enclosed
envelope.
By order of the board of directors,
LEE SANDERS
Chairman
Dallas, Texas
__________, 2000
<PAGE>
[travelbyus.com logo]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER __, 2000
To the shareholders of travelbyus.com ltd.:
You are hereby given notice that a special meeting of shareholders of
travelbyus.com ltd., an Ontario corporation, will be held on October __, 2000,
beginning at 11:00 a.m., Toronto time, at _________, Toronto, Ontario to vote
on:
1. a special resolution to approve a proposed arrangement pursuant to an
arrangement agreement with Aviation Group, Inc., a Texas corporation,
and its subsidiary;
2. a proposed resolution to approve an amendment to travelbyus.com's
stock option plan; and
3. such other business, if any, as may properly be brought before the
meeting.
You have the right to dissent in connection with the arrangement and to be
paid in cash the fair value of your travelbyus.com common shares, subject to
certain conditions. This right is described in detail in the joint proxy
statement/prospectus. If you are a beneficial owner of our common shares that
are registered in the name of a broker, custodian, nominee or other
intermediary, you are not entitled to exercise your dissenters' rights. Only
registered owners of our common shares are entitled to dissent. The requirements
relating to dissenters' rights must be strictly followed or these rights may be
lost.
We are providing this notice and joint proxy statement/prospectus to you
pursuant to an interim order of the Ontario Superior Court of Justice dated
September __, 2000. You are being asked to consider and pass a special
resolution to approve the arrangement under Section 182 of the Business
Corporations Act (Ontario). Copies of the arrangement agreement, interim order
and special resolution are attached to this booklet as Appendices A, C and F,
respectively.
Only holders of record of our common shares as of October __, 2000, our
record date, are entitled to vote at the meeting. Transferees after our record
date may take steps to be added to the voters' list as described under "The
Special Meetings--Subsequent Transferees of travelbyus.com Common Shares" in
this booklet.
Shareholders who are individuals may attend and vote at the meeting in
person or by proxy. Shareholders that are corporations may attend and vote at
the meeting by proxy or by a duly authorized representative.
All shareholders are requested to complete and return, in the return
envelope provided, the enclosed proxy card. Proxies must be received by:
Computershare Investor Services
100 University Avenue
Attention: Proxy Department
Toronto, Ontario M5J 2Y1
not later than 10:00 a.m., Toronto time, on October __, 2000 in order to be
valid for use at the meeting or, if the meeting is adjourned, not later than
10:00 a.m., Toronto time, on the day (excluding Saturdays, Sundays and holidays)
before the date of the adjourned meeting in order to be valid for use at the
adjourned meeting.
You have the right to appoint a person or company (who need not be a
shareholder), other than the persons designated as proxyholders in the
accompanying form of proxy, as proxyholder to represent you at the meeting. To
do so, please strike out the names of the designated persons and insert the name
of your chosen proxyholder in the blank space provided for that purpose in the
form of proxy, or complete and sign another proper form of proxy.
<PAGE>
A proxy must be in writing and must be executed by you or by your attorney
authorized in writing. If you execute and return the accompanying form of proxy,
you may revoke it by an instrument in writing executed by you or your attorney
authorized in writing and deposited either at the office of travelbyus.com (204-
3237 King George Highway, South Surrey, British Columbia V4P 1B7), at any time
up to and including the last business day preceding the day of the meeting, or
with the chairman of the meeting on the day of the meeting prior to its
commencement, or in any other manner permitted by law.
By order of the board of directors,
WILLIAM KERBY
September __, 2000 Chief Executive Officer
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE AVIATION GROUP/TRAVELBYUS.COM ARRANGEMENT......................................... 9
SUMMARY........................................................................................................... 11
The Companies................................................................................................ 11
Proposal to Approve the Arrangement.......................................................................... 12
Board Recommendations of Arrangement......................................................................... 12
Votes Required for Approval.................................................................................. 12
Opinions of Financial Advisors............................................................................... 12
No Change in Aviation Group Shares........................................................................... 12
Exchangeable Shares Received by travelbyus.com Shareholders in the Arrangement............................... 13
Listings After the Arrangement............................................................................... 13
Eligibility for Investment of Exchangeable Shares............................................................ 13
Board of Directors and Management of Aviation Group After the Arrangement.................................... 13
Ownership of Aviation Group and travelbyus.com After the Arrangement......................................... 13
Share Ownership of Management; Voting Intention.............................................................. 14
Conflicts of Interest........................................................................................ 14
Dissenters' Rights........................................................................................... 14
Federal Income Tax Considerations for travelbyus.com Shareholders............................................ 14
Conditions of the Arrangement................................................................................ 15
Termination of the Arrangement Agreement and Payment of Fees................................................. 16
Accounting Treatment......................................................................................... 16
Comparison of Shareholder Rights............................................................................. 16
Regulatory Approval.......................................................................................... 17
Other travelbyus.com Proposal................................................................................ 17
Other Aviation Group Proposals............................................................................... 17
Exchange Offer for Preferred Stock........................................................................... 19
RISK FACTORS...................................................................................................... 20
Non-Tax Risks Relating to the Arrangement.................................................................... 20
Tax Risks Relating to the Arrangement........................................................................ 21
Risks Relating to the Travel Business........................................................................ 22
Risks Relating to the e-Commerce Travel Business............................................................. 23
Risks Relating to Exchangeable Shares or Aviation Group Common Stock......................................... 27
Other Risks Relating to the Business of travelbyus.com....................................................... 28
Other Risks Relating to Both Businesses After the Arrangement................................................ 30
CURRENCY.......................................................................................................... 32
WHERE YOU CAN FIND MORE INFORMATION............................................................................... 32
FORWARD-LOOKING STATEMENTS........................................................................................ 33
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS.................................................. 33
SELECTED CONSOLIDATED FINANCIAL DATA OF TRAVELBYUS.COM............................................................ 34
SELECTED CONSOLIDATED FINANCIAL DATA OF AVIATION GROUP............................................................ 35
COMPARATIVE MARKET DATA........................................................................................... 36
SELECTED COMPARATIVE PER SHARE DATA............................................................................... 37
</TABLE>
5
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<TABLE>
<S> <C>
THE SPECIAL MEETINGS.............................................................................................. 38
Times, Places and Dates...................................................................................... 38
Purposes of the Aviation Group Special Meeting............................................................... 38
Purposes of the travelbyus.com Special Meeting............................................................... 38
Record Dates; Quorum......................................................................................... 38
Voting Rights; Votes Required for Approval................................................................... 39
How You Can Vote............................................................................................. 39
Solicitation of Proxies; Expenses............................................................................ 40
Other Matters................................................................................................ 40
Subsequent Transferees of travelbyus.com Common Shares....................................................... 41
PROPOSAL NO. 1 THE ARRANGEMENT.................................................................................... 42
General...................................................................................................... 42
Background of the Arrangement................................................................................ 42
Effect of the Arrangement.................................................................................... 43
Votes Required for Approval.................................................................................. 44
Regulatory Approval.......................................................................................... 44
Effective Time of Arrangement................................................................................ 44
Recommendation of the travelbyus.com Board of Directors...................................................... 44
Recommendation of the Aviation Group Board of Directors...................................................... 46
Fairness Opinion of travelbyus.com's Financial Advisor....................................................... 47
Fairness Opinion of Aviation Group's Financial Advisor....................................................... 51
Conflicts of Interests of Certain Persons in the Arrangement................................................. 58
Accounting Treatment......................................................................................... 59
Consequences under Securities Laws; Resale of Exchangeable Shares and Aviation Group Shares.................. 59
Ongoing Canadian Reporting Obligations....................................................................... 60
Fees and Expenses............................................................................................ 60
Dissenters' Rights........................................................................................... 60
Exchange of travelbyus.com Common Share Certificates......................................................... 61
Treatment of Outstanding travelbyus.com Stock Options and Warrants........................................... 61
Representations and Warranties............................................................................... 62
Conditions of the Arrangement................................................................................ 63
Termination of the Arrangement Agreement and Payment of Fees................................................. 63
Arrangement Mechanics........................................................................................ 64
Description of Exchangeable Shares........................................................................... 65
Covenants.................................................................................................... 68
Management and Board of Directors After the Arrangement...................................................... 69
Listings After the Arrangement............................................................................... 69
The Voting And Exchange Agreement............................................................................ 69
The Support Agreement........................................................................................ 70
FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE ARRANGEMENT..................................................... 72
Canadian Federal Income Tax Considerations................................................................... 72
United States Federal Income Tax Considerations.............................................................. 79
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS................................................................. 85
DESCRIPTION OF AVIATION GROUP CAPITAL STOCK....................................................................... 93
Common Stock................................................................................................. 93
Preferred Stock.............................................................................................. 93
Warrants and Options......................................................................................... 96
Convertible Debt Securities.................................................................................. 97
Transfer Agent, Registrar and Warrant Agent.................................................................. 98
</TABLE>
6
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<TABLE>
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COMPARISON OF SHAREHOLDERS' RIGHTS................................................................................ 99
Vote Required for Extraordinary Transactions................................................................. 99
Dissenters' Rights........................................................................................... 99
Cumulative Voting and Classification of Board of Directors................................................... 100
Amendment to Governing Documents............................................................................. 100
Derivative Action............................................................................................ 101
Director Qualifications...................................................................................... 101
Fiduciary Duties of Directors................................................................................ 101
Indemnification of Officers and Directors.................................................................... 101
Director Liability........................................................................................... 102
Special Meetings of the Shareholders......................................................................... 103
Shareholder Action by Written Consent........................................................................ 103
Removal of Directors......................................................................................... 103
No Pre-emptive Rights........................................................................................ 103
Inspection of Books and Records.............................................................................. 103
OTHER TRAVELBYUS.COM SPECIAL MEETING PROPOSAL..................................................................... 105
Proposal No. 2: Amendment to Stock Option Plan............................................................... 105
OTHER AVIATION GROUP SPECIAL MEETING PROPOSALS.................................................................... 107
Proposal No. 2: Amendment of the Articles of Incorporation to Increase Authorized Common Stock............... 107
Proposal No. 3: Amendment of the Articles of Incorporation to Change the Name of Aviation Group.............. 109
Proposal No. 4: Ratification of Warrants to Purchase 500,000 Shares of Aviation Group Common Stock........... 109
Proposal No. 5: Ratification of Certain Securities Issued or to be Issued in Connection With Aviation
Group's Acquisition of Global Leisure Travel, Inc................................................... 110
Proposal No. 6: Adoption of Amendment to Aviation Group's 1997 Stock Option Plan............................. 112
Proposal No. 7: Ratification of Warrants to Purchase 150,000 Shares of Aviation Group Common Stock........... 112
Proposal No. 8: Proposal to Amend the Articles of Incorporation to Effect a One-For-Five Reverse
Stock Split......................................................................................... 113
TRAVELBYUS.COM.................................................................................................... 117
Business..................................................................................................... 117
Legal Proceedings............................................................................................ 126
Management's Discussion and Analysis of Financial Condition and Results of Operation......................... 126
Principal Shareholders of travelbyus.com..................................................................... 130
Directors and Executive Officers............................................................................. 131
Executive Compensation....................................................................................... 133
Description of Share Capital................................................................................. 135
Prior Sales.................................................................................................. 136
Interest of Management and Others in Material Transactions................................................... 137
Auditors, Registrar and Transfer Agent....................................................................... 137
AVIATION GROUP.................................................................................................... 138
Business..................................................................................................... 138
Properties................................................................................................... 143
Legal Proceedings............................................................................................ 144
Selected Financial Data...................................................................................... 144
Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 144
Principal Shareholders of Aviation Group..................................................................... 150
Directors and Executive Officers............................................................................. 151
Executive Compensation....................................................................................... 153
Prior Sales.................................................................................................. 156
</TABLE>
7
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<TABLE>
<S> <C>
Certain Relationships and Related Transactions............................................................... 157
EXCHANGE OFFER TO SERIES B PREFERRED SHAREHOLDERS................................................................. 159
SELLING SHAREHOLDERS.............................................................................................. 160
PLAN OF DISTRIBUTION.............................................................................................. 161
LEGAL MATTERS..................................................................................................... 164
EXPERTS........................................................................................................... 164
OTHER MATTERS..................................................................................................... 165
INDEX TO FINANCIAL STATEMENTS..................................................................................... 166
</TABLE>
Appendices:
Appendix A - Arrangement Agreement
Appendix B - Plan of Arrangement and Share Provisions for travelbyus.com
ltd.
Appendix C - Interim Order of Ontario Superior Court.
Appendix D - Form of Voting and Exchange Trust Agreement
Appendix E - Form of Support Agreement
Appendix F - Special Resolution for travelbyus.com Shareholders on
Arrangement
Appendix G - Fairness Opinion of Wellington West Capital Inc.
Appendix H - Fairness Opinion of CIBC World Markets Corp.
Appendix I - Ontario Dissenters' Rights Provisions
8
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE AVIATION GROUP/TRAVELBYUS.COM ARRANGEMENT
Q: What is being proposed?
A: We intend to combine the businesses of Aviation Group, Inc. and
travelbyus.com ltd. To accomplish this, we, the boards of directors of
Aviation Group and travelbyus.com, are proposing an arrangement under
Ontario law between travelbyus.com and an Ontario subsidiary of Aviation
Group, subject to final approval of an Ontario court. Following
consummation of these transactions, we expect to change the name of
Aviation Group to travelbyus, Inc.
When the arrangement is completed, travelbyus.com will become an indirect
subsidiary of Aviation Group. travelbyus.com shareholders will receive one
exchangeable share of travelbyus.com for each common share they currently
own. Each exchangeable share may be exchanged by the holder for one share
of Aviation Group common stock, subject to adjustment if Aviation Group
effects a one-for-five reverse split as expected. The exchangeable shares
not previously exchanged will be automatically exchanged into Aviation
Group common stock on January 1, 2003, or earlier upon certain events.
Q: Why is the business combination being proposed?
A: We have determined that the business combination is likely to benefit the
shareholders of Aviation Group and travelbyus.com in several ways. The
combined companies will create a content-rich, e-commerce-based provider of
travel services of significant size. The companies believe they will have
greater access to the U.S. capital markets to support future growth. By
content-rich, we mean that the combined companies will have a wide range of
travel products, services, functions and options available through its Web
site. The combined companies will be larger, with a greater number of
shareholders and greater equity capitalization than either Aviation Group
or travelbyus.com alone.
For travelbyus.com, the arrangement results in greater access to the U.S.
capital markets, significantly expands its travel products by those offered
by Aviation Group's subsidiary, Global Leisure Travel, Inc., and allows the
sale of non- strategic assets of Aviation Group. For Aviation Group, the
arrangement enables it to shift its assets and capital into an industry
with significant growth opportunities. Since August 1999, Aviation Group
has sought to sell its businesses to fund acquisitions with growth
opportunities.
Additionally, we believe that investors, especially institutional
investors, are more likely to invest in the combined companies due to a
larger market capitalization and the possible listing of Aviation Group
common stock on the Nasdaq National Market. This should result in greater
liquidity for existing investors. For the same reasons, we believe that the
combined companies will be better able than either Aviation Group or
travelbyus.com alone to attract new investors and, therefore, to obtain
financing to pursue additional acquisitions and fund growth.
Q: What will I receive in the arrangement?
A: Each common share in travelbyus.com will be converted into one exchangeable
share of travelbyus.com. For example, if you own 100 common shares, you
will receive 100 exchangeable shares. Every five exchangeable shares will
be exchangeable, at the holder's election, into a share of Aviation Group
common stock, assuming Aviation Group effects the one-for-five reverse
stock split as proposed. Shareholders of travelbyus.com may immediately
elect to receive Aviation Group common stock in exchange for their
exchangeable shares.
Each existing share of common stock of Aviation Group will remain
outstanding and unchanged by the arrangement.
Q: What vote is required to approve the arrangement?
A: To approve the arrangement, holders of at least two- thirds of the
travelbyus.com common shares voted at the special meeting in person or by
proxy must vote in favor of the arrangement. Holders of at least a majority
of the shares of Aviation Group common stock represented at the special
meeting in person or by proxy must also vote in favor of the arrangement.
In addition, holders of at least two-thirds of the outstanding shares of
Aviation Group common stock must approve an amendment to its
9
<PAGE>
articles of incorporation to increase its authorized number of shares of
common stock.
Q: What do I need to do now?
A: Carefully read this joint proxy statement/prospectus. If you choose to vote
by proxy, complete the enclosed proxy card and indicate how you want to
vote. Sign and mail the proxy card in the enclosed prepaid return envelope
as soon as possible. Mailing in a proxy card now will not prevent you from
later canceling or revoking your proxy until the day of the special
meeting.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this by sending a written notice stating that
you would like to revoke your proxy or by completing and submitting a new
proxy card. You may also attend the special meeting of the company for
which you are a shareholder and vote in person. Simply attending the
meeting, however, will not revoke your proxy. If you have instructed a
broker to vote your shares, you must follow the directions received from
your broker to change your vote.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you instruct your broker how to
vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. If you do not tell your
broker how to vote, your shares will not be voted.
Q: Where and at what time will the meetings be held?
A: The Aviation Group special meeting will be held on October __ 2000, at the
offices of Aviation Group at 700 North Pearl Street, Suite 2170, Dallas,
Texas, at 10:00 a.m., local time.
The travelbyus.com special meeting will be held on October __, 2000,
_____________________, Toronto, Ontario, at 11:00 a.m., local time.
Q: Should I send in my stock certificates now?
A: No. After the arrangement is completed, we will send travelbyus.com
shareholders written instructions for exchanging their certificates
representing common shares for certificates representing exchangeable
shares and for exchanging their exchangeable shares for certificates
representing shares of Aviation Group common stock instead of exchangeable
shares. Aviation Group shareholders will keep their existing stock
certificates.
Q: When do the companies expect to complete the arrangement?
A: If the shareholders of each company approve the arrangement, we expect to
obtain the necessary approval of the Ontario court at a hearing scheduled
for October __, 2000. The closing of the arrangement will occur promptly
after the court's approval.
Q: Will I have dissenters' rights in the arrangement?
A: Under applicable law, dissenters' rights are not available to the holders
of Aviation Group common stock. Dissenters' rights are available to the
holders of travelbyus.com common shares, as described in the section
entitled "Proposal No. 1 The Arrangement-Dissenters' Rights" on page 60.
Q: How will my shares be listed for trading?
A: We have applied to list the Aviation Group common stock on the Nasdaq
National Market. We intend to apply to list the exchangeable shares on The
Toronto Stock Exchange and the Aviation Group common stock on the Frankfurt
Stock Exchange. The Aviation Group common stock is currently listed on the
Nasdaq SmallCap Market and the Boston Stock Exchange.
Q: Whom should I call with questions?
A: Aviation Group shareholders should contact Lee Sanders, Chairman, at (214)
922-8100, ext. 1100, or by e-mail to "[email protected]."
travelbyus.com shareholders should contact Peter Rooney at (905) 475-5111
or by e-mail to "[email protected]."
If you would like additional copies of this joint proxy
statement/prospectus or related agreements or documents, you should contact
Heather Martin at (604) 541-2400 or by e-mail to
"[email protected]."
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SUMMARY
This summary and the preceding questions and answers highlight selected
information from this joint proxy statement/prospectus. They do not contain all
of the information that is important to you. We encourage you to carefully read
this entire joint proxy statement/prospectus and the documents to which we refer
you. The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this joint proxy
statement/prospectus. References in this joint proxy statement/prospectus to "$"
refer to U.S. dollars, unless otherwise indicated.
The Companies
travelbyus.com ltd. Aviation Group, Inc.
204-3237 King George Highway 700 North Pearl Street, Suite 2170
South Surrey, British Columbia V4P 1B7 Dallas, Texas 75201
(604) 541-2400 (214) 922-8100
travelbyus.com is an Internet-based travel company. travelbyus.com's Web
site, www.travelbyus.com, will provide consumers with on-line travel options 24
------------------
hours per day. Through the travelbyus.com Web site, consumers will have the
ability to browse travel options world-wide and book travel reservations. In
addition to offering consumers travel options through the Internet,
travelbyus.com will also offer the consumer travel options through 1-800 call
centers and traditional travel agencies. For the nine months ended June 30,
2000, travelbyus.com had revenues of $12,016,173 and a net loss of $21,715,088.
For the same period, it obtained 3%, 83% and 14% of its revenues from its
Website, 1-800 call centers and travel agencies, respectively.
Since April 1999, travelbyus.com has focused on completing strategic
acquisitions to build the components of travelbyus.com's business model, which
include product offerings, distribution, marketing and technology.
travelbyus.com provides a broad range of travel products, targeted primarily at
the leisure customer, including airline tickets, cruise packages and ground
packages. travelbyus.com distributes such products to the consumer through the
Internet and 1-800 call centers and will distribute through traditional travel
agencies. It utilizes each distribution channel and traditional advertising
sources for marketing purposes. travelbyus.com continuously seeks technology
that allows it to distribute its products to the consumer effectively and offer
consumers additional travel related options. The travelbyus.com Web site is in
the early stages of development. As of September 1, 2000, the Web site had
destination content including maps, weather information, a worldwide directory
of hotels, currency conversion rates and an airline ticket booking capability.
It also had vacation packages listed for Mexico, Hawaii, Florida and other
popular destinations with sample prices. However, these packages must be booked
via telephone. By the first quarter of fiscal year 2001, travelbyus.com
anticipates that vacation packages will be available for online purchase and
that advanced search technology will be provided to significantly enhance and
simplify the booking capabilities for airline tickets. At that time, consumers
will have the ability to book and pay for a vacation package, including the air
and hotel accommodation components, through the Web site without requiring
telephone interaction.
Aviation Group provides services and products to airline companies and
other aviation firms primarily in the United States. Aviation Group's business
consists of painting and paint stripping services for commercial and freight
aircraft and the manufacture, sale and repair of aircraft batteries and aircraft
and truck weighing scales. For the fiscal year ended June 30, 2000, Aviation
Group had revenues of $13,381,000, and a net loss of $7,128,000.
In March 2000, Aviation Group acquired a controlling stock interest in
Global Leisure Travel, Inc. Global Leisure is primarily engaged in the wholesale
and retail sale of travel packages for both domestic and Pacific Island and
Australian destinations. Travel packages created by Global Leisure include
airline tickets, hotel accommodations, automobile rentals and other land
components. Global Leisure contracts with vendors and primarily markets the
packages directly to retail travel agents. Aviation Group acquired 100%
ownership of Global Leisure in May 2000.
Following closing of the arrangement, the combined companies will focus on
developing and expanding the travelbyus.com travel business. Aviation Group's
existing businesses, other than Global Leisure, are expected to be sold, with
the proceeds to be directed toward the further implementation and expansion of
the travel business.
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Proposal to Approve the Arrangement
This joint proxy statement/prospectus describes the proposed business
combination of travelbyus.com and Aviation Group through an arrangement under
Ontario law between travelbyus.com and Aviation Group's Ontario subsidiary
pursuant to an arrangement agreement. The arrangement is subject to approval of
the shareholders of both companies and final approval by an Ontario court. When
the arrangement is completed, travelbyus.com will become an indirect subsidiary
of Aviation Group. travelbyus.com shareholders will receive one exchangeable
share of travelbyus.com for each common share they currently own. Assuming
Aviation Group effects a one-for-five reverse stock split, as proposed,
travelbyus.com shareholders may elect to exchange every five exchangeable shares
they own or are entitled to receive for one share of Aviation Group common
stock. The arrangement agreement is the primary legal document that governs the
arrangement. The arrangement agreement is attached as Appendix A to this joint
proxy statement/prospectus. We encourage you to read it in its entirety.
Through this joint proxy statement/prospectus, the boards of directors of
Aviation Group and travelbyus.com are asking the shareholders of Aviation Group
and travelbyus.com, respectively, to approve the arrangement pursuant to the
arrangement agreement. The approval by travelbyus.com shareholders of the
arrangement will constitute approval of the special resolution attached as
Appendix F to this joint proxy statement/prospectus.
Board Recommendations of Arrangement
The board of directors of each company believes that the arrangement is
fair to its shareholders and in their best interests and unanimously recommends
that its shareholders vote "FOR" the approval of the arrangement pursuant to the
arrangement agreement.
Votes Required for Approval
The affirmative votes of at least two-thirds of the travelbyus.com common
shares voted at the special meeting in person or by proxy are required to
approve the proposed arrangement pursuant to the terms of the arrangement
agreement.
The affirmative votes of at least a majority of the shares of Aviation
Group common stock represented at the special meeting in person or by proxy are
required to approve the proposed arrangement pursuant to the terms of the
arrangement agreement.
Opinions of Financial Advisors (see pages 47 and 51)
The board of directors of travelbyus.com has received a written opinion
dated May 11, 2000, from Wellington West Capital Inc. The opinion states that
the exchange ratio for the arrangement was fair to the shareholders of
travelbyus.com from a financial point of view.
The board of directors of Aviation Group has received a written opinion
dated May 3, 2000, from CIBC World Markets Corp. The opinion states that, as of
May 3, 2000, the consideration to be received by the shareholders of
travelbyus.com pursuant to the arrangement agreement was fair to the
shareholders of Aviation Group from a financial point of view.
These opinions are attached as Appendices G and H, respectively, to this
joint proxy statement/prospectus. We encourage you to read them.
No Change in Aviation Group Shares
After the arrangement, each certificate representing shares of Aviation
Group common stock will, without any action on the part of Aviation Group
shareholders, continue to represent the same Aviation Group common stock.
Aviation Group shareholders do not need to exchange their stock certificates
after the arrangement.
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Exchangeable Shares Received by travelbyus.com Shareholders in the Arrangement
travelbyus.com shareholders will receive one exchangeable share of
travelbyus.com in exchange for each travelbyus.com common share held. The
exchangeable shares will be securities of travelbyus.com. They will entitle
their holders to dividends, distributions, and other rights that are, as nearly
as practicable, economically equivalent to those of Aviation Group common stock.
Through a voting trust, they will also entitle their holders to vote at meetings
of Aviation Group shareholders.
Assuming Aviation Group effects a one-for-five reverse stock split, as
proposed, every five exchangeable shares will be exchangeable at the option of
the holder for one share of Aviation Group common stock. We anticipate that most
holders of exchangeable shares will elect to exchange their shares into Aviation
Group common stock if they choose to sell their shares at a later date. Any
remaining exchangeable shares not previously exchanged will be automatically
exchanged into Aviation Group common stock on January 1, 2003, or earlier upon
the occurrence of certain events, including the winding up or dissolution of
Aviation Group or travelbyus.com. No fractional shares of Aviation Group common
stock will be issued. Any fractional share of Aviation Group common stock will
be rounded up to the next whole share of common stock.
The reasons for structuring the transaction with exchangeable shares are to
permit shareholders of travelbyus.com to defer realizing taxable capital gains
until they exchange their exchangeable shares for Aviation Group shares and to
permit Canadian institutional shareholders of travelbyus.com to continue to hold
Canadian securities pending their orderly sale. See "Federal Income Tax
Considerations Relating to the Arrangement."
Listings After the Arrangement
Aviation Group intends to apply for listing of the Aviation Group common
stock on the Nasdaq National Market and the Frankfurt Stock Exchange. The
Aviation Group common stock is currently listed on the Nasdaq SmallCap Market
and the Boston Stock Exchange under the symbol "AVGP".
travelbyus.com intends to apply for listing of the exchangeable shares on
The Toronto Stock Exchange under the symbol "TBU". Under the terms of the
exchangeable shares, travelbyus.com will not be required to retain The Toronto
Stock Exchange listing beyond December 31, 2001.
Eligibility for Investment of Exchangeable Shares
If the exchangeable shares are listed on The Toronto Stock Exchange, under
Ontario, Canada law they should not be foreign property for trusts governed by a
registered retirement savings plan, a registered retirement income fund or a
deferred profit sharing plan or for certain other persons to whom Part XI of the
Income Tax Act (Canada) is applicable. The exchangeable shares will be qualified
investments for trusts governed by a registered retirement savings plan, a
registered retirement income fund or a deferred profit sharing plan.
Board of Directors and Management of Aviation Group After the Arrangement
In connection with the closing of the arrangement, all of the current
directors of travelbyus.com and Lee Sanders, currently Chairman and a director
of Aviation Group, will be appointed as the directors of Aviation Group. The
officers of travelbyus.com will become the officers of Aviation Group at the
time the arrangement becomes effective. See "travelbyus.com-Directors and
Executive Officers" on page 131.
Ownership of Aviation Group and travelbyus.com After the Arrangement
If the arrangement is completed, Aviation Group will offer to issue
approximately 90.8 million shares of Aviation Group common stock in exchange for
all of the exchangeable shares. These shares will represent approximately 95% of
the outstanding common stock of Aviation Group after consummation of the
arrangement, assuming all exchangeable shares are exchanged. Current
shareholders of Aviation Group will represent approximately 5% of the
outstanding shares of Aviation Group, assuming all exchangeable shares are
exchanged. Under the arrangement, an Ontario subsidiary of Aviation Group will
be issued one travelbyus.com common share, which will be the only outstanding
common share after the arrangement.
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Share Ownership of Management; Voting Intention
On the record date, Aviation Group directors and executive officers owned
___________ outstanding shares of Aviation Group common stock representing
approximately ____% of the outstanding shares. These directors and executive
officers have indicated that they intend to vote "FOR" all of the proposals.
On the record date, travelbyus.com directors and executive officers owned
___________ outstanding travelbyus.com common shares representing approximately
____% of the outstanding shares. These directors and executive officers have
indicated that they intend to vote "FOR" the arrangement proposal.
Conflicts of Interest (see page 58)
The determinations of the boards of Aviation Group and travelbyus.com to
participate in the arrangement may have been affected by conflicts of interest.
In particular:
- If approved by the shareholders of Aviation Group, three directors of
Aviation Group will be able to exercise warrants to purchase an
aggregate of 150,000 shares of Aviation Group common stock at the pre-
transaction trading price of $1.50 per share at any time after
completion of the arrangement until February 2005.
- Two executive officers, directors and shareholders of travelbyus.com,
William Kerby and John Fenyes, had been recently appointed and were
serving as travelbyus.com's representatives on Aviation Group's board
of directors at the time of and participated in the final approvals by
the boards of directors of Aviation Group and travelbyus.com of the
arrangement in early May 2000. These two directors had potential
conflicts of interest as a result of their fiduciary duties to both
travelbyus.com and Aviation Group.
The directors of Aviation Group and travelbyus.com were aware of these
interests and considered them before their final unanimous approvals of the
arrangement.
Dissenters' Rights (see page 60)
Under applicable law, Aviation Group shareholders do not have rights to
dissent or to an appraisal of the value of their shares in connection with the
arrangement.
Holders of travelbyus.com common shares have the right to dissent as to the
arrangement and to be paid in cash the fair value of their travelbyus.com common
shares. Any holder of record of travelbyus.com common shares who objects to the
arrangement has the right to obtain a cash payment for the fair value of his or
her travelbyus.com common shares if the holder follows specific procedures
required by Section 185 of the Ontario Business Corporations Act. Initially, a
dissenting holder must deliver to travelbyus.com a demand for payment of the
fair value of the holder's travelbyus.com common shares prior to 5:00 p.m.,
Toronto time, on the business day preceding the meeting. A copy of Section 185
is attached as Appendix I to this joint proxy statement/prospectus.
Federal Income Tax Considerations for travelbyus.com Shareholders (see page 72)
Canada - In general, a Canadian resident who holds travelbyus.com common
shares as capital property and deals at arm's length with travelbyus.com will be
deemed to have disposed of such shares for proceeds of disposition equal to the
adjusted cost base thereof immediately before the arrangement, to have acquired
the rights under the support agreement and the voting and exchange trust
agreement at a cost equal to the fair market value thereof, and to have acquired
the exchangeable shares at a cost equal to the adjusted cost base of the
holders' travelbyus.com common shares less the fair market value of these
rights. Recently released proposed amendments to the Income Tax Act (Canada) may
require holders of exchangeable shares or shares of Aviation Group common stock
to report annually as income or loss on these shares annual changes in the value
of the shares accruing after December 31, 2001. The amendments generally could
be applicable to investments by Canadian residents in certain non-resident
corporations. See "Federal Income Tax Considerations Relating to the
Arrangement."
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United States - travelbyus.com intends to treat the arrangement as a
"reorganization" within the meaning of the Internal Revenue Code. Accordingly,
in general, a United States holder of travelbyus.com common shares as a capital
asset should not recognize a gain or loss on the exchange of travelbyus.com
common shares solely for exchangeable shares pursuant to the arrangement. See
"Federal Income Tax Considerations Relating to the Arrangement." A subsequent
exchange of exchangeable shares for Aviation Group common stock generally would
result in the recognition of gain or loss.
Tax matters are very complicated, and the tax consequences of the
arrangement to you will depend on the facts of your own situation. You should
consult your tax advisor for a full understanding of the tax consequences to you
of the arrangement.
Conditions of the Arrangement
Completion of the arrangement is dependent upon the fulfillment of a number
of conditions, including the following material conditions:
- the final approval of the arrangement by the Ontario court;
- the approval of the arrangement by the holders of at least a majority
of the shares of Aviation Group common stock represented at the
Aviation Group special meeting and the holders of at least two-thirds
of the travelbyus.com common shares voted at the travelbyus.com
special meeting in person or by proxy;
- the execution by Aviation Group and travelbyus.com of the voting and
exchange trust agreement and the support agreement;
- the shares of Aviation Group common stock offered in exchange for
exchangeable shares having been approved for listing on the American
Stock Exchange or Nasdaq's SmallCap or National Market;
- the exchangeable shares having been approved for listing on The
Toronto Stock Exchange;
- all necessary consents from third parties having been obtained;
- each party having performed its obligations under the arrangement
agreement in all material respects;
- no restraining order, injunction, order or decree of any court having
been issued;
- the delivery of opinions of legal counsel;
- travelbyus.com shareholders holding an aggregate of more than 5% of
the outstanding common shares must not have exercised their dissent
rights;
- the filing by the parties of all documents and instruments required to
be filed with governmental entities;
- the approval by holders of at least two-thirds of the outstanding
shares of Aviation Group common stock of an amendment to Aviation
Group's articles of incorporation to increase its authorized number of
shares of common stock; and
- no action having been taken by any state or federal government or
agency which would prevent the arrangement or impose material
conditions on the arrangement.
The arrangement agreement permits each of the parties to waive any of these
conditions that are for its benefit. If a party elects to waive any of these
conditions, this joint proxy statement/prospectus will be amended or
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<PAGE>
supplemented, as appropriate, and will be recirculated to the affected
shareholders if the waiver occurs prior to approval of the arrangement by the
shareholders. If any of these material conditions to the arrangement are waived
after the parties receive shareholder approval, the shareholders of a party
adversely affected by the waiver will be asked to reapprove the arrangement.
Termination of the Arrangement Agreement and Payment of Fees
The arrangement agreement may be terminated at any time prior to the
effective date in the following circumstances:
- by mutual agreement;
- by travelbyus.com or Aviation Group, if the transaction has not been
consummated on or prior to November 15, 2000, so long as the
terminating party has not failed to fulfill any material obligation
under the arrangement agreement;
- by travelbyus.com, if Aviation Group materially breaches any
representation, warranty, covenant or agreement set forth in the
arrangement agreement;
- by Aviation Group, if travelbyus.com materially breaches any
representation, warranty, covenant or agreement set forth in the
arrangement agreement;
- by travelbyus.com or Aviation Group, if the required approvals
of the shareholders of both companies are not approved;
- by travelbyus.com, if the board of directors of travelbyus.com
determines that another proposed acquisition constitutes a superior
proposal and travelbyus.com pays a termination fee of $1.0 million;
and
- by Aviation Group, if the board of directors of Aviation Group
determines that another proposed acquisition constitutes a superior
proposal and Aviation Group pays a termination fee of $1.0 million.
Accounting Treatment
The combined companies will account for the transaction under the purchase
method of accounting as if travelbyus.com had acquired Aviation Group and had
been recapitalized under the capital structure of Aviation Group. Accordingly,
the combined companies will record the assets and liabilities of Aviation Group
as being acquired by travelbyus.com in the arrangement.
Comparison of Shareholder Rights (see page 99)
The rights of travelbyus.com shareholders are currently governed by Ontario
corporate law and by travelbyus.com's articles and bylaws. The rights of
Aviation Group shareholders are currently governed by Texas corporate law and
Aviation Group's articles and bylaws. If the arrangement is completed, the
rights of travelbyus.com shareholders will change and their rights as Aviation
Group shareholders will be governed by Texas corporate law and Aviation Group's
articles and bylaws. Important differences in shareholder rights include the
following:
- the Ontario Business Corporations Act requires a board of directors of
a company that has made a public distribution of its securities to be
composed of at least three directors and that a majority of the
directors of every corporation other than a non-resident corporation
be Canadian residents. The Texas Business Corporation Act does not
contain any residency requirements for directors.
- the Ontario Business Corporations Act does not permit a limitation on
a director's liability, while Texas law and the Aviation Group
articles of incorporation limit the monetary liability of a
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director except for a breach of the duty of loyalty, intentional
misconduct, a knowing law violation, a transaction from which a
director received an improper benefit and a liability imposed by
statute.
- under the Ontario Business Corporations Act, a special meeting of the
shareholders may be called by requisition to the board of directors by
the holders of not less than five percent of the issued shares
entitled to vote at the meeting. Under the bylaws of Aviation Group, a
special meeting of the shareholders may be called by the holders of at
least 10% of the outstanding shares entitled to vote at the meeting.
- the Aviation Group bylaws provide for a board of directors staggered
in three classes, with each class serving a term of three years. The
travelbyus.com articles of incorporation and bylaws do not provide for
a staggered board of directors.
These different provisions may be less favorable to travelbyus.com
shareholders than the corresponding provisions of Ontario corporate law and
travelbyus.com's articles and bylaws. Some of these differences may have the
effect of delaying, deferring or preventing a change in control in Aviation
Group or other transactions that might involve a premium price for Aviation
Group shares or otherwise be in the best interests of Aviation Group
shareholders.
Regulatory Approval
The arrangement requires approval of the Ontario Superior Court of Justice
under the Ontario Business Corporations Act. A hearing to obtain a final order
is set for October __, 2000, at 10:00 a.m., Toronto time. At this hearing, any
shareholder or other interested party who wishes to appear and be heard may do
so but must serve a form of appearance on travelbyus.com before 4:00 p.m.,
Toronto time, on October __, 2000. To issue the final order approving the
arrangement, the court must be satisfied that travelbyus.com has complied with
the required procedural formalities and that the plan of arrangement is not
unfair or unreasonable and does not disregard in any substantial way the rights
and interests of travelbyus.com's shareholders.
Other travelbyus.com Proposal
Shareholders of travelbyus.com are also being asked to approve a proposal
to amend the stock option plan of travelbyus.com. The amendment would increase
the number of common shares that could be issued under the plan from 6,500,000
to 10,000,000.
Other Aviation Group Proposals
Shareholders of Aviation Group are also being asked to approve six other
proposals as summarized below:
Proposed Amendments to the Articles of Incorporation of Aviation Group
Proposal no. 2 is to increase the number of shares of Aviation Group common
stock authorized under its articles of incorporation from 10,000,000 to
250,000,000 shares. The primary purposes of the proposed increase are to ensure
that additional shares are available for issuance:
- upon exchange of exchangeable shares in connection with the
arrangement,
- upon conversion of Series C convertible preferred stock being offered
in exchange for outstanding Series B preferred stock, and
- upon exercise of contingent Series A, B and C warrants issued by
Aviation Group in connection with the acquisition of Global Leisure
and related financing.
As illustrated in the following table, Aviation Group has sufficient authorized
shares of common stock to cover its other commitments to issue shares. Approval
of the proposal to increase the authorized shares is a condition to
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completion of the arrangement, which is a condition to completion of the
exchange offer for the Series C preferred stock. Because by their terms the
Series A, B and C warrants are exercisable only after approval by Aviation
Group's shareholders of their issuance, the Aviation Group board authorized the
issuance of the warrants knowing that approval would be solicited at the same
time as the solicitation for the increase in the authorized number of shares of
Aviation Group common stock to permit consummation of the arrangement. The
exercisability of the Series A and B warrants is also conditional on approval by
the shareholders of an increase in the number of authorized shares of common
stock. The following table summarizes the needs for additional authorized shares
of common stock based on existing commitments by Aviation Group's board of
directors:
<TABLE>
<S> <C>
Outstanding shares 4,956,722
Reserved for stock option plan 150,000
Reserved for other derivative securities 2,202,406
Reserved for Series A convertible preferred 2,750,000
Reserved for contingent warrants to directors and executive officers 650,000
Reserved for contingent Series A, B and C warrants 5,489,750
Reserved for Series C preferred exchange offer 3,558,000
Reserved for travelbyus.com arrangement 111,000,000
------------
Total outstanding reserved and committed shares 130,106,878
Less: Number of shares currently authorized (10,000,000)
------------
Deficiency in authorized shares 120,106,878
============
</TABLE>
Proposal no. 3 is to change the name of Aviation Group to "travelbyus,
Inc." effective upon consummation of the arrangement. The purpose of the name
change is to reflect the change in the primary business of Aviation Group after
the arrangement.
Proposal no. 6 is to increase the number of shares of Aviation Group common
stock available for issuance under its 1997 stock option plan from 150,000 to
10.0 million, or 2.0 million if the reverse stock split is effected.
Proposal no. 8 is to amend the articles of incorporation to effect a one-
for-five reverse split of Aviation Group's common stock subject to completion of
the arrangement.
Ratification of Issuance of Securities of Aviation Group
As required by Nasdaq rules, Aviation Group is seeking, in proposal no. 5,
shareholder ratification of certain warrants and convertible preferred stock
that were issued in connection with the acquisition of Global Leisure and the
related financing. These securities include:
- contingent Series A warrants to purchase 750,000 shares of common
stock exercisable at $5 per share;
- contingent Series B warrants to purchase 3,500,000 shares of common
stock exercisable at $3 per share;
- contingent Series C warrants to purchase 1,239,750 shares of common
stock exercisable at $3 per share; and
- 1,650 shares of Series A convertible preferred stock that are
convertible into 2,750,000 shares of Aviation Group common stock,
assuming a $6 conversion price.
In addition, Aviation Group is offering to exchange 2,153 shares of Series C
convertible preferred stock for outstanding shares of Series B preferred stock.
These shares of Series C convertible preferred stock, if issued, will be
convertible into approximately 3,588,000 shares of Aviation Group common stock,
assuming a $6 conversion price.
The acquisition of Global Leisure and the issuance of related securities
was structured and timed to allow for the immediate participation by Global
Leisure and Aviation Group in the travelbyus.com business strategy. A
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failure to acquire control of Global Leisure promptly would have jeopardized
Aviation Group's opportunity to effect a business combination with
travelbyus.com. The Aviation Group board of directors believed that it was more
important to Aviation Group and its shareholders to take advantage of this
opportunity by entering into these transactions before obtaining shareholder
approval. The Aviation Group board did, however, provide that the exercisability
of the Series A, B and C warrants would be contingent on obtaining shareholder
approval to comply with Nasdaq requirements.
If shareholder approval is not obtained, the exchange offer of the Series C
preferred stock for the Series B preferred stock will not proceed and the Series
A, B and C warrants will not be exercisable. However, the Series A preferred
stock would remain outstanding and might jeopardize the Nasdaq listing of the
common stock. Aviation Group cannot unwind the acquisition of Global Leisure and
related financings. Holders of warrants that do not become exercisable because
of shareholder disapproval might make a claim for damages against Aviation
Group, but the Aviation Group board does not believe Aviation Group should have
any liability to these holders for the shareholder disapproval.
As required by Nasdaq rules, Aviation Group is also seeking, in proposals
nos. 4 and 7, shareholder ratification of the issuance of warrants to certain of
its executive officers and directors. In February 2000, the board of directors
of Aviation Group approved the grants of warrants to purchase an aggregate of
150,000 shares of Aviation Group common stock to three directors of Aviation
Group and to purchase an aggregate of 500,000 shares of Aviation Group common
stock to two executive officers of Aviation Group. The exercise price for these
warrants is $1.50 per share. Both grants were subject to shareholder approval of
the grants. The grant to the three directors was also subject to completion of
the arrangement.
Board of Directors Recommendation
The Aviation Group board of directors recommends that you vote "FOR" all of
the other proposals described above and elsewhere in this joint proxy
statement/prospectus.
Exchange Offer for Preferred Stock (see page 159)
Aviation Group is also offering to issue to holders of its Series B
preferred stock one share of its Series C convertible preferred stock in
exchange for each share of Series B preferred stock. The exchange of shares is
conditional on completion of the arrangement. Holders of Series B preferred
stock will receive a supplement to this joint proxy statement/prospectus that
describes the exchange offer and related risks and compares the terms of the
Series B preferred stock to the Series C convertible preferred stock. Aviation
Group is required to conduct the exchange offer by the agreement under which
travelbyus.com purchased Series B preferred stock from Aviation Group. The
purpose is to provide the holders of Series B preferred the opportunity to
obtain preferred stock that is freely transferable and convertible into common
stock after completion of the arrangement.
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RISK FACTORS
The following risk factors should be considered by holders of
travelbyus.com common shares and by holders of Aviation Group common stock in
evaluating whether to approve the arrangement. These factors should be
considered in conjunction with the other information included elsewhere in this
joint proxy statement/prospectus. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations.
Non-Tax Risks Relating to the Arrangement
Aviation Group, travelbyus.com and Global Leisure have histories of losses, and
the combined business of these three companies may continue to incur substantial
losses even after the arrangement.
Aviation Group has incurred net losses from operations in each fiscal
period since its inception in December 1995. Global Leisure has incurred losses
for each of the three years ending December 31, 1999. travelbyus.com has
incurred losses since focusing its attention on the travel sector in mid-1999.
travelbyus.com previously incurred losses in its discontinued precious metals
exploration business. On a pro forma basis, for the nine months ended June 30,
2000, the combined companies incurred net losses of approximately $37.8 million.
Even after the arrangement, we expect a net loss at least through calendar year
2000.
Significant costs have been expended by travelbyus.com in designing and
implementing its Web site, and additional costs are anticipated to be incurred
to fund increased marketing initiatives, strategic alliances, enhancements to
the Web site, and the consolidation of its operations in Reno, Nevada.
travelbyus.com has incurred operating losses to date. Significant operating
losses are anticipated through at least calendar year 2000 and may occur in
subsequent calendar years. Additionally, travelbyus.com expects to compete with
bigger, more established online travel agents such as Expedia and Travelocity,
neither of which have achieved profitability.
While management believes the travel products of the combined companies
taken together with its Internet platform can permit the combined companies to
generate profits beginning in calendar year 2001, our revenue may not grow as
expected, and the combined companies may be unable to achieve profitability
resulting in continued losses.
Expected benefits from the arrangement between Aviation Group and travelbyus.com
may not be realized.
A failure to realize the benefits anticipated from the arrangement could
adversely affect the market value of the combined companies. See "Proposal No. 1
The Arrangement" on page 42 for a discussion of the anticipated benefits.
The ownership interest of current shareholders of Aviation Group will be
substantially reduced, and a change of control of Aviation Group will occur.
The current shareholders of Aviation Group will lose the ability to control
the outcome of shareholder votes. Former travelbyus.com shareholders will
initially have the power to vote approximately 95% of the outstanding votes at
meetings of shareholders following completion of the arrangement.
Certain directors of Aviation Group and travelbyus.com had potential conflicts
of interest in approving and recommending the arrangement.
Three directors of Aviation Group have been granted certain warrants to
purchase Aviation Group common stock. Their right to exercise these warrants is
conditioned upon completion of the arrangement, as well as approval of Aviation
Group's shareholders. The Aviation Group board authorized these warrants to
reward the directors for past services and to incentivize the directors to
maximize the trading price for Aviation Group's stock and to continue to serve
as directors until completion of the arrangement. These directors had potential
conflicts of interest as a result of these warrants.
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Two executive officers, directors and shareholders of travelbyus.com,
William Kerby and John Fenyes, had been recently appointed and were serving as
travelbyus.com's representatives on Aviation Group's board of directors at the
time of the final approval by the boards of directors of travelbyus.com and
Aviation Group of the arrangement in early May 2000. These two directors had
potential conflicts of interest as a result of their fiduciary duties to both
travelbyus.com and Aviation Group. See "Proposal No. 1 The Arrangement-Conflicts
of Interest of Certain Persons in the Arrangement."
The risk exists that these directors may have been influenced to approve
and recommend the arrangement by their personal financial interests or the
interests of travelbyus.com. Accordingly, they may not have been making
decisions based solely on the best interests of Aviation Group or its
shareholders. The Aviation Group board believes that neither its decision-making
process nor its shareholders' interests were adversely affected by these
potential conflicts.
Tax Risks Relating to the Arrangement
travelbyus.com shareholders may have to pay taxes upon exchange of exchangeable
shares for Aviation Group common stock.
When shareholders exchange exchangeable shares for shares of Aviation Group
common stock, they may be required to pay tax on any gain they may have under
the laws of Canada and the U.S. Tax consequences under the laws of Canada and
the U.S. vary depending on:
- where the shareholder is a resident for tax purposes;
- whether the shareholder exchanges exchangeable shares by way of
redemption or exchange;
- how long the shareholder has held the exchangeable shares; and
- the amount of outstanding exchangeable shares held by Aviation Group's
Canadian subsidiary immediately after the exchange.
We strongly urge shareholders to consult with their tax advisor with respect to
the tax consequences of the exchange of exchangeable shares for shares of
Aviation Group common stock. See "Federal Income Tax Considerations Relating to
the Arrangement."
Canadian taxes will be imposed on Canadians who acquire Aviation Group common
stock.
If a shareholder's exchangeable shares are redeemed or retracted, and
- the shareholder is a Canadian resident holding exchangeable shares as
capital property;
- the shareholder deals at arm's-length with Aviation Group; and
- the shareholder is not otherwise affiliated with Aviation Group;
then the shareholder will generally be treated as if he or she received a
dividend equal to the amount paid to the shareholder on the redemption or
retraction, less the paid-up capital of his or her exchangeable shares. If the
net proceeds of disposition, less any deemed dividend, exceed the adjusted cost
base for the exchangeable shares exchanged, the shareholder will also generally
be treated as if he or she realized a capital gain to the extent of that excess.
If the net proceeds of disposition, less any deemed dividend, are less than the
adjusted cost base for the exchangeable shares that are exchanged, the
shareholder will generally be treated as if he or she realized a capital loss to
the extent of that shortfall.
If shareholders otherwise exchange their exchangeable shares for shares of
Aviation Group common stock, they will generally be considered to have realized
a capital gain equal to the amount, if any, by which the net proceeds of
disposition exceed the adjusted cost base for the exchangeable shares exchanged.
If the net
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proceeds of disposition are less than the adjusted cost base for the
exchangeable shares exchanged, the shareholder will generally be treated as if
he or she realized a capital loss to the extent of that shortfall.
Aviation Group may be considered to be, or may become, a foreign investment
entity under recently released proposed amendments to the Income Tax Act
(Canada).
Under proposed amendments to the Income Tax Act (Canada) released June 22,
2000, as amended by a press release issued September 7, 2000 by the Minister of
Finance (Canada), Aviation Group may be, or may become, a foreign investment
entity. If that occurs, certain Canadian residents who hold exchangeable shares
or shares of Aviation Group common stock could be required annually to recognize
as income (or loss) any increase or decrease in the value of those shares
accruing after December 31, 2001. See "Federal Income Tax Considerations
Relating to the Arrangement".
U.S. taxes will be imposed on U.S. persons who acquire Aviation Group's common
stock.
In most circumstances, "U.S. persons" for U.S. federal income tax purposes
will generally recognize a gain or loss when they exchange exchangeable shares
for shares of Aviation Group's common stock. This gain or loss will be equal to
the difference between the fair market value of the shares of common stock
received in the exchange and the basis in the exchangeable shares exchanged. The
gain or loss will generally be a capital gain or loss, except that ordinary
income may be recognized with respect to any declared but unpaid dividends on
the exchangeable shares. A capital gain or loss will be a long-term capital gain
or loss under current law if a shareholder's holding period for exchangeable
shares is more than one year at the time of the exchange.
Aviation Group common stock is "foreign property" under the Income Tax Act
(Canada) for RRSPs, RRIFs, DPSPs, registered pension plans, registered
investments and certain other tax exempt entities, and may subject them to
additional taxes, fees and expenses.
Aviation Group common stock will always be "foreign property" under the
Income Tax Act (Canada) for trusts governed by a registered retirement savings
plan, a registered retirement income fund or a deferred profit sharing plan, and
for registered pension plans, registered investments and certain other tax
exempt entities. This treatment may be different from the treatment of the
exchangeable shares, which should not be "foreign property" under the Income Tax
Act (Canada) as long as they are listed on a prescribed stock exchange in Canada
and travelbyus.com maintains a substantial Canadian presence within the meaning
of the Income Tax Act (Canada). Accordingly, if you are such a holder, you
should consult your own tax advisors before you exchange exchangeable shares for
shares of Aviation Group common stock. Investing in Aviation Group common stock
may not be an acceptable investment for such entities or may subject such
entities to additional taxes, fees or expenses.
Risks Relating to the Travel Business
Adverse changes or interruptions in relationships with travel suppliers,
distribution partners and other third party service providers could reduce
revenue.
If travelbyus.com or Global Leisure is unable to maintain or expand its
relationships with travel suppliers, including airline, hotel, tour and car
rental suppliers, its ability to offer and expand travel service offerings or
lower-priced travel inventory could be reduced. Travel suppliers may not make
their services and products available to travelbyus.com or Global Leisure on
satisfactory terms, or at all. They may choose to provide their products and
services only to competitors of travelbyus.com or Global Leisure. In addition,
these travel suppliers may not continue to sell services and products through
global distribution systems on terms satisfactory to travelbyus.com or Global
Leisure. Any discontinuance or deterioration in the services provided by third
parties, such as global distribution systems providers, could prevent customers
from accessing or purchasing particular travel services through travelbyus.com
or Global Leisure.
The contracts of travelbyus.com or Global Leisure with travel suppliers are
generally renewed on an annual basis and, in some cases, can be canceled at will
by the supplier. If these suppliers cancel or do not renew the contracts,
travelbyus.com or Global Leisure would not have the range or volume of services
it requires to meet demand and its revenue would decline.
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A decline in commission rates or the elimination of commissions by travel
suppliers would reduce revenues.
We expect that a substantial portion of travelbyus.com's revenue will come
from the commissions paid by travel suppliers, such as hotel chains and
airlines, for bookings made through its online travel service. Consistent with
industry practices, these travel suppliers are not obligated to pay any
specified commission rates for bookings made through it or to pay commissions at
all. Over the last several years, travel suppliers have reduced commission rates
substantially. For example, in October 1999, the major airlines announced
reductions in the commissions they will pay travel agents from approximately 8%
to 5% and a cap of $50.00 per ticket for domestic round trip ticket sales. We
anticipate continued downward pressure on airline commission rates. Future
reductions, if any, in commission rates that are not offset by lower operating
costs from its Internet platform could have a material adverse effect on the
operations of travelbyus.com.
Failure to maintain relationships with traditional travel agents could adversely
affect travelbyus.com's and Global Leisure's business.
Both travelbyus.com and Global Leisure have historically received, and
expect to continue in the foreseeable future to receive, a significant portion
of their revenue through relationships with traditional travel agents.
Maintenance of good relations with these travel agents depends in large part on
continued offerings of travel services in demand, timely payment of commissions
based on sales and Web site support and availability. If travelbyus.com does not
maintain good relations with travel agents, these agents could terminate their
sales and promotion of its products.
Declines or disruptions in the travel industry could reduce travelbyus.com's
revenue.
Potential declines or disruptions in the travel industry include:
- price escalation in the airline industry or other travel-related
industries;
- airline or other travel related strikes;
- political instability and hostilities;
- bad weather;
- fuel price escalation;
- increased occurrence of travel-related accidents; and
- economic downturns and recessions.
Risks Relating to the e-Commerce Travel Business
travelbyus.com and Aviation Group have only recently focused their businesses on
the travel sector and their recent business experience in unrelated industries
might not carry over into the business of being an Internet-based provider for
travel services.
Prior to 1999, travelbyus.com was a precious metals exploration company
since its incorporation in 1986. Aviation Group has been in the business of
providing services and products to airline companies since its inception in
December 1995. The precious metals exploration and airline services and products
industries are unrelated to the travel industry. Being a provider of e-commerce-
based travel services is a developing business that is inherently riskier than
businesses in the industries where the companies have established operating
histories. Although some of the business experience gained in the unrelated
industries may be beneficial, the lack of industry-specific or related
experience or knowledge may lead to unfavorable operating results.
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travelbyus.com has a limited operating history in the e-commerce travel business
upon which to evaluate its business and prospects.
Although the various businesses of travelbyus.com have operating experience
in traditional travel services venues, its Web site was launched on January 21,
2000, and is in the early stages of development, and full integration of
travelbyus.com's operations is not complete. For the nine months ended June 30,
2000, travelbyus.com had revenues from its Web site of Cdn $343,563.
travelbyus.com has limited operating history upon which to evaluate its results
in the e-commerce travel market.
It is also difficult to evaluate our prospective business because we face
the risks frequently encountered by early stage companies using new and unproven
business models and entering new and rapidly evolving markets, such as online
commerce. These risks include our potential failure to:
- attract additional travel suppliers and consumers to our
services;
- maintain and enhance our brand;
- expand our service offerings;
- operate, expand and develop our operations and systems
efficiently;
- maintain adequate control of our expenses;
- raise additional capital;
- attract and retain qualified personnel;
- respond to technological changes; and
- respond to competitive market conditions.
Competition in the on-line travel industry is intense, and travelbyus.com may
not be able to compete successfully.
In recent years, the number of Web sites in the travel industry competing
for customers' attention has increased rapidly. Future competition is expected
to intensify given the relative ease with which new Web sites can be developed.
travelbyus.com believes that the primary competitive factors affecting its
business are brand recognition, Web site content, ease of use, price,
fulfillment speed, customer support and reliability. Other factors that will
affect travelbyus.com's ability to compete include market acceptance of
travelbyus.com's products, its continued ability to attract experienced
marketing, technology, operations and management talent and the success of
travelbyus.com's marketing programs. If travelbyus.com does not compete
successfully for customers in the intensely competitive online travel services
market, particularly in promoting and differentiating its brand name from
competitors, travelbyus.com will lose or be unable to gain customers. Some
competitors have greater brand recognition and greater financial, technological,
marketing and other resources than travelbyus.com. travelbyus.com competes with
a variety of companies with respect to each product or service offered. These
competitors include:
- online travel agents, including Expedia, Travelocity, Trip.com and
American Express Interactive, Inc.;
- local, regional, national and international traditional travel
agencies;
- consolidators and wholesalers of airline tickets, hotels and other
travel products, including online consolidators such as
Cheaptickets.com and Priceline.com and online wholesalers such as
Hotel Reservations Network, Inc.;
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- airlines, hotels, rental car companies, cruise operators and other
travel service providers, whether working individually or
collectively, some of which are suppliers to the travelbyus.com
website; and
- operators of travel industry reservations databases.
In addition to the traditional travel agency channel, many travel suppliers
also offer their travel services as well as third-party travel services directly
through their own Web sites and by telephone. These travel suppliers include
many suppliers with which we do business. In particular, five U.S. airlines,
American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines and
United Airlines, have announced their intention to launch a direct- distribution
Web site, named "Orbitz" in June 2001. Orbitz will offer a centralized
marketplace for a number of airlines, integrating fare, scheduling, seating
availability and booking data. Orbitz will also offer car, hotel, cruise and
vacation packages. As the market for online travel services grows, we believe
that travel suppliers, traditional travel agencies, travel industry information
providers and other companies will increase their efforts to sell inventory from
a wide variety of suppliers. travelbyus.com's operations may be unable to
compete successfully with any current or future competitors.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Some
of our competitors may be able to secure services and products from travel
suppliers on more favorable terms, devote greater resources to marketing and
promotional campaigns and commit more resources to Web site and systems
development than we are able to devote. In addition, the introduction of new
technologies and the expansion of existing technologies may increase competitive
pressures. Increased competition may result in reduced operating margins.
Competitive pressures faced by us could have a material adverse effect on our
business, operating results and financial condition.
If the Internet as a medium for commerce does not develop as expected,
travelbyus.com will not grow as it expects.
Use of the Internet by consumers is at a relatively early stage of
development. Market acceptance of the Internet as a medium for commerce is
subject to a high level of uncertainty. travelbyus.com's ability to
significantly increase revenue will require the development and widespread
acceptance of the Internet as a medium for commerce. The Internet may not be a
successful channel for selling travel services. Additionally, the Internet may
not prove to be a viable commercial marketplace because of inadequate
development for commerce of the necessary infrastructure, such as reliable
network backbones, high speed modems and security procedures. The viability of
the Internet for commerce may prove uncertain due to delays in the development
and adoption of new standards and protocols to handle increased levels of
Internet activity or due to increased government regulation or taxation. In
addition, the nature of the Internet as an electronic marketplace may render it
inherently more competitive than conventional commerce formats.
Regulation of domain names is evolving and changing, and travelbyus.com may not
be able to maintain its domain name.
travelbyus.com currently holds certain Web domain names, including the
www.travelbyus.com domain name. The acquisition and maintenance of domain names
------------------
generally is regulated by governmental agencies and their designees. The
regulation of domain names in the United States and in foreign countries is
expected to change in the near future. Requirements for holding domain names may
be affected. As a result, travelbyus.com may not be able to acquire or maintain
relevant domain names in all countries in which it conducts business. In
addition, travelbyus.com may be unable to prevent third parties from acquiring
domain names that are similar to or otherwise decrease the value of its
trademarks and other proprietary rights. Any such inability would have a
material adverse effect on travelbyus.com's business.
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Evolving government regulation could impose taxes or other burdens on
travelbyus.com's e-commerce business which could increase costs or decrease
demand for travelbyus.com's products.
Increased regulation of the Internet or different applications of existing
laws might slow the growth in the use of the Internet and commercial online
services. For example, U.S. legislation imposing limitations on the ability of
states to tax Internet-based sales was enacted in 1998. The Internet Tax Freedom
Act exempts specific types of sales transactions conducted over the Internet
from multiple or discriminatory state and local taxation through October 21,
2001. If this legislation is not renewed when it terminates, state and local
governments could impose taxes on Internet-based sales. These taxes could
decrease the demand for travelbyus.com's products and services or increase
travelbyus.com's costs of operations.
Software licensed from third parties could become unavailable, obsolete or
incompatible with travelbyus.com's operations, Web site or products and
adversely affect sales.
Software licensed from other parties is incorporated into travelbyus.com's
Web site. travelbyus.com intends to increase the capabilities of its operations
and Web site by licensing additional software applications from other parties.
travelbyus.com depends on the abilities of these other parties to deliver and
support reliable software, as well as enhance their current, and develop new,
applications on a timely and cost-effective basis and respond to emerging
industry standards and other technological changes. A significant interruption
of the availability of any licensed software could adversely affect sales,
unless travelbyus.com can replace this software with other software that
performs similar functions.
Rapid technological changes may render travelbyus.com's Web site technology
obsolete or decrease the attractiveness of travelbyus.com's services to
consumers.
If travelbyus.com fails to continually improve its Web site speed,
functionality and customer service, travelbyus.com could lag behind its
competitors or travelbyus.com's Web site could become obsolete. Competitors may
develop technology to improve the performance of their Web sites or to lower
their costs. travelbyus.com may have to incur substantial expenses to respond to
these developments. If travelbyus.com fails to keep up with technological
changes, it could fail to gain market share or increase revenue.
Security breaches in travelbyus.com's systems could damage its reputation and
cause it to lose customers.
The security of customers' confidential transaction data could be
jeopardized by accidental or intentional acts of Internet users, current and
former employees or others, or by computer viruses. travelbyus.com could lose
customers and be liable for damages caused by these security breaches. Security
breaches experienced by other electronic commerce companies could reduce
consumers' confidence in the travelbyus.com Web site. Although travelbyus.com
plans to continue to use encryption and authentication technology, these
measures can be circumvented. The costs required to continually upgrade security
measures could be prohibitively expensive and could result in delays or
interruption of service.
travelbyus.com's computer and telecommunications systems may suffer system
failures, capacity constraints and business interruptions which could increase
operating costs and cause losses of customers.
The interruption, impaired performance or insufficient capacity of
travelbyus.com's computer and telecommunications systems could lead to
interruptions or delays in service, loss of data or inability to process
reservations. travelbyus.com's systems and operations can be damaged or
interrupted by fire, flood, power loss, telecommunications failure, earthquake,
tornado, employee error and similar events. While travelbyus.com continually
reviews and seeks to upgrade its technical infrastructure and provide for
certain system redundancies and back-up power to limit the likelihood of systems
overload or failure, any damage, failure or delay that causes interruptions in
operations could have a material adverse effect on travelbyus.com's business.
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travelbyus.com's ability to increase revenue depends substantially on the
continued use and growth of the Internet.
Although travelbyus.com also sells its travel services and products through
travel agents and 1-800 call centers, travelbyus.com's ability to significantly
increase revenues will depend on performance of its Web site. In turn, Web site
revenue will depend in large part on whether consumers will purchase
significantly more travel services online than they do currently and whether the
use of the Internet as a medium of commerce continues to grow or grows at the
expected rate. Rapid growth in the use of the Internet and online services is a
recent development which may not continue.
Risks Relating to Exchangeable Shares or Aviation Group Common Stock
The exchangeable shares or Aviation Group's common stock price could fluctuate
significantly, and you may be unable to resell your shares at a profit.
The trading prices for small capitalization companies often fluctuate
significantly. In addition, after the arrangement, Aviation Group may be viewed
by investors as an Internet-related company engaged in electronic commerce.
Market prices and trading volume for stocks of these types of companies have
been volatile. If revenue or earnings are less than expected for any quarter,
the market price of Aviation Group common stock could significantly decline,
even if the decline in consolidated revenue or earnings is not reflective of any
long-term problems with our business.
Aviation Group might fail to maintain a listing for its common stock.
Aviation Group's common stock is presently listed on the Nasdaq SmallCap
Market and the Boston Stock Exchange. Aviation Group intends to apply for
listing on the Nasdaq National Market and the Frankfurt Stock Exchange in
connection with the arrangement. If Aviation Group fails to maintain such
listing, the market value of its common stock would likely decline. As a result,
holders would likely find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the common stock.
Active trading markets for the exchangeable shares and the Aviation Group common
stock may not develop or continue.
While the listings of the Aviation Group common stock and the exchangeable
shares are a condition to the closing of the arrangement, an active and liquid
trading market for Aviation Group common stock or the exchangeable shares may
not develop or be sustained in the future. In addition, we cannot predict the
price at which the Aviation Group common stock or exchangeable shares will
trade.
Exchangeable shares will become taxable Canadian property if they cease to be
listed on a Canadian stock exchange
Any capital gains realized by a shareholder who is not resident in Canada
on a disposition of exchangeable shares that constitute taxable Canadian
property, including on the redemption or exchange of an exchangeable share,
would be taxable under the Income Tax Act (Canada), subject to relief under an
applicable tax treaty. travelbyus.com intends to keep the exchangeable shares
listed only until December 31, 2001, but the exchangeable shares will be
automatically exchanged on January 1, 2003. See "Federal Income Tax
Considerations Relating to the Arrangement-Shareholders Not Resident in Canada."
If delisted, the Aviation Group common stock will cease to be a "qualified
investment" under the Income Tax Act (Canada) for RRSPs, RRIFs and DPSPs.
If the Aviation Group common stock is delisted from Nasdaq and not listed
on certain other stock exchanges, it will cease to be a "qualified investment"
under the Income Tax Act (Canada) for trusts governed by registered retirement
savings plans, registered retirement income funds and deferred profit sharing
plans. In that case, these trusts and the annuitants of these trusts may be
liable to pay penalty taxes.
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The other equity securities of Aviation Group may limit the price growth
potential of Aviation Group common stock.
After completion of the arrangement, assuming all proposals are approved by
shareholders, Aviation Group will have outstanding:
- warrants and options to purchase an aggregate of 35,861,266 shares of
common stock;
- Series A and Series C preferred stock convertible into a total of
6,330,000 shares of common stock, assuming all shares of Series B
preferred stock are exchanged in Aviation Group's exchange offer and a
$6 conversion price.
In addition to limiting the trading price growth potential of Aviation Group
common stock, these securities may impair Aviation Group's ability to raise
needed capital by depressing the price at which it could sell Aviation Group
common stock.
Certain provisions in Aviation Group's charter and bylaws and Texas law make a
takeover of Aviation Group more difficult.
Aviation Group's basic corporate documents and Texas law contain provisions
that might enable its management to resist an attempted take over of Aviation
Group. For example, the members of the board of directors are divided into three
classes who serve staggered three-year terms. Aviation Group's board can also
issue shares of common stock and preferred stock without stockholder approval in
order to dilute and adversely affect various rights of a potential acquiror. The
board could use other provisions to discourage, delay or prevent a change of
control, a change of management or an acquisition of Aviation Group that you may
find beneficial. These provisions could also make it more difficult for
shareholders to elect directors and take other corporate action and could
depress the price that investors are willing to pay for Aviation Group common
stock.
No dividends on Aviation Group common stock may ever be declared.
Dividends will not be paid unless and until they are declared by the
Aviation Group board of directors. Holders of Aviation Group common stock will
have no authority to compel the Aviation Group board to declare dividends.
Aviation Group's board of directors may authorize the issuance of additional
incentive warrants to its officers and directors in the future outside of its
existing stock option plan.
The Aviation Group board has in the past authorized incentive warrants to
be issued to its executive officers and directors and is seeking shareholder
approval in this joint proxy statement/prospectus for the grant of similar
warrants to executive officers and directors. These grants of warrants have been
and are being made outside of Aviation Group's existing stock option plan and,
according to Nasdaq's rules, require shareholder approval. The grant of similar
warrants may be authorized in the future by the board of directors and may
jeopardize the continued listing of Aviation Group's common stock. These kinds
of warrants may also dilute the interests of existing shareholders.
Other Risks Relating to the Business of travelbyus.com
travelbyus.com may not be able to obtain additional capital on reasonable terms,
or at all, to fund additional cash acquisitions, and this inability may prevent
travelbyus.com from taking advantage of opportunities, hurt its business and
negatively impact its shareholders.
travelbyus.com has historically made most of its acquisitions using all
common shares or a combination of cash and common shares. travelbyus.com does
not at this time have any commitments to make additional acquisitions for cash.
Nevertheless, acquisitions may be undertaken that require cash capital to
consummate. If adequate funds are not available on reasonable terms, or at all,
travelbyus.com may be unable to take advantage of future opportunities to make
additional acquisitions for cash. While travelbyus.com believes that it has
sufficient
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capital resources from existing reserves, proposed private placements and on-
going operations to satisfy on-going cash requirements for operations, Web site
costs, planned acquisitions and material commitments, if capital requirements
vary from those currently planned, or losses are greater than expected,
additional financing may be required. If additional funds are raised through the
issuance of debt or equity securities, the percentage ownership of existing
shareholders may be diluted, the securities issued may have rights and
preferences senior to those of shareholders, and the terms of the securities may
impose restrictions on operations.
travelbyus.com may not be able to protect its intellectual property, causing the
value of its services to decline.
travelbyus.com relies on a combination of trademark, service mark,
copyright and trade secret laws to protect its intellectual property. It also
enters into confidentiality agreements with its suppliers, strategic partners
and key employees and consultants. Unauthorized parties may copy or infringe
upon aspects of travelbyus.com methodologies, copyrights, service marks or
trademarks. Existing trade secret, copyright and trademark laws offer only
limited protection. Effective trade secret, copyright and trademark protection
may not be available in every country in which travelbyus.com may offer its
services. Policing unauthorized use of its intellectual property is difficult.
Competitors of travelbyus.com may independently develop similar methodologies
and expertise, and travelbyus.com would have no claim against them. If
travelbyus.com resorts to legal proceedings to enforce its intellectual property
rights, the proceedings could be burdensome and expensive, and the outcome could
be uncertain.
Claims against travelbyus.com alleging intellectual property infringement could
result in litigation costs, monetary damages and the loss of valuable assets.
Infringement claims, even if not true, could result in significant legal
and other costs and may be a distraction to management. If any of these claims
were to prevail, travelbyus.com could be forced to pay damages, comply with
injunctions or stop providing certain of its services. Any of these events could
harm the operating results of travelbyus.com.
If travelbyus.com does not manage its growth effectively, the quality of its
services may suffer.
travelbyus.com is growing rapidly and is subject to related risks,
including capacity constraints and pressure on its internal systems and
controls. The ability of travelbyus.com to manage its growth effectively
requires it to continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. The inability of
travelbyus.com to manage this growth would have a material adverse effect on its
business, operations and prospects.
Because travelbyus.com depends on key personnel, their loss could harm its
business.
travelbyus.com's key personnel are: William Kerby, Jon Snyder, John Fenyes,
Michael London, Gary Saner, and Peter Rooney. travelbyus.com may not be able to
retain the services of these key personnel as no employment contract exists with
Mr. Kerby or Mr. Rooney and only 17 months remain on the employment agreements
with Messrs. Snyder and Fenyes. The employment agreements for the other key
personnel expire in 2003. These personnel would be difficult to replace.
travelbyus.com does not carry any insurance covering the loss of any of these
key personnel.
travelbyus.com may or may not merge with a German Internet company, Travel24.com
AG.
In June 2000, travelbyus.com entered into an agreement with Travel24.com AG
to create a strategic partnership through a cross shareholding arrangement. The
companies intend to negotiate a full merger proposal between them, to be
completed no later than December 31, 2000. The terms of the proposed merger have
not been negotiated. The companies may be unable to reach an agreement as to the
terms of the merger, so the merger may never occur. It is expected that any
merger will require shareholder approval.
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Other Risks Relating to Both Businesses After the Arrangement
Future acquisitions or investments could negatively affect the companies'
operations and financial results or dilute the ownership percentage of
shareholders of Aviation Group after the arrangement.
While there are no current binding agreements not described in this
joint proxy statement/prospectus, both companies expect to review acquisition
and investment prospects that would complement or expand their current services
or otherwise offer growth opportunities. Both companies have limited experience
in acquisition activities and may have to devote substantial time and resources
in order to complete potential acquisitions. Either company may not identify or
complete acquisitions in a timely manner, on a cost-effective basis or at all.
In the event of any future acquisitions, the companies could:
- issue additional stock that would further dilute current shareholders'
percentage ownership;
- incur debt;
- assume unknown or contingent liabilities; or
- experience negative effects on reported operating results from
acquisition-related charges and amortization of acquired technology,
goodwill and other intangibles.
These transactions involve numerous risks that could harm operating results and
cause the companies' stock prices to decline, including:
- potential loss of key employees of acquired organizations;
- problems integrating the acquired business, including its information
systems and personnel;
- unanticipated costs that may harm operating results;
- diversion of management's attention from business concerns;
- adverse effects on existing business relationships with customers; and
- risks associated with entering an industry in which we have no or
limited prior experience.
Any of these risks could harm the businesses and operating results.
Risks Relating to the Business of Aviation Group
Aviation Group's earnings historically have been inadequate to cover fixed
charges and preferred stock dividends and earnings may continue to be
inadequate.
Aviation Group's earnings were inadequate to cover fixed charges and
preferred stock dividends for the fiscal years ended June 30 by $6,736,000 in
2000, $2,766,000 in 1999, $1,838,000 in 1998, $850,000 in 1997 and $37,000 in
1996. We expect earnings to continue to be inadequate through at least fiscal
year 2001 and may continue to be inadequate in subsequent fiscal years.
Aviation Group may be unable to sell its current businesses on acceptable terms
in the near future.
Aviation Group has had discussions with various parties regarding the sale
of its existing businesses. To date, no agreements have been reached on
acceptable terms. Aviation Group intends to continue to investigate the sale of
one or all of these businesses. If Aviation Group is unable to sell these
businesses, a general economic downturn could adversely affect its financial
results. Additionally, Aviation Group would also not have cash proceeds
available to further the business objectives of the combined companies.
30
<PAGE>
Failure to comply with environmental, health and safety regulations could
negatively impact the business of Aviation Group.
The Environmental Protection Agency and state and local regulatory
authorities regulate Aviation Group's operations primarily with respect to:
- the use, storage, handling, transportation and disposal of the
substances used in aircraft stripping and painting operations; and
- disposal of batteries.
Operating permits for facilities are subject to revocation or modification and
may not be renewed. Violations of these operating permits may result in
substantial fines and civil or criminal sanctions. The operation of any facility
that handles chemical substances involves risks of adverse environmental impact
and worker exposure to toxic or harmful substances. Material costs or
liabilities may be incurred to minimize these risks or to rectify any injury or
damage. In addition, significant expenditures may be required to comply with
environmental, health and safety laws and regulations that may be adopted or
imposed in the future.
Failure to comply with Federal Aviation Administration regulations could
negatively impact the financial condition of Aviation Group.
The FAA regulates most of the business operations of Aviation Group. The
painting and stripping business and the battery manufacturing and repair
business must continue to comply with the requirements of the FAA and maintain
the FAA's certifications of Aviation Group's subsidiaries. These certifications
allow the subsidiaries to perform their services as well as other repair and
maintenance services at their facilities. Loss of any necessary FAA
certifications would have a material adverse effect on the operations and
financial condition of Aviation Group and any plans to sell its current
businesses.
31
<PAGE>
CURRENCY
Unless otherwise indicated, all dollar amounts in this joint proxy
statement/prospectus are expressed in United States dollars. For convenience,
certain portions of this joint proxy statement/prospectus contain amounts which
have been converted from Canadian dollars into United States dollars using an
exchange rate of US$1 to Cdn$1.455, based upon exchange rates at March 31, 2000,
unless it is indicated that a different exchange rate was used for a specific
conversion. This exchange rate may not represent the actual exchange rate at
which Canadian dollars could be converted into United States dollars at any
particular time in the future.
The following table shows the rates of exchange for a Canadian dollar per
US$1 in effect at the end of certain periods. The high and low rates of exchange
for the periods and the average rate of exchange for the periods are also shown.
All rates are based on the noon buying rate, certified by the Federal Reserve
Bank of New York for customs purposes in New York City for cable transfers in
Canadian dollars.
<TABLE>
<CAPTION>
Year Ended December 31 (Canadian Dollars) Six Months
--------------------------------------------------- ----------
1999 1998 1997 1996 1995 Ended June 30, 2000
---- ---- ---- ---- ---- -------------------
<S> <C> <C> <C> <C> <C> <C>
High for the period 1.5302 1.5770 1.4398 1.3822 1.4238 1.5085
Low for the period 1.4440 1.4075 1.3357 1.3310 1.3285 1.4350
Average for the period* 1.4827 1.4894 1.3893 1.3644 1.3689 1.4692
End of period 1.4440 1.5375 1.4288 1.3697 1.3655 1.4798
</TABLE>
On September 7, 2000, the noon buying rate in Canadian dollars reported by the
Federal Reserve Bank of New York was US$1 = Cdn$1.4777.
______________
* The average for the period was calculated by averaging the noon buying rate
or noon spot rate, as applicable, on the last business day of each month
during the period.
WHERE YOU CAN FIND MORE INFORMATION
travelbyus.com is a reporting issuer under the Alberta Securities Act, the
British Columbia Securities Act, the Manitoba Securities Act, the Ontario
Securities Act, the Quebec Securities Act and the Saskatchewan Securities Act.
It files financial statements and management information circulars with the
Alberta, British Columbia, Manitoba, Ontario, Quebec and Saskatchewan Securities
Commissions. These commissions maintain a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the commissions. Such reports, proxy and other information
may be found on the Web site address, www.sedar.com. Certain securities of
travelbyus.com are listed on The Toronto Stock Exchange under the symbol "TBU."
Materials filed by travelbyus.com may be inspected at the offices of The Toronto
Stock Exchange at 2 First Canadian Place, The Exchange Tower, Toronto, Ontario
M5X 1J2.
Aviation Group files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. The public reference room at the SEC's office in Washington,
D.C. is located at 450 Fifth Street, N.W. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. Aviation Group's SEC
filings are also available to the public from commercial document retrieval
services and at the Web site maintained by the SEC at "http://www.sec.gov." In
addition, certain securities of Aviation Group are listed on the Nasdaq SmallCap
Market under the symbol "AVGP." Materials filed by Aviation Group may be
inspected at the offices of Nasdaq at 9801 Washingtonian Boulevard, Fifth Floor,
Gaithersburg, Maryland 20878.
Aviation Group has filed a registration statement on Form S-4 to register
with the SEC the shares of Aviation Group common stock to be offered to
travelbyus.com shareholders and shares of Aviation Group Series C preferred
stock to be offered in exchange for its outstanding Series B preferred stock.
This joint proxy statement/prospectus is a part of that registration statement
and constitutes a prospectus of Aviation Group in addition to being a proxy
statement of Aviation Group and travelbyus.com for the special meetings. As
allowed by
32
<PAGE>
SEC rules, this joint proxy statement/prospectus does not contain all the
information contained in the registration statement or in the exhibits to the
registration statement.
Statements contained in this joint proxy statement/prospectus as to the
provisions of the agreements or documents attached as appendices are qualified
in all respects by reference to the appropriate appendix to this joint proxy
statement/prospectus.
FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus contains forward-looking statements
based on our current expectations, assumptions, estimates and projections about
us and our industry. These forward-looking statements involve risks and
uncertainties. These statements include, in particular, statements about our
plans, strategies and prospects under the headings "Questions and Answers About
the Aviation Group/travelbyus.com Arrangement," "Summary," "Proposal No. 1 The
Arrangement," "Unaudited Pro Forma Combined Financial Information,"
"travelbyus.com" and "Aviation Group." You can identify certain forward-looking
statements by our use of forward-looking terminology such as the words "may,"
"will," "believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including but not limited to the factors described in the "Risk Factors" section
and elsewhere in this joint proxy statement/prospectus.
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table summarizes the ratio of Aviation Group's earnings to
fixed charges and preferred stock dividends at the dates set forth below:
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges and preferred ** ** ** ** **
stock dividends
</TABLE>
_____________________
** Earnings were inadequate to cover fixed charges and preferred stock
dividends by $37,000, $850,000, $1,838,000, $2,766,000, $1,523,000 and
$6,736,000 for the fiscal years ended June 30, 1996, 1997, 1998, 1999
and 2000, respectively.
33
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA OF TRAVELBYUS.COM
The selected consolidated financial data below is derived from the
consolidated balance sheets of travelbyus.com (formerly LatinGold Inc.) as of
December 31, 1995, 1996, 1997, 1998, September 30, 1999 and June 30, 2000
(unaudited), and consolidated statements of operations and deficit for the years
ended December 31, 1995, 1996, 1997 and 1998, period from January 1, 1999 to
September 30, 1999 and the nine-month periods ended June 30, 1999 and 2000
(unaudited). The selected consolidated financial data as of June 30, 2000, and
for the nine-month periods ended June 30, 1999 and 2000, is derived from
travelbyus.com's unaudited financial statements prepared using U.S. generally
accepted accounting principles on a basis consistent with the audited
consolidated financial statements and the accompanying notes of travelbyus.com.
All amounts, other than share numbers, are in Canadian dollars. The following
data is qualified in its entirety by, and should be read in conjunction with
"travelbyus.com--Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and the
accompanying notes of travelbyus.com contained elsewhere in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
Period From
Nine Months Nine Months January 1, to
Ended Ended September 30, Year Ended December 31,
-----------------------------------------------------
June 30, 2000 June 30, 1999 1999 1998 1997 1996 1995
------------- ------------- ------------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (5) $ 12,016,173 $ - $ - $ - $ - $ 74,579 $ 166,243
Net Income (Loss) Before
Discontinued Operations
and Extraordinary Item (3) (21,070,196) (654,333) (1,697,820) (238,354) (3,902,312) (130,473) 78,028
Income (Loss) before
Extraordinary Item (2)(6) (20,647,020) (1,400,204) (1,772,215) (1,282,999) (10,780,020) (130,473) 78,028
Net Income (Loss) (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020) (130,473) 78,028
Basic and Fully Diluted Loss
per Common Share From
Continuing Operations (0.32) (0.04) $ (0.05) $ (0.01) $ (0.28) $ (0.01) $ 0.01
Basic and Fully Diluted
Loss Per Share (0.33) (0.04) (0.05) (0.07) (0.69) (0.01) 0.01
Weighted Average Number of
Common Shares Outstanding 65,203,705 31,729,436 31,781,090 19,400,822 15,588,904 11,296,912 8,745,750
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
June 30, 2000 September 30, 1999 1998 1997 1996 1995
------------- ------------------ --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $ 96,148,123 $ 12,465,014 $ 253,629 $ 1,609,404 $ 8,481,599 $ 1,747,110
Total Long Term Debt (1) 6,688,379 6,254,407 - - - 1,345,274
Other Data
Gross Bookings (4) 43,634,174 - - - - -
</TABLE>
_____________
(1) During the period ended September 30, 1999, travelbyus.com raised Cdn$11.95
million from a debenture financing, with attached warrants. The debentures
earn interest at 12.5% per annum, payable semi-annually. The debentures are
to be repaid on September 9, 2001, with travelbyus.com retaining the right
to repay the debentures in full at any time.
(2) During the period ended December 31, 1997, travelbyus.com, formerly
LatinGold Inc., a gold exploration company with operations in Latin
American countries, ceased operations on their Columbia properties and
recognized a loss from discontinued operations of Cdn$6.4 million and, in
addition, recognized a loss on write-off of marketable securities of
Cdn$3.9 million.
(3) During the nine month period ended June 30, 2000, the increased loss is due
to the development of new business opportunities in the travel sector.
(4) Management uses gross bookings as a key indicator of general business
activity, success of promotional efforts, capacity to handle customer
demand and efficiency of reservation agents. Gross bookings is not a
financial measurement in accordance with generally accepted accounting
principles and should not be considered in isolation or as a substitute for
other information prepared in accordance with GAAP, and period-to-period
comparisons of gross bookings are not necessarily meaningful as a measure
of our revenues due to, among other things, changes in commission rates,
and, as with operating results, should not be relied upon as an indication
of future performance.
(5) In December 1999, the SEC issued Staff Accounting Bulletin No. 101-Revenue
Recognition in Financial Statements. The guidelines focus on determining
whether the company in substance acts as principal, agent or broker in a
transaction, whether it takes title to the products, and whether it assumes
the risks and rewards of ownership. travelbyus.com has considered these
recent developments in determining its revenue recognition and reporting
policies and believes its current policies are conservative and consistent
with this guidance. However, it is possible that these evolving standards
may allow or require travelbyus.com to amend its practices for the
recognition and reporting of revenues.
(6) On March 9, 2000, travelbyus.com repaid $2,494,000 of debentures, resulting
in an extraordinary loss on settlement of $1,068,068.
34
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA OF AVIATION GROUP
The selected consolidated financial data below is derived from Aviation
Group's audited consolidated financial statements for the period from inception
on December 5, 1995 through June 30, 1996 and the years ended June 30, 1997,
1998, 1999 and 2000. All amounts are in thousands of U.S. dollars. The following
data is qualified in its entirety by, and should be read in conjunction with,
"Aviation Group--Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and the
accompanying notes of Aviation Group contained elsewhere in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
Year Ended Nine Months
September 30, Ended June 30, Year Ended June 30,
------------- -------------- ------------------------------------------------------
1995 (1) 1996 (1) 1997 1998 1999 2000
------------- -------------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 2,533 $ 3,881 $ 8,096 $ 11,043 $ 15,097 $ 13,381
Income (loss) from
continuing 342 34 (544) (994) (1,796) (6,933)
operations
Income (loss) from
continuing
operations per 0.02 (0.31) (0.32) (0.53) (1.75)
share - basic and
diluted
</TABLE>
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------
1996 1997 1998 1999 2000
-------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $ 4,524 $ 5,111 $ 11,600 $ 13,052 $ 63,744
Long-term obligations 1,350 1,392 919 1,319 738
</TABLE>
__________________
(1) The period prior to December 1995 includes the operations of Aviation
Group's predecessors, Tri-Star Airline Services, Inc. and Tri-Star Aircraft
Services, Inc.
35
<PAGE>
COMPARATIVE MARKET DATA
Aviation Group's shares of common stock are listed on the Nasdaq SmallCap
Market and the Boston Stock Exchange under the ticker symbol "AVGP".
travelbyus.com's common shares are listed on The Toronto Stock Exchange and the
Winnipeg Stock Exchange under the ticker symbol "TBU" and on the Frankfurt Stock
Exchange under the ticker symbol "TVB".
The following table sets forth on a calendar year basis the quarterly high
and low closing sale prices of Aviation Group common stock as reported by Nasdaq
SmallCap Market and travelbyus.com common shares as reported by The Toronto
Stock Exchange and the total trading volume for the indicated periods.
<TABLE>
<CAPTION>
Aviation Group travelbyus.com
Common Stock Common Shares
------------------------------ -----------------------------
(Canadian)
High Low Volume High Low Volume
-------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Calendar 1998
-------------
First Quarter...................... $ 8.375 $ 3.375 1,448,600 $0.16 $0.10 2,048,532
Second Quarter..................... 4.375 3.000 1,449,600 0.15 0.12 1,024,500
Third Quarter...................... 3.875 2.250 1,100,900 0.15 0.07 1,467,600
Fourth Quarter..................... 3.250 1.625 791,300 0.09 0.07 5,266,400
Calendar 1999
-------------
First Quarter...................... 2.938 1.781 635,800 0.34 0.06 4,710,100
Second Quarter..................... 2.250 1.250 641,300 0.73 0.22 26,599,500
Third Quarter...................... 2.500 1.563 637,000 2.24 0.48 30,600,000
Fourth Quarter..................... 2.375 1.125 605,300 2.16 1.35 32,896,000
Calendar 2000
-------------
January............................ 1.625 1.125 77,700 4.20 3.60 8,662,100
February........................... 4.625 1.000 1,152,000 5.00 3.70 8,472,000
March.............................. 4.750 3.625 1,151,800 4.99 3.60 8,311,600
April.............................. 3.438 1.875 373,200 3.95 2.01 3,552,800
May ............................... 3.063 1.875 405,800 3.40 2.20 3,991,584
June............................... 2.500 1.938 183,000 2.65 2.05 2,651,855
July............................... 2.000 1.500 82,200 2.05 1.32 4,302,093
August............................. 2.125 1.250 179,900 1.72 1.50 1,927,416
September.......................... 2.000 1.281 172,400 1.85 1.32 3,270,875
</TABLE>
On February 25, 2000, the last full trading day prior to the public
announcement of the arrangement, Aviation Group common stock closed on the
Nasdaq SmallCap Market at $3 per share and the travelbyus.com common shares
closed on The Toronto Stock Exchange at Cdn$3.90 per share.
On October 5, 2000, the closing trading price for Aviation Group's
common stock as reported by Nasdaq SmallCap Market was $1.219. On October 5,
2000, the closing trading price for travelbyus.com's common shares as reported
by The Toronto Stock Exchange was Cdn$1.15.
As of October 1, 2000, Aviation Group had 61 holders of record of common
stock and seven holders of record of redeemable common stock warrants. As of
October 1, 2000, travelbyus.com had approximately 3,800 holders of record of
common shares.
Because the market price of Aviation Group common stock fluctuates, the
market value of Aviation Group common stock that travelbyus.com shareholders may
receive in the arrangement may increase or decrease prior to and following the
arrangement. Shareholders are urged to obtain current market quotations for
Aviation Group common stock and travelbyus.com common shares.
36
<PAGE>
SELECTED COMPARATIVE PER SHARE DATA
The following table sets forth selected combined historical per share data
for Aviation Group and travelbyus.com, selected unaudited pro forma per share
data for Aviation Group giving effect to the arrangement using the purchase
method of accounting and the equivalent unaudited pro forma combined per share
amounts for travelbyus.com. The pro forma combined data are not necessarily
indicative of actual financial position or future operating results or that
which would have occurred or will occur upon consummation of the arrangement.
The information shown below should be read in conjunction with the
historical consolidated financial statements and notes thereto and the selected
pro forma financial data for the combined company included elsewhere in this
proxy statement.
<TABLE>
<CAPTION>
For the Nine Months Ended or As At June 30, 2000
-----------------------------------------------------------------------
travelbyus.com
Aviation Group travelbyus.com Aviation Group Pro Forma
Historical Historical Pro Forma /(1)/ Equivalent/(2)/
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net loss per common share from
continuing operations........................ $ (1.59) $ (0.22) $ (0.35) $ (1.75)
Book value per common share/(3)/.................. 9.12 0.59 0.95 4.75
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended or As At September 30, 1999
-----------------------------------------------------------------------
travelbyus.com
Aviation Group travelbyus.com Aviation Group Pro Forma
Historical Historical Pro Forma/(1)/ Equivalent/(2)/
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net loss per common share from
continuing operations/(4)/....................... $ (0.53) $ (0.04) $ (0.26) $ (1.30)
Book value per common share/(3)/...................... 1.43 0.09
</TABLE>
____________________
(1) The pro forma loss per share data for Aviation Group is presented as if the
arrangement and certain other recent transactions as described in
"Unaudited Pro Forma Combined Financial Statements" had occurred as of
October 1, 1998.
(2) The equivalent per share amounts of travelbyus.com are calculated by
multiplying pro forma net loss per Aviation Group common share and pro
forma book value per Aviation Group common share (post-arrangement) by the
exchange ratio of 5 to 1, assuming Aviation Group effects a one-for-five
reverse split, as proposed.
(3) Book value per common share was calculated using shareholders' equity as
reflected in the historical and pro forma financial statements divided by
the number of Aviation Group or travelbyus.com common shares outstanding.
The liquidation preference of the Aviation Group preferred stock is ignored
for this purpose. It is intended that the net proceeds from the sale of
certain Aviation Group assets and businesses will be applied to redeem
preferred stock. The historical Aviation Group book value per common share
for September 30, 1999 is as of June 30, 1999.
(4) The historical net loss per common share for Aviation Group for the year
ended September 30, 1999 is based on its net loss for the year ended
June 30, 1999.
Dividend Policies
Aviation Group does not have a fixed dividend policy and has not paid any
cash dividends on its common stock since its inception in 1995. Aviation Group
does not anticipate that it will pay dividends in the foreseeable future. The
payment of dividends in the future will depend upon, among other factors, the
earnings, capital requirements and financial condition of Aviation Group.
travelbyus.com does not have a fixed dividend policy and has not paid any
cash dividends on its common shares since its inception in 1986. travelbyus.com
does not anticipate that it will pay dividends in the foreseeable future. The
payment of dividends in the future will depend upon, among other factors, the
earnings, capital requirements and financial condition of travelbyus.com.
37
<PAGE>
THE SPECIAL MEETINGS
Times, Places and Dates
Aviation Group's special meeting of shareholders will be held at 10:00
a.m., Dallas time, on October __, 2000, at the offices of Aviation Group,
located at 700 North Pearl Street, Suite 2170, Dallas, Texas.
travelbyus.com's special meeting of shareholders will be held at 11:00
a.m., Toronto time, on October __, 2000, at ____________________________,
Toronto, Ontario.
Purposes of the Aviation Group Special Meeting
At the Aviation Group special meeting, Aviation Group shareholders will
vote on a proposal to approve the arrangement pursuant to the terms of the
arrangement agreement between Aviation Group, its Canadian subsidiary and
travelbyus.com. Shareholders will also be asked to vote upon proposals to amend
Aviation Group's articles of incorporation to:
- increase the authorized number of shares of Aviation Group common
stock from 10,000,000 to 250,000,000; and
- change the name of Aviation Group to "travelbyus, Inc."
In addition, Aviation Group shareholders will be asked to ratify:
- the amendment to Aviation Group's 1997 stock option plan;
- warrants issued to three directors of Aviation Group;
- warrants issued to two executive officers of Aviation Group; and
- warrants and preferred stock issued or to be issued in connection with
the acquisition of Global Leisure and the related financing.
Purposes of the travelbyus.com Special Meeting
At the travelbyus.com special meeting, travelbyus.com shareholders will be
asked to vote on a special resolution to approve an arrangement pursuant to the
terms of the arrangement agreement between Aviation Group, its Canadian
subsidiary and travelbyus.com. Shareholders will also be asked to vote upon a
proposal to amend travelbyus.com's stock option plan to increase the number of
common shares that may be issued under the plan from 6,500,000 to 10,000,000,
and to consider such other business as may properly come before the
meeting.
Record Dates; Quorum
Shareholders of Aviation Group at the close of business on September 28,
2000, the record date, are entitled to receive notice of and to vote at the
special meeting of shareholders and at any adjournments or postponements of this
meeting. On the record date, approximately _____ holders of record held
approximately ________ issued and outstanding shares of Aviation Group common
stock. Holders of a majority of shares of Aviation Group common stock entitled
to vote at the special meeting of shareholders, represented in person or by
proxy, will constitute a quorum for the meeting. A quorum is necessary for a
valid special meeting of shareholders.
Shareholders of travelbyus.com at the close of business on September __,
2000, the record date, are entitled to receive notice of and to vote at the
special meeting of shareholders and at any adjournments or postponements of this
meeting, subject to subsequent transferees taking the necessary steps to be
added to the voters list. On the record date, approximately _______ holders of
record held approximately ________ issued and
38
<PAGE>
outstanding common shares of travelbyus.com. Holders of 10% of the outstanding
travelbyus.com common shares, represented in person or by proxy, will constitute
a quorum for the meeting. A quorum is necessary for a valid special meeting of
shareholders.
Voting Rights; Votes Required for Approval
Each holder of shares of Aviation Group common stock as of the record date
will be entitled to cast one vote per share held at the special meeting of
shareholders. In order to pass each proposal to amend Aviation Group's articles
of incorporation, the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Aviation Group common stock represented at the special
meeting, in person or by proxy is required. For each other proposal to pass, the
affirmative vote of the holders of a majority of the shares of Aviation Group
common stock represented at the special meeting, in person or by proxy, is
required.
As of the record date, the directors and executive officers of Aviation
Group were entitled to vote ________ shares, or approximately ________%, of the
outstanding Aviation Group common stock. These directors and executive officers
have indicated their intent to vote in favor of the proposals to be presented at
the Aviation Group special meeting.
Each holder of travelbyus.com common shares as of the record date will be
entitled to cast one vote per share held at the special meeting of shareholders.
For the proposal to approve the arrangement to pass, the affirmative vote of the
holders of at least two-thirds of the outstanding travelbyus.com common shares
voted at the special meeting, in person or by proxy, is required. For the
proposal to approve the amendment to travelbyus.com's stock option plan, the
affirmative vote of the holders of at least a majority of the shares voted at
the special meeting, in person or by proxy, is required.
As of the record date, the directors and executive officers of
travelbyus.com were entitled to vote ________ shares, or ________%, of the
outstanding travelbyus.com common shares. These directors and executive officers
have indicated their intent to vote in favor of the proposals to be presented at
the travelbyus.com special meeting.
How You Can Vote
Attending Meeting or Submitting Proxies
You may vote either by:
- attending the special meeting of shareholders of the company in which
you hold shares and voting your shares in person at the meeting; or
- completing the enclosed proxy card by signing, dating and mailing it
in the enclosed postage pre- paid envelope.
If you sign a written proxy card and return it without instructions, the
person authorized in the proxy will vote your shares for each of the proposals
presented at the special meeting of shareholders.
If your shares are held in "street name," which means the shares are held
in the name of a broker, bank or other record holder, you must either direct the
record holder of your shares as to how to vote your shares or obtain a proxy
from the record holder to vote at the special meeting of shareholders.
Shareholders who submit their proxy cards should not send in any stock
certificates with their proxy cards.
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Revoking Proxies
If you are a shareholder of record, you may revoke your proxy at any time
prior to the time it is voted at the special meeting of shareholders. You may
revoke your proxy:
- by sending written notice, including by telegram or telecopy, to the
Corporate Secretary of the company in which you hold shares;
- by signing and returning a later-dated proxy by mail to the Corporate
Secretary of the company in which you hold shares; or
- by attending the special meeting of shareholders of the company in
which you hold shares and notifying the chair of the meeting of your
revocation of your proxy.
Attendance at the special meeting will not in and of itself constitute a
revocation of a proxy. You should send any written notice of a revocation of a
proxy so as to be delivered no later than the last business day prior to the
special meeting to the following address of the company in which you hold
shares:
travelbyus.com ltd. Aviation Group, Inc.
204-3237 King George Highway 700 North Pearl Street, Suite 2170
South Surrey, British Columbia V4P1B7 Dallas, Texas 75201
Fax: (604) 541-2450 Fax: (214) 922-9242
Attention: Corporate Secretary Attention: Corporate Secretary
In addition, under Ontario law, a travelbyus.com shareholder may also
revoke a proxy by depositing a written revocation executed by the shareholder,
or his or her attorney authorized in writing, with the chairman of the special
meeting on the day of the meeting prior to its commencement.
Abstention
You may specify an abstention on the proposals. If you submit a proxy with
an abstention, you will be treated as present at the special meetings for
purposes of determining the presence or absence of a quorum for the transaction
of all business. An abstention by an Aviation Group shareholder will have the
same effect as a vote against the proposals.
Solicitation of Proxies; Expenses
This joint proxy statement/prospectus is furnished by each of the companies
to its shareholders for the solicitation of proxies on behalf of its management
and board of directors. Each of the companies will bear the cost of solicitation
of its proxies. In addition to solicitation by mail, the directors, officers and
employees of each of the companies may also solicit proxies from its
shareholders by telephone, telecopy, telegram or in person. Arrangements will
also be made with brokerage houses and other custodians, nominees and
fiduciaries to send the proxy materials to beneficial owners. Each of the
companies will, upon request, reimburse those brokerage houses and custodians
for their reasonable expenses in so doing.
Other Matters
The enclosed form of proxy confers discretionary authority upon the persons
named as proxies with respect to any other business properly before the
meetings. At the date of this joint proxy statement/prospectus, management and
the boards of directors of both companies are not aware of any other business to
be brought before the meetings.
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Subsequent Transferees of travelbyus.com Common Shares
A transferee of travelbyus.com common shares acquired after the record date
will be entitled to vote at the travelbyus.com meeting if he or she produces
properly endorsed share certificates for such shares or otherwise establishes
that he or she owns such shares. travelbyus.com must also receive from the
transferee, at least 10 days before the meeting, a demand that his or her name
be included in the list prepared as of the record date of shareholders entitled
to vote at the meeting.
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PROPOSAL NO. 1
THE ARRANGEMENT
General
This section of the joint proxy statement/prospectus describes the material
aspects of the arrangement, the arrangement agreement and related agreements.
You should read the plan of arrangement, the arrangement agreement and the
related agreements attached as appendices to this joint proxy
statement/prospectus.
Background of the Arrangement
In January 1999, the management of Aviation Group began reviewing
opportunities for acquisition of Internet-related companies in the aviation
service business. Its primary goal was to reverse a continuing decline in the
trading prices of Aviation Group's common stock. Aviation Group originally
planned to grow through acquisitions. Because of the decline in Aviation Group's
stock price, management was unable and unwilling to use Aviation Group's stock
as currency to purchase additional businesses.
Because of Aviation Group's limited cash resources, Aviation Group's board
of directors determined in June 1999 to investigate potential merger partners
and the sale of Aviation Group's businesses. The following month, Aviation Group
engaged a small investment banking firm to pursue a merger or sale of its
existing businesses. In August 1999, private discussions began with various
parties regarding the sale of all or part of Aviation Group's businesses.
Aviation Group sold its ground handling division located in Dallas, Texas in
December 1999, and its fueling and repair operations in Casper, Wyoming in
February 2000.
In January 2000, senior management of Aviation Group were introduced to
Doerge Capital Management, a Chicago based investment banking firm. Doerge was
seeking third parties to assist in the reorganization of Global Leisure Travel,
Inc. Doerge contacted travelbyus.com to inquire into the possibility of
travelbyus.com acquiring Global Leisure. In early February 2000, management of
travelbyus.com, Global Leisure and Aviation Group met in Chicago in the offices
of Doerge Capital Management to discuss the potential for a transaction
involving a combination of their businesses. These discussions and due diligence
continued through the end of February 2000.
In late February 2000, management of Aviation Group provided background
information and explained the structure of the proposed combination of the
businesses of travelbyus.com, Global Leisure and Aviation Group to Aviation
Group's board of directors. The Aviation Group board of directors approved the
negotiation and finalization of separate letters of intent and appropriate
acquisition documents, but reserved final approval on the proposed transactions
for a later time. The board of directors also authorized the engagement of an
investment banking firm to render a fairness opinion relating to the acquisition
of travelbyus.com.
By the end of February 2000, management of Global Leisure, travelbyus.com
and Aviation Group completed negotiation of separate letters of intent and a
term sheet relating to the proposed acquisitions of Global Leisure and
travelbyus.com by Aviation Group. The Aviation Group board of directors
subsequently approved the term sheet and authorized Aviation Group to enter into
separate letters of intent for the acquisitions of Global Leisure and
travelbyus.com.
The parties' letters of intent contemplated initially the acquisition of
Global Leisure by Aviation Group and interim funding of Global Leisure's
operations to be provided by travelbyus.com and by Doerge's clients. Definitive
agreements between Aviation Group and travelbyus.com and Aviation Group and
Global Leisure relating to the interim funding of Global Leisure were promptly
negotiated and then executed on March 1, 2000.
Under these agreements, in March 2000, travelbyus.com made a net investment
of $5 million in the purchase of Aviation Group's non-voting Series B preferred
stock. In turn, Aviation Group used these funds to purchase Series B preferred
stock in Global Leisure. These shares provided Aviation Group a controlling
voting position in Global Leisure. Aviation Group appointed its Chief Financial
Officer Richard Morgan and two travelbyus.com officers, William Kerby and Jon
Snyder, as the directors of Global Leisure.
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On March 17, 2000, Aviation Group, Global Leisure and its shareholders and
certain debtholders executed an agreement providing for Aviation Group's
acquisition of the remaining outstanding shares and related party indebtedness
of Global Leisure. At that time, Aviation Group's directors appointed two of
travelbyus.com's executive officers, William Kerby and Jon Snyder, as directors
of Aviation Group, and Mr. Kerby as President and Chief Executive Officer of
Aviation Group. Lee Sanders resigned from these positions but remained as
Chairman of Aviation Group. Mr. Snyder resigned as a director on May 1, 2000.
Another executive officer of travelbyus.com, John Fenyes, was appointed to fill
this director vacancy on May 3, 2000.
During March 2000, due diligence continued, and management of Aviation
Group interviewed various investment banking firms and engaged CIBC World
Markets Corp. to render a fairness opinion with respect to the consideration to
be received by travelbyus.com shareholders pursuant to the arrangement
agreement. An understanding as to the amount of this consideration had
previously been reached between travelbyus.com and Aviation Group in the letter
of intent. CIBC completed its due diligence and review of the proposed
transaction in April 2000. See "-Fairness Opinion of Aviation Group's Financial
Advisor" below.
On May 3, 2000, the Aviation Group board of directors considered the
proposed arrangement with travelbyus.com as negotiated and documented. Senior
management and CIBC made detailed presentations concerning the material aspects
of the proposed transaction. Aviation Group's legal counsel summarized the
material terms of the agreements relating to the arrangement that had been
distributed to the board and discussed various aspects of the directors'
fiduciary duties in connection with the proposed arrangement. CIBC rendered its
oral fairness opinion, followed later by a written opinion, that, as of the date
of the opinion, the consideration to be received by the shareholders of
travelbyus.com pursuant to the arrangement agreement was fair to the
shareholders of Aviation Group from a financial point of view. Following further
discussion, during which the directors asked numerous questions that were
responded to by representatives of senior management and CIBC, the board of
directors of Aviation Group unanimously approved the definitive agreements and
the transactions contemplated by the agreements, and authorized the officers of
Aviation Group to execute and deliver the agreements.
On February 23, 2000, the travelbyus.com board of directors considered the
proposed arrangement with Aviation Group. Senior management retained Wellington
West Capital Inc. as its financial advisor to render an opinion from a financial
point of view of the fairness of the proposed exchange ratio for the arrangement
to the travelbyus.com shareholders. This engagement was subsequently ratified by
the board of directors of travelbyus.com.
Wellington West Capital Inc. completed its due diligence and review of the
proposed transaction and rendered its written opinion dated May 11, 2000 that
the exchange ratio under the arrangement agreement was fair from a financial
point of view to the travelbyus.com shareholders. See "Fairness Opinion of
travelbyus.com's Financial Advisor" below.
On May 3, 2000, Aviation Group and travelbyus.com executed and delivered
the arrangement agreement, a copy of which is incorporated in this joint proxy
statement/prospectus as Appendix A. In that connection, the boards of directors
of the companies adopted the plan of arrangement, a copy of which is
incorporated in this joint proxy statement/prospectus as Appendix B.
On May 10, 2000, Aviation Group completed its acquisition of the remaining
outstanding shares and related party indebtedness of Global Leisure, as
described under "Aviation Group-Business-Acquisition of Global Leisure Travel,
Inc." on page 139.
Effect of the Arrangement
When the arrangement becomes effective, each outstanding travelbyus.com
common share, other than those owned by dissenting shareholders, will be
exchanged for one exchangeable share of travelbyus.com. The rights of
travelbyus.com shareholders as holders of travelbyus.com common shares will
cease and they will have only the right to receive the arrangement
consideration.
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Aviation Group's Canadian subsidiary will become the sole holder of the
common shares of travelbyus.com and an indirect subsidiary of Aviation Group.
The separate existence of travelbyus.com as an Ontario corporation will continue
until there are no longer any outstanding exchangeable shares.
Votes Required for Approval
The affirmative votes of a majority of the votes cast by shareholders of
Aviation Group common stock represented at the special meeting in person or by
proxy are required to approve the proposed arrangement pursuant to the
arrangement agreement.
The affirmative vote of at least two-thirds of the travelbyus.com common
shares voted at the special meeting in person or by proxy are required to
approve the proposed arrangement pursuant to the terms of the arrangement
agreement.
Regulatory Approval
The arrangement requires approval of the Ontario Superior Court of Justice
under the Ontario Business Corporations Act. Prior to the mailing of this joint
proxy statement/prospectus, the court issued an interim order providing for the
calling and holding of the travelbyus.com special meeting of shareholders and
other procedural matters. The granting of the interim order involved no
substantive findings by the court. A copy of the interim order is attached as
Appendix C to this joint proxy statement/prospectus. A hearing to obtain a final
order from the court is set for __________, 2000 at 10:00 a.m., Toronto time. At
this hearing, any travelbyus.com shareholder or other interested party who
wishes to appear and be heard may do so provided that they serve a form of
appearance on travelbyus.com before 4:00 p.m., Toronto time, on ________, 2000.
The court has broad discretion under the Ontario Business Corporations Act
when issuing orders relating to the arrangement. The court may approve the
arrangement either as proposed or as amended in any manner the court directs.
Pursuant to Ontario law, in order for the court to grant the final order, the
court must conclude, among other things, that the arrangement is fair and
reasonable to all affected persons. No material amendment to the arrangement
will be made without obtaining further travelbyus.com shareholder approval.
Effective Time of Arrangement
The arrangement will be effective when the Director under the Ontario
Business Corporations Act issues a certificate of arrangement. If the final
order is obtained on __________, 2000, is satisfactory to travelbyus.com and
Aviation Group, and all other conditions in the arrangement agreement are
satisfied or waived, we expect that the effective date of the arrangement will
be _________________, 2000.
Recommendation of the travelbyus.com Board of Directors
The travelbyus.com board of directors believes that the arrangement is fair
to and in the best interests of travelbyus.com and its shareholders.
Accordingly, the travelbyus.com board of directors has unanimously approved the
arrangement and recommends that the travelbyus.com shareholders vote "FOR"
approval of the arrangement. The approval by shareholders of travelbyus.com of
the arrangement will constitute approval of the special resolution attached as
Appendix F to this joint proxy statement/prospectus.
The decision of the travelbyus.com board of directors to approve the
arrangement and recommend the approval of the arrangement by travelbyus.com
shareholders was based upon various factors. In addition to the factors
mentioned above in "Background of the Arrangement," the board of directors
considered the following material factors:
- the combined entity will be larger, with a greater number of
shareholders and greater equity capitalization than travelbyus.com
alone;
- the combined companies will create an e-commerce-based provider of
travel services of significant size;
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- the arrangement will combine travelbyus.com's integrated e-travel
services operation with Aviation Group's Global Leisure division and
allow the travel products and packages offered by Global Leisure to be
added to the travel products and services currently offered through
travelbyus.com's Web site and traditional distribution channels;
- the board of directors believed that the combination with Aviation
Group should provide travelbyus.com with access to the U.S. capital
markets to support future growth;
- the exchange ratio offered by Aviation Group permits travelbyus.com
shareholders to remain in control of the combined companies through
direct or indirect ownership of more than 90% of Aviation Group's
outstanding common stock;
- the board believed the exchange ratio to be fair to travelbyus.com
shareholders;
- the receipt of a fairness opinion from Wellington West Capital Inc.,
that the exchange ratio for the arrangement is fair, from a financial
point of view, to travelbyus.com shareholders was a condition to the
closing;
- the structure of the transactions and the anticipated costs and time
frame for completing the transaction;
- the need to effect a reverse stock split to achieve the minimum
trading price for listing on the Nasdaq National Market and the
possible adverse effects of the split on market capitalization;
- the possible dilutive effect of the arrangement on earnings per
share;
- the ongoing costs and efforts required to be a publicly reporting
company in the U.S.;
- the potential problems with Aviation Group's existing businesses;
- the trading prices of travelbyus.com common shares and Aviation Group
common stock prior to the date of the arrangement agreement. During
the 30 days prior to the announcement of the transaction, the trading
prices ranged from $1.00 to $1.40 for Aviation Group's common stock
and from Cdn $3.05 to Cdn $4.14 for travelbyus.com's common shares.
These ranges suggested a pre-transaction market capitalization of from
$4 million to $5.6 million for Aviation Group and Cdn $210 million to
Cdn $290 million for travelbyus.com;
- other alternatives that might be available to achieve the same
objectives;
- the arrangement should provide travelbyus.com with additional capital
through the future sale of Aviation Group's existing businesses, other
than Global Leisure;
- the arrangement will further travelbyus.com's goal of becoming a U.S.-
based travel service company;
- the structure of the arrangement, which generally permits Canadian
resident travelbyus.com shareholders who hold their shares as capital
property the opportunity to defer their Canadian federal income tax by
electing to retain their exchangeable shares for a period of time; and
- the terms of the arrangement agreement, which do not prevent a third
party from making a competing offer or proposing a competing
transaction.
Based on the foregoing factors, the board concluded that the arrangement
and exchange ratio were fair and in the best interests of travelbyus.com's
shareholders. The board believes that investors, especially institutional
investors, are more likely to invest in the combined companies due to its larger
market capitalization and the anticipated listing of Aviation Group common stock
on the Nasdaq National Market. The board also believed that the business
combination
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should result in greater liquidity for existing investors and provide investors
increased opportunity for growth of their investment.
The travelbyus.com board of directors did not find it practicable to and
did not attempt to rank or assign relative weights to the foregoing factors.
Individual members of the travelbyus.com board of directors may give different
weights to different factors.
Recommendation of the Aviation Group Board of Directors
The Aviation Group board of directors believes that the arrangement is fair
and in the best interest of Aviation Group and its shareholders. Accordingly,
the Aviation Group board of directors has unanimously approved the arrangement
and recommends that the Aviation Group shareholders vote "FOR" approval of the
arrangement.
The decision of the Aviation Group board of directors to approve the
arrangement and recommend the approval of the arrangement by Aviation Group
shareholders was based upon various factors. In addition to the factors
mentioned above in "Background of the Arrangement," the board of directors
considered the following material factors:
- the combined entity will be larger, with a greater number of
shareholders and greater equity capitalization than Aviation Group
alone;
- the combined companies will create an e-commerce-based provider of
travel services of significant size;
- the travelbyus.com management team plans to create an integrated
online travel services company capable of delivering selection, value,
flexibility and timely service to the traveling public;
- the arrangement will combine travelbyus.com's integrated e-travel
services operation with Aviation Group's Global Leisure division and
allow the travel products and packages offered by Global Leisure to be
added to the travel products and services currently offered through
travelbyus.com's Web site and traditional distribution channels;
- the arrangement will also allow Aviation Group to create a U.S.
publicly traded, online e-commerce platform that encompasses the
necessary elements of a full-service, e-commerce company in the travel
industry and prepares Aviation Group for future growth;
- the board of directors believed that the combined companies should
have greater access than Aviation Group to the capital markets to
support future growth;
- travel services represents the largest e-commerce category on the
Internet in terms of dollar volume and is expected to grow at a rapid
pace;
- the anticipated costs and time frame for completing the
transaction;
- the need to effect a reverse stock split to achieve the minimum
trading price for listing on the Nasdaq National Market and the
possible adverse effects of the split on market capitalization;
- the possible dilutive effect of the arrangement on earnings per
share;
- the risks associated with effecting travelbyus.com's business
plan;
- Aviation Group will obtain the travelbyus.com management team, which
has considerable experience in travel service, Internet technology and
multimedia advertising and marketing;
- the trading prices of travelbyus.com common shares and Aviation Group
common stock prior to the date of the arrangement agreement. During
the 30 days prior to the announcement of the transaction,
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the trading prices ranged from $1.00 to $1.40 for Aviation Group's
common stock and from Cdn $3.05 to Cdn $4.14 for travelbyus.com's
common shares. These ranges suggested a pre-transaction market
capitalization of from $4 million to $5.6 million for Aviation Group
and Cdn $210 million to Cdn $290 million for travelbyus.com;
- the board believed the exchange ratio to be fair to Aviation Group
shareholders;
- the fairness opinion by CIBC World Markets Corp., which concluded that
the consideration to be received by travelbyus.com shareholders
pursuant to the arrangement agreement was fair to the shareholders of
Aviation Group from a financial point of view;
- the combination with travelbyus.com represents the culmination of the
plan made by Aviation Group's board last year to redirect its assets
and capital into an industry with significant growth opportunities;
- the terms of the arrangement agreement, which do not prevent a third
party from making a competing offer or proposing a competing
transaction; and
- the other alternatives available to Aviation Group, including
liquidation of its assets and distribution of the net proceeds to its
shareholders.
Based on the foregoing factors, the board concluded that the arrangement
and exchange ratio are fair and in the best interests of Aviation Group's
shareholders. The board believes that investors, especially institutional
investors, are more likely to invest in the combined companies due to its larger
market capitalization and the anticipated listing of Aviation Group common stock
on the Nasdaq National Market. The board also believes that the business
combination should result in greater liquidity for existing investors and
provide investors increased opportunity for growth of their investment.
The Aviation Group board of directors did not find it practicable to and
did not attempt to rank or assign relative weights to the foregoing factors.
Individual members of the Aviation Group board of directors may give different
weights to different factors.
Fairness Opinion of travelbyus.com's Financial Advisor
At the request of the board of directors of travelbyus.com, Wellington West
Capital Inc. delivered a written opinion to the board of directors of
travelbyus.com, that, based upon and subject to the various assumptions,
limitations and other matters set forth in the opinion, as of such date, the
exchange ratio as contemplated by the arrangement is fair to the shareholders of
travelbyus.com from a financial point of view. No limitations were imposed by
travelbyus.com upon Wellington West Capital Inc. with respect to investigations
made or procedures followed by Wellington West Capital Inc. in rendering its
opinion. A copy of the Wellington West Capital Inc. opinion dated May 11, 2000
is attached as Appendix G to this joint proxy statement/prospectus.
Wellington West Capital Inc. will receive a fee for its services and will
also be reimbursed for all reasonable expenses incurred in connection with its
services under its engagement agreement with travelbyus.com, including the
reasonable fees and disbursements of its counsel and other advisors. In
addition, travelbyus.com has agreed to indemnify Wellington West Capital Inc.,
its affiliates, agents and personnel against certain liabilities and expenses
arising out of its engagement and the transaction to which the engagement
relates. The fees payable to Wellington West Capital Inc. under its engagement
agreement are not contingent in whole or in part on the success of the
arrangement. Wellington West Capital Inc. will be paid a fee of $125,000 plus
warrants to purchase 100,000 common shares exercisable at Cdn $2.50 per share.
If the warrants cannot be issued, an additional cash fee of $100,000 must be
paid.
The full text of Wellington West Capital Inc.'s opinion, which sets out,
among other things, the assumptions made, matters considered, limitations of the
review undertaken and various qualifications in connection with the opinion, is
attached as Appendix G. Wellington West Capital Inc.'s opinion solely addresses
the fairness of the exchange ratio to be received by the holders of
travelbyus.com common shares from a financial point of view and is not intended
to be, and does not constitute, a recommendation to any shareholder as to how
such shareholder should vote with respect to the arrangement or any matters
related thereto. This summary of Wellington West Capital Inc.'s opinion is
qualified in its
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entirety by reference to the full text of Wellington West Capital Inc.'s
opinion. Shareholders of travelbyus.com are urged to read Wellington West
Capital Inc.'s opinion carefully and in its entirety.
In preparing its opinion, Wellington West Capital Inc. considered such
factors and conducted such analyses, investigations, research and testing of
assumptions as were deemed by Wellington West Capital Inc. to be appropriate in
the circumstances. The preparation of a fairness opinion is a complex process
and is not necessarily amenable to partial analysis or summary description.
Wellington West Capital Inc. believes that its analyses must be considered as a
whole and that selecting portions of its analyses or the factors considered by
it, without considering all factors and analyses together, could create an
incomplete or misleading view of the processes and approaches underlying
Wellington West Capital Inc.'s opinion.
In rendering its opinion, Wellington West Capital Inc. relied upon and
assumed, without independent verification or investigation, the accuracy and
completeness of all of the financial and other information provided to and
reviewed by it, including all information provided by travelbyus.com and its
employees, representatives and affiliates. Both travelbyus.com and Aviation
Group provided forecasts of future financial condition and operating results
consisting of annual projections of revenue, earnings before interest, taxes,
depreciation and amortization, net income, capital expenditure, free cash flow
and capital structure (including debt and cash positions) from the year 2000
through 2005. With respect to forecasts of future financial condition and
operating results of Aviation Group provided to Wellington West Capital Inc.,
Wellington West Capital Inc. assumed, at the direction of Aviation Group's
management and without independent verification or investigation, that these
forecasts were reasonably prepared on a basis reflecting the best available
information, estimates and judgment of Aviation Group's management. With respect
to forecasts of future financial condition and operating results of
travelbyus.com provided to Wellington West Capital Inc., Wellington West Capital
Inc. assumed, at the direction of travelbyus.com's management and without
independent verification or investigation, that these forecasts were reasonably
prepared on a basis reflecting the best available information, estimates and
judgment of travelbyus.com's management.
Wellington West Capital Inc. neither made nor obtained any independent
evaluations or appraisals of the assets or the liabilities of travelbyus.com or
its affiliated entities. Wellington West Capital Inc. did not express any
opinion as to the underlying valuation, future performance or long term
viability of travelbyus.com or the combined operation following the completion
of the arrangement or as to the price at which Aviation Group common stock or
the exchangeable shares will trade subsequent to the completion of the
arrangement. Wellington West Capital Inc.'s opinion is necessarily based on the
information that was available to Wellington West Capital Inc. and general
economic, financial and stock market conditions and circumstances as they
existed and could be evaluated by Wellington West Capital Inc. as of the date of
Wellington West Capital Inc.'s opinion.
In arriving at its opinion, Wellington West Capital Inc. reviewed and
relied without further verification upon the following:
1. the arrangement agreement dated May 3, 2000;
2. audited financial statements for Aviation Group for the fiscal years ending
June 30, 1997, 1998 and 1999 and the unaudited financial statements of
Aviation Group for the six months ending December 31, 1999, together with
financial projections prepared by the management of Aviation Group;
3. audited financial statements for travelbyus.com for the fiscal years ending
December 31, 1998 and September 30, 1999 and the unaudited financial
statements of travelbyus.com for the three months ending December 31, 1999,
together with financial projections prepared by the management of
travelbyus.com;
4. offering presentation materials prepared by the management of
travelbyus.com respecting the September 1999 travelbyus.com debenture
offering and the December 1999 travelbyus.com special warrant offering,
together with discussions with management respecting the key assumptions
entailed in the forecasted performance;
5. due diligence and closing documentation relating to travelbyus.com
acquisitions made to date;
6. historical trading prices and trading volumes for Aviation Group and
travelbyus.com;
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7. industry data and information; current and historical trading prices and
volumes for publicly traded shares of comparable companies; comparable
company offering documents, financial statements and investment company
research reports; publicly available commentary and information of a
general nature relating to the aviation and travel and leisure industries;
and information pertaining to general economic conditions; and
8. such other public and confidential information, discussions, investigations
and analyses as Wellington West Capital Inc. considered relevant.
Wellington West Capital Inc. further assumed that:
1. the representations and warranties of the parties contained in the
arrangement agreement are, and all of the information provided to
Wellington West Capital Inc. with respect to the arrangement is, true and
correct;
2. the arrangement will be consummated in accordance with the terms described
in the arrangement agreement and related agreements, without any amendment
to those terms; and
3. the arrangement will be consummated in a manner that complies in all
material respects with all applicable federal, foreign, state, provincial
and local statutes, rules, regulations and other laws.
Wellington West Capital Inc. further relied upon the assurance of
travelbyus.com management that there are no material facts not contained in or
referred to in the information provided to Wellington West Capital Inc. in
connection with Wellington West Capital Inc.'s opinion which could reasonably be
expected to affect materially the assumptions used, the procedures adopted or
the scope of the review undertaken by Wellington West Capital Inc. in providing
its opinion.
The following represents a brief summary of the financial analyses
undertaken by Wellington West Capital Inc. in rendering its opinion.
Discounted Cash Flow Analysis
Wellington West Capital Inc. applied a discounted cash flow model to
forecasted cash flows provided by Aviation Group management, predicated on a
five year holding period and application of a multiple range of 6.0 to 8.0 times
trailing earnings before interest, taxes, depreciation and amortization to
determine the residual value. The resultant income stream was discounted to
present values based on application of a discount rate range of 25% to 30%. The
analysis provided a share price range for the shares of Aviation Group common
stock of $4.29 to $9.57.
Wellington West Capital Inc. applied a discounted cash flow model to
forecasted cash flows provided by travelbyus.com management, predicated on a
five year holding period and application of a multiple range of 7.0 to 9.0 times
trailing earnings before interest, taxes, depreciation and amortization to
determine the residual value. The resultant income stream was discounted to
present values based on application of a discount rate range of 30% to 35%. The
analysis provided a share price range for the travelbyus.com common shares of
$5.71 to $8.51.
Application of varying residual value multiples and discount rates in the
cash flow analysis reflect the inherent differences in the character of the two
businesses, particularly as it relates to scalability, operating margin,
forecast growth rates and operating risk. In particular, the significantly
greater forecasted rates of growth in the aggregate industry size, company
revenue, operating cash flow, earnings before interest, taxes, depreciation and
amortization margin and net income margin of travelbyus.com compared to Aviation
Group, in the opinion of Wellington West Capital Inc., warrant a greater
multiple on the forecasted performance of travelbyus.com than on the forecasted
performance of Aviation Group in determining the residual value of the
respective companies. Conversely, the limited operating history of
travelbyus.com and the early stage development of the online travel industry
relative to the significantly longer operating history of the Aviation Group and
the maturity of the aircraft maintenance industry, justify, in the opinion of
Wellington West Capital Inc., a significantly greater discount rate on the
forecasted cash flows of travelbyus.com relative to the forecasted cash flows of
Aviation Group. This significantly greater discount rate reflects the opinion of
Wellington West Capital Inc. that a greater risk premium on the forecasted cash
flows of travelbyus.com than on the forecasted cash flows of the Aviation Group
is warranted. Accordingly, the analysis entails a significant measure of
qualitative judgment.
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The price ranges determined for Aviation Group and travelbyus.com resulted
in an implied exchange ratio range of .7461 to 1.1248. The exchange ratio of 1.0
x provided for by the arrangement falls within this range.
Comparable Company Analysis
An analysis of the historical and forecast financial performance of
Aviation Group was undertaken with a view to establishing quantitative data to
compare to financial information determined for selected comparable publicly
traded companies conducting similar business and of similar size to Aviation
Group. Comparable companies reviewed were AAR Corporation, Aviation Sales
Company, Aviall Inc., First Aviation Services Inc., HEICO Corporation and
Kellstrom Industries Inc. Company financials were reviewed and compared on the
basis of total enterprise value (market capitalization plus net debt) to
earnings before interest, taxes, depreciation and amortization, both on a last
twelve months basis and an estimated current fiscal year end basis. The review
provided a multiple range of 4.1 to 20.4 times.
As a result of the inherent differences in the comparable companies, a
qualitative assessment of governing valuation factors was applied to determine
an applicable multiple range of 6.0 to 8.0 times total enterprise value/earnings
before interest, taxes, depreciation and amortization (current fiscal year
estimate), producing a resultant share price range for the shares of Aviation
Group common stock of $2.57 to $3.15.
An analysis of the historical and forecast financial performance of
travelbyus.com was undertaken with a view to establishing quantitative data to
compare to financial information determined for selected comparable publicly
traded companies conducting similar business and of similar size to
travelbyus.com. Comparable companies reviewed were Cheap Tickets Inc., Expedia
Inc., Travelocity.com Inc., and Uniglobe.com Inc. Company financials were
reviewed and compared on the basis of total enterprise value (market
capitalization plus net debt) to net revenues, on an estimated current fiscal
year end basis. The review provided a multiple range of 0.3 to 18.0 times.
From a qualitative perspective, Wellington West Capital Inc. views the
ratio of enterprise value to earnings before interest, taxes, depreciation and
amortization to be a superior comparative ratio to enterprise value to revenue
because the ratio of enterprise value to earnings before interest, taxes,
depreciation and amortization incorporates the public market valuation of a
business relative to its ability to generate operating cash flow. However, due
to the early stage of the industry, there exists a lack of meaningful financial
data within the online travel industry peer group which precluded Wellington
West Capital Inc. from using the qualitatively superior ratio of enterprise
value to earnings before interest, taxes, depreciation and amortization on
travelbyus.com. Wellington West Capital Inc. did not feel it was in the
interests of the shareholders of travelbyus.com to default to the ratio of
enterprise value to revenue when developing a comparative valuation of Aviation
Group because adequate market data existed within the peer group of Aviation
Group to conduct a meaningful, qualitatively superior ratio analysis.
As a result of the inherent differences in the comparable companies, a
qualitative assessment of governing valuation factors was applied to determine
an applicable multiple range of 4.0 to 6.0 times current fiscal year estimated
total enterprise value to net revenues, producing a resultant share price range
for the travelbyus.com common shares of $2.31 to $3.39.
The price ranges determined for Aviation Group and travelbyus.com resulted
in an implied exchange ratio range of .929 to 1.11. The exchange ratio of 1.0 x
provided for in the arrangement falls within this range.
Trading Range
Historical trading prices were reviewed for each of Aviation Group and
travelbyus.com for the 90-day period prior to announcement of the transaction
and the period following the transaction until the date of rendering the
opinion. The analysis also included adjustments for exchange rate differentials
between the U.S. dollar and Canadian dollar throughout the analysis period.
Based on the May 10, 2000 closing price, the implied exchange ratio represents a
16.3% premium to the current trading price of travelbyus.com. Trading prices
were also reviewed in the context of the most recent financings completed by
both companies. In the opinion of Wellington West Capital Inc., this exercise is
relevant to establishing the fairness of the exchange ratio because it validates
the secondary, public market pricing of the shares of the company relative to
the pricing of treasury offerings of the companies' securities to institutional
and retail investors which were most recently negotiated and approved by the
directors of the respective companies on behalf of the respective shareholders.
Current trading prices and the exchange ratio are reflective of the expectations
provided to shareholders at
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that time. A review of the trading history of each company combined with a
review of comparable company trading levels also suggests that travelbyus.com
shareholders should anticipate a benefit resulting from a listing on the
American Stock Exchange, the Nasdaq SmallCap Market or the Nasdaq National
Market. The quantitative analysis represented by the discounted cash flow and
comparable company analyses have not factored in this tangible benefit to
travelbyus.com shareholders.
Wellington West Capital Inc. did not assign relative weights to any of the
above analyses that it performed. Accordingly, the ranges of valuations
resulting from any particular analysis described above should not be taken as
Wellington West Capital Inc.'s view of Aviation Group, travelbyus.com or the
combined entity. No company used in the comparable company analyses summarized
above is identical to Aviation Group or travelbyus.com. Any analysis of the
fairness of the exchange ratio to be received by the shareholders of
travelbyus.com from a financial point of view, involves complex considerations
and judgments concerning differences in the potential financial and operating
characteristics of the comparable companies and other factors in relation to the
trading and acquisition values of comparable companies. Analyses based upon
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than those suggested
by these analyses. Wellington West Capital Inc.'s opinion was rendered solely
with respect to the fairness of the exchange ratio to be received by the holders
of travelbyus.com common shares from a financial point of view and does not
constitute an opinion with respect to the fairness of the arrangement as a whole
or any aspect of the arrangement other than the exchange ratio, including
without limiting the generality of the foregoing, the fairness of any tax
consequences to travelbyus.com shareholders. The foregoing summary describes the
material aspects of the analyses performed by Wellington West Capital Inc.
Wellington West Capital Inc. is a full service investment dealer based in
Winnipeg, Manitoba, Canada, and is actively engaged in corporate finance
initiatives involving public and private company debt and equity financings,
mergers and acquisitions, and other financial advisor arrangements, including
business valuations and fairness opinions. In its ordinary course of business,
Wellington West Capital Inc. and its affiliates may actively trade securities of
Aviation Group and travelbyus.com for their own accounts and for the accounts of
their customers and, accordingly, may at any time hold long or short positions
in these securities. Wellington West Capital Inc. may in the future provide
investment banking or other financial advisory services to Aviation Group or
travelbyus.com.
In furnishing its opinion, Wellington West Capital Inc. does not admit that
it is an expert within the meaning of the term "expert" as used in the
Securities Act, nor does it admit that its opinion constitutes a report or
valuation within the meaning of the Securities Act.
Fairness Opinion of Aviation Group's Financial Advisor
CIBC World Markets has acted as financial advisor to Aviation Group in
connection with the arrangement. At the request of Aviation Group, on May 3,
2000, CIBC World Markets delivered an oral opinion to the Aviation Group board,
which was subsequently confirmed by a written opinion, that, based upon and
subject to the various assumptions, limitations and other matters set forth in
the opinion, as of such date, the consideration to be received by the
shareholders of travelbyus.com pursuant to the arrangement agreement is fair to
the stockholders of Aviation Group from a financial point of view. No
limitations were imposed by Aviation Group upon CIBC World Markets with respect
to investigations made or procedures followed by CIBC World Markets in rendering
its opinion.
The full text of the written opinion of CIBC World Markets dated May 3,
2000, which sets forth assumptions made, general procedures followed, matters
considered and limits on the scope of the review undertaken by CIBC World
Markets, is attached as Appendix H and is incorporated herein by reference.
Aviation Group's shareholders are urged to and should read and carefully
consider the entire opinion. The summary set forth herein of the CIBC World
Markets opinion is qualified in its entirety by reference to the full text of
the opinion attached hereto as Appendix H.
CIBC World Markets' opinion addresses only the fairness to the holders of
shares of Aviation Group common stock, from a financial point of view, of the
consideration to be received by the shareholders of travelbyus.com pursuant to
the arrangement agreement and does not constitute a recommendation to any
shareholder as to how the shareholder should vote on any matters relating to the
arrangement.
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CIBC World Markets reviewed the draft of the arrangement agreement that was
distributed on May 2, 2000 in the preparation of its opinion. While Aviation
Group and travelbyus.com had the opportunity to agree to materially add, delete
or alter material and other terms of the arrangement agreement prior to its
execution, the agreement entered into by the parties was substantially similar
to the draft distributed on May 2, 2000.
In connection with rendering its opinion, CIBC World Markets also reviewed:
- Aviation Group's audited financial statements for the fiscal years
ended June 30, 1997, 1998 and 1999;
- unaudited financial statements of Aviation Group for the six months
ended December 31, 1999;
- travelbyus.com's audited financial statements for the fiscal years
ended December 31, 1998 and September 30, 1999;
- unaudited financial statements of travelbyus.com for the three months
ended December 31, 1999;
- financial projections of Aviation Group prepared and supplied by
Aviation Group's management;
- financial projections of travelbyus.com prepared and supplied by
travelbyus.com's management;
- public information concerning Aviation Group and travelbyus.com that
CIBC World Markets deemed relevant;
- historical market prices and trading volume for shares of Aviation
Group common stock and travelbyus.com common shares;
- certain publicly available financial data and historical trading price
information for certain public companies CIBC World Markets deemed
comparable to Aviation Group and travelbyus.com; and
- certain publicly available information for transactions CIBC World
Markets deemed comparable to the arrangement.
CIBC World Markets also performed such analyses and investigations and
reviewed such other information as it deemed appropriate and held discussions
with the senior management of Aviation Group and travelbyus.com with respect to
the business and prospects for future growth of Aviation Group and
travelbyus.com.
In the course of its review, CIBC World Markets, at the direction of the
Aviation Group board of directors, relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information reviewed by it, including all of the financial
and other information reviewed by it that was provided to or discussed with it
by Aviation Group and travelbyus.com and their employees, representatives and
affiliates. With respect to forecasts of future financial condition and
operating results of Aviation Group provided to CIBC World Markets or discussed
with it, CIBC World Markets assumed, at the direction of Aviation Group's
management, without independent verification or investigation, that these
forecasts were reasonably prepared on bases reflecting the best available
information, estimates and judgments of Aviation Group's management. CIBC World
Markets further relied upon the assurance of management of Aviation Group that
they are unaware of any facts that would make the information provided to CIBC
World Markets incomplete in any meaningful respect or misleading in any respect.
With respect to forecasts of future financial condition and operating results of
travelbyus.com provided to CIBC World Markets or discussed with it, CIBC World
Markets assumed, at the direction of Aviation Group's management, without
independent verification or investigation, that such forecasts were reasonably
prepared on bases reflecting the best available information, estimates and
judgments of travelbyus.com's management. CIBC World Markets further relied upon
the assurance of management of travelbyus.com that they are unaware of any facts
that would make the information provided to CIBC World Markets incomplete in any
meaningful respect or misleading in any respect. CIBC World Markets assumed no
responsibility for and expressed no view as to any forecasts or the information
or assumptions on which they are based.
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CIBC World Markets neither made nor was provided with any independent
valuations or appraisals of any assets or liabilities of Aviation Group or
travelbyus.com and made no physical inspection of the properties or facilities
of Aviation Group or travelbyus.com or their affiliated entities. CIBC World
Markets did not express any opinion as to the underlying valuation, future
performance or long term viability of Aviation Group or the combined companies
following the arrangement, or the price at which Aviation Group common stock
will trade subsequent to the arrangement. CIBC World Markets further assumed,
with the consent of Aviation Group's board, that:
- the representations and warranties of the parties contained in the
arrangement agreement are true and correct;
- the arrangement will be consummated in accordance with the terms
described in the arrangement agreement and related agreements, without
any amendment to those terms;
- the arrangement will be accounted for under the purchase method in
accordance with generally accepted accounting principles; and
- the arrangement will be consummated in a manner that complies in all
material respects with all applicable federal, foreign, state and
local statutes, rules, regulations and other laws.
CIBC World Markets' opinion was necessarily also based upon the information
reviewed by it and general economic, financial and stock market conditions and
circumstances as they existed on the date of its opinion.
In connection with rendering its opinion to the Aviation Group board, CIBC
World Markets performed a variety of financial analyses, the material portions
of which are summarized below. The summary set forth below is a complete
description in all material respects of the material portions of the analyses
performed by CIBC World Markets. In addition, CIBC World Markets believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered in those analyses, without considering all
factors and analyses, could create an incomplete view of the analyses and
processes on which CIBC World Markets' opinion was based. Certain of the
financial analyses summarized below include information presented in tabular
format. In order to understand CIBC World Markets' financial analysis fully, the
tables must be read together with the text of each summary. Considering the data
set forth in the tables below without considering the full narrative description
of the financial analyses, including the methodologies and assumptions
underlying the analyses, could create a misleading or incomplete view of CIBC
World Markets' financial analysis.
The preparation of a fairness opinion is a complex process involving
subjective judgments and is not susceptible to partial analysis or summary
description. CIBC World Markets performed certain procedures, including each of
the financial analyses described below, and reviewed with management of Aviation
Group the assumptions on which the analyses were based and other factors,
including historical, current and projected financial results. The forecasts for
Aviation Group and travelbyus.com provided by management of Aviation Group and
travelbyus.com underlying CIBC World Markets' analyses are forward looking, are
not necessarily indicative of future results or values, which may be
significantly more or less favorable than such forecasts, and are subject to
numerous risks and uncertainties. Estimates of values of companies do not
purport to be appraisals or necessarily reflect the prices at which companies or
their securities may be sold.
The following is a brief summary of all material financial analyses
performed by CIBC World Markets in connection with its presentation to the
Aviation Group board on May 3, 2000.
Comparable Companies Analysis
Using publicly available information, CIBC World Markets compared financial
information for Aviation Group, excluding Global Leisure, with similar
information for seven selected companies that provide similar services and are
similar in size to Aviation Group, excluding Global Leisure, and compared
financial information for travelbyus.com with similar information for six
selected companies that provide similar services and are similar in size to
travelbyus.com. In accordance with standard valuation practices, this analysis
was based on projections rather than historical information,
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since projections are viewed as more representative of value in the context of
this type of analysis, especially for growth industries like those involved
here.
The comparable companies used for Aviation Group were:
- AAR Corporation,
- Aviation Sales Company,
- Aviall Inc.,
- Avteam Inc.,
- First Aviation Services, Inc.,
- HEICO Corporation, and
- Kellstrom Industries Inc.
For each of these companies, CIBC World Markets calculated firm value
(market value of equity plus net debt) of the comparable company as a multiple
of its estimated revenues and as a multiple of its estimated earnings before
interest, taxes, depreciation and amortization, or EBITDA, for calendar years
2000 and 2001, which produced the following mean multiples.
Mean
----
Estimated 2000 Revenues.......................... 0.9x
Estimated 2000 EBITDA............................ 8.5x
Estimated 2001 Revenues.......................... 1.0x
Estimated 2001 EBITDA............................ 6.2x
Multiples 20% below and 20% above the mean multiples in the above table
were applied to the estimated revenues and EBITDA for Aviation Group, excluding
Global Leisure, for calendar years 2000 and 2001. The results were then adjusted
to add the value of Global Leisure based on the value of the consideration paid
to acquire it, using the Black-Scholes method to value the consideration paid in
the form of warrants. This produced an implied equity reference range for
Aviation Group's common stock of $2.19 to $3.89 per share.
Because of the inherent differences between the businesses, operations,
financial conditions and prospects of Aviation Group and the businesses,
operations, financial conditions and prospects of the companies included in its
comparable company group, CIBC World Markets believes that it is inappropriate
to rely solely on the quantitative results of the analysis, and accordingly,
also made qualitative judgments concerning differences between the financial and
operating characteristics of Aviation Group and the comparable companies that
would affect the public trading values of Aviation Group and the comparable
companies.
The comparable companies used for travelbyus.com were:
- Cheap Tickets, Inc.,
- Ebookers.com plc,
- Expedia, Inc.,
- Hotel Reservations Networks, Inc.,
- Travelocity.com, Inc., and
- Uniglobe.com Inc.
For each of these companies, CIBC World Markets calculated firm value
(market value of equity plus net debt) of the comparable company as a multiple
of its estimated net revenues for calendar years 2000 and 2001, which produced
the following mean multiples.
Mean
----
Estimated 2000 Net Revenues...................... 7.4x
Estimated 2001 Net Revenues...................... 3.8x
Multiples 20% below and 20% above the mean multiples in the above table
were applied to the estimated net
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revenues for travelbyus.com for calendar years 2000 and 2001 to produce an
implied equity reference range for travelbyus.com common shares of $3.68 to
$5.50 per share.
Because of the inherent differences between the businesses, operations,
financial conditions and prospects of travelbyus.com and the businesses,
operations, financial conditions and prospects of the companies included in its
comparable company group, CIBC World Markets believes that it is inappropriate
to rely solely on the quantitative results of the analysis, and accordingly,
also made qualitative judgments concerning differences between the financial and
operating characteristics of travelbyus.com and the comparable companies that
would affect the public trading values of travelbyus.com and the comparable
companies.
CIBC World Markets calculated a range of exchange ratios based on the
comparable companies analysis. The low per share equity value for travelbyus.com
common shares was divided by the low per share equity value for Aviation Group
common stock. The high per share equity value for travelbyus.com common shares
was divided by the high per share equity value for Aviation Group common stock.
These calculations resulted in an implied exchange ratio reference range of 1.42
to 1.68. CIBC World Markets noted that the ratio of 1.00 being received by
travelbyus.com shareholders in the arrangement is less than the low end of this
range.
Precedent Transactions Analysis
CIBC World Markets compared financial information for Aviation Group,
excluding Global Leisure, to similar information, to the extent publicly
available, from 14 transactions CIBC World Markets believed to be comparable to
the arrangement that occurred within the aviation services market since February
1, 1997. CIBC World Markets also compared financial information for
travelbyus.com to similar information, to the extent publicly available, from 15
transactions CIBC World Markets believed to be comparable to the arrangement
that occurred within the online and offline travel services market since May 1,
1998. These transactions were deemed to be comparable because they reflect
valuations paid in negotiated transactions among companies, both public and
private, that operate in these markets.
The comparable transactions in the aviation services market that were used
in the analysis were:
Target Acquiror
------ --------
Hudson General Corporation GlobeGround GmbH
AMR Combs Signature Flight Support Corp.
Triad International Maintenance Company Aviation Sales Company
SMR Aerospace, Inc. BE Aerospace Inc.
DeCrane Aircraft Holdings Inc. DLJ Merchant Banking Partners
McClain International Heico Corporation
Aerocar Aviation Corp. Kellstrom Industries, Inc.
Aircraft Service International Group Ranger Aviation
Whitehall Corp. Aviation Sales Group
Kratz-Wilde Machine Company Inc. Aviation Sales Company
Aero Support USA Inc. Kellstrom Industries, Inc.
Northwings Accessories, Corp. Heico Corporation
Greenwich Air Services Inc. General Electric Company
UNC Inc. Greenwich Air Services, Inc.
For each of the transactions in the aviation services market, CIBC World
Markets calculated, to the extent possible, the firm value of the acquired
company as a multiple of revenues for the latest 12 months preceding the
announcement of the transaction, as a multiple of revenues for the next fiscal
year following the date of the announcement of the transaction and as a multiple
of EBITDA for the next fiscal year following the date of the announcement of the
transaction. These calculations produced the following mean multiples:
Mean
----
Latest Twelve Months Revenues.................... 1.5x
Next Fiscal Year Revenues........................ 1.2x
Next Fiscal Year EBITDA.......................... 9.6x
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Multiples 20% below and 20% above the mean multiples in the above table
were applied to the estimated revenues for Aviation Group, excluding Global
Leisure, for the twelve months ended June 30, 2000 and to the estimated revenues
and EBITDA for Aviation Group, excluding Global Leisure, for calendar year 2000.
The results were then adjusted to add the value of Global Leisure based on the
value of the consideration paid to acquire it, using the Black- Scholes method
to value the consideration paid in the form of warrants. This produced an
implied equity reference range for Aviation Group's common stock of $2.25 to
$3.98 per share.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the business, operations, financial condition and prospects of Aviation Group
and the businesses, operations, financial conditions and prospects of the
companies included in the aviation services precedent transactions group, CIBC
World Markets believes that a purely quantitative comparable transaction
analysis would not be particularly meaningful in the context of the arrangement.
CIBC World Markets believes that the appropriate use of comparable transaction
analysis in this instance involves qualitative judgments concerning the
differences between the characteristics of these transactions and the
arrangement that affect the acquisition values of the acquired companies and
Aviation Group.
The comparable transactions in the online and offline travel services
market that were used in the analysis were:
Target Acquiror
------ --------
Travel Services International, Inc. Airtours plc
Trip.com (remaining 80%) Galileo International, Inc.
Travelscape.com, Inc. Expedia, Inc.
VacationSpot.com Corp. Expedia, Inc.
REZsolutions, Inc. Pegasus Solutions, Inc.
Preview Travel, Inc. Travelocity, Inc.
Hotel Reservations Network, Inc. USA Networks Inc.
Lifestyle Vacation Incentives, Inc. Travel Services International, Inc.
AHI International Corp. Travel Services International, Inc.
World Express Travel, Inc. Navigant International, Inc.
Arrington Travel Center, Inc. Navigant International, Inc.
Havas Voyages American Express Company
Lexington Services Associates Travel Services International, Inc.
Goodfellow Enterprises, Inc. Travel Services International, Inc.
Landry & Kling, Inc. Travel Services International, Inc.
For each of the transactions in the online and offline travel services
market, CIBC World Markets calculated, to the extent possible, the firm value of
the acquired company as a multiple of net revenues for the latest 12 months
preceding the announcement of the transaction and as a multiple of net revenues
for the next fiscal year following the date of the announcement of the
transaction. These calculations produced the following mean multiples:
Mean
----
Latest Twelve Months Net Revenues................ 11.8x
Next Fiscal Year Net Revenues.................... 4.5x
Multiples 20% below and 20% above the mean multiples in the above table
were applied to the estimated revenues for travelbyus.com for the twelve months
ended June 30, 2000 and for calendar year 2000 to produce an implied equity
reference range for travelbyus.com common shares of $3.33 to $4.97 per share.
Because the reasons for and the circumstances surrounding each of the
transactions analyzed were so diverse and because of the inherent differences in
the business, operations, financial condition and prospects of travelbyus.com
and the businesses, operations, financial conditions and prospects of the
companies included in the online and offline travel services precedent
transactions group, CIBC World Markets believes that a purely quantitative
comparable transaction analysis would not be particularly meaningful in the
context of the arrangement. CIBC World Markets believes that the appropriate use
of comparable transaction analysis in this instance involves qualitative
judgments
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concerning the differences between the characteristics of these transactions and
the arrangement that affect the acquisition values of the acquired companies and
travelbyus.com.
CIBC World Markets calculated a range of exchange ratios based on the
precedent transactions analysis. The low per share equity value for
travelbyus.com common shares was divided by the low per share equity value for
Aviation Group common stock. The high per share equity value for travelbyus.com
common shares was divided by the high per share equity value for Aviation Group
common stock. These calculations resulted in an implied exchange ratio reference
range of 1.25 to 1.48. CIBC World Markets noted that the ratio of 1.00 being
received by travelbyus.com shareholders in the arrangement is less than the low
end of this range.
Discounted Cash Flow Analysis
Using a discounted cash flow analysis based on forecasts provided by
Aviation Group's management, CIBC World Markets estimated the present value of
the future streams of free cash flows that Aviation Group could produce during
the five fiscal years ending June 30, 2005. In this analysis, CIBC World Markets
estimated the terminal value based on multiples of 7.0 to 8.0 times Aviation
Group's estimated EBITDA for the fiscal year ending June 30, 2005. The free cash
flows and terminal values were discounted to present values using discount rates
of 20%, 25% and 30% . After deducting debt, preferred and minority interest
from, and adding back cash to, the present value of free cash flows and terminal
values, this analysis produced an implied equity reference range for Aviation
Group common stock of $7.00 to $14.71 per share.
Using a discounted cash flow analysis based on forecasts provided by
travelbyus.com's management, CIBC World Markets estimated the present value of
the future streams of free cash flows that travelbyus.com could produce during
the five fiscal years ending September 30, 2005. In this analysis, CIBC World
Markets estimated the terminal value based on multiples of 7.0 to 8.0 times
travelbyus.com's estimated EBITDA for the fiscal year ending September 30, 2005.
The free cash flows and terminal values were discounted to present values using
discount rates of 20%, 25% and 30% . After deducting debt, preferred and
minority interest from, and adding back cash to, the present value of free cash
flows and terminal values, this analysis produced an implied equity reference
range for travelbyus.com common shares of $7.69 to $12.51 per share.
CIBC World Markets calculated a range of exchange ratios based on the
discounted cash flow analysis. The low per share equity value for travelbyus.com
common shares was divided by the low per share equity value for Aviation Group
common stock. The high per share equity value for travelbyus.com common shares
was divided by the high per share equity value for Aviation Group common stock.
These calculations resulted in an implied exchange ratio reference range of 0.85
to 1.10. CIBC World Markets noted that the ratio of 1.00 being received by
travelbyus.com shareholders in the arrangement is within this range.
Fifty-Two Week Trading Range
CIBC World Markets reviewed the closing trading prices for Aviation Group
common stock for the fifty-two week period ended April 28, 2000. During this
period, Aviation Group's common stock closed at a low of $0.50 per share and a
high of $10.00 per share.
CIBC World Markets reviewed the closing trading prices for travelbyus.com
common shares for the fifty-two week period ended April 28, 2000. During this
period, travelbyus.com's common shares closed at a low of $0.24 per share and a
high of $3.75 per share.
Pro Forma Analysis of Arrangement:
CIBC World Markets analyzed the pro forma impact of the arrangement on
Aviation Group's projected earnings per share in fiscal years 2001, 2002 and
2003, based on managements' financial projections for Aviation Group and
travelbyus.com. Based on the exchange ratio of 1.00 in the arrangement, this
analysis indicated that the arrangement would be substantially dilutive to
Aviation Group's earnings per share in each of those fiscal years.
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General
The foregoing is a summary of the material portions of the financial
analyses used by CIBC World Markets in connection with rendering its opinion.
The preparation of a fairness opinion is a complex process and involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances,
and therefore is not necessarily susceptible to a partial analysis or summary
description. CIBC World Markets believes that its analyses must be considered as
a whole and that selecting portions of its analyses, without considering the
analyses taken as a whole, would create an incomplete view of the process
underlying the analyses set forth in the opinion. In addition, CIBC World
Markets considered the results of all such analyses and did not assign relative
weights to any of the analyses, so that the ranges of valuations resulting from
any particular analysis described below should not be taken to be CIBC World
Markets' view of Aviation Group or the combined entity. No company used in the
comparable company analyses summarized above is identical to Aviation Group, and
no transaction used in the comparable transaction analysis is identical to the
arrangement. Any analysis of the fairness of the arrangement, from a financial
point of view, to the shareholders of Aviation Group involves complex
considerations and judgments concerning differences in the potential financial
and operating characteristics of the comparable companies and transactions and
other factors in relation to the trading and acquisition values of comparable
companies. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than those suggested by such analyses. As described above, CIBC World
Markets' opinion and the related presentation to the Aviation Group board on May
3, 2000 was one of many factors taken into consideration by the Aviation Group
board in making its determination to approve the arrangement agreement.
CIBC World Markets was selected by Aviation Group because of CIBC World
Markets' qualifications and expertise in the travel services industry and in
providing valuations of businesses and securities in connection with
acquisitions and mergers, underwritings, secondary distributions of securities,
private placements and valuations for other purposes. In its ordinary course of
business, CIBC World Markets and its affiliates may actively trade securities of
Aviation Group and travelbyus.com for their own accounts and for the accounts of
their customers and, accordingly, may at any time hold long or short positions
in such securities. CIBC World Markets may in the future provide investment
banking or other financial advisory services to Aviation Group or
travelbyus.com.
In furnishing its opinion, CIBC World Markets does not admit that it is an
expert within the meaning of the term "expert" as used in the Securities Act,
nor does it admit that its opinion constitutes a report or valuation within the
meaning of the Securities Act.
Pursuant to a letter agreement dated March 23, 2000, which was modified by
a letter agreement dated May 5, 2000, Aviation Group engaged CIBC World Markets
in connection with the arrangement. Pursuant to the terms of this agreement,
Aviation Group paid CIBC World Markets a retainer of $50,000 and agreed to
reimburse CIBC World Markets for certain expenses incurred. Aviation Group also
agreed to pay CIBC World Markets a fee of $350,000 for rendering its fairness
opinion. Aviation Group also agreed to indemnify CIBC World Markets against
certain liabilities, including liabilities under United States federal
securities laws.
Conflicts of Interests of Certain Persons in the Arrangement
The determinations of the boards of Aviation Group and travelbyus.com to
participate in the arrangement may have been affected by conflicts of interest.
In particular:
- If approved by the shareholders of Aviation Group, three directors of
Aviation Group will be able to exercise warrants to purchase an
aggregate of 150,000 shares of Aviation Group common stock at the pre-
transaction trading price $1.50 per share at any time after completion
of the arrangement until February 2005. See "Other Aviation Group
Special Meeting Proposals-Proposal No. 7: Ratification of Warrants to
Purchase 150,000 Shares of Aviation Group Common Stock."
- In February 2000, the boards of directors of Aviation Group and
travelbyus.com made their initial determinations to proceed with the
proposed arrangement. In early March 2000, when travelbyus.com made
its initial $2 million investment in Aviation Group, two executive
officers of travelbyus.com, including William Kerby, were appointed to
serve as travelbyus.com's representatives
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on the board of directors of Aviation Group. Mr. Kerby was also
appointed as President and Chief Executive Officer of Aviation Group
and is also a director, Vice Chairman and Chief Executive Officer of
travelbyus.com. The second travelbyus.com representative resigned in
early May 2000, and John Fenyes was appointed as his replacement. Mr.
Fenyes is also a director and executive officer of travelbyus.com.
Both Mr. Kerby and Mr. Fenyes are also shareholders of travelbyus.com.
They participated in the final approvals of the arrangement by the
boards of directors of Aviation Group and travelbyus.com in early May
2000. At that time, Mr. Kerby and Mr. Fenyes, in their respective
capacities as directors of both companies, owed fiduciary duties to
both Aviation Group and travelbyus.com. These duties represent a
potential conflict of interest for both Mr. Kerby and Mr. Fenyes. In
addition, as to Aviation Group, their shareholdings in travelbyus.com
represented a conflict of interest.
The directors of Aviation Group and travelbyus.com were aware of these interests
and considered them before their final unanimous approval of the arrangement.
Accounting Treatment
The combined companies will account for the transaction under the purchase
method of accounting as if travelbyus.com had acquired Aviation Group and had
recapitalized under the capital structure of Aviation Group. Accordingly, the
combined company will record the assets and liabilities of Aviation Group as
being acquired by travelbyus.com in the arrangement.
Consequences under Securities Laws; Resale of Exchangeable Shares and Aviation
Group Shares
United States. The issuance of exchangeable shares to travelbyus.com
shareholders will not be registered under U.S. federal securities laws. These
shares will be issued in reliance upon the exemption provided by Section
3(a)(10) of the Securities Act of 1933. Section 3(a)(10) exempts securities
issued in exchange for one or more bona fide outstanding securities from the
general requirement of registration where the terms and conditions of the
issuance and exchange of those securities have been approved by any court, after
a hearing upon the fairness of the terms and conditions of the issuance and
exchange at which all persons to whom the securities will be issued have the
right to appear.
In connection with the arrangement, the Ontario Supreme Court of Justice
will conduct a hearing to determine the fairness of the terms and conditions of
the arrangement, including the proposed issuance of securities in exchange for
other outstanding securities. The court entered its interim order on September
__, 2000. If the arrangement is approved by travelbyus.com shareholders, a
hearing on the fairness of the arrangement will be held on October __, 2000 by
the court. See "Proposal No. 1 The Arrangement-Regulatory Approval" on page
44.
Aviation Group has registered under the Securities Act, pursuant to a
registration statement of which this joint proxy statement/prospectus forms a
part, the shares of Aviation Group common stock that may be issued from time to
time upon the exchange of the exchangeable shares and upon the exercise of the
replacement options.
There will be no U.S. federal securities law restrictions upon the resale
or transfer of the shares by shareholders, except for those shareholders who are
considered "affiliates" of travelbyus.com, as that term is defined in Rule 144
and Rule 145 adopted under the Securities Act. Exchangeable shares and shares of
Aviation Group common stock received by those shareholders who are considered to
be "affiliates" of travelbyus.com may be resold without registration only as
provided for by Rule 145 or as otherwise permitted under the Securities Act.
Aviation Group has registered the resale of shares of Aviation Group common
stock to be received by certain "affiliates" of travelbyus.com in exchange for
the exchangeable shares. For a listing of these "affiliates," the number of
shares being offered by them for resale and their plans for distribution, see
"Selling Shareholders" and "Plan of Distribution." Persons who may be considered
to be affiliates of travelbyus.com generally include individuals or entities
that control, are controlled by, or are under common control with travelbyus.com
and may include the executive officers and directors of travelbyus.com as well
as its principal shareholders.
Canada. Aviation Group, its Canadian subsidiary and travelbyus.com will
apply for rulings or orders of certain securities regulatory authorities in
Canada to permit the issuance of the exchangeable shares and the shares of
Aviation Group common stock upon exchange of exchangeable shares and upon
exercise of the replacement options. Application
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will be made to permit resale of those shares in various jurisdictions without
restriction by persons other than "control persons."
Ongoing Canadian Reporting Obligations
After the arrangement is completed, the sole outstanding common share of
travelbyus.com will be owned by a Canadian subsidiary of Aviation Group. As the
issuer of the exchangeable shares, travelbyus.com will continue to have
reporting obligations in certain of the Canadian provinces and territories.
Applications are being or will be made for certain exemptions from statutory
financial and reporting requirements, including exempting insiders of
travelbyus.com from the requirements of filing reports of trades of
travelbyus.com securities. These exemptions depend on Aviation Group continuing
to file with the relevant securities regulatory authorities and sending to
holders of the exchangeable shares copies of certain reports it files with the
SEC. If these exemptions are obtained, holders of exchangeable shares will not
receive separate financial statements of travelbyus.com. Consistent with the
foregoing, travelbyus.com will also apply for an exemption from certain
requirements of the Ontario Business Corporations Act, including those
respecting proxy solicitation, the establishment of an audit committee and
insider reporting.
Fees and Expenses
The combined estimated fees and expenses of Aviation Group and
travelbyus.com in connection with the arrangement, including financial advisors'
fees, filing fees, legal and accounting fees, soliciting dealer fees and
printing and mailing costs, is approximately $3.0 million. These fees and
expenses are reflected in the unaudited pro forma condensed combined financial
statements included elsewhere in this joint proxy statement/prospectus.
Dissenters' Rights
Under applicable law, Aviation Group shareholders do not have rights to
dissent or to appraisal of the value of their shares in connection with the
arrangement.
As indicated in the notice of the travelbyus.com meeting, any holder of
travelbyus.com common shares is entitled to be paid the fair value of all, but
not less than all, of those shares in accordance with section 185 of the Ontario
Business Corporations Act if the shareholder dissents to the arrangement and the
arrangement becomes effective. A holder of travelbyus.com common shares is not
entitled to dissent with respect to the arrangement if he votes any of such
shares in favor of the proposal, and therefore, the special resolution
authorizing the arrangement. The execution or exercise of a proxy does not
constitute a written objection for purposes of the Ontario Business Corporations
Act.
The following summary is not a complete statement of the procedures to be
followed by a dissenting shareholder under the Ontario Business Corporations
Act. The Ontario Business Corporations Act requires adherence to the procedures
and failure to do so may result in the loss of all dissenter's rights.
Accordingly, each shareholder who might desire to exercise dissenter's rights
should carefully consider and comply with the provisions of section 185 and
consult his legal adviser. The full text of section 185 of the Ontario Business
Corporations Act is set out in Appendix I to this joint proxy
statement/prospectus.
A dissenting shareholder who seeks payment of the fair value of his
travelbyus.com common shares is required to send a written objection to the
special resolution to travelbyus.com at or prior to the travelbyus.com meeting.
The address for travelbyus.com for such purpose is travelbyus.com ltd., 204-3237
King George Highway, South Surrey, British Columbia V4P 1B7, Attention:
Secretary. A vote against the proposal, and therefore, the special resolution or
withholding a vote does not constitute a written objection.
Within 10 days after the proposal, and therefore, the special resolution,
is approved by shareholders, travelbyus.com, must so notify the dissenting
shareholder who is then required, within 20 days after receipt of such notice,
or if he does not receive such notice within 20 days after he learns of the
approval of the special resolution, to send to travelbyus.com, a written notice
containing his name and address, the number and class of shares in respect of
which he dissents and a demand for payment of the fair value of such shares and,
within 30 days after sending such written notice, to send travelbyus.com or its
transfer agent, Montreal Trust, the appropriate share certificate or
certificates. If the proposal contemplated in the special resolution becomes
effective, travelbyus.com is required to determine the fair value of the shares
and to make a written offer to pay such amount to the dissenting shareholder. If
such offer is not made or
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not accepted within 50 days after the proposal and the special resolution
becomes effective, travelbyus.com may apply to the court to fix the fair value
of such shares. There is no obligation on travelbyus.com to apply to the court.
If travelbyus.com fails to make such an application, a dissenting shareholder
has the right to so apply within a further 20 days. If an application is made by
either party, the dissenting shareholder will be entitled to be paid the amount
fixed by the court. The fair value of the travelbyus.com common shares as
determined for such purpose by a court will not necessarily be the same as and
could vary significantly from the fair market value of such shares as determined
for the arrangement.
Persons who wish to dissent and who are beneficial owners of travelbyus.com
common shares registered in the name of a broker, custodian, nominee or other
intermediary should be aware that ONLY A REGISTERED SHAREHOLDER IS ENTITLED TO
DISSENT. A shareholder who beneficially owns travelbyus.com common shares but is
not the registered holder thereof, should contact the registered holder for
assistance.
Exchange of travelbyus.com Common Share Certificates
At the effective time of the arrangement, all travelbyus.com common shares,
other than the common share to be owned by Aviation Group's Canadian subsidiary,
will cease to be outstanding and will automatically be canceled and retired.
Each certificate formerly representing travelbyus.com common shares will
represent ownership of the right to receive the exchangeable shares issuable in
the arrangement until those certificates are surrendered to the exchange agent.
The exchange agent for the arrangement is Montreal Trust Company of Canada.
As soon as possible after the completion of the arrangement, the exchange
agent will mail to travelbyus.com shareholders a form of letter of transmittal
and instructions for use in exchanging travelbyus.com common share certificates
for exchangeable share certificates. When a travelbyus.com shareholder
surrenders the holder's share certificates, together with a signed letter of
transmittal, they will receive in exchange certificate(s) representing the whole
exchangeable shares to which they are entitled.
If you are a holder of travelbyus.com common shares and are contemplating
voting against the arrangement and requesting dissenter's rights, please see
"Dissenters' Rights" above for a detailed explanation of the procedures for
doing so.
travelbyus.com shareholders should not send share certificates to the
exchange agent until they receive a letter of transmittal.
The letter of transmittal will also contain an election form where a
travelbyus.com shareholder may elect to exchange the holder's exchangeable
shares for shares of Aviation Group common stock. To obtain shares of Aviation
Group common stock in exchange for exchangeable shares, the travelbyus.com
shareholder must elect on the letter of transmittal to effect the exchange and
return the signed letter of transmittal with the holder's common share
certificates to the exchange agent.
If necessary because of any adjustment, cash will be paid for any
fractional shares of Aviation Group common stock resulting from the exchange.
Upon surrender of the letter of transmittal and the certificate representing
travelbyus.com common shares, the holder will receive in exchange a certificate
representing a whole number of shares of Aviation Group common stock and a check
or the right to receive a check representing the amount of cash in lieu of
fractional shares. No interest will be paid on any cash in lieu of fractional
shares.
Treatment of Outstanding travelbyus.com Stock Options and Warrants
On September 15, 2000, travelbyus.com had outstanding various options and
warrants. These options, when vested, would be exercisable to acquire a total of
approximately 7,491,300 travelbyus.com common shares at prices between Cdn$0.12
and Cdn$4.90 with various expiration dates through January 2005. The warrants
are exercisable to acquire a total of approximately 18,448,050 travelbyus.com
common shares at prices between Cdn$0.68 and Cdn$3.50 with various expiration
dates to December 2002, except that 6,922,300 of the warrants are special
warrants for which the exercise price has already been received by
travelbyus.com.
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After completion of the arrangement, with the consent of the optionholder,
each outstanding travelbyus.com option will be exchanged for a replacement
option issued under Aviation Group's 1997 stock option plan. Each replacement
option will entitle its holder to purchase a number of shares of Aviation Group
common stock equal to the number of common shares of travelbyus.com for which it
was exercisable. The replacement option will provide for an exercise price per
share of Aviation Group common stock equal to the exercise price per share of
the travelbyus.com option immediately prior to the effectiveness of the
arrangement converted from Canadian dollars to U.S. dollars at the noon spot
rate announced by the Federal Reserve on the third business day immediately
preceding the effective date of the arrangement. If the reverse stock split is
approved by Aviation Group shareholders and becomes effective, the number of
shares of Aviation Group common stock and exercise price per share for each
option will be adjusted proportionately. The term to expiration of the option
and the vesting schedule will be unchanged. The replacement option will be
subject to the terms and conditions of Aviation Group's 1997 stock option plan.
See "Proposal No. 6. Adoption of Amendment to Aviation Group's 1997 Stock Option
Plan" for a detailed discussion of the plan.
Each outstanding travelbyus.com warrant will remain outstanding and be
exercisable for exchangeable shares after completion of the arrangement. Each
warrant will continue to entitle its holder to purchase the same number of
exchangeable shares as the number of common shares of travelbyus.com for which
it was exercisable. The exercise price, term to expiration of the warrants and
all other terms and conditions of the warrant will otherwise remain unchanged.
Any document or agreement previously evidencing a travelbyus.com warrant will
remain unchanged.
Representations and Warranties
The arrangement agreement contains representations and warranties by each
of Aviation Group and travelbyus.com relating to, among other things:
- organization, qualification, standing and similar corporate matters
for it and its subsidiaries;
- the authorization, performance and enforceability of the arrangement
agreement;
- the absence of any violation of its governing instruments or
applicable laws and agreements, governmental filings, authorizations
and consents required to complete the arrangement;
- its capital structure, including the number of authorized shares and
the number of shares outstanding;
- the filing of all required securities reports and financial statements
with securities regulators and Nasdaq or The Toronto Stock Exchange;
- the absence of any untrue statements of material facts or omission of
material facts in the documents it filed with securities regulators;
- the fair presentation of its financial condition in the financial
statements it filed with securities regulators;
- the absence of any material adverse changes or events relating to its
business and properties, its capital stock or compensation of any of
its employees since the date of its most recent consolidated balance
sheet filed with the securities regulators;
- its compliance with all material applicable laws and disclosure of all
material litigation;
- that its employee benefit matters, labor matters, tax matters,
intellectual property matters and insurance matters all are as stated
in the arrangement agreement;
- that its material contracts and debt instruments are as stated in the
arrangement agreement, and that it will continue its business
relationships as stated in the arrangement agreement; and
- the absence of any broker or financial advisor fees to be paid by it
in connection with the arrangement, other than those being paid to its
financial advisors.
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Conditions of the Arrangement
Completion of the arrangement is dependent upon the fulfillment of a number
of conditions, including the following material conditions:
- the final approval of the arrangement by the Ontario court;
- the approval of the arrangement by the holders of at least a majority
of the shares of Aviation Group common stock represented at the
Aviation Group special meeting, whether by proxy or in person, and at
least two-thirds of the travelbyus.com common shares voted at the
travelbyus.com special meeting, in person or by proxy;
- the execution by Aviation Group and travelbyus.com of the voting and
exchange trust agreement and the support agreement;
- the shares of Aviation Group common stock offered in exchange for
exchangeable shares having been approved for listing on the American
Stock Exchange or Nasdaq's SmallCap or National Market;
- the exchangeable shares having been approved for listing on The
Toronto Stock Exchange;
- all necessary consents from third parties having been obtained;
- each party having performed its obligations under the arrangement
agreement in all material respects;
- no restraining order, injunction, order or decree of any court having
been issued;
- the delivery of opinions of legal counsel;
- travelbyus.com shareholders holding an aggregate of more than 5% of
the outstanding common shares must not have exercised their dissent
rights;
- the filing by the parties of all documents and instruments required to
be filed with governmental entities;
- the approval by the holders of at least two-thirds of the outstanding
shares of Aviation Group common stock of an amendment to Aviation
Group's articles of incorporation to increase the authorized number of
shares of Aviation Group common stock; and
- no action having been taken by any state or federal government or
agency which would prevent the arrangement or impose material
conditions on the arrangement.
The arrangement agreement permits each of the parties to waive any of the
conditions that are for its benefit. If either party elects to waive any of
these material conditions, this joint proxy statement/prospectus will be amended
or supplemented, as appropriate, and will be recirculated to the affected
shareholders if the waiver occurs prior to approval of the arrangement by the
shareholders. If any of these material conditions to the arrangement is waived
after the parties receive shareholder approval, the shareholders of a party
adversely affected by the waiver will be asked to reapprove the arrangement.
Termination of the Arrangement Agreement and Payment of Fees
The arrangement agreement may be terminated at any time prior to the
effective date in the following circumstances:
- by mutual agreement;
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- by travelbyus.com or Aviation Group, if the transaction has not been
consummated on or prior to November 15, 2000, so long as the
terminating party has not failed to fulfill any material obligation
under the arrangement agreement;
- by travelbyus.com, if Aviation Group materially breaches any
representation, warranty, covenant or agreement set forth in the
arrangement agreement;
- by Aviation Group, if travelbyus.com materially breaches any
representation, warranty, covenant or agreement set forth in the
arrangement agreement;
- by travelbyus.com or Aviation Group, if the required approvals of the
shareholders of both companies are not approved;
- by travelbyus.com, if the board of directors of travelbyus.com
determines that another proposed acquisition constitutes a superior
proposal and travelbyus.com pays a termination fee of $1.0 million;
and
- by Aviation Group, if the board of directors of Aviation Group
determines that another proposed acquisition constitutes a superior
proposal and Aviation Group pays a termination fee of $1.0 million.
Arrangement Mechanics
When the arrangement becomes effective, the following events will occur
in the following order:
- each outstanding travelbyus.com common share, other than shares held
by dissenting shareholders who are ultimately entitled to be paid the
fair value of their shares, will be automatically transferred by the
holder to travelbyus.com in exchange for one fully-paid and non-
assessable exchangeable share. This one-for-one ratio, subject to
adjustment, is sometimes referred to as the exchange ratio;
- each travelbyus.com option will be exchanged for a replacement option
that is exercisable for the same number of shares of Aviation Group
common stock on the same terms, except that if Aviation Group effects
the one-for-five reverse stock split, the exercise price and number of
shares of Aviation Group common stock will be proportionately
adjusted;
- Aviation Group will issue and deposit the special voting share with
the trustee; and
- the Canadian subsidiary of Aviation Group will become the holder of
the sole outstanding common share of travelbyus.com.
Immediately following the effectiveness of the arrangement,
travelbyus.com's outstanding capital stock will consist of approximately 90.8
million exchangeable shares, all of which will be held by the former
travelbyus.com common shareholders, and one common share, which will be held by
the Canadian subsidiary of Aviation Group. Assuming all exchangeable shares are
immediately exchanged for Aviation Group common stock, based on the number of
shares of Aviation Group common stock and travelbyus.com common shares
outstanding as of September 11, 2000, existing travelbyus.com shareholders will
hold approximately 95% of the outstanding Aviation Group common stock.
The exchange ratio is subject to adjustment on any stock split, reverse
stock split, stock dividend, recapitalization or other like change with respect
to travelbyus.com common shares prior to the effectiveness of the arrangement.
In the event the exchange ratio is adjusted, no fractional exchangeable
shares will be delivered in exchange for travelbyus.com common shares pursuant
to the arrangement. Each travelbyus.com shareholder otherwise entitled to a
fractional interest in an exchangeable share will receive a cash payment equal
to the product of the fractional interest, multiplied by the average per share
closing price of travelbyus.com common shares during the 20 consecutive trading
days ending on the third business day prior to the effective date of the
arrangement, without interest.
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See "Exchange of travelbyus.com Common Share Certificates" for procedures
to be followed in order to obtain certificates representing the exchangeable
shares issuable in the arrangement.
Description of Exchangeable Shares
General
The exchangeable shares will be exchangeable for Aviation Group common
stock at any time at the option of the holder. Holders of exchangeable shares
will also be entitled to receive, subject to applicable law, dividends
equivalent to all dividends paid on the Aviation Group common stock, if any.
Cash dividends will be payable in U.S. dollars or the Canadian dollar
equivalent. The record date and payment date for dividends on the exchangeable
shares will be the same as the relevant date for the corresponding dividends on
the Aviation Group common stock. Holders of exchangeable shares will also be
entitled to participate in any liquidation of Aviation Group through the
automatic exchange right.
Retraction of Exchangeable Shares
Holders of exchangeable shares will be entitled at any time to require
travelbyus.com to redeem any or all of their exchangeable shares for a
retraction price per share equal to the exchangeable share consideration. The
term exchangeable share consideration for purposes of a retraction, redemption
or exchange means certificates representing the total number of shares of
Aviation Group common stock required to be delivered, a check for any declared
and unpaid cash dividends and any stock or property constituting any declared
and unpaid non-cash dividends on the exchangeable shares. A holder may retract
the exchangeable shares by presenting the certificates representing the
exchangeable shares to travelbyus.com or the trustee, a retraction request
indicating the number of exchangeable shares the holder desires to retract and
the date on which the holder desires to receive the retraction price, and any
other documents required by the transfer agent.
When a holder requests travelbyus.com to redeem retracted shares, Aviation
Group and the Canadian subsidiary of Aviation Group will have an overriding call
right to purchase all of the retracted shares directly from the holder on the
terms of the holder's retraction request. Upon receipt of a retraction request,
travelbyus.com will immediately notify Aviation Group and the Canadian
subsidiary of Aviation Group. Aviation Group and its Canadian subsidiary must
advise travelbyus.com within two business days as to whether it will exercise
the retraction call right. If Aviation Group and its Canadian subsidiary do not
so advise travelbyus.com, travelbyus.com will notify the holder as soon as
possible that Aviation Group and its Canadian subsidiary will not exercise the
retraction call right. If Aviation Group and its Canadian subsidiary advise
travelbyus.com that they will exercise the retraction call right and the request
to retract is not revoked by the holder, the request to retract will be
considered to be an offer by the holder to sell the retracted shares to Aviation
Group or its Canadian subsidiary. It is expected that Aviation Group or its
Canadian subsidiary will exercise its overriding call right with respect to any
retraction.
A holder may revoke its request to retract in writing at any time prior to
the close of business on the business day preceding the retraction date. If the
request is revoked, the retracted shares will not be purchased by Aviation Group
or its Canadian subsidiary or redeemed by travelbyus.com. If the holder does not
revoke its request to retract, on the retraction date the retracted shares will
be purchased by Aviation Group or its Canadian subsidiary or redeemed by
travelbyus.com. travelbyus.com, Aviation Group, its Canadian subsidiary or the
transfer agent will deliver the aggregate retraction price to the holder.
If solvency law requirements do not permit travelbyus.com to redeem all
retracted shares and neither Aviation Group nor its Canadian subsidiary have
exercised the retraction call right, travelbyus.com will redeem only those
retracted shares tendered by the holder, rounded down to a whole number of
shares, as permitted by law. If the redemption would be contrary to law,
travelbyus.com will redeem the shares on a pro rata basis. On the retraction
date, Aviation Group or its Canadian subsidiary will be required to purchase the
retracted shares not redeemed by travelbyus.com because it would be contrary to
law in accordance with the voting and exchange trust agreement.
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Redemption of Exchangeable Shares
The outstanding exchangeable shares will be redeemed by travelbyus.com for
a redemption price per share equal to the exchangeable share consideration upon
the earliest of any of the following:
- January 1, 2003;
- the date selected by the travelbyus.com board of directors at a time
when less than 15% of the exchangeable shares, other than those held
by Aviation Group or its Canadian subsidiary, are outstanding;
- any sale of a majority of the outstanding voting stock of Aviation
Group or any merger, amalgamation or any proposal to do so if the
board of directors determines redemption is necessary;
- any sale of a majority of the then outstanding voting shares of
travelbyus.com by Aviation Group or any affiliate of Aviation Group to
a third party, any merger, amalgamation or tender offer or any
proposal to do so if the board of directors determines redemption is
necessary;
- the business day before the record date for any meeting or vote of
travelbyus.com shareholders to consider a matter on which the holders
of exchangeable shares would not be entitled to vote; or
- the business day after the holders of exchangeable shares fail to take
action required to approve or disapprove a proposal intended to
maintain the legal and economic equivalence of the exchangeable shares
with the Aviation Group common stock.
When travelbyus.com is required to redeem the exchangeable shares, Aviation
Group or its Canadian subsidiary have an overriding redemption call right to
purchase all of the exchangeable shares outstanding, excluding exchangeable
shares held by Aviation Group and its subsidiaries, for a purchase price per
share equal to the redemption price. Upon the exercise of the redemption call
right, holders will be required to sell their exchangeable shares to Aviation
Group or its Canadian subsidiary and travelbyus.com's redemption obligation will
terminate. It is expected that Aviation Group or its Canadian subsidiary will
exercise its overriding redemption call right with respect to any redemption.
On or before the redemption date, upon the holder's surrender of the
certificates representing the exchangeable shares and proper transfer documents,
travelbyus.com, Aviation Group or its Canadian subsidiary will deliver the
exchangeable share consideration to the holder by mailing it to the holder's
address on file with the transfer agent or by holding the consideration for the
holder to pick up at the registered office of travelbyus.com or the office of
the transfer agent, as specified in the written notice of redemption. In each
case, any amounts required to be withheld for tax may be deducted from the
consideration.
Exchange Put Right
Holders of exchangeable shares have the right at any time to require
Aviation Group or its Canadian subsidiary to purchase all or any part of the
exchangeable shares owned by those holders for an exchange price equal to the
exchangeable share consideration. A holder of exchangeable shares may exercise
this exchange put right by presenting a certificate or certificates to the
trustee representing the number of exchangeable shares the holder desires to
sell, together with a notice indicating the number of exchangeable shares the
holder desires to sell, and any other documents as may be required to effect the
transfer of the exchangeable shares.
Voting Rights
On the effective date of the arrangement, Aviation Group, its Canadian
subsidiary, travelbyus.com and the trustee will enter into the voting and
exchange trust agreement in substantially the form attached to this joint proxy
statement/prospectus as Appendix D. The holders of the exchangeable shares will
not be entitled to vote at any meeting of shareholders of travelbyus.com except
for certain approval rights intended to protect their rights and benefits and
otherwise as required by law. See "The Voting and Exchange Trust Agreement"
below.
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Dividend Rights
Holders of exchangeable shares will be entitled to receive dividends as
follows:
- in the case of a cash dividend declared on the Aviation Group common
stock, an amount in cash for each exchangeable share corresponding to
one-fifth of the cash dividend declared on each share of Aviation
Group common stock;
- in the case of a stock dividend declared on the Aviation Group common
stock to be paid in shares of Aviation Group common stock, the number
of exchangeable shares for each exchangeable share equal to the number
of shares of Aviation Group common stock to be paid on each share of
Aviation Group common stock; or
- in the case of a dividend declared on the Aviation Group common stock
in property other than cash or Aviation Group common stock, the type
and amount of property as is the same as the type and amount of
property declared as a dividend on each share of Aviation Group common
stock, divided by five.
Cash dividends on the exchangeable shares are payable in U.S. dollars or the
Canadian dollar equivalent. The declaration date, record date and payment date
for dividends on the exchangeable shares will be the same as the date for the
corresponding dividends on the Aviation Group common stock.
Liquidation Rights With Respect to travelbyus.com
Holders of exchangeable shares will also be entitled to receive
travelbyus.com assets if travelbyus.com is liquidated, dissolved or wound up,
before distribution of any assets to the holder of the travelbyus.com common
share. If travelbyus.com is liquidated, dissolved or wound up, Aviation Group
and its Canadian subsidiary will have an overriding liquidation call right to
purchase all of the exchangeable shares, other than exchangeable shares held by
Aviation Group or its subsidiaries, from the holders for a purchase price equal
to the exchangeable share consideration described above.
If Aviation Group or its Canadian subsidiary chooses to purchase the
exchangeable shares, it will give written notice to the transfer agent at least
55 days before liquidation. The transfer agent will notify the holders as to
whether Aviation Group or its Canadian subsidiary will exercise this right. If
Aviation Group or its Canadian subsidiary does not choose to purchase the
exchangeable shares, travelbyus.com will pay the exchangeable share
consideration to each holder.
Ranking
The exchangeable shares will rank senior to the travelbyus.com common share
and any other shares ranking junior to the exchangeable shares with respect to
the payment of dividends and the distribution of assets in the event of a
liquidation, dissolution or winding up of travelbyus.com, whether voluntary or
involuntary. There are no authorized or outstanding shares that rank senior to
the exchangeable shares with respect to the payment of dividends and the
distribution of assets upon a liquidation, dissolution or winding up of
travelbyus.com, and no such shares may be authorized without the affirmative
vote or consent of the exchangeable shares, voting separately as a class.
Certain Restrictions
Approval of the holders of the exchangeable shares will be required for
travelbyus.com to:
- pay any dividends on the travelbyus.com common share or any other
shares ranking junior to the exchangeable shares, other than stock
dividends payable in other shares ranking junior to the exchangeable
shares;
- redeem, purchase or make any capital distribution on the
travelbyus.com common share or any other shares ranking junior to the
exchangeable shares with respect to the payment of dividends or on any
liquidation distribution; or
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- redeem or purchase any other shares of travelbyus.com ranking equally
with the exchangeable shares with respect to the payment of dividends
or on any liquidation distribution.
These restrictions will not apply at any time when the dividends on the
outstanding exchangeable shares corresponding to dividends declared and paid on
the Aviation Group common stock have been declared and paid in full.
Amendment of Terms of Exchangeable Shares
The rights, privileges, restrictions and conditions attaching to the
exchangeable shares may be amended only with the approval of a majority of the
votes cast by holders of exchangeable shares at a duly called meeting at which a
quorum is present.
Covenants
The parties to the arrangement agreement made a number of covenants or
promises to each other. Each of travelbyus.com and Aviation Group covenanted to,
among other things:
- carry on its business in the ordinary course consistent with prior
practice and use reasonable efforts to preserve intact its present
business organization and keep available the services of its
directors, officers, employees, consultants and others having business
dealings with it;
- not amend its articles of incorporation or bylaws or merge,
consolidate, amalgamate or otherwise combine with any person;
- not declare or pay any dividend or distribution, issue or sell any
shares of capital stock, except upon the exercise of outstanding
securities, or acquire, directly or indirectly, any shares of its
capital stock;
- not amend any outstanding options or warrants;
- not acquire or license any assets that are material, individually or
in the aggregate, to it except in the ordinary course of business
consistent with prior practice;
- not make aggregate capital expenditures in excess of $50,000 for
Aviation Group or $250,000 for travelbyus.com other than transactions
by travelbyus.com in the ordinary course of business or in connection
with acquisitions, joint ventures or strategic alliance transactions
entered into by travelbyus.com in the ordinary course of business;
- not incur any indebtedness for borrowed money or any other
indebtedness except in the ordinary course of business;
- not sell, lease, license, encumber or otherwise dispose of any of its
property or assets, except in the ordinary course of business
consistent with prior practice;
- not enter into or amend any contract or engage in any transaction not
in the ordinary course of business consistent with past practice
except with respect to acquisitions, joint ventures or strategic
alliance transactions entered into by travelbyus.com in the ordinary
course of business;
- not take any action that would adversely affect its ability to
complete the arrangement;
- take all actions necessary to convene the meetings to vote on the
approval of the arrangement;
- give the representatives of the other party reasonable access to
information concerning its business; and
- notify the other parties of any material adverse change in its
business, properties, assets, liabilities or results of operations.
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Both travelbyus.com and Aviation Group have agreed not to solicit any
proposal to be acquired by another party. However, if another party does propose
to acquire either company and the board of directors of the company that
received an acquisition proposal determines in good faith that it is a superior
proposal, the board of directors that received the acquisition proposal can
terminate the arrangement agreement in order to accept the superior proposal. In
that event, however, the terminating company must pay the other company a cash
termination fee of $1.0 million. A proposal will be considered superior if the
board of directors determines that it is more favorable from a financial point
of view to its shareholders than the arrangement, is capable of being financed
by the parties making the acquisition proposal and, if accepted, would be more
likely than not to be consummated.
Management and Board of Directors After the Arrangement
Following completion of the arrangement, the board of directors of Aviation
Group will consist of all of the members of the travelbyus.com board of
directors and Lee Sanders, who will remain as a director. The officers of
Aviation Group will be the current officers of travelbyus.com, and Richard
Morgan and Lee Sanders will remain as Vice Presidents of Aviation Group. For a
detailed description of the travelbyus.com management, please see
"travelbyus.com--Directors and Executive Officers" on page 131.
Listings After the Arrangement
Exchangeable Shares
travelbyus.com intends to apply for the listing of the exchangeable shares
on The Toronto Stock Exchange under the symbol "TBU". The approval of this
listing will be under the terms of the exchangeable shares, subject to the
satisfaction of its customary requirements, including the distribution of
exchangeable shares to a minimum number of public shareholders. There will be no
obligation to maintain this listing after December 31, 2001. We do not currently
intend to list the exchangeable shares on any other stock exchange in Canada or
the United States.
Aviation Group Common Stock
The Aviation Group common stock is currently listed on the Nasdaq SmallCap
Market and on the Boston Stock Exchange under the symbol "AVGP". Aviation Group
intends to apply for listing of its common stock on the Nasdaq National Market
and on the Frankfurt Stock Exchange.
The Voting And Exchange Agreement
The form of voting and exchange trust agreement that will be entered into
by Aviation Group, its Canadian subsidiary, travelbyus.com and the trustee on
completion of the arrangement is attached to this joint proxy statement/
prospectus as Appendix D. Pursuant to the voting and exchange trust agreement,
Aviation Group will issue a voting share to the trustee for the benefit of the
holders of the exchangeable shares, other than Aviation Group and its
subsidiaries. The voting share will have a number of votes, which may be cast at
any meeting at which Aviation Group shareholders are entitled to vote. The votes
will be equal to the number of outstanding exchangeable shares, other than
exchangeable shares held by Aviation Group and its subsidiaries, divided by
five. Each holder of an exchangeable share on the record date for any meeting at
which Aviation Group shareholders are entitled to vote will be entitled to
instruct the trustee to exercise one of the votes attached to the voting share
for each exchangeable share held by that holder. If a holder does not instruct
the trustee how to vote, the trustee will not exercise those votes. A holder may
instruct the trustee to give the holder a proxy entitling the holder to vote the
voting shares directly at the relevant meeting. If the trustee has not been
instructed to sign and deliver a proxy to the holder, the trustee will exercise
its voting rights for that holder's shares either by proxy or in person.
The trustee will send to the holders of the exchangeable shares the notice
of the meeting at which the Aviation Group shareholders are entitled to vote on
the same day as Aviation Group sends the notice and materials to the Aviation
Group shareholders. Additionally, the trustee will send the related meeting
materials and a statement describing how the holder may instruct the trustee to
exercise the votes attaching to the voting share. The trustee will also send to
the holders of exchangeable shares copies of all information statements, interim
and annual financial statements, reports and other materials sent by Aviation
Group to the Aviation Group shareholders. If materials such as dissident proxy
circulars and
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tender and exchange offer circulars sent by third parties to Aviation Group
shareholders are provided to the trustee by Aviation Group, the trustee will
send those materials to the holders of exchangeable shares as soon as possible.
All rights of a holder of exchangeable shares to exercise votes attached to
the voting share will cease upon the exchange of the holders of exchangeable
shares for shares of Aviation Group common stock. This includes rights by
redemption, retraction or liquidation, through the exercise of the related call
rights or through the exercise of the exchange put right of the shares
exchangeable for Aviation Group common stock.
The voting and exchange trust agreement contains provisions that require
the trustee to effect an exchange of the exchangeable shares for Aviation Group
common stock upon request of the holder and other provisions that parallel the
rights and terms of the exchangeable shares.
The Support Agreement
The form of support agreement that will be entered into by Aviation Group,
its Canadian subsidiary and travelbyus.com on completion of the arrangement is
attached to this joint proxy statement/prospectus as Appendix E. Pursuant to the
support agreement, so long as any exchangeable shares, other than exchangeable
shares held by Aviation Group or its subsidiaries, remain outstanding:
- Aviation Group will not declare or pay dividends on the Aviation Group
common stock unless travelbyus.com is able to declare and pay and
simultaneously declares or pays an equivalent dividend on the
exchangeable shares;
- Aviation Group will advise travelbyus.com in advance of the
declaration of any dividend on the Aviation Group common stock. The
declaration date, record date and payment date for dividends on the
exchangeable shares will be the same as that for the corresponding
dividend on the Aviation Group common stock;
- the record date for any dividend declared on the Aviation Group common
stock will not be less than ten business days after the declaration
date of the dividend;
- Aviation Group will pay to the holders of the exchangeable shares the
applicable travelbyus.com liquidation amount, retraction price and
redemption price in the event of a liquidation, dissolution or winding
up of travelbyus.com or upon a retraction request by a holder of
exchangeable shares or a redemption of exchangeable shares by
travelbyus.com, including the delivery of Aviation Group common stock;
and
- Aviation Group will perform its obligations arising upon the exercise
by it of the call rights, the exercise by a holder of exchangeable
shares of the holder's exchange right or exchange put right, or the
automatic exchange of a holder's exchangeable shares, including the
delivery of Aviation Group common stock.
The support agreement and the exchangeable share provisions provide that,
without the prior approval of travelbyus.com and the holders of the exchangeable
shares, Aviation Group will not issue or distribute any of the following to all
or substantially all the holders of shares of Aviation Group common stock unless
the same or an economically equivalent distribution on the exchangeable shares
is made at the same time:
- additional Aviation Group common stock;
- securities exchangeable for, convertible into, or carrying rights to
acquire Aviation Group common stock; or
- rights to subscribe for Aviation Group common stock or other assets.
The support agreement and the exchangeable share provisions also provide that,
without the prior approval of travelbyus.com and the holders of the exchangeable
shares, Aviation Group will not subdivide, combine, reclassify or
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otherwise change the terms of the Aviation Group common stock, unless the same
or an economically equivalent change to the exchangeable shares, or in the
rights of their holders, is made at the same time. The board of directors of
travelbyus.com will have the power, in its sole discretion, to determine in good
faith whether any corresponding distribution on, or change to, the exchangeable
shares is the same as, or economically equivalent to, any proposed distribution
on or change to the Aviation Group common stock. If a tender offer is proposed
or a share exchange offer, issuer bid, take-over bid or similar transaction with
respect to the Aviation Group common stock takes place which is recommended by
the board of directors of Aviation Group and the exchangeable shares are not
redeemed by travelbyus.com or purchased by the redemption call right of Aviation
Group's Canadian subsidiary, Aviation Group will use reasonable efforts to
expeditiously and in good faith take all actions and do all things necessary to
enable holders of exchangeable shares to participate in the transaction to the
same extent and on an economically equivalent basis as the holders of Aviation
Group common stock.
travelbyus.com is required to notify Aviation Group:
- if travelbyus.com is liquidated, dissolved or wound up or threatened
with a claim or proceeding for that purpose;
- if travelbyus.com receives a retraction request from a holder of
exchangeable shares;
- if the board of directors of travelbyus.com determines to take action
which would require a vote of the holders of exchangeable shares;
- at least 130 days prior to any automatic redemption date; and
- of the issuance by travelbyus.com of any exchangeable share or right
to acquire any exchangeable share.
Aviation Group agreed in the support agreement not to exercise any voting
rights attached to the exchangeable shares owned by it or any of its
subsidiaries on any matter considered at meetings of holders of exchangeable
shares. Aviation Group has also agreed to use its reasonable efforts to enable
travelbyus.com's exchangeable shares to remain listed on The Toronto Stock
Exchange until December 31, 2001.
The support agreement may not be amended without the approval of the
holders of the exchangeable shares unless it is amended to:
- add covenants to protect the holders of the exchangeable shares;
- make necessary amendments not inconsistent with the support agreement;
or
- cure ambiguities, inconsistencies or clerical errors.
The foregoing amendments may not be effected unless the boards of directors of
all parties to the support agreement have concluded that these amendments are
not prejudicial to the interests of the holders of the exchangeable shares.
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FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE ARRANGEMENT
Canadian Federal Income Tax Considerations
The following is a summary of the principal Canadian federal income tax
considerations generally applicable to travelbyus.com shareholders in connection
with the arrangement who, for purposes of the Income Tax Act (Canada), hold
their travelbyus.com common shares and will hold their exchangeable shares and
shares of Aviation Group common stock as capital property, deal at arm's length
with travelbyus.com, Aviation Group and its Canadian subsidiary and are not
affiliated with travelbyus.com, Aviation Group or its Canadian subsidiary. This
summary does not apply to a holder with respect to whom Aviation Group is or
will be a foreign affiliate within the meaning of the Canadian Tax Act.
travelbyus.com common shares will generally be considered to be capital
property to a travelbyus.com shareholder unless they are held in the course of
carrying on a business, in an adventure in the nature of trade or as "mark-to-
market property" for purposes of the Income Tax Act (Canada). travelbyus.com
shareholders who are Canadian residents and whose travelbyus.com common shares
might not otherwise qualify as capital property may be entitled to obtain
qualification by making the irrevocable election provided by subsection 39(4) of
the Income Tax Act (Canada). travelbyus.com shareholders who do not hold their
shares as capital property should consult their own tax advisors regarding their
particular circumstances and, in the case of certain "financial institutions,"
as defined in Section 142.2 of the Income Tax Act (Canada), the potential
application to them of the "mark-to-market" rules in the Income Tax Act
(Canada), as the following summary does not apply to these shareholders.
This summary is based on the current provisions of the Income Tax Act
(Canada), the Regulations thereunder, the current provisions of the Canada-
United States Income Tax Convention of 1980, the "Tax Treaty," and counsel's
understanding of the current administrative practices of the Canada Customs and
Revenue Agency. This summary takes into account the proposed amendments to the
Income Tax Act (Canada) and regulations publicly announced by the Canadian
Minister of Finance prior to the date of this joint proxy statement/prospectus
and assumes that all of these proposed amendments will be enacted in their
present form. However, the proposed amendments may not be enacted in the
proposed form or at all.
Except for the proposed amendments, this summary does not take into account
or anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. No
advance tax ruling has been sought or obtained from the Canada Customs and
Revenue Agency to confirm the tax consequences of any of the transactions
described in this joint proxy statement/prospectus.
While this summary is intended to address the principal Canadian federal
income tax considerations, it is of a general nature only and is not intended to
be, nor should it be construed to be, legal, business or tax advice to any
particular travelbyus.com shareholder. Shareholders of travelbyus.com should
consult their own tax advisors with respect to their particular circumstances.
For purposes of the Income Tax Act (Canada), all amounts must be expressed
in Canadian dollars, including dividends, adjusted cost base and proceeds of
disposition. Amounts expressed in United States dollars must be converted into
Canadian dollars based on the prevailing United States dollar exchange rate at
the time the amounts arise.
travelbyus.com Shareholders Resident in Canada
The following portion of the summary applies to travelbyus.com shareholders
who, for purposes of the Income Tax Act (Canada) and the Tax Treaty, are
resident or deemed to be resident in Canada.
Exchange of travelbyus.com Common Shares for Exchangeable Shares
The arrangement is structured as a reorganization of the capital of
travelbyus.com for purposes of the Income Tax Act (Canada). Accordingly, so long
as at the effective time of the arrangement the aggregate adjusted cost base of
a holder's travelbyus.com common shares exceeds the fair market value of the
rights acquired by the holder under the support agreement and the voting and
exchange trust agreement, collectively the "ancillary rights," in connection
with the exchange and net of any reasonable costs of disposition, the holder
will not realize a capital gain for purposes of the
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Income Tax Act (Canada) on the exchange. To the extent that the fair market
value of the ancillary rights received by a holder, net of any reasonable costs
of disposition, exceeds the aggregate adjusted cost base of the holder's
travelbyus.com common shares, the holder will realize a capital gain for
purposes of the Income Tax Act (Canada). The taxation of capital gains and
losses is described below.
On the exchange, a travelbyus.com shareholder will be deemed to have
acquired:
- exchangeable shares for a cost equal to the amount, if any, by which
the adjusted cost base to such holder of the travelbyus.com common
shares exceeds the fair market value of the ancillary rights; and
- the ancillary rights for a cost equal to their fair market value.
A holder of travelbyus.com common stock will be required to determine the
fair market value of the ancillary rights on a reasonable basis for purposes of
the Income Tax Act (Canada). travelbyus.com believes that the ancillary rights
have only nominal value. Therefore, a holder of travelbyus.com common shares
should not realize a capital gain on the exchange of travelbyus.com common
shares for exchangeable shares. This determination of value, however, is not
binding on the Canada Customs and Revenue Agency.
Call Rights
travelbyus.com believes that the call rights granted to Aviation Group and
its Canadian subsidiary in connection with the exchange of travelbyus.com common
shares for exchangeable shares have nominal value. On this basis, no
travelbyus.com shareholder should realize a gain at the time that any of such
rights are granted to Aviation Group and its Canadian subsidiary. This
determination of value, however, is not binding on the Canada Customs and
Revenue Agency.
Dividends
Exchangeable Shares. In the case of a travelbyus.com shareholder who is an
individual, dividends received or deemed to be received on the exchangeable
shares will be included in computing the shareholder's income, and will be
subject to the gross-up and dividend tax credit rules normally applicable to
taxable dividends received from taxable Canadian corporations.
The exchangeable shares will be "taxable preferred shares," "short-term
preferred shares" and subject to the discussion below, "term preferred shares"
for purposes of the Income Tax Act (Canada). Accordingly, travelbyus.com will be
subject to a 66 2/3% tax under Part VI. I of the Income Tax Act (Canada) on
dividends (other than excluded dividends) paid or deemed to be paid on the
exchangeable shares. In certain circumstances, travelbyus.com would be entitled
to deductions under Part I of the Income Tax Act (Canada) which could
substantially offset the impact of the Part VI. I tax. Dividends received or
deemed to be received on the exchangeable shares will not be subject to the 10%
tax under Part IV. I of the Income Tax Act (Canada) applicable to certain
corporations.
If Aviation Group, its Canadian subsidiary or any person with whom Aviation
Group or its Canadian subsidiary does not deal at arm's length is a "specified
financial institution" under the Income Tax Act (Canada) at the time a dividend
is paid on an exchangeable share, then, subject to the exemption described
below, dividends received or deemed to be received by a travelbyus.com
shareholder that is a corporation will not be deductible in computing taxable
income and will be fully includable in income under Part I of the Income Tax Act
(Canada). Such dividend will not be subject to tax under Part IV of the Income
Tax Act (Canada). A corporation will generally be a specified financial
institution for these purposes if it is a bank, a trust company, a credit union,
an insurance corporation or a corporation whose principal business is the
lending of money to persons with whom the corporation is dealing at arm's length
or the purchasing of debt obligations issued by such persons or a combination
thereof, and corporations controlled by or related to such entities and certain
prescribed corporations.
The denial of the dividend deduction for a corporate travelbyus.com
shareholder as described above will not apply if, at the time a dividend is
received or deemed to be received:
- the exchangeable shares are listed on a prescribed stock exchange
(which currently includes The Toronto Stock Exchange);
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- Aviation Group controls travelbyus.com; and
- the recipient, together with persons with whom the recipient does not
deal at arm's length or any partnership of which the recipient or
person is a member or trust of which the recipient or person is a
beneficiary, does not and is not deemed to receive dividends on more
than 10% of the issued and outstanding exchangeable shares.
travelbyus.com currently expects that the exchangeable shares will be listed on
The Toronto Stock Exchange immediately prior to the effective time of the
arrangement.
Subject to the foregoing, in the case of a travelbyus.com shareholder that
is a corporation other than a specified financial institution as defined in the
Income Tax Act (Canada), dividends received or deemed to be received on the
exchangeable shares will be included in computing the corporation's income and
will normally be deductible in computing its taxable income.
In the case of a travelbyus.com shareholder that is a specified financial
institution, a dividend which is otherwise deductible in accordance with the
above discussion will be deductible in computing its taxable income only if
either:
- the specified financial institution did not acquire the exchangeable
shares in the ordinary course of the business carried on by such
institution; or
- at the time of the receipt of the dividend by the specified financial
institution, the exchangeable shares are listed on a prescribed stock
exchange in Canada, which currently includes The Toronto Stock
Exchange, and the specified financial institution, either alone or
together with persons related to such shareholder, does not and is not
deemed to receive dividends on more than 10% of the issued and
outstanding exchangeable shares.
A travelbyus.com shareholder that is a private corporation, as defined in
the Income Tax Act (Canada), or any other corporation resident in Canada and
controlled or deemed to be controlled by, or for the benefit of an individual,
other than a trust, or a related group of individuals, other than trusts, may be
liable under Part IV of the Income Tax Act (Canada) to pay a refundable tax of
33 1/3% on dividends received or deemed to be received on the exchangeable
shares to the extent that such dividends are deductible in computing the
travelbyus.com shareholder's taxable income. A travelbyus.com shareholder that
is a Canadian-controlled private corporation, as defined in the Income Tax Act
(Canada), may be liable to pay an additional refundable tax of 6 2/3% on
dividends or deemed dividends that are not deductible in computing taxable
income.
Aviation Group Common Stock. Dividends received by holders of shares of
Aviation Group common stock will be included in the recipient's income for the
purpose of the Income Tax Act (Canada). Dividends received by a holder who is an
individual will not be subject to the gross-up and dividend tax credit rules in
the Income Tax Act (Canada). A holder that is a corporation will include such
dividends in computing its income and generally will not be entitled to deduct
the amount of these dividends in computing its taxable income. A holder that is
a Canadian-controlled private corporation, as defined in the Income Tax Act
(Canada) throughout the relevant taxation year, may be liable to pay an
additional refundable tax of 6 2/3% on its aggregate investment income for the
year which will include such dividends. United States non-resident withholding
tax on such dividends will be eligible for foreign tax credit or deduction
treatment where applicable under the Income Tax Act (Canada).
Redemption or Exchange of Exchangeable Shares
On the redemption, including a retraction, of an exchangeable share by
travelbyus.com, the holder of an exchangeable share will be deemed to have
received a dividend equal to the amount, if any, by which the redemption
proceeds exceeds the paid-up capital, for purposes of the Income Tax Act
(Canada), at the time of the redemption of the exchangeable share. For this
purpose, redemption proceeds would be equal to the fair market value at that
time of Aviation Group common stock received less any amount allocated to the
ancillary rights. The amount of any deemed dividend will be subject to the tax
treatment described above under "Dividends--Exchangeable Shares." On the
redemption, the holder of an exchangeable share will also be considered to have
disposed of the exchangeable share for proceeds of disposition equal to the
redemption proceeds less the amount of such deemed dividend and any amount
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allocated to the ancillary rights. A holder will in general realize a capital
gain or loss equal to the amount by which the adjusted cost base to the holder
of the exchangeable share is less than or exceeds such proceeds of disposition.
See "Taxation of Capital Gain or Capital Loss" below. In the case of a
shareholder that is a corporation, in some circumstances the amount of any
deemed dividend may be treated as proceeds of disposition and not as a dividend.
On the exchange of an exchangeable share by the holder thereof with
Aviation Group or Aviation Subco for shares of Aviation Group common stock, the
holder will in general realize a capital gain or loss to the extent the proceeds
of disposition of the exchangeable share net of any reasonable costs of
disposition, exceed or are less than the adjusted cost base to the holder of the
exchangeable share. For this purpose, proceeds would be equal to the fair market
value at that time of Aviation Group common stock received less any amount
allocated to the ancillary rights. See "Taxation of Capital Gain or Capital
Loss" below.
Due to the existence of the call rights, the exchange right and the
automatic exchange right, a holder of exchangeable shares cannot control whether
shares of Aviation Group common stock will be received by way of redemption of
the exchangeable shares by travelbyus.com or by way of purchase of the
exchangeable shares by Aviation Group or its Canadian subsidiary, except to the
extent that the holder may exercise the exchange put right. As described above,
the Canadian federal income tax consequences of redemption differ from those of
a purchase.
Acquisition and Disposition of Aviation Group Common Stock
The cost of any shares of Aviation Group common stock received by a holder
on the retraction, redemption or exchange of an exchangeable share will be an
amount equal to the fair market value of these shares of Aviation Group common
stock at the time of such event.
A disposition or deemed disposition of shares of Aviation Group common
stock by a holder will generally result in a capital gain or loss to the extent
that the proceeds of disposition, net of any reasonable costs of disposition,
exceed or are less than the adjusted cost base to the holder of the shares of
Aviation Group common stock immediately before the disposition. In computing the
adjusted cost base of a share of Aviation Group common stock, the cost must be
averaged with the adjusted cost base of any other shares of Aviation Group
common stock held at that time as capital property by the holder.
Taxation of Capital Gain or Capital Loss
Of any capital gain realized by a shareholder, 75% will be included in the
shareholder's income for the year of disposition. Of any capital loss realized
by a shareholder, generally 75% may be deducted by the holder against taxable
capital gains for the year of disposition. Under the proposed amendments, the
inclusion rate for capital gains and losses will be reduced from 75% to 66-2/3%.
Any excess of allowable capital losses over taxable capital gains of the
shareholder for the year of disposition may be carried back up to three taxation
years or forward indefinitely, and deducted against net taxable capital gains in
those other years to the extent and in the circumstances described in the Income
Tax Act (Canada) and the proposed amendments.
Capital gains realized by an individual or trust, other than certain
trusts, may give rise to alternative minimum tax under the Income Tax Act
(Canada). A shareholder that is a Canadian-controlled private corporation may be
liable to pay an additional refundable tax of 6 2/3% on taxable capital gains.
The amount of any capital loss arising on a disposition or deemed
disposition of any travelbyus.com common share or exchangeable share may be
reduced by the amount of dividends received or deemed to have been received by
the holder on such share to the extent and under the circumstances prescribed by
the Income Tax Act (Canada).
Dissenting Shareholders
If a shareholder exercises dissenter's rights on the arrangement and is
paid the fair value of the holder's travelbyus.com common shares, the
shareholder will be deemed to receive a taxable dividend equal to the amount by
which the fair value, other than in respect of interest awarded by the court,
exceeds the paid-up capital of these shares. The holder will also be considered
to have disposed of the travelbyus.com common shares for proceeds of disposition
equal to the redemption proceeds less the amount of any deemed dividend and any
interest awarded by the court. A
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holder will in general realize a capital gain or loss equal to the amount by
which the adjusted cost base to the holder of the travelbyus.com common shares
is less than or exceeds the proceeds of disposition. See "Taxation of Capital
Gain or Capital Loss" above. In the case of a shareholder that is a corporation,
in some circumstances the amount of any deemed dividend may be treated as
proceeds of disposition and not as a dividend. Any interest awarded to a
dissenting shareholder by the court will be included in the dissenting
shareholder's income for the purposes of the Income Tax Act (Canada). Dissenting
shareholders should consult their own tax advisors for advice with respect to
the tax consequences of an exercise of dissent rights. See "Proposal No. 1 The
Arrangement-Dissenters' Rights."
Eligibility for Investment
Qualified Investments. The exchangeable shares and the shares of Aviation
Group common stock, if issued on the date of this joint proxy
statement/prospectus and listed on Toronto Stock Exchange and Nasdaq,
respectively, would be qualified investments under the Income Tax Act (Canada)
for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans. We will refer to
these plans collectively as deferred plans. The ancillary rights will not be
qualified investments under the Income Tax Act (Canada). However, as indicated
above, travelbyus.com believes that the fair market value of the ancillary
rights is nominal.
Foreign Property. The exchangeable shares, if issued on the date of this
joint proxy statement/prospectus and listed on The Toronto Stock Exchange, would
not be "foreign property" under the Income Tax Act (Canada) for registered
pension plans, deferred plans and certain other tax-exempt persons.
The shares of Aviation Group common stock will be foreign property under
the Income Tax Act (Canada) as will the ancillary rights. As indicated above,
travelbyus.com believes that the fair market value of the ancillary rights is
nominal.
Foreign Property Information Reporting
A holder of shares of Aviation Group common stock who is a specified
Canadian entity for a taxation year or a fiscal period and whose total cost
amount of specified foreign property, including shares of Aviation Group common
stock, at any time in the year or fiscal period exceeds Cdn. $100,000 will be
required to file an information return for the year or period disclosing
prescribed information, including the holder's cost, any dividends received in
the year, and any gains or losses realized in the year, in respect of such
property. With some exceptions, a taxpayer resident in Canada in the year will
generally be a specified Canadian entity. A holder of shares of Aviation Group
common stock should consult its own advisors about whether it must comply with
these rules.
Proposed Amendments - Foreign Investment Entities
On June 22, 2000, the Minister of Finance (Canada) released draft income
tax legislation generally applicable to the taxation of interests held by
Canadian residents in certain non-resident corporations. Further amendments were
issued by press release dated September 7, 200 by the Minister of Finance
(Canada). It is expected that further amendments to the proposed rules will be
made before they are enacted. The discussion that follows is based upon the
draft legislation in its current form, the press release and discussions with
officials from the Department of Finance (Canada).
In general, the proposed rules would apply to persons owning shares, or
rights to acquire shares, of a "foreign investment entity", subject to certain
exemptions, including an exemption for shares, or rights to acquire shares, of
widely held public companies if specific conditions are satisfied. If Aviation
Group is treated as a foreign investment entity, the exchangeable shares and
shares of Aviation Group common stock would potentially be subject to the
proposed rules. It is proposed that the new rules will take effect initially for
a holder's 2002 taxation year.
The proposed rules would require an annual determination of whether
Aviation Group is a foreign investment entity or whether Aviation Group
satisfies the conditions for the public company exemption referred to above.
Each of these determinations would be based primarily on the nature of Aviation
Group's assets and activities.
Aviation Group has advised counsel that, following a review of the draft
legislation and its most currently available financial information, it believes
the proposed rules, if enacted in their current form, would not apply to the
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exchangeable shares or Aviation Group shares at the present time. However, a
definitive conclusion cannot be made until the legislation is enacted in its
final form. Moreover, as the proposed rules require an annual determination of
whether Aviation Group is a foreign investment entity and, if so, whether
Aviation Group satisfies the conditions for the public company exemption, no
assurance can be given with respect to the application of the proposed rules in
any particular year.
If the proposed rules are applicable to the exchangeable shares or Aviation
Group shares, the tax consequences of holding these shares as described above
would generally be modified in certain respects as described below. For
taxpayers with taxation years that do not end on December 31, references to
December 31, 2001 should be read as a reference to the last day of the taxation
year that includes December 31, 2001 and references to January 1, 2002 should be
read as a reference to the first day of the next taxation year.
Exchangeable Shares
The tax consequences of the exchange of travelbyus.com common shares for
exchangeable shares would be as described above under "Exchange of
travelbyus.com Common Shares for Exchangeable Shares". For 2002 and subsequent
taxation years, a shareholder who holds exchangeable shares would be required
annually to include in or deduct from income any increase or decrease in the
value of the exchangeable shares during the year. Any capital gain that has
accrued to December 31, 2001 on the exchangeable shares will be deferred until
the disposition of the exchangeable shares. If the fair market value of the
exchangeable shares at December 31, 2001 is not less than the fair market value
of the exchangeable shares on the effective date of the arrangement, the
deferred gain will include the entire accrued gain on the travelbyus.com common
shares that is otherwise deferred by the travelbyus.com shareholder on the
exchange of travelbyus.com common shares for exchangeable shares.
On a disposition of an exchangeable share including a redemption or
retraction, the holder would be required to include in or deduct from income,
the amount by which the proceeds of disposition exceed or are exceeded by the
fair market value of the exchangeable share at the commencement of the taxation
year in which the disposition occurs. In addition, in the taxation year in which
a disposition of an exchangeable share occurs, the holder would be required to
include in income an amount equal to the "deferral amount" in respect of the
exchangeable share. The deferral amount for an exchangeable share would be equal
to two-thirds of the amount by which the fair market value of the exchangeable
share on January 1, 2002 exceeds the adjusted cost base of the exchangeable
share to the holder on December 31, 2001. The cost of the exchangeable share to
the holder would be as described above under "Exchange of travelbyus.com Common
Shares for Exchangeable Shares".
Any dividends received or deemed to be received by a holder on the
exchangeable shares would continue to be taxed in the manner described above
under "Dividends - Exchangeable Shares". While the matter is not free from
doubt, the amount of any dividend deemed to be received on a redemption or
retraction of an exchangeable share should reduce the proceeds of disposition of
the share for the purpose of computing the amount to be included in income in
respect of the disposition of the share as described in the preceding paragraph.
Aviation Group Common Stock
The tax consequences of the redemption or exchange of exchangeable shares
for Aviation Group common stock would be as described above under "Redemption or
Exchange of Exchangeable Shares". For 2002 and subsequent taxation years,
holders of shares of Aviation Group common stock would be required annually to
include in or deduct from income any increase or decrease in the value of the
shares of Aviation Group common stock during the year plus any amounts received
from Aviation Group in the year on the shares. On a disposition of a share of
Aviation Group common stock the holder would be required to include in income
the amount by which the aggregate of the proceeds of disposition exceed are
exceeded by the fair market value of the shares of Aviation Group common stock
at the commencement of the taxation year in which the disposition occurs, plus
the deferral amount for the shares of Aviation Group common stock. This deferral
amount would be equal to two-thirds of the amount by which the fair market value
of such shares of Aviation Group common stock on January 1, 2002 exceeds the
adjusted cost base of such shares of Aviation Group common stock to the holder
on December 31, 2001.
Alternatively, if requisite financial information for Aviation Group is
available to the holder, the holder may elect to include in or deduct from
income his or her share of Aviation Group's income or loss for the year
calculated in
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accordance with Canadian tax principles other than the portion of any income
that, in effect, has been subject to tax at Canadian tax rates. Any amount so
included or deducted in computing a holder's income would be added or deducted
in computing the adjusted cost base of the holder's shares of Aviation Group
common stock. Subject to the foregoing comments, the tax consequences of a
disposition of shares of Aviation Group common stock would be as described above
under "Acquisition and Disposition of Aviation Group Common Stock". Aviation
Group is under no obligation to provide a shareholder with the information that
would be required to permit the shareholder to make this election and it has no
current intention of providing that information. Under these circumstances,
shareholders should assume that the tax treatment under this alternate election
mechanism would not be available.
Dividends received on shares of Aviation Group common stock would continue
to be taxed in the manner described above under "Dividends - Aviation Group
Common Stock". However, in any taxation year in which a dividend is received on
a share of Aviation Group common stock, the holder of the share would be
entitled to deduct, in computing his or her income for that taxation year, the
lesser of the amount included in income in respect of the dividend in the
taxation year (other than in accordance with the proposed rules) and the net
amount included in the holder's income in respect of the Aviation Group common
stock pursuant to the proposed rules in the taxation year or any preceding
taxation year less any such deductions previously claimed. Any amount so
deducted would reduce the adjusted cost base of the shares of Aviation Group
common stock to the holder.
Tax-Exempt Shareholders and Financial Institutions
The proposed rules will not apply to most taxpayers exempt from tax under
Part I of the Canadian Tax Act, including registered retirement savings plans,
registered retirement income funds and deferred profit sharing plans. As a
result, the "cost amount" of exchangeable shares and shares of Aviation Group
common stock for the purposes of Part XI of the Income Tax Act (Canada), which
imposes a penalty tax on excess holdings of "foreign property", will not be
affected.
Although this summary does not address the tax considerations relevant to
"financial institutions" as defined in the Income Tax Act (Canada) that hold
"mark-to-market property", the proposed rules will generally not apply to
exchangeable shares and shares of Aviation Group common stock held by those
taxpayers.
Shareholders Not Resident in Canada
The following portion of the summary applies to travelbyus.com shareholders
who, for purposes of the Income Tax Act (Canada), have not been and will not be
resident or deemed to be resident in Canada at any time while they hold
travelbyus.com common shares or exchangeable shares and to whom such shares are
not taxable Canadian property and, in the case of a non-resident of Canada who
carries on an insurance business in Canada and elsewhere, the shares are not
effectively connected with its Canadian insurance business.
travelbyus.com common shares and exchangeable shares will generally not
be taxable Canadian property to a holder, provided that:
- such shares are listed on a prescribed stock exchange, which currently
includes The Toronto Stock Exchange and Nasdaq;
- the holder does not and is not deemed to use or hold the
travelbyus.com common shares or the exchangeable shares, as
applicable, in connection with carrying on a business in Canada;
- the holder, persons with whom such holder does not deal at arm's
length, or the holder and such persons, has not owned or had under
option, 25% or more of the issued shares of any class or series of the
capital stock of travelbyus.com at any time within five years
preceding the date of disposition; and
- has not acquired the travelbyus.com common shares or exchangeable
shares in a transaction where the travelbyus.com common shares or
exchangeable shares are deemed to be taxable Canadian property, such
as where the holder disposed of taxable Canadian property and the
resulting gain was deferred under the Income Tax Act (Canada).
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Even if the travelbyus.com common shares or exchangeable shares are considered
to be taxable Canadian property, relief may be available under an applicable tax
convention, such as the Tax Treaty. Holders for whom the travelbyus.com common
shares or exchangeable shares are taxable Canadian property should consult their
own tax advisors to determine the tax consequences in their own situation.
On the assumption that the travelbyus.com common shares of a non-resident
holder do not constitute taxable Canadian property or that the holder can
otherwise claim the benefit of a tax treaty, any capital gain realized on the
exchange of travelbyus.com common shares for exchangeable shares will not be
subject to tax under the Income Tax Act (Canada). Similarly, any capital gain
realized on the exchange of exchangeable shares which do not constitute taxable
Canadian property will not be subject to tax under the Income Tax Act (Canada).
A holder whose exchangeable shares are redeemed, either pursuant to
travelbyus.com's redemption right or pursuant to the holder's retraction rights,
will be deemed to receive a dividend as described above under the heading
"Shareholders Resident in Canada," which deemed dividend will be subject to
withholding tax as described in the following paragraph.
Dividends paid on the exchangeable shares, including deemed dividends, are
subject to non-resident withholding tax under the Income Tax Act (Canada) at the
rate of 25%. However, this rate may be reduced under the provisions of an
applicable income tax treaty. For example, under the Tax Treaty, the rate is
generally reduced to 15% for dividends paid to a person who is the beneficial
owner and who is resident in the United States for purposes of the Tax Treaty.
Holders of travelbyus.com common shares who elect to dissent from the
arrangement will be entitled, in the event the arrangement becomes effective, to
be paid by travelbyus.com the fair value of the travelbyus.com common shares
held by such holder. This holder will be considered to have realized a deemed
dividend and capital gain or loss based on redemption proceeds equal to such
fair value, computed as generally described above in the case of a redemption,
including a retraction, of an exchangeable share by travelbyus.com for a share
of Aviation Group common stock under "Shareholders Resident in Canada--
Redemption or Exchange of Exchangeable Shares." Deemed dividends will be subject
to withholding tax as described above. Any capital gain realized by a dissenting
shareholder will not be taxed under the Income Tax Act (Canada) provided the
travelbyus.com common shares for which the right of dissent is exercised are not
taxable Canadian property, as described above, or relief is available under the
provisions of an applicable tax treaty. Additional income tax considerations may
be relevant to dissenting shareholders who fail to perfect or withdraw their
claims pursuant to the right of dissent in accordance with the specific
statutory provisions. See "Proposal No. 1 The Arrangement-Dissenters' Rights"
above.
United States Federal Income Tax Considerations
The following is a summary of the material United States federal income tax
considerations that may be relevant to you if you are a "United States person"
and hold travelbyus.com common shares as capital assets arising from and
relating to the arrangement, including the receipt and ownership of exchangeable
shares or Aviation Group common stock. For United States federal income tax
purposes, United States persons are:
- United States citizens or resident aliens, as determined under the
Internal Revenue Code;
- corporations, partnerships or other entities organized in or under the
laws of the United States or any political subdivision thereof;
- estates subject to United States federal income tax on income
regardless of source; and
- trusts:
- if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons
are authorized to control all substantial decisions of the trust;
or
- that has elected to be treated as a United States person under
applicable Treasury regulations.
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This summary is based on the Internal Revenue Code, existing and proposed
Treasury regulations and judicial and administrative determinations which are in
effect as of the date hereof and which are subject to change at any time,
possibly on a retroactive basis. No statutory, judicial, or administrative
authority exists which directly addresses certain of the United States federal
income tax consequences of the issuance and ownership of instruments and rights
comparable to the exchangeable shares and the voting rights, exchange rights and
call rights associated with such exchangeable shares. Consequently, as discussed
more fully below, significant aspects of the United States federal income tax
treatment of the arrangement, including the receipt and ownership of
exchangeable shares and the exchange of exchangeable shares for shares of
Aviation Group common stock, are not certain. No advance income tax ruling has
been sought or obtained from the Internal Revenue Service regarding the United
States federal income tax consequences of any of the transactions described
herein.
This summary does not address aspects of United States taxation other than
United States federal income taxation, nor does it address all aspects of United
States federal income taxation that may be applicable to you if you are:
- a tax-exempt organization;
- a financial institution;
- an insurance company;
- a broker-dealer;
- a person having a "functional currency" other than the United States
dollar;
- a holder that holds travelbyus.com common shares or exchangeable
shares as part of a straddle, wash sale, hedging or conversion
transaction;
- a trader that elects to mark-to-market your securities;
- an individual that received shares of travelbyus.com stock pursuant to
the exercise of employee stock options or otherwise as compensation;
or
- subject to tax pursuant to the Internal Revenue Code provisions
applicable to certain United States expatriates.
In addition, this summary does not address the United States state or local
tax consequences or the foreign tax consequences of the arrangement or the
receipt and ownership of the exchangeable shares or shares of Aviation Group
common stock.
You are urged to consult and rely on your tax advisors with respect to the
United States federal, state, and local tax consequences and the foreign tax
consequences of the arrangement, including the receipt and ownership of
exchangeable shares, voting rights, exchange rights and shares of Aviation Group
common stock.
Shareholders that are United States Holders
Tax Treatment of Arrangement
travelbyus.com intends to treat the exchange of travelbyus.com common
shares for exchangeable shares pursuant to the arrangement as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. There is,
however, no direct authority addressing the proper treatment of the arrangement
for United States federal income tax purposes, and therefore this treatment is
subject to significant uncertainty. Accordingly, we do not know whether the
Internal Revenue Service would challenge the status of the arrangement as a
reorganization or that, if challenged, whether a court would agree with the
Internal Revenue Service. Assuming the arrangement qualifies as a reorganization
under Section 368(a) of the Internal Revenue Code, upon receipt of exchangeable
shares in the arrangement, generally:
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- you would not recognize gain or loss, except as otherwise provided in
this joint proxy statement/prospectus;
- your tax basis for the exchangeable shares received generally would be
equal to your tax basis for the travelbyus.com common shares reduced
by the tax basis allocated to fractional share interests for which
cash is received and travelbyus.com common shares, if any, deemed to
have been exchanged for the voting rights and exchange rights, as
discussed below;
- your holding period for the exchangeable shares would include the
holding period of the travelbyus.com common shares that were exchanged
for the exchangeable shares;
- you would recognize gain or loss equal to the difference, if any,
between the amount of cash received in lieu of a fractional share
interest and the tax basis of the travelbyus.com common shares
allocated to the fractional share interest;
- the gain or loss recognized by you would constitute capital gain or
loss and would be long-term capital gain or loss if the fractional
share interest exchanged has been held for more than one year at the
time cash is received in lieu thereof. Your ability to deduct capital
losses may be subject to limitations.
travelbyus.com believes that the voting rights and exchange rights that you
receive and any call rights deemed to be conveyed by you to Aviation Group or a
Canadian subsidiary of Aviation Group pursuant to the arrangement should have
only nominal value and, therefore, that their receipt or conveyance, as the case
may be, should not result in any material United States federal income tax
consequences. It is possible, however, that the Internal Revenue Service could
take the position that the voting rights, exchange rights and call rights have
greater than nominal value and that the transfer or receipt of such rights
results in taxable gain in an amount equal to their value. This gain generally
would be capital gain or loss, unless the Internal Revenue Service were to
assert that the voting rights, exchange rights or any other rights, such as the
rights beneficially enjoyed by you under the voting and exchange trust
agreement, were transferred to you by travelbyus.com, and not by Aviation Group
and its Canadian subsidiary, in redemption of a portion of your travelbyus.com
common shares.
If the Internal Revenue Service successfully asserted that the voting
rights and exchange rights have greater than nominal value and the rights are
deemed to have been transferred by travelbyus.com rather than Aviation Group or
a Canadian subsidiary of Aviation Group in redemption of travelbyus.com common
shares, you would recognize dividend income equal to the value of such rights to
the extent of the current and accumulated earnings and profits of
travelbyus.com, as determined under United States federal income tax principles,
unless such deemed redemption is either "not essentially equivalent to a
dividend" or "substantially disproportionate," as such terms are defined in
Section 302(b) of the Internal Revenue Code. If the deemed redemption is
"substantially disproportionate" or "not essentially equivalent to a dividend,"
any gain you recognize by would be capital gain.
Even if the arrangement qualifies as a reorganization, there is the risk
that you may nevertheless be required to recognize gain with respect to the
arrangement. See "Possibility of Gain Recognition on Receipt of Exchangeable
Shares" and "Possibility of Gain Recognition on Constructive Sale," below.
Requirement of Notice Filing
If the arrangement qualifies as a reorganization under Section 368(a) of
the Internal Revenue Code and you receive exchangeable shares in exchange for
travelbyus.com common shares, you must file a notice with the Internal Revenue
Service on or before the last date for filing a United States federal income tax
return for the your taxable year in which the arrangement occurs. The notice
must contain certain information specifically enumerated in the United States
Treasury regulations, and you are advised to consult your tax advisors for
assistance in preparing such notice.
If you are required to give notice as described above and you fail to do
so, without establishing reasonable cause for the failure, then the Commissioner
of the Internal Revenue Service will be required to determine, based on all the
facts and circumstances, whether the exchange of travelbyus.com common shares
for exchangeable shares is eligible for nonrecognition treatment. In making this
determination, the Commissioner may conclude:
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- the exchange is eligible for nonrecognition treatment, despite such
noncompliance;
- the exchange is eligible for nonrecognition treatment, provided that
certain other conditions imposed by the United States Treasury
regulations are satisfied; or
- the exchange is not eligible for nonrecognition treatment and that any
gain realized will be recognized and will be taken into account for
purposes of increasing your tax basis for the exchangeable shares
received pursuant to the combination agreement and the arrangement.
Nevertheless, the failure of any one United States holder to satisfy the
foregoing notice requirements should not affect you if you satisfy such
requirements from receiving nonrecognition treatment with respect to the
exchange of your travelbyus.com common shares for exchangeable shares pursuant
to the arrangement, assuming the exchange otherwise qualifies as a
reorganization as described above.
Dissent Rights
If you exercise your right to dissent from the arrangement, you generally
will recognize gain or loss on the exchange of your travelbyus.com common shares
for cash in an amount equal to the difference between the amount of cash
received and your tax basis in the travelbyus.com common shares. The gain or
loss will be capital gain or loss if you held your travelbyus.com common shares
as capital assets at the effective time of the arrangement and will be long-term
capital gain or loss if you held your travelbyus.com common shares for more than
one year at the effective time of the arrangement. Your ability to deduct
capital losses may be subject to limitations.
Possibility of Gain Recognition on Receipt of Exchangeable Shares
Although travelbyus.com believes it is unlikely, it is possible that the
Internal Revenue Service might view the exchangeable shares as nonqualified
preferred stock, which could cause you to recognize gain or loss on your receipt
of exchangeable shares.
Possibility of Gain Recognition on Constructive Sale
Under Section 1259 of the Internal Revenue Code, if there is a
"constructive sale" of an "appreciated financial position," a taxpayer is
required to recognize gain, but not loss, as if such appreciated financial
position were sold for its fair market value on the date of such constructive
sale. For this purpose, an "appreciated financial position" would include
ownership of appreciated stock. A taxpayer would be treated as having made a
constructive sale of the appreciated financial position if the taxpayer, or a
related person, enters into one or more of the following:
- a short sale of the same or substantially identical property;
- an offsetting notional principal contract with respect to the same or
substantially identical property;
- a futures or forward contract to deliver the same or substantially
identical property;
- in the case of an appreciated financial position that is a short sale
or a contract described above with respect to any property, an
acquisition of the same or substantially identical property; or
- to the extent provided in Treasury regulations that have not yet been
issued, one or more other transactions, or the acquisition of one or
more positions, that have substantially the same effect as a
transaction described above. The Treasury is authorized to issue
regulations that would treat as constructive sales other financial
transactions that, like those specified above, have the effect of
eliminating substantially all of the taxpayer's risk of loss and
opportunity for income or gain with respect to the appreciated
financial position.
If you entered into one of the enumerated transactions with respect to
travelbyus.com common shares, you must recognize gain, if any, on such
travelbyus.com common shares as if you sold the travelbyus.com common shares for
its fair market value. Proper adjustment would be made to the amount of gain or
loss you subsequently realize with respect
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to the exchangeable shares for any gain taken into account by virtue of the
constructive sale, and the holding period of the exchangeable shares would be
determined as if the shares were acquired on the date of the constructive sale.
There is the possibility that the arrangement might be viewed by the
Internal Revenue Service as a constructive sale of the travelbyus.com common
shares under future Treasury regulations interpreting Section 1259 of the
Internal Revenue Code. If viewed as a constructive sale, an argument exists that
the arrangement is a reorganization of Aviation Group common stock for
travelbyus.com common shares. However, because the Treasury has not yet issued
regulations interpreting Section 1259 of the Internal Revenue Code, the
application of the constructive sale rules contained in Section 1259 of the
Internal Revenue Code to the receipt of exchangeable shares in exchange for
travelbyus.com common shares is uncertain, and no assurance can be given as to
the effect of Section 1259 of the Internal Revenue Code on your receipt of
exchangeable shares pursuant to the arrangement. You are urged to consult your
tax advisors with respect to the application of Section 1259 of the Internal
Revenue Code to the arrangement.
Exchange of Exchangeable Shares
If you exchange your exchangeable shares for Aviation Group common stock,
generally:
- you would recognize gain or loss on the receipt of the shares of
Aviation Croup common stock in exchange for your exchangeable shares,
although there is a possibility that under certain limited
circumstances, the exchange may be characterized as a tax-free
reorganization;
- the gain or loss would be equal to the difference between the fair
market value of the shares of Aviation Group common stock at the time
of the exchange and your tax basis in the exchangeable shares
exchanged therefor;
- the gain or loss would be capital gain or loss, except that, to the
extent of any declared but unpaid dividends on the exchangeable
shares, you may recognize ordinary income;
- the capital gain or loss would be long-term capital gain or loss if
the exchangeable shares, together with the pre-conversion
travelbyus.com common shares if the arrangement otherwise qualifies as
a reorganization, have been held by you for more than one year at the
time of the exchange;
- the gain or loss realized on the exchange of exchangeable shares for
shares of Aviation Group common stock generally would be treated as
United States source gain or loss for United States foreign tax credit
purposes;
- your tax basis in the shares of Aviation Group common stock would be
equal to the fair market value of the shares of Aviation Group common
stock at the time of the exchange; and
- your holding period of the shares of Aviation Group common stock
received in the exchange would begin on the day after your receipt of
the shares of Aviation Group common stock.
Distributions on the Exchangeable Shares or Aviation Group Common Stock
If distributions are made on exchangeable shares, you generally should be
required to include in gross income as ordinary dividend income the amount of
the dividend, including amounts withheld to pay Canadian withholding taxes, to
the extent of the current or accumulated earnings and profits of travelbyus.com,
as determined under United States federal income tax principles. Distributions
that exceed the current and accumulated earnings and profits of travelbyus.com
would be treated as a return of capital to you to the extent of your tax basis
in the exchangeable shares and thereafter as capital gain.
Distributions that constitute dividend income generally should be treated
as foreign source passive income for United States foreign tax credit purposes,
although there is some possibility that the Internal Revenue Service may assert
that the income should be considered to be from United States sources. Subject
to certain limitations of United States federal income tax law, you generally
should be entitled to either a credit against your United States federal income
tax
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liability or a deduction in computing United States taxable income for Canadian
income taxes withheld from distributions with respect to the exchangeable
shares.
If distributions are made on your Aviation Group common stock, you
generally should be required to include in gross income as ordinary dividend
income the amount of the dividend to the extent of the current or accumulated
earnings and profits of Aviation Group, as determined under United States
federal income tax principles. Distributions that exceed the current and
accumulated earnings and profits of Aviation Group will be treated as a return
of capital to you to the extent of your tax basis in the Aviation Group common
stock, and thereafter as capital gain.
Shareholders that are not United States Holders
The following summary of United States federal income tax consequences is
applicable to you if you are not an United States holder of travelbyus.com
common shares. Except as provided below, you generally will not be subject to
United States federal income tax on:
- the gain, if any, realized on the receipt of the exchangeable shares;
- the sale or exchange of the exchangeable shares; or
- the receipt of or sale of shares of Aviation Group common stock.
However you could be subject to United States federal income tax on gain,
if any, realized on the receipt of the exchangeable shares, the sale or exchange
of the exchangeable shares, or the receipt of or sale of shares of Aviation
Group common stock if:
- the gain is effectively connected with a United States trade or
business;
- you are an individual and present in the United States for 183 days or
more during the taxable year and certain other conditions are
satisfied; or
- Aviation Group is at any time a United States real property holding
corporation, or an "USRPHC", for United Sates federal income tax
purposes. Although Aviation Group considers it unlikely that it will
become an USRPHC, there can be no assurances as to this issue. If
Aviation Group were to become an USRPHC, then gain on the sale or
other disposition of Aviation Group common stock by you generally
would not be subject to United States federal income tax provided:
- the Aviation Group common stock was regularly traded on an
established securities market; and
- you do not actually or constructively own more than 5% of the
Aviation Group common stock during the shorter of the five-year
period preceding the disposition or your holding period.
If you receive distributions with respect to the exchangeable shares
constituting dividend income because paid out of the current or accumulated
earnings and profits of travelbyus.com, you should not be subject to United
States withholding tax. There is some possibility, however, that the Internal
Revenue Service may assert that United States withholding tax is payable with
respect to dividends paid on the exchangeable shares to you. If this were the
case, you could be subject to United States withholding tax at a rate of 30
percent, which rate may be reduced by an applicable income tax treaty in effect
between the United States and your country of residence, generally 15% on
dividends paid to residents of Canada under the current income tax treaty
between the United States and Canada.
If you receive dividends with respect to the Aviation Group common stock,
you generally will be subject to United States withholding tax at a rate of 30%,
which rate may be subject to reduction by an applicable income tax treaty,
generally 15% on dividends paid to residents of Canada under the current income
tax treaty between the United States and Canada.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements have
been prepared to reflect the transactions described below as if they had all
occurred as of June 30, 2000, with respect to the pro forma balance sheet, and
as of October 1, 1998 with respect to the pro forma statements of operations.
The transactions are as follows:
1. The issuance by Aviation Group of $16.5 million liquidation value of
Series A convertible preferred stock and warrants in March 2000 to
certain debt holders and the common stockholders and warrant holders of
Global Leisure in exchange for retirement of the debt and cancellation
of the outstanding common stock.
2. The sale of $21 million of Series B preferred stock and warrants in
March 2000 by Aviation Group and the purchase of Series B preferred
stock of Global Leisure and the retirement of Global Leisure debt and
payables with the proceeds.
3. The proposed acquisition of Aviation Group by travelbyus.com by the
issuance of Aviation Group common stock to the travelbyus.com
shareholders, resulting in the travelbyus.com shareholders owning
approximately 95% of the outstanding common stock of Aviation
Group.
4. The acquisitions by travelbyus.com of Cheap Seats, Inc. and Express
Vacations, Inc, during the fourth calendar quarter of 1999, Cruise
Shoppes America, Ltd. in April 2000, Epoch Technology Inc. in May 2000,
Muffin Communication, Inc. in July 2000; and the acquisitions of
ProSoft Corporation and SiteRabbit.com in September 2000.
The pro forma financial statements combine the historical financial
statements of the various companies and include adjustments to reflect the
effects of the transactions described above. The pro forma financial statements
are expressed in U.S. dollars. The travelbyus.com historical financial
statements, which are in Canadian dollars, have been converted to U.S. dollars
at the exchange rate in effect on June 30, 2000, for purposes of the pro forma
financial statements. The difference between the exchange rate in effect at
June 30, 2000 and the average exchange rates in effect for the nine months ended
June 30, 2000 and the year ended September 30, 1999 is not material. The pro
forma statements of operations are presented based upon the September 30 fiscal
year end of travelbyus.com. The fiscal year end of Express Vacations is also
September 30. The statements of operations of the other entities, which do not
have a September 30 fiscal year end are combined with the appropriate fiscal
quarters to conform with the presentation. The pro forma statement of operations
for the year ended September 30, 1999 includes (a) the Aviation Group, Cruise
Shoppes, Cheap Seats and SiteRabbit statements of operations for the year ended
June 30, 1999, and (b) the Global Leisure, Epoch Technology and Pro Soft
statements of operations for the year ended December 31, 1999. The pro forma
statement of operations for the nine months ended June 30, 2000 includes (a) the
Aviation Group, Cruise Shoppes, ProSoft and SiteRabbit statements of operations
for the nine months ended June 30, 2000; (b) the Global statement of operations
for the six months ended December 31, 1999; and (c) the Epoch Technology
statement of operations for the eight months ended May 31, 2000, Express
Vacations statement of operations for the one month period ending October 31,
1999 and the Cheap Seats statement of operations for the three month period
ending December 31, 1999, which are prior to their acquisition and consolidation
into the statement of operations of travelbyus.com. The Epoch Technology, Global
Leisure and ProSoft statements of operations for the three month period ended
December 31,1999 are included in both the pro forma statements of operations for
the year ended September 30, 1999 and the nine months ended June 30, 2000. The
statements of operations of Global for the three months ended March 31, 2000
have not been included in the accompanying pro forma statement of operations for
the nine months ended June 30, 2000. The effect would not be material and the
information is not readily available, because Aviation Group is unable to
prepare a statement of operations for Global for the six months ended March 31,
2000, because it does not have separate financial information for Global for the
three months ended December 31, 1999. The acquisition of Muffin is effectively
an asset acquisition. Therefore, the operations of Muffin are excluded from the
proforma statement of operations.
The acquisition of Global Leisure by Aviation Group effectively
occurred as of March 31, 2000 and was accounted for as a purchase and reflected
in the Aviation Group historical financial statements beginning March 31, 2000.
The acquisition of Aviation Group, following its acquisition of Global Leisure,
by travelbyus.com is accounted for as a purchase combined with a
recapitalization of travelbyus.com under the capital structure of Aviation
Group.
Several of the adjustments in the pro forma financial information are
based on preliminary estimates, subject to change upon obtaining more
information about specific assets acquired and liabilities assumed and
performing more detailed appraisals and valuations of the assets acquired.
Accordingly, adjustments may be made to the purchase price allocations to the
businesses acquired by travelbyus.com and Aviation Group prior to the
consummation of the merger between the two companies, the purchase price
allocation on the acquisition of Aviation Group by travelbyus.com (including the
allocation of the purchase price to the Aviation Group non travel business to
be sold) and the estimates of the useful lives of the assets acquired.
The unaudited pro forma combined financial statements should be read in
conjunction with the accompanying notes and with the historical financial
statements of the various companies involved in the transactions described
above, which are included elsewhere in this joint proxy statement/prospectus.
85
<PAGE>
The unaudited pro forma combined financial statements are not
indicative of the financial position or results of operations of Aviation Group
which would actually have occurred if the transactions described above had
occurred at the dates presented or which may be obtained in the future.
86
<PAGE>
AVIATION GROUP, INC. AND TRAVELBYUS.COM LTD.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2000 (expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Site
Aviation Group travelbyus Pro Soft Rabbit
-------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 432 $ 8,259 $ 121 $ 16
Accounts receivable 2,018 2,762 209 1
Inventory and barter credits 1,049 947
Other current assets 6,215 834 1 76
------------ ----------- ---------- ---------
Total current assets 9,714 12,802 331 93
Property and equipment, net 2,653 2,567 19 155
Investments 4,515 150
Goodwill 50,657 37,444
Software, contracts & other intangibles 2,258
Other assets
720 5,256 3 22
------------ ----------- ---------- ---------
Total assets $ 63,744 $ 64,842 $ 503 $ 270
============ =========== ========== =========
Notes payable and current maturities of long-term debt 8,288 3,392 2 9
Accounts payable and accrued expenses
11,037 9,274 333 583
------------ ----------- ---------- ---------
Total current liabilities 19,325 12,666 335 592
Long-term debt 728 4,510 7 50
Deferred Income Taxes
------------ ----------- ---------- ---------
Total liabilities 20,053 17,176 342 642
Preferred stock 31,500
Common stock 48 115,106 2
Other stockholders' equity 23,952 13,027 8 1,432
Accumulated earnings (deficit) (11,809) (80,467) 153 (1,806)
------------ ----------- ---------- ---------
Total stockholders' equity (deficit) 43,691 47,666 161 (372)
------------ ----------- ---------- ---------
Total liabilities and stockholders' equity $ 63,744 $ 64,842 $ 503 $ 270
============ =========== ========== =========
<CAPTION>
Pro Forma Pro Forma
Adjustments Combined
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ (300) (5) $ 10,028
1,500 (1)
Accounts receivable (1,901) (4) 3,089
Inventory and barter credits (1,049) (4) 947
Other current assets (2,662) (4) 2,489
(1,975) (14)
------------ ------------
Total current assets (6,387) 16,553
Property and equipment, net (2,430) (4) 2,964
Investments (3,015) (1) 150
(1,500) (1)
Goodwill 7,729 (1) 105,814
3,718 (5)
6,266 (5)
Software, contracts and other intangibles 3,000 (5) 12,579
7,000 (5)
321 (5)
Other assets (404) (4) 5,597
------------ ------------
Total assets $ 14,298 $ 143,657
============ ============
Notes payable and current maturities of long-term debt (3,667) (4) 6,049
(1,975) (14)
Accounts payable and accrued expenses 1,000 (2) 19,636
450 (1)
1,000 (1)
(4,041) (4)
------------ ------------
Total current liabilities (7,233) 25,685
Long-term debt (738) (4) 4,557
------------ ------------
Total liabilities (7,971) 30,242
Preferred stock (3,015) (1) 27,485
(1,000) (2)
Common stock 806 (3) 854
(115,106) (3)
(2) (5)
Other stockholders' equity (806) (3) 165,543
115,106 (3)
14,372 (1)
4,050 (1)
(23,952) (1)
4,200 (5)
8,894 (5)
6,700 (5)
(1,432) (5)
(8) (5)
Accumulated earnings (deficit) 11,809 (1)
(153) (5)
1,806 (5)
(80,467)
------------ ------------
Total stockholders' equity (deficit) 22,269 113,415
------------ ------------
Total liabilities and stockholders' equity $ 14,298 $ 143,657
============ ============
</TABLE>
See notes to pro forma adjustments.
87
<PAGE>
AVIATION GROUP, INC. AND TRAVELBYUS.COM LTD.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000
(expressed in thousands of U.S. Dollars, except per share amounts)
<TABLE>
<CAPTION>
Aviation Global Pro Forma Pro Forma
Group Leisure Adjustments Combined travelbyus
----------- --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 10,252 $ 4,530 $ - $ 14,782 $ 8,104
Operating expenses 6,948 14,266 - 21,214 4,199
General and administrative
expenses 7,282 - - 7,282 13,525
Depreciation and
amortization 1,821 552 2,533 (6) 4,906 2,704
----------- --------- ------------- ---------- -----------
Income (loss) from
operations (5,799) (10,288) (2,533) (18,620) (12,324)
Other income (expense):
Interest and other income - - 208
Interest expense (480) (3,152) 2,799 (7) (833) (2,077)
Other expense (23) - - (23) (16)
----------- --------- ------------- ---------- -----------
Total other income
(expense) (503) (3,152) 2,799 (856) (1,885)
Income (loss from
continuing operations
before income taxes (6,302) (13,440) 266 (19,476) (14,209)
Income tax (expense)
benefit - - - - 285
----------- --------- ------------- ---------- -----------
Income (loss) from
continuing operations $ (6,302) $ (13,440) $ 266 $ (19,476) $ (13,924)
=========== ========= ============= ========== ===========
Income (loss) from
continuing operations per
share, basic and diluted $ (1.59) $ (4.28) $ (0.22)
=========== ========== ===========
Weighted average shares
outstanding 3,972 583 (13) 4,555 65,204
=========== ============= ========== ===========
<CAPTION>
Express Cheap Cruise Pro
Vacations/(11)/ Seats, Inc./(11)/ Shoppes/(11)/ Epoch/(11)/ Soft
--------- ------------ --------- ----- ----
<S> <C> <C> <C> <C> <C>
Revenues, net $ 17 $ 1,018 $ 1,051 $ 270 $ 273
Operating expenses 5 716 465 212 131
General and administrative
expenses 193 417 259 49 400
Depreciation and
amortization 3 10 - - 5
--------- ------------ --------- ----- ----
Income (loss) from
operations (184) (125) 327 9 (263)
Other income (expense):
Interest and other income 4 - - - 1
Interest expense - - - -
Other expense - - (6) -
--------- ------------ --------- ----- ----
Total other income
(expense) 4 - (6) - 1
Income (loss from
continuing operations
before income taxes (180) (125) 321 9 (262)
Income tax (expense)
benefit - - (160) -
--------- ------------ --------- ----- ----
Income (loss) from
continuing operations $ (180) $ (125) $ 161 $ 9 $ (262)
========= ============ ========= ===== ====
Income (loss) from
continuing operations per
share, basic and diluted
Weighted average shares
outstanding
<CAPTION>
Site Pro Forma Pro Forma
Rabbit Adjustments Combined
-------- ----------- ---------
<S> <C> <C> <C>
Revenues, net 268 (9,435) (12) $ 16,348
Operating expenses 901 (6,948) (12) 23,584
2,689 (8)
General and administrative
expenses 426 (4,100) (12) 18,845
394 (10)
Depreciation and
amortization 43 5,811 (8)
576 (8) 13,444
(614) (12)
-------- ----------- ---------
Income (loss) from (1,102) (7,243) (39,525)
operations
Other income (expense):
Interest and other income 18 231
Interest expense (32) 480 (12) (2,036)
426 (14)
Other expense - (45)
-------- ----------- ---------
Total other income
(expense) (14) 906 (1,850)
Income (loss from
continuing operations
before income taxes (1,116) (6,337) (41,375)
Income tax (expense)
benefit (125) (15) -
-------- ----------- ---------
Income (loss) from
continuing operations (1,116) $ (6,462) $ (41,375)
======== =========== =========
Income (loss) from
continuing operations per $ (0.35)
share, basic and diluted =========
Weighted average shares 22,319 (9) 119,292
outstanding 26,491 (9)
723 (13)
=========== =========
</TABLE>
See notes to pro forma adjustments.
88
<PAGE>
AVIATION GROUP, INC. AND TRAVELBYUS.COM LTD.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(expressed in thousands of U.S. Dollars, except per share amounts)
<TABLE>
<CAPTION>
Aviation Pro Forma Pro Forma Express
Group Global Adjustments Combined travelbyus Vacations
--------- -------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $ 15,097 $ 9,438 $ - $ 24,535 $ - $ 7,235
Operating expenses 10,129 16,965 - 27,094 249 2,345
General and administrative 5,482 - - 5,482 757 2,611
expenses
Depreciation, amortization and
impairment 674 4,403 5,066 (6) 10,143 5 41
--------- --------- --------- ----------- --------- ----------
Income (loss) from operations (1,188) (11,930) (5,066) (18,184) (1,011) 2,238
Other income (expense):
Interest and other income 52 139 - 191 15 101
Interest expense (461) (5,263) 4,674 (7) (1,050) (198) -
--------- --------- --------- ----------- --------- ----------
Total other income (409) (5,124) 4,674 (859) (183) 101
(expense)
Income (loss) from continuing
operations before income taxes (1,597) (17,054) (392) (19,043) (1,194) 2,339
Income tax (expense) benefit (199) - - (199) - -
--------- --------- --------- ----------- --------- ----------
Income (loss) from continuing
operations $ (1,796) $ (17,054) $ (392) $ (19,242) $ (1,194) 2,339
========= ========= ========= =========== ========= ==========
Income (loss) from continuing
operations per share, basic and
diluted $ (0.53) $ (4.62) $ (0.04)
========= =========== =========
Weighted average shares
outstanding 3,419 750 (13) 4,169 29,083
========= =============== =========== ============
<CAPTION>
Cheap Cruise Epoch Site
Seats, Inc. Shoppes Technology ProSoft Rabbit
------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues, net $ 4,163 $ 2,629 $ 276 $ 1,639 $ 1,375
Operating expenses 2,724 1,855 216 742 645
General and administrative 1,536 630 48 727 327
expenses
Depreciation, amortization and
impairment 21 - - 8 30
----------- --------- ---------- --------- --------
Income (loss) from operations (118) 144 12 162 373
Other income (expense):
Interest and other income 4 44 - 1
Interest expense - (9) - (1) (10)
----------- --------- ---------- --------- --------
Total other income 4 35 - (1) (9)
(expense)
Income (loss) from continuing
operations before income taxes (114) 179 12 161 364
Income tax (expense) benefit 25 (30) -
----------- --------- ---------- --------- --------
Income (loss) from continuing
operations $ (89) 149 $ 12 $ 161 $ 364
=========== ========= ========== ========= ========
Income (loss) from continuing
operations per share, basic and
diluted
Weighted average shares
outstanding
<CAPTION>
Pro Forma Pro Forma
Adjustments Combined
----------- --------
<S> <C> <C>
Revenues, net $ (15,097) (12) $ 26,755
Operating expenses (10,129) (12) 29,358
3,617 (8)
General and administrative (5,002) (12) 7,641
expenses 525 (10)
Depreciation, amortization and (674) (12) 19,867
impairment 9,525 (8)
768 (8)
----------- ----------
Income (loss) from operations (13,727) (30,111)
Other income (expense):
Interest and other income (52) (12) 304
Interest expense 461 (12) (1,334)
(527) (14)
----------- ----------
Total other income (118) (1,030)
(expense)
Income (loss) from continuing
operations before income taxes (13,845) (31,141)
199 (12)
Income tax (expense) benefit 5 (15) -
----------- ----------
Income (loss) from continuing
operations $ (13,641) $ (31,141)
=========== ==========
Income (loss) from continuing
operations per share, basic and
diluted $ (0.26)
==========
Weighted average shares 930 (13)
outstanding 26,491 (9)
58,440 (9) 119,113
=========== ==========
</TABLE>
See notes to pro forma adjustments.
89
<PAGE>
Notes to Unaudited Pro Forma Adjustments
1. Adjustment to record the acquisition of Aviation Group by travelbyus.com
and the recapitalization of travelbyus.com by recording the approximate
market value of the shares of common stock, options and warrants held by
the Aviation Group shareholders at the common share price immediately
preceding the announcement of the merger with travelbyus.com. The shares of
common stock, options and warrants held by Aviation Group's shareholders
are treated as an issuance of new equity by travelbyus.com. 4,790,801
shares of Aviation Group common stock at the quoted price of $3.00 per
share results in an adjustment to stockholders' equity of approximately
$14,372,000. The value of the options and warrants of $4,050,000 results in
an additional adjustment to stockholders' equity. The values of the options
and warrants are estimated using the Black Scholes option pricing model.
These amounts, as well as the estimated transaction costs of $1,000,000 and
a $450,000 bonus due Aviation Group officers upon sale of the non travel
related assets of Aviation Group are allocated to the identifiable net
assets of Aviation Group based upon the estimated fair market values of
those assets with the remainder of $58,386,000 assigned to goodwill. The
goodwill that was recorded on the Aviation Group balance sheet of
$50,657,000 was increased by $7,729,000 as an adjustment to reflect the
effect of the acquisition. The adjustment also includes the removal of
Aviation Group's other stockholders' equity and accumulated deficit
accounts and elimination of $3,015,000 of Series B preferred stock of
Aviation Group owned by travelbyus.com. The adjustment also reflects the
sale of $1,500,000 of Series B preferred stock held by travebyus.com to a
third party after June 30, 2000. The estimated costs to register the
securities being issued in the transactions of $1,000,000 will be a non-
recurring charge to the operations of Aviation Group in the period
following the transactions and are not included in the pro forma statement
of operations.
The components of the purchase adjustment are as follows:
<TABLE>
<S> <C>
Value of shares issued $ 14,372,000
Value of warrants and options 4,050,000
Transaction costs 1,000,000
Bonus liability assumed 450,000
Other 48,000
-------------
Total consideration and costs $ 19,920,000
Fair value of identifiable assets $ (13,087,000)
Fair value of liabilities $ 20,053,000
Fair value of preferred stock 31,500,000
-------------
Net obligations acquired 38,466,000
-------------
Goodwill $ 58,386,000
=============
</TABLE>
Certain amounts in the purchase calculation above are based on the
preliminary estimates and the final amounts may differ.
2. Adjustment to record a $1 million payment related to arranging the
Series B preferred stock sale. The payment of this amount is contingent on
completion of the transactions.
3. Adjustment to record the $0.01 per share par value of the Aviation Group
shares of common stock to be issued to travelbyus.com shareholders,
80,600,066 shares outstanding at June 30, 2000, and reflect the
reorganization of travelbyus.com's shareholders' equity accounts to
Aviation Group's capital structure.
4. Adjustment to reclassify the Aviation Group assets and liabilities
associated with its non-travel related business segments to net assets for
resale, because the companies intend to sell those assets and repay the
associated liabilities following completion of the arrangement with
travelbyus.com. The net assets are recorded at book value, which does not
exceed net realizable value. The amount of net proceeds from the sale are
uncertain and none are assumed for the purpose of these pro forma financial
statements. Any net proceeds that would be received from the sale of the
non-travel related business segments is required to be used to redeem
preferred stock.
5. Adjustment to record the acquisition by travelbyus.com of (a) Muffin in
July 2000 for approximately $300,000 in cash and 1,000,000 shares of common
stock (valued at $6,700,000); and (b) the acquisitions of ProSoft and
SiteRabbit for 1,680,000 and 3,558,000 shares of common stock,
respectively, valued at $4,200,000 and $8,894,000, respectively. The terms
of each acquisition require adjustment to the number of shares as necessary
to provide the values cited above. The effect of the potential adjustment
to the number of shares has not been considered in these pro forma
financial statements. The adjustment also includes removal of the ProSoft
and SiteRabbit stockholders' equity accounts. Each acquired company's
identifiable net assets are recorded at estimated fair value, with the
remainder of approximately $3,718,000 and $6,266,000 assigned to goodwill
for ProSoft and SiteRabbit, respectively. For Muffin, ProSoft and
SiteRabbit, $7,000,000, $321,000 and $3,000,000 have been assigned to
software, contracts or other intangibles.
6. Adjustment to record the effect of the amortization of the goodwill
recorded upon the purchase of Global Leisure over 10 years as if the
acquisition had occurred October 1,1998. The amortization is $5,066,000 for
the year ended September 30, 1999 and $2,533,000 for the nine months ended
June 30, 2000.
90
<PAGE>
7. Adjustment to record the reduction in interest expense for the retirement
of approximately $26.0 million in Global Leisure debt, as if the retirement
had occurred at October 1, 1998. The effective interest rates on the
retired debt were approximately 18% and 21% for the year ended
September 30, 1999 and the nine months ended June 30, 2000, respectively.
The amounts of the interest reduction are $4,674,000 for the year ended
September 30, 1999 and $2,799,000 for the nine months ended June 30,
2000.
8. Adjustment to record the effect of the amortization of the goodwill,
software and contracts, as applicable, recorded upon the purchases of Cheap
Seats, Express Vacations, Cruise Shoppes, Epoch Technology, Muffin, ProSoft
and SiteRabbit as if these acquisitions had occurred at October 1, 1998.
The acquisition of Cheap Seats includes contingent consideration, the
resolution of which is currently unknown and has not been included in the
amortization calculation. The goodwill is amortized over 10 years for Cheap
Seats and Cruise Shoppes, five years for Express Vacations and Epoch, three
years for Site Rabbit and two years for ProSoft. The software, contracts
and other intangibles are amortized over three years for Muffin and
SiteRabbit and two years for ProSoft. The goodwill amortization of Cheap
Seats, Express Vacations, Cruise Shoppes and Epoch Technology are included
in the travelbyus.com historical statements of operations for the nine
months ended June 30, 2000 beginning January 1, 2000, November 1, 1999,
April 1, 2000 and June 1, 2000, respectively. The pro forma adjustments
record the additional amounts which would have been recorded if the
acquisitions had occurred at the beginning of the periods. The amounts of
the adjustments are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year ended
----------------- ----------
June 30, 2000 September 30, 1999
------------- ------------------
<S> <C> <C>
Cheap Seats $ 265,000 $ 1,061,000
Express Vacations 59,000 703,000
Epoch Technology 1,340,000 2,010,000
Cruise Shoppes 380,000 759,000
Muffin 2,363,000 3,150,000
ProSoft 1,514,000 2,020,000
SiteRabbit 2,579,000 3,439,000
----------- -----------
Total $ 8,500,000 $13,142,000
=========== ===========
</TABLE>
An additional adjustment is made to record the increase in amortization of
goodwill recorded upon the acquisition of Aviation Group by travelbyus.com.
This adjustment is $768,000 and $576,000 for the year ended September 30,
1999 and the nine months ended June 30, 2000, respectively.
The amortization of software and contract rights included in the above
table of $2,689,000 and $3,617,000 for the nine months ended June 30, 2000
and the year ended September 30, 1999, respectively, are classified as
adjustments to operating expenses.
9. Adjustment to the number of weighted average shares outstanding as if the
share exchange between Aviation Group and travelbyus.com and the common
stock issued in the acquisitions of Cheap Seats, Express Vacations, Epoch
Technology, Cruise Shoppes, Muffin, ProSoft and SiteRabbit had occurred at
October 1, 1998. The adjustments for the shares issued in the share
exchange between Aviation Group and travelbyus.com are 58,440,000 and
22,319,000 for the year ended September 30, 1999 and the nine months ended
June 30, 2000, respectively. These include warrants representing 6,922,000
shares, which have been exercised. The adjustment for shares issued to
acquire the companies is a total of 26,491,000 for each period. Unexercised
common stock options, warrants and convertible securities are not
considered because their effect would be antidilutive.
10. Adjustments to record compensation expense for effect of $1,050,000 of
contingent stock consideration to be issued two years after the acquisition
of ProSoft if the individuals are still employed at that time. The expense
is accrued over the two year period and is $525,000 for the year ended
Sept. 30, 1999 and $394,000 for the nine months ended June 30, 2000.
11. The operations of Express Vacations, Cheap Seats, Cruise Shoppes and Epoch
Technology that are presented in the pro forma statement of operations for
the nine months ended June 30, 2000 are for the periods prior to November
1, 1999, January 6, 2000, April 3, 2000 and May 23, 2000 respectively,
after which the operations of these companies are consolidated with the
historical statement of operations of travelbyus.com.
12. Adjustment to remove statement of operations accounts of Aviation Group's
non-travel related segments, to reflect the expected sale of these assets
and repayment of associated liabilities following completion of the
arrangement with travelbyus.com. General and administrative expenses of
$480,000 for the year ended September 30, 1999 and $360,000 for
91
<PAGE>
the nine months ended June 30, 2000 are not removed because these amounts
are the estimated costs that will continue with the ongoing entity.
13. Adjustment to the number of weighted average shares outstanding as if the
sale of 750,000 shares of common stock by Aviation Group and 930,000 common
shares by travelbyus.com in connection with these transactions had occurred
at October 1, 1998. The adjustments for the nine months ended June 30, 2000
are 583,000 and 723,000 shares, respectively. The adjustments for the year
ended September 30, 1999 are 750,000 and 930,000 shares, respectively.
14. Adjustment to eliminate borrowing by travelbyus.com of $1,975,000 from
Aviation Group. This borrowing was done to partially fund certain
acquisitions described in Note 5 above and was funded by a $3 million
borrowing by Aviation Group in May 2000. An additional adjustment is made
to record the interest expense that would be incurred on the $3 million
borrowing, as if the borrowing had occurred at the beginning of the
respective periods. The stated interest rate is 12% and the note is due
nine months after issuance. The borrowing includes five-year warrants to
purchase 225,000 shares at $2.125 per share. The interest expense is
$527,000, for each of the year ended September 30, 1999 and the nine months
ended June 30, 2000, which includes $257,000 for the amortization of the
discount on the debt related to the value of the warrants issued with the
debt. The adjustments are $527,000 for the year ended September 30, 1999
and $426,000 for the nine months ended June 30, 2000. For the nine months
ended June 30, 2000, $101,000 of the expense had been recognized in the
historical financial statements.
15. Adjustments to income tax expense or benefit to reflect the amounts that
would have occurred if the transactions had occurred on October 1,
1998.
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DESCRIPTION OF AVIATION GROUP CAPITAL STOCK
Aviation Group is a Texas corporation governed by its articles of
incorporation, bylaws and the Texas Business Corporation Act. We urge you to
read Aviation Group's articles of incorporation and bylaws, which are filed as
exhibits to the registration statement of which this joint proxy
statement/prospectus is a part. The authorized capital stock of Aviation Group
consists of 10 million shares of common stock, $0.01 par value, and 5 million
shares of preferred stock, $0.01 par value. One of the proposals submitted for
approval at the Aviation Group special meeting, if adopted by shareholders,
would increase the authorized number of shares of common stock to 255 million.
Common Stock
As of September 1, 2000, Aviation Group had approximately 61 holders of
record of its common stock. The holders of outstanding shares of common stock
may receive dividends out of assets legally available at the times and in the
amounts as the Aviation Group board of directors may, from time to time,
determine. These dividends are subject to any preferences which may be granted
to the holders of preferred stock. Holders of common stock do not have
cumulative voting rights and are entitled to one vote per share on all matters
on which the holders of common stock may vote. The common stock does not have
preemptive rights and is not subject to redemption or conversion. Upon
liquidation, dissolution, or winding-up of Aviation Group, the assets available
for distribution to shareholders are distributable ratably among the holders of
the common stock after payment of all debt and liabilities of Aviation Group and
the liquidation preference of any outstanding class or series of preferred
stock. The rights of holders of common stock are subject to the preferential
rights of any preferred stock that is outstanding or that Aviation Group may
issue in the future.
Preferred Stock
The Aviation Group board of directors may, without further action of the
shareholders of Aviation Group, establish and issue shares of preferred stock in
one or more series and fix the rights, preferences and restrictions of the
series of preferred stock. The rights of holders of common stock are subject to,
and may be adversely affected by, the rights of holders of preferred stock. The
issuance of additional shares of preferred stock could adversely affect the
voting power of holders of common stock and could have the effect of delaying or
preventing a change in control of Aviation Group or other corporate action. The
board has established three series of preferred stock. Aviation Group issued
shares of preferred stock in connection with its acquisition of Global Leisure
and the related financing.
Series A Convertible Preferred Stock
Aviation Group has designated 2,000 shares of Series A convertible
preferred stock, par value $0.01 per share. As of September 1, 2000, 1,650
shares of Series A convertible preferred stock were issued and outstanding.
Ranking. The Series A convertible preferred stock ranks junior to Series B
preferred stock and Series C convertible preferred stock but senior to the
common stock and any other series of preferred stock as to dividends and
liquidation preference.
Dividends. If declared by the board of directors of Aviation Group,
dividends on each share of the Series A convertible preferred stock will be paid
each month at an annual rate of 9% of the liquidation preference per share.
Dividends must be paid prior to payment of any dividends on the common stock or
any series of preferred stock other than Series B preferred stock and Series C
convertible preferred stock. Any unpaid dividends accrue and are cumulative. The
board of directors of Aviation Group does not intend to declare any dividends on
the Series A convertible preferred stock in the near future.
Liquidation Preference. Upon liquidation, dissolution or winding up of
Aviation Group, and after the payment of the liquidation preferences of the
Series B preferred stock and the Series C convertible preferred stock but before
payment of any amount to any other class or series of capital stock of Aviation
Group, each share of Series A convertible preferred stock will be entitled to be
paid out of assets available for distribution $10,000 plus all accrued unpaid
dividends, calculated through the date of liquidation.
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Voting Rights. The holders of Series A convertible preferred stock will be
entitled to vote as shareholders of Aviation Group on any matters after the
earlier of September 30, 2000 or the completion of the arrangement. Each share
will be entitled to one vote and will vote together as a single class with the
holders of common stock. The holders of the Series A convertible preferred stock
will have the right to vote as a separate class if required by the Texas
Business Corporation Act or on matters that adversely affect that series. Under
the Texas Business Corporation Act, the Series A convertible preferred stock are
entitled to vote as a class on:
- a proposed amendment to the articles of amendment that affects the
authorized number, par value, rights or preferences of the shares,
effects a reclassification, cancellation or exchange of the shares,
creates a new class or series of shares having equal or superior
rights to the shares, increases the rights of a junior class or series
of shares, affects any accrued dividends or includes in the articles
any provisions for a close corporation;
- a plan of merger that contains a provision which if contained in a
proposed amendment to the articles of incorporation would require a
separate vote of the Series A convertible preferred stock; and
- a plan of exchange that requires shares of Series A convertible
preferred stock to be exchanged.
Redemption. Aviation Group has the right to redeem all or part of the
outstanding Series A convertible preferred stock at any time on or before
September 30, 2000. The redemption price per share will be $10,000 plus all
accrued unpaid dividends, calculated through the date of redemption. After
receiving notice of a redemption, holders of Series A convertible preferred
stock will have the right to convert their shares of Series A convertible
preferred stock into shares of common stock.
Conversion. Holders of Series A convertible preferred stock have the right
to convert their stock into shares of common stock at any time after October 31,
2000, or earlier if Aviation Group has exercised its right to redeem the stock.
In addition, Aviation Group has the right to require conversion of the Series A
convertible preferred stock into shares of common stock at any time. This right
of Aviation Group terminates when Aviation Group completes a new common stock,
preferred stock or debt financing after consummation of the arrangement that
provides new gross cash proceeds to Aviation Group of at least $25.0 million.
The conversion price is the greater of $6 or the arithmetic mean of the
closing bid prices of the common stock as reported by Bloomberg, L.P. for the 21
trading days preceding the date of conversion. The number of shares of common
stock into which each share of Series A preferred stock is converted equals (A)
$10,000 plus all accrued unpaid dividends calculated through the date of
conversion, divided by (B) the conversion price.
No fractional shares will be issued upon conversion of the Series A
convertible preferred stock. Aviation Group will pay a cash amount to any holder
of Series A convertible preferred stock who otherwise would be entitled to a
fractional share.
Series B Preferred Stock
Aviation Group has designated 3,000 shares of Series B preferred stock, par
value $0.01 per share. As of September 1, 2000, 2,153 shares of Series B
preferred stock were issued and outstanding. The shares of Series B preferred
stock were issued as part of units with the Series C warrants.
Ranking. The Series B preferred stock ranks on parity with the Series C
convertible preferred stock and senior to common stock and any other series of
preferred stock as to dividends and liquidation preference.
Dividends. Dividends on the Series B preferred stock, if declared by the
board of directors of Aviation Group, will be paid quarterly at an annual rate
of 12% of liquidation preference per share. Dividends will be paid prior to
payment of any dividends on the common stock or any series of preferred stock
other than the Series C convertible preferred stock. Any unpaid dividends accrue
and are cumulative. The board of directors does not intend to declare any
dividends on the Series B preferred stock in the near future.
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Liquidation Preference. Upon liquidation, dissolution or winding up of
Aviation Group, and before payment of any amount to any other class or series of
capital stock of Aviation Group, each share of Series B preferred stock and
Series C convertible preferred stock will be entitled to be paid out of assets
available for distribution $10,000, plus all accrued unpaid dividends calculated
through the date of liquidation.
Voting Rights. No holder of Series B preferred stock will be entitled to
vote as a shareholder of Aviation Group except to the extent required by the
Texas Business Corporation Act or on matters that adversely affect that series.
The matters on which the Series B preferred are entitled to vote under the Texas
Business Corporation Act are described above under "-Series A Convertible
Preferred Stock-Voting Rights."
Redemption. Aviation Group has the right to redeem all or part of the
outstanding Series B preferred stock at any time after February 28, 2001.
Additionally, Aviation Group is required to redeem shares of the outstanding
Series B preferred stock from and to the extent of the net cash proceeds from
the sale of any assets of Aviation Group other than in the ordinary course of
business or any public debt or equity securities after completion of the
arrangement. The Series B preferred stock will be redeemed at a price per share
equal to $10,000, plus all accrued unpaid dividends, calculated through the date
of redemption.
Conversion. Holders of Series B preferred stock do not have the right to
convert their stock to shares of common stock.
Series C Convertible Preferred Stock
Aviation Group has designated 3,000 shares of Series C convertible
preferred stock, par value $0.01 per share. No shares of Series C convertible
preferred stock are outstanding. Aviation Group is offering to issue shares of
this series in exchange for outstanding shares of Series B preferred stock, on a
one-for-one basis.
Ranking. The Series C preferred stock ranks on parity with Series B
preferred stock and senior to common stock and any other series of preferred
stock as to dividends and liquidation preference.
Dividends. If declared by the board of directors of Aviation Group,
dividends on each share of the Series C convertible preferred stock will be paid
each month at an annual rate of 9% of the liquidation preference per share.
Dividends will be paid prior to payment of any dividends on the common stock or
any series of preferred stock other than the Series B preferred stock. Any
unpaid dividends will accrue and are cumulative.
Liquidation Preference. Upon liquidation, dissolution or winding up of
Aviation Group, and before payment of any amount to any other class or series of
capital stock of Aviation Group, each share of Series B preferred stock and
Series C convertible preferred stock will be entitled to be paid out of assets
available for distribution $10,000, plus all accrued unpaid dividends calculated
through the date of liquidation.
Voting Rights. The holders of Series C convertible preferred stock will be
entitled to vote as shareholders of Aviation Group after the earlier of
September 30, 2000, or the completion of the arrangement. Each share of Series A
convertible preferred stock will be entitled to one vote per share and will vote
together as a single class with the holders of common stock. The holders of
Series C convertible preferred stock will have the right to vote as a separate
class if required by the Texas Business Corporation Act or on matters that
adversely affect that series.
Redemption. Aviation Group has the right to redeem all or part of the
outstanding Series C convertible preferred stock at any time on or before
September 30, 2000. The redemption price per share will be $10,000, plus all
accrued but unpaid dividends calculated through the date of redemption. After
receiving notice of redemption, holders of Series C convertible preferred stock
will have the right to convert their shares of Series C convertible preferred
stock into shares of common stock.
Conversion. Holders of Series C convertible preferred stock have the right
to convert their stock into shares of common stock, at any time after October
31, 2000, or earlier if Aviation Group has elected to exercise its right to
redeem the stock. In addition, Aviation Group has the right to require
conversion of the Series C convertible preferred stock into shares of common
stock at any time after February 28, 2001.
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The conversion price is the greater of $6 or the arithmetic mean of the
closing bid prices of the common stock as reported by Bloomberg, L.P. for the 21
trading days preceding the date of conversion. The number of shares of common
stock into which each share of Series C convertible preferred stock is converted
equals (A) $10,000 plus all accrued unpaid dividends calculated through the date
of conversion, divided by (B) the conversion price.
No fractional shares will be issued upon conversion of the Series C
convertible preferred stock. Aviation Group will pay a cash amount to any holder
of Series C convertible preferred stock who otherwise would be entitled to a
fractional share.
Warrants and Options
Public Warrants
As of September 1, 2000, Aviation Group has outstanding 1,150,000
redeemable common stock purchase warrants that expire in August 2002. These
warrants are publicly held and traded on the Nasdaq SmallCap Market and Boston
Stock Exchange. Each warrant entitles the holder to purchase 1.198 shares of
Aviation Group common stock at an exercise price of $5.758 per share, subject to
adjustment if a merger, reorganization, stock dividend, stock split or
recapitalization occurs, unless earlier redeemed.
The warrants are redeemable, in whole and not in part, by Aviation Group if
the average closing price of the common stock for a period of any 20 consecutive
trading days is at least $9.4875. The warrants are redeemable at a price of
$0.10 per warrant. A holder must either exercise the warrant within 30 days of
the notice of redemption or accept the redemption price.
Holders of warrants have no voting, dividend or other rights as
shareholders of Aviation Group with respect to the shares underlying the
warrants, unless and until the warrants are exercised.
Employee Stock Options
As of September 1, 2000, Aviation Group has outstanding incentive stock
options to purchase, at an exercise price of $1.685 per share, an aggregate of
35,000 shares of common stock. In addition., Aviation Group's Chairman Lee
Sanders owns an incentive stock option to purchase 50,000 shares of common stock
at $1.8563 per share. These options expire in 2004 and 2005.
Warrants Issued In Connection With Global Acquisition
Aviation Group issued certain warrants in connection with its acquisition
of Global Leisure and related financing. On September 1, 1000, Aviation Group
had outstanding:
- Series A warrants to purchase a total of 750,000 shares of common
stock at an exercise price of $5 per share;
- Series B warrants to purchase a total of 3,500,000 shares of common
stock at an exercise price of $3 per share; and
- Series C warrants to purchase a total of 1,239,750 shares of common
stock at an exercise price of $3 per share.
These warrants are not exercisable until the Aviation Group shareholders approve
the issuance of the warrants and increase the authorized number of shares of
common stock. The warrants expire on the earlier of March 31, 2005, or the
second anniversary of the date the shares of common stock issuable upon the
exercise of the warrants are registered for resale under the Securities Act of
1933, as amended. Aviation Group intends to register the underlying shares of
common stock for resale under the Securities Act. The exercise price and the
number of shares of common stock purchasable under the warrants are adjusted in
the event of any stock dividend, stock split, recapitalization or merger.
Holders of the warrants do not possess any rights as shareholders of Aviation
Group before exercise.
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Under the terms of the Series A warrant to purchase 500,000 shares of
common stock that was issued to the former controlling owner of Global Leisure,
Aviation Group is required to redeem the 1,005 shares of Series A convertible
preferred stock held by that owner from and to the extent that the net cash
proceeds from the sale of any public debt or equity securities after completion
of the arrangement exceed $25 million and the amount needed to redeem all
outstanding shares of the Series B preferred stock. However, no redemption is
required from the sale of common stock or preferred stock that is junior to the
Series A preferred stock or to the extent the net cash proceeds are used to
effect a strategic acquisition by Aviation Group. The total redemption price of
the former owner's Series A preferred stock would be $10,050,000, plus any
accrued unpaid dividends calculated through the date of redemption. The other
Series A warrant to purchase 250,000 shares of common stock was issued to a
former minority owner of Global Leisure, whose principal is involved in Global
Leisure's management. These warrants are not exercisable or transferable until
the revenues of Global Leisure exceed $80 million and Global Leisure has net
income for any four consecutive fiscal quarters.
The Series C warrants may be redeemed by Aviation Group, at $0.10 per
warrant, if the closing bid price of its common stock for 60 consecutive trading
days exceeds $5 per share. If Aviation Group exercises this right, holders may
exercise the warrants and pay the exercise price or accept the redemption price.
Holders who do not exercise their warrants prior to redemption by Aviation Group
will forfeit their right to purchase the shares of common stock underlying the
warrants. The Series C warrants were issued as part of units with the Series B
preferred stock. Prior to completion of the arrangement, the Series C warrants
may not be transferred separate from the Series B preferred stock with which it
was issued as a unit.
Underwriters' Warrants
In connection with its initial public offering in 1997, Aviation Group sold
to its underwriter, for $0.001 per warrant, warrants to purchase a combination
of 100,000 shares of its common stock at an exercise price of $9.4875 per share
and 100,000 redeemable common stock purchase warrants at an exercise price of
$11.38 per warrant. The underwriters' warrants expire on August 13, 2002. The
exercise price and the number of shares of common stock purchasable under the
underwriters' warrants are subject to adjustment if a merger, reorganization,
stock dividend, stock split or recapitalization occurs. Holders of the
underwriters' warrants do not possess any rights as shareholders of Aviation
Group before exercise. They do have certain demand and piggyback registration
rights.
Other Warrants
In addition to the options and warrants described above, as of September 1,
2000, Aviation Group had outstanding warrants to purchase a total of 707,166
shares of its common stock at exercise prices varying between $1 and $8 per
share and expiring at various dates up to February 2005.
In February 2000, Aviation Group issued to three of its directors, Hank
Clements, Gordon Whitener and Charles E. Weed, contingent warrants to purchase a
total of 150,000 shares of its common stock exercisable at $1.50 per share. The
exercisability of these warrants is subject to approval of Aviation Group's
shareholders and the completion of the arrangement with travelbyus.com. For a
description of these warrants, see the discussion under "Proposal No. 7:
Ratification of Warrants to Purchase 150,000 shares of Aviation Group Common
Stock" on page 112.
In February 2000, Aviation Group issued to two of its executive officers,
Lee Sanders and Richard Morgan, contingent warrants to purchase a total of
500,000 shares of its common stock exercisable at $1.50 per share. The
exercisability of these warrants is contingent on the approval of Aviation
Group's shareholders. For a description of these warrants, see the discussion
under "Proposal No. 4: Ratification of Warrants to Purchase 500,000 Shares of
Aviation Group Common Stock" on page 109.
Convertible Debt Securities
Aviation Group has outstanding certain notes that are convertible at the
option of the holders at $4.50 per share into shares of Aviation Group common
stock. The convertible notes require equal quarterly installments of principal
in an amount necessary to fully amortize the notes by March 1, 2001, when all
remaining principal and accrued interest will be due. In March 2000, holders of
$340,600 in principal amount of the convertible notes elected to convert their
notes. However, as an inducement to convert, Aviation Group guaranteed that any
resales of the shares obtained by these holders
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would result in proceeds of at least the conversion price. As of September 1,
2000, Aviation Group had outstanding $25,000 in aggregate principal amount of
unconverted convertible notes.
Subsidiaries of Aviation Group issued six promissory notes totaling
$365,718 to trade creditors in cancellation of trade debt. The notes are payable
in full on October 31, 2000. These notes are exchangeable by their holders for
shares of Aviation Group at an exchange price of $3.00 per share. Aviation Group
has agreed to register these shares for resale by the noteholders under the
Securities Act. The subsidiaries have agreed to indemnify the noteholders for a
period of one year from any loss realized upon the resale of the shares if the
notes are exchanged.
Transfer Agent, Registrar and Warrant Agent
Securities Transfer Corporation, Dallas, Texas, is the stock transfer agent
and registrar for the common stock and the warrant agent for Aviation Group's
Series B and Series C warrants and its public warrants. Aviation Group serves as
its own transfer agent and registrar for its preferred stock and other warrants.
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COMPARISON OF SHAREHOLDERS' RIGHTS
While the rights and privileges of shareholders of a Texas corporation are,
in many instances, comparable to those of shareholders of an Ontario company,
there are differences. The following is a summary of the material differences
between the rights of holders of travelbyus.com common shares and those of the
holders of Aviation Group common stock after giving effect to the arrangement.
These differences arise from differences between United States and Canadian
securities laws, between the Texas Business Corporation Act and the Ontario
Business Corporations Act, and between the travelbyus.com articles of
incorporation and bylaws and the Aviation Group articles of incorporation and
bylaws.
Vote Required for Extraordinary Transactions
Under the Ontario Business Corporations Act, extraordinary corporate
actions, such as certain amalgamations, continuances and sales, leases or
exchanges of all or substantially all the property of a corporation other than
in the ordinary course of business, and other extraordinary corporate actions
such as liquidations, dissolutions and, if ordered by a court, arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders that voted in respect to the resolution. In certain cases, a
special resolution to approve an extraordinary corporate action is also required
to be approved separately by the holders of a class or series of shares,
including in certain cases a class or series of shares not otherwise carrying
voting rights.
Texas law generally requires that a merger, share exchange, conversion or
sale of all or substantially all of the assets or dissolution of a corporation
be approved by the holders of at least two-thirds of the outstanding shares
entitled to vote, unless the corporation's articles of incorporation provide
otherwise. The articles of incorporation of Aviation Group do not provide
otherwise. Therefore these actions require approval by the affirmative vote of
holders of at least two-thirds of the outstanding shares entitled to vote on
them. Under Article 5.03 of the Texas Business Corporation Act, unless the
articles of incorporation otherwise require, action by the shareholders of a
corporation on a plan of merger in which the corporation is a party to the
merger will not be required in certain circumstances when the corporation is the
survivor and no more than 20% of the outstanding voting shares are issued in the
merger. The articles of incorporation of Aviation Group do not require
otherwise. The Texas Business Corporation Act does not require a vote of
shareholders for the merger of a Texas corporation with a corporation in which
it holds at least 90% of the outstanding shares of each class and series of the
corporation. The Texas Business Corporation Act also does not require a vote of
shareholders for a special type of merger transaction intended to form a holding
company.
Take-over bids, issuer bids or self tenders, going-private transactions and
transactions with directors, officers, significant shareholders and other
related parties to which travelbyus.com is a party will be subject to regulation
by Canadian provincial securities legislation and administrative policies of
Canadian securities administrators. Similar matters to which Aviation Group is a
party will be subject to regulation under U.S. securities laws and the
Securities and Exchange Commission. Texas also has a business combination
statute that applies to Aviation Group. Aviation Group cannot engage in a
business combination with a shareholder that is a beneficial owner of 20% or
more of its outstanding voting shares unless the business combination is
approved by the board of directors before the affected shareholder acquired its
shares or by a vote of the holders of at least two-thirds of the outstanding
voting shares of Aviation Group. This statute would make a hostile takeover bid
more difficult without the cooperation of Aviation Group's board of directors.
Dissenters' Rights
Article 5.11 of the Texas Business Corporation Act provides for appraisal
rights in the case of a plan of merger or exchange or a sale of all or
substantially all of the corporation's assets where shareholder approval is
required. No appraisal rights are available for a plan of merger or plan of
exchange if:
- the shares of the corporation held by the shareholder are listed on a
national securities exchange or held of record by at least 2,000
holders; and
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- the shareholder is not required to accept any consideration other than
(a) shares of a corporation that will be listed on a national
securities exchange or will be held of record by at least 2,000
holders and (b) cash in lieu of fractional shares.
The Ontario Business Corporations Act provides that the shareholders who
are entitled to vote on certain matters are entitled to exercise dissent rights
and to be paid the fair value of their shares in connection therewith. The
Ontario Business Corporations Act does not distinguish for this purpose between
listed and unlisted shares. Such matters include:
- an amendment of articles to add, remove or change any restriction on
the issue, transfer or ownership of shares of a class or series of the
shares of the corporation;
- an amendment of articles to add, remove or change any restriction upon
the business or businesses that the corporation may carry on or upon
the powers that the corporation may exercise;
- an amalgamation with another corporation;
- a continuance under the laws of another jurisdiction; or
- the sale, lease or exchange of all or substantially all of the
property of the corporation.
Under the Ontario Business Corporations Act, a shareholder may, in addition to
exercising dissent rights, seek an oppression remedy for any act or omission of
a corporation which is oppressive, unfairly prejudicial to or that unfairly
disregards a shareholder's interests.
Cumulative Voting and Classification of Board of Directors
The articles of incorporation and bylaws of Aviation Group do not provide
for cumulative voting in director elections. The bylaws of Aviation Group
provide for a board of directors staggered in three classes. The term of office
of each class of directors is three years. The articles of incorporation and
bylaws of travelbyus.com do not provide for cumulative voting in director
elections or for a classified board of directors.
Amendment to Governing Documents
Article 4.02 of the Texas Business Corporation Act provides that an
amendment to a corporation's articles of incorporation must be approved by the
board of directors and by the affirmative vote of holders of at least two-thirds
of the outstanding shares entitled to vote, unless the corporation's articles of
incorporation provide otherwise. The articles of incorporation of Aviation Group
do not provide otherwise. If an amendment alters the powers, preferences or
special rights of a particular class or series of stock so as to affect them
adversely, that class or series will have the power to vote as a class
notwithstanding the absence of that power in the articles of incorporation.
Aviation Group's articles of incorporation specifically authorize the board of
directors to adopt, amend and repeal the bylaws of Aviation Group. The Texas
Business Corporation Act also specifies that the shareholders have the power to
adopt, amend and repeal the bylaws. The bylaws of Aviation Group provide that
for shareholders to adopt, amend or repeal the bylaws or any of their
provisions, a vote of the holders of at least two-thirds of the outstanding
shares entitled to vote is required.
Under the Ontario Business Corporation Act, any amendment to a company's
articles of incorporation generally is required to be approved by special
resolution. Under the Ontario Business Corporation Act, unless the articles or
bylaws of the company otherwise provide, the directors may, by resolution, make,
amend, repeal or re-enact any bylaws that regulate the business or affairs of
the company. If the directors make, amend, repeal or re-enact a bylaw, they are
required under the Ontario Business Corporations Act to submit the bylaw,
amendment, repeal or re-enactment to the shareholders at a special meeting of
the shareholders of the company called for that purpose or at the next annual
meeting of shareholders. The bylaw, in default of confirmation at the meeting,
will from that time only cease to be in force. The shareholders may confirm,
reject or amend the bylaw, amendment, repeal or re-enactment by an ordinary
resolution. An ordinary resolution is a resolution passed by a majority of the
votes cast by shareholders present in person or by proxy at the meeting at which
the bylaw is considered.
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Derivative Action
Derivative actions may be brought in Texas by a shareholder on behalf of,
and for the benefit of, the corporation. Section 5.14 of the Texas Business
Corporation Act provides that a shareholder must have been a shareholder of the
corporation at the time of the act or omission of which he or she complains and
must fairly and adequately represent the interests of the corporation in
enforcing the corporation's rights. A shareholder may not sue derivatively
unless he or she first makes demand on the corporation that it bring suit and
the demand has been refused or 90 days have expired from the date the demand was
made unless irreparable injury to the corporation is being suffered or would
result by waiting for the expiration of the 90-day period.
Under the Ontario Business Corporations Act, a complainant may apply to the
court for leave to bring an action in the name of and on behalf of a corporation
or any subsidiary, or to intervene in an existing action to which the
corporation is a party, for the purpose of prosecuting, defending or
discontinuing the action on behalf of the corporation. Under the Ontario
Business Corporations Act, no action may be brought and no intervention in an
action may be made unless the complainant has given fourteen days' notice to the
directors of the corporation or its subsidiary of the complainant's intention to
apply to the court if: (i) the directors of the corporation or its subsidiary do
not bring, diligently prosecute or defend or discontinue the action; (ii) the
complainant is acting in good faith; and (iii) it appears to be in the interests
of the corporation or its subsidiary that the action be brought, prosecuted,
defended or discontinued.
Under the Ontario Business Corporations Act, the court in a derivative
action may make any order it thinks fit. In addition, under the Ontario Business
Corporations Act, a court may order a corporation or its subsidiary to pay the
complainant's interim costs, including reasonable legal fees and disbursements.
Although the complainant may be held accountable for the interim costs on final
disposition of the complaint, it is not required to give security for costs in a
derivative action.
Director Qualifications
The bylaws of Aviation Group provide that its directors need not be
residents of Texas or shareholders of Aviation Group unless the articles of
incorporations so require. The articles of incorporation of Aviation Group do
not contain a provision regarding qualification of directors.
In the absence of qualifications in the articles of incorporation or
bylaws, directors of an Ontario company need not be residents of Ontario or
Canada, nor be shareholders of the company, in order to act as directors of the
company. travelbyus.com's articles of incorporation and bylaws contain no
provisions regarding qualification of directors. However, the Ontario Business
Corporations Act does require a board of directors of a company that has made a
distribution to the public of its securities to be composed of at least three
directors and that a majority of the directors of every corporation other than a
non-resident corporation be resident Canadians.
Fiduciary Duties of Directors
Directors of corporations incorporated or organized under the Ontario
Business Corporations Act and the Texas Business Corporation Act have fiduciary
obligations to the corporation and their shareholders. Pursuant to these
fiduciary obligations, the directors must act in accordance with the so-called
duties of "due care" and "loyalty." Under the Texas Business Corporation Act,
the duty of care requires that the directors act in an informed and deliberative
manner and to inform themselves, prior to making a business decision, of all
material information reasonably available to them. The duty of loyalty may be
summarized as the duty to act in good faith, not out of self-interest, and in a
manner which the directors reasonably believe to be in the best interests of the
shareholders. Pursuant to the Ontario Business Corporations Act, directors must
act honestly and in good faith with a view to the best interests of the
corporation, and must exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances.
Indemnification of Officers and Directors
The Texas Business Corporation Act provides that a corporation may
indemnify its present and former directors, officers, employees and agents, each
called an indemnitee, against all reasonable expenses, including attorneys'
fees. Except in actions initiated by or in the right of the corporation, the
corporation may indemnify any indemnitee
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against all judgments, fines and amounts paid in settlement in actions brought
against them, if the indemnitee acted in good faith and in a manner which he or
she reasonably believed to be in or not opposed to the best interests of the
corporation. The corporation may indemnify the indemnitee for a criminal action
or proceeding if he or she had no reasonable cause to believe that his or her
conduct was unlawful. The corporation may indemnify an indemnitee to the extent
that he or she is successful on the merits or otherwise in the defense of any
proceeding associated with an action. If an action is brought against a present
or former director, officer, employee or agent by or in the right of the
corporation, the corporation may not make any indemnification in respect of any
claim, issue or matter as to which the person is adjudged to be liable to the
corporation unless and only to the extent that an appropriate court of law
determines that, despite the adjudication of liability, but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to be
indemnified for the expenses the court deems proper. The Aviation Group articles
of incorporation provide for indemnification of directors and officers to the
fullest extent permitted by the Texas Business Corporation Act. The Texas
Business Corporation Act allows for the advance payment of an indemnitee's
expenses prior to the final disposition of an action, if the indemnitee agrees
to repay any amount advanced if it is later determined that the indemnitee is
not entitled to indemnification with regard to the action for which the expenses
were advanced.
Under the Ontario Business Corporations Act, a corporation may indemnify a
director or officer, a former director or officer or a person who acts or acted
at the corporation's request as a director or officer of a body corporate of
which the corporation is or was a shareholder or creditor, and his or her heirs
and legal representatives, each called an indemnifiable person, against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by him or her in respect of any civil,
criminal or administrative action or proceeding to which he or she is made a
party by reason of being or having been a director or officer of such
corporation or such body corporate, if:
- he or she acted honestly and in good faith with a view to the best
interests of such corporation; and
- in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, he or she had reasonable grounds
for believing that his or her conduct was lawful.
An indemnifiable person is entitled by statute to such indemnity from the
corporation if he or she was substantially successful on the merits in his or
her defense of the action or proceeding and fulfilled the conditions set out
above. A corporation may, with the approval of a court, also indemnify an
indemnifiable person in respect of an action by or on behalf of the corporation
or body corporate to procure a judgment in its favor, to which such person is
made a party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfils the conditions set out in
above. The Ontario Business Corporations Act does not expressly provide for an
advance payment of expenses of an indemnifiable person.
Director Liability
The Texas Business Corporation Act provides that the articles of
incorporation of the corporation may limit a director's monetary liability if
the liability does not arise from the following:
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- breach of the duty of loyalty;
- the payment of unlawful dividends; or
- expenditure of funds for unlawful stock purchases or redemptions or
transactions from which the director derived an improper personal
benefit.
The articles of incorporation of Aviation Group contain a provision
limiting the monetary liability of its directors to the fullest extent permitted
by the Texas Business Corporation Act. The Ontario Business Corporations Act
does not permit limitation of a director's liability.
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Special Meetings of the Shareholders
The bylaws of Aviation Group provide that a special meeting of the
shareholders may be called by the chairman of the board, the president or the
secretary of Aviation Group, the Aviation Group board of directors or the
holders of at least 10% of the outstanding shares entitled to vote at the
meeting.
Under the Ontario Business Corporations Act, the directors of a
corporation:
- shall call an annual meeting of shareholders not later than eighteen
months after the corporation comes into existence and subsequently not
later than fifteen months after holding the last preceding annual
meeting; and
- may at any time call a special meeting of shareholders.
Under the Ontario Business Corporations Act, the holders of not less than five
per cent (5%) of the issued shares of a corporation that carry the right to vote
at the meeting sought to be held, may requisition the directors to call a
meeting of shareholders for the purposes stated in such requisition. On
receiving a requisition, the Ontario Business Corporations Act provides that the
directors shall call a meeting of shareholders to transact the business stated
in the requisition, subject to certain exceptions. If the directors do not call
a meeting within 21 days after receiving the requisition, any shareholder that
signed the requisition may call the meeting.
Shareholder Action by Written Consent
Article 9.10 of the Texas Business Corporation Act provides that
shareholders may act without a meeting only by the unanimous written consent of
all of the shareholders, unless the articles of incorporation otherwise provide.
The articles of incorporation of Aviation Group do not provide otherwise. Under
the Ontario Business Corporations Act, shareholder action without a meeting may
only be taken by written resolution signed by all shareholders that would be
entitled to vote at a meeting.
Removal of Directors
Under Article 2.32 of the Texas Business Corporation Act, directors of a
corporation are elected to serve until the next annual meeting of shareholders,
and until their successors are elected and qualified. Any director or the entire
board of directors may be removed in accordance with provisions of the
corporation's articles of incorporation or bylaws. The bylaws of Aviation Group
provide that a majority of the shareholders may remove any director with or
without cause at any shareholders meeting called expressly for that purpose. The
articles of incorporation of Aviation Group contain no provisions in this
regard.
Under the Ontario Business Corporations Act, the shareholders of a
corporation may by ordinary resolution at an annual or special meeting remove
any director or directors from office. However, where the holders of any class
or series of shares of a corporation have an exclusive right to elect one or
more directors, a director so elected may only be removed by an ordinary
resolution at a meeting of the shareholders of that class or series.
No Pre-emptive Rights
No holder of any class of capital stock of Aviation Group or travelbyus.com
has a pre-emptive right to subscribe to any or all additional issues of the
stock of Aviation Group or travelbyus.com.
Inspection of Books and Records
The Texas Business Corporations Act provides that a person who has been a
shareholder of a corporation for at least six months or is the holder of at
least 5% of the outstanding shares of a corporation, may for any proper purpose
upon written demand, inspect the books and records of the corporation and make
extracts therefrom.
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The Ontario Business Corporations Act provides that shareholders,
creditors, their agents and legal representatives may examine certain of the
corporation's records during usual business hours and take extracts therefrom
free of charge, and, where the corporation is an offering corporation, any other
person may do so upon payment of a reasonable fee. In addition, any person is
entitled to obtain the list of registered shareholders of a distributing
corporation upon compliance with certain requirements.
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OTHER TRAVELBYUS.COM SPECIAL MEETING PROPOSAL
Proposal No. 2: Amendment to Stock Option Plan
Shareholders of travelbyus.com are being asked to approve a resolution of
the directors authorizing an amendment to travelbyus.com's stock option plan
which was implemented by the directors of travelbyus.com on April 16, 1997. The
amendment would increase the number of options to purchase common shares that
may be issued under the plan from 6,500,000 to 10,000,000, subject to receipt of
requisite regulatory approval, including without limitation the approval of The
Toronto Stock Exchange.
Management of travelbyus.com is of the view that it is in the best
interests of travelbyus.com to amend the plan given the recent increase of the
issued capital of travelbyus.com. As of September 15, 2000, travelbyus.com had
outstanding options to purchase 7,491,300 common shares under the plan. These
options include options to purchase 1,119,000 common shares which were granted
to new officers of travelbyus.com in connection with recent acquisitions and
which are subject to receipt of all necessary regulatory approvals and the
shareholder approval for this proposed amendment. The total number of options
that may be granted will represent approximately 10% of the issued and
outstanding common shares. While The Toronto Stock Exchange would permit the
increase to up to 20% of the issued and outstanding common shares, at this time,
management does not feel that it is necessary to reserve such a high number of
common shares to be subject to options. Management does feel that the increased
number of options to purchase common shares under the plan will enable
travelbyus.com to provide incentives from time to time, to key directors,
officers and employees.
The plan provides that eligible persons under the plan include any
director, employee (full-time or part-time), officer or consultant of
travelbyus.com or any of its subsidiaries. A consultant means an individual,
including an individual whose services are contracted through a personal holding
corporation, with whom travelbyus.com or a subsidiary has a contract for
substantial services.
The plan provides that the maximum number of common shares which may be
reserved for issuance to any one insider pursuant to share options under the
plan or any other share compensation arrangement may not exceed 5% of the common
shares outstanding at the time of grant (on a non-diluted basis). Any common
shares subject to a share option which for any reason is cancelled or terminated
without having been exercised shall again be available for grant under the plan.
The maximum number of common shares that may be reserved for issuance to
insiders of travelbyus.com under the plan or any other share compensation
arrangement is limited to 10% of the common shares outstanding at the time of
the grant (on a non-diluted basis).
travelbyus.com will not provide any optionee with financial assistance in
order to enable such optionee to exercise share options granted under the plan.
travelbyus.com has no other share compensation plans or arrangements in place,
and none are currently contemplated.
The resolution authorizing an amendment to the plan requires confirmation
by a majority of the votes cast on the proposal at the special meeting.
The text of the resolution being submitted to shareholders is set forth below.
"NOW THEREFORE BE IT RESOLVED THAT:
1. Subject to receipt of requisite regulatory approval
including the approval of The Toronto Stock Exchange,
the Stock Option Plan be and same is hereby amended to
provide that the number of options to purchase Common
Shares that may be reserved for issuance thereunder be
increased from 6,500,000 to 10,000,000.
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2. Any one director or officer of the Corporation be and he is hereby
authorized and directed to do all such acts and things and to execute
and deliver under the corporate seal or therwise all such deeds,
documents, instruments and assurances as in his opinion may be
necessary or desirable to give effect to this resolution."
The board of directors of travelbyus.com recommends that its shareholders
vote for the adoption of the amendment to its stock option plan.
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OTHER AVIATION GROUP SPECIAL MEETING PROPOSALS
Proposal No. 2: Amendment of the Articles of Incorporation to Increase
Authorized Common Stock
The Aviation Group articles of incorporation currently authorize the
issuance of up to 5,000,000 shares of Aviation Group preferred stock and
10,000,000 shares of Aviation Group common stock. As of September 1, 2000, all
of these shares of Aviation Group common stock were issued and outstanding or
reserved for issuance, as follows:
<TABLE>
<S> <C>
Outstanding shares.................................................... 4,956,722
Reserved for stock option plan........................................ 150,000
Reserved for other derivative securities.............................. 2,202,406
Reserved for Series A convertible preferred........................... 2,750,000
Reserved for contingent warrants to directors and executive officers.. 650,000
Reserved for contingent Series A, B and C warrants.................... 5,489,750
Reserved for Series C preferred exchange offer ....................... 3,558,000
Reserved for travelbyus.com arrangement............................... 111,000,000
------------
Total outstanding reserved and committed shares.................... 130,106,878
Less: Number of shares currently authorized........................... (10,000,000)
------------
Deficiency in authorized shares.................................... 120,106,878
============
</TABLE>
__________________
(1) The exercisability of these warrants is subject to approval by Aviation
Group's shareholders of Proposal Nos. 4 and 7. The exercisability of
150,000 of these warrants is also subject to completion of the proposed
arrangement.
(2) The exercisability of the warrants is subject to the approval by Aviation
Group's shareholders of this proposal and the ratification of the issuance
by Aviation Group's shareholders in Proposal No. 5.
The arrangement cannot be consummated without an increase in the number of
authorized shares of common stock. The approval of this proposal is a condition
to the closing of the arrangement. In addition, the Series A and B warrants
described above issued in connection with the Global Leisure acquisition and
related financing will not be exercisable unless the increase in the authorized
number of shares of common stock is approved. The approval of the proposal is
also a condition to the closing of the exchange offer by Aviation Group to the
holders of Series B preferred stock. Finally, the Aviation Group board of
directors believes that Aviation Group would not have a sufficient number of
authorized but unissued shares of stock to give it maximum flexibility to meet a
variety of business needs as they may arise and to enhance Aviation Group's
flexibility in connection with possible future opportunities. If the proposal
passes, Aviation Group will have available approximately 130 million shares of
authorized but unissued common stock that are not reserved for issuance under
outstanding securities or pursuant to the travelbyus.com arrangement.
Pursuant to the proposal, the leading paragraph and subsection (a) of
Article Four of the Aviation Group articles of incorporation will be amended to
read as follows:
"ARTICLE FOUR
The aggregate number of shares of stock that the Corporation shall have
authority to issue is two hundred and fifty-five million (255,000,000)
shares, which shall be divided into two (2) classes as follows:
(a) Two hundred fifty million (250,000,000) shares of Common Stock,
having a par value of one cent ($0.01) each (hereinafter "Common
Stock"); and"
Other than increasing the authorized shares of common stock from 10,000,000
to 250,000,000 and all authorized shares of capital stock from 15,000,000 to
255,000,000, the proposed amendment in no way changes the articles of
incorporation.
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Purpose and Effect of the Amendment to Increase Authorized Shares
The purpose of the proposed increase in the number of authorized shares is
to ensure that sufficient shares of Aviation Group common stock are available
for issuance pursuant to the arrangement and pursuant to the exercise of the
securities issued in connection with the Global Leisure acquisition and related
financing. In addition, the proposed increase would ensure that additional
shares will be available, if and when needed, for issuance from time to time for
any proper purpose approved by the Aviation Group board of directors. These
purposes may include issuances to raise capital or effect acquisitions and for
other corporate purposes. Although there are no present arrangements, agreements
or understandings for the issuance of additional shares, other than the shares
to be issued pursuant to the arrangement or previously reserved for issuance as
described above, the Aviation Group board of directors believes that the
availability of the additional authorized shares for issuance upon approval of
the Aviation Group board of directors for a proper purpose, without the
necessity for, or the delay inherent in, a meeting of the shareholders (except
as may be required by applicable law, by regulatory authorities, or by the
policies, rules and regulations of Nasdaq, the Boston Stock Exchange or any
other stock exchange on which Aviation Group's securities may then be listed),
will be beneficial to Aviation Group and its shareholders by providing Aviation
Group with the flexibility required to promptly consider and respond to future
business opportunities and needs as they arise.
Shareholders generally do not have any preemptive or similar rights to
subscribe for or purchase any additional shares that may be issued in the
future. Future issuances of shares of Aviation Group common stock or Aviation
Group preferred stock, depending upon the circumstances, may have a dilutive
effect on the earnings per share, book value per share, voting power and other
interests of the existing shareholders.
The proposed increase in the authorized number of shares could have an
anti-takeover effect, although that is not its purpose. For example, if Aviation
Group were the subject of a hostile takeover attempt, it could try to impede the
takeover by issuing shares of Aviation Group common stock or Aviation Group
preferred stock, thereby diluting the voting power of the other outstanding
shares and increasing the potential cost of the takeover. The availability of
this defensive strategy to Aviation Group could discourage unsolicited takeover
attempts and limit the opportunity for Aviation Group's stockholders to realize
a higher price for their shares than might otherwise be available in the public
markets.
Except for shares currently reserved or planned to be issued as explained
above, Aviation Group does not now have any present plan, understanding or
agreement to issue additional shares of common stock. However, the Aviation
Group board of directors believes that the proposed increase in authorized
shares of common stock is desirable to enhance Aviation Group's flexibility in
connection with possible future actions, such as stock splits, stock dividends,
corporate mergers and acquisitions, financings, acquisitions of property, use in
employee benefit plans, or other corporate purposes. The Aviation Group board of
directors will determine whether, when, and on what terms the common stock may
be issued for any of these purposes.
If the proposed amendment is approved, all or any of the authorized shares
of common stock may be issued without further action by the shareholders and
without first offering such shares to the shareholders for subscription. If the
common stock is not issued to shareholders on a pro-rata basis, the
shareholders' proportionate interests would be reduced.
The Aviation Group board of directors has unanimously adopted resolutions
containing the proposed amendment to the articles of incorporation, declaring
its advisability and directing that the proposed amendment be submitted to the
shareholders for their approval at the special meeting. If adopted by the
shareholders, the amendment will become effective when it is filed with the
Texas Secretary of State as required by the Texas Business Corporation Act.
The board of directors of Aviation Group recommends that its shareholders
vote for the adoption of the proposed amendment to Aviation Group's articles of
incorporation to increase the number of authorized shares of common stock of
Aviation Group.
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Proposal No. 3: Amendment of the Articles of Incorporation to Change the Name
of Aviation Group
The Aviation Group board of directors has approved and recommends to the
shareholders a proposed amendment to Aviation Group's articles of incorporation
to change the name of Aviation Group to "travelbyus, Inc." The amendment would
be effective upon effectiveness of the arrangement. If the shareholders approve
this proposal, Article One of the Aviation Group articles of incorporation will
be amended to read in its entirety as follows:
"ARTICLE ONE
The name of the corporation is travelbyus, Inc."
The objective of the name change is to reflect the change in the primary
business of Aviation Group following the arrangement. Accordingly, the proposed
amendment will not be effective until the effectiveness of the arrangement. The
Aviation Group board of directors believes the name "travelbyus" may also have a
beneficial impact in the financial and investment community by identifying
Aviation Group with the primary business of Aviation Group and its subsidiaries
after the arrangement. The new name also reflects that the primary shareholders
of Aviation Group will be the former shareholders of travelbyus.com ltd.,
assuming those shareholders exchange their exchangeable shares for shares of
Aviation Group's common stock.
The board of directors of Aviation Group recommends that its shareholders
vote for the adoption of the proposed amendment to Aviation Group's articles of
incorporation to change Aviation Group's name to travelbyus, Inc.
Proposal No. 4: Ratification of Warrants to Purchase 500,000 Shares of Aviation
Group Common Stock
Trades in Aviation Group's common stock are quoted on the Nasdaq SmallCap
Market. To maintain this Nasdaq listing, Aviation Group must continue to satisfy
the requirements of Nasdaq's rules. One of these rules requires Aviation Group
to obtain shareholder approval when it issues warrants to purchase more than 1%
of the outstanding common stock of Aviation Group to officers or directors of
Aviation Group, if the warrants are not issued under a plan that was previously
approved by the shareholders. In February 2000, the board of directors approved
the grant of the following warrants to the indicated executive officers of
Aviation Group. These warrants were not granted pursuant to a previously
approved plan. Therefore, to satisfy Nasdaq's rules, the board of directors is
seeking shareholder approval of these warrants.
February 2000 Warrant Grants
<TABLE>
<CAPTION>
Common Stock Expiration
Name and Position Purchasable Under Warrants Date of Warrant
----------------- -------------------------- ---------------
<S> <C> <C>
Lee Sanders, Chairman and Director 250,000 2/23/05
Richard L. Morgan, Executive Vice President,
Chief Financial Officer and Director 250,000 2/23/05
-------
Total 500,000
</TABLE>
The exercise price for all of the warrants is $1.50 per share which was the
trading price for Aviation Group's common stock on the date of grant. The
closing trading price for the common stock was $1.94 per share on September 11,
2000. The warrants contain certain anti-dilution provisions and may be exercised
in a "cashless" manner through a surrender and cancellation of warrants having
sufficient value, based on the then trading price for the common stock, to pay
the exercise price of the warrants being exercised.
If the proposal is approved, the warrants will be exercisable and, if
exercised, will dilute the interests of existing shareholders. If the proposal
is not approved, the warrants will not become exercisable or dilute the
interests of existing shareholders.
The Aviation Group board of directors believes that Aviation Group's
executive officers should be given an
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incentive through ownership of Aviation Group stock. Because only 65,000 shares
of common stock were available for issuance under Aviation Group's existing
stock option plan, the board determined to authorize the issuance of warrants to
purchase common stock outside the plan. The board also considered that it had
authorized the grant of similar warrants to executive officers in 1997 that were
ratified by Aviation Group's shareholders. The Aviation Group board of directors
believes that the warrants granted in February 2000, as summarized above, create
a strong incentive for the executive officers to maximize the trading price for
Aviation Group's stock, which benefits all of Aviation Group's shareholders. The
warrants were issued in recognition of the past services provided to Aviation
Group by these executive officers and in anticipation of future services to be
rendered by them. In particular, the board believed that these warrants will
provide proper incentives to these officers to remain involved with Aviation
Group and to work toward closing a transaction with travelbyus.com and Global
Leisure.
The Aviation Group board of directors believes that the warrants provide
the proper incentives to Aviation Group's executive officers to maximize
shareholder value.
The board of directors of Aviation Group recommends that its shareholders
vote for approval of the proposal to ratify the grant of the warrants to
purchase 500,000 shares of common stock.
Proposal No. 5: Ratification of Certain Securities Issued or to be Issued in
Connection With Aviation Group's Acquisition of Global Leisure Travel, Inc.
Trades in Aviation Group's common stock are currently quoted on The Nasdaq
SmallCap Market. To maintain this Nasdaq listing, Aviation Group must continue
to satisfy the requirements of Nasdaq's rules. One of these rules requires
Aviation Group to obtain shareholder approval when it issues warrants or
convertible securities to purchase more than 20% of its outstanding common stock
to a third party.
In May 2000, in connection with its acquisition of Global Leisure and
related financing, Aviation Group issued the following:
- contingent Series A warrants to purchase 750,000 shares of its common
stock at an exercise price of $5 per share, of which 500,000 were
issued to Genesis Diversified Investments, Inc. and 250,000 were
issued to Global Leisure, Inc.;
- contingent Series B warrants to purchase 3,500,000 shares of its
common stock at an exercise price of $3 per share to existing
warrantholders of Global Leisure in exchange for their warrants in
Global Leisure;
- contingent Series C warrants to purchase 1,239,750 shares of its
common stock at an exercise price of $3 per share to private investors
who also purchased 1,653 shares of Series B preferred stock; and
- 1,650 shares of Series A convertible preferred stock that are
convertible into 2,750,000 shares of Aviation Group common stock,
assuming a $6 conversion price, to the former owners of Global Leisure
in exchange for indebtedness owed to them by Global Leisure.
In addition, as required under its agreement with travelbyus.com, Aviation Group
is offering to exchange 2,153 shares of Series C convertible preferred stock for
outstanding shares of Series B preferred stock. These shares of Series C
convertible preferred stock, if issued, will be convertible into approximately
3,588,000 shares of Aviation Group common stock, assuming a $6 conversion price.
See "Description of Aviation Group Capital Stock" for a description of the terms
of these securities.
By their terms, the Series A, Series B and Series C warrants are not
exercisable until their issuance is approved by Aviation Group's shareholders.
Approval by the shareholders of the increase in the number of authorized shares
of Aviation Group's common stock is also a condition to exercise of the Series A
and B warrants. In addition, the warrants are exercisable for more than 20% of
Aviation Group's outstanding common stock. The Series A preferred stock are, and
the Series C convertible preferred stock will be, convertible into more than 20%
of Aviation Group's outstanding common stock. Accordingly, Aviation Group's
board of directors determined at the time of original authorization of the
Global
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Leisure acquisition and related financing to seek shareholder approval and
ratification of the issuance of these securities to comply with Nasdaq's rules
and the terms of the Series A, B and C warrants. In addition, the Series A
preferred shareholders have agreed that, until the issuance of their shares is
approved by Aviation Group shareholders, their shares collectively will not be
convertible into, will not represent votes, in excess of 19.9% of the oustanding
shares of Aviation Group's common stock. In return, Aviation Group has agreed to
use reasonable efforts to obtain the approval of its shareholders to the
issuance of the Series A preferred stock.
The acquisition of Global Leisure and the issuance of related securities
was structured and timed to allow for the immediate participation by Global
Leisure and Aviation Group in the travelbyus.com business strategy. A failure to
acquire control of Global Leisure promptly would have jeopardized Aviation
Group's opportunity to effect a business combination with travelbyus.com. The
Aviation Group board of directors believed that it was more important to
Aviation Group and its shareholders to take advantage of this opportunity by
entering into these transactions before obtaining shareholder approval. The
Aviation Group board did, however, provide that the exercisability of the Series
A, B and C warrants would be contingent on obtaining shareholder approval to
comply with Nasdaq requirements.
If shareholder approval is not obtained, the exchange offer of the Series C
preferred stock for the Series B preferred stock will not proceed and the Series
A, B and C warrants will not be exercisable. However, the Series A preferred
stock would remain outstanding and might jeopardize the Nasdaq listing of the
common stock. Aviation Group cannot unwind the acquisition of Global Leisure and
related financings because the funds have been used primarily to pay off Global
Leisure's debts and Global Leisure's operations are now being managed by
travelbyus.com pursuant to a management agreement with Aviation Group. Holders
of warrants that do not become exercisable because of shareholder disapproval
might make a claim for damages against Aviation Group, but the Aviation Group
board does not believe Aviation Group should have any liability to these holders
for the shareholder disapproval.
Aviation Group's board of directors recommends that shareholders vote for
approval and ratification of the issuance of these securities for the following
reasons:
- The exercise prices of the Series A, B, and C warrants, along with the
minimum conversion prices of the Series A and C convertible preferred
stock, significantly exceeded the prevailing trading prices of
Aviation Group's common stock prior to the announcement of the Global
Leisure acquisition and the arrangement with travelbyus.com.
- These securities, if fully exercised and converted, will provide
Aviation Group with $50,800,000 in additional common stock capital
with which to pursue and support its e-commerce travel business
activities.
- The acquisition of Global Leisure and related financing were key
components in the planned three-way business combination among
Aviation Group, Global Leisure and travelbyus.com. See "Proposal No. 1
The Arrangement-Background of the Arrangement."
- The failure to obtain the approval and ratification of Aviation
Group's shareholders to the issuance of these securities may result in
claims against Aviation Group by the holders of the Series A, B or C
warrants or may jeopardize the listing of its common stock on the
Nasdaq SmallCap Market.
- The exercise of the warrants and conversion of the preferred stock
does not require Aviation Group to incur or pay any additional up-
front fees, which represents significant potential savings to Aviation
Group, when compared to alternative capital sources.
- The additional equity capital generated from the exercise of the
warrants will significantly strengthen Aviation Group's balance sheet,
which can reduce or otherwise improve the cost and terms of subsequent
debt financings.
- Because these securities will not be exercisable or convertible until
the completion of the arrangement with travelbyus.com, the common
stock associated with their exercise and conversion will not result in
a change of control or create a significant concentration of share
ownership.
- The warrants do not possess any voting rights or other privileges
enjoyed by Aviation Group common stock holders. They do not limit
Aviation Group's ability to enter into or dictate the terms of other
transactions.
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The board of directors of Aviation Group recommends that its shareholders
vote for approval and ratification of the securities issued or to be issued in
connection with the Global Leisure acquisition and related financing.
Proposal No. 6: Adoption of Amendment to Aviation Group's 1997 Stock Option Plan
In May 2000, the Aviation Group board of directors amended the 1997 stock
option plan to increase the number of shares of Aviation Group's common stock
available for issuance thereunder from 150,000 to 10,000,000, or 2,000,000 if
the one-for-five reverse split of the common stock is effected, as set forth in
Proposal No. 8 below. This increase is necessary to enable Aviation Group to
issue options under the 1997 stock option plan in exchange for outstanding
options of travelbyus.com in connection with the arrangement. This exchange of
options is required under the arrangement agreement with travelbyus.com. The
failure of the shareholders to approve this proposal will jeopardize the ability
of Aviation Group to close the arrangement with travelbyus.com.
At September 15, 2000, travelbyus.com had outstanding options to purchase
up to 5,765,300 common shares. The total number of shares authorized to be
issued under travelbyus.com's stock option plan is 6,500,000. The board of
directors believes that increasing the number of shares available under the 1997
stock option plan will enable Aviation Group, following the arrangement, to
provide increased incentives to its employees and directors, including those of
travelbyus.com and its subsidiaries, to render services and exert maximum effort
to achieve business success for Aviation Group. By the registration statement of
which this joint proxy statement/prospectus is a part, Aviation Group has
registered the 9,850,000 additional shares of common stock issuable under the
1997 stock option plan under the Securities Act, assuming the shareholders
approve the proposal to increase the number of available shares, or 1,970,000 if
the proposed reverse split is effected. The amendment will not be effective
until completion of the arrangement.
As of September 1, 2000, Aviation Group had outstanding under the 1997
stock option plan incentive stock options to purchase, at an exercise price of
$1.6875 per share, an aggregate of 35,000 shares of common stock. In addition,
Lee Sanders, Chairman of Aviation Group, has been granted an incentive stock
option to purchase 50,000 shares of common stock at $1.8563 per share. These
options expire in 2004 and 2005. No options under the 1997 stock option plan
have ever been exercised.
The proposed amendment requires the approval of the shareholders of
Aviation Group pursuant to the terms of the 1997 stock option plan. The
affirmative vote of the holders of a majority of the outstanding shares of
common stock represented at the special meeting in person or by proxy is
necessary to approve the amendment to the 1997 stock option plan.
The board of directors of Aviation Group recommends that its shareholders
vote for the adoption of the amendment to its 1997 stock option plan.
Proposal No. 7: Ratification of Warrants to Purchase 150,000 Shares of Aviation
Group Common Stock
Trades in Aviation Group's common stock are currently quoted on the Nasdaq
SmallCap Market. To maintain this Nasdaq listing, Aviation Group must continue
to satisfy the requirements of Nasdaq's rules. One of these rules requires
Aviation Group to obtain shareholder approval when it issues warrants to
purchase more than 1% of the outstanding common stock of Aviation Group to its
officers or directors, if the warrants are not issued under a plan that was
previously approved by the shareholders. In February 2000, the board of
directors of Aviation Group approved the grant of the following warrants to the
indicated officers and directors of Aviation Group. The grant was made subject
to successful completion of the arrangement and approval by Aviation Group's
shareholders. These warrants were not granted pursuant to a previously approved
plan.
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February 2000 Warrant Grants
Number of Shares
Name and Position Purchasable Under Warrants
----------------- --------------------------
Charles E. Weed, Director 50,000
Gordon Whitener, Director 50,000
Hank Clements, Director 50,000
-------
TOTAL 150,000
=======
The exercise price for all of the warrants is $1.50 per share, which was
the trading price for Aviation Group's common stock on the date of grant and
significantly above the trading price range of Aviation Group's common stock in
the period proceeding the announcement of the acquisition of Global Leisure and
arrangement with travelbyus.com. The closing trading price for the common stock
was $1.94 per share on September 11, 2000. The warrants contain certain anti-
dilution provisions and may be exercised in a "cashless" manner through a
surrender and cancellation of warrants having sufficient value, based on the
then trading price for the common stock, to pay the exercise price of the
warrants being exercised.
If the proposal is approved and the arrangement is completed, the warrants
will be exercisable and, if exercised, will dilute the interests of existing
shareholders. If the proposal is not approved or the arrangement is not
completed, the warrants will not become exercisable or dilute the interests of
existing shareholders.
The board of directors believes that the warrants granted in February 2000,
as summarized above, create a strong incentive for the directors to maximize the
trading price for Aviation Group's stock, which benefits all shareholders of
Aviation Group, and to continue to serve as directors until completion of the
arrangement. The warrants were issued in recognition of the past services
provided to Aviation Group by these directors and in anticipation of future
services to be rendered by them until completion of the arrangement. Although
these directors have received grants of warrants in prior years, the directors
have not received any cash compensation for serving as directors. See "Aviation
Group-Principal Shareholders of Aviation Group" for information on the number of
warrants each of these directors owns.
The board of directors believes that the warrants provide the proper
incentives to these directors to maximize shareholder value.
The board of directors of Aviation Group recommends that its shareholders
vote for the approval of the proposal to ratify the grant to three directors of
the warrants to purchase 150,000 shares of Aviation Group common stock.
Proposal No. 8: Proposal to Amend the Articles of Incorporation to Effect a One-
For-Five Reverse Stock Split
The Aviation Group board of directors believes that effecting a one-for-
five reverse stock split of the issued and outstanding common stock of Aviation
Group by reducing the number of outstanding shares of common stock from
4,956,722 shares to approximately 991,344 shares is in the best interests of
Aviation Group. The par value of Aviation Group's common stock would remain
unchanged at $0.01 per share. Cash in lieu of fractional shares would be paid to
the shareholders upon the sale of a fractional interest. Conversion rates for
Aviation Group's preferred stock and the per share exercise price and the number
of shares issuable upon exercise of outstanding warrants and options would be
adjusted accordingly. The amendment would reduce the number of outstanding
shares of Aviation Group's common stock to approximately 991,344 shares, before
taking into account the arrangement.
Pursuant to the proposal, Article Four of Aviation Group's articles of
incorporation would be amended to add the following paragraph immediately
following the initial subsection (b) of Article Four:
"On October __, 2000 (the "Effective Date"), each five (5) issued and
outstanding shares of previously authorized common stock, par value $0.01
per share, of the corporation (the "Old Common Stock" or "Common Stock"),
shall be combined into one (1) validly issued, fully paid and non-
assessable share of common stock, par value $0.01 per share of the
corporation (the "New
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Common Stock"). Each certificate previously representing shares of the Old
Common Stock shall after the Effective Date represent the number of shares
of New Common Stock into which the shares of Old Common Stock shall be
combined; provided, however:
(1) That each person holding of record a stock certificate(s) that
represented shares of Old Common Stock shall receive, upon
surrender of such certificate(s), a new certificate(s) evidencing
and representing the number of shares of New Common Stock to
which such person is entitled; and
(2) The corporation shall not issue fractional shares with respect to
the New Common Stock. In lieu of such fractional shares, the
corporation shall pay to any shareholder entitled to fractional
shares of the New Common Stock the cash value of the Old Common
Stock based upon a value of $2.00 per share for each share of Old
Common Stock not exchanged for New Common Stock pursuant to this
Article Four. The per share value of the Old Common Stock set
forth herein was determined by the Board of Directors of the
corporation and approved by vote of the shareholders at a special
meeting duly called and held on October __, 2000."
Reasons for the Reverse Stock Split
Aviation Group's common stock is currently listed on the Nasdaq SmallCap
Market and Boston Stock Exchange. In connection with the arrangement, Aviation
Group plans to apply to list its shares on the Nasdaq National Market. To be
eligible for listing on the Nasdaq National Market, a security must have a
minimum bid price of at least $5. If effected, the reverse stock split will
reduce the number of shares of Aviation Group's common stock issued and
outstanding. Aviation Group's board of directors expects that such reduction
will result in an increase in the bid price of its common stock to at least $5
per share. However, there are numerous factors and contingencies that could
affect the bid price of Aviation Group's common stock and an increase in the bid
price may not occur, or, if it occurs, the bid price may not increase to $5 per
share for a sustained period. Even if the minimum bid price of Aviation Group's
common stock is at least $5 for a sustained period, Aviation Group must meet the
other listing requirements to be approved for listing on the Nasdaq National
Market. Accordingly, even if the reverse stock split is approved, Aviation
Group's common stock may not be approved for listing on the Nasdaq National
Market.
Aviation Group's board of directors also believes that the reverse stock
split may improve the marketability and liquidity of its common stock because
the anticipated increase in the per share price of its common stock should
reduce the reluctance of many brokerage firms and institutional investors to
recommend its common stock to their clients or to otherwise hold it in their own
portfolios. Aviation Group's board of directors believes that some of the
practices of the securities industry that may tend to discourage individual
brokers within those firms from dealing in lower-priced stocks or lending funds
to facilitate the purchase of these stocks have affected the per share price of
Aviation Group's common stock. Some of those practices involve time-consuming
procedures which make dealing in lower-priced stocks less appealing
economically. Furthermore, the brokerage commission on a sale of lower-priced
stock may also represent a higher percentage of the sale price than the actual
brokerage commission on a higher-priced issue.
The market value of Aviation Group's common stock may not increase in
proportion to the reduction in the number of outstanding shares resulting from
the reverse stock split. Accordingly, these objectives may not be achieved or
the market price of Aviation Group's common stock resulting upon implementation
of the proposed reverse stock split may not be maintained for any period of time
or such market price may not approximate five times the market price before the
proposed reverse stock split.
Effective Time
If approved by the holders of two-thirds of the outstanding shares of
common stock of Aviation Group, the reverse stock split will be effected as soon
as practicable by filing the articles of amendment containing the amendment to
the articles of incorporation set forth above with the Secretary of State of the
State of Texas.
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Upon the filing of articles of amendment, the shares of common stock of
Aviation Group presently issued and outstanding will be canceled and the share
certificates representing the old common stock will represent solely the right
for each shareholder of Aviation Group to receive, for each five shares of old
common stock held before the articles of amendment are filed, one share of new
common stock.
Exchange of Stock Certificates
As soon as practicable after the articles of amendment are filed, holders
of the common stock will be notified that their shares have been reclassified in
accordance with the reverse stock split and that the certificates that
represented their shares of old common stock represent the number of shares of
new common stock held as a result of the reverse stock split. Holders of the
common stock will also be requested to exchange their old stock certificates for
new certificates. In that regard, a letter of transmittal will be mailed to all
holders of record of the common stock when the articles of amendment are filed.
The letter of transmittal will be used by the holders in surrendering
certificates that represented the number of common stock owned of record by the
holders prior to the reverse stock split. The letter of transmittal will contain
instructions concerning the exchange of certificates for certificates
representing the number of shares of new common stock owned of record by the
holders following the reverse stock split. Certificates representing the old
common stock should not be surrendered until the letter of transmittal is
received by the shareholder.
Following the surrender of certificates representing the old common stock,
shareholders will receive certificates representing the shares of new common
stock to which they are entitled, plus cash in lieu of fractional shares at a
rate of $2.00 per share of old common stock. After the articles of amendment
are filed and until so surrendered, each certificate that represented shares of
old common stock will be deemed for all purposes to represent and evidence
ownership of the number of shares of new common stock, and the right to receive
the amount of cash, without interest, for any fractional shares, into which the
shares represented by the certificate have been converted. Certificates
representing new common stock will only be registered in the name or names in
which the surrendered certificates were registered. Aviation Group will issue
certificates representing new common stock attributable to any certificate that
has been lost or destroyed only upon receipt of satisfactory evidence of
ownership of the shares represented by the certificate and after appropriate
indemnification.
Potential Effects of the Reverse Stock Split
Pursuant to the reverse stock split, each holder of five shares of Aviation
Group's common stock, par value $0.01 per share, immediately prior to the
effectiveness of the reverse stock split would become the holder of one share of
Aviation Group's common stock, par value $0.01 per share, after consummation of
the reverse stock split. Although the reverse stock split will not, by itself,
impact Aviation Group's assets or prospects, the reverse stock split could
result in a decrease in the aggregate market value of Aviation Group's equity
capital. Aviation Group's board of directors believes that this risk is
outweighed by the benefits of the reverse stock split. If approved, the reverse
stock split will result in some stockholders owning odd-lots of less than 100
shares of Aviation Group's common stock. Brokerage commissions and other costs
of transactions in odd-lots are generally somewhat higher than the costs of
transactions in round-lots of even multiples of 100 shares.
Increase in Number of Shares of Common Stock Available for Future Issuance
As a result of the reverse stock split, there will be a reduction in the
number of shares of Aviation Group's common stock issued and outstanding, or
held as treasury shares, and an associated increase in the number of authorized
shares which would be unissued and available for future issuance after the
reverse stock split. These increased available number of shares could be used
for any proper corporate purpose approved by Aviation Group's board of directors
including, among others, future financing transactions. Because the reverse
stock split will create the increased number of available shares, the reverse
stock split may be construed as having an anti-takeover effect. Although neither
Aviation Group's board of directors nor the management of Aviation Group views
the reverse stock split as an anti-takeover measure, Aviation Group's board
could use the increased number of available shares to frustrate persons seeking
to effect a takeover or otherwise gain control of Aviation Group.
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The board of directors of Aviation Group recommends that its shareholders
vote for the approval of the amendment to Aviation Group's articles of
incorporation to effect a one-for-five reverse stock split.
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TRAVELBYUS.COM
References in this section to "$" refer to Canadian dollars, unless
otherwise indicated.
Business
Overview
travelbyus.com was incorporated under the laws of the Province of
Ontario on July 21, 1986 under the name MVP Capital Corp., and on October 23,
1996, changed its name to LatinGold Inc. Prior to 1999, travelbyus.com was a
precious metals exploration company with a focus on Latin America and Mexico. In
April 1999, because of changing market conditions, travelbyus.com focused its
business on the travel sector. On June 4, 1999, travelbyus.com filed articles of
amendment to change its name to its current name.
travelbyus.com is an integrated Internet travel organization which
provides travel services via the Internet, through 1-800 call centers and
through traditional travel agencies, primarily to customers in the western
United States and Canada. travelbyus.com also provides advertising services to
airlines and hotels. The travelbyus.com website provides consumers with online
travel options 24 hours a day. Through its website, consumers are able to browse
travel options world-wide and book travel reservations. travelbyus.com also
offers travel services and products through its 1-800-i-Travel(R) phone number
and traditional travel agencies.
Since April 1999, travelbyus.com has focused on completing certain
strategic acquisitions to build the components of its business model, which
include product offering, distribution, marketing and technology. travelbyus.com
provides a broad range of travel products, targeted primarily at the leisure
customer, including airfare, hotel rooms, cruise packages and ground packages.
travelbyus.com utilizes three distribution channels to market its products: the
traditional travel agency base, 1-800 call centers and the Internet.
travelbyus.com continuously seeks technology that allows it to distribute its
travel products effectively and to offer consumers more travel related options.
The travelbyus.com website is in the early stages of development.
The registered office of travelbyus.com is located at Scotia Plaza,
Suite 2100, 40 King Street, West, Toronto, Ontario, M5H 3C2. Currently, the head
office of travelbyus.com is located at 204-3237 King George Hwy., South Surrey,
British Columbia, V4P 1B7. By October 2000, travelbyus.com expects to move its
head office to Reno, Nevada. Through its acquisition of Express Vacations, the
bulk of its operations are already located in Reno. See "-Recent Acquisitions-
Express Vacations, LLC" below.
Business Model
The key components of travelbyus.com's business model include product
offerings, distribution, marketing and technology.
Product Offerings
travelbyus.com has made certain strategic acquisitions enabling it to
offer consumers various travel products. travelbyus.com provides a broad range
of travel products targeted primarily at the leisure customer, including airline
tickets, cruise packages and ground packages. For the nine months ended June 30,
2000, travelbyus.com received 70%, 8% and 21% of its travel sales revenues from
sales of airline tickets, cruise packages and ground packages, respectively.
Through travelbyus.com's marketing program with Mr. Cheaps Travel and Gotham
Media and through special net airfare contracts held by Cheap Seats,
travelbyus.com has the ability to offer airline tickets to consumers at
competitive prices.
Airline Tickets. In October 1999, travelbyus.com acquired all of the
issued and outstanding shares of Gotham Media Group, Ltd. and Mr. Cheaps Travel,
Ltd. See "- Recent Acquisitions - Gotham Media Group, Ltd. and Mr. Cheaps
Travel, Ltd." Gotham Media and Mr. Cheaps combine a strategy of fulfilling
marketing programs for airfare suppliers in exchange for travel products. Mr.
Cheaps was founded in 1980 and is a full service travel agency specializing in
discount and last minute airfares. Gotham Media works in conjunction with Mr.
Cheaps to provide travelbyus.com
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with airline tickets and hotel rooms at a significant discount to market. Gotham
Media acquires the rights to billboard, radio, television and print advertising
which it exchanges with its airline and hotel industry clients in return for
travel credits to be applied toward the purchase of travel products. These
credits are converted into cash through sales to customers from the Mr. Cheaps'
operations.
The activities undertaken by Gotham Media allow airlines to market
their product without additional cash outlay. Airline suppliers that utilize the
marketing program include Frontier Airlines Inc., Proair Inc., AOM French
Airlines, Air Tahiti Nui, and City Bird.
On January 6, 2000, travelbyus.com acquired all of the issued and
outstanding shares of Cheap Seats, Inc. Cheap Seats was founded in 1988 and is a
net airfare consolidator with a wide range of net fare ticket contracts with
several U.S. and international airline carriers. The airlines use net airfare
consolidators to sell excess inventory without compromising their published
pricing structures. To purchase airfare at the lowest published rate, a consumer
is usually required to book their airfare 14 to 21 days in advance and stay at
their destination over a Saturday night. With the net fare program, the airline
companies grant travelbyus.com the ability to waive the advance purchase
restriction and the requirement to stay over a Saturday night. Since
travelbyus.com has the ability to waive the fare restrictions, travelbyus.com
can offer the airfare at a discounted price to consumers requiring a last minute
flight or short duration flight.
Cruise Packages. In October 1999, travelbyus.com acquired certain
assets of Galaxsea Cruises and Tours, Inc. and all outstanding shares of IT
Cruise, Inc. See "Recent Acquisitions--International Tours, Inc., Galaxsea
Cruises and Tours, Inc. and IT Cruise Inc." Through Galaxsea Cruises,
travelbyus.com maintains an office in California offering cruise packages
directly to the consumer. These cruise packages are also being offered directly
to the consumer through the travelbyus.com Web site and 1-800 call centers.
In April 2000, travelbyus.com acquired the travel operations of Bell
Travel Systems and all of the issued and outstanding shares of Cruise Shoppes
America, Ltd. See "- Recent Acquisitions - Bell Travel Systems" and "- Cruise
Shoppes America, Ltd." Bell Travel is a travel company with approximately 120
associate cruise agency members. Cruise Shoppes is a nationwide cruise and
leisure sales organization with over 350 associate cruise agency members. The
acquisitions bring the total number of agency members associated with
travelbyus.com to over 2,700. As a result of this large number of agency members
associated with it, travelbyus.com obtains favorable rates on cruise packages,
which can be offered to the agency members at a discount to market.
Ground Packages. Through its subsidiaries, travelbyus.com has developed
a comprehensive array of ground packages, including hotel, tour and car rental.
travelbyus.com has business arrangements with various hotel chains, hotel
properties and time share properties with concentration on Hawaii, Mexico, Las
Vegas, Reno, Florida, California and Europe. These hotels and properties provide
travelbyus.com with reservations at a discount to market. These discounted
reservations are then made available directly to consumers and to associated
agencies. travelbyus.com also has non- exclusive relationships with over 200
preferred suppliers. Preferred suppliers are travel entities that have
negotiated special override commissions and rates with travelbyus.com in order
to focus travelbyus.com on selling their products. The preferred supplier
arrangements that are offered to travelbyus.com by vendors are generally non-
exclusive. Rates and override commissions that vendors extend to travelbyus.com
may also be offered to other groups that sell travel. A list of some of the
preferred suppliers include Walt Disney Attractions, Inc., Starwood Hotels and
Resorts Worldwide, Inc., Continental Airlines, Inc., Delta Airlines, Inc.,
Holland America Line - Westours Inc., Princess Cruises, National Car Rental
System, The Hertz Corporation, Amadeus Global Travel Distribution LLC and The
Sabre Group, Inc.
Distribution
travelbyus.com's distribution channels allow travelbyus.com to market
its products through the traditional travel agency base, 1-800 call centers and
the Internet.
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Travel Agencies. In October 1999, travelbyus.com acquired certain
assets of International Tours, Inc. See "-Recent Acquisitions-International
Tours, Inc., Galaxsea Cruises and Tours, Inc. and IT Cruise, Inc." In April
2000, travelbyus.com acquired the travel operations of Bell Travel.
International Tours and Bell Travel maintain a network of associated travel
agencies in the United States. The acquisitions bring the total number of travel
agency members associated with travelbyus.com to over 2,700. As a result of the
large number of travel agency members associated with travelbyus.com,
travelbyus.com obtains favorable rates on travel packages, which can then be
offered to the travel agency members at a discount to market. The services that
travelbyus.com offers to these member agencies are two-tiered. As basic members
of the travelbyus.com marketing program, the travel agents are entitled to use
travelbyus.com's trade names and trademarks, to participate in the preferred
supplier program, to receive help desk support and newsletters, to have access
to training programs, travelbyus.com's cruise center, air desk, emergency
assistance service and 1-800-i-Travel program and to receive the benefits of
travelbyus.com's marketing programs. For a higher annual fee, they can enjoy the
benefits of travelbyus.com's enhanced membership program, which includes one
customized Web site and access to travelbyus.com's booking engine, intranet and
client database management.
1-800 Call Centers. travelbyus.com's 1-800 call centers will offer
small and medium sized independent travel agents with the opportunity to
increase their client bases and travel product sales while earning higher
commissions. The cornerstone of the program will be the toll free 1-800-i-
Travel(R) phone number which is currently connected only to the Reno call
center. As of September 1, 2000, the 1-800-i-Travel marketing program was not
being offered to member travel agents, and, consequently, there were no
participants at that time. When the program begins, each participating agency
will purchase a protected marketing territory from which it will be the
exclusive recipient of all advertising benefits. Customer calls will then be
automatically routed to the office phone of the member agent serving the zip
code from which the call originates. When any customer dials 1-800-i-Travel, the
call will first be answered by a professionally recorded digital announcement
that will require the entry of the consumer's home zip code. This system will
enable consumers to dial 1-800-i-Travel from any touch-tone telephone in the
United States and by entering their home zip code, be immediately connected to a
local travel agency.
Offsetting the normal marketing limitations of independent travel
agents, the 1-800-i-Travel co-operative marketing program pools agents'
advertising budgets and booking volumes to provide major media advertising,
volume based commission overrides and access to special travel packages
previously unavailable to small and medium sized independent travel agencies.
travelbyus.com will begin its marketing efforts through its current
associate members. The 1-800-i-Travel marketing program will be launched in
concert with the national marketing campaign in the first quarter of fiscal year
2001. travelbyus.com will not have a different legal relationship with the
participating agencies in the 1-800-i-travel program than exists today.
Participating agencies will only be required to pay an additional marketing fee.
The routing system and related call center infrastructure to implement the
1-800-i-travel marketing program to travel agents is already in place. To enable
travel agent members to participate in the program, there is no additional cost
to travelbyus.com involved. As members join the program, their zip code is pre-
programmed into the call routing system. As the marketing/advertising program
begins in different market areas, there will be varying percentages of the
population who are exposed to the 1-800-i-Travel advertising program, but who do
not live within a member agency's protected marketing territory. This will
result in many travel customer calls that cannot be routed to a local travel
agency. Though travelbyus.com will initially be assigning additional zip codes
to member agencies, creating a larger protected marketing territory for early
members, there will be many areas that remain unassigned. travelbyus.com
believes it is important to professionally serve every calling customer, and as
commission income may be generated in the process, travelbyus.com will operate a
full service call center to take the unallocated calls. Consequently,
travelbyus.com becomes a direct retail beneficiary of the overall marketing and
advertising program, commission overrides, bulk travel purchases and other areas
of service provided to member agencies.
Internet. travelbyus.com's Web site will provide consumers with on-line
travel options 24 hours a day. Through the Web site, consumers will have the
ability to browse travel options world-wide and book travel reservations. The
travelbyus.com Web site is in the early stages of development. The tour
operating system, Epoch, is currently available for call center bookings. The
Application Programming Interface (API), which provides the interface between
the Web site and Epoch, is now being compiled and is expected to be completed in
September. Accordingly, the first vacation packages with Web site booking access
will be available in September. Integration of ITA software, which facilitates
the search for the lowest airfare, is also anticipated in October. The API to
link this search to Amadeus for airline ticketing
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is in the final phase of completion. travelbyus.com expects member travel agents
will be able to use the Web site to book airfares and tour packages by the first
quarter of fiscal year 2001. The approximate cost for completion of this stage
of the Web site is $480,000.
Customers will have the option to book travelbyus.com products via the
Web site, the call center or through a travel agent. Not all bookings are
projected to be made online. travelbyus.com will offer travel agents guaranteed
commissions on any consumer purchases made by their customers over the
travelbyus.com Web site or through travelbyus.com's 1-800 call center. In
addition, travelbyus.com will create personalized Web pages for its travel
agencies. These Web pages will be linked to and powered by the travelbyus.com
Web site. travelbyus.com member agencies are asked to register their clients'
names and addresses with travelbyus.com in order to track the bookings completed
by an agency's customers and also to pay commissions. In addition, member
agencies will have the facility to input client names and addresses into the
travelbyus.com client database. This process creates a concept of "client
ownership" for the agents, while allowing the travelbyus.com Web site to collect
data and to market directly to the agents' customers.
travelbyus.com believes that the travelbyus.com Web site will offer
consumers certain advantages over traditional "call-in" and "walk-in" travel
bookings, including the following:
Efficiency. The travelbyus.com Web site will provide consumers with a
one-stop convenient location to browse thousands of travel options
world-wide.
Multiple Search Engines. Consumers will be able to search using one or
a combination of several search criteria, including, type of vacation,
location, price range, date and time.
Live to the Internet. The travelbyus.com Web site will provide
consumers with access to travel reservations and information on the
Internet 24 hours a day.
Real Time Availability. The travelbyus.com Web site will provide
consumers with up-to-the-second reservation availability at selected
destinations.
Travel Information. The travelbyus.com Web site will provide consumers
with information on selected destinations including, where available,
information on services and fees, facilities and amenities, promotions
offered and local weather forecasts.
Marketing
While travelbyus.com believes that the Internet has modified the
business model for the travel industry, travelbyus.com also offers the consumer
the ability to interact directly with travel professionals either by phone or in
person. travelbyus.com's marketing strategy places consumers at the center of
the process, allowing them the option to ask questions, obtain information,
order products and receive delivery from home, via telephone or the Internet or
from the traditional travel agency.
travelbyus.com's marketing strategy is built on the following key
ideas:
- Traditional travel agencies introduce consumers to
travelbyus.com and allow for personal marketing of
travelbyus.com's brand. These travel agents have established
relationships with their clients who in turn have particular
loyalties. travelbyus.com will provide materials, including
window decals and logos designed for office stationery and
business cards containing the travelbyus.com name, to create
brand awareness within their agency which will be subsequently
shared with their clients. The agency takes advantage of a
direct mail promotion to introduce its new travelbyus.com
affiliation and website.
- Bricks-and-mortar outlets provide an opportunity to direct
traffic to the travelbyus.com Web site. travelbyus.com can
market its travelbyus.com web address on shopping bags, tags and
bills.
- Travel agencies can offer travelbyus.com's products ahead of
other travel product suppliers. The ease of booking products
through the travelbyus.com Web site, versus the required phone
call for other
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similar products, preferred commissions particularly on Cheap
Seats and Mr. Cheaps airfare, and the ability to offer their own
website with booking functionality to clients will provide
significant incentive to sell travelbyus.com products.
- travelbyus.com can offer increased levels of service through its
distribution channels as all transactions will be routed through
travelbyus.com's Web site. For example, clients will be able to
take advantage of the 24/7 call center system and speak with a
travelbyus.com representative at any time.
- travelbyus.com can promote its products with highly targeted
marketing programs including television, radio, billboard and
print. The Endless Travel television program will showcase
destinations sold by travelbyus.com. Each show will highlight
the web address and 1-800-i-travel phone number. A magazine
similarly promoting destinations offered by travelbyus.com will
be distributed to member agency clients. Finally, traditional
media will be employed to promote products and the Web
site.
- travelbyus.com offers consumers the ability to choose to do
business via the telephone, the Internet or through a
traditional travel agency.
travelbyus.com also markets its travel products through the television
series "The Travel Magazine." This travel show has been airing world-wide since
the early 1970s. New shows on The Travel Magazine will target specific content,
preferred locations and popular destination resorts for travelbyus.com. When
aired on television, the shows will include repeated mention of the 1-800-i-
Travel phone number and the travelbyus.com Web site. travelbyus.com will also
earn revenues from the distribution of television series in Canada and the
U.S.
Additionally, pursuant to a promotional agreement dated March 8, 2000
between travelbyus.com and Genesis Intermedia Inc., travelbyus.com will be the
exclusive travel content provider, save for a link to American Express credit
cards, to appear on Genesis Intermedia's CenterLINQ kiosks and, when available,
on CenterLINQ's broadcast television network and Web site. CenterLINQ's kiosks
are located in malls across the United States. The term of the advertising
agreement is three years and is renewable.
Technology
As part of its business model, travelbyus.com continuously seeks
technology that allows it to distribute its products to its consumers
effectively and offer consumers additional travel related options. On March 30,
2000, travelbyus.com entered into a licensing agreement with ITA Software for
access to its proprietary airfare search engine. Pursuant to the licensing
agreement, travelbyus.com has obtained a license, for a period of three years,
to use certain licensed software enabling online customers to obtain information
relating to airline routes and schedules, airfares and availability and to
search for low airfares. The basic license fee for the licensed software will be
based upon the number of transactions performed with the licensed software.
travelbyus.com also provides users with various services on its Web
site. The Web site will include a travel vault that will store personal
information for consumers, such as travel documentation, passport images, visas
and itineraries. Additionally, pursuant to an agreement between travelbyus.com
and HealthyConnect.com, Inc., HealthyConnect will provide travelbyus.com's
customers with global access to their personal health records, to healthcare
content and e-commerce products and supplies through a link from the
travelbyus.com Web site to HealthyConnect's application Clinic@Home. Such
services will be offered as part of travelbyus.com's travel vault.
travelbyus.com has also entered into an agreement with Amadeus Global
Travel Distribution LLC. Amadeus operates a computer reservation system that
houses information on registered travel products, fares, schedules, conditions
and restrictions. The agreement provides for the sharing of revenues from
segment fees booked through travelbyus.com's system.
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Competition
The markets for travelbyus.com's products are competitive.
travelbyus.com is subject to competition from both established competitors and
potential new market entrants. travelbyus.com faces competition from traditional
travel agencies, which remain the preferred source for travel reservations, and
Internet-based travel companies, including Microsoft Expedia, Travelocity and
Priceline.com Inc.
Both the e-commerce market and travel industry are highly competitive.
Since the introduction of e-commerce to the Internet, the number of e-commerce
Web sites competing for customers' attention has increased rapidly.
travelbyus.com expects future competition to intensify given the relative ease
with which new Web sites can be developed. travelbyus.com believes that the
primary competitive factors in e-commerce are brand recognition, Web site
content, ease of use, price, fulfillment speed, customer support and
reliability. Other factors that will affect travelbyus.com's success include
market acceptance of travelbyus.com's products, travelbyus.com's continued
ability to attract experienced marketing, technology, operations and management
talent and the success of travelbyus.com's marketing programs.
Intellectual Property
travelbyus.com protects its technology through a combination of
copyrights, trade secrets and contractual arrangements. travelbyus.com regards
its intellectual property as critical to its success, and relies on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, suppliers, partners and others to protect its
proprietary rights. travelbyus.com will pursue the registration of its
trademarks and service marks in Canada and the United States as required.
Effective trademark, servicemark, copyright and trade secret protection may not
be available in every country in which travelbyus.com offers its services.
travelbyus.com expects that it may license certain of its proprietary rights,
such as trademarks or copyrighted material, to third parties in the future.
travelbyus.com has applied for a patent of the travelbyus.com business model,
but this patent has not and may not be granted. "See Risk Factors--Other Risks
Relating to the Business of travelbyus.com."
Personnel and Facilities
travelbyus.com maintains a leased facility in Reno, Nevada comprising
approximately 37,000 square feet. The lease is for a term of five years.
travelbyus.com also has leased offices in White Rock, Toronto, Los Angeles,
Portland, Louisiana and St. Petersburg. As of September 1, 2000, travelbyus.com
had approximately 213 full-time employees.
Recent Acquisitions
Gotham Media Group, Ltd. and Mr. Cheaps Travel, Ltd.
On October 4, 1999, travelbyus.com acquired all of the issued and
outstanding common shares of Gotham Media Group Ltd. and all of the issued and
outstanding shares of Mr. Cheaps Travel, Ltd. pursuant to a share purchase
agreement. Mr. Cheaps is a full service travel agency specializing in discount
and last minute airfares. Gotham Media works in conjunction with Mr. Cheaps to
provide travelbyus.com with airline tickets and hotel rooms at a significant
discount to market. Gotham Media acquires the rights to billboard, radio,
television and print advertising which it exchanges with its airline and hotel
industry clients in return for credits to be applied toward the purchase of
travel products. These credits are converted into cash through sales to
customers from the Mr. Cheaps' operations. As consideration for the Gotham
shares and the Mr. Cheaps shares, travelbyus.com issued 2,000,000 of its common
shares and paid US$3,000,000 in cash to vendors of Gotham/Mr. Cheaps. A finder's
fee of 150,000 common shares was paid to Peter Adam, a former officer of
travelbyus.com.
Concurrent with the execution of the Gotham/Mr. Cheaps share purchase
agreement, travelbyus.com and Bridget Beaudet, a principal of Gotham and Mr.
Cheaps, entered into an employment agreement dated September 30, 1999. Pursuant
to the employment agreement, Bridget Beaudet became Chief Financial Officer of
Gotham Media for an initial term of two years commencing October 1, 1999.
Additionally, travelbyus.com and Georgetown Inc. entered into a consulting
agreement dated September 30, 1999, in which Georgetown Inc. agreed to provide
the services of George Beaudet as Chairman and Chief Operating Officer of Mr.
Cheaps for an initial term of two years.
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International Tours, Inc., Galaxsea Cruises and Tours, Inc. and I.T.
Cruise, Inc.
Pursuant to an agreement dated October 13, 1999 among travelbyus.com,
travelbyus--IT Incorporated, Travelbyus Galaxsea Incorporated, International
Tours, Inc., Galaxsea Cruises and Tours, Inc. and North American Gaming and
Entertainment Company, travelbyus.com acquired certain assets of International
Tours, Inc., certain assets of Galaxsea Cruises and Tours, Inc. and all of the
issued and outstanding common shares of I.T. Cruise, Inc. International Tours
maintains a network of affiliated travel agencies in the United States and
Galaxsea Cruises maintains a network of affiliated cruise-only offices. As
consideration for the IT assets, travelbyus.com issued 333,333 of its common
shares and paid US$666,666 in cash. As consideration for the Galaxsea assets,
travelbyus.com paid US$285,000 in cash. As consideration for the IT Cruise
shares, travelbyus.com issued 666,667 of its common shares and paid US$1,048,334
in cash.
Concurrent with the execution of the IT agreement, travelbyus.com and
Ronald Blaylock, a principal of International Tours, entered into an employment
agreement dated October 13, 1999. Mr. Blaylock agreed to be employed as
President of travelbyus-IT for an initial term of three years commencing October
13, 1999.
Express Vacations, LLC
Pursuant to a unit purchase agreement dated November 1, 1999 between
travelbyus.com and John Fenyes, The John and Judy Fenyes Charitable Remainder
Unitrust, Jon Snyder, The Jon and Janet Snyder Charitable Remainder Unitrust and
Eldorado Resorts, LLC, travelbyus.com acquired all of the issued and outstanding
units of Express Vacations, LLC. Express Vacations is a call center based in
Reno, Nevada with a base of approximately 80 workstations. Additionally, Express
Vacations offers vacation packages to numerous destinations including Hawaii,
Mexico, Nevada, California and Europe. As consideration for the Express
Vacations units, travelbyus.com issued to the unit holders 3,462,000 of its
common shares and paid US$2.0 million in cash. A finder's fee of 150,000 common
shares was paid to a third party. On November 1, 1999 Express Vacations merged
with travelbyus.com's wholly owned subsidiary, Express Vacations, Inc. On May 2,
2000, the name of Express Vacations was changed to travelbyus.com USA Inc.
travelbyus.com expects travelbyus.com USA Inc. to be its primary operating
subsidiary in the near future.
Concurrent with the execution of the Express Vacations purchase
agreement, travelbyus.com and John Fenyes, a principal of Express Vacations,
entered into an employment agreement dated November 1, 1999, in which John
Fenyes became employed as Executive Vice President and Chief Operating Officer
of travelbyus.com and Express Vacations for an initial term of two years.
Additionally, travelbyus.com and Jon Snyder, a principal of Express Vacations,
entered into an employment agreement dated November 1, 1999, in which Jon Snyder
became President of travelbyus.com and Express Vacations for an initial term of
two years.
Travel Magazine
On November 15, 1999, travelbyus.com acquired from First Property
Holding Inc. all rights, interest and title to 120 episodes of the television
series known as "The Travel Magazine," except for some home video rights and
television distribution agency rights. As consideration for the series,
travelbyus.com issued 2,855,883 of its common shares to First Property. In
addition, travelbyus.com acquired the rights to 130 new half- hour Travel
Magazine shows to be produced over the next few years. As consideration for the
new episodes, travelbyus.com issued to First Property 1,146,497 of its common
shares and will pay US$1.8 million upon delivery of 40 new episodes. Upon
receipt of the 40 episodes, travelbyus.com has the right to terminate the
arrangement or acquire the balance of 90 episodes for a further consideration of
US$4.5 million in cash or in its common shares. The Travel Magazine has been
airing world-wide since the early 1970s.
Cheap Seats, Inc.
Effective as of December 1, 1999, travelbyus.com acquired all of the
issued and outstanding common shares of Cheap Seats, Inc. Cheap Seats is a net
airfare consolidator with a wide range of net fare ticket contracts with several
U.S. airline carriers. As consideration for the Cheap Seats shares,
travelbyus.com issued to principals of Cheap Seats 5,000,000 of its common
shares and paid US$5,000,000 in cash. The
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Cheap Seats share purchase agreement also provides that the purchase
price may be increased by up to US$4.0 million based upon the increase in
certain gross revenues during the period from October 1, 1999 to September 30,
2002.
Concurrent with the execution of the Cheap Seats share purchase
agreement, Cheap Seats and Robert Beaudet, a principal of Cheap Seats, entered
into an employment agreement dated January 6, 2000, in which Robert Beaudet
became President of Cheap Seats for an initial term of three years.
Additionally, Cheap Seats and Thomas Spagnola, a principal of Cheap Seats,
entered into an employment agreement dated January 6, 2000, in which Thomas
Spagnola agreed to be Vice President of Cheap Seats for an initial term of three
years.
Legacy Storage Systems Corp.
Pursuant to a share purchase agreement dated December 1, 1999 between
travelbyus.com and John Whyte, travelbyus.com acquired all of the issued and
outstanding common shares of Legacy Storage Systems Corp. and a shareholder's
advance of $150,000 made by John Whyte to Legacy. Legacy designs and sells data
storage systems. As consideration for the Legacy shares and the shareholder's
advance, travelbyus.com issued to John Whyte 3,028,000 of its common shares. In
addition, the Legacy share purchase agreement provided for the repayment of
indebtedness of $50,000 owing to John Whyte by Legacy within 90 days of closing.
travelbyus.com repaid on closing indebtedness of $90,000 owing to the Canada
Customs and Revenue Agency by Legacy.
Concurrent with the execution of the Legacy share purchase agreement,
Legacy and John Whyte entered into an employment agreement dated December 1,
1999, in which John Whyte agreed to be employed as the President and Chief
Executive Officer of Legacy for an initial term of two years. On June 30, 2000,
John Whyte resigned from all positions with travelbyus.com and its subsidiaries.
1-800-i-Travel(R)
Pursuant to an asset purchase agreement dated December 7, 1999, among
travelbyus.com, Express Vacations, John M. Elliott, Charles Farrell, Peter Adam
and Gene Koch, Express Vacations acquired a co-operative marketing program and
related assets known as the 800-i-Travel Cooperative Marketing Program. This
program utilizes a sophisticated telephone switching technology that will route
customers' calls to the closest appropriate member travel agency or to
travelbyus.com's call center. As consideration for this marketing program,
travelbyus.com issued 350,000 of its common shares and warrants to purchase
50,000 of its common shares at an exercise price of US$1 per share expiring
December 7, 2002. As additional consideration, Express Vacations agreed to pay
for a period of 48 months, as determined under the agreement, a royalty in an
amount equal to US$0.10 per good faith consumer call placed to the toll-free
numbers 1-800-487-2835 and 1-800-287-2835 from any location, irrespective of
call duration. The warrants are exercisable prior to December 7, 2002, provided
certain performance criteria are fulfilled. Performance criteria are fulfilled
if certain minimum numbers of consumer calls to the two 1-800 numbers have been
achieved prior to May, 2001 or the average trading price of travelbyus.com's
common shares during November 2000, has been US$4 per common share. In the event
the performance criteria are not fulfilled, the 1-800 sellers can exercise an
automatic right to re-acquire the 1-800-i-Travel Cooperative Marketing Program
and in the event travelbyus.com determines it no longer seeks to utilize the two
1-800 numbers or aggressively market these the 1-800 numbers, travelbyus.com has
the right to transfer the 1-800-i-Travel Cooperative Marketing Program back to
the sellers.
Bell Travel Systems
Pursuant to an asset purchase agreement dated April 3, 2000, among
Murray L. "Jack" Bell, travelbyus.com and travelbyus-IT Incorporated,
travelbyus.com acquired Bell Travel Systems. Bell Travel is a travel company
which currently has approximately 1,200 travel agency members. As consideration
for the assets, travelbyus.com issued 690,558 of its common shares and paid
US$1.9 million in cash.
Concurrent with the execution of the purchase agreement, travelbyus-IT
and Murray L. "Jack" Bell entered into a consulting agreement dated April 3,
2000. Mr. Bell agreed to provide services to travelbyus-IT and act as the
President of BTS Travel Network, a separate unincorporated division of
travelbyus-IT, for an initial term of two years.
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Cruise Shoppes America, Ltd.
Pursuant to an agreement and plan of merger dated April 4, 2000, among
Cruise Shoppes America, Ltd., Gary P. Brown, Michael J. Wild, travelbyus.com and
travelbyus-Cruise Shoppes Inc., travelbyus.com acquired all of the issued and
outstanding common shares of Cruise Shoppes. Cruise Shoppes is a nationwide
cruise and leisure sales organization with over 350 associate travel agencies.
As consideration for the Cruise Shoppes shares, travelbyus.com issued 2,619,000
of its common shares at an agreed price of Cdn$4 per share and paid US$1.8
million in cash subject to adjustment. On April 4, 2000, Cruise Shoppes merged
with travelbyus.com's wholly owned subsidiary, travelbyus-Cruise Shoppes Inc.
Concurrent with the execution of the Cruise Shoppes agreement,
travelbyus.com and Gary P. Brown entered into an employment agreement dated
April 4, 2000, in which Mr. Brown agreed to be President of Cruise Shoppes for
an initial term of two years.
Epoch Technology, Inc.
On May 23, 2000, travelbyus.com acquired all of the issued and
outstanding stock of Epoch Technology Inc. The consideration for the purchase
was US$10 million, consisting of US$2 million in cash and 3,280,000 common
shares of travelbyus.com. To make this purchase, travelbyus.com borrowed
US$1,975,000 from Aviation Group under a 12% note due February 28, 2001, or
earlier in certain events, and granted a security interest in the Epoch
Technology stock to Aviation Group to secure the loan. The security interest is
subordinate to the security interest of the holders of travelbyus.com's 12.5%
senior redeemable debentures. Aviation Group obtained the funds for this loan
from a US$3 million investor loan that has been guaranteed by travelbyus.com.
See "Aviation Group-Business-Recent Debt Financing."
Epoch Technology is a Dallas-based developer of integrated software for
the travel, leisure and hospitality industry. The reservations system developed
by Epoch Technology automates all reservations functions at a component level
and is integrated with marketing, sales, operations, administration, accounting
and finance systems. The reservations system is able to customize the itinerary
of an individual traveler within minutes.
Travel24.com
On June 16, 2000, travelbyus.com entered into a share exchange
agreement with Travel 24.com AG to create a strategic partnership through a
cross shareholding arrangement. Under this arrangement, travelbyus.com has
issued 2 million common shares to Travel24.com in exchange for US $5 million.
travelbyus.com has also placed in escrow 11,800,000 newly issued common shares
of travelbyus.com that will be exchanged for 1,482,594 newly issued common
shares of Travel24.com if three conditions are satisfied. These conditions are
(a) receipt by travelbyus.com of required regulatory approvals, including
approval of the Toronto Stock Exchange, (b) receipt by travelbyus.com of a
certificate representing the Travel24.com shares, and (c) receipt by
Travel24.com of required regulatory approval, including approval of the German
Neuer Market. As a result, on a fully diluted basis if the arrangement were
completed currently, travelbyus.com would own approximately 13% of Travel
24.com's common shares and Travel24.com would own approximately 14% of
travelbyus.com's common shares. In addition, Travel 24.com has loaned US $3
million to travelbyus.com with a maturity date of June 16, 2002. This loan is
convertible at Travel24.com's option into common shares at a conversion price of
US $2.50 per share, callable by Travel24.com after February 28, 2001 on three
months prior written notice, and secured by a lien on all of travelbyus.com's
assets, subject to existing liens and to normal bank indebtedness.
The parties would also exchange information on their businesses and
financial plans and start to exchange mutual resources such as technology,
supplier contracts, tourist flows and similar matters on a preferred status. The
definitive agreements would require the appointment by each company of two
observers, to be substituted as soon as practical by two members, to the other
company's board of directors. Following completion of the strategic partnership
arrangements, the companies also intend to negotiate a full merger proposal
between them, to be completed no later than December 31, 2000. Their respective
financial advisors will be directed to prepare valuations of the companies to
serve as a basis for the merger negotiations.
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ProSoft Corporation
On September 14, 2000, travelbyus.com acquired all of the issued and
outstanding shares of ProSoft Corporation pursuant to a share purchase
agreement. ProSoft is in the business of creating custom software in the travel
business. ProSoft also holds 12% of the outstanding shares of SiteRabbit.com as
described below. As consideration for the ProSoft shares, travelbyus.com issued
1,680,000 of its common shares. Of such shares, 1,260,000 common shares were
issued at closing and 420,000 common shares will be issued two years following
closing provided certain employment conditions are completed. The share purchase
agreement also provides that travelbyus.com is required to issue additional
shares, to a maximum of 1,680,000, if certain conditions relating to the
travelbyus.com stock price are not fulfilled.
Concurrent with the execution of the ProSoft share purchase agreement,
travelbyus.com entered into an employment agreement with Gary Saner under which
Gary Saner will act as Chief Technical Officer of ProSoft for a term of three
years. Additionally, travelbyus.com and Michael Rucker entered into an
employment agreement under which Michael Rucker will act as the Vice-President,
Travel Technology of ProSoft for a term of three years. Additionally,
travelbyus.com and Ron Lindsay entered into an employment agreement under which
Ron Lindsay will act as the Vice-President, Systems Development of ProSoft for a
term of three years. Travelbyus.com also entered into an employment agreement
with David Vasil under which David Vasil will act as Vice President, Engg. of
ProSoft for a period of three years.
SiteRabbit.com Inc.
On September 14, 2000, travelbyus.com acquired the remaining issued and
outstanding shares of SiteRabbit.com Inc. pursuant to a share purchase
agreement. SiteRabbit sells corporate charters and travel club memberships and
develops software for Internet applications. Subsequent to the acquisition,
SiteRabbit will discontinue selling new charters and memberships and will focus
on developing websites for the travel agencies who want to have their own
customized travelbyus website. As consideration for the SiteRabbit shares,
travelbyus.com issued 3,557,712 of its common shares. The share purchase
agreement also provides that travelbyus.com is required to issue additional
shares, to a maximum of 4,000,000, if certain conditions relating to the
travelbyus.com stock price are not fulfilled.
Concurrent with the execution of the SiteRabbit share purchase
agreement, travelbyus.com entered into an employment agreement with Michael
London under which Michael London will act as President of SiteRabbit for a term
of three years. Additionally, travelbyus.com and Michael Gibbore entered into an
employment agreement under which Michael Gibbore will act as the Senior Vice-
President, Finance of SiteRabbit for a term of three years. Additionally,
travelbyus.com and Alex Franke entered into an employment agreement under which
Alex Franke will act as the Vice-President, Internet Development of SiteRabbit
for a term of three years.
Muffin Communications Ltd.
On July 20, 2000, travelbyus.com acquired all of the issued and
outstanding shares of Muffin Communications Ltd. pursuant to a share purchase
agreement. Muffin Communications was in the business of the creation,
development and production of travel publications, travel television series and
e-commerce website media as well as other travel-related media including
wireless communications, however, the company has been inactive since January 1,
1999, except for certain contracts it has entered into during that time to
provide certain content for wireless communications. As consideration for the
Muffin Communication shares, travelbyus.com paid US$300,000 in cash and issued
1,000,000 of its common shares. Per the terms of the agreement, the share
consideration is subject to adjustment based on the price of the common shares
of travelbyus.com on December 15, 2000. If the market value of the stock at
December 15, 2000 falls below the guaranteed price of U.S. $6.70, additional
shares will be issued or cash will be paid to maintain the value of share
consideration at U.S. $6,700,000. The combination of shares and/or cash in
respect of this adjustment may be determined by travelbyus.com.
Concurrent with the execution of the Muffin Communications share
purchase agreement, travelbyus.com entered into an employment agreement with
Michael Rosenblum under which Michael Rosenblum will act as Senior Vice
President of Muffin Communications for a term of three years.
Recent Financing
travelbyus.com has entered into a financing and loan commitment with
Doerge Capital Management whereby Doerge Capital directly and through its
affiliates will purchase from travelbyus.com up to US $1.5 million liquidation
value of Series B preferred stock of Aviation Group held by travelbyus.com at
face value and provide to travelbyus.com a line of credit for up to US $10
million. The line of credit bears interest at 12% per annum, is collateralized
by a security interest in substantially all of travelbyus.com's assets, subject
to the security interests relating to its existing debentures, and expires on
October 15, 2001. Doerge Capital may elect to convert any amounts outstanding on
the line of credit, plus accrued and unpaid interest, to common shares of
travelbyus.com at a conversion price of US $2.00 per share. For each US $1
million drawn under the financing and loan commitment, travelbyus.com will grant
to Doerge Capital warrants to acquire 100,000 common shares exercisable at US
$2.00 per share and expiring three years following their grant. The financing
agreement requires travelbyus.com to use its best efforts to complete the
arrangement with Aviation Group and restricts travelbyus.com from paying
dividends or entering into certain other transactions without the consent of the
lender.
Legal Proceedings
travelbyus.com is not involved in any material pending legal
proceedings other than ordinary routine litigation considered to be incidental
to its business.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction
with travelbyus.com's consolidated financial statements and the accompanying
notes that appear elsewhere in this joint proxy statement/prospectus.
Overview
In November 1999, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued a
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discussion paper EITF 99-19, Reporting Revenue Gross Versus Net which has not
yet been finalized. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 -Revenue Recognition in Financial
Statements. Both of these reports include guidelines for determining the
appropriateness of gross versus net revenue reporting practices specifically in
the e-commerce and travel sectors. These guidelines focus on determining whether
a company in substance acts as principal, agent or broker in a transaction,
whether it takes title to the products, and whether it assumes the risks and
rewards of ownership. travelbyus.com has considered these recent developments in
determining its revenue recognition and reporting policies and believes its
current policies are conservative and consistent with this guidance. However, it
is possible that these evolving standards may allow or require travelbyus.com to
amend its practices for the recognition and reporting of revenues.
Travel sales revenues are derived from air ticket, hotel and car
reservations with air tickets making up the substantial majority of these
revenues. With certain air travel suppliers, travelbyus.com purchases airline
tickets in advance. Where travelbyus.com is considered to be the purchaser and
reseller of air tickets, the full amount charged to the customer is recognized
as revenue. In other situations where travelbyus.com is considered to act as an
agent and only makes an airline reservation when a customer requests an airline
booking, only the net commission or markup on the transaction is recognized as
revenue. Revenues earned for air travel, hotel and car reservations are
recognized when the travel services are ticketed to third parties. Revenues from
vacation packages are recognized on the date of departure. Override commissions
from travel suppliers are recognized at the end of each monthly or quarterly
measurement period if the specified target has been achieved and when
collectibility is reasonably assured.
travelbyus.com also derives revenues from its associate marketing
programs. Under these programs, travelbyus.com provides member retail travel
agencies with access to certain airline, hotel, cruise and car rental suppliers
under negotiated preferred supplier agreements. The member agencies are charged
an annual license fee for participation in the associate marketing programs. The
full amount of the license fee is recognized on a straight-line basis over the
license period.
Revenues from advertising are derived on the placement of advertising
on behalf of retail travel agencies. Revenues from technology sales are derived
from the sale of computer data storage systems.
Cost of travel sales consists of commissions paid to travel agencies
and the cost of airline tickets where travelbyus.com is considered to be the
purchaser and reseller of air tickets. Costs of advertising are derived from the
costs of placing advertising for travelbyus.com's customers. The cost of
technology sales consists of the manufacturing costs of the data storage
systems.
Results of Operations
In 1999, travelbyus.com changed its fiscal year end to September 30 to
synchronize the fiscal periods of travelbyus.com and its subsidiaries.
Accordingly, these financial statements compare the results for the nine months
ended June 30, 2000 with the nine months ended September 30, 1999. Certain
comparatives have been restated to reflect the current period presentation.
travelbyus.com's results in prior years do not provide a meaningful comparative,
due to changes in the nature of business.
Nine-Month Period Ended June 30, 2000 Compared to Nine-Month Period
Ended September 30, 1999
Revenues. For the nine months ended June 30, 2000, travel sales
revenues were $9,844,756 on gross bookings of $43,634,174, associate marketing
program revenues were $485,014, advertising revenues were $462,444, and
technology revenues were $1,223,959. Since none of travelbyus.com's travel
acquisitions were completed until the fall of 1999, there are no comparable
amounts for travel, associate marketing, advertising and technology revenues for
the nine months ended September 30, 1999.
Interest and other revenues for the nine months were $308,358 compared
to $6,972 for the nine months ended September 30, 1999. The increase is due to
travelbyus.com holding significantly higher cash balances raised from
travelbyus.com's equity financings during the period.
Expenses. General and administrative expenses increased $16,224,490
from $854,059 for the nine months
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ended September 30, 1999 to $17,078,549 for the nine months ended June 30, 2000.
The increase in expenses is due primarily to the decision to take travelbyus.com
in a new direction as a travel company. During the period, travelbyus.com
decided to center its operations in Reno, Nevada. As a result of this decision,
staffing levels have been increased significantly in Reno in anticipation of the
higher sales volumes to be realized in connection with the completion of the
website booking engine. The completion of the booking engine is scheduled for
late 2000.
In February 2000, travelbyus.com announced a binding letter of intent
to effect a business combination with Aviation Group, which is listed on the
Nasdaq SmallCap Market. travelbyus.com is currently working with Aviation Group
to obtain shareholder approval for the business combination. The costs to date,
which have been included in general and administrative expenses, are
approximately $1,307,000.
For the nine months ended June 30, 2000, travelbyus.com incurred
advertising expenses of $2,729,959, versus none for the nine months ended
September 30, 1999, as the travelbyus.com brand name was introduced with the
brand names currently used by travelbyus.com's operating divisions. Amortization
expenses of $691,003, versus $6,928 for the nine months ended September 30,
1999, included $365,510 related to capital and intangible assets and $325,493
related to deferred finance costs. Both amounts have increased significantly
over the prior period as a result of travelbyus.com's investment in new
subsidiaries and related financing. travelbyus.com has also incurred $390,000,
versus none for the nine months ended September 30, 1999, for expenses in
connection with the integration of operations at travelbyus.com's new state-of-
the-art call center in Reno.
For the nine months ended June 30, 2000, interest expense of $1,070,937
was incurred, versus $92,137 for the nine months ended September 30, 1999, as a
result of travelbyus.com's $11.95 million debenture financing in September 1999.
Net loss. The consolidated net loss before goodwill amortization for
the nine months ended June 30, 2000 was $18,435,897, or $0.28 per share,
compared to $1,772,215, or $0.05 per share, for the nine months ended September
30, 1999. Goodwill amortization related to travelbyus.com's recent acquisitions
was $3,279,192 for the period or $0.05 per share. Accordingly, the consolidated
net loss for the nine months was $21,715,088, or $0.33 per share, compared to
$1,772,215, or $0.05 per share, for the nine months ended September 30, 1999.
The increased loss was due to the significant expenses incurred to move
travelbyus.com into the travel sector.
Nine-Month Period Ended September 30, 1999 Compared to Year Ended
December 31, 1998
travelbyus.com incurred a loss of $1,772,215, or $0.05 per share during
the nine month period ended September 30, 1999 compared to a loss of $1,282,999,
or $0.07 per share for the year ended December 31, 1998. The increased loss
reflects management's decision to develop new business opportunities in the
Internet travel sector.
General and administrative expenses for the nine month period ended
September 30, 1999 were $854,059 as compared to $256,910 for the year ended
December 31, 1998. The increased expenditures for the nine month period ended
September 30, 1999 were due to professional services required to change
travelbyus.com's business from the resource sector to the travel sector,
salaries for travelbyus.com's new management team and travel and promotional
costs to promote shareholder interest in travelbyus.com's new business plan.
Website development costs of $362,435, versus none for the year ended
December 31, 1998, were incurred during the nine month period ended September
30, 1999 primarily for the initial design work of travelbyus.com's Web site. The
official launch date of the travelbyus.com Web site was January 21, 2000.
Financing of the expenditures during the nine month period ended
September 30, 1999 was primarily from the 12.5% debenture financing which
resulted in gross proceeds of $11,950,000. In addition, travelbyus.com raised
net proceeds of $1,136,000 by way of private placement and through the exercise
of stock options.
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<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
travelbyus.com incurred a loss of $1,282,999 for the year ended
December 31, 1998, compared to a loss of $10,780,020 for the year ended December
31, 1997. The reduced loss in 1998 reflects significantly lower exploration
costs and general administrative costs. During the latter part of 1997 and 1998,
travelbyus.com focused on minimizing costs.
General administrative expenses for the year ended December 31, 1998
were $256,910 compared to $528,215 during the prior year. The major components
of these costs were salaries and wages, shareholder communications expenses,
costs associated with the Toronto office, and travel costs. The lower costs in
1998 are the result of staff reductions and the significant reduction in
exploration activity.
Funding of expenditures in 1998 and 1997 was primarily from private
placements of travelbyus.com common shares. During the year ended December 31,
1998, 4,000,000 travelbyus.com common shares were issued under a private
placement for net proceeds of $464,634. During 1997, 3,100,000 travelbyus.com
common shares were issued under a private placement for net proceeds of
$4,683,663. In addition, 500,000 travelbyus.com common shares were issued for
net proceeds of $72,500 as part of the acquisition of certain Mexican
properties.
Liquidity and Capital Resources
Cash flow used from operating activities for the nine months ended June
30, 2000 was $8,282,925 compared to $984,433 for the period ended September 30,
1999. The increase in 2000 was attributed to the net loss before amortization of
capital assets and goodwill. travelbyus.com also funded operations through an
increase in accounts payable and accrued liabilities of $3.2 million and due to
related parties of $3.1 million.
Investing activities for the period ended June 30, 2000 totaled
$27,488,255 compared to $8,057,728 for the period ended September 30, 1999. The
major components of the 2000 expenditures include $16,840,054 for cash paid to
acquire travelbyus.com's subsidiaries, $6,695,392 in net advances for the
purchase of Series B preferred stock of Aviation Group, $939,769 in restricted
cash deposits for security for letters of credit issued to certain suppliers,
and $2,621,577 paid to acquire capital assets for travelbyus.com's call center
in Reno. The investing activities in 1999 were limited to the placement of
$7,200,000 in trust to complete travelbyus.com's first acquisition in October
1999.
Total financing of $44,677,979 for travelbyus.com's acquisitions and
operating expenses during the nine months ended June 30, 2000 was received from
a private placement of special warrants to raise $20 million and a private
placement of common shares to raise an additional $10 million. travelbyus.com
has also raised $4.5 million from the issuance of a convertible debenture to
Travel24.com, a Frankfurt-listed travel company, and $2.9 million from the
issuance of a promissory note to Aviation Group. In addition, travelbyus.com
received $5.6 million from the exercise of stock options and share purchase
warrants.
During the nine months ended September 30, 1999, the $12,252,441 in
financing activities was attributed mainly to travelbyus.com's debenture
financing to raise a total of $11.95 million. In terms of commitments over the
next 12 months, travelbyus.com must pay approximately $1,200,000 in interest
payments on the $9.45 million in outstanding debentures, approximately $360,000
in interest on the Travel24.com loan, and approximately $1.4 million in
operating lease payments. In addition, travelbyus.com has also provided a
guarantee to support a U.S. $3 million loan to Aviation Group. This loan must be
repaid in February 2001.
Management believes that travelbyus.com has sufficient resources from
existing reserves, proposed private placements and ongoing operations to satisfy
ongoing cash requirements for operations, Web site costs, planned acquisitions
and material commitments. Additional cash acquisitions will require
travelbyus.com to raise additional funds through debt or equity financings or
through the sale of its investments. In the event sufficient financing is not
available, travelbyus.com may be required to postpone its acquisition activity.
Management believes that it has already acquired the key operating companies
required to substantially complete the travelbyus.com business model. Although
future acquisitions could improve the operations and add important content to
the website, in the opinion of management, no acquisition is critical to the
success of the model.
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Principal Shareholders of travelbyus.com
The following table sets forth certain information, as of September 15,
2000, with respect to the beneficial ownership of shares of travelbyus.com's
common stock (i) by any person or "group," as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, known to us to own
beneficially more than 5% of the outstanding shares of common stock, (ii) by
each director of travelbyus.com and each executive officer of travelbyus.com
named in the Summary Compensation Table, and (iii) by all directors and
executive officers of travelbyus.com as a group. Unless otherwise indicated,
travelbyus.com believes that each person named below possesses sole voting and
investment power over his shares of common stock.
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned /(1)/ Percent of Total /(2)/
------------------- ------------------ ----------------
William Kerby 6,333,334 /(3)/ 7.0%
204-3237 King George Highway
South Surrey, B.C.
Canada V4P 1B7
Michael Farrugia 1,800,000 /(4)/ 2.0%
c/o MB Capital Investments Ltd.
Jardine House, 4/th/ Floor
33-35 Reid Street
Hamilton HM12
Bermuda
John Fenyes 1,279,000 /(5)/ 1.4%
3301 South Virginia Street
Reno, Nevada 89502
John Craig 62,500 /(6)/ *
c/o Cassels Brock & Blackwell LLP
40 King Street West, Suite 2100
Toronto, Ontario
Canada M5H 3C2
Jon Snyder 1,279,000 /(7)/ 1.4%
3301 South Virginia Street
Reno, Nevada 89502
Alan Thompson 137,500 /(8)/ *
c/o Millbank Marketing
210-1455 Bellview Avenue
West Vancouver, B.C.
Canada
All executive officers and directors
as a group (12 persons) 13,688,903 /(9)/ 14.8%
-------------------------------
* Less than 1%
(1) This information has been furnished by the respective officers and
directors. A person is deemed to be the beneficial owner of securities
that can be acquired within 60 days from the date set forth above
through the exercise of any option, warrant or convertible or
exchangeable note.
(2) In calculating percentage ownership, all common shares that the named
shareholder has the right to acquire upon exercise of any option,
warrant or convertible or exchangeable note are deemed to be
outstanding for the purpose of computing the percentage of common
stockowned by the shareholder, but are not deemed outstanding for the
purpose of computing the percentage of common stock owned by any other
shareholders. Percentages of shares beneficially owned are based upon
90,839,357 common shares outstanding.
(3) Includes options to purchase 250,000 common shares.
(4) Includes options to purchase 1,000,000 common shares.
(5) Includes options to purchase 125,000 common shares.
(6) Represents options to purchase 62,500 shares.
(7) Includes options to purchase 125,000 common shares.
(8) Represents options to purchase 137,500 common shares.
(9) Includes vested options to purchase 1,487,500 common shares.
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Directors and Executive Officers
The names, ages, positions and municipalities of residence of the executive
officers and directors of travelbyus.com are as follows:
<TABLE>
<CAPTION>
Name Age Position Residence
---------------------------- --- --------------------------------------------------- ----------------------------
<S> <C> <C> <C>
Michael A. Farrugia/(1)//(2)/ 55 Director and Chairman of the Board Bermuda
William Kerby 42 Director, Vice Chairman and Chief Executive Officer White Rock, British Columbia
John Fenyes 52 Director, Executive Vice President and Chief Sparks, Nevada
Operating Officer
John H. Craig/(1)//(2)/ 52 Director and Secretary Toronto, Ontario
Alan Thompson/(1)//(2)/ 60 Director Vancouver, British Columbia
Jon Snyder 53 President Reno, Nevada
Grant Kuramoto 33 Chief Financial Officer Richmond, British Columbia
Ian J. Hooker 52 Vice President-Call Center Operations Reno, Nevada
Robert M. Coffey 53 Senior Vice President-Business Development Reno, Nevada
Michael C. Gibbore 42 Senior Vice President-Finance San Diego, California
Gary Saner 49 Chief Technology Officer San Diego, California
J. Michael London 48 President-New Media Division San Diego, California
</TABLE>
---------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
The following sets forth certain background information for the executive
officers and directors of travelbyus.com, including their principal occupations:
Michael A. Farrugia was appointed Director and Chairman of the Board in
April 1997. Mr. Farrugia has been the Chairman and President of MB Capital
Investments Ltd., a merchant bank, since June 1997. Prior thereto, Mr. Farrugia
was Chairman and President of MB Capital Corp., a securities dealer and merchant
bank from 1994. Mr. Farrugia also serves as a director on the boards of
directors for Scorpion Minerals Inc., MacMillan Gold Corp. and Martlet Venture
Management Ltd.
William Kerby has been Vice Chairman, Chief Executive Officer and a
director of travelbyus.com since April 1999. Prior to joining travelbyus.com,
Mr. Kerby was the founder, President and Chief Executive Officer of Leisure
Canada Inc., a publicly traded company in the travel industry, from January 1995
to March 1999. Leisure Canada Inc. specializes in the development of four and
five star hotel and resort properties. During his tenure with Leisure Canada
Inc., Mr. Kerby engineered the development of Leisure Canada's travel division
assets. These assets included TravelPlus (formerly Goliger's Travel) and Travel
Trade International with over 200 agencies across Canada, Altracs Publishing &
Multimedia, producing Leisure Canada Magazine and Canadian Traveller, Bluebird
Holidays/Tour Division in Great Britain and South Africa, Skyhigh Holidays and
Cook Island Holidays in Canada.
John Fenyes has been Executive Vice President, Chief Operating Officer and
director of travelbyus.com and Express Vacations since November 1999. Mr. Fenyes
has been involved in the travel industry for over 25 years, holding key
positions, including Vice President, Product Development with American Airlines
FlyAAway Vacations from August 1998 to November 1999. During his tenure with
American Airways FlyAAway Vacations, Mr. Fenyes developed one of the first in-
house vacation package programs. Most recently, Mr. Fenyes was Director of
Marketing Programs for ITT, Sheraton and General Manager of "Vacations by
Sheraton", now part of the Starwood Group, from December 1995 to August 1998.
John H. Craig has been Secretary and a director of travelbyus.com since
June 1996. Mr. Craig is a partner in the law firm Cassels Brock & Blackwell LLP
specializing in securities law since 1995. Mr. Craig also serves on the boards
of directors for Derlan Industries Limited, Glyko Biomedical Ltd. and TVX Gold
Inc.
Alan Thompson has been a director of travelbyus.com since April 1999. Mr.
Thompson has been involved in the tour and travel business for over 40 years,
operating in all aspects of the industry including airlines, wholesale and
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<PAGE>
retail. Mr. Thompson founded a wholesale and charter operation in Canada in 1964
which operated a fleet of five 747's with weekly tours to the United Kingdom and
Europe. In 1993, the operations were sold. In 1995, Mr. Thompson started a
telecommunications company that was a forerunner in the de-regulated local dial
tone business in British Columbia. Mr. Thompson sold the telecommunications
company to Texas Metronet Inc. in 1998. Mr. Thompson has been President of the
Millbank Group of Companies, which deals in financing, mortgages and venture
capital and operates a diversified group of companies since 1991.
Jon Snyder has been President of travelbyus.com and Express Vacations since
November 1999. Mr. Snyder has been involved in the travel industry for over 30
years and was one of the principals involved in the creation of American
Airlines FlyAAway Vacations program from August 1998 to November 1999. During
his tenure with American Airlines FlyAAway Vacations, Mr. Snyder served as
President. From September 1992 to August 1998, Mr. Snyder was a partner in FBN.
Due to divorce proceedings, Mr. Snyder filed for personal bankruptcy protection
in 1996.
Grant Kuramoto has been Chief Financial Officer of travelbyus.com since May
1999. Previously, Mr. Kuramoto served as corporate controller for Manex
Services, a company providing management services to publicly traded junior
resource companies from April 1998 to May 1999. Prior to joining Manex Services,
Mr. Kuramoto was a business assurance manager with Coopers and Lybrand (now
PricewaterhouseCoopers LLP) from September 1990 to April 1998.
J. Michael London was appointed President New Media Division of
travelbyus.com in September 2000, when travelbyus.com purchased SiteRabbit.com.
Mr. London has been in the travel business for over 20 years, and has extensive
experience in the cruise, meetings and conventions, and travel consulting
segments of the travel industry. From 1990 to 1996, he was President of San
Diego-based Cruise Holiday International, one of the largest cruise marketing
businesses in the world. From 1996 to 1997, he served as Senior Vice President
of World Travel Meetings, a California-based travel marketing and consulting
business. Beginning 1997, Mr. London was a founder of SiteRabbit.com and served
as its President and Chief Executive Officer.
Michael C. Gibbore was appointed Vice President Finance of travelbyus.com
in September 2000, when travelbyus.com purchased SiteRabbit.com. From 1980 to
1988, Mr. Gibbore worked in the Emerging Business Services division of Coopers &
Lybrand, specializing in assisting start-up and high growth companies in the
creation of financial and accounting systems, and in initial and secondary
public offerings. From 1988 to 1995, Mr. Gibbore was Corporate Controller and
Chief Financial Officer for two healthcare start-up companies. From 1995 to
1998, Mr. Gibbore was Corporate Controller for the Americas for Mobile Systems
International. In 1998, Mr. Gibbore became Chief Financial Officer of
SiteRabbit.com.
Gary Saner was appointed Chief Technology Officer of travelbyus.com in
September 2000, when travelbyus.com purchased ProSoft Corporation. Mr. Sander
has worked in the software development field for over 18 years. From 1994 to
1995, Mr. Saner was Manager of Research & Development of Litton Software
Systems, a division of Litton Industries. In December 1995, Mr. Saner was a co-
founder and became President and Chief Executive Officer of ProSoft Corporation.
He is a member of the San Diego Software Internet & Industry Council and
Microsoft Development Network.
Ian J. Hooker has been Vice President-Call Center Operations at
travelbyus.com since September 2000. He was Vice President of Operations at Club
America Vacations in Atlanta, Georgia from April 1994 to September 2000.
Robert M. Coffey has been Senior Vice President-Business Development at
travelbyus.com since August 2000. He was Vice President at Certified Vacations
in Fort Lauderdale, Florida from July 1996 to November 1997. From July 1989 to
July 1996, Mr. Coffey was Vice President Product Development and Vice President
of Marketing at Alamo Vacation in Fort Lauderdale, Florida.
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Executive Compensation
Summary Compensation Table
The following table contains information about the compensation paid to or
earned by travelbyus.com's Vice Chairman and Chief Executive Officer for the
nine-month period ended September 30, 1999. During the nine-month period ended
September 30, 1999, travelbyus.com had no other named executive officer pursuant
to Ontario Regulation 638/93 made under the Ontario Securities Act because, as
at September 30, 1999, no executive officer earned more than $100,000 in total
salary and bonus. Specific aspects of the compensation of the named executive
officer are dealt with in further detail in subsequent tables.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------------- ------------------------------------------
Grants Pay-outs
---------------------------- ----------
Other Restricted
Annual Securities Shares or
Remun- Under Restricted
Name and principal Fiscal Salary Bonus eration Option/SARs Share Units LTIP Pay- Other Compen-
position Year ($) ($) ($) Granted (#) ($) outs ($) sation ($)
---------- ------ ------- ----- ----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Kerby/(1)/ 1999/(2)/ - - 81,000/(3)/ 500,000 - - -
Chief Executive
Officer
Gary German 1998 146,000 - - - - - -
former President 1997 150,000 - - 50,000 - - -
</TABLE>
-----------------------------------------------
(1) Mr. Kerby joined travelbyus.com in April 1999. The information provided for
Mr. Kerby represents a six month period.
(2) travelbyus.com changed its year end to September 30 and as such year end
information for 1999 represents a nine-month period.
(3) Paid to 151156 Canada Ltd. as a consulting fee for the consulting services
of Mr. Kerby.
Option Grants in Nine Month Period Ended September 30, 1999
The following table provides details on stock options granted to the named
executive officer during the nine- month period ended September 30, 1999 under
the terms of travelbyus.com's stock option plan.
Options Granted During the Nine Month Period Ended September 30, 1999
<TABLE>
<CAPTION>
Market Value of
Securities
Underlying
Common Shares % of Total Options Options on
Under Granted Exercise Price Date of Grant
Name Options Granted in Fiscal Year ($/sh.) ($/sh.) Expiration Date
---- --------------- ---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
William Kerby 250,000 9.1% $0.46 $0.35/(1)/ April 20, 2004
250,000 9.1% $1.00 $0.73/(2)/ June 03, 2004
</TABLE>
----------------------------------
(1) Based on the closing price of the Common Shares on the TSE on April 20,
1999.
(2) Based on the closing price of the Common Shares on the TSE on June 3, 1999.
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<PAGE>
Options Exercised and Value of Unexercised Option
The following table provides detailed information regarding options
exercised by the named executive officer during the nine-month period ended
September 30, 1999. In addition, details on remaining options held are provided.
<TABLE>
<CAPTION>
Aggregated Option Exercises in the Nine Month Period Ended September 30, 1999
and Year End Option Values
Unexercised options Value of Unexercised
Securities Aggregate at Financial Year End in-the-money options at
acquired on value Exercisable/ Financial Year End Exercisable/
Name Exercise (#) realized ($) Unexercisable (#) Unexercisable ($)
---- ------------ ------------ ----------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Kerby 100,000 24,000/(1)/
150,000 46,500/(2)/ 250,000 - 287,500/(3)/ -
</TABLE>
---------------------------------------
(1) Based on the closing price of the Common Shares on the TSE on August 23,
1999 of $0.70.
(2) Based on the closing price of the Common Shares on the TSE on August 24,
1999 of $0.77.
(3) Based on the closing price of the Common Shares on the TSE on September 30,
1999 of $2.15.
Other Compensation Matters
There were no long-term incentive awards made to the named executive
officer during the nine month period ended September 30, 1999. There are no
pension plan benefits in place for the named executive officer.
Indebtedness of Directors, Executive Officers and Senior Officers
During the nine month period ended September 30, 1999, no loans were made
by travelbyus.com to any senior officer or director or any key employee of
travelbyus.com or any of their other respective associates for any reason
whatsoever.
Compensation of Directors
None of the directors of travelbyus.com were compensated in their
capacity as a director by travelbyus.com during the nine month period ended
September 30, 1999 pursuant to any arrangement or in lieu of any standard
arrangement save and except through the granting of stock options.
During the nine month period ended September 30, 1999, options to
purchase 1,450,000 common shares of travelbyus.com were granted to directors of
travelbyus.com.
Employment Contracts
There are no employment contracts between travelbyus.com and the named
executive officer and no compensatory plan or arrangement that results or will
result from the resignation, retirement or any other termination of employment
of such officer's employment with travelbyus.com, from a change of control of
travelbyus.com or a change in the named executive officer's responsibilities
following a change-in-control.
Stock Option Plan
travelbyus.com's stock option plan provides that its board of directors
may, from time to time, in its discretion, grant to directors, officers,
employees and consultants of travelbyus.com, or any subsidiary of
travelbyus.com, the option to purchase common shares, provided that the number
of common shares reserved for issuance under the stock option plan shall not
exceed 6,500,000 common shares, or such greater number as may be approved from
time to time by the
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shareholders of travelbyus.com. In addition, the number of common shares
reserved for issuance to any one person shall not exceed 5% of the issued and
outstanding common shares on a non-diluted basis at the time of such grant. All
options currently held by directors, officers and employees of travelbyus.com
have been granted pursuant to the stock option plan or its predecessor. The
stock option plan provides that the terms of the option and the option price
shall be fixed by the directors of travelbyus.com subject to the price
restrictions imposed by The Toronto Stock Exchange.
The stock option plan also provides that no option shall be granted to any
person except upon recommendation of the directors of travelbyus.com and that
only optionees may receive stock options. Stock options granted under the stock
option plan may not be for a period of less than one year or longer than ten
years and the exercise price must be paid in full upon exercise of the option.
Options under the stock option plan are non-assignable. If prior to the exercise
of an option, the holder ceases to be an optionee as a result of his or her
resignation or discharge, all options granted to the optionee under the stock
option plan are terminated and are of no further force or effect. If prior to
the exercise of an option, the holder ceases to be an optionee for reasons other
than his or her resignation or discharge, the option of the holder shall be
limited to the number of shares purchasable by him immediately prior to the time
of his cessation of office or employment and he shall have no right to purchase
any other shares. Options must be exercised within eighteen months of
termination of employment or cessation of position with travelbyus.com, provided
that if the cessation of office, directorship, consulting arrangement or
employment was by reason of death, the option must be exercised within 12 months
after such death, subject to the expiry date of such option. As of September 30,
2000, travelbyus.com had outstanding the following options under the stock
option plan:
<TABLE>
<CAPTION>
Market Value of
Number of Exercise Price Common Shares
Common Shares Per Common Under Option on
Name Under Option Share Date of Grant Date of Grant Expiry Date
---- ------------ ----- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Six executive officers as a group 250,000 $1.00 Jun. 30/99 $0.50 Jun. 30/04
500,000 $1.65 Nov. 03/99 $1.65 Nov. 03/04
519,000 $1.70 Sept. 14/00 $1.70 Sept. 14/03
245,000 $1.50 Aug. 15/00 $1.50 Aug. 15/05
175,000 $1.62 Aug. 28/00 $1.62 Aug. 28/05
Three directors who are not 250,000 $0.12 Mar. 09/98 $0.11 Mar. 09/03
executive officers as a group 600,000 $0.79 Jun. 03/99 $0.73 Jun. 03/04
250,000 $1.00 Jun. 30/99 $0.50 Jun. 30/04
100,000 $3.90 Jan. 13/00 $3.90 Jan. 13/05
Employees who are not 301,300 $0.46 Apr. 20/99 $0.35 Apr. 20/04
executive officers or directors as 1,196,500 $4.28 Dec. 23/99 $4.28 Dec. 23/05
a group 120,000 $3.80-$4.90 Jan. 05-27/00 $3.80-$4.90 Jan. 05-27/05
9,000 $3.30 Feb. 21/00 $3.30 Feb. 21/05
130,500 $4.39-$4.50 Mar. 06-27/00 $4.39-$4.50 Mar. 06-27/05
114,000 $3.75 Apr. 03/00 $3.75 Apr. 03/05
696,500 $2.35-$3.25 May 01-25/00 $2.35-$3.25 May 01-25/05
30,000 $2.05 July 04/00 $2.05 July 05/05
175,000 $1.50 Jul. 20/00 $1.50 Jul. 20/03
600,000 $1.70 Sept. 14/00 $1.70 Sept. 14/03
195,000 $1.70 Sept. 14/00 $1.70 Sept. 14/05
Consultants as a group
89,000 $0.55 Jul. 12/99 $0.48 Jul. 12/04
250,000 $3.30 Dec. 06/99 $3.30 Dec. 06/04
200,000 $3.20 Feb. 09/00 $3.05 Feb. 03/02
50,000 $3.75 Jan. 28/00 $3.75 Jan. 28/01
175,000 $1.65 Nov. 03/99 $1.65 Nov. 03/04
12,000 $3.40 May 09/00 $3.40 May 09/02
</TABLE>
Description of Share Capital
The authorized capital of travelbyus.com consists of an unlimited number of
common shares of which 90,839,357 common shares were issued and outstanding as
of September 18, 2000. The following is a summary of the principal attributes of
the common shares.
The holders of the common shares are entitled to receive notice of, attend
and vote at any meeting of shareholders of travelbyus.com, except those meetings
where only the holders of another class or series of shares are entitled to vote
separately as a class or series. The common shares carry one vote per share.
The holders of common shares are entitled to receive on an equal basis such
dividends as may be declared by the board of directors of travelbyus.com, out of
funds legally available therefor, subject to the preferential rights of any
shares ranking prior to the common shares.
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In the event of the liquidation, dissolution or winding-up of
travelbyus.com, the holders of travelbyus.com will be entitled to receive on a
pro rata basis all the assets of travelbyus.com remaining after payment of all
its liabilities, subject to the preferential rights of any shares ranking prior
to the common shares.
No pre-emptive or conversion rights attach to the common shares, and the
common shares when fully paid, will not be liable to further call or assessment.
No other class of voting shares may be created without the approval of the
holders of the common shares voting separately as a class.
Prior Sales
The following table contains details of the prior sales of securities of
travelbyus.com for the 12-month period prior to the date hereof:
Number of Aggregate
Date of Issue Common Shares Proceeds (*)
------------- ------------- ------------
April 1999/(1)/ 20,000,000 $1,200,000
January 1999 to Sept. 2000/(2)/ 1,397,200 575,452
September 1999 to Sept. 2000/(3)/ 9,360,700 6,364,800
October 4, 1999/(4)/ 2,000,000 4,040,000
October 4, 1999/(5)/ 150,000 303,000
October 13, 1999/(6)/ 1,000,000 1,720,000
November 1, 1999/(7)/ 3,462,000 4,916,040
November 1, 1999/(8)/ 150,000 255,000
November 15, 1999/(9)/ 2,855,883 4,997,795
December 1, 1999/(10)/ 5,000,000 13,500,000
December 1, 1999/(11)/ 3,028,000 8,175,604
December 7, 1999/(12)/ 350,000 1,211,000
December 15, 1999/(13)/ 4,000,000 10,000,000
January 26, 2000 /(14)/ 1,146,497 1,777,070
January, 2000 to Sept. 2000/(15)/ 206,750 723,625
February 2000 to May 2000/(16)/ 215,000 537,500
April 3, 2000/(17)/ 690,558 2,589,583
April 4, 2000/(18)/ 2,619,000 9,428,400
April 2000 to May 2000/(19)/ 147,500 100,300
April 2000 to Aug. 2000/(20)/ 1,077,700 2,694,250
May 23, 2000/(21)/ 3,280,000 9,184,000
June 30, 2000/(22)/ 2,000,000 7,396,500
July 17, 2000/(23)/ 40,000 65,200
July 20, 2000/(24)/ 1,000,000 1,500,000
Aug. 8, 2000/(25)/ 2,541,591 0
Sept. 14, 2000/(26)/ 1,260,000 4,682,475
Sept. 14, 2000/(27)/ 3,557,712 13,221,347
Sept. 25, 2000/(28)/ 3,280,000 -
(*) Shares issued for acquisitions are shown using market price on date of
issue.
-------------------------------------
(1) In April 1999, travelbyus.com issued and sold on a private placement basis,
20,000,000 common shares at a price of $0.06 per common share.
(2) Issued upon exercise of stock options.
(3) Issued upon exercise of debenture warrants.
(4) Issued pursuant to the Gotham/Mr. Cheaps Share Purchase Agreement. See
"travelbyus.com -Business-Recent Acquisitions--Gotham Media Group, Ltd. and
Mr. Cheaps Travel, Ltd."
(5) Issued as a finders fee pursuant to the Gotham/Mr. Cheaps Share Purchase
Agreement. See "travelbyus.com-Business-Recent Acquisitions-Gotham Media
Group, Ltd. and Mr. Cheaps Travel, Ltd."
(6) Issued pursuant to the IT Agreement. See "travelbyus.com-Business-Recent
Acquisitions-International Tours, Inc., Galaxsea Cruises and Tours, Inc.
and IT Cruise, Inc."
(7) Issued pursuant to the Express Vacations Unit Purchase Agreement. See
"travelbyus.com-Business-Recent Acquisitions - Express Vacations, LLC."
(8) Issued as a finders fee pursuant to the Express Vacations Unit Purchase
Agreement. See "travelbyus.com-Business-Recent Acquisitions-Express
Vacations, LLC."
(9) Issued pursuant to the 1999 Travel Magazine Agreement. See "travelbyus.com-
Business-Recent Acquisitions-Travel Magazine."
(10) Issued pursuant to the Cheap Seats Share Purchase Agreement. See
"travelbyus.com-Business-Recent Acquisitions-Cheap Seats, Inc."
(11) Issued pursuant to the Legacy Share Purchase Agreement. See "travelbyus.
com-Business-Recent Acquisitions-Legacy Storage Systems Corp."
(12) Issued pursuant to the 1-800 Agreement. See "travelbyus.com-Business-Recent
Acquisitions-1-800-i-Travel."
(13) A private placement of 4,000,000 units at a price of $2.50 per unit. Each
unit is comprised of one common share and one-half of one common share
purchase warrant. Each whole unit warrant entitles the holder thereof to
purchase one common share at a price of $3.50 per share at any time on or
before March 15, 2001. Pursuant to the private placement, travelbyus.com
issued 400,000 compensation options to the agent, each unit option is
exercisable into one common share at an exercise price of $2.50 per share
at any time on or before 4:30 p.m., Toronto time, on March 15, 2001.
(14) Issued pursuant to the 2000 Travel Magazine Agreement. See "travelbyus.com-
Business-Recent Acquisitions-Travel Magazine."
(15) Issued upon exercise of unit warrants.
(16) Issued upon exercise of unit options.
(17) Issued pursuant to the BTS Agreement. See "travelbyus.com-Business-Recent
Acquisitions-Bell Travel Systems."
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(18) Issued pursuant to the Cruise Shoppes Agreement. See "travelbyus.com-
Business-Recent Acquisitions-Cruise Shoppes America, Ltd."
(19) Issued upon exercise of brokers' warrants issued in connection with
debenture warrants.
(20) Issued upon exercise of special warrants.
(21) Issued upon the purchase of Epoch Technology Inc. See "travelbyus.com-
Business-Recent Acquisitions-Epoch Technology Inc."
(22) Issued at a price of $3.70 per share to Travel24.com.
(23) Issued to Euro Consulting Group for finder's fee in connection with ITA
Software Agreement.
(24) Issued pursuant to the acquisition of Muffin Communications, Ltd. See
"Business-Recent Acquisitions-Muffin Communications, Ltd."
(25) Issued additional common shares pursuant to the adjustment clause contained
in the Cruise Shoppes America Ltd. purchase agreement in order to maintain
the value of total consideration.
(26) Issued pursuant to the purchase of ProSoft Corporation. See "Business-
Recent Acquisitions-ProSoft Corporation."
(27) Issued pursuant to the purchase of Site Rabbit.com Inc. See "Business-
Recent Acquisitions-Site Rabbit.com Inc."
(28) Issued additional common shares pursuant to the adjustment clause contained
in the Epoch Technology Inc. purchase agreement in order to maintain the
value of total consideration.
Interest of Management and Others in Material Transactions
No director or senior officer of travelbyus.com or any shareholder holding
of record or beneficially, directly or indirectly, more than 10% of the issued
common shares of travelbyus.com, or any of their respective associates or
affiliates, had any material interest, directly or indirectly, in any
transaction with travelbyus.com, or in any proposed transaction, within the past
three years, except as set out in this prospectus or noted below.
In April 1999, travelbyus.com completed a private placement of 20,000,000
common shares at an issue price of $0.06. William Kerby, the Vice Chairman and
Chief Executive Officer of travelbyus.com, subscribed for 6,083,334 of such
common shares for gross proceeds to travelbyus.com of $365,000.
Auditors, Registrar and Transfer Agent
The auditors of travelbyus.com are PricewaterhouseCoopers LLP, Chartered
Accountants, Vancouver, British Columbia.
The registrar and transfer agent for the common shares is Montreal Trust
Company of Canada at its principal offices in the City of Toronto, Ontario.
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AVIATION GROUP
Business
General
Aviation Group was organized in December 1995 to serve as a holding
company for businesses beneficially owned by Aviation Group's Chairman of the
Board, Lee Sanders. In August 1997, Aviation Group completed its initial public
offering of shares of its common stock and redeemable common stock purchase
warrants. These shares and warrants are listed and traded on the Nasdaq SmallCap
Market and the Boston Stock Exchange.
Aviation Group provides services and products to airline companies and
other aviation firms primarily in the United States. Aviation Group's business
consists of:
- painting and paint stripping services for commercial and freight
aircraft at facilities located in Portland, Oregon, New Iberia,
Louisiana and Greenville, Mississippi; and
- the manufacture, sale and repair of aircraft batteries and
aircraft and truck weighing scales.
In August 1999, Aviation Group determined to seek to shift its assets
and capital into an industry with significant growth opportunity. In February
2000, Aviation Group entered into letters of intent with Global Leisure and
travelbyus.com to effect a three-way business combination intended to effect a
shift of its assets and capital into the e-commerce travel industry.
On May 3, 2000, Aviation Group entered into an arrangement agreement
under Ontario, Canada law to acquire travelbyus.com, an e-commerce travel
company.
In March 2000, Aviation Group acquired a controlling stock interest in
Global Leisure. Global Leisure is primarily engaged in the wholesale and retail
sale of travel packages for both domestic and Pacific Island and Australian
destinations. Travel packages created by Global Leisure include airline seats,
hotel accommodations, automobile rentals and other land components. Global
Leisure contracts with vendors and primarily markets the packages directly to
retail travel agents. Aviation Group acquired 100% ownership of Global Leisure
in May 2000.
The principal executive offices of Aviation Group are located at 700
North Pearl Street, Suite 2170, Dallas, Texas 75201, and the telephone number is
(214) 922-8100.
History
Aviation Group's historical business objective has been to grow through
acquisition of other aviation-related companies, assets or products or service
lines that would complement or expand its existing businesses. Since 1995,
Aviation Group has purchased five separate companies. Management believed that
acquisitions would enable Aviation Group to leverage its fixed costs of
operations and that Aviation Group would be able to use its common stock as the
major source of its capital to execute its acquisition strategy.
Aviation Group acquired:
- In March 1996, 99% of the outstanding stock of Pride Aviation,
Inc. Pride, now known as Aviation Exteriors Louisiana, Inc.,
engages in the aircraft painting and paint stripping business in
New Iberia, Louisiana.
- In August 1997, all of the outstanding stock of Casper Air
Service. Casper operated an aircraft fueling, light maintenance
and parts sales business in Casper, Wyoming.
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- In March 1998, all of the outstanding equity interests in Aero
Design, Inc. and Battery Shop, L.L.C. Aero Design and Battery
Shop manufacture, sell and repair aircraft replacement batteries
at their facilities near Nashville, Tennessee.
- In August 1998, all of the common stock of General
Electrodynamics Corporation. General Electrodynamics, which is
based in Arlington, Texas, manufactures and sells truck scales,
aircraft scales and other aviation components used by the
aviation maintenance and transportation industries.
While management was successful in identifying additional candidates
that met its acquisition criteria, the trading price and volume of Aviation
Group's shares created a significantly negative environment for acquiring
aviation businesses using its stock as consideration. Aviation Group management
has endeavored since 1998 to remedy this condition, while continuing to incur
high corporate overhead costs necessary to properly operate and maintain a
larger aviation service enterprise.
In August 1999, the Aviation Group's board of directors approved a
management plan to engage investment advisors and pursue the additional strategy
of selling all or part of Aviation Group's businesses. The major factors
influencing this decision were:
- the board believed that Aviation Group's stock was trading below
the value of its existing underlying companies;
- acquisitions of new companies at then existing share price levels
would be dilutive to existing shareholders; and
- continuation of its historical corporate overhead strategy would
erode shareholder value.
Aviation Group commenced discussions with third parties regarding a
sale or merger of the entire enterprise or the sale of certain remaining
segments of Aviation Group's operations on an individual basis. Various parties
interested in Aviation Group's status as a public company expressed interest in
a business combination, spin-off, or other transaction. While this process was
underway, management cut overhead costs and focused its energies on the
maximization of cashflows from its existing business units.
On December 31, 1999, Aviation Group's subsidiary Tri-Star Airline
Services, Inc. sold all of its ground handling assets and operations, primarily
located at Dallas-Ft. Worth International Airport, to Tri-Star Acquisition
Corp., d/b/a Servisair Texas, Inc. The purchase price was $1,500,000 in cash.
Tri-Star Airline Services retained all accounts payable, accounts receivable and
inventories of the business.
On February 8, 2000, Casper Air Service sold its operations and most of
its assets located in Casper, Wyoming to Casper Jet Center Fueling, L.L.C. The
purchase price was $200,000 in cash and the assumption by Casper Jet Center
Fueling of approximately $600,000 of Casper Air Service's accounts payable.
Casper Air Service retained its inventory of aircraft parts, three aircraft and
all of its accounts receivable. Casper Air Service intends to sell or otherwise
realize on these retained assets before June 30, 2000 and will not continue in
business.
In late February 2000, Aviation Group entered into letters of intent
and publicly announced a proposed three-way business combination with Global
Leisure and travelbyus.com. The business combination contemplated the
acquisition by Aviation Group of the other two companies with financing provided
by travelbyus.com and private investment capital raised by Doerge Capital
Management. Doerge Capital's clients and affiliates had previously invested
significant capital into Global Leisure. On May 10, 2000, Aviation Group
completed the acquisition of Global Leisure as described below.
Acquisition of Global Leisure Travel, Inc.
On May 10, 2000, Aviation Group completed its acquisition of Global
Leisure. Global Leisure is now a wholly owned subsidiary of Aviation Group. As
consideration for the purchase, Aviation Group issued:
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- $16,500,000 in liquidation preference, represented by 1,650
shares, of its Series A convertible preferred stock and Series A
warrants to purchase 750,000 shares of its common stock at an
exercise price of $5 per share, to the former owners of Global
Leisure in exchange for the transfer or cancellation of the stock
and indebtedness owned by them and their affiliates; and
- Series B warrants to purchase 3,500,000 shares of its common
stock at an exercise price of $3 per share, to the former
warrantholders in Global Leisure in exchange for cancellation of
their warrants.
In connection with the acquisition, Aviation Group also invested $20.9
million in Global Leisure. These funds were used primarily to pay debts and
other payables of Global Leisure. The financing for this investment by Aviation
Group in Global Leisure was provided by:
- $5.0 million invested by travelbyus.com through the purchase of
500 shares of Series B preferred stock from Aviation Group at
$10,000 per share;
- $2.0 million invested by private investors in the purchase of
750,000 shares of Aviation Group common stock at $2.667 per
share; and
- Approximately $16.5 million invested by private investors in the
purchase of 1,653 units of Aviation Group's Series B preferred
stock and Series C warrants, at a price of $10,000 per unit, each
unit consisting of one share and 750 warrants.
Upon the completion of both the arrangement with travelbyus.com and the
acquisition by Aviation Group of Global Leisure and related financing, Aviation
Group agreed to deliver to the broker/dealer arranging the financing, Doerge
Capital Management, a division of Balis Lewittes & Coleman, Inc., a fee of $1.0
million and warrants to purchase 1.5 million shares of common stock of Aviation
Group at a weighted average exercise price of $4.07 per share.
Existing Business
Besides Global Leisure, Aviation Group has two business divisions.
These business divisions are as follows:
- Aircraft Paint Services Division: This division is made up of
aircraft paint services provided by three of Aviation Group's
subsidiaries. Aviation Group's subsidiaries, Aviation Exteriors
Louisiana, Inc. and Aviation Exteriors Portland, Inc., provide
painting and paint stripping services for commercial and freight
aircraft at their facilities located in New Iberia, Louisiana and
Portland, Oregon. Their primary customers are United Parcel
Service and Federal Express. In January 1999, Aviation Group
executed a lease and established a new paint facility at
Greenville, Mississippi through a new subsidiary, Aviation
Exteriors Greenville, Inc.
- Aircraft Products Division: Aviation Group manufactures and sells
certain types of aircraft components and equipment through three
of its subsidiaries. Aero Design manufactures and sells aircraft
batteries for the commercial airline industry. Battery Shop
repairs batteries for the aviation industry. General
Electrodynamics Corporation primarily manufactures and sells
aircraft and truck weighing scales.
Business of Global Leisure Travel, Inc.
Global Leisure provides travel related services primarily through
retail travel agencies. Global Leisure is a seller of bulk travel services,
maintaining several wholesale and discount contracts with leading providers of
travel in the industry. Global Leisure maintains non-exclusive contracts with
several major airlines, hotel operators and touring companies, including United
Airlines, Continental Airlines, Delta Airlines, Hawaiian Airlines, Alaskan
Airlines, Outrigger Hotels Hawaii, and Hotel Corporation of the Pacific d/b/a
Aston Hotels & Resorts. These contracts allow Global Leisure to purchase airline
tickets, hotel reservations and travel packages at wholesale prices. Airlines
enter into contracts with a limited number of wholesalers. Airlines offer
contracts to wholesalers who can enhance their marketing plan and who perform
for them from year to year. Global Leisure competes through its expertise and
marketing in the
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sectors that the airlines wish to promote and its ability to sell tickets in a
lower profile manner. Because the airline tickets are sold to Global Leisure on
a bulk or net fare basis and advertising of the fares is prohibited by the
airlines, Global Leisure must, and has the ability to, bundle and sell the
airline tickets as part of packages with other travel products. Although the
number of seats available on each flight is limited, the contracts with the
airlines are not exclusive. Global Leisure can enter into a contract with
another carrier for the same destination.
Global Leisure's travel products are resold to the public through
retail travel agents and other sellers. Several tradenames under which Global
Leisure operates are "Sunmakers," "Kailani Hawaii Tours" and "Hawaii Leisure."
Global Leisure has non-exclusive contracts with travel agencies and suppliers of
travel in Washington, Hawaii, Nevada and California. These agencies have
designated Global Leisure as a non-exclusive preferred supplier for all
destinations and products that Global Leisure or its subsidiaries offer in
exchange for certain sales-based commissions.
Effective September 1, 2000, Aviation Group, Global Leisure and
travelbyus.com entered into a management agreement under which travelbyus.com
assumed responsibility for management of Global Leisure's business.
travelbyus.com provides management and support services, including office space,
utilities, office equipment, staff support, bookkeeping, accounting, billing,
collection, contract administration and other overhead services. To the extent
funds are available, Global Leisure is required to pay to travelbyus.com a
servicing fee of $55 per paid passenger and a monthly retainer of $5,000 and to
reimburse travelbyus.com for direct advertising and marketing expenses and long
distance, postage and delivery charges arising from Global Leisure's business.
travelbyus.com also assumed responsibility for Global's working capital deficit
upon commencement of the agreement. This management agreement expires September
1, 2001.
Recent Debt Financing
In May 2000, Aviation Group issued to SW Pelham Fund, L.P. a promissory
note in the principal amount of $3.0 million requiring quarterly interest
payments at an annual rate of 12%. In connection with the promissory note,
Aviation Group issued to SW Pelham Series D warrants to purchase 225,000 shares
of its common stock at an exercise price of $2.125 per share, subject to
shareholder approval if required by Nasdaq rules. The Series D warrants expire
on the earlier of May 8, 2005, or two years after the effective date of a
registration statement filed for the resale of the common stock underlying the
Series D warrants. Aviation Group is required to register for resale with the
SEC the shares of common stock purchasable under the warrants. The promissory
note has been unconditionally guaranteed by travelbyus.com. Aviation Group is
also required to use the proceeds from the note to finance acquisitions by
travelbyus.com or Aviation Group. The promissory note is payable in full on
February 28, 2001. SW Pelham will have the option to require Aviation Group to
repay the promissory note early if:
- the closing of the arrangement, the closing of at least one
acquisition and the approval by Aviation Group's shareholders of
the issuance of the Series D warrants, if required by Nasdaq
rules, have not taken place on or before September 30, 2000; or
- William Kerby ceases to be the chief executive officer of
Aviation Group and actively involved in the management and
operation of Aviation Group.
On May 25, 2000, Aviation Group loaned $1,975,000 of these loan
proceeds to travelbyus.com for its acquisition of Epoch Technology Inc. The
terms of the loan were similar to the terms of the loan from SW Pelham. The loan
is secured by a security interest in the stock of Epoch Technology, except that
the security interest is subordinate to a security interest in the stock in
favor of the holders of travelbyus.com's 12.5% senior redeemable debentures.
Advertising and Marketing
Most of Aviation Group's revenues from its aircraft paint and products
businesses come from direct sales and customer referrals. Aviation Group also
utilizes direct mailings and trade journal advertisements as a secondary source
of advertising and public relations. Aviation Group has a full-time marketing
representative who directly contacts the maintenance and service executives of
airlines and other aviation customers to generate business.
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Customers
Aviation Exteriors Louisiana and Aviation Exteriors Portland provide
stripping and painting services to major carriers in the airline industry. Their
past and current customers include United Airlines, Continental Airlines, Boeing
Commercial Aircraft Group, Federal Express, United Parcel Service, Delta
Airlines, Southwest Airlines, Northwest Airlines and Piedmont Airlines.
Aero Design, Battery Shop and General Electrodynamics sell their
products to aircraft parts distributors and airlines around the world. They also
sell their products directly to airlines in certain instances. Since the recent
completion of the FAA approval process for their generic battery product lines,
Aero Design and Battery Shop have increased their marketing activities and hope
to achieve significant revenue growth during the 2000 fiscal year and beyond.
Regulation
Environmental Regulation
Aviation Group must comply with federal, state and local environmental
protection laws and related regulations in its operations and facilities. These
laws and regulations are particularly applicable to the paints and paint
stripping chemicals and solvents used by Aviation Group in its operations and to
the disposal of batteries. Aviation Group could be held liable as a current or
former operator for releases of hazardous substances at its facilities. Aviation
Group could also incur liability for cleanup costs at off-site facilities to
which it ships hazardous substances for treatment, handling, storage, or
disposal. Management of Aviation Group believes that its operations and
facilities are in material compliance with all federal, state and local
environmental laws and regulations and that Aviation Group's hazardous waste
management practices minimize the potential for release of hazardous substances
into the environment. Aviation Group has not experienced any significant
environmental regulatory problems in the past. To date, it has not been subject
to any significant fines, penalties or other liabilities under these laws and
regulations. However, Aviation Group cannot assure you that these laws or
regulations may not require it to make significant expenditures or otherwise may
have a material adverse impact on its future operations or financial condition.
Aviation Regulation
The FAA regulates all aspects of the airline and aircraft industries.
Aviation Group's subsidiaries have certifications from the FAA to operate
aircraft repair stations. These certifications are limited as to the kinds of
repair and maintenance activities that may be performed by Aviation Group's
subsidiaries at their certified facilities. The FAA regularly inspects these
facilities for compliance with FAA regulations and guidelines. Failure to comply
with FAA regulations and guidelines could result in a loss of certification. A
loss of certification for a particular facility would prevent that facility from
performing any aircraft repair or maintenance operations. Aviation Group
believes that its subsidiaries are in compliance in all material respects with
the FAA's regulations and guidelines. Nevertheless, these regulations and
guidelines, or any FAA enforcement actions, could have a material adverse effect
on Aviation Group's future operations and financial condition.
Competition
Each of Aviation Group's subsidiaries, other than Global Leisure,
directly competes with other companies in the airline services industry. Its
Aviation Exteriors subsidiaries compete primarily with many heavy maintenance
facilities that perform aircraft stripping and painting services as an adjunct
to their maintenance operations. The owners of these heavy maintenance
facilities include Dee Howard Company, Pemco, Tramco, Inc. and Raytheon.
Aviation Exteriors competes through price, reliability of services, flexibility
in scheduling aircraft for painting, availability of aircraft hangars and proven
expertise in painting aircraft.
Aero Design and Battery Shop compete primarily with SAFT America, Inc.
and Marathon Power Technologies Company, both of which are much larger and have
greater financial resources. As the battery components sold by Aero Design tend
to be generic, Aero Design primarily competes through lower prices and
comparable product reliability. General Electrodynamics competes with InterComp
Company, a privately held miscellaneous scale manufacturer,
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Load-O-Meter Corporation and PAT America, Inc., as well as numerous other public
and private manufacturers of other aviation components, many of which are larger
and have greater financial resources. General Electrodynamics competes through
pricing, marketing and product reliability.
Global Leisure competes with other wholesale and retail suppliers of
travel packages. In its primary markets of Pacific Island and Australian
destinations, Global Leisure competes with Pleasant Hawaiian Holidays and All
About Travel, which are larger and have greater financial resources. Global
Leisure competes for airline tickets through its expertise and marketing in the
sectors that the airlines wish to promote and its ability to sell tickets in a
lower profile manner. Global Leisure is able to perform for its vendors from
year to year. It also competes by bundling its products in attractively priced
tour packages.
Employees
At September 1, 2000, Aviation Group had approximately 178 employees.
Aviation Exteriors Louisiana and Aviation Exteriors Portland have approximately
150 employees, depending upon seasonality. At September 1, 2000, Aero Design and
Battery Shop had 10 employees, General Electrodynamics Corporation had 36
employees and Global Leisure had one employee. Corporate management has two
employees. Management believes its employee relations are good. No employees are
covered by collective bargaining agreements.
Insurance
Aviation Group carries $200,000,000 of insurance for general aviation
liability and $200,000,000 of hangar keeper insurance, as required by its
customers, and customary coverage for other business insurance. While Aviation
Group believes its insurance is adequate, we cannot assure you that this
coverage will fully protect Aviation Group against all losses which it might
sustain. Aviation Group's insurance for aircraft liability carries a deductible
requiring it to pay $20,000 of any loss or damage.
Properties
Hangar Facilities for Paint Operations
Aviation Exteriors Louisiana leases four aircraft hangars and office
space at Acadiana Regional Airport from the Iberia Parish Authority in New
Iberia, Louisiana. One lease having an annual rent of $120,000 expires August 1,
2000. An adjacent hangar has a term expiring in October 2023 and requires annual
rent of $158,000. The third lease expires on February 1, 2001 and has an annual
rent of $60,000. Each of the three leases allows the Iberia Parish Authority and
Aviation Exteriors Louisiana to agree to extend the lease terms and provides for
10% rent increases every five years.
Aviation Exteriors Louisiana has also executed a 30-year operating
lease with the Iberia Parish Authority to obtain funds from the State of
Louisiana to build a larger hangar for the housing and maintenance of Boeing 747
aircraft. The State of Louisiana and the U.S. government have approved grants
totaling $4.5 million to pay part of the cost of construction of a hangar at
Acadiana Regional Airport. Iberia Parish Authority financed the remaining cost
of the hangar construction through a bond issuance. This project is targeted for
completion in the summer of 2000. After the hangar is complete, the annual rent
will be $420,000. The estimated total cost to build the hangar is $9,500,000.
Aviation Exteriors Portland leases two hangars and office space at the
Airtrans Center at Portland International Airport in Portland, Oregon. The
facility is presently being used to paint aircraft for Federal Express. Rent
under the lease is equal to 10% of the revenues of Aviation Exteriors Portland
earned from its Portland painting activities.
Aviation Exteriors Greenville leases one hangar at the Mid Delta
Regional Airport in Greenville, Mississippi. This lease expires in 2009.
Aviation Exteriors Greenville pays rent in the amount of $9,000 per month for
the facility.
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Dallas Office Space
Aviation Group also occupies 5,900 square feet of office space at 700
North Pearl Street, Suite 2170, Dallas, Texas, pursuant to a lease that expires
in September 2003. Aviation Group pays rent in the amount of $7,120 per month
for this office space. It has subleased 4,500 square feet of this space to third
parties for $5,000 per month.
Nashville, Tennessee Facilities
Aero Design utilizes approximately 3,000 square feet of manufacturing
and office space in Nashville, Tennessee under a two-year lease at the monthly
rate of $1,500, plus expenses. Aviation Group believes that there are suitable
facilities in the area sufficient to support additional growth.
Arlington, Texas Facilities
General Electrodynamics Corporation operates an approximately 20,000
square-foot manufacturing and operating facility in Arlington, Texas under a
short term lease. Rent payments are $5,000 per month plus all utilities and
taxes.
Legal Proceedings
Aviation Group is not involved in any material pending legal proceeding
other than ordinary routine litigation considered to be incidental to its
business.
Selected Financial Data
Certain selected financial data for Aviation Group appears under the
captions "Selected Historical Consolidated Financial Data of Aviation Group" and
"Comparative Per Share Data" in this joint proxy statement/prospectus.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
A key element of Aviation Group's strategy historically involved growth
through acquisitions of other companies, assets or product or service lines that
would complement or expand Aviation Group's existing aviation service
operations. Since 1996, Aviation Group has purchased five separate entities.
Management believed that acquisitions would enable it to leverage its fixed
costs of operations and further expand the products and services that it could
offer to its customers. Aviation Group intended to use its common stock as the
major source of its capital to execute its acquisition strategy.
While management was successful in identifying candidates that met its
acquisition criteria, the trading price of Aviation Group's shares and the level
of trading volume experienced in the public marketplace created a significantly
negative environment for acquiring aviation businesses for Aviation Group using
its stock as consideration. Management endeavored since 1998 to remedy this
condition, while continuing to incur high corporate overhead costs necessary to
properly operate and maintain its aviation service enterprises.
During the fiscal 2000 year, management concluded that (a) Aviation
Group's stock traded below the potential value of its existing underlying
companies, (b) acquisitions of new companies at these lower share price levels
would dilute existing shareholders, and (c) continuation of its historical
corporate overhead strategy without growth from acquisitions would erode
shareholder value. Accordingly, in August 1999, the board of directors approved
a management plan to engage investment advisors and pursue the additional
strategy of selling all or part of Aviation Group's businesses, or merging with
another company with greater growth and shareholder appreciation potential.
During the quarter ended December 31, 1999, Aviation Group sold its
Tri-Star Airline Services ground handling subsidiary operations. On February 8,
2000, Aviation Group sold its Casper Air Service general aviation fixed
base
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operations. Both businesses were sold to unrelated third parties, and together
generated a net gain on sale to Aviation Group of $600,000. In February 2000
Aviation Group entered into letters of intent and publicly announced a proposed
three-way business combination with Global Leisure Travel, Inc. and
travelbyus.com ltd. Global Leisure is a travel business specializing in the sale
of Hawaiian and other Pacific-region vacation tour and other travel products to
consumers. travelbyus.com is an Internet-based travel company. This business
combination and its related costs have been funded by financing provided to
Aviation Group by travelbyus.com along with private investment capital raised by
Doerge Capital Management, Aviation Group's financial advisor for this
transaction. Additionally, Aviation Group engaged the investment firm of CIBC
World Markets Corp. to review the transaction and express an opinion regarding
the fairness of the terms to Aviation Group shareholders.
The combination with travelbyus.com, when approved, will allow
management to immediately begin to reduce overlapping corporate overhead,
complete the integration of its Global Leisure travel operations into and with
travelbyus.com, and pursue the sale of its remaining aviation service and
manufacturing businesses. While negotiations regarding the sale of these
businesses is underway with certain third parties, no agreements have been
reached. Proceeds from the sale of these entities will be used first to fund
repayment of Global Leisure acquisition financing, with the remainder if any
invested in Aviation Group's travel operations.
Results of Operations
The following discussions and tables set forth a summary of changes in
the major operating categories; aircraft painting, aviation parts manufacturing
and service, and travel. These historical results are not necessarily indicative
of results to be expected for any future period.
<TABLE>
<CAPTION>
Year Ended June 30,
(000's)
-----
Total Aviation Group 2000 1999
-------------------- ---- ----
<S> <C> <C>
Revenues $ 13,381 $ 15,097
Cost of revenue (8,805) (10,129)
Operating and other expenses (6,459) (3,686)
-------- ---------
Recurring division income (loss) (1,883) 1,282
-------- ---------
Corporate overhead (2,380) (1,796)
Depreciation and amortization (1,991) (674)
Loss from discontinued operations (795) (509)
Gain (loss) on sale of subsidiaries 600 -
Other income (23) 52
Interest expense (656) (461)
-------- ---------
Pre-tax loss $ (7,128) $ (2,106)
======== =========
</TABLE>
Paint Division
Revenues are generated primarily from stripping and painting and other
aircraft coating services to major passenger and freight airlines and corporate
aircraft and aviation related companies. For the last two years, the Paint
Division has operated out of three separate locations in Louisiana, Oregon, and
Mississippi. During fiscal 2000, Aviation Group completed construction and
executed a hangar-facility operating lease on a new Boeing-747 sized hangar at
its Louisiana headquarters. This new location commenced operations in July 2000,
and its addition to Aviation Group's capacity should allow the Paint Division to
consolidate much of its operations in Louisiana, thus reducing costs and
improving future operating margins.
Aviation Group's paint operations and related revenue and income can
vary significantly from quarter to quarter based upon seasonality and scheduling
factors of its major customers. During fiscal 2000, Aviation Group experienced
reductions in revenues relating to the completion of its multi-year painting
contract with United Airlines. This reduction, along with the retention of
multiple paint facility locations pending the completion of its Boeing-747 sized
paint facility in Louisiana, contributed to the operating loss for the fiscal
2000 year.
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<PAGE>
Costs of revenues consist largely of direct and indirect labor, direct
material and supplies, insurance and other indirect costs applicable to the
completion of each contract or order. Operating expenses consist of all general
and administrative and operating costs not included in costs of sales, including
but not limited to facilities rent, indirect labor and other overhaul
costs.
<TABLE>
<CAPTION>
Year Ended June 30,
(000's)
-------
Aircraft Paint Division 2000 1999
----------------------- ---- ----
<S> <C> <C>
Revenues $ 8,670 $ 11,162
Cost of revenue (6,794) (8,066)
Operating and other expenses (2,114) (2,211)
-------- ---------
Recurring division income (loss) $ (238) $ 885
======== =========
</TABLE>
Aviation Parts Manufacturing & Service Division
Aviation Group's Aviation Parts Manufacturing & Service Division
consists of two operating entities, Aero Design, Inc. and General
Electrodynamics Corporation. Aero Design manufactures and sells aviation
batteries, primarily in the replacement aftermarket. Aero Design is positioning
for significant growth, and during the fiscal 2000 year, it applied for and won
approval from the FAA for numerous additional manufacturing licenses relating to
its line of commercial and general aviation replacement batteries. These
licenses will allow Aero Design to focus its activities in future operating
periods on growth in sales and operating profits. General Electrodynamics
manufactures, sells, and services aviation scales to airlines and aviation
maintenance customers worldwide. It also manufactures under bid-to- produce
contracts various electronic aviation equipment for original equipment
manufacturers. This business segment is expected to increase in activity and
focus during the fiscal 2001 year.
<TABLE>
<CAPTION>
Year Ended June 30,
Aviation Parts Manufacturing & (000's)
-------
Service Division 2000 1999
---------------- ---- ----
<S> <C> <C>
Revenues $ 3,894 $ 3,935
Cost of revenue (2,011) (2,204)
Operating and other expenses (1,523) (1,334)
-------- ---------
Recurring division income (loss) $ 360 $ 397
======== =========
</TABLE>
Leisure Travel Division
In conjunction with Aviation Group's letter of intent agreement to
merge with travelbyus.com, on March 17, 2000, Aviation Group executed agreements
to purchase Global Leisure. On May 10, 2000, Aviation Group completed its
acquisition of Global Leisure, and Global Leisure is now a wholly-owned
subsidiary of Aviation Group. Global Leisure provides travel related services
primarily through retail travel agencies, and is a seller of bulk travel
services, maintaining several wholesale and discount contracts with leading
providers of travel in the industry. Global Leisure has contracts with several
major airlines, hotel operators and touring companies, including United
Airlines, Continental Airlines, Delta Airlines, Hawaiian Airlines, Alaskan
Airlines, Outrigger Hotels Hawaii, and Hotel Corporation of the Pacific d/b/a
Aston Hotels & Resorts. These contracts allow Global Leisure to purchase airline
tickets, hotel reservations and travel packages at wholesale prices.
Global Leisure travel products are resold to the public through retail
travel agents and other sellers. Several tradenames under which Global Leisure
operates are "Sunmakers", "Kailani Hawaii Tours", and "Hawaii Leisure". Global
Leisure has contracts with travel agencies and suppliers of travel in
Washington, Hawaii, Nevada and California. These agencies have designated Global
Leisure as a preferred supplier for all destinations and products that Global
Leisure offers in exchange for certain sales-based commissions.
Since its acquisition, Aviation Group has worked closely with
travelbyus.com to fully integrate Global Leisure's products and operations into
those of travelbyus.com. Aviation Group has executed a management agreement with
travelbyus.com providing for the integration of Global Leisure's business into
and with travelbyus.com. Cost reductions have been implemented by shutting down
Global Leisure's Seattle, Washington offices, and combining its operations
with
146
<PAGE>
those of travelbyus.com in Reno, Nevada. Global Leisure's travel products are
being combined and cross-sold with travelbyus.com travel products, thus
increasing potential for future revenue growth. When fully integrated into
travelbyus.com's Internet distribution system, operating margins of Global
Leisure should improve in the coming fiscal year. Management believes that this
integration is vital to the success of its leisure travel operations, and if
successful, can allow Global Leisure to grow and achieve profitability for
Aviation Group and travelbyus.com.
For financial reporting purposes, Aviation Group has treated the Global
Leisure acquisition as if it occurred on March 31, 2000 and has included the
balance sheet of Global Leisure in Aviation Group's unaudited financial
statements as of March 31, 2000.
<TABLE>
<CAPTION>
Year Ended June 30,
(000's)
-----
Leisure Travel Division 2000 1999
----------------------- ---- ----
<S> <C> <C>
Gross bookings $ 8,408 $ -
Cost of tickets (7,591) -
--------
Reportable revenues 817 -
Operating and other expenses (2,822) -
--------
Recurring division income (loss) $ (2,005) -
========
</TABLE>
Aviation Group - Corporate Overhead
Operating expenses consist of all general and administrative and
operating costs to provide management to Aviation Group's divisions, to support
expected growth, and to seek acquisition or merger/sale targets, not directly
attributable to the divisions' operations. These charges include legal,
accounting, travel and other related overhead. During the fiscal years ended
June, 2000 and 1999, Aviation Group incurred $436,000 and $262,000 in non-
amortizable acquisition related costs and direct costs associated with Aviation
Group's status as a public company. A key benefit of its intended merger with
travelbyus.com is the reduction in corporate expenses, which management believes
it generates upon its complete integration into the travelbyus.com business.
These costs include legal, accounting, public-company costs, and other overhead
items that significantly overlap with existing travelbyus.com operations.
<TABLE>
<CAPTION>
Year Ended June 30,
(000's)
-----
Corporate Overhead 2000 1999
------------------ ---- ----
<S> <C> <C>
Operating and other expenses $ (1,944) $ (1,534)
Acquisition activity costs (436) (262)
--------- ---------
Total corporate expenses $ (2,380) $ (1,796)
========= =========
</TABLE>
Seasonality and Variability of Results
Aviation Group's Global Leisure travel operations experience seasonal
variability in revenues, primarily relating to the heavy summer and year-end
leisure travel seasons. Management believes, however, that the integration of
Global Leisure into travelbyus.com's other travel and technology companies will
allow it to increase revenues above historical levels in future periods, and
that when combined with other travelbyus.com travel products, can generate
higher gross margins as well. Aviation Group's aircraft painting operations can
experience significant seasonality and quarter-to- quarter variability in its
stripping and painting operations. Scheduling of Aviation Group's paint customer
fleet deliveries can significantly affect quarter-to-quarter results as well.
During fiscal 2000, Aviation Group experienced reductions in revenues relating
to the completion of its multi-year painting contract with United Airlines. This
reduction, along with the retention of multiple paint facility locations pending
the completion of its Boeing-747 sized paint facility in Louisiana contributed
to the operating loss for the fiscal 2000 year. Significant changes in such
scheduled operations or failure to attract additional aircraft painting
contracts could have a material adverse effect on Aviation Group operations.
Management, therefore, is required to plan cash flow accordingly.
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<PAGE>
Year 2000 Compliance Issues
Aviation Group's systems experienced no significant Year 2000
shutdowns, issues or costs. Aviation Group considers its present systems to be
Year 2000 compliant and operational. Aviation Group continues to monitor its
hardware and software systems for potential Year 2000 operating risks and costs,
however, and will continue such oversight for the remainder of the calendar 2000
year.
Fiscal Year Ended June 30, 2000 Compared to the Fiscal Year Ended June 30,
1999
Aviation Group's net revenue decreased by $1,716,000, or 11%, for the
fiscal year ended June 30, 2000 compared to the fiscal year ended June 30, 1999.
The decrease was primarily due to reductions in paint revenues of $2,492,000,
offset by Global Leisure travel revenues of $817,000. Costs of revenue for the
fiscal 2000 year decreased by $1,324,000 to $8,805,000 compared to 1999. Costs
of revenue as a percentage of revenue decreased by 1.3%, from 67.1% in 1999, to
65.8% in 2000. Marginal cost of revenues were higher in aircraft paint, but
offset by Global Leisure margins during the period ended June 30, 2000.
Operating costs and overhead associated with Global Leisure travel
operations accounted for the increase in fiscal 2000 to $6,459,000 from
$3,686,000 in fiscal 1999. Aviation Group's interest expense was $656,000 for
the year ended June 30, 2000 versus $461,000 for the year ended June 30, 1999,
and included non-cash interest expense of $303,000 associated with common stock
warrants issued to lenders relating to Aviation Group's short term note and
$4.50 convertible note financings.
Depreciation and amortization expense rose significantly during the
year ended June 30, 2000 to $1,991,000 from $674,000 for the year ended June 30,
1999. This increase relates to goodwill amortization associated with Aviation
Group's acquisition of Global Leisure and, while non-cash in nature, will have a
significant negative effect on reported net income figures in future periods,
totaling approximately $50,000,000 over the next ten years.
During the year ended June 30, 2000, Aviation Group recognized an
operating loss from discontinued businesses of $795,000, versus a loss from
these divisions of $509,000 for the year ended June 30, 1999. This increase was
associated with Aviation Group's lower operating levels of its fixed base
operations in anticipation of its eventual sale. Aviation Group sold its ground
handling operations and certain fixed base departments during the year ended
June 30, 2000, and recognized a net gain on sale of $600,000.
Certain stock options and warrants were re-priced in fiscal 2000. These
options and warrants will be accounted for as variable instruments beginning
July 1, 2000, which will entail recording expense for any increase in Aviation
Group's stock price over the exercise prices of the options and warrants. This
could have a material effect on Aviation Group's future results of operations.
Fiscal Year Ended June 30, 1999 Compared to the Fiscal Year Ended June 30, 1998
Aviation Group's net revenue from continuing operations increased by
$4,054,000 or 37%, for the year ended June 30, 1999 compared to the year ended
June 30, 1998. These increases were from our acquisition of Aero Design and
General Electrodynamics Corporation, and increases in paint operations at our
Portland location.
Aviation Group's cost of revenues increased by $1,749,000 to
$10,129,000 for the year ended June 30, 1999 from $8,380,000 for the year ended
June 30, 1998. This increase in cost of revenues resulted primarily from the
acquisitions of Aero Design and General Electrodynamics Corporation. Cost of
revenues decreased as a percentage, relative to net revenue, to 67%, for the
fiscal year ended June 30, 1999 from 75% for the year ended June 30, 1998. This
improvement is the result of improvements in paint operations and increases in
battery sales, which generate higher margins.
Aviation Group's continuing operating expenses increased by $2,115,000
to $5,482,000 for the year ended June 30, 1999 from $3,367,000 for the year
ended June 30, 1998. This increase in operating expenses resulted primarily from
the acquisitions of Aero Design and General Electrodynamics Corporation, and
internal growth in our paint operations. Corporate overhead also included
$123,000 in expense related to the value of Aviation Group's common stock
warrants issued to certain financial and investment advisors relating to
acquisition activities.
Goodwill amortization and depreciation increased by $205,000 to
$674,000 for the year ended June 30, 1999. This increase related to Aviation
Group's acquisition of Aero Design and General Electrodynamics Corporation.
Interest expense was up $261,000 during the 1999 fiscal year to $461,000 for the
year ended June 30, 1999, versus $200,000 for
148
<PAGE>
the year ended June 30, 1998. This increase resulted primarily from interest
expense in our General Electrodynamics Corporation subsidiary acquired in August
1998, and $133,000 in finance charges relating to our restructuring of certain
stock price guarantees in August 1998 as described further in Note H to Aviation
Group's financial statements.
Financial Condition and Liquidity
Aviation Group has incurred significant losses, due principally to
corporate overhead associated with Aviation Group's acquisition strategy.
Management continues its efforts to reduce overhead costs. Reductions in non-
essential division operating expenses, along with elimination of marginal
products and services that do not provide future growth or near-term profits
have also been pursued.
Since the acquisition of Global Leisure, Aviation Group has worked
closely with travelbyus.com to fully integrate Global Leisure's products and
operations into those of travelbyus.com. Aviation Group has executed a
management agreement with travelbyus.com providing for the integration of Global
Leisure's business into and with travelbyus.com, including the funding by
travelbyus.com of operating shortfalls at Global Leisure pending the completion
of Aviation Group's combination with travelbyus.com. Cost reductions have been
implemented by shutting down Global Leisure's Seattle, Washington offices and
combining its operations with those of travelbyus.com in Reno, Nevada. Global
Leisure's travel products are being combined and cross-sold with travelbyus.com
travel products, thus increasing potential for future revenue growth. When fully
integrated into travelbyus.com's Internet distribution system, operating margins
of Global Leisure should improve in the coming fiscal year. Management believes
that this integration and the related arrangement with travelbyus.com is vital
to the long term success of Aviation Group. For a discussion of the liquidity
and capital resources of travelbyus.com, see "travelbyus.com - Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources."
During the year ended June 30, 2000, Aviation Group sold its Tri-Star
Airline Services ground handling and its Casper Air Service general aviation
fixed base operations. Both businesses were sold to unrelated third parties, and
together generated a gain on sale to Aviation Group of $600,000. In connection
with Aviation Group's acquisition of Global Leisure, through March 31, 2000,
Aviation Group raised a total of $20.4 million in capital. These funds were used
primarily to finance Global Leisure, with Aviation Group retaining approximately
$500,000 in funds for operating and transaction cost funding purposes. These
funds have supplemented Aviation Group's existing revolving credit facilities to
fund its business. At June 30, 2000, Aviation Group had a working capital
deficit of 9,611,000. Aviation Group has negotiated with certain of its aviation
service vendors and lenders exchange agreements wherein these parties may
receive Aviation Group common stock in exchange for cancellation of certain
current payables and debt. In addition, $3,000,000 in debt is supported by a
travelbyus.com guarantee. While these funds combined with current operating
levels and travelbyus.com funding support agreements should allow Aviation Group
to meet its working capital requirements during fiscal 2001, significant
interruptions in currently scheduled Aviation Group operations would adversely
affect Aviation Group's financial condition and require additional capital from
asset sales, borrowings, or equity financings in order to allow Aviation Group
to meet its obligations. No assurance can be made that such sales or financings
will be available or available on terms deemed advantageous to Aviation Group if
such events occur.
The combination with travelbyus.com, if approved, will allow management
to begin immediately to reduce overlapping corporate overhead, complete the
integration of its Global Leisure travel operations into and with the travel
operations of travelbyus.com, and pursue the sale of its remaining aviation
service and manufacturing businesses. While negotiations regarding the sale of
these businesses is underway with certain third parties, no agreements have been
reached. Proceeds from the sale of these entities will be used first to redeem
preferred stock, with the remainder, if any, invested in Aviation Group's travel
operations. If the business combination of Aviation Group with travelbyus.com is
not approved by shareholders, the board of directors intends to negotiate and
enact an arrangement with travelbyus.com that allows both companies to continue
their relationship and joint business activities, and thereby promote the long-
term viability of Aviation Group's operations. The terms and conditions of this
alternative arrangement may have less potential for success that those
unanimously recommended by the board of directors under the arrangement
agreement.
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<PAGE>
Principal Shareholders of Aviation Group
The following table sets forth certain information, as of September 1,
2000, with respect to the beneficial ownership of shares of Aviation Group's
common stock (i) by any person or "group," as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, known to us to own
beneficially more than 5% of the outstanding shares of common stock, (ii) by
each director of Aviation Group and each executive officer of Aviation Group
named in the Summary Compensation Table and (iii) by all directors and executive
officers of Aviation Group as a group. Except as otherwise indicated, Aviation
Group believes that each person named below possesses sole voting and investment
power over his shares of common stock.
<TABLE>
<CAPTION>
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned/(1)/ Percent of Total/(2)/
------------------- ------------------ ----------------
<S> <C> <C>
Lee Sanders 1,493,966/(3)/ 27.3%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Richard Morgan 398,500/(4)/ 7.5%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Hank Clements 52,950/(5)/ 1.1%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Charles E. Weed 145,283/(6)/ 2.9%
920 Pierremont, Suite 105
Shreveport, Louisiana 71106
Gordon Whitener 65,000/(7)/ 1.3%
39 Carrington Drive
Cartersville, Georgia 30120
William Kerby/(8)/ - -
204-3237 King George Highway
South Surrey, B.C.
Canada V4P 1B7
John Fenyes/(8)/ - -
5270 Neil Road
Reno, Nevada 89502
All executive officers and directors as a 2,209,949 36.9%
group (9 persons)/(9)/
</TABLE>
__________________________
(1) This information has been furnished by Aviation Group's transfer agent
and the respective officers and directors. A person is deemed to be the
beneficial owner of securities that can be acquired within 60 days from
the date set forth above through the exercise of any option, warrant or
convertible or exchangeable note.
(2) In calculating percentage ownership, all shares of common stock that
the named shareholder has the right to acquire upon exercise of any
option, warrant or convertible or exchangeable note are deemed to be
outstanding for the purpose of computing the percentage of common stock
owned by the shareholder, but are not deemed outstanding for the
purpose of computing the percentage of common stock owned by any other
shareholders. Percentages of shares beneficially owned are based upon
4,956,722 shares.
(3) Represents (i) 987,300 shares owned of record by The Sanders Companies,
Inc., a corporation wholly owned by Mr. Sanders, (ii) warrants to
purchase 200,000 shares at $1.6875 per share expiring 2003, (iii)
options to purchase 50,000 shares at $1.8563 per share expiring 2004,
of which 60% had vested and were exercisable, (iv) warrants to purchase
250,000 shares at $1.50 per share expiring 2005 subject to completion
of the arrangement with travelbyus.com and shareholder approval, and
(v) warrants to purchase 26,666 shares at $1 per share expiring 2005
issued in connection with the funding of loans to Aviation Group by Mr.
Sanders.
(4) Includes (i) warrants to purchase 15,000 shares at $1.6875 per share
expiring 2004, (ii) warrants to purchase 250,000 shares at $1.50 per
share expiring 2005 subject to completion of the arrangement and
approval of shareholders, and (iii) warrants to purchase 75,000 shares
at $1 per share expiring 2005 issued in connection with funding of
loans to Aviation Group by Mr. Morgan.
(5) Includes (i) 2,500 shares purchasable at $1.6875 per share under
warrants expiring in 2002, and (ii) 50,000 shares purchasable at $1.50
per share under warrants expiring 2005 subject to completion of the
arrangement and approval of shareholders.
(6) Includes (i) 15,000 shares purchasable at $1.6875 per share under
warrants expiring in 2004, (ii) 5,000 shares purchasable at $1.6875 per
share under warrants expiring in 2003, and (iii) 50,000 shares
purchasable at $1.50 per share under warrants expiring 2005 subject to
completion of the arrangement and approval of shareholders.
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<PAGE>
(7) Represents (i) 15,000 shares purchasable at $1.6875 per share under
warrants expiring in 2003 and 2004, and (ii) 50,000 shares purchasable
at $1.50 per share under warrants expiring 2005 subject to completion
of the arrangement and approval of shareholders.
(8) Messrs. Kerby and Fenyes are executive officers and directors of
travelbyus.com, which owns 500 shares of Aviation Group's Series B
preferred stock. These shares represent 23% of the outstanding shares
of Series B preferred.
(9) Includes (i) 6,000 shares purchasable at $1.6875 under options held by
John Arcari and (ii) 4,000 shares purchasable at $1.6875 under options
held by Paul Lubomirski.
Directors and Executive Officers
The board of directors is classified into three classes of directors
pursuant to which the directors serve for staggered three-year terms. The terms
of office of Messrs. Morgan, Weed and Clements as directors expire at the annual
meeting of shareholders to be held in 2000. The terms of office of Mr. Fenyes
and Mr. Whitener expires at the annual meeting of shareholders in 2001. The
terms of office of Mr. Sanders and Mr. Kerby expires at the annual meeting of
shareholders in 2002.
The names, ages, positions and municipalities of residence of the
executive officers and directors of Aviation Group are as follows:
<TABLE>
<CAPTION>
Name Age Position Residence
------------------------------ ----------- ----------------------------------------------- ---------------------------
<S> <C> <C> <C>
Lee Sanders/(1)/ 40 Chairman and Director Red Oak, Texas
William Kerby 42 President, Chief Executive Officer and Director White Oak, British Columbia
Richard L. Morgan/(1)/ 42 Executive Vice President, Chief Financial Dallas, Texas
Officer and Director
Paul Lubomirski 46 President of Aviation Exteriors Louisiana Inc., New Iberia, Louisiana
a subsidiary of Aviation Group
John Arcari 59 Vice President - Marketing and Developmen Plano, Texas
Charles E. Weed/(2)/ 68 Director Shreveport, Louisiana
Gordon Whitener/(3)/ 37 Director Cartersville, Georgia
Hank Clements/(2)(3)/ 42 Director Dallas, Texas
John Fenyes 52 Director Sparks, Nevada
</TABLE>
________________________________
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Business Histories
The following sets forth certain background information regarding
executive officers and directors of Aviation Group, including their principal
occupations:
Lee Sanders was appointed Chairman of the Board of Aviation Group in
March 2000, and he previously served as Chief Executive Officer of Aviation
Group and its predecessors for more than five years. Mr. Sanders is also a
founder and principal owner of Aviation Group. As a result of his service for
Aviation Group and its predecessors, Mr. Sanders has experience in acquiring and
managing businesses. He also has a marketing background resulting from his
experiences in starting and operating private businesses. Mr. Sanders is a
graduate of the University of Tennessee, with a Bachelor of Science in Business
Administration.
William Kerby was appointed President, Chief Executive Officer and a
director of Aviation Group in March 2000. Mr. Kerby has been Vice Chairman and
Chief Executive Officer of travelbyus.com since April 1999. Prior to joining
travelbyus.com, Mr. Kerby was the founder, President and Chief Executive Officer
of Leisure Canada Inc., a publicly traded company in the travel industry from
January 1995 to March 1999. During his tenure with Leisure Canada Inc., Mr.
Kerby engineered the development of that company's travel division assets. These
assets included TravelPlus (formerly Goliger's Travel and Travel Trade
International) with over 200 agencies across Canada, Altracs Publishing &
Multimedia, producing Leisure Canada Magazine and Canadian Traveller, Bluebird
Holidays/Tour Division in Great Britain and South Africa, Skyhigh Holidays and
Cook Island Holidays in Canada.
Richard L. Morgan was appointed as a director of Aviation Group on
February 26, 1997, and as Aviation Group's Chief Financial Officer and Executive
Vice President in April 1998. He served as a consultant to
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<PAGE>
Aviation Group prior to April 1998. Mr. Morgan was formerly Chief Financial
Officer of Search Capital Group, Inc. from August 1985 through December 1994,
when he voluntarily resigned. After Mr. Morgan's departure, eight Search
subsidiaries conducting business in the sub-prime, used-automobile finance
business filed for protection under Chapter 11 of the Federal Bankruptcy Code in
August 1995. From December 1994 to April 1998, he served as an independent
financial consultant. Mr. Morgan holds a graduate degree in business from
Vanderbilt University.
Paul Lubomirski was appointed as President of Aviation Exteriors
Louisiana, Inc., one of the parent subsidiaries of Aviation Group, in March 1996
and has over 20 years of experience with industrial and marine paint
applications and has extensive knowledge of paint systems and electrostatic
application equipment. He has primary responsibility for Aviation Group's
facilities and training programs applicable to the strip and paint operations.
He has served as an executive officer with Aviation Exteriors Louisiana, Inc.
for more than five years, including periods prior to its acquisition by Aviation
Group in March 1996. Mr. Lubomirski attended the University of Hawaii where he
majored in mechanical engineering.
John Arcari was appointed as a Vice President of Aviation Group in
April 1997. From 1958 to 1987, he served in numerous line and management
positions with Pan American World Airways. From 1987 to 1990, he was vice
president of maintenance and engineering for Tower Air, a New York-based
airline. From 1990 to 1993, he was president of Page Avjet, an aircraft heavy
maintenance and overhaul outsourcing company. From 1994 until his employment
with Aviation Group, he was an independent consultant to aviation maintenance
and service outsourcing companies.
Charles E. Weed was elected a director of Aviation Group in December
1996 and served as the President of Sunbelt Business Capital Incorporated from
August 1992 to February 1996. Mr. Weed is engaged in the business of making
private investments individually.
Gordon Whitener was elected a director of Aviation Group in December
1996. He is a private businessman and was President and Chief Executive Officer
of Interface Americas of LaGrange, Georgia, a subsidiary of Interface Inc. and
one of America's largest manufacturers of commercial carpet from November 1993
to November 1999. Since then, he has been a private investor and consultant. He
was additionally a member of Interface Inc.'s board of directors. From 1992 to
1994, Mr. Whitener held various senior marketing and sales positions in the
commercial carpet manufacturing industry with companies including Interface and
Collins & Aikman. Mr. Whitener is a graduate of the University of Tennessee.
Hank Clements was appointed a director of Aviation Group on August 19,
1999. Mr. Clements is a resident of Dallas, Texas and since 1989 has been
President of The Clements Group, Inc., a Texas-based government relations and
political consulting firm. Mr. Clements was appointed to a Texas state
regulatory board in 1987 by Governor Bill Clements (no relation) and then
elected chairman of the board by his colleagues in 1991, serving in that role
until his term ended in 1994. Mr. Clements has represented several fortune 100
corporations on legislative issues in both Austin and Washington, D.C. Mr.
Clements advises numerous elected officials, corporations and associations on
political and legislative strategies. Mr. Clements is a graduate of Texas Tech
University.
John Fenyes was appointed as a director of Aviation Group in May 2000.
Mr. Fenyes has been Executive Vice President and Chief Operating Officer of
travelbyus.com and its subsidiary, Express Vacations, since November 1999. Mr.
Fenyes has been involved in the travel industry for over 25 years, holding key
positions, including Vice President, Product Development with American Airlines
FlyAAway Vacations, from August 1998 to November 1999. During his tenure with
American Airways FlyAAway Vacations, Mr. Fenyes developed one of the first in-
house vacation package programs. Most recently, Mr. Fenyes was Director of
Marketing Programs for ITT, Sheraton and General Manager of "Vacations by
Sheraton", now part of the Starwood Group, from December 1995 to August 1998.
No family relationships exist among the directors or executive officers
of Aviation Group. Except as indicated above, none of the directors serve as
members of the board of directors of another company which is subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended.
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<PAGE>
Board Committees
The Compensation Committee consists solely of Messrs. Whitener and
Clements. The Compensation Committee recommends compensation for officers other
than the President, administers incentive compensation and benefit plans,
including Aviation Group's 1997 stock option plan, and recommends policies
relating to such plans.
The Audit Committee currently consists of Messrs. Weed and Clements.
The Audit Committee meets periodically with management and Aviation Group's
independent auditors and reviews the results and scope of audits and other
services provided by Aviation Group's independent auditors, Aviation Group's
accounting procedures, and the adequacy of Aviation Group's internal controls.
In August 1998, the board of directors established an Executive
Committee. Messrs. Sanders and Morgan presently constitute the Executive
Committee and are empowered to exercise the powers of the board of directors in
the management of the business and affairs of Aviation Group, except when the
board of directors is in session and except for certain powers which may be
exercised only by the board of directors.
Director Compensation
Directors are reimbursed for certain expenses in connection with
attendance at board of directors and committee meetings. Non-employee directors
have also been granted warrants for their services as directors. As a result of
these grants, Mr. Whitener owns warrants to purchase 15,000 shares of common
stock. Mr. Clements owns warrants to purchase 2,500 shares of common stock and
Mr. Weed owns warrants to purchase 20,000 shares of common stock, each share
exercisable at $1.6875 per share, which expire in 2003 and 2004. In February
2000, each of the non-employee directors was granted warrants to purchase 50,000
shares of common stock at $1.50 per share, which was the trading price of the
common stock at that time. These warrants may not be exercised unless they are
approved by the shareholders and the arrangement is completed.
Executive Compensation
The following table sets forth information, for the fiscal years ended
June 30, 2000, 1999 and 1998, regarding the compensation of Aviation Group's
Chairman and former Chief Executive Officer and one other executive officer who
received compensation of more than $100,000 for the fiscal year ended June 30,
2000. No other executive officers had compensation exceeding $100,000 for the
fiscal year ended June 30, 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------- ----------------------
Fiscal Other Annual Securities
Name and Principal Position Year Salary Bonus Compensation Underlying Options
--------------------------- ---- ------ ----- ------------ ------------------
<S> <C> <C> <C> <C> <C>
William Kerby, President and 2000 $ 0 $ - $ - -
Chief Executive Officer /(8)/
Lee Sanders, Former President 2000 152,759 - 500,000 /(7)/
and Chief Executive Officer /(6)/ 1999 144,000 -
1998 144,000 75,000/(5)/ 250,000 /(2)/
Richard L. Morgan, 2000 120,000 - 7,582 /(1)/ 445,000 /(7)/
Executive Vice President and 1999 120,000 - 12,000 /(1)/ -
Chief Financial Officer 1998 30,000 - 117,000 /(3)/ 115,000 /(4)/
</TABLE>
______________________
(1) Represents aggregate annual lease payments, insurance costs and related
expenses for an automobile.
(2) Represents (i) options to purchase 50,000 shares of common stock
exercisable at $1.875 per share expiring in 2004, and (ii) warrants to
purchase 200,000 shares of common stock at $1.6875 per share expiring
in 2003.
(3) Represents consulting fees earned prior to appointment as an executive
officer of Aviation Group.
153
<PAGE>
(4) Represents (i) warrants to purchase 100,000 shares of common stock at
$1.6875 per share expiring in 2003 and (ii) warrants to purchase 15,000
shares of common stock at $1.6875 expiring in 2004.
(5) Paid in connection with Aviation Group's initial public offering.
(6) Mr. Sanders resigned as President and Chief Executive Officer in March
2000.
(7) Represents (i) new warrants to purchase 250,000 shares of common stock
issued to each of Mr. Sanders and Mr. Morgan at $1.50 per share
expiring in 2005 but subject to shareholder approval, (ii) other
existing warrants the exercise prices of which were reduced from $3.50
to $1.6875, and (iii) options to purchase 50,000 shares held by Mr.
Sanders, the exercise price of which was reduced from $3.80 to $1.8563.
(8) Mr. Kerby was appointed President and Chief Executive Officer in March
2000.
Stock Options and Warrants
During the fiscal year ended June 30, 2000, the board of directors
granted certain warrants to the executive officers named in the summary
compensation table as described in the table blow.
Option/Warrant Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Shares % of Total Options/
Underlying Warrants Granted
Options/Warrants to Employees in Exercise Price
Name Granted Fiscal Year ($/Share) Expiration Date
--------------------------- --------- ------------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Lee Sanders 250,000 /(1)/ 27% $ 1.50 2/23/05
200,000 /(2)/ 21 1.6875 4/28/05
50,000 /(2)/ 5 1.8563 8/22/04
Richard Morgan 250,000 /(1)/ 27 1.50 2/23/05
180,000 /(2)/ 20 1.6875 3/31/03
15,000 /(2)/ 1 1.6875 4/28/05
</TABLE>
___________________________
(1) Warrants are not exercisable until approved by the shareholders.
(2) Represents repricing of options and warrants in August 1999.
Following the end of the fiscal year, in August 1999, the board of directors
determined to amend the outstanding options and warrants for Aviation Group's
employees and directors, including Mr. Sanders and Mr. Morgan, by reducing the
exercise price to $1.6875 per share, which was the then current market price for
the common stock. In August 1999, the board of directors also extended the
expiration date of warrants to purchase 80,000 shares previously issued to Mr.
Morgan, when he was a consultant to Aviation Group, from March 31, 1999 to March
31, 2003.
Aggregate Option/Warrant Exercises in Last Fiscal Year and
Fiscal Year End Option/Warrant Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Value Options/Warrants Options/Warrants
Name Exercise(#) Realized($) at June 30, 2000 at June 30, 2000
------------------- ------------- ----------- -------------------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------------ ------------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Lee Sanders 0 0 200,000 250,000/(1)/ $ 62,500 $ 125,000
30,000 20,000 4,500 3,000
Richard Morgan 58,500/(2)/ $146,250 15,000 250,000/(1)/ 4,688 125,000
</TABLE>
____________________
(1) Warrants are not exercisable until approved by shareholders.
(2) Mr. Morgan surrendered warrants to purchase 180,000 shares as
consideration for the purchase of these shares.
154
<PAGE>
Employment and Consulting Agreements
Aviation Group has an employment agreement with Paul Lubomirski and
with John Arcari. The employment agreements of Mr. Lubomirski and Mr. Arcari
expire in 2000. Mr. Lubomirski is paid an annual salary of $90,000 and Mr.
Arcari is paid an annual salary of $80,000. Each employment agreement contains a
non- competition agreement for a period of three years after any expiration or
termination of the agreement. Each employee is entitled to additional benefits,
including disability insurance, life insurance, and health and dental insurance.
Mr. Arcari is eligible for additional bonuses as may be determined by the board
of directors. Mr. Lubomirski's employment agreement specifies a formula for
bonus payments that varies between 10% and 70% of his annual salary if the net
profit for the Aviation Group's painting subsidiary Aviation Exterior Louisiana,
Inc. for any fiscal year exceeds certain amounts during the term of his
agreement.
Aviation Group entered into an employment agreement with Lee Sanders in
March 1996. In April and August 1997 and August 1998, the employment agreement
was amended. Under the amended employment agreement, Mr. Sanders earns an annual
salary of $144,000 with increases at the end of each calendar year based on the
Consumer Price Index. Mr. Sanders is eligible for a bonus to be determined in
the sole discretion of the board of directors based on merit, Aviation Group's
financial performance and other relevant criteria. The employment agreement
expires on August 13, 2003 but automatically extends for an additional year on
August 13 of each year unless either party affirmatively elects not to extend
the term. The employment agreement contains a non- competition agreement for
three years after any expiration or termination of the agreement. Mr. Sanders is
entitled to additional benefits, including disability insurance, life insurance,
and health and dental insurance. If Aviation Group terminates Mr. Sanders'
employment at any time or if Mr. Sanders terminates his employment within one
year after a change in ownership or control of Aviation Group, Aviation Group is
required to pay him severance pay equal to the unpaid salary for the remainder
of the term of the agreement plus the total salary and bonus compensation paid
to him during the year period preceding the termination. A change in ownership
or control of Aviation Group includes appointment of any person other than Mr.
Sanders as Chairman or Chief Executive Officer or the removal of him from either
of these positions, any change in a majority of the board members not approved
by him, any transfer or issuance of shares representing more than 25% of the
beneficial ownership of Aviation Group if not approved in advance by Mr.
Sanders, any material change in his authority or duties and any breach by
Aviation Group of the employment agreement not remedied within ten days after
notice from him. The election of William Kerby as Chief Executive Officer
resulted in a change in control for purposes of Mr. Sanders' employment
agreement.
Effective February 23, 2000, Aviation Group and Lee Sanders amended his
employment agreement to provide for a minimum bonus of $300,000 payable on the
earlier of (a) January 2, 2001, (b) the sale of the existing operating
subsidiaries of Aviation Group or their assets, on terms acceptable to Aviation
Group's board of directors, or (c) the termination by Aviation Group of his
employment for any reason. Completion of the arrangement with travelbyus.com
will not trigger the requirement to pay this bonus.
Effective February 23, 2000, Aviation Group and Richard Morgan entered
into a one-year employment agreement providing for an annual salary of $125,000
and a minimum bonus of $150,000 payable on the earlier of (a) January 2, 2001,
(b) the sale of the existing operating subsidiaries of Aviation Group or their
assets, on terms acceptable to Aviation Group's board of directors, or (c) the
termination by Aviation Group of his employment for any reason. Completion of
the arrangement will not trigger the requirement to pay this bonus. Under the
employment agreement, Mr. Morgan promised not to compete with any business, and
not to solicit employees or customers, of Aviation Group or its subsidiaries for
one year following termination or expiration of his employment. In consideration
for entering into the employment agreement, Aviation Group's board of directors
granted to Mr. Morgan five-year warrants to purchase 250,000 shares of Aviation
Group common stock at an exercise price of $1.50 per share. Because of the
requirements of Nasdaq's rules, the exercisability of these warrants was
conditioned on the approval of Aviation Group's shareholders. Aviation Group's
board of directors believed that the employment agreement and warrants for Mr.
Morgan were advisable to assure that Aviation Group would continue to receive
the benefits of Mr. Morgan's services through and following the completion of
the transactions then being contemplated with travelbyus.com and Global Leisure.
155
<PAGE>
1997 Stock Option Plan
Aviation Group's 1997 stock option plan was adopted by the board of
directors and the shareholders in February 1997. The purpose of the plan is to
provide increased incentives to key employees and directors to render services
and exert maximum effort to achieve long term business success. Pursuant to the
plan, Aviation Group may grant incentive and nonstatutory (nonqualified) stock
options to key employees and directors. A total of 150,000 shares of common
stock have been reserved for issuance under the plan.
The board of directors or the Compensation Committee has the authority
to select the key employees and directors of Aviation Group to whom stock
options are granted (provided that incentive stock options only be granted to
employees of Aviation Group). Subject to the limitations set forth in the plan,
the board of directors or the Compensation Committee has the authority to
designate the number of shares to be covered by each option, determine whether
an option is to be an incentive stock option or a nonstatutory option, establish
vesting schedules, specify the type of consideration to be paid to Aviation
Group upon exercise and, subject to certain restrictions, specify other terms of
the options.
The maximum term of options granted under the plan is ten years. The
aggregate fair market value of the stock with respect to which incentive stock
options are first exercisable in any calendar year may not exceed $100,000 per
incidence. Options granted under the plan are nontransferable and generally
expire within three months after the termination of an optionee's service to
Aviation Group. In general, if an optionee is disabled, dies or retires from his
or her service to Aviation Group, this option may be exercised up to three
months following the disability or death unless the board of directors or
Compensation Committee determine to allow a longer period for exercise.
The exercise price of incentive stock options must not be less than the
fair market value of the common stock on the date of grant. The exercise price
of incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all classes
of stock must be at least 10% higher than the fair market value of the stock on
the date of grant, and the term of those options cannot exceed five years.
As of September 1, 2000, Aviation Group had outstanding under the 1997
stock option plan the following options:
<TABLE>
<CAPTION>
Shares of Exercise Market Value of
Common Stock Price Common Stock
Name Under Option Per Share /(1)/ Date of Grant on Date of Grant /(1)/ Expiration Date
---- ------------ --------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Five executive officers 4,000 $1.6875 Apr. 29/98 $3.50 Apr. 28/04
as a group 6,000 1.6875 Apr. 29/98 3.50 Apr. 29/05
50,000 1.8563 Apr. 29/98 3.50 Apr. 29/05
Employees who are not 4,000 1.6875 Apr. 29/98 3.50 Apr. 28/04
executive officers or 21,000 1.6875 Apr. 29/98 3.50 Apr. 29/05
directors as a group
Consultants or directors 0
who are not executive
officers as a group
</TABLE>
_______________________
(1) All options were repriced on August 18, 1999 to $1.6875, which was the
market value of the common stock on that date, except the 50,000
options to Lee Sanders for which the repricing established the exercise
price at $1.8563 per share. The exercise prices before the repricing
were $3.50 per share for all options except that the exercise price for
the option of Mr. Sanders was $3.85.
Prior Sales
The following table contains details of the prior sales of securities
of Aviation Group for the 12-month period prior to the date of this joint proxy
statement/prospectus:
156
<PAGE>
<TABLE>
<CAPTION>
Number of Number of Shares Number of Shares
Shares of of Series A Convertible of Series B Aggregate
Date of Issue Common Stock Preferred Stock Preferred Stock Proceeds
------------- ------------ --------------- --------------- --------
<S> <C> <C> <C> <C>
September 29, 1999/(1)/ 155,250 $ 297,600
January 6, 2000/(2)/ 11,849 53,320
January 20, 2000/(3)/ 58,500 40,073
March 17, 2000/(4)/ 450 4,500,000
April 19, 2000/(5)/ 78,864 337,526
May 10, 2000/(6)/ 1,650 16,500,000
May 10, 2000/(5)/ 50 500,000
May 10, 2000/(7)/ 750,000 2,000,000
May 10, 2000/(8)/ 1,653 16,530,000
May 25, 2000/(9)/ 112,000 200,000
August 18, 2000/(10)/ 165,921 269,621
</TABLE>
____________________
(1) Issued in lieu of payment of an obligation for royalties and a share
price guaranty at $1.92 per share.
(2) Issued pursuant to conversion of notes at conversion price of $4.50 per
share.
(3) Issued upon cashless exercise of warrants at exercise price of $0.685
per share.
(4) Issued pursuant to purchase by travelbyus.com at $10,000 per share. See
"Aviation Group--Business-Acquisition of Global Leisure Travel, Inc."
(5) Issued pursuant to conversion of notes, 67,289 shares at a conversion
price of $4.50 per share and 11,575 shares at a conversion price of $3
per share.
(6) Issued to the former owners of Global Leisure, along with Series A
warrants to purchase 750,000 shares of Aviation Group common stock at
an exercise price of $5 per share, in exchange for the transfer or
cancellation of stock and indebtedness owned by them and their
affiliates. See "Aviation Group--Business-Acquisition of Global Leisure
Travel, Inc."
(7) Issued through private purchase at $2.667 per share. See "Aviation
Group--Business-Acquisition of Global Leisure Travel, Inc."
(8) Issued through private purchase at $10,000 per unit, each unit
consisting of one share of Series B preferred stock and 750 Series C
warrants. See "Aviation Group-Business-Acquisition of Global Leisure
Travel, Inc."
(9) Issued in payment of an obligation arising from the settlement of a
lawsuit in June 1999.
(10) Issued in connection with a note to satisfy outstanding rental
obligation.
Certain Relationships and Related Transactions
Charles E. Weed, a director of Aviation Group, served as a consultant
to Aviation Group from March 1996 until February 2000. During the fiscal years
ended June 30, 1998 and 1999, Aviation Group paid Mr. Weed $48,000 and $54,200
in consulting fees, respectively. As of June 30, 1999, Mr. Weed held convertible
notes of Aviation Group totaling $62,064 in principal amount. To induce the
conversion by holders of the 10% convertible notes of the payments due on March
31, June 30 and September 30, 1999, Aviation Group agreed to reduce the
conversion price for these notes to $1.75 per share. In May 1999, six holders of
the notes agreed to convert these payments totaling $221,000 for a total of
126,427 shares of common stock, including the conversion by Mr. Weed of $37,250
in principal amount of his notes, plus accrued interest, for 24,954 shares of
common stock.
In June 1999, two shareholders of Aviation Group, who were not
affiliated with Aviation Group, loaned Aviation Group $600,000 pursuant to a
secured note due December 31, 1999. The shareholders were granted warrants to
purchase 200,000 shares of common stock at $1 per share. This loan was repaid in
full in December 1999. As compensation for arranging this financing on behalf of
Aviation Group, Mr. Weed received 40,000 shares of Aviation Group's common
stock.
During the fiscal 2000 year, Lee Sanders and Richard Morgan provided
Aviation Group with $80,000 and $225,000, respectively, in short-term unsecured
working capital loans. These loans paid interest at the annual rate of 9%, and
the proceeds were used by Aviation Group to fund certain operating expenses and
debt repayments. These loans have been repaid, and there is presently no
outstanding balance. In consideration for these financings, Messrs. Sanders and
Morgan received warrants to purchase 26,666 and 75,000 shares, respectively, of
Aviation Group common stock at an exercise price of $1 per share. The interest
and warrant terms for these loans were identical to the terms of the $600,000
short-term secured loan described above from an unaffiliated third party to
Aviation Group in June 1999.
157
<PAGE>
In August 1998, under their prior acquisition agreements with Aviation
Group, two former shareholders of Aviation Group, who owned an aggregate of
82,165 shares of common stock, claimed that they were entitled to receive
certain payments from Aviation Group upon a resale of their shares. Charles Weed
purchased 20,000 shares, and three other existing shareholders purchased the
remainder of the shares, of these two shareholders at a price of $3 per share.
This price was in the range of closing trading prices at the time of the sale in
late August 1998. To facilitate the transaction, Aviation Group agreed with each
of the shareholders, including Mr. Weed, that the purchasers would receive at
least $3.50 per share in sales proceeds upon any resale of these shares after
one year. Mr. Weed and each shareholder agreed not to resell these shares for
one year. As a result of this arrangement, Aviation Group paid Mr. Weed $10,000.
The board of directors of Aviation Group believes that all transactions
between Aviation Group and any of its affiliates have been made on terms no less
favorable to Aviation Group than would have been obtained from non-affiliated
third parties. Any future transactions between Aviation Group and any of its
affiliates will be subject to approval by a majority of the independent
disinterested members of the board of directors or by a majority of the
shareholders, other than any interested shareholders, and will be made on terms
no less favorable to Aviation Group than could be obtained from unaffiliated
third parties. Aviation Group will not make any loans to its officers,
directors, 5% shareholders or affiliates, except for bona fide business
purposes.
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<PAGE>
EXCHANGE OFFER TO SERIES B
PREFERRED SHAREHOLDERS
Through this joint proxy statement/prospectus and a prospectus
supplement, Aviation Group is offering to issue to holders of its Series B
preferred stock one share of its Series C convertible preferred stock in
exchange for each share of Series B preferred stock. The exchange offer is
required by the terms of Aviation Group's agreement with travelbyus.com entered
into on March 1, 2000. The exchange offer will remain open for not less than 20
business days after the date notice of the exchange offer is mailed to the
holders of the Series B preferred stock. The purpose is to provide the holders
of Series B preferred the opportunity to obtain preferred stock that is freely
transferable and convertible into common stock after completion of the
arrangement.
When issued, cumulative dividends on each share of Series C convertible
preferred stock will accrue from the date immediately following the last date on
which dividends were paid on the share of Series B preferred stock exchanged for
Series C convertible preferred stock. If no dividends have been paid on the
Series B preferred stock, cumulative dividends will accrue from the date the
share of the Series B preferred stock was originally issued.
The exchange of shares is conditioned on completion of the arrangement.
Aviation Group is entitled to close the exchange offer at the same time the
arrangement is completed, but must accept all Series B preferred stock validly
tendered before that time in accordance with the exchange offer. Holders of
Series B preferred stock will receive a supplement to this joint proxy
statement/prospectus that describes the exchange offer and related risks and
compares the terms of the Series B preferred stock to the Series C convertible
preferred stock.
159
<PAGE>
SELLING SHAREHOLDERS
This joint proxy statement/prospectus also relates to the potential
offer from time to time following the arrangement by the holders of shares of
Aviation Group common stock identified in the table below. The following table
provides the names of each selling shareholder, the number of travelbyus.com
common shares beneficially owned by each holder as of September 1, 2000, and the
number of the shares of Aviation Group common stock that may be offered by each
selling shareholder, to the knowledge of Aviation Group.
<TABLE>
<CAPTION>
travelbyus.com
Common Shares Percent of
Beneficially Aviation Group Common All Outstanding
Owned as of Stock Offered by Aviation Group
Name September 1, 2000 this Prospectus(1) Common Stock(1)
--------------------------- ----------------- ------------------ ---------------
<S> <C> <C> <C>
William Kerby 6,083,334 6,083,334 6.4%
Michael Farrugia 800,000 800,000 0.8%
John Fenyes 1,154,000 1,154,000 1.2%
Jon Snyder 1,154,000 1,154,000 1.2%
</TABLE>
_____________________
(1) Assumes consummation of the arrangement and issuance of shares of
Aviation Group common stock to all travelbyus.com shareholders.
William Kerby has served as President, Chief Executive Officer and a
director of Aviation Group since March 1, 2000. Jon Snyder served as a director
of Aviation Group between March 1, 2000 and May 3, 2000. John Fenyes has served
as a director since May 3, 2000. These three individuals also serve as executive
officers of travelbyus.com, which owns 500 shares of Series B preferred stock in
Aviation Group.
160
<PAGE>
PLAN OF DISTRIBUTION
Aviation Group has registered with the SEC the shares of Aviation Group
common stock to be issued in exchange for the exchangeable shares pursuant to
the arrangement. That registration also applies to resales by certain selling
shareholders, who are named above as selling shareholders. The registration does
not necessarily mean that any shares will be offered or sold by the selling
shareholders. Aviation Group will not receive any of the proceeds of the sale of
the shares offered by the selling shareholders.
The distribution of shares of Aviation Group common stock by the
selling shareholders may be effected from time to time in one or more
underwritten transactions at a fixed price or prices, which may be changed, or
in other transactions at market prices prevailing at the time of sale, at prices
related to these prevailing market prices or at negotiated prices. Any
underwritten offering may be on either a "best efforts" or a "firm commitment"
basis. In connection with any underwritten offering, underwriters or agents may
receive compensation in the form of discounts, concessions or commissions from
the selling shareholders and/or from purchasers of the shareholders' shares for
whom they may act as agents. Underwriters may sell the shares to or through
dealers. These dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents.
The selling shareholders and any underwriters, dealers or agents that
participate in the distribution of shares may be deemed to be "underwriters"
within the meaning of the Securities Act. Any profit on the sale of shares by
them and any discounts, commissions or concessions received by any underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. If a selling shareholder is deemed to be an
"underwriter," the shareholder may have liability for the accuracy of the
contents of this joint proxy statement/prospectus under the Securities Act.
At a time a particular offer of shares is made by a selling
shareholder, a prospectus supplement, if required, will be distributed that will
set forth the names of any underwriters, dealers or agents and any discounts,
commissions and other terms constituting compensation from the selling
shareholders and any other required information.
The sale of shares of Aviation Group common stock by the selling
shareholders may also be effected from time to time by selling shares directly
to purchasers or to or through a broker-dealer. A broker-dealer may act as agent
for the selling shareholders or may purchase from the selling shareholders all
or a portion of the shares as principal. Sales may be made pursuant to any of
the methods described below. Sales may be made on Nasdaq, the Boston Stock
Exchange or other exchanges on which the shares are then traded, in the
over-the-counter market, in negotiated transactions or otherwise. In each case,
sales will be made at prices and at terms then prevailing or at prices related
to the then-current market prices or at prices otherwise negotiated.
The selling shareholders' shares may also be sold in one or more of the
following transactions:
- block transactions (which may involve crosses) in which a broker-
dealer may sell all or a portion of the shares as agent but may
position and resell all or a portion of the block as principal to
facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account pursuant to a prospectus
supplement;
- a special offering, an exchange distribution or a secondary
distribution in accordance with applicable Nasdaq, Boston Stock
Exchange or other stock exchange rules;
- ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers;
- sales "at the market" to or through a market maker or into an
existing trading market, on an exchange or otherwise; and
161
<PAGE>
- sales in other ways not involving market makers or established
trading markets, including direct sales to purchasers.
In effecting sales, broker-dealers engaged by the selling shareholders may
arrange for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the selling shareholders in amounts to be
negotiated immediately prior to the sale that will not exceed those customary in
the types of transactions involved. Broker-dealers may also receive compensation
from purchasers of the shares which is not expected to exceed that customary in
the types of transactions involved.
In connection with distributions of the shareholders' shares or
otherwise, the selling shareholders may enter into hedging transactions with
broker-dealers or others prior to or after the effective time of the
arrangement. These broker-dealers may engage in short sales of shares or other
transactions in the course of hedging the positions assumed by or otherwise. The
selling shareholders may also
- sell shares short and redeliver shares to close out short
positions;
- enter into option or other transactions with broker-dealers or
others which may involve the delivery to those persons of the
shares, the broker-dealers may resell those shares pursuant to
this proxy statement/prospectus; and
- pledge the shares to a broker or dealer or others and, upon a
default, these persons may effect sales of the shares pursuant to
this proxy statement/prospectus.
In addition, any shares covered by this proxy statement/prospectus that qualify
for resale pursuant to Rule 145 of the Securities Act may be sold under Rule 145
rather than with this proxy statement/prospectus.
In order to comply with securities laws of certain states, if
applicable, the shares of Aviation Group common stock may be sold only through
registered or licensed brokers or dealers.
The selling shareholders will be subject to applicable provisions of
the Securities Exchange Act and its rules and regulations, including without
limitation, Rule 102 under Regulation M. These provisions may limit the timing
of purchases and sales of any of the common stock by the selling shareholders.
Rule 102 under Regulation M provides, with certain exceptions, that it is
unlawful for a selling shareholder or its affiliated purchaser to, directly or
indirectly, bid for or purchase or attempt to induce any person to bid for or
purchase, for an account in which the selling shareholder or affiliated
purchaser has a beneficial interest in any securities that are the subject of
the distribution during the applicable restricted period under Regulation M. All
of the foregoing may affect the marketability of the common stock.
The selling shareholders may offer all of the shares of common stock
for sale. Further, because it is possible that a significant number of shares
could be sold at the same time under this prospectus, such sales, or that
possibility, may have a depressive effect on the market price of Aviation
Group's common stock.
Until the distribution of the common stock is completed, SEC rules may
limit the ability of any underwriters to bid for and purchase common stock. As
an exception to these rules, underwriters are permitted to engage in certain
transactions that stabilize the price of the common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
The lead underwriters may also impose a penalty bid on certain other
underwriters participating in the offering and selling group members. This means
that if the lead underwriters purchase common stock in the open market to reduce
the underwriters' short position or to stabilize the price of the common stock,
they may reclaim the amount of any selling concession from the underwriters and
selling group members who sold those shares of common stock as part of the
offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
162
<PAGE>
bid might also have an effect on the price of a security to the extent that it
were to discourage resale of the security before the distribution is completed.
Aviation Group makes no representation or prediction as to the
direction or magnitude of any effect that the transactions described above might
have on the price of the common stock. In addition, it makes no representation
that underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
All expenses incident to the offering and sale of the shareholders'
shares (other than brokerage and underwriting commissions and certain taxes)
will be paid by Aviation Group.
163
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Aviation Group common
stock to be issued in connection with the arrangement will be passed upon for
Aviation Group by Jenkens & Gilchrist, a Professional Corporation, Dallas,
Texas. Cassels Brock & Blackwell LLP will render an opinion with respect to
certain Canadian tax matters described under the caption "Federal Income Tax
Considerations Relating to the Arrangement." A director of travelbyus.com, John
Craig, is also a partner in Cassels Brock & Blackwell LLP. Shearman & Sterling
will render an opinion with respect to certain U.S. tax matters described under
the caption "Federal Income Tax Considerations Relating to the Arrangement."
EXPERTS
The consolidated financial statements of Aviation Group as of June 30,
2000 and 1999 and for each of the two years ended June 30, 2000, have been
included herein in reliance on the report of Hein + Associates, LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Aviation Group as of June 30,
1998 and for each of the two years in the period ended June 30, 1998, have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Global Leisure as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999, have been included herein in reliance on the report of BDO Seidman
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of travelbyus.com as of September
30, 1999 and for the nine-month fiscal year ended September 30, 1999, have been
included herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of travelbyus.com as of December
31, 1998 and for each of the two years in the period ended December 31, 1998,
have been included herein in reliance on the report of Ernst & Young LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Cheap Seats as of June 30, 1999 and 1998
and each of the two years in the period ended June 30, 1999, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Express Vacations as of September 30, 1999
and for the period from August 5, 1998 to September 30, 1999 have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Cruise Shoppes as of June 30, 1999 and 1998
and for each of the two years in the period ended June 30, 1999, have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Epoch Technology Inc. as of December 31,
1999 and 1998 and for each of the two years in the period ended December 31,
1999, have been included herein in reliance on the report of Hein + Associates,
LLP, independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Muffin Communications as of December 31,
1999 and 1998 and for the period from February 6, 1998 to December 31, 1999,
have been included herein in reliance on the report of Friduss, Lukee, Schiff &
Co., P.C., independent accountants, given on the authority of said firm as
experts in accounting and auditing.
164
<PAGE>
The financial statements of ProSoft Corporation as of December 31, 1999
and for the year ended December 31, 1999, have been included herein in reliance
on the report of Swenson Advisors, LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The financial statements of SiteRabbit.com as of June 30, 2000, 1999
and 1998 and for each of the years ended June 30, 2000 and 1999 and for the
period from July 21, 1997 to June 30, 1998, have been included herein in
reliance on the report of Swenson Advisors, LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
OTHER MATTERS
Our boards of directors do not plan to bring or know of any other
matter that will be brought before the special shareholders meetings other than
those specifically set forth in the this joint proxy statement/prospectus. If
any other matters properly come before either special shareholders meeting, the
persons named in the accompanying proxies intend to vote these proxies in
accordance with the judgment of the applicable board of directors.
No persons have been authorized to give any information or to make any
representation other than those contained in this joint proxy
statement/prospectus in connection with the solicitation of proxies or the
offering of securities made hereby and, if given or made, such information or
representation must not be relied upon as having been authorized by Aviation
Group or travelbyus.com or by any other person. This joint proxy
statement/prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, any securities, or the solicitation of a proxy, in any
jurisdiction to or from any person to whom it is not lawful to make any such
offer or solicitation in such jurisdiction. Neither the delivery of this joint
proxy statement/prospectus nor any distribution of securities made hereunder
shall, under any circumstances, create an implication that there has been no
change in the affairs of Aviation Group or travelbyus.com since the date hereof
or that the information herein is correct as of any time subsequent to its date.
165
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AVIATION GROUP, INC.
<S> <C>
Report of Hein + Associates LLP.......................................................................................... F-1
Report of PricewaterhouseCoopers LLP..................................................................................... F-2
Consolidated Balance Sheets at June 30, 2000 and June 30, 1999........................................................... F-3
Consolidated Statements of Operations for Years ended June 30, 2000, 1999 and 1998....................................... F-4
Consolidated Statement of Changes in Shareholders' Equity for the Period From July 1, 1997
Through June 30, 2000........................................................................................... F-5
Consolidated Statements of Cash Flows for the Years ended June 30, 2000, 1999 and 1998................................... F-6
Notes to Consolidated Financial Statements............................................................................... F-8
GLOBAL LEISURE TRAVEL, INC.
Report of BDO Seidman LLP................................................................................................ F-26
Consolidated Balance Sheets at December 31, 1999 and 1998................................................................ F-27
Consolidated Statements of Loss for the Years ended December 31, 1999, 1998 and 1997..................................... F-28
Consolidated Statements of Stockholders' Deficit for the Period from January 1, 1997 through
December 31, 1999............................................................................................... F-29
Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997............................... F-30
Notes to Financial Statements............................................................................................ F-31
TRAVELBYUS.COM LTD.
Report of PricewaterhouseCoopers LLP..................................................................................... F-41
Report of Ernst & Young LLP.............................................................................................. F-42
Consolidated Balance Sheets at June 30, 2000, September 30, 1999 and December 31, 1998................................... F-43
Consolidated Statement of Operations and Deficit for the Nine Months ended June 30, 2000 and 1999,
for the Period from January 1, 1999 to September 30, 1999 and for the Years ended December 31,
1998 and 1997................................................................................................... F-45
Consolidated Statement of Changes in Shareholders' Equity for the Nine Months ended June 30, 2000
and 1999, for the Period from January 1, 1999 to September 30, 1999 and for the Years ended
December 31, 1998 and 1997...................................................................................... F-46
Consolidated Statement of Cash Flows for the Nine Months ended June 30, 2000 and 1999, for the Period
from January 1, 1999 to September 30, 1999 and for the Years ended December 31, 1998 and 1997................... F-47
Notes to Consolidated Financial Statements............................................................................... F-49
CRUISE SHOPPES AMERICA, LTD.
Report of PricewaterhouseCoopers LLP..................................................................................... F-77
Balance Sheets at June 30, 1999 and 1998................................................................................. F-78
Statements of Earnings and Retained Earnings for the Years ended June 30, 1999 and 1998.................................. F-79
Statements of Changes in Shareholders' Equity ........................................................................... F-80
Statements of Cash Flows for the Years ended June 30, 1999 and 1998...................................................... F-81
Notes to Financial Statements............................................................................................ F-82
</TABLE>
166
<PAGE>
<TABLE>
<S> <C>
EPOCH TECHNOLOGY, INC.
Report of Hein + Associates LLP......................................................................................... F-89
Consolidated Balance Sheets at March 31, 2000, December 31, 1999 and 1998............................................... F-90
Consolidated Statements of Operations for the Three Months ended March 31, 2000 and 1999 and the
Years ended December 31, 1999 and 1998......................................................................... F-91
Consolidated Statements of Stockholders' Deficiency for the Period from January 1, 1998 through
March 31, 2000................................................................................................. F-92
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2000 and 1999 and the
Years ended December 31, 1999 and 1998......................................................................... F-93
Notes to Consolidated Financial Statements.............................................................................. F-94
EXPRESS VACATIONS, LLC
Report of PricewaterhouseCoopers LLP.................................................................................... F-97
Balance Sheets at October 31, 1999 and September 30, 1999 and 1998...................................................... F-98
Statements of Members' Equity for the Period from August 5, 1998 to September 30, 1999, Year ended
September 30, 1999 and One-Month Period ended October 31, 1999................................................. F-99
Statements of Loss for the Period from August 5, 1998 to September 30, 1999, Year ended
September 30, 1999 and One-Month Period ended October 31, 1999................................................. F-100
Statements of Cash Flows for the Period from August 5, 1998 to September 30, 1999, Year ended
September 30, 1999 and One-Month Period ended October 31, 1999................................................. F-101
Notes to Financial Statements........................................................................................... F-102
CHEAP SEATS INC.
Report of PricewaterhouseCoopers LLP.................................................................................... F-107
Balance Sheets at November 30, 1999 and June 30, 1999 and 1998.......................................................... F-108
Statements of Operations and Retained Earnings for the Years ended June 30, 1999 and 1998 and the
Period from July 1, 1999 to November 30, 1999.................................................................. F-109
Statements of Cash Flows for the Years ended June 30, 1999 and 1998 and the Period from July 1, 1999
to November 30, 1999........................................................................................... F-110
Notes to Financial Statements........................................................................................... F-111
MUFFIN COMMUNICATIONS, LTD.
Report of Friduss, Lukee, Schiff & Co., P.C............................................................................. F-116
Balance Sheets at June 30, 2000 and December 31, 1999 and 1998.......................................................... F-117
Statements of Income (Loss) and Retained Earnings (Accumulated Deficit) for the Six Months
ended June 30, 2000, the Year ended June 30, 1999 and the Period from February 6, 1998
(Inception) to December 31, 1998............................................................................... F-119
Statements of Changes in Stockholder's Equity (Deficit) for the Period from February 6, 1998
to June 30, 2000............................................................................................... F-120
Statements of Cash Flows for the Six Months ended June 30, 2000, the Year ended June 30, 1999
and the Period from February 6, 1998 (Inception) to December 31, 1998.......................................... F-121
Notes to Financial Statements........................................................................................... F-122
PROSOFT CORPORATION
Report of Swenson Advisors, LLP......................................................................................... F-124
Balance Sheet at December 31, 1999...................................................................................... F-125
Statement of Income for the Year ended December 31, 1999................................................................ F-126
Statement of Stockholders' Equity for the Year ended December 31, 1999.................................................. F-127
Statement of Cash Flow for the Year ended December 31, 1999............................................................. F-128
Notes to Financial Statements........................................................................................... F-129
</TABLE>
167
<PAGE>
<TABLE>
<S> <C>
SITERABBIT.COM
Report of Swenson Advisors, LLP........................................................................................ F-132
Consolidated Balance Sheets at June 30, 2000, 1999 and 1998............................................................ F-133
Consolidated Statements of Operations for the Years ended June 30, 2000 and 1999 and for the
Period from July 21, 1997 to June 30, 1998.................................................................... F-134
Consolidated Statements of Stockholders' Equity for the Years ended June 30, 2000 and 1999 and
the Period from July 21, 1997 to June 30, 1998................................................................ F-135
Consolidated Statements of Cash Flows for the Years ended June 30, 2000 and 1999 and
the Period from July 21, 1997 to June 30, 1998................................................................ F-136
Notes to Financial Statements.......................................................................................... F-137
</TABLE>
168
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Aviation Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Aviation Group,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Aviation Group, Inc. and subsidiaries at June 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
two years then ended, in conformity with generally accepted accounting
principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Dallas, Texas
September 11, 2000
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Aviation Group, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in shareholders' equity and of cash flows present fairly, in all
material respects, the results of operations and cash flows of Aviation Group,
Inc. and its subsidiaries for the year ended June 30, 1998 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dallas, Texas
October 12, 1998, except for Note P,
which is dated May 15, 2000
F-2
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 432,000 $ 84,000
Restricted cash and time deposit 1,957,000 538,000
Accounts receivable, net of allowance of $35,000 and $138,000, respectively 2,018,000 2,200,000
Note receivable - affiliate 1,930,000 --
Inventory, net of reserve for obsolescence of $176,000 and $242,000, respectively 1,049,000 1,547,000
Prepaid expenses and other 685,000 170,000
Prepaid tour costs 1,643,000 --
------------- -------------
Total current assets 9,714,000 4,539,000
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation 2,653,000 4,050,000
OTHER ASSETS:
Goodwill, net 50,657,000 4,144,000
Other 720,000 319,000
------------- -------------
Total other assets 51,377,000 4,463,000
------------- -------------
Total assets $ 63,744,000 $ 13,052,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,976,000 $ 463,000
Current portion of capital lease obligations 150,000 164,000
Short-term borrowings, net of discount of $206,000 and $140,000 at
June 30, 2000 and 1999 4,162,000 2,316,000
Accounts payable 4,216,000 2,334,000
Customer deposits 3,718,000 --
Accrued and other liabilities 3,103,000 1,335,000
------------- -------------
Total current liabilities 19,325,000 6,612,000
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 431,000 880,000
Capital lease obligations, net of current maturities 264,000 439,000
Other 33,000 --
------------- -------------
Total long-term liabilities 728,000 1,319,000
------------- -------------
Total liabilities 20,053,000 7,931,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes G, H and K)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
Series A 9% convertible, 1,650 shares outstanding
(liquidation preference of $16,500,000) 2,000 --
Series B 12% cumulative, 2,100 shares outstanding
(liquidation preference of $21,000,000) 2,000 --
Common stock, $.01 par value, 10,000,000 shares authorized, 4,790,801
shares at June 30, 2000 and 3,573,929 shares at June 30, 1999 issued
and outstanding 48,000 36,000
Additional paid-in capital 55,448,000 9,766,000
Accumulated deficit (11,809,000) (4,681,000)
------------- -------------
Total shareholders' equity 43,691,000 5,121,000
------------- -------------
Total liabilities and shareholders' equity $ 63,744,000 $ 13,052,000
============= =============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
REVENUE $ 13,381,000 $ 15,097,000 $ 11,043,000
COST OF REVENUE 8,805,000 10,129,000 8,380,000
----------------- ----------------- ----------------
Gross profit 4,576,000 4,968,000 2,663,000
----------------- ----------------- ----------------
OPERATING EXPENSES:
General and administrative expenses 8,839,000 5,482,000 3,367,000
Depreciation and amortization 1,991,000 674,000 469,000
----------------- ----------------- ----------------
Total operating expenses 10,830,000 6,156,000 3,836,000
----------------- ----------------- ----------------
Loss from operations (6,254,000) (1,188,000) (1,173,000)
----------------- ----------------- ----------------
OTHER INCOME (EXPENSE):
Other income (loss) (23,000) 52,000 20,000
Interest expense, net (656,000) (461,000) (200,000)
----------------- ----------------- ----------------
Total other income (expense) (679,000) (409,000) (180,000)
----------------- ----------------- ----------------
Loss from continuing operations before provision for
income taxes (6,933,000) (1,597,000) (1,353,000)
(PROVISION) BENEFIT FOR INCOME TAXES - (199,000) 359,000
----------------- ----------------- ----------------
LOSS FROM CONTINUING OPERATIONS (6,933,000) (1,796,000) (994,000)
DISCONTINUED OPERATIONS:
Loss from operations (795,000) (509,000) (644,000)
Gain on sale of subsidiaries 600,000 - -
----------------- ----------------- ----------------
(195,000) (509,000) (644,000)
----------------- ----------------- ----------------
NET LOSS $ (7,128,000) $ (2,305,000) $ (1,638,000)
================= ================= ================
LOSS PER SHARE, basic and diluted:
Continuing operations $ (1.75) $ (0.53) $ (0.32)
================= ================= ================
Net loss $ (1.79) $ (0.67) $ (0.54)
================= ================= ================
WEIGHTED AVERAGE SHARES OUTSTANDING 3,972,094 3,419,161 3,059,632
================= ================= ================
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 30, 1997 THROUGH JUNE 30, 2000
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Paid-in Accumulated
-------------------------
Shares Amount Stock Capital Deficit
-------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1997 1,600,250 $ 16,000 - $ 1,951,000 $ (738,000)
Issuance of shares and warrants in
connection with initial public offering 1,150,000 11,500 - 5,168,500 -
Issuance of shares in connection with
acquisition of Casper Air Service 153,565 1,600 - 881,400 -
Stock warrants issued in connection with
acquisitions - - - 26,000 -
Issuance of shares in connection with
acquisition of Aero Design, Inc. and
Battery Shop, LLC 134,068 1,400 - 545,600 -
Issuance of shares in connection with Bridge
Notes Warrants 43,478 400 - (400) -
Issuance of shares in connection with
conversion of LEDC convertible note
payable 82,153 800 - 367,200 -
Issuance of shares in connection with
conversion of 10% convertible note 975 - - 3,000 -
Stock warrants exercised 129,112 1,300 - (300) -
Issuance of shares in connection with
payment of note payable 3,000 - - 15,000 -
Net loss - - - - (1,638,000)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 1998 3,296,601 33,000 - 8,957,000 (2,376,000)
Issuance of shares in connection with
acquisition of General Electrodynamics
Corporation 112,029 1,000 - 293,000 -
Issuance of shares for principal
and interest payments on notes 126,428 2,000 - 237,000 -
Value of warrants issued and
shares granted with notes - - - 156,000 -
Value of warrants issued for services - - - 123,000 -
Exercise of warrants 38,871 - - - -
Net loss - - - - (2,305,000)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 1999 3,573,929 36,000 - 9,766,000 (4,681,000)
Issuance of common stock for cash 790,000 8,000 - 2,032,000 -
Issuance of common stock for conversion
of debt 215,122 2,000 438,000
Additional shares issued for acquisition of
Aero Design, Inc. and Battery Shop, LLC 153,250 1,000 - (1,000) -
Issuance of shares upon cashless conversion
of warrants 58,500 1,000 - - -
Series A preferred stock - - 2,000 10,498,000 -
Series B preferred stock - - 2,000 20,998,000 -
Issuance of warrants - - - 11,717,000
Net loss - - - - (7,158,000)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 2000 4,790,801 $ 48,000 $ 4,000 $ 55,448,000 $(11,839,000)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,128,000) $(2,305,000) $(1,638,000)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 2,224,000 978,000 694,000
Accreted interest 303,000 16,000 64,000
Deferred income taxes - 191,000 (359,000)
(Gain) loss on disposal of assets (600,000) 36,000 -
Interest paid with common stock - 34,000 -
Warrants issued for services - 123,000 -
(Increase) decrease in accounts receivable 1,059,000 64,000 (587,000)
Decrease in inventories 498,000 676,000 567,000
Decrease in prepaids and other assets 148,000 107,000 70,000
Increase (decrease)in accounts payable (116,000) 519,000 275,000
Decrease in customer deposits (2,471,000) - -
Increase (decrease) in accrued and other liabilities 918,000 (261,000) 410,000
Other (138,000) (75,000) 73,000
----------- ----------- -----------
Net cash provided (used) by operating activities (5,303,000) 103,000 (431,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash (paid for) included with acquisitions 811,000 41,000 (2,235,000)
Proceeds from sale of business segments 1,700,000 - -
Advances from related parties - - 29,000
Decrease (increase) in restricted cash 1,640,000 (338,000) (200,000)
Proceeds from redemption of certificate of deposit 200,000 - 100,000
Increase in note receivable (1,930,000) - -
Proceeds from sale of marketable securities - - 113,000
Proceeds from sale of property and equipment - 17,000 -
Payments for long-lived asset additions (418,000) (344,000) (811,000)
---------- ----------- -----------
Net cash provided by investing activities 2,003,000 (624,000) (3,004,000)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,000,000 1,859,000 720,000
Repayments of short-term borrowings (1,189,000) (855,000) (607,000)
Repayment of notes payable - (425,000) (500,000)
Proceeds from issuance of long-term debt 3,980,000 - 225,000
Payments on long-term debt and capital leases (4,183,000) (483,000) (1,647,000)
Proceeds from issuance of common stock 2,040,000 - 5,565,000
--------- ----------- -----------
Net cash provided by financing activities 3,648,000 96,000 3,756,000
--------- ----------- -----------
</TABLE>
- Continued -
F-6
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 348,000 (425,000) 321,000
CASH AND CASH EQUIVALENTS, beginning of period 84,000 509,000 188,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 432,000 $ 84,000 $ 509,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR
INTEREST AND INCOME TAXES:
Cash paid for interest $ 533,000 $ 424,000 $ 287,000
Cash paid for income taxes - - 4,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and warrants in connection with
acquisitions $11,348,000 $ 294,000 $ 1,456,000
Machinery and equipment acquired under capital leases - 484,000 183,000
Conversion of liabilities to common stock 438,000 239,000 371,000
Issuance of preferred stock in connection with acquisition 31,500,000 - -
</TABLE>
See accompanying notes to these consolidated financial statements.
F-7
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND DESCRIPTION OF BUSINESS
Aviation Group, Inc. ("the Company") (a Texas corporation) was formed on
December 4, 1995 for the purposes of combining certain aircraft service
operations formerly owned by The Sanders Companies, Inc. ("Sanders") and to
acquire additional aircraft servicing related businesses. Sanders was 100%
owned by Lee Sanders, Chairman and chief executive officer of the Company.
On February 21, 1996, the Company acquired Pride Aviation, Inc. , which was
subsequently renamed Aviation Exteriors Louisiana, Inc. ("AvEx") in a
business combination accounted for as a purchase. AvEx operates a Federal
Aviation Administration ("FAA") approved repair station and provides
aircraft painting and maintenance services. In August 1997, the Company
acquired Casper Air Service ("CAS"). CAS was a full service fixed base
operation ("FBO") located at Natrona County International Airport in
Casper, Wyoming and offered aircraft line services, repair and maintenance,
parts distribution and aircraft sales. The operating assets of CAS were
sold in February 2000. In March 1998, the Company acquired all of the
outstanding common stock of Aero Design, Inc. and all of the outstanding
ownership interests of Battery Shop, LLC (collectively, "Aero Design"), two
sister companies involved in the manufacturing and overhaul of replacement
batteries for the aviation industry. Aero Design is located outside
Nashville, Tennessee. In August 1998, the Company acquired all the
outstanding common stock of General Electrodynamics Corporation ("GEC").
GEC manufactures and sells aircraft and truck scales and other aviation
components used by the aviation maintenance and transportation industries
and is located in Arlington, Texas. In March 2000, the Company acquired
control of Global Leisure Travel, Inc. ("Global"). Global provides
wholesale and retail travel-related services. See Note C.
If the proposed merger described in Note Q is approved by the companies'
shareholders, management anticipates its non-travel related businesses will
be sold.
In August 1997, the Company completed an initial public offering ("IPO") of
its common stock (See Note J).
Until March 31, 2000, the Company was organized into three operating
divisions: overhaul and service, ground handling and services, and fixed
base operation ("FBO") and airport management. As described above, the
Company acquired a travel business on March 31, 2000. The overhaul and
service division includes two business segments for financial reporting
purposes: painting and maintenance and manufacturing. The ground handling
and services and the FBO and airport management divisions were each
considered separate business segments for financial reporting purposes.
These two business segments were discontinued in December 1999 and February
2000, respectively, as described in Note P. The painting and maintenance
business segment provides painting and paint stripping services and certain
maintenance for commercial and freight aircraft at the Company's FAA
approved repair stations in New Iberia, Louisiana and Portland, Oregon. The
manufacturing business segment manufactures and sells aircraft batteries,
scales and other aviation components to customers throughout the United
States and Europe. The ground handling and services division provided
aircraft ground handling and light catering services to a variety of
passenger and freight airlines at the Dallas/Fort Worth International
Airport. Services at other airports were terminated in fiscal years 1998
and 1999. The FBO and airport management division provided fuel and light
maintenance services to general aviation, corporate and light freight
aircraft customers at an airport in Casper, Wyoming.
F-8
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated financial statements present the consolidated
results of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
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 at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates in the
accompanying financial statements include the carrying values and the
estimated useful lives of intangible assets, goodwill and assets held for
sale. Actual results could differ materially from those estimates. The most
significant estimate is the approximately $49,000,000 of goodwill the
Company has recorded in connection with its acquisition of Global on March
31, 2000 (Note C). Global has incurred losses in the past and its future
results may be dependent on the successful integration of its business with
travelbyus.com (see Note Q). Therefore it is reasonably possible the
expected useful life of 10 years for the goodwill could materially change
in the near term.
Revenue Recognition
-------------------
For operations other than travel services, revenues are recognized as
services are performed or when products are shipped.
The Company earns commission from the sale of travel products including
airline tickets, hotel accommodations, car rentals, and other land
components. Net revenues consist primarily of markups on travel packages.
The Company generally recognizes net revenue when earned on the date of
travel net of estimated cancellations and returns.
Customer deposits represent unearned revenues and are initially recorded as
customer deposit liabilities on the balance sheet when received. Customer
deposits are subsequently recognized as revenue, generally in the month
of travel.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash and Time Deposit
--------------------------------
Restricted cash at June 30, 2000 consists of customer travel deposits of
$1,785,000 and collateral deposit account balances associated with a bank
line of credit of $172,000. At June 30, 1999, restricted cash consisted of
$338,000 of collateral deposit account balances and a $200,000 bank
certificate of deposit which matured, after renewal, in October 1999. The
certificate of deposit collateralized an open letter of credit and was
restricted as to withdrawal until the associated letter of credit expired
in October 1999.
F-9
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
-----------
Aircraft held for resale are valued at the lower of cost or market, with
cost determined by the specific identification method. Parts and supplies
inventories are stated at the lower of cost or market, with cost determined
by the average costing method. Aircraft and truck scales and aviation
components inventories are stated at the lower of cost or market, with cost
determined by the first-in-first-out method. Provision is made for
estimated excess and obsolete inventories.
Inventories consisted of the following:
June 30,
-------------------------------
2000 1999
------------ ------------
Aircraft held for sale $ - $ 170,000
Raw materials, parts and supplies 1,049,000 1,377,000
------------ ------------
$ 1,049,000 $ 1,547,000
============ ============
Goodwill
--------
Goodwill represents the cost in excess of fair value of the net assets
(including tax attributes) acquired in acquisitions. Goodwill is being
amortized on a straight-line basis over periods ranging from 10 to 25
years. Amortization expense for the years ended June 30, 2000,1999 and 1998
was $1,387,000, $217,000 and $99,000, respectively. Accumulated
amortization totaled $1,771,000 and $384,000 at June 30, 2000 and 1999,
respectively.
Property and Equipment
----------------------
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation has been provided using straight line and double declining
balance methods over the estimated useful lives of the assets which range
from 5 to 30 years.
Long-Lived Assets
-----------------
The Company's policy is to periodically review the net realizable value of
its long-lived assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. In the event that
assets are found to be carried at amounts in excess of estimated
undiscounted future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of
the underlying assets. Based upon its most recent analysis, the Company
believes no impairment of long-lived assets exists at June 30, 2000 or June
30, 1999. However, if the merger discussed in Note Q is approved by the
shareholders of both companies, it is anticipated most of the Company's
non-travel related operations would be sold. It is uncertain that a sale of
these assets would result in recovery of their carrying amounts.
Income Taxes
------------
The Company accounts for income taxes using an asset and liability
approach. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.
Earnings (Loss) Per Share
-------------------------
Basic earnings or loss per share ("EPS") is calculated by dividing the
income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were
F-10
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exercised or converted into common stock. Debt and equity instruments
convertible into shares of common stock have been excluded from the
computation of diluted EPS because their inclusion would have been
antidilutive.
Comprehensive Income (Loss)
---------------------------
Comprehensive income or loss is defined as all changes in stockholders'
equity, exclusive of transactions with owners, such as capital investments.
Comprehensive income or loss includes net income or loss, changes in
certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries, and certain
changes in minimum pension liabilities. The Company's comprehensive loss
was equal to its net loss for each period presented.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash
equivalents, accounts receivable, short-term borrowings and accounts
payable, the carrying amounts approximate fair value due to their short
maturities. Management believes the carrying amount reported for long-term
debt approximates fair value based on current interest rates for debt with
similar terms and maturities.
Liquidity
---------
The Company has incurred significant losses from operations in fiscal years
2000, 1999 and 1998 and has a working capital deficit of $9,611,000 at
June 30, 2000. Management has significantly reduced overhead costs after
June 30, 2000. Reductions in non-essential division operating expenses,
along with elimination of marginal products and services that do not
provide future growth or near-term profits have also been pursued. In
August 2000, the Company entered into exchange agreements with certain of
its aviation service vendors wherein these parties will receive Company
common stock of up to approximately $1,500,000 at $3.00 per share in
exchange for retirement of certain current payables and debt. The Company
agreed to register the shares prior to conversion by the creditors. If the
liabilities had been converted at the Company's stock price on September
11, 2000, approximately $940,000 of liabilities would have been converted
to common stock. On September 1, 2000, the Company entered into an
agreement with travelbyus.com (TBU) (see Note Q) in which TBU agreed to
manage and fund the operations of Global. TBU has also guaranteed
$3,000,000 in Company debt relating to the transactions described in Note
Q. Management believes the foregoing events combined with current operating
levels should allow the Company to meet its working capital requirements
during fiscal 2001, however, significant interruptions in currently
scheduled Company operations would adversely affect the Company's financial
condition and require additional capital from asset sales, borrowings, or
equity financings in order to allow the Company to meet its obligations.
The combination with TBU would allow management to immediately begin to
reduce overlapping corporate overhead, complete the integration of its
Global travel operations into and with TBU, and pursue the sale of its
remaining aviation service and manufacturing businesses. Proceeds from the
sale of these entities will be used first to fund repayment of Series B
Preferred Stock (see Note J), with the remainder, if any, invested in the
Company's travel operations. If the merger of the Company with TBU is not
approved by the shareholders, the Board of Directors intends to negotiate
and enact an arrangement with TBU that allows both companies to continue
their relationship with joint business activities, and thereby promote the
long-term viability of the Company's operations. However, if the Company
continues to experience losses and is unable to complete the merger with
TBU, the Company could have liquidity problems which could require it to
dispose of assets or enter into potentially unfavorable financing
arrangements.
Discontinued Operations
-----------------------
As described in Note P, in December 1999 and February 2000, the Company
sold two business segments. The results of operations from these two
segments have been netted and reclassified as loss from discontinued
operations in the accompanying statements of operations.
F-11
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
-----------------
Certain reclassifications have been made to prior period amounts to conform
to the current year presentation.
C. ACQUISITIONS
General Electrodynamics Corporation
-----------------------------------
In August 1998, the Company acquired all the outstanding common stock of
GEC in exchange for 112,029 shares of the Company's common stock valued at
approximately $294,000. In addition, the Company agreed to remit to the
former shareholder of GEC up to $300,000 of any collections from certain
government contracts, net of direct expenses, received by GEC after the
acquisition. The former shareholder of GEC relinquished the right to those
collections in a subsequent settlement with the Company. The acquisition
was accounted for using the purchase method and the purchase price has been
allocated to the net assets acquired based on their estimated fair values.
The results of GEC are included in the accompanying financial statements
beginning September 1, 1998. The excess of the purchase price over the fair
value of the net assets acquired of $1,244,000 has been recorded as
goodwill and is being amortized using the straight-line method over 20
years.
Casper Air Service
------------------
Concurrent with the IPO in August 1997, the Company acquired all of the
outstanding common stock of CAS. The purchase price of $2,400,000 included
$1,167,000 in cash, 153,565 shares of the Company's common stock valued at
approximately $883,000 and transaction costs. The acquisition was accounted
for using the purchase method and the purchase price was allocated to the
net assets acquired based on their estimated fair values. The results of
CAS are included in the accompanying financial statements beginning August
20, 1997. The excess of the purchase price over the fair value of the net
assets acquired (including tax attributes) of $1,041,000 was recorded as
goodwill and is being amortized using the straight-line method over 20
years. As described in Note P, CAS was sold in February 2000 and its
results have been reclassified as discontinued for all periods presented.
Aero Design, Inc. and Battery Shop, LLC
---------------------------------------
In March 1998, the Company acquired all of the outstanding common stock and
ownership interests of Aero Design. The purchase price of $1,550,000
included $753,000 in cash and 134,068 shares of the Company's common stock
valued at approximately $547,000 and transaction costs. The terms of the
acquisition agreement provide for additional consideration to be paid if
Aero Design's results of operations exceed certain targeted levels. The
Company also agreed to protect the sellers from losses (up to $450,000)
realized upon the resale of the Company's stock for a period of 540 days
from closing of the acquisition. The Company issued the sellers 153,250
shares of common stock in fiscal year 2000 to satisfy this guarantee. The
acquisition was accounted for using the purchase method and the purchase
price was allocated to the net assets acquired based on their estimated
fair values. The results of Aero Design are included in the accompanying
financial statements beginning March 24, 1998. The excess of the purchase
price over the fair value of the net assets acquired (including tax
attributes) of $1,44,000 was recorded as goodwill and is being amortized
using the straight-line method over 25 years.
Global Leisure Travel, Inc.
---------------------------
In March 2000, the Company entered into an agreement to acquire Global
Leisure Travel, Inc. ("Global"). The acquisition of Global involved (1) the
issuance by the Company of approximately $16,500,000 of liquidation value
Series A preferred stock and warrants to purchase 4,250,000 shares of the
Company's
F-12
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock to certain debt holders and the common stockholders and
warrant holders of Global in exchange for retirement of the debt and
cancellation of the outstanding common stock of Global; and (2) the sale of
approximately $21,000,000 liquidation value Series B preferred stock and
warrants by the Company in March 2000 and the purchase of Series B voting
preferred stock of Global and the retirement of certain of Global's debt
and payables with the proceeds. The sale of Series B preferred stock was to
travelbyus.com (see Note Q) and other investors and included warrants to
purchase 1,239,750 shares of common stock. The preferred stock was recorded
at estimated fair value of $10,500,000 for the Series A and $21,000,000 for
the Series B.
Supplemental Pro Forma Results of Operations (Unaudited)
--------------------------------------------------------
The following unaudited pro forma summary presents the consolidated results
of operations for the years ended June 30, 2000, 1999 and 1998 as if the
CAS, Aero Design, GEC and Global acquisitions had occurred as of the
beginning of the Company's 1998 fiscal year. The summarized information
does not purport to be indicative of what would have occurred had the
acquisitions actually been made as of such dates or of results which may
occur in the future.
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues $ 18,959,000 $ 27,813,000 $ 27,916,000
Net loss $ (17,568,000) $ (11,059,000) $ (12,112,000)
Net loss per share (basic and diluted) $ (4.42) $ (2.65) $ (3.00)
</TABLE>
Adjustments made in arriving at pro forma unaudited results of operations
included adjustment related to additional depreciation expense,
amortization of goodwill and related tax adjustments.
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
--------------- --------------
<S> <C> <C>
Machinery and equipment $ 2,013,000 $ 3,624,000
Buildings and leasehold improvements 832,000 993,000
Furniture, fixtures and office equipment 1,302,000 491,000
Aircraft and vehicles 162,000 714,000
-------------- --------------
4,309,000 5,822,000
Less accumulated depreciation (1,656,000) (1,772,000)
-------------- --------------
$ 2,653,000 $ 4,050,000
============== ==============
</TABLE>
Depreciation expense charged to operations for the years ended June 30,
2000, 1999 and 1998 was $587,000, $761,000, and $595,000, respectively.
E. SHORT-TERM BORROWINGS
Line of Credit Facilities
-------------------------
In August 1998, the Company's operating subsidiaries (other than GEC)
obtained a $3,000,000 line of credit facility with the CIT Group/Credit
Finance, Inc. for working capital management purposes. The line of credit
bears interest at prime plus 1.5% (total of 7.75% at June 30, 2000) and
extends through August 2001.
F-13
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amount available for borrowing are based on the level and composition of
the Company's accounts receivable and inventory. Amounts borrowed are
repayable from lock box collections of the Company's accounts receivable.
Outstanding borrowings under this line of credit at June 30, 2000 were
$1,008,000. No additional borrowings were available under the terms of the
line of credit at June 30, 2000. The line of credit is collateralized by
substantially all of the assets of the Company's operating subsidiaries
(other than GEC and Global) and guaranteed by the Company.
In addition, GEC has a note payable to a bank under a revolving credit
agreement with a balance of $360,000 at June 30, 2000. Interest is at the
bank's index rate plus 0.25% (total of 10.5% at June 30, 2000). The note is
collateralized by equipment, inventory and accounts receivable of GEC and
is due in February 2001.
Other Short-Term Borrowings
---------------------------
The Company borrowed $3,000,000 from an investment fund on May 9, 2000. The
promissory note requires quarterly interest payments at an annual rate of
12%, and is due February 28, 2001. In connection with the promissory note,
the Company issued Series D warrants to purchase 225,000 shares of its
common stock at an exercise price of $2.125 per share. The value of the
warrants of $257,000 has been recorded as a discount, which is being
amortized to interest expense over the term of the note. The balance of the
note at June 30, 2000 is $2,794,000. The note is guaranteed by TBU (see
Note Q).
In June 1999, the Company borrowed $600,000 and executed notes payable to
two individuals. The principal and interest at 9% were repaid at maturity
of December 31, 1999. The notes were collateralized by stock of the
Company's subsidiaries (except GEC). In connection with the notes, the
Company issued the note holders warrants to purchase a total of 200,000
shares of the Company's common stock at $1.00 per share through June 2002.
The warrants include a cashless exercise feature and the exercise price may
be adjusted in certain circumstances, as specified in the agreement. The
Company also granted 40,000 shares of common stock to a director as a
finder's fee in connection with the notes. The shares were issued in July
1999. The estimated value of the warrants at the date of issuance of
$106,000 and the quoted value of the shares at the grant date of $50,000
have been accounted for as a discount to the notes which has been amortized
to expense over the seven-month life of the notes.
At June 30, 1999, the Company owed $200,000 without interest to a previous
owner of GEC in connection with a non-compete agreement. The entire balance
was satisfied as a conversion to stock through the issuance of 112,000
shares of common stock on May 26, 2000.
F. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Convertible notes payable, payable in quarterly installments
totaling $72,000 beginning April 1, 1998, bearing interest
at 10%, maturing March 1, 2001 and collateralized by the
Company's shares of common stock of Pride Exterior, Inc.
In March 2000 the outstanding balance and accrued interest
was converted into 78,864 shares of common stock at a
conversion price of $4.50 per share. See Note H. 25,000 $ 377,000
</TABLE>
F-14
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Note payable to a bank, interest at bank base rate (11.00% at
June 30, 2000); collateralized by equipment, inventories,
accounts receivable and intangibles of GEC. Due in monthly
payments of $17,000 plus interest through April 2003. 620,000 792,000
Various notes payable to an aircraft finance company, payable
in varying monthly installments, including interest at prime
plus 2.0% (9.75% at June 30, 1999, maturing December 1998 to
June 2000, collateralized by certain aircraft and equipment. - 53,000
Various notes payable to a bank, payable in varying installments,
including interest at rates ranging from 9.25% to 9.5%, maturing
through December 2002 and collateralized by certain aircraft. - 53,000
Note payable to two companies in connection with the acquisition
of Global (See Note C). The terms of the notes are currently
under negotiation. 3,700,000 -
Various other notes payable, including $25,000 loan from
shareholder 62,000 68,000
------------ ------------
Total 4,407,000 1,343,000
Less current maturities of long-term debt (3,976,000) (463,000)
------------ ------------
Total long-term debt $ 431,000 $ 880,000
============ ============
</TABLE>
Notes payable with due on demand provisions have been classified as a current
liability in the accompanying balance sheets.
Maturities of long-term debt as of June 30, 2000 were as follows:
Year ending June 30,
--------------------
2001 $ 3,976,000
2002 220,000
2003 204,000
2004 7,000
-------------
$ 4,407,000
=============
G. LEASES
Capital Leases
--------------
The Company leases certain machinery and equipment under arrangements
classified as capital leases. The net book value of machinery and equipment
recorded under capital leases totaled approximately $400,000 and $600,000
at June 30, 2000 and June 30, 1999, respectively. Amortization expense
associated with assets held under capital leases is included in
depreciation and amortization expense for all periods presented.
Future minimum lease payments at June 30, 2000, together with the present
value of the minimum lease payments are:
Years ended June 30, 2000
-------------------- ----------
2001 $ 213,000
2002 122,000
2003 110,000
----------
Total minimum lease payments 445,000
Less amount representing interest (31,000)
----------
Total present value of minimum lease payments 414,000
Less current portion (150,000)
----------
Long-term obligation $ 264,000
==========
F-15
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Leases
----------------
The Company leases various equipment and office and hanger facilities under
cancelable and non-cancelable rental arrangements. Rental expenses from
operating leases for the years ended June 30, 2000, 1999 and 1998 were
$1,617,000, $1,493,000 and $1,466,000, respectively.
At June 30, 2000, the minimum future lease payments for non-cancelable
operating leases for the next five years and thereafter were as follows:
(Need Global lease information)
Years ending June 30,
--------------------
2001 $ 1,676,000
2002 1,581,000
2003 1,015,000
2004 780,000
2005 785,000
Thereafter 18,538,000
-------------
$ 24,375,000
=============
H. COMMITMENTS AND CONTINGENCIES
In connection with the conversion of notes payable to 78,864 shares of
common stock (see Note F), the Company guaranteed the shareholders a
minimum stock price of $4.50 per share. The Company recorded a current
liability as of June 30, 2000 and an expense during the quarter ended June
30, 2000 of $197,000 to reflect the excess of the guarantee price over the
trading price of the stock at June 30, 2000. The maximum potential
liability the Company could experience under this guarantee is $355,000.
In connection with the acquisition of Aero Design discussed in Note C, the
Company entered into a royalty agreement which provides that the Company
will pay the former owners of Aero Design a royalty of 2.5% of net revenues
associated with new product license agreements developed during the seven
year period beginning with the acquisition date. The royalties earned under
the agreement were insignificant during all periods presented.
The Company, in connection with the production of revenue, produces
chemical waste, which is temporarily stored on the Company's premises.
Costs for disposal are expensed by the Company as waste is produced. The
provision for disposal of waste on hand totaled $4,000 and $9,000 as of
June 30, 2000 and 1999, respectively, and is included in accrued
liabilities in the accompanying balance sheet.
Certain of the Company's subsidiaries are partially self-insured for
employee medical claims. Insurance with independent insurance carriers is
maintained to cover medical claims in excess of self-insured limits. The
Company's self-insured limits vary by month and policy year and are based
on various factors including the number of employees and dependents covered
and certain experience factors. In addition to aggregate annual and monthly
limitations, the Company's exposure is further limited to specific limits
per covered individual.
The Company has employment agreements with two officers, which are
described in Note K.
The Company is involved in certain legal proceedings in the normal
course of business. Management believes none of these matters will have a
material effect on the Company's results of operations or financial
position.
I. STOCK OPTIONS AND WARRANTS
1997 Stock Option Plan
----------------------
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted by the
Company's Board of Directors and shareholders in February 1997. The purpose
of the Option Plan is to provide increased incentives to key employees and
directors of the Company to render services and exert maximum effort for
the business success of the Company. The Company has reserved 150,000
shares of its common stock for
F-16
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issuance upon exercise of such options. In May 2000, the Board of Directors
approved an increase in the number of shares reserved for issuance under
the Option Plan to 6,500,000 shares, effective if and when the arrangement
with TBU (see Note Q) is completed.
The Board of Directors or its Compensation Committee has the authority to
select key employees and directors to whom stock options are granted as
well as determining vesting schedules and other terms. The options vest
ratably over five years and can have a term of up to ten years. The
aggregate fair market value of the stock with respect to which incentive
stock options are first exercisable in any calendar year may not exceed
$100,000 per incident. The exercise price of incentive stock options must
not be less than the fair market value of the common stock on the date of
grant.
The Company's Board of Directors approved the issuance of 78,000 incentive
stock options in fiscal year 1998 and 10,000 in fiscal year 1999. Of these,
59,000 were issued in replacement for and cancellation of previously issued
options. The exercise price on all the options granted was the market price
at the date of grant except for options for 50,000 shares which were
granted at 110% of market price. All of the options were repriced in fiscal
1999 to the current market price of $1.69 per share, (except for the 50,000
shares which were repriced to $1.86 per share).
Warrant Issuances
-----------------
In connection with a private placement of stock in 1996, the Company issued
280,000 warrants to investment advisors and other parties. 200,000 warrants
were issued with an exercise price of $1.00 per share and 80,000 were
issued to a director with an exercise price of $2.50 per share. These
warrants were scheduled to expire February 28, 1999. The exercise price and
number of shares issuable under the warrants are subject to adjustment for
certain equity transactions and other circumstances. The warrants also
contain a "cashless" exercise feature whereby the warrants may be
surrendered in exchange for a number of shares to be determined based on
the difference between the exercise price and the market price for the
Company's common stock. During fiscal year 1998, holders of the $1.00
warrants surrendered 144,755 warrants to purchase 129,112 shares of common
stock. Additional warrants were surrendered to purchase 38,871 shares of
common stock and the remainder expired in fiscal year 1999. In August 1999,
the $2.50 warrants were extended to March 31, 2003 and repriced to the
current market price of $1.69 per share. These warrants were surrendered in
exchange for 26,000 shares of common stock in January 2000.
The Company issued 1,150,000 redeemable common stock purchase warrants in
connection with its IPO discussed in Note J. These warrants entitle the
holders to purchase, anytime after two years from the effective date of the
offering, 1.058 shares of common stock per each warrant for $6.52. The
exercise price and number of shares purchaseable is required to be adjusted
periodically as a result of the issuance of new warrants or shares of
common stock at exercise or issue prices lower than the exercise price of
the warrants. In October 1999, the exercise price of the warrants was
adjusted to $5.76 and the number of shares purchaseable was adjusted to
1.198 shares per warrant. The warrants expire five years from the effective
date of the IPO and are redeemable at a price of $0.10 per warrant, with
consent of the underwriter, upon 30 days written notice, provided that the
average closing bid quotations or sales prices of the common stock equal or
exceed $9.49 for 20 consecutive trading days ending on the tenth day prior
to the date on which the Company gives notice of redemption. None of the
warrants had been exercised as of June 30, 2000.
The Company also sold 100,000 warrants (the "Underwriter's Warrants") to
the Underwriters of its IPO, for $0.001 per warrant. Each warrant entitles
the holder to purchase a share of common stock at $9.49 and also
F-17
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to receive an Underlying Warrant whose term is identical to the warrants
described above except that the exercise price is $11.38. The Underwriter's
Warrants are exercisable for four years beginning one year after the
effective date of the IPO. None of these warrants had been exercised as of
June 30, 2000.
In April 1998, the Board of Directors elected to grant 345,000 warrants to
officers, directors and consultants of the Company. In addition, the Board
approved the issuance of warrants to purchase 52,000 shares of common stock
in replacement for and cancellation of previously issued warrants to
purchase an aggregate of 52,000 shares of common stock. The original
exercise price on all the warrants granted was the market price at the date
of grant. However, the 345,000 warrants were repriced to the current market
price of $1.69 per share in August 1999. In January 2000, 100,000 of the
warrants were surrendered to purchase 32,500 shares of common stock.
During fiscal year 1999, the Company granted warrants to various parties to
purchase a total of 260,000 warrants at per share prices ranging from $2.13
to $9.00 and terms ranging from two to five years. The warrants were
granted for services and were recorded as expense based on the estimated
fair values of the warrants, which totaled $123,000.
Additional warrants were issued in fiscal years 1999 and 2000 in connection
with notes payable as described in Notes E and F.
In connection with the acquisition of Global and the issuance of preferred
stock described in Note C, the company issued warrants that entitle the
holders to purchase shares of common stock as follows: (1) Series A
warrants - 750,000 shares at $5.00 per share, (2) Series B warrants -
3,500,000 shares at $3.00 per share, and (3) Series C warrants - 1,239,750
shares at $3.00 per share. The warrants are not exercisable until the
Company's shareholders approve the issuance of the warrants and increase
the authorized number of shares of common stock. The warrants expire on the
earlier of March 31, 2005 or the second anniversary of the date the shares
of common stock issuable upon the exercise of the warrants are registered
for resale under the Securities Act of 1933, as amended.
In February 2000, the Company's board of directors granted warrants to
certain officers and directors to acquire 650,000 shares of common stock at
$1.50 per share for three years. Warrants to purchase 500,000 of the shares
are subject to shareholder approval and warrants to purchase 150,000 shares
are subject to approval of both sets of shareholders in the arrangement
described in Note Q.
SFAS No. 123 Information
------------------------
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for
its outstanding stock purchase warrants and employee stock options under
the fair value method of that statement. The fair value of each warrant and
option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted- average assumptions for
2000, 1999 and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Dividend yield none none none
Risk free interest rate 6.50% 5.25% 5.74%
Expected volatility 0.91 0.85 0.30
Expected lives (years) 2.0 1.0 5.5
</TABLE>
F-18
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period while the estimated
fair value of the warrants is expensed on the grant date. The Company's pro
forma net loss and loss per share were as follows for the years ending June
30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net Loss
As reported $ (7,128,000) $ (2,305,000) $ (1,638,000)
============= ============= =============
Pro forma $ (7,421,000) $ (2,310,000) $ (2,103,000)
============= ============= =============
Loss per share - Basic and Diluted
As reported $ (1.79) $ (0.67) $ (0.54)
============= ============= =============
Pro forma $ (1.89) $ (0.67) $ (0.69)
============= ============= =============
</TABLE>
A summary of stock purchase warrant transactions and stock option
transactions under the Option Plan is set forth below. Warrants issued with
the IPO and the Underwriter's Warrants are not included in the tables.
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
---------------- ----------------
<S> <C> <C>
Outstanding at July 1, 1997 56,500 $ 5.53
Granted 513,000 3.96
Exercised - -
Forfeited/Canceled (99,500) 6.86
--------------- ---------------
Outstanding at June 30, 1998 470,000 3.54
Granted 470,000 $ 2.89
Repriced - previous (435,000) 3.50
Repriced - new 435,000 1.69
Exercised - -
Forfeited/Canceled (33,000) 3.50
--------------- ---------------
Outstanding at June 30, 1999 907,000 2.33
Granted 619,000 1.43
Exercised (180,000) 1.69
Forfeited/Canceled (55,000) 7.50
--------------- ---------------
Outstanding at June 30, 2000 1,291,000 $ 1.77
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
================ ===============
<S> <C> <C>
Exercisable Warrants and Options:
June 30, 1998 396,600 $ 3.50
================ ===============
June 30, 1999 841,000 $ 2.33
================ ===============
June 30, 2000 791,000 $ 1.94
================ ===============
</TABLE>
F-19
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Exercise Price Exercise Price Exercise Price
Less than Equal to Greater than
Market Price Market Price Market Price
----------------- ------------------ -----------------
<S> <C> <C> <C>
Weighted average fair value of warrants
and options granted during the years ended:
June 30, 1998 $ - $ 1.57 $ -
================= ================== =================
June 30, 1999 $ 0.53 $ 0.71 $ 0.31
================= ================== =================
June 30, 2000 $ 1.10 $ - $ 0.63
================= ================== =================
</TABLE>
The following table summarizes information about the stock purchase
warrants and the fixed price stock options outstanding June 30, 2000. All
the warrants and approximately 40,000 of the options are exercisable at
June 30, 2000.
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Outstanding at Contractual Exercise
Exercise Prices: June 30, 2000 Life (months) Price
---------------- -------------- -------------- --------
<S> <C> <C> <C>
$1.00 - $1.69 1,139,000 46 $ 1.42
$2.13 - $3.00 21,000 22 $ 2.38
$3.50 - $5.50 91,000 39 $ 4.23
$6.00 - $9.00 40,000 34 $ 7.13
</TABLE>
J. SHAREHOLDERS' EQUITY
Initial Public Offering
-----------------------
On August 19, 1997, the Company closed an initial public offering of its
common stock and redeemable common stock purchase warrants. The Company
sold 1,150,000 shares of common stock at a price of $5.75 per share and
1,150,000 common stock purchase warrants at a price of $0.10 per warrant.
Proceeds from the stock offering totaled $5,180,000, net of approximately
$1,548,000 of associated underwriting discounts and offering expenses.
Preferred Stock
---------------
The Company has 5,000,000 shares of preferred stock authorized. The
preferred stock may be issued in series and with rights and preferences as
determined by the Company's Board of Directors. As of June 30, 2000, the
Company has designated (1) 2,000 shares of Series A convertible voting
preferred stock, of which 1,650 shares were outstanding; and (2) 3,000
shares of Series B preferred stock of which 2,100 shares were outstanding.
The Series A and Series B preferred shares were issued in connection with
the acquisition of Global (Note C). The Series A and Series B preferred
shares each have a liquidation preference of $10,000 per share. The shares
were recorded at their estimated fair values of $10,500,000 for the Series
A and $21,000,000 for the Series B.
The Company has designated 3,000 shares of Series C convertible preferred
stock, par value $0.01 per share. As of June 30, 2000, no shares of Series
C preferred stock are outstanding. The Company is offering to issue shares
of this series in exchange for outstanding shares of Series B preferred
stock on a one-for-one basis.
F-20
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If declared by the board of directors, dividends on the Series A and Series
B preferred shares will be paid quarterly at an annual rate of 9% and 12%,
respectively on the liquidation preference amounts.
The Company has the right to redeem all or part of the outstanding Series A
preferred stock at any time on or before September 30, 2000. The redemption
price per share will be $10,000 plus all accrued unpaid dividends,
calculated through the date of redemption.
Holders of Series A preferred stock have the right to convert their stock
into shares of common stock at any time after October 31, 2000, or earlier
if the Company has exercised its right to redeem the stock. In addition,
the Company has the right to require conversion of the Series A preferred
stock into shares of common stock at any time. This right of the Company
terminates when the Company completes a new common stock, preferred stock
or debt financing after consummation of the arrangement described in Note Q
that provides new gross cash proceeds of at least $25,000,000. The
conversion price is the greater of $6 or the arithmetic mean of the closing
bid prices of the common stock for the 21 trading days preceding the date
of conversion. The Company has the right to redeem all or part of the
outstanding Series B preferred stock at any time after February 28, 2001.
Additionally, the Company is required to redeem shares of the outstanding
Series B preferred stock from and to the extent of the net cash proceeds
from the sale of any assets of Aviation Group other than in the ordinary
course of business or any public debt or equity securities offering after
completion of the arrangement described in Note Q. The Series B preferred
stock will be redeemed at a price per share equal to $10,000, plus all
accrued unpaid dividends, calculated through the date of redemption.
K. RELATED PARTY TRANSACTIONS
The Company had a consulting arrangement with a member of the Board of
Directors. The consulting arrangement provided for monthly fees of $4,000
and reimbursement of certain expenses. The agreement expired in February
2000. Fees paid under this arrangement totaled $32,000, $48,000 and $59,000
for the years ended June 30, 2000, 1999 and 1998, respectively.
In connection with the acquisition of Aero Design in fiscal year 1998, the
Company paid $25,000 in fees and issued 20,000 common stock warrants to RAS
Securities, a company affiliated with a member of the Company's Board of
Directors.
During the year ended June 30, 2000, two officers and directors of the
Company loaned the Company a total of $305,000 for working capital. The
loans were repaid in March 2000. In connection with the loans, the
individuals were granted warrants to purchase a total of approximately
102,000 shares of common stock at $1.00 per share anytime for three years.
The value of these warrants of $112,000 was charged to interest expense
during the year ended June 30, 2000.
Effective February 23, 2000, the Company amended and entered into
employment agreements with two officers and directors of the Company. Under
the terms of the agreements, the Company will provide minimum bonuses of
$450,000 to be paid the earlier of January 2, 2001 or upon sale of the
Company's operating subsidiaries. This obligation is being amortized into
expense on a straight-line basis through January 2, 2001. In addition, the
employment agreements require minimum salary payments as follows:
<TABLE>
<CAPTION>
Year ending June 30
-------------------
<S> <C>
2001 $227,000
2002 144,000
2003 96,000
--------
$467,000
========
</TABLE>
On May 25, 2000, the Company loaned $1,975,000 to travelbyus.com (TBU) for
its acquisition of another unrelated entity, Epoch Technology, Inc.
(EPOCH). The loan will mature in February 28, 2001 and is
F-21
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
collateralized by a security interest in the stock of EPOCH. The security
interest is subordinate to a security interest in EPOCH's stock in favor of
TBU's senior redeemable debentures. See Note Q.
Other related party transactions are described in Notes E, H and I.
L. PROVISION FOR INCOME TAXES
The (provision) benefit for income taxes consist of the following
components:
2000 1999 1998
---- ---- ----
Current $ - $ - $ -
Deferred - (199,000) 359,000
------- ---------- -----------
(Provision) benefit for income taxes $ - $ (199,000) $ 359,000
======= ========== ===========
The following is a reconciliation of taxes computed at the federal
statutory rate to the provision for income taxes included in the financial
statements:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Tax benefit computed by applying federal statutory rate $ 2,426,000 $ 716,000 $ 679,000
Expenses not deductible for tax purposes (a) (485,000) (74,000) (71,000)
Other - - 52,000
Valuation allowance (1,941,000) (841,000) (301,000)
---------------- ------------- ------------
Provision (benefit) for income taxes $ - $ (199,000) $ 359,000
================ ============= ============
(a) Principally goodwill amortization.
</TABLE>
Deferred tax assets and liabilities consisted of the following at June 30:
<TABLE>
<CAPTION>
Assets: 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net operating loss carryforward $ 4,420,000 $ 1,548,000 $ 984,000
Investment tax credits 81,000 81,000 81,000
Other - 114,000 88,000
------------- ------------- -----------
4,501,000 1,743,000 1,153,000
Less: Valuation allowance (3,981,000) (1,223,000) (382,000)
------------- ------------- -----------
Total deferred tax assets 520,000 520,000 771,000
------------- ------------- -----------
Deferred tax liabilities - property and equipment (520,000) (520,000) (571,000)
------------- ------------- -----------
Net deferred tax assets $ - $ - $ 200,000
============= ============= ===========
</TABLE>
For income tax purposes, the Company has available at June 30, 2000, unused
federal net operating loss carryforwards (NOL) of approximately
$13,000,000, which may be applied against future taxable income of the
Company, expiring in various years from 2005 to 2020. The NOL related to
businesses acquired are subject to certain annual limitations on their
usage. The Company's valuation allowance against deferred tax assets
increased from $382,000 at June 30, 1998 to $1,223,000 at June 30, 1999 due
to an increase in the NOL and to a change in the Company's assessment as to
the likelihood of utilization of the NOL in the future. The valuation
allowance increased by $2,758,000 in fiscal year 2000 due to an increase in
the NOL. Under the Internal Revenue Code, the utilization of the NOL could
be limited if certain changes in ownership of the Company's common stock
were to occur.
F-22
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution ("401(k)") employee benefit
plan, which is open to all employees meeting certain age and length of
service requirements. Employees may contribute up to 15% of their
compensation to the plan subject to statutory limits. Employer
contributions to the plan are discretionary and no employer contributions
have been made to date.
N. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Most of the Company's accounts receivable at June 30, 2000 and all of its
accounts receivable at 1999, resulted from sales to third party companies
in the airline industry. This concentration of customers may impact the
Company's overall credit risk either positively or negatively, in that
these entities may be similarly affected by changes in economic or other
conditions. The Company believes that the risk is mitigated by the size,
reputation and nature of its customers. Approximately $117,000 of the
Company's accounts receivable at June 30, 2000 result from travel-related
sales and are due from various customers and retail travel agents. Although
the Company generally does not require collateral or other security to
support customer receivables, it may have certain rights, such as the
ability to place liens on aircraft services, in the event of nonpayment by
its customers.
During the year ended June 30, 2000, the Company derived approximately 9%
and 28% of its revenues from United Airlines and Federal Express, customers
of its overhaul and service division. During the year ended June 30, 1999,
the Company derived approximately 16% and 15% of its revenues from United
Airlines and Federal Express, respectively, customers of its overhaul and
service division. Accounts receivable from five customers at June 30, 2000
represented approximately 40% of the total accounts receivable.
O. BUSINESS SEGMENT INFORMATION
The following table summarizes financial information by the Company's three
business segments and corporate for fiscal years 2000, 1999 and 1998. The
Company's other two business segments were discontinued as described in
Note P.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Painting and maintenance $ 8,670,000 $ 11,162,000 $ 10,729,000
Manufacturing 3,894,000 3,935,000 314,000
Travel 817,000 - -
Corporate - - -
-------------- ------------- ------------
Total $ 13,381,000 $ 15,097,000 $ 11,043,000
============== ============= ============
Operating income (loss):
Painting and maintenance $ (695,000) $ 443,000 $ 178,000
Manufacturing 158,000 187,000 155,000
Travel (3,305,000) - -
Corporate (2,412,000) (1,818,000) (1,506,000)
-------------- ------------- ------------
Total $ (6,254,000) $ (1,188,000) $ (1,173,000)
============== ============= ============
Total assets:
</TABLE>
F-23
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Painting and maintenance $ 3,979,000 $ 4,382,000 $ 4,226,000
Manufacturing 4,989,000 2,196,000 1,898,000
Travel 51,937,000 - -
Corporate 2,774,000 454,000 980,000
-------------- ------------- -------------
Total $ 63,679,000 $ 7,032,000 $ 7,104,000
============== ============= =============
Depreciation and amortization
Painting and maintenance $ 457,000 $ 442,000 $ 435,000
Manufacturing 202,000 210,000 22,000
Travel 1,300,000 - -
Corporate 32,000 22,000 7,000
-------------- ------------- -------------
Total $ 1,991,000 $ 674,000 $ 464,000
============== ============= =============
Capital expenditures (including capital leases):
Painting and maintenance $ 89,000 $ 592,000 $ 291,000
Manufacturing 123,000 87,000 -
Travel - - -
Corporate - 29,000 66,000
-------------- ------------- -------------
Total $ 212,000 $ 708,000 $ 357,000
============== ============= ============
</TABLE>
There were no significant intersegment sales or transfers for any period.
Operating income by business segment excludes interest and other
miscellaneous income and interest expense. Corporate assets consist
primarily of cash and cash equivalents, note receivable and prepaid
expenses.
P. SALE OF DISCONTINUED BUSINESS SEGMENTS
In December 1999, the Company sold its Tri-Star Airline Services ground
handling subsidiary operations for $1,500,000, which resulted in a gain on
disposal of $1,166,000. On February 8, 2000 the Company sold its Casper Air
Service general aviation fixed base operations for $200,000 and the
assumption of $600,000 in accounts payable, which resulted in an estimated
loss on disposal of $566,000. Both businesses were sold to unrelated third
parties. The Company retained certain assets of each entity, which were
substantially impaired as of June 30, 2000. The revenues of these two
business segments during the periods presented were as follows:
Years Ended June 30,
-------------------------------------------------
2000 1999 1998
---- ---- ----
Casper $ 1,689,000 $ 5,903,000 $ 5,739,000
Tri-Star $ 766,000 $ 1,553,000 $ 1,462,000
Q. PROPOSED BUSINESS COMBINATION
On May 3, 2000, the Company entered into an agreement to effect an
arrangement with travelbyus.com ("TBU"). The arrangement with TBU is to
involve the issuance of new shares of common stock to the TBU shareholders,
which will result in the TBU shareholders owning approximately 95% of the
ongoing company.
The arrangement with TBU is subject to approval of the shareholders of the
Company and TBU and approval of an Ontario court. If the arrangement with
TBU is approved, the Company anticipates it will attempt to sell the
remaining non-travel related assets of the Company. Two directors of the
Company will receive bonuses totaling $450,000 upon the earlier of the sale
of these assets or January 2, 2001 as described in Note K. In addition, if
the arrangement is approved, certain directors of the Company will be
entitled to exercise warrants
F-24
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to purchase an aggregate of 150,000 shares of the Company's common stock at
$1.50 per share after completion of the arrangement. Following completion
of the arrangement, the Company could be required to redeem Series B
preferred stock in certain circumstances as described in Note J.
In connection with the proposed arrangement, the Company will increase its
authorized number of common stock from 10,000,000 shares to 250,000,000
shares.
R. SUBSEQUENT EVENT
In August 2000, the Company entered into various resale price indemnity and
exchange agreements to satisfy various accrued liabilities, debt, and
unpaid hanger rental payments in the aggregate amount of approximately
$1,507,000. The agreements include provisions for the creditor to exchange
the outstanding debt for common stock of the Company at an exchange price
of $3.00 per share. The Company agreed to register the shares prior to the
exchange. If the value of The Company's common stock at the time of the
exchange is less than $3.00 per share, the amount of the liabilities that
are converted to stock will be reduced accordingly.
************************
F-25
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
Global Leisure Travel, Inc.
We have audited the accompanying consolidated balance sheets of Global Leisure
Travel, Inc. and Subsidiaries (the "Company") for the years ended December 31,
1999 and 1998 and the related consolidated statements of loss, stockholders'
deficit and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Global
Leisure Travel, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company has been
acquired by Aviation group in accordance with the acquisition and Merger
Agreement dated March 17, 2000.
/s/ BDO Seidman, LLP
Seattle, Washington
March 31, 2000
F-26
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 1998
=======================================================================================================================
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 349,883 $ 212,854
Restricted cash 1,953,535 1,893,783
Accounts receivable, net of allowance for doubtful
accounts of $46,062 in 1999 and $45,000 in 1998 1,034,632 674,115
Accounts receivable from related party 71,800 35,593
Prepaid tour costs 1,905,142 2,358,510
Prepaid and other assets 311,633 868,566
-----------------------------------------------------------------------------------------------------------------------
Total Current Assets 5,626,625 6,043,421
Property and Equipment, net 638,618 2,967,664
Intangible Assets, net 3,217,533 4,723,464
Investments - 221,328
-----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,482,776 $ 13,955,877
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks issued in excess of deposits $ 730,251 $ 3,242,196
Accounts payable 8,197,820 9,503,014
Customer deposits 5,585,142 10,385,021
Accrued tour costs 2,110,866 2,565,480
Accrued expenses and other liabilities 1,445,305 2,185,311
Current portion of long-term debt 9,981,219 1,221,304
Notes Payable to Related Parties 15,764,319 9,415,000
Net current liabilities of discontinued operations - 938,431
-----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 43,814,922 39,455,757
Long-Term Debt, less current portion 265,188 285,000
-----------------------------------------------------------------------------------------------------------------------
Total Liabilities 44,080,110 39,740,757
-----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, no par value, 20,000,000 shares authorized,
4,000,000 shares issued and outstanding 1,000 1,000
Accumulated deficit (34,598,334) (25,785,880)
-----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficit (34,597,334) (25,784,880)
-----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,482,776 $ 13,955,877
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Statements of Loss
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
=======================================================================================================================
<S> <C> <C> <C>
Net Commission Revenue $ 9,438,301 $ 11,906,394 $ 10,854,284
Selling, General and Administrative Expenses (16,964,862) (18,954,168) (16,384,573)
Impairment of Reservation System (3,473,337) - -
Impairment of Goodwill (929,664) - -
-----------------------------------------------------------------------------------------------------------------------
Loss from Operations (11,929,562) (7,047,774) (5,530,289)
Other Income (Expense)
Interest income 91,675 73,451 -
Interest expense (5,262,680) (578,288) (7,716)
Other 46,691 5,566 -
-----------------------------------------------------------------------------------------------------------------------
Total Other Expense (5,124,314) (499,271) (7,716)
-----------------------------------------------------------------------------------------------------------------------
Net Loss From Continuing Operations (17,053,876) (7,547,045) (5,538,005)
-----------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Gain (loss) from discontinued operations (260,521) 980,083 510,415
Gain on dispositions 8,501,943 - -
-----------------------------------------------------------------------------------------------------------------------
Income From Discontinued Operations 8,241,422 980,083 510,415
-----------------------------------------------------------------------------------------------------------------------
Net Loss $ (8,812,454) $ (6,566,962) $ (5,027,590)
=======================================================================================================================
Net income (loss) per share
From continuing operations $ (4.26) $ (1.89) $ (1.38)
From discontinued operations $ 2.06 $ 0.25 $ 0.12
-----------------------------------------------------------------------------------------------------------------------
Net loss per share $ (2.20) $ (1.64) $ (1.26)
======================================================================================================================
Weighted average shares outstanding, restated for stock
dividend 4,000,000 4,000,000 4,000,000
======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Total
Common Stock Accumulated Stockholders'
-----------------------------------
Shares Amount Deficit Deficit
=======================================================================================================================
<S> <C> <C> <C> <C>
Balance at January 1, 1997 4,000,000 $ 1,000 $ (14,191,328) $ (14,190,328)
Net loss - - (5,027,590) (5,027,590)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,000,000 1,000 (19,218,918) (19,217,918)
Net loss - - (6,566,962) (6,566,962)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,000,000 1,000 (25,785,880) (25,784,880)
Net loss - - (8,812,454) (8,812,454)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 4,000,000 $ 1,000 $ (34,598,334) $ (34,597,334)
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
=======================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (8,812,454) $ (6,566,962) $ (5,027,590)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,003,846 639,545 558,305
Impairment of goodwill 929,664 - -
Impairment of fixed asset 3,473,337 - -
Change in net assets and liabilities of discontinued
operations (938,411) 147,826 (572,353)
Change in assets and liabilities
Restricted cash (59,752) (1,475,309) (107,041)
Accounts receivable (396,724) 244,180 87,253
Prepaid and other assets 1,010,301 335,424 (634,756)
Customer deposits (4,799,879) 498,018 1,966,387
Accounts payable (3,817,139) 3,298,957 1,979,648
Accrued tour costs (454,614) (128,450) 584,111
Accrued expenses and other liabilities (745,006) (658,751) 885,510
-----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (13,606,831) (3,665,522) (280,526)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for trade name purchase - (130,000) -
Additions to land, building and equipment (1,468,188) (2,148,632) (460,106)
Other (103,702) 93,697 (6,410)
-----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (1,571,890) (2,184,935) (466,516)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on debt 19,582,784 607,500 1,600,000
Payments on debt (10,245,232) (1,187,064) (239,380)
Proceeds from borrowings from related parties 26,016,334 6,395,000 -
Payments on notes payable to related parties (19,665,687) - (315,000)
Payments under capital lease obligation (372,449) (90,194) (43,802)
-----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 15,315,750 5,725,242 1,001,818
-----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 137,029 (125,215) 254,776
CASH AND CASH EQUIVALENTS, beginning of year 212,854 338,069 83,293
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 349,883 $ 212,854 $ 338,069
========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,575,000 $ 538,000 $ 142,000
Assets acquired by capital lease $ - $ 425,718 $ -
Pushdown of GLT debt $ - $ 3,020,000 $ -
Exchange of asset for debt relief $ 221,328 $ - $ -
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 1: Nature of Operations - Global Leisure Travel, Inc.
Description of Business ("GLT" or "the Company") is primarily engaged in
and Summary of wholesale and retail travel for both domestic and
Significant Accounting international destinations. Packages created by the
Policies Company, including airline seats, hotel accommodations,
automobile rentals and other land components, are
contracted with the vendors and primarily marketed
directly to retail travel agents.
Principles of Consolidation and Basis of Presentation -
The consolidated financial statements include the
accounts of GLT and its wholly owned subsidiaries:
Sunmakers, Inc. ("Sunmakers"), KWTI Company ("KWTI"),
Firstrav International, Inc., Cruise Alaska Tours, Inc.
("CAT") and AOI, Inc. ("AOI"). Jetset Tours, Inc. and
Maupintour were wholly owned subsidiaries until their
respective sales in late 1999. All significant
intercompany balances and transactions have been
eliminated in consolidation.
Effective February 28, 1997, the Company was purchased
by Global Leisure, Inc. for $2.7 million in cash and
notes. The accompanying financial statements have been
prepared on the historical cost basis, with the $18
million excess of Global Leisure, Inc.'s purchase price
over the net assets acquired remaining on Global
Leisure, Inc.'s books.
On December 22, 1998, Global Leisure Travel, Inc.
entered into an agreement to sell 95% of its common
stock to Genesis Diversified Investments, Inc.
("Genesis"). The accompanying financial statements have
been prepared on the historical cost basis, with the
$27 million excess of Genesis' purchase price over the
historical cost of net assets acquired on Genesis'
books.
Cash and Cash Equivalents - The Company considers all
highly liquid investments purchased with an original
maturity of three months or less to be cash
equivalents. Receivables from credit cards are treated
as cash equivalents.
Property and Equipment - Property and equipment are
stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method
over the estimated useful lives of three to five years.
F-31
<PAGE>
NOTE 1: Impairment of Long-Lived Assets - In accordance with
Description of Business the provisions of Statement of Financial Accounting
and Summary of Standards ("SFAS") No. 121, "Accounting for the
Significant Accounting Impairment of Long-lived Assets and for Long-lived
Policies Assets to be Disposed of", management of the Company
(continued) reviews the carrying value of its equipment and
intangible assets on a regular basis. Estimated
undiscounted future cash flows from operations is
compared to current carrying value. Reductions or
reserves against assets, if necessary, are recorded to
the extent the net book value of the asset exceeds the
estimate of future undiscounted cash flows.
Intangible Assets - The excess purchase price of
subsidiaries over the fair market value of net assets
acquired is recorded as an intangible asset and is
being amortized using the straight-line method over 15
years.
Revenue Recognition - In November 1999 the Emerging
Issues Task Force ("EITF") of the Financing Accounting
Standards Board issued a discussion paper EITF 99-19,
Reporting Revenue Gross Versus Net, which has not yet
been finalized and in December 1999, the U.S.
Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in
Financial Statements, both of which covered and
included guidelines for determining the appropriateness
of gross versus net revenue reporting practices
specifically in the e-commerce and travel sectors. The
guidelines contained therein focus on determining
whether the company in substance acts as principal,
agent or broker in a transaction, whether it takes
title to the products, and whether it assumes the risks
and rewards of ownership. The Company has considered
these very recent developments in determining its
revenue recognition and reporting policies and believes
its current policies are conservative and consistent
with this guidance, however, it is possible that these
evolving standards may allow or require the Company to
amend its practices for the recognition and reporting
of revenue.
Net revenues consist primarily of markups on travel
packages. The Company generally recognizes net revenue
when earned on the date of travel net of all
cancellations and charges to reservations booked.
Customer deposits represent unearned revenues and are
initially recorded as customer deposit liabilities on
the balance sheet when received. Customer deposits are
subsequently recognized as revenue, generally upon the
month of travel.
F-32
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 1: Investments - The Company accounts for its investments
Description of Business in which it has significant influence, but not control
and Summary of (generally represented by ownership of more than 20%
Significant Accounting but less than 50% of the entity's outstanding common
Policies stock) using the equity method of accounting. See Note
(continued) 6 for details on the sale of investment during 1999.
Advertising Costs - Advertising costs, consisting
primarily of brochures, printing and postage
expenditures, are amortized over the period the tour
departs. Recognition of advertising costs is in
conformance with the provisions of The American
Institute of Certified Public Accountants Statement of
Position 93-7, "Reporting of Advertising Costs".
Advertising costs of approximately $900,000 in 1999,
$3.0 million in 1998, and $2.2 million in 1997 are
included in the accompanying Consolidated Statements of
Loss. Prepaid expenses includes prepaid advertising
costs of $0 and $400,000 at December 31, 1999 and 1998,
which will be reflected as an expense during the period
benefited.
Income Taxes - The Company accounts for income taxes in
accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". SFAS 109 requires the
recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary
differences between the financial statement carrying
amounts and the tax basis of assets and liabilities.
Deferred taxes are determined using enacted tax rates
expected to be in effect in the years in which the
temporary differences are expected to reverse.
Fair Value of Financial Instruments - Carrying amounts
reported in the balance sheet for cash and cash
equivalents, restricted cash, accounts receivable,
prepaid tour costs, prepaid and other current assets,
accounts payable and accrued expenses approximate fair
value because of their immediate or short-term nature.
The fair value of long-term debt approximates its
carrying value because the stated rates of the debt
either reflect recent market conditions or are variable
in nature.
Accounting Estimates - The presentation 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.
F-33
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 1: Basic and Diluted Net Income (Loss) per Common Share -
Description of Business Basic earnings per share is computed by dividing net
and Summary of income by the weighted average number of common shares
Significant Accounting outstanding during the period. Diluted earnings per
Policies share is computed by dividing net loss, as adjusted, by
(continued) the weighted average number of shares of common stock,
common stock equivalents and other potentially dilutive
securities outstanding during each period. All per
share information has been restated to reflect the
stock dividend declared on December 22, 1998.
Reclassifications - Certain reclassifications have been
made to the prior years' financial statements to
confirm the current year's presentation.
New Accounting Standards - In July 1999, the Financial
Accounting Standards Board (the "FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of FASB No.
133". The Statement defers for one year the effective
date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The rule now will
apply to fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133, issued in June 1998,
establishes accounting and reporting standards
requiring that every derivative instrument (including
certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15,
1999. Management has considered the impact of this
statement, and believes it does not have a material
impact upon the Company's results of operations or
financial position.
In March 1998, the American Institute of Certified
Public Accountants (the "AICPA") issued Statement of
Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," ("SOP
98-1"). SOP 98-1 requires the Company to capitalize
internal computer software costs once the
capitalization criteria are met. SOP 98-1 is effective
January 1, 1999, and is applied to all projects in
progress upon initial application. Based on the
adoption of SOP 98-1, the Company capitalized
approximately $1.7 million and $2.0 million related to
the Company's internal reservation systems during the
years ended December 31, 1999 and 1998. Capitalized
software is amortized on a straight-line basis over a
five-year period. See Note 4 for details on reservation
system impairment losses recognized in 1999.
F-34
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 2: The Company continues to have significant
Financial Condition, operating losses, working capital deficiencies
Liquidity and and has not been able to generate adequate cash
Subsequent Events to meet its obligations.
In March 2000, the Company entered into an agreement to
be acquired by Aviation Group, Inc. ("Aviation"). The
acquisition of the Company is to involve (1) the
issuance by Aviation of approximately $16,500,000 of
Series A preferred stock; (2) the issuance of warrants
to purchase 4,250,000 shares of Aviation's common
stock; and (3) the repayment of approximately
$16,500,000 of the Company's outstanding debt. The
funds required to repay the Company's outstanding debt
are to be provided by the sale of preferred stock to
Travelbyus.com ("TBU") and a proposed private placement
of securities.
NOTE 3: In October 1999, the Company completed the sale of
Discontinued assets and assumption of certain liabilities of
Operations Maupintour to Ardsley, LLC, which after the forgiveness
of intercompany debt, resulted in a payment to Ardsley,
LLC of approximately $419,000. In November 1999, the
Company completed the sale of Jetset stock to Arnell
Corp. for approximately $6.3 million cash.
F-35
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
The results of operations of Jetset and Maupintour have
been classified as discontinued operations in the
accompanying financial statements as the respective
operations were geographically separate and operated
independently of the Company's operations in Seattle,
Washington. Additionally, after the sales, the Company
no longer handled bulk wholesale airfare transactions
(Jetset) or packaged tours which were directly
purchased by the tour operator (Maupintour). The gain
or loss incurred on the sales of Jetset and Maupintour
is presented separately as a component of discontinued
operations.
Travel sales and commissions and net income from
discontinued operations were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
Travel sales and commissions:
Maupintour $ 28,813,310 $ 41,794,311 $ 40,569,374
Jetset 71,824,144 65,117,650 33,388,930
------------------------------------------------------------------------------
Net income (loss):
Maupintour (593,480) 1,070,516 575,792
Jetset 332,959 (90,433) (65,377)
------------------------------------------------------------------------------
$ (260,521) $ 980,083 $ 510,415
==============================================================================
</TABLE>
NOTE 4: Property and equipment consists of the following at
Property and Equipment December 31:
<TABLE>
<CAPTION>
1999 1998
==========================================================================
<S> <C> <C>
Capital leases $ 157,043 $ 511,964
Buildings and leasehold improvements - 292,649
Furniture and equipment 778,819 649,928
Reservation system 300,000 2,058,791
--------------------------------------------------------------------------
1,235,862 3,513,332
Less accumulated depreciation 597,244 545,668
--------------------------------------------------------------------------
Property and equipment, net $ 638,618 $ 2,967,664
==========================================================================
</TABLE>
F-36
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
Depreciation expense was approximately $221,477,
$234,000 and $211,000 for the years ended December 31,
1999, 1998 and 1997. Depreciation expense on capital
leases was approximately $102,400, $147,000 and
$107,000 for the years ended December 31, 1999, 1998
and 1997.
The Company recorded a charge of $3,473,337 during 1999
for the write-down of the reservation system. Based on
the Company's history of operating losses and
projection of future cash flows, management determined
that it was necessary to write down the carrying value
of this asset to its estimated fair market value.
NOTE 5: Intangible assets in the amount of $929,664 were
Intangible Assets written off through a charge to operations in 1999, and
reflected in the Consolidated Statement of Loss as
"impairment of goodwill". The amount written off
relates to goodwill recorded upon various subsidiary
and trade name purchases, and represents the amount
necessary to reduce the carrying values of the
purchased goodwill to the Company's best estimate of
the future undiscounted cash flows from the acquired
assets.
Accumulated amortization at December 31, 1999 and 1998
was approximately $1.3 million and $2.0 million.
NOTE 6: GLT had a 45 percent interest in 4192 Meridian
Investments Associates (the "Venture"). The Venture was formed in
May 1994 to acquire and operate a commercial office
building in Bellingham, Washington. The Company leased
office space from the Venture under a non-cancelable
operating lease having a three-year term. Rent expense
paid to the Venture was approximately $28,000 for each
of the years ended December 31, 1999, 1998 and 1997.
During 1999, the investment was sold to two former
owners of the Company as settlement of a note payable
to them. Book value of the investment at the date of
sale was approximately $218,000.
F-37
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 7: Related party debt consists of the following at
Related Party December 31:
Transactions
<TABLE>
<CAPTION>
1999 1998
=============================================================================
<S> <C> <C>
Due to majority shareholder $ 9,549,319 $ 2,000,000
Due to minority shareholder and related
individuals 6,215,000 7,415,000
-----------------------------------------------------------------------------
$ 15,764,319 $ 9,415,000
=============================================================================
</TABLE>
The loans from shareholders carry an interest rate of
prime plus 2% (10.5% at December 31, 1999) and are
payable on demand. Interest paid to the related parties
was approximately $400,000, $414,000 and $32,000 for
the years ended December 31, 1999, 1998 and 1997.
NOTE 8: Long-term debt consists of the following at December
Long-Term Debt 31:
<TABLE>
<CAPTION>
1999 1998
=============================================================================
<S> <C> <C>
Notes payable to a company, due throughout
2000, 16% interest. $ 9,863,623 $ -
Signing bonus, monthly payments of
$8,333, non-interest bearing. 285,000 387,500
Capitalized lease obligations 97,784 470,233
Note payable to a company, due June 27,
1999, non-interest bearing, principal
payments of $71,428, collateralized by the
Company's 45% interest in 4192 Meridian
Associates. - 428,571
Note payable to an individual, due on
demand, 6% interest. - 110,000
Note payable to an individual, due on
demand, 6% interest. - 110,000
-----------------------------------------------------------------------------
Total long-term debt 10,246,407 1,506,304
Less current portion 9,981,219 1,221,304
-----------------------------------------------------------------------------
Long-term debt, less current portion $ 265,188 $ 285,000
=============================================================================
</TABLE>
F-38
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
Maturities of debt are as follows:
Year ending December 31, Amount
------------------------------------------------------
2000 $ 9,981,219
2001 117,596
2002 117,596
2003 29,996
------------------------------------------------------
$10,246,407
======================================================
NOTE 9: As of the year ended December 31, 1999, the Company has
Income Taxes net loss carryforwards of approximately $26 million.
The loss carryforwards are available, through their
expiration date of 2020, to offset future taxable
income. The utilization of these loss carryforwards is
subject to limitation due to the changes in control of
the Company.
Included in loss carryforwards is $410,000 attributable
to CAT that can only be offset against future earnings
of CAT.
At December 31, 1999 and 1998, the Company had a net
deferred long-term tax asset of $5.7 million and $8.8
million arising primarily from net operating loss
carryforwards offset by the use of accelerated methods
of depreciation of fixed assets. The Company has
recognized a valuation allowance on all of its net
deferred tax assets due to the uncertainty of realizing
the benefits thereof.
The provision for income taxes differs from expected
amounts, computed using the federal statutory rate of
34%, as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
=======================================================================================
<S> <C> <C> <C>
Expected benefit $ 2,996,235 $ 1,960,660 $ 1,709,381
Non-deductible expenses (657,924) (247,722) (271,132)
Change in valuation allowance (2,338,311) (1,712,938) (1,438,249)
---------------------------------------------------------------------------------------
Provision for income taxes $ - $ - $ -
=======================================================================================
</TABLE>
F-39
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 10: The Company leases certain facilities under agreements
Lease Commitments which expire at various dates. Annual minimum rental
commitments under operating leases that have initial or
remaining non-cancelable lease terms are as follows:
Year ending December 31, Amount
------------------------------------------------------
2000 $ 945,684
2001 894,578
2002 636,109
2003 36,656
------------------------------------------------------
$2,513,027
======================================================
Rent expense under operating leases was approximately
$618,000, $413,000 and $370,000 for the years ended
December 31, 1999, 1998 and 1997.
NOTE 11: The Company had outstanding irrevocable letters of
Letters of Credit credit in the amount approximately $1.9 million as of
the years ended December 31, 1999 and 1998. These
letters of credit were issued in the ordinary course of
the Company's business and are collateralized by
restricted cash of approximately $1.7 million.
NOTE 12: The Company has a 401(k) employee benefit plan for
Employee Benefit those employees who meet the eligibility requirements
Plans set forth in the plan. Eligible employees may
contribute up to 15% of their compensation. The Company
may make matching contributions at the discretion of
its board of directors. An employee becomes fully
vested with respect to employer contributions after 6
years of service. The Company contributed approximately
$68,000, $65,000 and $56,000 to the plan for the years
ended December 31, 1999, 1998 and 1997.
NOTE 13: As part of the 1995 purchase of Maupintour, the Company
Commitments and was contingently liable for additional payments to
Contingencies the former owners from 1997 to 2000. The additional
payments are a percentage of domestic and international
sales exceeding a specified minimum. The Company
settled the remaining obligation, in conjunction with
the sale of Maupintour, for $275,000. The Company
accrued $155,000 in 1998 which was also paid during
1999.
F-40
<PAGE>
Report of Independent Accountants
To the Directors of
travelbyus.com ltd.
We have audited the consolidated balance sheet of travelbyus.com ltd. (formerly
LatinGold Inc.) as at September 30, 1999 and the consolidated statements of
operations and deficit and cash flows and changes in shareholders' equity for
the period from January 1, 1999 to September 30, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at September 30,
1999 and the results of its operations, its cash flows and changes in
shareholders' equity for the period from January 1, 1999 to September 30, 1999
in accordance with generally accepted accounting principles in the United
States.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
December 2, 1999
(except as to note 12 which is as at December 7, 1999 and note 23, which is as
at October 6 , 2000)
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors of
travelbyus.com ltd.
We have audited the consolidated balance sheet of travelbyus.com ltd. [formerly
LatinGold Inc.] as at December 31, 1998 and the consolidated statements of
operations and deficit, cash flows and changes in shareholders' equity for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and the results of its operations, its cash flows and changes in shareholders'
equity for the years ended December 31, 1998 and 1997 in accordance with
generally accepted accounting principles in the United States.
Toronto, Canada, /s/ Ernst & Young LLP
April 21, 1999. Chartered Accountants
F-42
<PAGE>
travelbyus.com ltd.
Consolidated Balance Sheets
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 12,246,675 3,256,021 45,741
Accounts receivable and prepaid expenses (note 5) 4,095,451 50,504 9,535
Inventory and barter credits (note 5) 1,403,907 - -
Marketable securities (notes 4 and 14(h)) 1,236,980 326,355 179,175
----------------------------------------------------------
18,983,013 3,632,880 234,451
Cash deposits for acquisitions (note 7) 576,800 436,354 -
Cash in trust (note 8) 31,073 7,200,000 -
Security deposits (note 9) 943,153 - -
Deferred financing costs - net of accumulated
amortization of $325,493
(September 30, 1999 - $27,296) (note 13(a)) 448,440 922,861 -
Deferred acquisition costs - 194,281 -
Programming library (note 11) 5,794,814 - -
Investment (note 5) 6,695,392 - -
Property, plant and equipment - net of accumulated
amortization of $258,944 (September 30, 1999 -
$4,133; December 31, 1998 - $60,712) (note 10) 3,806,689 78,638 19,178
Goodwill - net of accumulated amortization of $3,279,191 55,521,555 - -
Other intangibles - net of accumulated amortization of
$110,699 (note 12) 3,347,194 - -
----------------------------------------------------------
96,148,123 12,465,014 253,629
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE>
travelbyus.com ltd.
Consolidated Balance Sheets ...continued
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Liabilities
Current liabilities
Bank indebtedness (note 3) 591,950 - -
Accounts payable and accrued liabilities (note 5) 6,215,039 300,673 51,028
Due to related parties (note 6(h) and 17(c)) 4,036,123 218,684 2,968
Customer deposits 580,770 - -
Advances (note 14(g)) 2,920,000 - -
Convertible debenture (note 13(b)) 4,437,900 - -
----------------------------------------------------------
18,781,782 519,357 53,996
Debentures (note 13(a)) 6,688,379 6,254,407 -
----------------------------------------------------------
25,470,161 6,773,764 53,996
----------------------------------------------------------
Shareholders' Equity
Capital stock (note 14)
Authorized
Unlimited number of common shares without par value
Issued
80,600,066 common shares
(September 30, 1999 - 41,539,178;
December 31, 1998 - 20,989,178) 170,679,387 97,080,625 95,720,625
Additional paid-in capital 569,988 569,988 569,988
Compensation for future services (note 11) (4,407,223) - -
Warrants and special warrants (note 14(e)) 23,274,568 5,756,652 -
Accumulated other comprehensive loss - net of tax of $nil
(note 14(h)) (122,801) (115,146) (262,326)
Deficit (119,315,957) (97,600,869) (95,828,654)
----------------------------------------------------------
70,677,962 5,691,250 199,633
----------------------------------------------------------
96,148,123 12,465,014 253,629
==========================================================
</TABLE>
Commitments and contingencies (note 16)
Subsequent events (note 23)
Approved by the Board of Directors
/s/ Michael A. Farrugia Director /s/ Bill Kerby Director
--------------------------------- ---------------------------
Michael A. Farrugia Bill Kerby
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
travelbyus.com ltd.
Consolidated Statements of Operations and Deficit
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
------------------------------------ ----------------- -----------------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Travel sales 9,844,756 - - - -
Associate marketing program 485,014 - - - -
Advertising 462,444 - - - -
Technology sales 1,223,959 - - - -
-------------------------------------------------------------------------------------------
12,016,173 - - - -
-------------------------------------------------------------------------------------------
Expenses
Cost of services 4,167,513 - - - -
Cost of technology product sales 1,115,272 - - - -
Advertising 2,729,959 - - - -
Amortization of goodwill 3,279,192 - - - -
Amortization of other intangibles 436,192 - - - -
Amortization of property, plant
and equipment 254,811 6,804 6,928 - -
Capital taxes 286,471 - 185,000 - -
Foreign exchange loss (gain) 23,977 (2,268) (2,323) - -
General and administration 17,078,549 428,471 854,059 256,910 528,215
Interest 3,079,770 - 284,464 - -
Interest and other income (308,358) (5,474) (6,972) (18,556) (91,449)
Website costs 943,021 226,800 362,435 - -
Write-off of marketable
Securities 3,902,312
Write-off of property, plant and
equipment - - 14,229 - -
-------------------------------------------------------------------------------------------
33,086,369 654,333 1,697,820 238,354 4,339,078
-------------------------------------------------------------------------------------------
Loss from continuing operations
before income tax (21,070,196) (654,333) (1,697,820) (238,354) (4,339,078)
Income tax recovery 423,176 - - - -
Loss from discontinued operations
- net of tax of $nil (note 21) - (745,871) (74,395) (1,044,645) (6,440,942)
-------------------------------------------------------------------------------------------
Loss before extraordinary item (20,647,020) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Extraordinary loss from repayment
of debentures - net of tax of
$nil (note 13(a)) (1,068,068) - - - -
-------------------------------------------------------------------------------------------
Loss for the period (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Deficit - Beginning of period (97,600,869) (95,132,490) (95,828,654) (94,545,655) (83,765,635)
-------------------------------------------------------------------------------------------
Deficit - End of period (119,315,957) (96,532,694) (97,600,869) (95,828,654) (94,545,655)
===========================================================================================
Basic and diluted loss per common
share from continuing
operations and before
discontinued operations and
extraordinary item (0.32) (0.04) (0.05) (0.01) (0.28)
===========================================================================================
Basic and diluted loss per common
share (0.33) (0.04) (0.05) (0.07) (0.69)
===========================================================================================
Weighted average number of common
shares outstanding 65,203,705 31,729,436 31,781,090 19,400,822 15,588,904
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
travelbyus.com ltd.
Consolidated Statements of Changes in Shareholders' Equity
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Common stock
--------------------------------------------------------
Additional
paid-in Compensation
capital for future
Number of Amount amount services
shares $ $ $
<S> <C> <C> <C> <C>
Balance - January 1, 1997 13,389,178 91,069,816 - -
Private placement of 3,100,000 units (consisting of one common
share and one half warrant) at $1.63 per unit (note 14(a)) 3,100,000 4,175,210 - -
Compensation warrants on private placement (note 14(a)) - (61,535) - -
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------------
Balance - December 31, 1997 16,489,178 95,183,491 - -
Private placement of 4,000,000 common shares at $0.12 per share
(note 14(b)) 4,000,000 464,634 - -
Expiry of warrants - - 569,988 -
Issuance of shares to acquire Mexican properties (note 21) 500,000 72,500 - -
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------------
Balance - December 31, 1998 20,989,178 95,720,625 569,988 -
Private placement of 20,000,000 common shares at $0.06 per share
(note 14(c)) 20,000,000 1,175,000 - -
Issuance of shares for cash from exercised options 550,000 185,000 - -
Issuance of debenture financing warrants (notes 13 and 14(d)) - - - -
Issuance of warrants as financing fee for debenture financing
(notes 13(a) and 14(d)) - - - -
Costs of issuing debenture financing warrants (notes 13(a) and
14(d)) - - - -
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------------
Balance - September 30, 1999 41,539,178 97,080,625 569,988 -
Issuance of shares for cash from exercised options 472,200 234,952 - -
Issuance of shares on business combinations (note 6) 21,379,558 39,450,659 - -
Issuance of shares and warrants to purchase assets (notes 11 and
12) 3,285,256 6,513,381 - -
Exercise of debenture financing warrants 6,012,500 7,461,513 - -
Private placement of 4,000,000 units (consisting of one common
share and
one half warrant) at $2.50 per unit (note 14(f)) 4,000,000 6,077,696 - -
Exercise of private placement warrants to common shares 181,750 922,745 - -
Compensation warrants on private placements (note 14(e) and (f)) - (564,760) - -
Exercise of compensation warrants to common shares 215,000 971,155 - -
Shares issued for future services (note 11) 1,067,124 4,407,223 - (4,407,223)
Private placement of 8,000,000 special warrants (each special
warrant exercisable into one common share and one half
warrant) at $2.50 per special warrant - - - -
Exercise of private placement special warrants to common shares 300,000 544,650 - -
Exercise of financing fee warrants to common shares 147,500 183,048 - -
Private placement of 2,000,000 common shares at $3.70 (U.S.
$2.50) per share (note 12(b)) 2,000,000 7,396,500 - -
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Translation adjustment - - - -
Total comprehensive income (loss) (note 14(h))
------------------------------------------------------
Balance - June 30, 2000 (unaudited) 80,600,066 170,679,387 569,988 (4,407,223)
------------------------------------------------------
<CAPTION>
----------------------------------------------------
Special Amount Warrants Amount
warrants $ $
<S> <C> <C> <C> <C>
Balance - January 1, 1997 - - - -
Private placement of 3,100,000 units (consisting of one common
share and one half warrant) at $1.63 per unit (note 14(a)) - - 1,550,000 508,453
Compensation warrants on private placement (note 14(a)) - - 155,000 61,535
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------
Balance - December 31, 1997 - - 1,705,000 569,988
Private placement of 4,000,000 common shares at $0.12 per share
(note 14(b)) - - - -
Expiry of warrants - - (1,705,000) (569,988)
Issuance of shares to acquire Mexican properties (note 21) - - - -
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------
Balance - December 31, 1998 - - - -
Private placement of 20,000,000 common shares at $0.06 per share
(note 14(c)) - - - -
Issuance of shares for cash from exercised options - - - -
Issuance of debenture financing warrants (notes 13 and 14(d)) - - 9,560,000 5,864,054
Issuance of warrants as financing fee for debenture financing
(notes 13(a) and 14(d)) - - 700,270 808,112
Costs of issuing debenture financing warrants (notes 13(a) and
14(d)) - - - (915,514)
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------
Balance - September 30, 1999 - - 10,260,270 5,756,652
Issuance of shares for cash from exercised options - - - -
Issuance of shares on business combinations (note 6) - - - -
Issuance of shares and warrants to purchase assets (notes 11 and
12) - - 50,000 131,450
Exercise of debenture financing warrants - - (6,012,500) (3,373,013)
Private placement of 4,000,000 units (consisting of one common
share and
one half warrant) at $2.50 per unit (note 14(f)) - - 2,000,000 3,154,000
Exercise of private placement warrants to common shares - - (181,750) (286,620)
Compensation warrants on private placements (note 14(e) and (f)) - - 1,080,000 564,760
Exercise of compensation warrants to common shares - - (215,000) (433,655)
Shares issued for future services (note 11) - - - -
Private placement of 8,000,000 special warrants (each special
warrant exercisable into one common share and one half
warrant) at $2.50 per special warrant 8,000,000 18,388,392 - -
Exercise of private placement special warrants to common shares (300,000) (750,000) 150,000 205,350
Exercise of financing fee warrants to common shares - - (147,500) (82,748)
Private placement of 2,000,000 common shares at $3.70 (U.S.
$2.50) per share (note 13(b)) - - - -
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Translation adjustment - - - -
Total comprehensive income (loss) (note 14(h))
---------------------------------------------------
Balance - June 30, 2000 (unaudited) 7,700,000 17,638,392 6,983,176 5,636,176
---------------------------------------------------
<CAPTION>
Other capital accounts
-----------------------------------------
Accumulated
other
comprehensive
(Deficit) income Total
retained (net of tax shareholders'
earnings of $nil) equity
$ $ $
(note 13)
<S> <C> <C> <C>
Balance - January 1, 1997 (83,765,635) 3,131,071 10,435,252
Private placement of 3,100,000 units (consisting of one common
share and one half warrant) at $1.63 per unit (note 14(a)) - - 4,683,663
Compensation warrants on private placement (note 14(a)) - - -
Comprehensive income
Loss for the period (10,780,020) -
Unrealized loss on marketable securities - (3,131,031)
Total comprehensive income (loss) (13,911,051)
------------------------------------------
Balance - December 31, 1997 (94,545,655) 40 1,207,864
Private placement of 4,000,000 common shares at $0.12 per share
(note 14(b)) - - 464,634
Expiry of warrants - - -
Issuance of shares to acquire Mexican properties (note 21) - - 72,500
Comprehensive income
Loss for the period (1,282,999) -
Unrealized loss on marketable securities - (262,366)
Total comprehensive income (loss) (1,545,365)
------------------------------------------
Balance - December 31, 1998 (95,828,654) (262,326) 199,633
Private placement of 20,000,000 common shares at $0.06 per share
(note 14(c)) - - 1,175,000
Issuance of shares for cash from exercised options - - 185,000
Issuance of debenture financing warrants (notes 13 and 14(d)) - - 5,864,054
Issuance of warrants as financing fee for debenture financing
(notes 13(a) and 14(d)) - - 808,112
Costs of issuing debenture financing warrants (notes 13(a) and
14(d)) - - (915,514)
Comprehensive income
Loss for the period (1,772,215) -
Unrealized gain on marketable securities - 147,180
Total comprehensive income (loss) (1,625,035)
------------------------------------------
Balance - September 30, 1999 (97,600,869) (115,146) 5,691,250
Issuance of shares for cash from exercised options - - 234,952
Issuance of shares on business combinations (note 6) - - 39,450,659
Issuance of shares and warrants to purchase assets (notes 11 and
12) - - 6,644,831
Exercise of debenture financing warrants - - 4,088,500
Private placement of 4,000,000 units (consisting of one common
share and
one half warrant) at $2.50 per unit (note 14(f)) - - 9,231,696
Exercise of private placement warrants to common shares - - 636,125
Compensation warrants on private placements (note 14(e) and (f)) - - -
Exercise of compensation warrants to common shares - - 537,500
Shares issued for future services (note 11) - - -
Private placement of 8,000,000 special warrants (each special
warrant exercisable into one common share and one half
warrant) at $2.50 per special warrant - - 18,388,392
Exercise of private placement special warrants to common shares - - -
Exercise of financing fee warrants to common shares - - 100,300
Private placement of 2,000,000 common shares at $3.70 (U.S.
$2.50) per share (note 13(b)) - - 7,396,500
Comprehensive income
Loss for the period (21,715,088) -
Unrealized gain on marketable securities - 102,386
Translation adjustment - (110,041)
Total comprehensive income (loss) (note 14(h)) (21,722,743)
------------------------------------------
Balance - June 30, 2000 (unaudited) (119,315,957) (122,801) 70,677,962
------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE>
travelbyus.com ltd.
Consolidated Statements of Cash Flows
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
----------------------------- -------------- ----------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Loss for the period (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Items not affecting cash
Amortization of property, plant and
equipment 254,811 6,804 79,009 - -
Write-off of property, plant and equipment - - 14,229 - -
Amortization of goodwill 3,279,192 - - - -
Amortization of other intangibles 110,699 - - - -
Interest accreted on debentures 2,008,833 - 168,461 - -
Amortization of deferred financing costs 325,493 - 27,296 - -
Stock based compensation 91,500 - - - -
Loss from discontinued operations - 627,426 74,395 86,239 5,978,194
Extraordinary loss from repayment of
debentures (note 13(a)) 1,068,068 - - - -
Income tax recovery (423,176) - - - -
Net change in non-cash working capital items:
Accounts receivable and prepaid expenses (671,917) (16,385) (40,970) 363,760 288,191
Inventory and barter credits 1,413,232 - - - -
Marketable Securities 754,458
Increase in security deposits (736,981) - - - -
Accounts payable and accrued liabilities 3,248,819 120,693 465,362 (386,501) (486,230)
Due to related parties 3,077,789 - - - -
Customer deposits (644,592) - - - -
Accrued interest 275,935 - - - -
-------------------------------------------------------------------------
(8,282,925) (661,666) (984,433) (1,219,501) (4,999,865)
-------------------------------------------------------------------------
Cash flows from investing activities
Cash paid for acquisitions and settlement
of notes payable - net (note 6) (16,840,054) - - - -
Cash deposits on acquisitions (note 23(c)) (576,800) (413,904) (7,636,354) - -
Advances for programming library (note 11) (744,000) - - - -
Funds in trust (10,432)
Purchase of property, plant and equipment (2,621,577) - - - -
Investment (note 5) (7,277,600) - - - -
Investing activities from discontinued operations - - (421,374) - (255,418)
Proceeds from disposal of investment (note 5) 582,208 - - - -
-------------------------------------------------------------------------
(27,488,255) (413,904) (8,057,728) - (255,418)
-------------------------------------------------------------------------
Cash flows from financing activities
Bank indebtedness (144,850) - - - -
Proceeds from issuance of debentures (note 13(b)) 4,437,900 - 11,950,000 - -
Costs on issuance of debentures (note 13(a)) - - (1,057,559) - -
Issuance of common shares - 1,224,000 1,200,000 480,000 5,053,000
Share issue costs (3,034,948) (25,935) (25,000) (15,366) (369,337)
Decrease in other liabilities - - - (171,600) (407,800)
Issue of special warrants 20,000,000 - - - -
Issue of equity units 10,000,000 - - - -
Private placement (note 13(b)) 7,396,500 - - - -
Exercises of options and warrants 5,597,377 - 185,000 - -
Subscriptions received (note 14(g)) 2,920,000 - - - -
Repayment of debentures (note 13(a)) (2,494,000) - - - -
-------------------------------------------------------------------------
44,677,979 1,198,065 12,252,441 293,034 4.275,863
-------------------------------------------------------------------------
Foreign exchange effect on cash 83,855 - - - -
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 8,990,654 122,495 3,210,280 (926,467) (979,420)
Cash and cash equivalents -
Beginning of period 3,256,021 76,817 45,741 972,208 1,951,628
-------------------------------------------------------------------------
Cash and cash equivalents -
End of period 12,246,675 199,312 3,256,021 45,741 972,208
=========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE>
travelbyus.com ltd.
Consolidated Statement of Cash Flows ...continued
Supplemental Disclosure of Interest and Non-Cash Investing and Financing
Activities
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
----------------------------- -------------- ----------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Information
Interest paid 746,875 - 2,137 - -
Interest received 302,810 5,474 4,402 - -
Non-cash investing
activities
Mineral property expenditures
paid by issuing common
shares - - - 72,500 -
Common shares issued in
connection with acquisition
of subsidiaries 39,450,659 - - - -
Common shares issued in
connection with acquisition
of assets (notes 11 and 12) 6,513,381 - - - -
Non-cash financing
activities
Common shares issued for
future services (note 11) 4,407,223 - - - -
Compensation warrants issued
to agents in connection
with private placements
(note 14(a) and (f)) 564,760 - - - 61,535
Compensation warrants issued
to agents in connection
with debenture financing
(note 13(a)) - - 808,112 - -
Compensation special warrants
issued to agents in
connection with private
placements (note 14(e)) 1,613,600 - - - -
Compensation warrants issued
to agents in connection
with asset purchase
(note 12) 131,450 - - - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
1 Nature of operations
travelbyus.com ltd. (formerly LatinGold Inc.)(the "company") is developing
an integrated internet travel organization which provides travel options via
the internet as well as through 1-800 call centres and traditional travel
agencies, primarily to retail customers located in the western United
States. The company also provides advertising services to airlines and
hotels located in the United States, provides retail travel agencies access
to certain travel suppliers under preferred supplier agreements, licenses
television program materials for broadcast, and sells computer data storage
equipment primarily to Canadian corporate customers.
The company was incorporated in 1986 under the Business Corporations Act
(Ontario). The company was a precious metals exploration company until 1999
when it changed its business focus to the travel sector. In April 1999, the
company discontinued its mining activities, and accordingly, its mining
activities have been presented as discontinued operations. The company
changed its name to travelbyus.com ltd. from LatinGold Inc. on June 11,
1999. In 1999, the company changed its year end to September 30.
The company has a limited operating history and the successful
implementation of its business strategy depends on numerous factors
including economic, competitive and other conditions and uncertainties,
including but not limited to the ability to hire and retain qualified
personnel, the ability to continue relationships with suppliers and travel
agents on satisfactory terms and the ability to obtain financing from other
sources if revenues from operations do not grow as expected. Adverse
economic or competitive and other conditions or the inability to obtain
financing if required could affect the company's operations in the future
and impact the company's ability to recover the value of its assets and
satisfy its obligations in the future.
2 Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States. A summary of the significant accounting policies is set out below.
Unaudited information
The consolidated balance sheet as at June 30, 2000 and the consolidated
statements of operations and deficit, cash flows and changes in
shareholders' equity for the nine-month periods ended June 30, 2000 and
1999, including the related notes, are unaudited. This unaudited information
reflects all adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods presented.
Basis of consolidation
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries.
Business combinations
Business combinations have been accounted for under the purchase method of
accounting and therefore include the results of operations of the acquired
business from the date of acquisition. Assets acquired and liabilities
assumed are recorded at their fair values at the date of their acquisition.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
F-49
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Cash and cash equivalents
Cash and cash equivalents consist of balances with banks and investments in
money market instruments with original maturities of less than 90 days.
Inventory and barter credits
Data storage systems are recorded at the lower of cost or estimated net
realizable value. Cost includes direct materials, labour and an allocation
of overhead, and is determined on a first-in, first-out basis.
Media credits are recorded at the lower of carrying value or estimated net
realizable value. Carrying value is determined as cost (the amount paid to
the media company in exchange for the media credits). Where the media
credits represent media availability which expires over time, cost is
amortized on a straight-line basis over the time to expiry. Where the
company incurs costs to prepare the media for use by the customer, the cost
of these services is included in the carrying value of the media credits.
Travel credits are recorded at the lower of cost and estimated net
realizable value. As prescribed by EITF Abstract Issue No. 93-11, cost is
determined as the carrying value of the media credits exchanged for travel
credits on the basis that there is not persuasive evidence of the fair value
of the media credits given up for the travel credits.
Revenue recognition
a) Travel sales
Travel sales consist of revenues derived from the sale of travel
products including airline tickets, hotel and vacation property
accommodations, car rentals, vacation packages including cruises and
tours, and volume bonuses and overrides from suppliers of these
products.
Where the company sells airline tickets or provides travel bookings as
an agent, at prices determined by the supplier, commission revenue is
recognized at the time the ticket is issued to the customer, which
generally corresponds to the time the payment is processed, less an
allowance for returns and cancellations based on the company's
historical experience.
Where the company acquires an inventory of travel services from
airlines, hotels, vacation properties, car rental companies and
vacation package providers and the company determines the selling price
of these products, revenue for these services is recognized upon the
customer's scheduled departure date, provided that collection is
reasonably assured. Sales are recorded at the gross amount collected
from the customer when the company has acquired an inventory which is
non-returnable and non-refundable. Where the inventory is returnable
and/or refundable, sales are recorded at the amount paid by the
customer net of the travel product costs.
The company also earns commissions for booking accommodations and
vehicle rentals, and receives certain volume bonuses and overrides from
the travel product suppliers (overrides represent commissions earned on
the basis of volumes). Revenues related to accommodations and vehicle
rentals are recognized
F-50
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
on the customers' scheduled departure dates. Volume bonus and
override commission revenues are recognized as specified in the
contractual arrangement when the specified targets have been
achieved.
b) Marketing program revenues
The company provides retail travel agencies with access to certain
travel product suppliers under preferred supplier agreements. Under
these associate marketing programs, the member agencies are charged
an annual or monthly license fee. The license fees are recognized on
a straight-line basis over the license period, when collectibility is
reasonably assured.
c) Advertising revenues
The company earns revenue from the exchange of advertising media
credits for travel credits, which is recognized as the media credits
are used by the travel product supplier involved in the exchange. The
company acquires rights to the use of certain media, including
billboards, radio, television and newspaper advertising, in exchange
for cash payments to media companies. These rights (media credits)
are exchanged with travel product suppliers in return for credits
that may be exchanged for their travel products (travel credits),
which in turn are sold to third parties. In connection with these
arrangements, the company may also provide services to travel product
suppliers to assist them in placing their advertisements in the
available media, the costs of which are added to the carrying value
of the media credits exchanged for travel credits. The carrying value
of the media credits is used as the basis for the measurement of the
exchange transaction, except where the expected net realizable value
of the travel credits at the time of the exchange is less than the
carrying amount of the media credits, in which case the expected net
realizable value of the travel credits is used.
Advertising revenues are also derived from travel product suppliers'
advertising included in printed marketing and promotional materials
prepared by the company and delivered to travel agents and customers.
Advertising revenues are recognized at the time the marketing and
promotional materials are distributed to the travel agents and
customers, when collectibility is reasonably assured. Costs of sales
comprise the direct costs of developing and producing the marketing
and promotional materials.
d) Technology sales
Revenue from the sales of computer data storage equipment is
recognized upon delivery of the equipment, provided collectibility is
reasonably assured.
e) Television programming revenues
Revenues from the license of television program material are
recognized when the license period begins and all of the following
conditions have been met: a) the license fee is known, b) the cost of
the episodes provided under the license agreement is known or
reasonably determinable, c) collectibility of the license fee is
reasonably assured, d) the episodes have been accepted by the
licensee in accordance with the license agreement and e) the episodes
are available for the first telecast.
F-51
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
amortization. Amortization is recorded on a straight-line basis to
amortize the cost of the capital assets over their estimated useful lives.
Amortization rates are as follows:
Automobiles 5 years
Office and computer equipment
and furniture 5 - 7 years
Manufacturing equipment 7 years
Leasehold improvements over term of lease
Goodwill
Goodwill represents the excess of costs over amounts assigned to the net
identifiable assets of acquired entities. The excess is amortized on a
straight-line basis over a period ranging from five to ten years, as
determined by the expected period of benefit from each acquisition.
In addition to the impairment policy for long-lived assets, the company
periodically evaluates whether changes have occurred that would require
revision of the remaining estimated useful life of the goodwill. If such
circumstances arise, the company would use an estimate of the undiscounted
value of the expected future operating cash flows and residual to
determine whether the net carrying amount of the goodwill exceeds the
estimated net recoverable amount.
Other intangibles
Proprietary software rights and the costs of acquiring the right to the
800-i-TRAVEL number are amortized on a straight-line basis over ten years.
Impairment of long-lived assets
The company reviews the carrying amount of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The determination of any impairment includes
a comparison of future operating cash flows anticipated to result from the
use of the asset to the net carrying value of the asset. In the event of a
business combination, any goodwill arising in the transaction is included
in the group of assets for the purpose of the recoverability tests, or is
allocated to the individual assets being tested on a pro rata basis using
the relative fair values of the long-lived assets acquired at the
acquisition date. In instances where goodwill is identified with assets
that are subject to an impairment loss, the carrying value of the goodwill
is eliminated before making any reduction of the carrying amounts of
impaired long-lived assets.
F-52
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Programming library
The costs to acquire television programming are capitalized and amortized
in the same ratio that current gross revenues bear to anticipated total
gross revenues. Estimates of anticipated total gross revenues are reviewed
periodically and revised when necessary to reflect more current
information. Where the carrying value of the unamortized costs exceeds the
estimated net realizable value, the carrying value is written down to the
net realizable value.
Foreign currency translation
Foreign currency transaction gains or losses are included in net earnings
(loss) for the period in which there is an exchange rate change. Assets
and liabilities of operations where the functional currency is other than
the Canadian dollar are translated at the exchange rate at the balance
sheet date. Revenues, costs and expenses of such operations are translated
at the average rate of exchange prevailing during the period. Translation
adjustments are included as a component of other comprehensive income and
charged or credited to accumulated other comprehensive income, a component
of shareholders' equity.
Advertising costs
The company accounts for advertising costs in accordance with AICPA
Statement of Position 93-7, Reporting on Advertising Costs, whereby costs
are generally expensed as incurred except for television and radio
advertisements, which are expensed, including related production costs,
the first time the advertising takes place.
Stock-based compensation
The company accounts for stock-based employee compensation arrangements
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations; accordingly, compensation cost of stock awards is
measured as the excess, if any, of the quoted market price of the
company's stock at the date of the grant over the option exercise price
and is charged to operations over the vesting period.
Income taxes
The company follows the asset and liability method of accounting for
income taxes. Under this method, deferred income tax assets and
liabilities are recognized for the estimated tax consequences attributable
to differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance is provided for deferred income tax assets if it is
more likely than not that the company will not realize the future benefit,
or if the future deductibility is uncertain.
F-53
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Loss per share
Basic loss per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Common shares outstanding include shares issuable for
little or no cash consideration and for which all necessary conditions
have been satisfied. Diluted loss per share is computed by including other
potential common stock from exercise of stock options and warrants in the
weighted average number of common shares outstanding for a period, if
dilutive.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
------------------------------------ ----------------- -----------------------------------
2000 1999
$ $ 1999 1998 1997
(unaudited) (unaudited) $ $ $
<S> <C> <C> <C> <C> <C>
Loss for the period (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Weighted average number of
shares outstanding
Common shares 65,203,705 31,729,436 31,781,090 19,400,822 15,588,904
Special warrants 5,956,923 - - - -
Basic and diluted loss per
common share (0.33) (0.04) (0.05) (0.07) (0.69)
</TABLE>
New accounting pronouncements
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133, as
subsequently amended, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (October 1, 2000 for the company). FAS
133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. As management of
the company does not currently use derivative instruments, the adoption of
FAS 133 is not expected to have a significant effect on the company's
results of operations or its financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements, and in March 2000, the SEC issued SAB 101A which provided
certain amendments to SAB 101. The company believes that its current
revenue recognition and reporting policies are consistent with the Staff
views set out in those bulletins.
F-54
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of
APB Opinion No. 25 ("FIN 44"), which clarifies the application of APB 25
for certain issues. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998 or January 12, 2000. The company has
determined that they are in compliance with the guidance contained in this
pronouncement.
On May 8, 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF 00-02, Accounting for Website
Development Costs, which covered and included guidelines to account for
costs incurred to develop a website. The guidelines contained therein
focus on determining the nature of website development costs and whether
to capitalize or expense these costs accordingly. The company has expensed
all costs incurred to date to develop its website. Transitional provisions
contained in this EITF 00-02 require application of these guidelines for
fiscal quarters beginning after June 30, 2000. The company will comply
with this policy in accordance with the transitional provisions.
On June 12, 2000, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 00-2, Accounting by Producers or Distributors
of Films ("SOP 00-2"), which provides guidance on generally accepted
accounting principles for films. Films are defined in SOP 00-2 as feature
films, television specials, television series, or similar products that
are sold, licensed, or exhibited, whether produced on film, video tape,
digital or other video recording format. Transitional provisions contained
in this SOP 00-2 require the application of these guidelines for fiscal
years beginning after December 15, 2000. The company will comply with this
policy in accordance with the transitional provisions. The company has not
yet determined the effect, if any, of this new pronouncement.
3 Bank indebtedness
A subsidiary of the company has an operating line of credit available of
$650,000, bearing interest at the bank's prime lending rate plus 2.5%.
Bank indebtedness drawn against this line of credit is payable on demand
and is secured by a general security agreement covering all of the
subsidiary's assets other than real property and Export Development Corp.
insurance coverage on certain accounts receivable as well as by a general
corporate level guarantee. As at June 30, 2000 (unaudited), $591,950 has
been drawn against this facility.
4 Marketable securities
Marketable securities are considered available-for-sale and are stated at
market value. Unrealized holding gains and losses are excluded from
earnings and reported in a separate component of shareholders' equity. At
June 30, 2000 (unaudited), the company held 639,912 (September 30, 1999 -
639,912; December 31, 1998 - 639,912) common shares of Scorpion Minerals
Inc. ("Scorpion"), a company related by virtue of a director in common. At
June 30, 2000 (unaudited), the cost of these marketable securities was
$230,984 (September 30, 1999 - $230,984; December 31, 1998-$230,984).
During the period ended June 30, 2000 (unaudited), the company also
acquired an investment in a short-term mutual fund through the purchase of
Cruise Shoppes America, Ltd. (Note 6(g)). The short-term mutual fund is
considered available-for-sale and is stated at market value which
approximates the cost at June 30, 2000 (unaudited).
F-55
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
5 Balance sheet components
Accounts receivable and prepaid expenses
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Trade receivables 2,763,802 2,756 9,535
Less: Allowance for doubtful accounts (376,230) - -
Other accounts receivable 933,911 37,739 -
----------------------------------------------------------------
3,321,483 40,495 9,535
Prepaid expenses 773,968 10,009 -
----------------------------------------------------------------
4,095,451 50,504 9,535
----------------------------------------------------------------
</TABLE>
Inventory and barter credits
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Data storage systems 797,399 - -
Media credits 60,651 - -
Travel credits 545,857 - -
----------------------------------------------------------------
1,403,907 - -
----------------------------------------------------------------
</TABLE>
Data storage systems comprise three major types of products: disk systems,
optical mediums (CD and DVD servers), and tape back-up products. There are
substantially no raw materials or work in process.
Investment
In connection with the proposed business combination with Aviation Group,
Inc. ("Aviation Group") (note 23), the company has invested $7,277,600
(U.S. $5,000,000) in Aviation Group through the purchase of 500 shares of
non-voting Series B 12% cumulative preferred stock from Aviation Group at
U.S. $10,000 per share liquidation value, the proceeds of which were used,
in part, by Aviation Group to acquire Global Leisure Travel, Inc. ("Global
Leisure"). These shares may be exchanged, conditional upon the completion
of the proposed business combination, for Aviation Group Series C
convertible preferred stock.
During the period, 40 shares of non-voting Series B 12% cumulative
preferred stock sold for proceeds of U.S. $400,000 (approximately Cdn.
$582,208).
F-56
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Accounts payable and accrued liabilities
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Trade accounts payable 3,281,233 203,424 51,028
Accrued interest 365,935 90,000 -
Accrued lease liability 350,000 - -
Accrued payroll 351,284 - -
Accrued professional fees 650,147 - -
Income tax payable 311,114 - -
Other liabilities 905,326 7,249 -
----------------------------------------------------------------
6,215,039 300,673 51,028
================================================================
</TABLE>
6 Acquisitions (unaudited)
All per share prices indicated for the various acquisitions outlined below
reflect the market value of the shares at the date of announcement of the
respective transactions, except where the purchase agreement contains
provisions for guaranteeing the value of total share consideration
subsequent to the completion date. These values have been used to account
for these transactions by the purchase method, with effect from the
completion dates indicated.
a) Mr. Cheaps Travel Ltd. ("Mr. Cheaps Travel") and Gotham Media Group
Ltd. ("Gotham Media Group")
On October 4, 1999, the company acquired all of the outstanding
shares of Mr. Cheaps Travel and Gotham Media Group (companies under
common control and management) for aggregate consideration of
$5,615,850 consisting of $4,395,850 ($4,354,733 (U.S. $3,000,000)
cash and costs of acquisition of $41,117) and 2,000,000 common shares
at $0.61 per share. A finder's fee of 150,000 common shares at $0.61
per share was paid to an officer of the company. The finder's fee has
been accounted for as stock-based compensation and included in
general and administration expense. The company acquired $2,270,000
of assets and assumed $555,000 of liabilities. Goodwill arising from
this acquisition is being amortized over ten years.
Mr. Cheaps Travel is a travel agency specializing in discount and
last minute airfares. Gotham Media Group acquires the rights to
outdoor billboards, radio, television and print advertising which it
exchanges with its airline and hotel clients in return for travel
credits to be applied toward the purchase of travel products. Both of
the companies are based near Portland, Oregon.
b) International Tours Inc., IT Cruise Inc. and GalaxSea Cruises and
Tours, Inc.
On October 13, 1999, the company acquired the travel marketing
operations of International Tours, Inc., the cruise-only marketing
operations of GalaxSea Cruises and Tours, Inc. and all of the shares
of IT Cruise Inc. for aggregate consideration of $3,592,568
consisting of $2,992,568 (U.S. $2,000,000) in cash and
F-57
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
1,000,000 common shares at $0.60 per share. Assets with a fair value
of approximately $202,603 were acquired. Goodwill arising from this
acquisition is being amortized over ten years. All of the companies
are based in Dallas, Texas. International Tours, Inc. maintains a
network of affiliated travel agencies in the United States, and
GalaxSea Cruises and Tours, Inc. maintains a network of affiliated
cruise-only offices.
c) Express Vacations, LLC ("Express Vacations")
On November 1, 1999, the company acquired Express Vacations, a
vacation package wholesaler in Reno, Nevada, for aggregate
consideration of $5,443,284 consisting of $1,528,619 ($1,458,505
(U.S. $1,000,000) cash and costs of acquisition of $70,114),
$1,458,505 (U.S. $1,000,000) in short-term promissory notes which
were paid shortly after closing, 3,462,000 common shares at $0.68 per
share, and a finder's fee of 150,000 common shares at $0.68 per share
which was paid to a third party. The company acquired $2,163,000 of
assets and assumed $2,010,000 of liabilities. Goodwill arising from
this acquisition is being amortized over five years.
The company plans to center its operations at Express Vacations'
offices in Reno.
d) Legacy Storage Systems Corp. ("Legacy")
On December 1, 1999, the company acquired all of the outstanding
common shares of Legacy for aggregate consideration of $1,835,680
consisting of $140,000 in cash and 3,028,000 common shares at $0.56
per share. The company acquired $1,693,053 of assets and assumed
$1,251,626 of liabilities. Goodwill arising from this acquisition is
being amortized over five years. Legacy designs and sells data
storage systems, is controlled by an officer of the company, and is
based in Markham, Ontario.
e) Cheap Seats Inc. ("Cheap Seats")
On January 6, 2000, the company acquired all of the outstanding
shares of Cheap Seats, a Los Angeles based airfare consolidator. The
company acquired $497,000 of assets and $603,000 of liabilities.
Goodwill arising from this acquisition is being amortized over ten
years. The terms of the agreement include total consideration of
$15,383,050 consisting of $7,333,050 ($7,250,000 (U.S. $5,000,000)
cash and costs of acquisition of $83,050) and 5,000,000 common shares
at $1.61 per share. At the time of closing, the company paid
$7,333,050 (U.S. $5,000,000) in cash and the vendors advanced
$739,650 (U.S. $500,000) to Cheap Seats pending resolution of certain
working capital adjustments. Any adjustment arising from the
settlement of this advance at an amount different than the advance
will be accounted for as an adjustment to goodwill. As at June 30,
2000 this amount has been included in amounts due to related parties
as the vendors remain officers of Cheap Seats. Based on discussions
with the vendors, the company estimates that to date $3,700,000 (U.S.
$2,500,000) of the purchase consideration paid, is contingently
returnable in accordance with a formula contained in the purchase
agreement based on Cheap Seats' pre-tax net income for the twelve-
month period ended November 30, 1999. No amount in relation to this
has been recorded in these consolidated financial statements. The
purchase price may also be increased by up to $5,914,400 (U.S.
$4,000,000) based on the increase in certain gross revenues during
the period from October 1, 1999 to September 30, 2002, calculated in
accordance with the terms of the agreement.
F-58
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
f) Bell Travel Systems ("Bell Travel")
On April 3, 2000, the company acquired all of the outstanding shares
of Bell Travel Systems, a travel agent consortium based in Scotts
Valley, California. Under the terms of the agreement, the company
paid aggregate consideration of $5,438,320 consisting of $2,814,200
($2,761,200 (U.S. $1,900,000) in cash and costs of acquisition of
$53,000) and 690,558 common shares at $3.80 per share. The company
acquired $296,071 in assets and assumed no liabilities. The
difference between purchase price and fair value of assets acquired
is allocated to goodwill and is being amortized over ten years.
g) Cruise Shoppes America, Ltd. ("Cruise Shoppes")
On April 4, 2000, the company acquired all of the outstanding shares
of Cruise Shoppes for aggregate consideration of $13,144,600
consisting of $2,668,600 ($2,615,600 (U.S. $1,800,000) in cash and
costs of acquisition of $53,000) and 2,619,000 common shares at $4.00
per share with the number of shares subject to adjustment based on
the trading price of the common shares on July 5, 2000. Subsequent to
June 30, 2000, an additional 2,541,591 common shares were issued
pursuant to the adjustment clause contained in the purchase agreement
to maintain the value of total consideration at $13,091,600. The
company acquired $2,960,235 in assets and $637,377 in liabilities.
Goodwill arising from the acquisition is being amortized over ten
years.
h) Epoch Technology, Inc. ("Epoch")
On May 23, 2000, the company acquired Epoch, a tour wholesale
software development company based in Dallas, Texas. Under the terms
of the agreement, the company paid aggregate consideration of
$15,374,800 consisting of $3,046,100 ($2,999,100 (U.S. $2,000,000) in
cash and costs of acquisition of $47,000) and 3,280,000 common shares
at U.S. $2.50 (approximately Cdn. $3.76) per share. Per the terms of
the purchase agreement the share consideration is subject to
adjustment based on the price of the common shares of the company on
August 22, 2000 up to a maximum of 3,280,000 common shares. On
September 25, 2000 the company issued 3,280,000 additional shares.
The company acquired $2,279,083 in assets consisting primarily of
proprietary software rights (note 12) and $276,636 in liabilities.
Goodwill arising from this acquisition is being amortized over five
years. To complete the acquisition, the company borrowed $2,921,618
(U.S. $1,975,000) from Aviation Group under a 12% note due February
28, 2001, or earlier, in certain events, and granted a security
interest in Epoch stock to Aviation Group to secure the note. This
note payable has been classified as due to related parties. The
security interest is subordinate to the security interest of the
holders of the company's 12.5% senior redeemable debentures. Aviation
Group obtained the funds for this note from a $4,498,600 (U.S.
$3,000,000) investor loan that has been guaranteed by the company.
F-59
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Details of the fair value of net assets acquired and consideration given
for the acquisitions, in aggregate, during the period since September 30,
1999 are as follows (allocations of purchase price to specifically
identifiable net assets are not yet complete and therefore subject to
adjustment in the near term):
<TABLE>
<CAPTION>
$
<S> <C>
Net non-cash assets acquired - at fair market values
Assets acquired 12,361,046
Liabilities assumed (6,060,390)
Less: Cash of acquired operations (1,174,334)
------------
Net non-cash assets acquired 5,126,322
Excess of cost of net assets over assigned value
Goodwill 58,800,746
------------
63,927,068
============
Cash consideration (including costs of acquisition) 24,192,237
Promissory notes 1,458,505
Share capital issued 39,450,660
Less: Cash of acquired operations (1,174,334)
------------
63,927,068
============
</TABLE>
All acquisitions are accounted for using the purchase method and the
results of operations of each entity acquired are included from the date
of acquisition.
The unaudited pro forma consolidated revenues, loss and basic and diluted
loss per share for the nine-month period ended June 30, 2000 are
$17,673,541, ($24,819,825) and ($0.39), respectively, presented as if the
acquisition of Mr. Cheaps Travel and Gotham Media Group, International
Tours Inc., IT Cruise Inc. and GalaxSea Cruises and Tours, Inc., Express
Vacations, Legacy, Cheap Seats, Bell Travel, Cruise Shoppes and Epoch had
occurred on October 1, 1999. This summarized information does not purport
to be indicative of what would have occurred had the acquisitions actually
been made as of such dates or of results which may occur in the future.
The unaudited pro forma consolidated revenues, income and basic and
diluted earnings per share for the nine-month period ended June 30, 1999
are $28,652,269, $(5,551,693) and $(0.13), respectively, presented as if
the acquisition of Mr. Cheaps Travel and Gotham Media Group, International
Tours, Inc., IT Cruise Inc. and GalaxSea Cruises and Tours, Inc., Express
Vacations, Legacy, Cheap Seats, Bell Travel, Cruise Shoppes and Epoch had
occurred on October 1, 1998. This summarized information does not purport
to be indicative of what would have occurred had the acquisitions actually
been made as of such dates or of results which may occur in the future.
F-60
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
7 Cash deposits for acquisitions
During the period ended June 30, 2000 (unaudited), the company advanced a
total of $500,000 to Just Vacations, Inc. ("JVI"). These advances are
unsecured and bear interest at the rate of 10% per annum, and become due
and payable in the event the company does not complete this potential
acquisition (note 23(e)). The balance of cash deposits for acquisitions
relate to various other potential acquisitions being investigated by the
company.
8 Cash in trust
As at June 30, 2000 (unaudited), $31,073 was held by the company's lawyers
in trust in connection with payments required for acquisitions.
As at September 30, 1999, $7,200,000 (U.S. $4,800,000) was held by the
company's lawyers in trust for the company's acquisitions of Mr. Cheaps
Travel, Gotham Media Group, International Tours, Inc., IT Cruise Inc. and
GalaxSea Cruises and Tours, Inc.
9 Security deposits
As at June 30, 2000 (unaudited), letters of credit totalling $667,904
(U.S. $451,500) have been issued to various hotels. These letters of
credit are required as security under certain hotel agreements. During the
period ended June 30, 2000 (unaudited), $nil has been drawn against these
letters of credit. As at June 30, 2000 (unaudited), $656,809 (U.S.
$444,000) has been deposited as security for these letter of credit
agreements.
In addition, $172,993 (U.S. $116,942) represents the amount held as
security for an irrevocable letter of credit issued to the Airline
Reporting Corporation ("ARC") to comply with the applicable regulations
for travel agencies in the United States. The remaining balance of
$113,351 consists of customer deposits held in trust for remittance to
cruise lines.
10 Property, plant and equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------
(Unaudited)
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Automobiles 61,977 5,977 56,000
Office and computer equipment and furniture 3,635,663 229,759 3,405,904
Manufacturing equipment 65,966 7,696 58,270
Leasehold improvements 302,027 15,512 286,515
-----------------------------------------
4,065,633 258,944 3,806,689
-----------------------------------------
</TABLE>
F-61
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Office and computer equipment and furniture 82,771 4,133 78,638
====================================
<CAPTION>
December 31, 1998
------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Office and computer equipment and furniture 79,890 60,712 19,178
=============================================
</TABLE>
11 Programming library
On November 15, 1999, the company acquired 120 episodes of the television
program "The Travel Magazine", except for certain home video rights and
television distribution agency rights, for an aggregate consideration of
$4,997,795 paid by the issuance of 2,855,883 common shares at $1.75 per
share. All programming contained in this library consists of completed
episodes.
Pursuant to an agreement dated October 1, 1999, as amended on January 21,
2000, the company purchased 130 new episodes of "The Travel Magazine" to
be produced over the next 24 months. On closing, $4,735,033 was paid
towards these episodes by the issuance of 1,146,497 common shares at $4.13
per share, with a further U.S. $1,800,000 (approximately Cdn. $2,610,000)
to be paid in cash upon the delivery of 40 new episodes. Upon receipt of
these 40 new episodes, the company has the right to terminate the
arrangement and not pay U.S. $4,500,000 (approximately Cdn. $6,525,000)
cash in respect of the remaining 90 episodes.
No revenue has been earned to June 30, 2000 (unaudited) from this
programming library.
The amount of $4,407,223 has been included as a deduction from
shareholders' equity and $327,810 has been classified as programming
library in respect of nine new episodes received to June 30, 2000
(unaudited). The amount recorded as a deduction from shareholders' equity
will be reclassified as programming library based on the program costs per
episode upon receipt of each episode. The company paid U.S. $300,000
(approximately Cdn. $446,400) with respect to the nine new episodes
received as at June 30, 2000 (unaudited). In addition, the company
advanced U.S. 200,000 (approximately Cdn. $297,600) in respect of the
remaining new episodes which is included in prepaid expenses (unaudited).
F-62
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
12 Other intangibles
<TABLE>
<CAPTION>
June 30, 2000 September 30,
(unaudited) 1999
---------------------------------------------- -------------
Accumulated
Cost amortization Net Net
$ $ $ $
<S> <C> <C> <C> <C>
800-i-TRAVEL 1,357,893 66,973 1,290,920 -
Proprietary software rights 2,100,000 43,726 2,056,274 -
---------------------------------------------------------------
3,457,893 110,699 3,347,194 -
===============================================================
</TABLE>
On December 7, 1999, the company acquired the right to the 800-i-TRAVEL
numbers and a system which utilizes a telephone switching technology that
will route customers' calls to their closest member travel agency or to
the company's call center. The vendor, a U.S. partnership which includes
an officer of the company, was paid 350,000 common shares at $3.46 per
share and warrants to purchase 50,000 common shares at U.S. $1.00 per
share. Warrants are exercisable prior to December 7, 2002 (fair value of
$131,450), provided certain performance criteria are fulfilled. Until such
time that these performance criteria are met, no portion of the warrants
issued may be exercised. Performance criteria are fulfilled if certain
minimum numbers of customer calls to the two 1-800 numbers have been
achieved prior to May 2001 or the average trading price of travelbyus.com
ltd.'s common shares during November 2000, has been at least U.S. $4.00
(approximately Cdn. $5.80) per common share. In addition, the vendors will
receive a royalty of U.S. $0.10 per call for a period of 48 months. In the
event that certain performance criteria are not fulfilled, the vendors may
exercise an automatic right to re-acquire the right to the 800-i-TRAVEL
numbers and system and in the event travelbyus.com determines that it no
longer seeks to utilize these numbers and system, travelbyus.com has the
right to transfer the numbers and switching technology back to the
vendors. In either circumstance, no past amounts paid are refundable to
the company. As at June 30, 2000 (unaudited), the company was in the
process of linking the company's network of member agents to this system.
13 Debentures
a) Senior redeemable debentures and deferred financing costs
As at September 9, 1999, the company issued 12.5% senior redeemable
debentures for gross proceeds of $11,950,000. The debentures earn
interest at 12.5% per annum, payable semi-annually, and mature on
September 9, 2001. The company may repay the debentures at any time.
A senior fixed and floating charge covering all assets of the company
has been granted as security.
Attached to each $1,000 debenture were warrants to purchase 800
common shares at $0.68 per common share. The warrants expire at the
earlier of September 9, 2001 and ten days following notice by the
company of an amended expiry date. The company has the right to amend
the expiry at any time that the daily closing price of the company's
common shares has exceeded $1.36 for a period of ten trading days. If
the company exercises its rights to amend the expiry date, the
company must file a prospectus with the
F-63
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
appropriate securities regulatory authorities to qualify the common
shares issuable on exercise. As at June 30, 2000 (unaudited), the
company has the right to amend the expiry date of the warrants.
The proceeds received on the debentures have been allocated to the
debentures and the warrants based on the relative fair values of the
respective instruments. The debentures were initially recorded at
$6,085,946 and the warrants at $5,864,054. The discount on the
debenture resulted in an effective annual rate of approximately 40%
and is being accreted over the term of the debenture.
Costs related to the issuance of the debentures and warrants amounted
to $1,865,671, which has been allocated to deferred financing costs
and warrants in the amounts of $950,157 and $915,514, respectively,
based on the relative fair values of the two instruments. Included in
costs related to issuance is the amount of $808,112 related to
700,270 share purchase warrants issued to the agents based on an
estimated fair value of $1.154 per warrant. The warrants are to
purchase 700,270 common shares at $0.68 per share and expire on
September 9, 2001.
On March 9, 2000, the company repaid debentures with a face value of
$2,494,000 for aggregate consideration of $2,494,000. The settlement
resulted in an extraordinary loss of $1,068,068 based on a carrying
value for a proportionate share of the debt on the settlement day of
$1,585,355 and a proportionate share of deferred financing costs of
$159,423.
b) Convertible debenture
During June 2000, the company completed a private placement of
2,000,000 common shares at U.S. $2.50 (Cdn. $3.70) per share for
proceeds of U.S. $5,000,000 (Cdn. $7,396,500) from Travel24.com.
Travel24.com also invested U.S. $3,000,000 (Cdn. $4,437,900) in a
convertible, callable, redeemable, secured debenture due on June 16,
2002 with interest payments payable quarterly in arrears at LIBOR
plus 1% until such time that the debenture is paid in full. This
debenture is convertible at the option of the holder, at any time,
for such number of common shares of the company that is determined by
dividing the outstanding principal amount by U.S. $3.00
(approximately Cdn. $4.50).
14 Capital stock
a) On March 14, 1997, the company completed a private placement of
3,100,000 units at $1.63 per unit for proceeds of $4,683,663 (net of
costs of $369,337, excluding cost of compensation warrants). Each
unit consisted of one common share and one half of a common share and
one half of a common share purchase warrant to purchase 1,550,000
common shares at $2.05 per share until March 14, 1998. The agents to
this placement were issued 155,000 common share purchase warrants
exercisable at $2.05 per share until March 14, 1998. All purchase
warrants expired unexercised on March 14, 1998.
b) On May 14, 1998, the company completed a private placement of
4,000,000 common shares at $0.12 per share for proceeds of $464,634
(net of costs of $15,366).
c) During the period ended September 30, 1999, the company completed a
private placement of 20,000,000 common shares at $0.06 per share for
gross proceeds of $1,200,000 (net proceeds $1,175,000).
F-64
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
d) The company has issued warrants to purchase a total of 10,260,270
common shares at $0.68 per share for a period of two years in
connection with the debenture financing (note 13(a)). As of June 30,
2000 (unaudited), 4,100,270 of the warrants were outstanding.
e) On December 21, 1999 (unaudited), the company completed a private
placement of 8,000,000 special warrants at a price of $2.50 per
special warrant for proceeds of $18,463,392 (net of costs of
$1,536,608 excluding cost of compensation warrants), each special
warrant being exchangeable, without additional consideration, into
one common share and one half of a share purchase warrant, each whole
warrant entitling the holder to purchase an additional common share
for a price of $3.50 per share for a period of 15 months. The company
has filed a preliminary prospectus to qualify the common shares and
share purchase warrants issuable upon exercise of the special
warrants offering. Since receipts for a final prospectus qualifying
the issuance of the common shares and share purchase warrants have
not been issued by applicable regulatory authorities within 180 days
of the closing of the special warrant offering, holders of the
outstanding special warrants will be entitled to receive 1.1 common
shares (in lieu of one common share) upon the exercise of each
special warrant. The agents were paid a commission of 7% of the gross
proceeds of the special warrant offering together with compensation
warrants entitling the agents to purchase that number of common
shares equal to 10% of the number of special warrants placed at a
price of $2.50 per share for a period of 15 months from the closing
of the offering.
During April and May of 2000, holders of special warrants exercised
300,000 special warrants into 300,000 common shares and 150,000
common share purchase warrants.
f) In addition, the company completed a private placement of 4,000,000
units at a price of $2.50 per unit for proceeds of $9,231,696 (net of
costs of $768,304, excluding cost of compensation warrants), each
unit consisting of one common share and one half of a share purchase
warrant, each whole warrant entitling the holder to purchase an
additional common share at a price of $3.50 for a period of 15
months. The agent was paid a commission of 7% of gross proceeds
together with warrants to purchase that number of common shares equal
to 7% of the number of units placed at a price of $2.50 per share for
a period of 15 months (280,000 warrants). As of June 30, 2000
(unaudited), 1,818,250 of the warrants at $3.50 per share and 65,000
of the warrants at $2.50 per share were outstanding.
g) During March 2000, the company received advances in the amount of
$2,920,000 (U.S. $2,000,000) from certain investors related to
Aviation Group and Global Leisure (note 23(a)) on the understanding
that these advances would be applied towards a private placement
subscription for which the terms had not been agreed as at June 30,
2000. Subsequent to June 30, 2000 (unaudited), the company agreed to
issue 930,000 common shares at U.S. $2.15 (approximately Cdn. $3.15)
per share to these investors further to the understanding described
above.
h) The ending accumulated other comprehensive income balance of
$(122,801) consists of an accumulated unrealized gain on marketable
securities of $(12,760), and an accumulated unrealized foreign
exchange translation adjustment of $(110,041).
F-65
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
15 Income taxes
The company is subject to U.S. federal and state income taxes in the U.S.
and Canadian federal and provincial taxes in Canada.
The company has non-capital losses for Canadian income tax purposes of
approximately $11,077,000 which are available for carryforward to reduce
future years' taxable income. These income tax losses expire as follows:
$
Year ending September 30, 2001 181,000
2002 -
2003 926,000
2004 1,278,000
2005 1,775,000
2006 1,168,000
Subsequent thereto (unaudited) 5,749,000
-------------
11,077,000
=============
In addition, the company has net capital losses of approximately
$46,700,000 (unaudited) available for application against net taxable
capital gains of future years.
As at June 30, 2000 (unaudited), the company has non-capital losses for
U.S. income tax purposes of approximately U.S. $3,486,000 (Cdn.
$5,230,000) which are available for carryforward to reduce future years'
taxable income of the U.S. companies. The losses expire in 2020.
Net deferred tax assets are as follows:
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards 7,338,200 2,397,200 1,531,200
Net capital loss carryforwards 21,015,000 21,015,000 21,015,000
Share issue costs 375,800 - 122,000
-------------------------------------------------------
28,729,000 23,412,200 22,668,200
Deferred tax asset valuation allowance (28,729,000) (23,412,200) (22,668,200)
-------------------------------------------------------
Net deferred tax assets - - -
-------------------------------------------------------
</TABLE>
Management believes there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance
has been provided.
F-66
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The income tax recovery (provision) for the period ended June 30, 2000
(unaudited) differs from the amount obtained by applying the applicable
statutory income tax rates to loss before income taxes as follows:
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Combined statutory income tax rate 45% 45% 45%
-------------------------------------------------------
Income tax recovery based on combined statutory rate 9,772,000 744,000 577,000
Effect of combined U.S. and Canadian income tax
rates for the period ended June 30, 2000 (1,182,200) - -
Temporary differences relating to non-deductible
goodwill, intangibles, deferred financing
costs and property, plant and equipment (1,804,000) - -
Non-deductible expenses (1,046,000) - (2,000)
Change in valuation allowance (5,316,800) (744,000) (575,000)
-------------------------------------------------------
423,000 - -
=======================================================
Losses acquired - - -
=======================================================
</TABLE>
16 Commitments and contingencies
a) The company has operating leases for the rental of office premises and
equipment. Payments required under these leases are as follows:
<TABLE>
<CAPTION>
September 30,
June 30, 2000 1999
$ $
(Unaudited)
<S> <C> <C>
2000 367,027 171,449
2001 1,457,780 124,681
2002 1,262,956 118,909
2003 1,039,467 9,522
2004 948,501 -
-----------------------------------
5,075,731 424,561
===================================
</TABLE>
F-67
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The company in turn has expected revenues in accordance with contract
terms on certain sub-lease agreements related to office premises as
follows:
June 30, September 30,
2000 1999
$ $
(Unaudited)
2000 18,129 58,569
2001 72,516 77,628
2002 6,043 77,628
2003 - 6,469
-------------------------------
96,688 220,294
===============================
b) During the period ended June 30, 2000, the company agreed to
guarantee a US $3,000,000 promissory note issued by Aviation Group
Inc. The note bears interest at an annual rate of 12% and is payable
in full on February 28, 2001.
17 Related party transactions
a) During the period ended June 30, 2000 (unaudited), the company paid
$366,941 (September 30, 1999 - $120,050) in consulting fees to
companies controlled by officers and directors.
b) During the period ended June 30, 2000 (unaudited), the company paid
or accrued legal fees totalling $608,542 (September 30, 1999 -
$256,166) to a firm in which a director is a partner.
c) As at June 30, 2000 (unaudited), $374,855 (September 30, 1999 -
$218,684; December 31, 1998 - $2,968) was due to a law firm in which
a director is a partner, and $739,650 is potentially repayable to
officers of a subsidiary company (note 6(e)).
18 Fair value of financial instruments
The fair value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their carrying value due to
the relatively short term to maturity of these instruments. The fair value
of the marketable securities is based on quoted market values. The fair
value of the redeemable debentures has been determined by discounting the
face value of the debenture and related semi-annual interest payments
using an implicit rate equivalent to debt instruments without
representation of detachable warrants. The fair value of the convertible
debentures approximates the face value.
19 Concentration of credit risk
Financial instruments which potentially subject the company to
concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The company limits its exposure
to credit loss by placing its cash and cash equivalents on deposit with
high credit quality financial institutions. Receivables arising from sales
to customers are generally not significant individually and are not
collateralized; as a result, management continually monitors the financial
condition of its customers to reduce the risk of loss.
F-68
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
20 Segmented information
The company operates within three operating segments: Travel, Technology
and Other. The Travel segment provides a broad range of travel products,
targeted primarily at the leisure customer, including airfare, hotel
rooms, cruise packages, and ground packages. Products and services are
offered through the traditional travel agency base, 1-800 call centers and
the internet. Included in the Travel segment are the operations of the
following subsidiaries: Mr. Cheaps Travel, International Tours Inc.,
GalaxSea Cruises and Tours, Inc., Express Vacations, Cheap Seats, Bell
Travel and Cruise Shoppes.
The Technology segment designs and manufactures electronic data storage
systems and develops internet accessible travel reservations systems.
Included in this segment are the operations of Legacy and Epoch.
The Other segment consists of the advertising and associate marketing
operations of International Tours Inc., GalaxSea Cruises and Tours, Inc.
and Cruise Shoppes.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
For the period and years prior to June 30, 1999, the company had a single
operating segment which encompassed its mining operations which were
discontinued (note 21). As a result of the significant change in the
direction of the company, segmented information for the quarter ended June
30, 1999 (unaudited) and the years ended December 31, 1998 and 1997 would
reflect only corporate expenses.
F-69
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine months period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Consolidated Travel Technology Other
------------------------- ----------------------- ---------------------------- -----------------------
Continuing Continuing Continuing Continuing
operations operations operations operation for
Nine- for the period Nine- for the period Nine- for the period Nine- the period
month from month from month from month from
period January 1, period January 1, period January 1, period January 1,
ended 1999 to ended 1999 to ended 1999 to ended 1999 to
June 30, September 30, June 30, September 30, June 30, September 30, June 30, September 30,
2000 1999 2000 1999 2000 1999 2000 1999
$ $ $ $
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
external
customers (1) 12,016,173 - 9,844,756 - 1,223,959 - 947,458 -
==================================================================================================================
Operating
(loss) income
before
amortization
of capital
assets,
goodwill
and other
intangibles (13,866,312) (1,415,714)(13,996,335) (1,415,714) (245,770) - 375,813 -
Amortization
of capital
assets,
goodwill and
other
intangibles (1) 4,009,296 79,009 3,018,541 79,009 508,279 - 482,476 -
------------------------------------------------------------------------------------------------------------------
Operating (loss)
income (17,875,608) (1,494,723)(17,014,876) (1,494,723) (754,049) - (106,663) -
Interest
expense 36,585 - 2,491 - 34,094 - - -
---------------------------------------------------------------------------------------
(17,017,387) (1,494,723) (788,143) - (106,663) -
=======================================================================================
Corporate
interest
expense 3,043,185 284,464
Corporate
interest
income (308,358) (6,972)
Extraordinary
loss from
repayment of
debentures 1,068,068 -
-------------------------
Loss for the
period (21,715,008) (1,772,215)
=========================
Capital
expenditures 2,621,577 - 2,621,577 - - - - -
Additions to
goodwill 58,800,746 - 40,644,175 - 14,766,606 - 3,389,965 -
Total assets (2) 96,148,123 12,465,014 73,810,836 12,465,014 17,820,771 - 4,516,516 -
</TABLE>
(1) Revenue and goodwill are primarily derived from, and capital assets
are substantially employed in the U.S.
(2) For the year ended September 30, 1999, the capital assets were
substantially employed in Canada.
F-70
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
21 Discontinued operations
As described in note 1, the company discontinued its mining activities and
accordingly the results of operations from these operating activities have
been disclosed separately from those of continuing operations for the
periods presented. During the period ended September 30, 1999, the company
discontinued all mining activities and abandoned its South American mineral
property interests. No gain or loss arose on the disposal of assets related
to these discontinued operations. The company had no revenues and no other
income or loss from these discontinued operations other than those already
disclosed in the consolidated statement of operations and deficit for the
periods presented.
The assets and liabilities of the company relate to its continuing
operations.
22 Stock options and warrants
The company has a Stock Option Plan that provides for the granting of
options to purchase common shares to directors, officers, employees and
consultants of the company. The number of common shares reserved for
issuance under the Stock Option Plan shall not exceed 6,500,000 common
shares or a greater number as approved by the shareholders of the company.
Terms of the options shall not be for a period less than one year or longer
than ten years. The option price shall be fixed by the directors of the
company subject to price restrictions imposed by the regulators. All
options were granted at or above market value at the date of grant.
Accordingly, no current or deferred compensation expense has been recorded
in the periods presented.
F-71
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Stock option transactions
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
$
<S> <C> <C>
Balance outstanding - December 31, 1997 1,837,000 2.22
Options granted during the year 1,075,000 0.54
Options expired during the year (1,737,000) 2.21
Options exercisable at end of year 350,000 0.64
Balance outstanding - December 31, 1998 1,175,000 0.70
Options granted during the year 2,725,000 0.65
Options exercised during the year (550,000) 0.34
Options expired during the year (675,000) 1.12
Options exercisable at end of year 350,000 0.64
Balance outstanding - September 30, 1999 2,675,000 0.61
Options granted during the period 3,820,000 3.40
Options exercised during the period (472,200) 0.50
Options expired during the period (87,500) 0.60
Options exercisable at end of period 2,538,800 0.97
Balance outstanding - June 30, 2000 (unaudited) 5,935,300 2.41
</TABLE>
F-72
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The following table summarizes information about options outstanding at
June 30, 2000 (unaudited).
<TABLE>
<CAPTION>
Range of Number
exercise outstanding Weighted average
prices at June 30, remaining
$ 2000 contractual life
<S> <C> <C>
0.12 /1/ 300,000 33 months
0.46 /1/ 451,300 46 months
0.46 /1/ 175,000 3 months
0.55 /2/ 89,000 49 months
0.79 /1/ 600,000 48 months
1.00 /1/ 500,000 49 months
1.65 /1/ 675,000 53 months
2.35 /2/ 165,000 59 months
2.77 /2/ 91,500 59 months
2.80 /2/ 350,000 60 months
3.20 /3/ 200,000 19 months
3.25 /2/ 90,000 59 months
3.30 /2/ 259,000 54 months
3.75 /2/ 50,000 7 months
3.75 /2/ 115,500 58 months
3.80 /2/ 18,000 56 months
3.90 /1/ 100,000 55 months
4.04 /2/ 6,000 55 months
4.08 /2/ 4,500 56 months
4.28 /2/ 1,467,500 55 months
4.29 /2/ 19,500 55 months
4.39 /2/ 7,500 58 months
4.47 /2/ 21,000 57 months
4.50 /2/ 105,000 57 months
4.90 /2/ 75,000 55 months
</TABLE>
/1/ Options vest per one-year period, with 1/2 vesting in six months and
1/2 vesting in the remaining six months.
/2/ Options vest over a three-year period, with 1/3 vesting in each year.
/3/ Options vest at specific dates as follows:
50,000 on May 8, 2000
50,000 on August 6, 2000
50,000 on November 5, 2000
50,000 on February 3, 2001
F-73
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Warrant transactions
The following table summarizes information about the company's warrant
activity:
<TABLE>
<CAPTION>
Number of
underlying Exercise price
shares $
<S> <C> <C>
Warrants outstanding - December 31, 1997 1,705,000 2.05
Surrendered or expired (1,705,000) 2.05
---------------------------------
Warrants outstanding - December 31, 1998 - -
Issued 10,260,270 0.68
---------------------------------
Warrants outstanding - September 30, 1999 10,260,270 0.68
Issued 11,280,000 1.48 - 3.50
Exercised (6,856,750) 1.48 - 3.50
---------------------------------
Warrants outstanding - June 30, 2000 (unaudited) 14,683,520 0.68 - 3.50
---------------------------------
</TABLE>
Warrants outstanding at June 30, 2000 (unaudited) are due to expire from
March 21, 2001 to December 7, 2002.
Pro forma compensation costs
Had the company determined compensation costs based on fair value at the date of
grant for its awards under the method for determining fair value prescribed by
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" the company's pro forma loss and loss per share would
be as follows:
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
-------------------------------- --------------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Loss for the period (21,715,088) (251,430) (1,772,215) (1,282,999) (10,780,020)
Additional
compensation
expense (2,729,885) - (125,113) (206,450) (263,150)
------------------------------------------------------------------------------------
Pro forma net loss (24,444,973) (251,430) (1,897,328) (1,489,449) (11,043,170)
------------------------------------------------------------------------------------
Pro forma basic loss
per common share (0.37) (0.01) (0.05) (0.08) (0.71)
------------------------------------------------------------------------------------
Pro forma diluted loss
per common share (0.34) (0.01) (0.05) (0.08) (0.71)
------------------------------------------------------------------------------------
</TABLE>
F-74
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The pro forma compensation expense reflected above has been estimated
using the Black Scholes option pricing model. Assumptions used in the
pricing model included:
a) risk-free interest rate of between 5.40% - 5.84%;
b) expected volatility of 90%;
c) expected dividend yield of $nil; and
d) an estimated average life of one to three years.
23 Subsequent events
a) The company entered into a letter of intent on February 28, 2000 (as
amended March 16, 2000, April 18, 2000, April 25, 2000 and May 3, 2000)
to merge with Aviation Group, an aviation services company based in
Dallas, Texas. Aviation Group provides services and products to airline
companies and other aviation firms primarily in the United States. The
completion of the arrangement is subject to receipt of requisite
regulatory approval, including without limitation the approval of an
Ontario, Canada court, the Toronto Stock Exchange and the Canadian
Venture Exchange. When the arrangement is completed, the company will
become an indirect subsidiary of Aviation Group. The arrangement will
result in a change in control of Aviation Group and former
travelbyus.com ltd. shareholders will own directly or indirectly more
than 90% of Aviation Group's outstanding common stock. The proposed
terms of the business combination contemplate a three-stage structure
which includes a bridge financing, a business combination of Aviation
Group and Global Leisure and finally the proposed business combination
of Aviation Group and the company. Through Aviation Group, the company
will acquire 100% of Global Leisure, a provider of discount air and
land vacation packages. Aviation Group has issued U.S. $16,500,000
(approximately Cdn. $23,510,400) of 9% convertible preferred shares and
4,250,000 warrants to Global Leisure debt and equity-holders to acquire
Global Leisure. This arrangement includes a termination clause whereby
if the board of directors of either the company or Aviation Group
decides not to complete the proposed business combination, then that
party must pay a termination fee of U.S. $1,000,000 (approximately Cdn.
$1,451,300) to the other party. In connection with the business
combination of Aviation Group and Global Leisure, a financing
arrangement was completed whereby U.S. $5,000,000 was invested in
Aviation Group by the company through the purchase of 500 shares of
Series B preferred stock from Aviation Group at U.S. $10,000 per share
(paid during March 2000 (note (5)); $2,000,000 invested in Aviation
Group by private investors in the purchase of 750,000 shares of
Aviation Group common stock at $2.67 per share; and approximately
$16,500,000 invested in Aviation Group by private investors in the
purchase of approximately 1,650 units of Aviation Group Series B
preferred stock and Series C warrants, at a price of $10,000 per unit,
each unit consisting of one share and 750 warrants. Aviation Group used
these funds to acquire control of Global Leisure and to service
indebtedness of Global Leisure.
F-75
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
b) On July 20, 2000, the company acquired all of the issued and
outstanding shares of Muffin Communications, Inc. for aggregate
consideration of U.S. $7,000,000 (approximately Cdn. $10,355,000)
consisting of U.S. $300,000 (approximately Cdn. $444,000) cash and
1,000,000 common shares at the guaranteed price of U.S. $6.70
(approximately Cdn. $9.91) per common share. Per the terms of the
agreement, the share consideration is subject to adjustment based on
the price of the common shares of the company on December 15, 2000. If
the market value of the stock at December 15, 2000 falls below the
guaranteed price of U.S. $6.70, additional shares will be issued or
cash will be paid to maintain the value of share consideration at U.S.
$6,700,000 (approximately Cdn. $9,911,310). The combination of shares
and/or cash in respect of this adjustment may be determined by the
company.
c) On September 14, 2000, the company acquired all of the issued and
outstanding shares of ProSoft Corporation ("ProSoft") for consideration
of U.S. $3,150,000 (approximately Cdn. $4,660,000) consisting of
1,260,000 common shares at a guaranteed price of U.S. $2.50
(approximately Cdn. $3.70) per share. An additional U.S. $1,050,000
(approximately Cdn. $1,553,000) consisting of 420,000 common shares at
a guaranteed price of U.S. $2.50 (approximately Cdn. $3.70) per share
are contingently issuable subject to the completion of the vendors'
two-year employment contracts. If the employment contracts are
terminated under the terms of the employment agreements or a
resignation is tendered before the two year term, the applicable
affected vendor will not receive his share of the pro rata contingent
common shares. The initial shares to be paid on closing and the 420,000
contingently issuable shares are adjustable based on the price of the
company's shares on the earlier of December 15, 2000 or 90 days after
the SEC approval of the Aviation Group Form S-4 registration statement.
Also, in connection with this transaction, the company issued 450,000
options to purchase common shares at a price of $1.70 per share for a
period of three years and which vest one-third annually. ProSoft is a
custom software programming company located in San Diego, California.
ProSoft also holds 12% of the outstanding shares of SiteRabbit.com
(note 23(d)).
d) On September 14, 2000, the company acquired the remaining issued and
outstanding shares of SiteRabbit.com, Inc. ("SiteRabbit.com") for
consideration of U.S. $8,894,000 (approximately Cdn. $13,221,000)
consisting of 3,557,712 common shares at a guaranteed price of U.S.
$2.50 (approximately Cdn. $3.70) per share. The number of shares is
adjustable based on the price of the company's shares on the earlier of
December 15, 2000 or 90 days after the SEC approval of the Aviation
Group Form S-4 registration statement. Also, in connection with this
acquisition, the company issued 669,000 options to purchase common
shares at a price of $1.70 per share for a period of three years. Of
these options, 50% vest immediately. Subsequent to June 30, 2000, the
company advanced SiteRabbit.com U.S. $100,000 (approximate Cdn.
$148,000) to be used for software development and working capital.
SiteRabbit.com predominantly develops and markets Internet based
application service products and is in the development stage.
e) Subsequent to June 30, 2000, the company entered into discussions with
JVI in connection with a proposed management arrangement whereby the
company would manage the business of JVI and provide further working
capital funding to JVI in exchange for the right to receive certain of
the net income, if any, generated by JVI. Currently, JVI is not
believed to be generating positive net income. Accordingly, there is
significant uncertainty as to the collectibility of the cash advances
made to JVI to date, and it is reasonably possible that the company may
not be able to recover these amounts in the near term (note 7). This
management agreement has not as yet been finalized or effected.
f) Subsequent to June 30, 2000, the company entered into an agreement with
HealthyConnect.com Inc. ("HC.com"), a private health care related
internet technology company. Pursuant to the terms of the agreement,
HC.com will issue 1,200,000 common shares to the company upon
confirmation of necessary technical specifications to establish links
between their respective web-sites. The company will issue 1,000,000
common shares in exchange for a further 1,400,000 common shares of
HC.com upon certain conditions. Under the terms of the agreement,
HC.com has an option whereby they may force the company to acquire up
to 1,200,000 common shares of HC.com at U.S. $2.50 (approximately Cdn.
$3.70) per share for total cash consideration of U.S. $3,000,000
(approximately Cdn. $4,400,000), subject to satisfactory due diligence
by and board approval of the company. The completion of these
transactions is subject to the necessary regulatory approvals.
g) The company has entered into a financing and loan commitment with
Doerge Capital Management whereby Doerge Capital Management directly
and through its affiliates ("Doerge") will purchase, at face value,
from the company up to US $1.5 million liquidation value of Series B
preferred stock of Aviation Group, Inc. held by the company and provide
to the company a line of credit for up to US $10 million. The line of
credit bears interest at 12% per annum, is collateralized by a security
interest in substantially all the company's assets, subject to the
security interests relating to the existing debentures, and expires on
October 15, 2001. Doerge may elect to convert any amounts outstanding
on the line of credit, plus accrued and unpaid interest, to common
shares of the company at a conversion price of US $2.00 per share. For
each US $1 million drawn under the financing and loan commitment, the
company will grant to Doerge warrants to acquire 100,000 common shares
exercisable at US $2.00 per share and expiring three years following
their grant. The financing agreement requires the company to use its
best efforts to complete the merger with Aviation Group and restricts
the company from paying dividends or entering into certain other
transactions without the consent of the lender.
h) Subsequent to June 30, 2000, 3,467,500 of the warrants issued in
connection with the debenture financing (note 13a)) were exercised for
gross proceeds of $2,357,900 to the company. The company also issued
820,000 options, in addition to those issued in connection with
acquisitions completed after June 30, 2000 outlined above, to purchase
common shares at prices ranging from $1.50 to $2.05 per share for
periods ranging from three to five years. The total number of options
granted by the company now exceeds the maximum number of options
issuable under the company's stock option plan. Accordingly, the
company is required to obtain shareholder and regulatory approval for
an amendment to the plan.
i) Subsequent to June 30, 2000, Aviation Group, Global Leisure and
travelbyus.com entered into a management agreement under which
travelbyus.com assumed responsibility for management of Global
Leisure's business. travelbyus.com provides management and support
services, including office space, utilities, office equipment, staff
support, bookkeeping, accounting, billing, collection, contract
administration and other overhead services. To the extent funds are
available, Global Leisure is required to pay to travelbyus.com a
servicing fee of $55 per paid passenger and a monthly retainer of
$5,000 and to reimburse travelbyus.com for direct advertising and
marketing expenses and long distance, postage and delivery charges
arising from Global Leisure's business. travelbyus.com also assumed
responsibility for Global's working capital deficit upon commencement
of the agreement. This management agreement expires September 1, 2001.
F-76
<PAGE>
Report of PricewaterhouseCoopers LLP Independent Auditors
To the Directors of
Cruise Shoppes America, Ltd.
We have audited the balance sheets of Cruise Shoppes America, Ltd. as at June
30, 1999 and 1998 and the statements of earnings and retained earnings, changes
in shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at June 30, 1999 and 1998 and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
April 12, 2000
F-77
<PAGE>
Cruise Shoppes America, Ltd.
Balance Sheets
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
March 31, June 30, June 30,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 62,676 128,833 127,082
Marketable securities 1,075,127 1,092,096 542,812
Accounts receivable (net of allowance of $nil) 697,826 372,905 511,158
Income taxes receivable - 51,635 34,591
Prepaids and other assets 69,547 11,321 12,342
---------------------------------------------------
Total current assets 1,905,176 1,656,790 1,227,985
Deposit (note 3) 22,727 21,945 20,950
Capital assets (note 5) 85,862 94,480 78,274
---------------------------------------------------
2,013,765 1,773,215 1,327,209
===================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities 20,147 242,306 211,161
Income taxes payable 214,535 - -
Due to related parties (note 7) - 446,952 173,660
Notes payable (note 8) - 18,347 21,347
Deferred income taxes (note 9) 198,908 50,751 116,301
---------------------------------------------------
Total current liabilities 433,590 758,356 522,469
---------------------------------------------------
Shareholders' Equity
Capital stock
Authorized
1,000 common shares without par value
Issued
1,000 shares (1999 - 1,000; 1998 - 1,000) 105,800 105,800 105,800
Paid-in capital 81,786 - -
Accumulated other comprehensive income 69,252 66,462 5,276
Retained earnings 1,323,337 842,597 693,664
---------------------------------------------------
Total shareholders' equity 1,580,175 1,014,859 804,740
---------------------------------------------------
2,013,765 1,773,215 1,327,209
===================================================
Commitments (note 6)
Subsequent events (note 10)
</TABLE>
Approved by the Board of Directors
/s/ Gary Brown Director /s/ Michael J. Wild Director
-------------------------- ------------------------
The accompanying notes are an integral part of the financial statements.
F-78
<PAGE>
Cruise Shoppes America, Ltd.
Statements of Earnings and Retained Earnings
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Nine-month periods ended
March 31, Years ended June 30,
--------------------------- ------------------------------
2000 1999 1999 1998
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Commissions 1,707,853 1,292,160 2,387,490 1,975,581
Advertising revenues 242,363 186,638 241,888 160,439
------------------------------------------------------------------
1,950,216 1,478,798 2,629,378 2,136,020
------------------------------------------------------------------
Expenses
Cost of services revenues 222,974 171,707 222,537 148,555
Selling, general and administrative 365,482 372,711 630,213 581,996
Salaries and commissions 616,853 473,974 1,632,311 1,194,985
------------------------------------------------------------------
1,205,309 1,018,392 2,485,061 1,925,536
------------------------------------------------------------------
Earnings from operations 744,907 460,406 144,317 210,484
------------------------------------------------------------------
Other income (expenses)
Interest income 782 16,804 995 14,061
Dividend income 20,560 - 20,158 13,235
Capital gains 8,433 - 22,895 9,140
Interest expense (2,358) (7,089) (9,305) (2,032)
------------------------------------------------------------------
27,417 9,715 34,743 34,404
------------------------------------------------------------------
Earnings before income taxes 772,324 470,121 179,060 244,888
------------------------------------------------------------------
Provision for (recovery of) income taxes
Current 143,427 411,096 130,077 (18,816)
Deferred 148,157 (242,628) (99,950) 112,903
------------------------------------------------------------------
291,584 168,468 30,127 94,087
------------------------------------------------------------------
Net earnings for the period 480,740 301,653 148,933 150,801
Retained earnings - Beginning of period 842,597 693,664 693,664 542,863
------------------------------------------------------------------
Retained earnings - End of period 1,323,337 995,317 842,597 693,664
==================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-79
<PAGE>
Cruise Shoppes America, Ltd.
Statements of Changes in Shareholders' Equity
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Accumulated
other
Common stock Additional comprehensive Total
-----------------------
Number of paid-in Retained income shareholders'
shares Amount capital earnings (loss) equity
$ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 1,000 105,800 - 542,863 (38) 648,625
Comprehensive income
Earnings for the year - - - 150,801 -
Other comprehensive income
Unrealized gain on marketable securities
(net of tax of $3,398) - - - - 5,314
Total comprehensive income 156,115
--------------------------------------------------------------------------------
Balance - June 30, 1998 1,000 105,800 - 693,664 5,276 804,740
Comprehensive income
Earnings for the year - - - 148,933 -
Other comprehensive income
Unrealized gain on marketable securities
(net of tax of $34,400) - - - - 61,186
Total comprehensive income 210,119
--------------------------------------------------------------------------------
Balance - June 30, 1999 1,000 105,800 - 842,597 66,462 1,014,859
Forgiveness of shareholder loan payable - - 81,786 - - 81,786
Comprehensive income
Earnings for the period - - - 480,740 -
Other comprehensive income
Unrealized gain on marketable securities
(net of tax of $1,783) - - - - 2,790
Total comprehensive income 483,530
--------------------------------------------------------------------------------
Balance - March 31, 2000 (Unaudited) 1,000 105,800 81,786 1,323,337 69,252 1,580,175
================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
Cruise Shoppes America, Ltd.
Statements of Cash Flows
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Nine-month periods ended
March 31, Years ended June 30,
--------------------------------- ----------------------------
2000 1999 1999 1998
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings for the period 480,740 301,653 148,933 150,801
Items not affecting cash
Amortization 18,795 17,849 25,132 21,493
Deferred income taxes (note 9) 148,157 (242,628) (99,950) 112,903
Gain on sale of marketable securities (8,433) - - -
Accounts receivable (324,921) 434,012 138,253 (231,196)
Prepaids and other assets (58,226) (11,613) 1,021 6,511
Accounts payable and accrued liabilities 33,760 489,674 14,101 84,563
Due to related parties (note 7) (365,166) (81,197) 273,292 364,079
--------------------------------------------------------------------
(75,294) 907,750 500,782 509,154
--------------------------------------------------------------------
Cash flows from investing activities
Investment in marketable securities - (785,322) (453,698) (381,787)
Proceeds from sale of marketable securities 20,097 - - -
Purchase of capital assets (10,178) (31,343) (41,338) (25,977)
(Increase) decrease in deposit (782) 950 (995) (20,950)
--------------------------------------------------------------------
9,137 (815,715) (496,031) (428,714)
--------------------------------------------------------------------
Cash flows from financing activities
Repayment of notes payable - (3,000) (3,000) (9,131)
--------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (66,157) 89,035 1,751 71,309
Cash and cash equivalents -
Beginning of period 128,833 127,082 127,082 55,773
---------------------------------------------------------------------
Cash and cash equivalents -
End of period 62,676 216,117 128,833 127,082
====================================================================
Interest paid (2,357) (7,089) 9,305 2,032
====================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-81
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 Nature of operations
Cruise Shoppes America, Ltd. ("the company") is engaged in the marketing
of cruise packages to its network of affiliated retail travel agencies
based throughout North America and is located in Metairie, Louisiana.
Revenues are earned from customers located in the United States. Capital
assets of the company are located in the United States.
2 Summary of significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Revenue recognition
The company's revenue consists primarily of commissions from the sale of
cruise ship vacation packages. The company earns commission revenue from
the sale of these cruise packages which are recognized on the scheduled
departure date of the cruise, provided that collection is reasonably
assured. The company also earns revenue from volume bonuses and override
commission which are recognized as specified in accordance with
contractual arrangements with travel product suppliers.
Advertising revenues are also derived from travel product suppliers'
advertising included in printed marketing and promotional materials
prepared by the company and delivered to travel agents and customers.
Advertising revenues are recognized at the time the marketing and
promotional materials are distributed to the travel agents and customers,
and when collectibility is reasonably assured. Costs of sales comprise the
direct costs of developing and producing the marketing and promotional
materials.
Marketable securities
Marketable securities consisting of mutual fund investments are considered
available-for-sale and are stated at market value. Unrealized holding
gains and losses are excluded from earnings and reported in a separate
component of shareholders' equity.
Capital assets
Capital assets are stated at cost. Amortization is recorded on a straight-
line basis to amortize the cost of the capital assets over their estimated
useful lives. Amortization rates are as follows:
Furniture and fixtures 7 years
Computer equipment and software 3 - 5 years
Leasehold improvements remaining lease term
F-82
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Income taxes
The company follows the asset and liability method for accounting for
income taxes. Under this method, deferred income tax assets and
liabilities are recognized for the estimated tax consequences attributable
to differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance is provided for deferred income tax assets if it is
more likely than not that the company will not realize the future benefit
or the future deductibility is uncertain.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses for the
period reported. Management believes its estimates to be appropriate;
however, actual results could differ from the amounts estimated.
Cash and cash equivalents
Cash and cash equivalents consist of cash balances with banks and
investments in money market instruments with original maturities of less
than 90 days.
Financial instruments
The carrying values reported on the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, amounts due to related parties, and notes payable approximate
their fair values due to the short-term nature of those instruments. The
carrying values of marketable securities approximate their fair values as
they are stated at market value.
3 Deposit
The company is required to maintain a certificate of deposit as security
for a letter of credit provided to the Airline Reporting Corporation.
These funds earn interest at 4.75% per annum.
F-83
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
4 Balance sheet components
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Accounts receivable
Due from affiliates - - 150,000
Employee advances 250 - -
Accounts receivable - override commissions 697,576 372,905 223,289
-----------------------------------------------
697,826 372,905 373,289
-----------------------------------------------
Accounts payable and accrued liabilities
Refunds payable to agents (5,088) (127,060) (13,593)
Employee related liabilities (15,059) (115,246) (197,568)
-----------------------------------------------
(20,147) (242,306) (211,161)
===============================================
</TABLE>
5 Capital assets
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------
(Unaudited)
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Furniture and fixtures 121,751 61,055 60,696
Computer equipment and software 75,388 52,112 23,276
Leasehold improvements 2,624 734 1,890
-----------------------------------------------
199,763 113,901 85,862
-----------------------------------------------
<CAPTION>
June 30, 1999
-----------------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Furniture and fixtures 116,244 49,654 66,590
Computer equipment and software 70,717 44,998 25,719
Leasehold improvements 2,624 453 2,171
-----------------------------------------------
189,585 95,105 94,480
===============================================
</TABLE>
F-84
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Furniture and fixtures 84,756 35,812 48,944
Computer equipment and software 60,867 34,083 26,784
Leasehold improvements 2,624 78 2,546
-----------------------------------------------
148,247 69,973 78,274
===============================================
</TABLE>
6 Commitments
a) Operating leases
The company leases office space and equipment under long-term
agreements. As at June 30, 1999, lease commitments through to expiry
are as follows:
$
2001 48,785
2002 41,079
2003 4,735
2004 -
b) Management contracts
The company has entered into a management contract with a director for
a one-year term. Effective November 1, 1999, the company signed a
management contract with a senior officer for $108,000 per year for
years 1 and 2 and $120,000 for year 3. As at June 30, 1999, these
contracts require the company to pay the following amounts:
$
2001 108,000
2002 114,000
2003 60,000
2004 -
The contracts also require the company to pay bonuses based on
specific criteria and assume certain monetary obligations to the
senior officer and director in the event of termination of the
contracts by the company without cause.
F-85
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
7 Related party balances and transactions
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Due (to) from
Charles Brown (related to
controlling shareholder) - 10,000 10,000
Cruise Shoppes Ltd. (controlled by
Charles Brown) - (259,513) (193,482)
Gary Brown (controlling shareholder) - (197,439) 9,822
-----------------------------------------------
- (446,952) (173,660)
===============================================
</TABLE>
During the period ended March 31, 2000 (Unaudited), the controlling
shareholder forgave $81,786 of the outstanding balance owing.
Balances due to the company earn interest at prime rate. No interest is due
on the amounts payable to related parties. The balances have no specific
terms of repayment.
The following transactions occurred with Cruise Shoppes Ltd. during the
respective years and are included in the statement of earnings:
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Net revenues - 33,603 156,375
General administrative expenses - 200,653 38,921
</TABLE>
The transactions are not necessarily on commercial terms or at normal
commercial rates.
8 Notes payable
The notes payable bear no interest and are due on demand.
F-86
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
9 Income taxes
The company is subject to U.S. federal and Louisiana state income taxes in
the U.S.
Net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Expenditures recognized on accrual basis 89,252 86,649 91,110
-----------------------------------------------
Deferred tax liabilities
Revenues recognized on accrual basis 261,203 133,352 202,521
Other 26,957 4,048 4,890
-----------------------------------------------
288,160 137,400 207,411
-----------------------------------------------
Net deferred tax liability 198,908 50,751 116,301
===============================================
</TABLE>
The income tax provision for the periods, differs from the amount obtained
by applying the applicable statutory income tax rates to income before
income taxes as follows:
<TABLE>
<CAPTION>
March 31, June 30,
---------------------------------- -------------------------------
2000 1999 1999 1998
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Combined statutory
income tax rate 38% 38% 38% 38%
Income tax provision
based on statutory rate 293,483 178,646 68,043 93,057
Effect of changes in
graduated income
tax rates 6,951 (10,531) (4,011) 3,968
Deferred income tax
expense (benefit) (8,850) 353 (33,905) (2,938)
----------------------------------------------------------------------
291,584 168,468 30,127 94,087
=======================================================================
</TABLE>
F-87
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The changes in the combined statutory rate across the periods presented
above are a function of graduated income tax rates based on level of
taxable income. No change to enacted rates occurred during these periods.
10 Subsequent events
Effective March 31, 2000, travelbyus.com ltd. agreed to acquire all of the
issued and outstanding shares of the company for a cost of approximately $9
million. This will be paid in cash and shares of travelbyus.com ltd.
Immediately prior to the agreement noted above, Gary Brown personally
assumed the liability for the notes payable and all liabilities for amounts
due to related parties. These liabilities were credited to shareholders'
equity, net of amounts due from Gary Brown.
F-88
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Epoch Technology, Inc.
Garland, Texas
We have audited the accompanying balance sheets of Epoch Technology, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Epoch Technology, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
limited operating history and limited financial resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ HEIN + ASSOCIATES LLP
Hein + Associates LLP
Dallas, Texas
April 19, 2000
F-89
<PAGE>
EPOCH TECHNOLOGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
----------- ----------------------------
2000 1999 1998
----------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,965 $ 22,112 $ --
Trade accounts receivable, no allowance for
doubtful accounts 66,912 25,747 --
Deposits and prepaid expenses 528 -- --
----------- ---------- ------------
Total current assets 119,405 47,859 --
PROPERTY AND EQUIPMENT, net 2,420 2,795 2,432
----------- ---------- ------------
Total assets $121,825 $ 50,654 $ 2,432
=========== ========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 464 $ 670 $ -
Accrued expenses and other liabilities 77,979 486 -
Due related parties 109,745 109,745 109,745
----------- ---------- ------------
Total current liabilities 188,188 110,901 109,745
STOCKHOLDERS' DEFICIENCY:
Common stock, no par value, 200,000 shares
authorized, 75,053 shares issued and
outstanding at March 31, 2000 and
December 31, 1999 and 40,000 at
December 31, 1998 39,053 39,053 4,000
Accumulated deficit (105,416) (99,300) (111,313)
----------- ---------- ------------
Total stockholders' deficiency (66,363) (60,247) (107,313)
----------- ---------- ------------
Total liabilities and stockholders'
deficiency $121,825 $ 50,654 $ 2,432
=========== ========== ============
</TABLE>
F-90
<PAGE>
EPOCH TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
---------------------------- ---------------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
INSTALLATION AND SUPPORT REVENUE $ 57,244 $ -- $ 275,992 $ --
COST OF REVENUE 35,715 -- 71,825 --
--------- --------- --------- ---------
Gross margin 21,529 -- 204,167 --
OPERATING EXPENSES:
Software development -- 5,344 144,000 108,424
General and administrative expenses 27,645 -- 48,154 --
--------- --------- --------- ---------
Total operating expenses 27,645 5,344 192,154 108,424
--------- --------- --------- ---------
NET INCOME (LOSS) $ (6,116) $ (5,344) $ 12,013 $(108,424)
========= ========= ========= =========
</TABLE>
F-91
<PAGE>
EPOCH TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Common Stock Accumulated
----------------------------
Shares Amount Deficit Total
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1998 40,000 $ 4,000 $ (2,889) $ 1,111
Net loss - - (108,424) (108,424)
---------- ---------- ------------ -------------
BALANCES, December 31, 1998 40,000 4,000 (111,313) (107,313)
Shares issued for services 35,053 35,053 - 35,053
Net income - - 12,013 12,013
---------- ---------- ------------ -------------
BALANCES, December 31, 1999 75,053 39,053 (99,300) (60,247)
Net loss (unaudited) - - (6,116) (6,116)
---------- ---------- ------------ -------------
BALANCES, March 31, 2000 (unaudited) 75,053 $ 39,053 $ (105,416) $ (66,363)
========== ========== ============ =============
</TABLE>
F-92
<PAGE>
EPOCH TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
------------------------ ---------------------------
2000 1999 1999 1998
----------- --------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,116) $ (5,344) $ 12,013 $(108,424)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 375 375 1,504 1,684
Compensation paid with stock -- -- 35,053 --
Change in receivables (41,165) -- (25,747) --
Change in current liabilities 77,287 6,241 1,156 --
Other (528) -- -- --
--------- ---------- --------- ----------
Net cash provided (used) by operating activities 29,853 1,272 23,979 (106,740)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment -- (1,272) (1,867) (2,205)
CASH FLOWS FROM FINANCING ACTIVITIES -
Advances from stockholders -- -- -- 108,945
--------- ---------- --------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 29,853 -- 22,112 --
CASH AND CASH EQUIVALENTS, beginning of year 22,112 -- -- --
--------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 51,965 $ -- $ 22,112 $ --
========= ========= ========= ==========
</TABLE>
F-93
<PAGE>
EPOCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (the period subsequent to December 31,
1999 is unaudited)
1. Nature of Business
------------------
Epoch Technology, Inc. ("the Company") is engaged in developing, selling,
installing and supporting an advanced reservation system which is Internet
accessible.
2. Summary of Significant Accounting Policies
------------------------------------------
Statement of Cash Flows
-----------------------
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
Recognition of Revenue
----------------------
Revenue is currently recognized in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect To Certain Transactions.
Revenue from the sale of computer hardware and software is generally
recognized upon delivery. The Company recognizes revenue from its maintenance
contracts over the life of the contracts. Amounts not recognized are
classified as deferred revenue. License fee revenue is recognized when a non-
cancelable contingency-free license agreement has been signed, the product
has been delivered, fees from the arrangement are fixed or determinable, and
collection is probable.
Earnings (Loss) Per Share
-------------------------
Basic earnings or loss per share ("EPS") is calculated by dividing the income
or loss available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
Computer Software
-----------------
Computer software development costs and other research and development costs
are expensed as incurred. Costs incurred to develop product masters of
computer software, for which technological feasibility has been established,
are capitalized. Capitalized software costs are amortized on a product-by-
product basis each year based on the greater of: (1) the amount computed
using the ratio of current year gross revenues to the sum of current and
anticipated future gross revenues for that product, or (2) five year
straight-line amortization. No software costs had been capitalized by the
Company as of March 31, 2000 or December 31, 1999.
Property and Equipment
----------------------
The Company's property and equipment is stated at cost. Depreciation expense
is computed on the straight-line method over the estimated useful lives of
the assets, which is 3 years.
Income Taxes
------------
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
F-94
<PAGE>
EPOCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(the period subsequent to December 31, 1999 is unaudited)
Comprehensive Income (Loss)
---------------------------
Comprehensive income is defined as all changes in stockholders' equity,
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets
and liabilities that are reported directly in equity such as translation
adjustments on investments in foreign subsidiaries, and certain changes in
minimum pension liabilities. The Company's comprehensive income (loss) was
equal to its net income (loss) for the years ended December 31, 1999 and
1998.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates.
Unaudited Information
---------------------
The consolidated balance sheet as of March 31, 2000 and the consolidated
statements of operations for the three month periods ended March 31, 2000 and
1999 were taken from the Company's books and records without audit. However,
in the opinion of management, such information includes all adjustments
(consisting only of normal recurring accruals) which are necessary to
properly reflect the consolidated financial position of the Company as of
March 31, 2000 and the results of operations for the three months ended March
31, 2000 and 1999.
Going Concern
-------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company incurred an
operating loss in 1998 and has a stockholders' deficiency at December 31,
1999. The Company had only one customer in 1999. The continuation of the
Company as a going concern is dependent on obtaining additional customers
and/or financing in order to expand the level of operations. The stockholders
funded the previous loss and intend to finance additional losses, should they
occur.
3. Property and Equipment
----------------------
Property and equipment consisted of the following:
March 31, December 31,
--------- ------------------
2000 1999 1998
------- ------- -------
Computer equipment $ 8,872 $ 8,872 $ 7,005
Less accumulated depreciation (6,452) (6,077) (4,573)
------- ------- -------
$ 2,420 $ 2,795 $ 2,432
======= ======= =======
Depreciation expense was $375, $421, $1,504 and $1,684 for the three month
periods ended March 31, 2000 and 1999 and the years ended December 31, 1999
and 1998, respectively.
F-95
<PAGE>
EPOCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(the period subsequent to December 31, 1999 is unaudited)
4. Fair Value of Financial Instruments and Concentrations of Credit Risk
---------------------------------------------------------------------
The Company's financial instruments are cash, accounts receivable and
payable, and accrued expenses and other liabilities. Management believes
the fair values of these instruments approximate the carrying values, due
to the short-term nature of the instruments.
Financial instruments that subject the Company to credit risk are cash
equivalents and accounts receivable. At December 31, 1999, 100% of the
Company's accounts receivable was from one customer. The Company does not
ordinarily require collateral from its customers, nor perform credit
evaluations. The Company believes no allowance for doubtful accounts is
necessary at March 31, 2000 or December 31, 1999.
5. Major Customers
---------------
The Company had sales to one customer in 1999 that amounted to 100% of
total sales that year. The Company had no sales in 1998.
6. Related Party Transactions
--------------------------
At March 31, 2000 and December 31, 1998 and 1999, amounts advanced by the
stockholders that remain unpaid totaled $109,745. These advances are non
interest bearing and contain no specific repayment terms.
7. Income Taxes
------------
The Company had no income tax expense in 1999 and 1998 due to taxable
losses and carryforwards. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. The Company's deferred tax assets and liabilities as
of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Deferred tax assets (primarily net operating losses) $ 25,000 $ 28,000
Deferred tax liabilities -- --
Valuation allowance (25,000) (28,000)
-------- --------
Net deferred tax balance $ -- $ --
======== ========
</TABLE>
***********
F-96
<PAGE>
Report of PricewaterhouseCoopers LLP Independent Auditors
To the Directors of
Express Vacations, LLC
(a Nevada limited liability company)
We have audited the balance sheets of Express Vacations, LLC (a Nevada limited
liability company) as at October 31, 1999, September 30, 1999 and 1998 and
the statements of loss, members' equity and cash flows for the one-month period
ended October 31, 1999, the year ended September 30, 1999 and the period from
August 5, 1998 (date of LLC formation) to September 30, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at October 31, 1999,
September 30, 1999 and 1998 and the results of its operations and its cash flows
for the one-month period ended October 31, 1999, the year ended September 30,
1999 and the period from August 5, 1998 (date of LLC formation) to September 30,
1998 in conformity with accounting principles generally accepted in the United
States.
These financial statements are those of a limited liability company and
accordingly do not reflect any income taxes related to its members.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
November 23, 1999
F-97
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Balance Sheets
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
October 31, September 30,
-----------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 544,313 1,055,768 1,831,748
Trade accounts receivable (net of allowance - $nil) 559,123 841,429 1,629,730
Prepaid expenses (note 3) 230,577 269,838 -
-----------------------------------------------------------
1,334,013 2,167,035 3,461,478
Capital assets (note 4) 136,121 139,285 7,266
-----------------------------------------------------------
1,470,134 2,306,320 3,468,744
-----------------------------------------------------------
Liabilities and Members' Equity
Current liabilities
Trade accounts payable and accrued liabilities
(note 3) 536,860 539,414 1,019,267
Customer deposits 832,560 1,443,271 2,334,295
-----------------------------------------------------------
1,369,420 1,982,685 3,353,562
Members' Equity (note 5) 100,714 323,635 115,182
-----------------------------------------------------------
1,470,134 2,306,320 3,468,744
-----------------------------------------------------------
</TABLE>
Commitments and contingencies (note 8)
Subsequent event (note 9)
Approved by the Members
/s/ Jon Snyder Member /s/ John Fenyes Member
----------------- -------------------
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Statements of Members' Equity
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
August 5, 1998
One-month (date of LLC
period ended Year ended formation) to
October 31, September 30, September 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Balance - Beginning of period 323,635 115,182 1
Net (loss) earnings for the period (180,302) 2,338,453 100,181
-----------------------------------------------------------
143,333 2,453,635 100,182
Add: Members' contributions - - 15,000
Less: Members' distributions 42,619 2,130,000 -
-----------------------------------------------------------
Balance - End of period 100,714 323,635 115,182
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Statements of Loss
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
August 5, 1998
One-month (date of LLC
period ended Year ended formation) to
October 31, September 30, September 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Revenues 16,856 7,234,577 772,866
-----------------------------------------------------------
Expenses
Cost of services revenues 5,394 2,344,995 228,387
General and administrative 192,771 2,611,046 437,911
Amortization 3,164 40,821 6,387
-----------------------------------------------------------
201,329 4,996,862 672,685
-----------------------------------------------------------
(Loss) earnings from operations (184,473) 2,237,715 100,181
Interest income 4,171 100,738 -
-----------------------------------------------------------
Net (loss) earnings for the period (180,302) 2,338,453 100,181
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Statements of Cash Flows
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
August 5, 1998
One-month (date of LLC
period ended Year ended formation) to
October 31, September 30, September 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) earnings for the period (180,302) 2,338,453 100,181
Item not affecting cash - amortization 3,164 40,821 6,387
Changes in non-cash working capital
Trade accounts receivable 282,306 788,301 (1,629,730)
Prepaid expenses 39,261 (269,838) -
Trade accounts payable and accrued liabilities (2,554) (479,853) 1,019,267
Customer deposits (610,711) (891,024) 2,334,295
--------------------------------------------------------------
(468,836) 1,526,860 1,830,400
--------------------------------------------------------------
Cash flows from investing activities
Purchase of capital assets - (172,840) (13,653)
--------------------------------------------------------------
Cash flows from financing activities
Members' contributions - - 15,000
Members' distributions (42,619) (2,130,000) -
--------------------------------------------------------------
(42,619) (2,130,000) 15,000
--------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (511,455) (775,980) 1,831,747
Cash and cash equivalents - Beginning of period 1,055,768 1,831,748 1
--------------------------------------------------------------
Cash and cash equivalents - End of period 544,313 1,055,768 1,831,748
--------------------------------------------------------------
Interest received 4,171 100,738 -
--------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 Nature of operations
Express Vacations, LLC ("Express") is a call center offering vacation
packages to customers located primarily in the United States. Operations of
Express are based solely from Reno, Nevada. Express was organized pursuant
to the provisions of the Nevada Limited Liability Company Act in the State
of Nevada, U.S.A. on August 5, 1998. Revenues are earned from customers
located in the United States. Capital assets of the company's operations
are located in the United States.
2 Summary of significant accounting policies
Generally accepted accounting principles
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Revenue recognition
The company's revenues consist primarily of commissions from the sale of
travel products including airline tickets, hotel and vacation property
accommodations, car rentals and vacation packages. The company earns
commission revenue from the sale of these travel products which are
recognized on the customer's scheduled departure date, less an allowance
for returns and cancellations based on the company historical experience
and provided that collection is reasonably assured.
Capital assets
Capital assets are stated at cost less accumulated amortization.
Amortization is recorded on a straight-line basis to amortize the cost of
the capital assets over their estimated useful lives as follows:
Furniture and fixtures 7 years
Computer and office equipment 5 years
Leasehold improvements over term of lease
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, liabilities, and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses for the period reported.
Management believes its estimates to be appropriate; however, actual
results could differ from the amounts estimated.
F-102
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid
short-term interest bearing securities with maturities at the date of
purchase of three months or less.
Income taxes
Income earned by Express is allocated to its members for tax purposes;
therefore, no provision for income taxes has been made in these financial
statements.
3 Balance sheet components
<TABLE>
<CAPTION>
October 31, September 30,
-------------------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Prepaid expenses
Deposits with travel suppliers 222,527 261,788 -
Other prepaids 8,050 8,050 -
------------------------------------------------------------------
230,577 269,838 -
------------------------------------------------------------------
October 31, September 30,
-------------------------------------------
1999 1999 1998
$ $ $
Trade accounts payable and accrued liabilities
Trade accounts payable 312,985 346,963 388,162
Accrued liabilities 223,875 192,451 631,105
------------------------------------------------------------------
536,860 539,414 1,019,267
------------------------------------------------------------------
4 Capital assets
October 31, 1999
----------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and fixtures 47,553 23,059 24,494
Computer and office equipment 122,493 25,341 97,152
Leasehold improvements 16,447 1,972 14,475
----------------------------------------------------------------
186,493 50,372 136,121
----------------------------------------------------------------
</TABLE>
F-103
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
-----------------------------------------------------------------------------
(expressed in U.S. dollars)
September 30, 1999
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and fixtures 47,553 22,685 24,868
Computer and office equipment 122,493 22,747 99,746
Leasehold improvements 16,447 1,776 14,671
--------------------------------------
186,493 47,208 139,285
--------------------------------------
September 30, 1898
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer and office equipment 13,653 6,387 7,266
--------------------------------------
5 Members' Equity
Authorized members' equity consists of an unlimited number of units.
$
Members' initial contribution
30 units 1
-------------
Limitation of liability
Under the terms of an Operating Agreement between the members put in place
in August 1998, two of the three members of the company have been elected
to manage the company ("managers"). Managers shall not be liable for the
return of any contribution of capital of any member or for any profits
thereon. Managers are not liable to the company or members for any act or
omission in connection with the business or affairs of the company unless
such act or omission constitutes gross negligence, intentional misconduct,
fraud or a knowing violation of law.
Members and managers of the company are not individually liable under a
judgement, decree, order of any court or any other manner, for a debt,
obligation, or liability of the company except as otherwise set forth in
Nevada State Regulations.
F-104
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
-----------------------------------------------------------------------------
(expressed in U.S. dollars)
Rights and restrictions of members
Each member's units consisting of their respective interest in the capital
and profits of the company carry the respective right to an allocative
share of the economic benefits of the company, including net profits, net
losses, and distributions, and the right to vote on matters as to which
the Operating Agreement requires or permits members to vote.
Members who are not managers are restricted from borrowing or lending
money on behalf of the company; selling, mortgaging, leasing, disposing of
or encumbering property of the company; selling, assigning, pledging or
mortgaging a member's interest in the company; purchasing any real estate
or equipment on behalf of the company; exercising or representing to any
third party that such member has the right to exercise any of the powers
of the managers in the Operating Agreement.
6 Cost of services revenues
Direct costs are comprised primarily of commissions paid to booking agents
and include fees totalling $1,564 for the one-month period ended October
31, 1999 (year ended September 30, 1999 - $635,714; 1998 - $105,952) paid
to the company's primary air travel service provider, applicable only to
certain bookings made before June 1999.
7 Financial instruments
Fair values of financial instruments
The carrying values reported on the balance sheet for cash and cash
equivalents, trade accounts receivable, trade accounts payable and accrued
liabilities and customer deposits approximate their fair values due to the
short-term nature of those instruments.
Concentration of credit risk
Accounts receivable include approximately $487,000 receivable from one
airline. The balance represents receivables relating to the processing of
credit card sales and does not represent significant credit risk to
Express.
Foreign exchange risk
Substantially all of the company's operations are denominated in U.S.
dollars.
F-105
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
-----------------------------------------------------------------------------
(expressed in U.S. dollars)
8 Commitments and contingencies
a) Lease commitments
The company leases a telephone system and office space under long-
term agreements. As at October 31, 1999, lease commitments through to
expiry are as follows:
$
2000 154,246
2001 146,546
2002 9,666
b) Letters of credit
Letters of credit totalling $443,000 have been issued to various
hotels by one of the members on behalf of Express. These letters of
credit are required by the hotels as security for block bookings of
hotel rooms. During the period ended October 31, 1999, no amounts
have been drawn against these letters of credit.
c) Commitments
On July 7, 1999, the company entered into a two-year agreement with a
telephone service provider requiring the company to satisfy a minimum
annual commitment. If the company does not reach this annual
commitment, the company would be required to pay an additional
surcharge for its phone services.
9 Subsequent event
On November 1, 1999, Express was acquired by travelbyus.com ltd., a
Canadian public company listed on the Toronto, Winnipeg and Frankfurt
Stock Exchanges.
F-106
<PAGE>
Report of PricewaterhouseCoopers LLP Independent Auditors
To the Directors of
Cheap Seats Inc.
We have audited the balance sheets of Cheap Seats Inc. as at November 30, 1999,
June 30, 1999 and 1998 and the statements of operations and deficit and cash
flows for the period from July 1, 1999 to November 30, 1999 and the years ended
June 30, 1999 and 1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. we believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at November 30, 1999, June
30, 1999 and 1998 and the results of its operations and its cash flows for the
period from July 1, 1999 to November 30, 1999 and the years ended June 30, 1999
and 1998 in conformity with accounting principles generally accepted in the
United States.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
January 28, 2000
F-107
<PAGE>
Cheap Seats Inc.
Balance Sheets
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
November 30, June 30, June 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Assets
Current assets
Cash 54,155 40,721 161,491
Trade accounts receivable (net of allowance - $nil)
(note 8) 66,666 231,566 97,076
Income tax recoverable 85,577 82,217 20,678
Payroll tax refundable - - 49,136
Loan to employees 3,876 3,311 -
-------------------------------------------------------
210,274 357,815 328,381
Deposits (note 3) 70,000 70,000 70,000
Capital assets (note 4) 127,407 85,905 91,671
-------------------------------------------------------
407,681 513,720 490,052
=======================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 5) 403,730 496,325 381,105
Current portion of long-term debt 3,951 3,786 3,145
-------------------------------------------------------
407,681 500,111 384,250
Long-term debt 1,409 3,105 6,891
-------------------------------------------------------
409,090 503,216 391,141
-------------------------------------------------------
Shareholders' Deficiency
Capital stock
Authorized
Unlimited number of common shares without
par value
Issued
5,920 shares (June 30, 1999 - 5,920; 1998 -
5,920) 1,000 1,000 1,000
(Deficit) retained earnings (2,409) 9,504 97,911
-------------------------------------------------------
(1,409) 10,504 98,911
-------------------------------------------------------
407,681 513,720 490,052
=======================================================
Commitments (note 7)
</TABLE>
Approved by the Board of Directors
/s/ Robert Beaudet Director /s/ Bill Kerby Director
---------------------- ---------------------
F-108
<PAGE>
Cheap Seats Inc.
Statements of Operations and Deficit
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
July 1,
1999 to
November 30, Years ended June 30,
--------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Net revenues (note 8) 1,881,074 4,163,133 2,858,490
--------------------------------------------------
Expenses
Selling, general and administrative expenses 1,673,443 2,723,621 2,354,795
Officers' compensation 211,739 1,536,239 426,831
Amortization 10,895 20,644 24,759
--------------------------------------------------
1,896,077 4,280,504 2,806,385
--------------------------------------------------
(Loss) earnings from operations (15,003) (117,371) 52,105
Interest income - net (270) 4,141 3,193
--------------------------------------------------
(Loss) earnings before income taxes (15,273) (113,230) 55,298
Provision for (recovery of) income taxes (3,360) (24,823) 46,737
--------------------------------------------------
Net (loss) earnings for the period (11,913) (88,407) 8,561
Retained earnings - Beginning of period 9,504 97,911 89,350
--------------------------------------------------
(Deficit) retained earnings - End of period (2,409) 9,504 97,911
==================================================
</TABLE>
F-109
<PAGE>
Cheap Seats Inc.
Statements of Cash Flows
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
July 1,
1999 to
November 30, Years ended June 30,
---------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) earnings for the year (11,913) (88,407) 8,561
Items not affecting cash
Amortization 10,895 20,644 24,759
Write-off of capital assets - 23,755 -
Net change in non-cash working capital items
Trade accounts receivable 164,900 (134,490) (185,460)
Income tax recoverable (3,360) (61,539) (8,085)
Payroll tax recoverable - 49,136 (49,136)
Loan to employees (565) (3,311) -
Trade accounts payable and accrued liabilities (92,595) 115,220 242,523
-----------------------------------------------------
67,362 (78,992) 33,162
-----------------------------------------------------
Cash flows from investing activities
Purchase of capital assets (52,397) (38,633) (58,770)
-----------------------------------------------------
Cash flows from financing activities
Increase in long-term debt - - 10,036
Repayment of long-term debt (1,531) (3,145) -
-----------------------------------------------------
(1,531) (3,145) 10,036
-----------------------------------------------------
Increase (decrease) in cash 13,434 (120,770) (15,572)
Cash - Beginning of period 40,721 161,491 177,063
-----------------------------------------------------
Cash - End of period 54,155 40,721 161,491
=====================================================
Interest paid 270 816 1,953
=====================================================
Income taxes paid - 36,716 57,035
=====================================================
</TABLE>
F-110
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
-------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 Nature of operations
Cheap Seats Inc. ("the company") is a net airfare consolidator, which
markets to customers throughout the United States. The company has in place
a wide range of net fare ticket contracts with several U.S. and
international carriers. The company currently offers air travel products
through their call centre based in Northridge, California and its website.
Revenues are earned from customers located in the United States. Capital
assets of the company's operations are located in the United States.
2 Summary of significant accounting policies
Generally accepted accounting principles
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Revenue recognition
The company's revenues include commission revenue on published airfares and
net revenues on non-published and wholesale airfares. Commission revenue
and net revenues on non-published and wholesale airfares are recognized at
the time the ticket is issued to the customer, which generally corresponds
to the time the payment is processed, less an allowance for returns and
cancellation based on the company's historical experience. These net
revenues are recorded as the amount paid by the customer less the amount
payable to the airline for the discounted airfare.
Capital assets
Capital assets are stated at cost. Amortization is recorded on a straight-
line basis to amortize the cost of the capital assets over their estimated
useful lives. Amortization rates are as follows:
Computer software 5 years
Furniture and fixtures 5 years
Computer and office equipment 5 years
Automobile 5 years
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, liabilities, and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses for the period reported.
Management believes its estimates to be appropriate; however, actual
results could differ from the amounts estimated.
F-111
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Income taxes
The company follows the asset and liability method for accounting for
income taxes. Under this method, deferred income tax assets and liabilities
are recognized for the estimated tax consequences attributable to
differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
A valuation allowance is provided for deferred income tax assets if it is
more likely than not that the company will not realize the future benefit
or the future deductibility is uncertain.
3 Deposits
Airlines Reporting Corporation ("ARC") requires that registered agents
maintained a bond or letter of credit, which they can access in case of
non-payment by the agent. The entire amount relates to funds set aside
pursuant to these requirements. Interest on these funds accrues to the
company.
4 Capital assets
November 30, 1999
-------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer software 35,000 10,696 24,304
Furniture and fixtures 87,058 32,468 54,590
Computer and office equipment 51,889 44,044 7,845
Automobile 50,056 9,388 40,668
--------------------------------------
224,003 96,596 127,407
======================================
June 30, 1999
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer software 35,000 5,835 29,165
Furniture and fixtures 39,393 28,939 10,454
Computer and office equipment 47,158 42,768 4,390
Automobile 50,056 8,160 41,896
--------------------------------------
171,607 85,702 85,905
======================================
F-112
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
June 30, 1998
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and fixtures 35,760 24,283 11,477
Computer and office equipment 64,431 58,238 6,193
Automobile 105,556 31,555 74,001
--------------------------------------
205,747 114,076 91,671
======================================
Computer software is related to the company's website reservation system.
The company capitalizes certain expenditures on software used in its
operation in accordance with Statement of Position 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use".
5 Balance sheet components
November 30, June 30,
-------------------------
1999 1999 1998
$ $ $
Trade accounts payable 326,134 471,349 333,516
Accrued wages payable 71,956 - 47,589
Other accrued liabilities 5,640 24,976 -
-------------------------------------------
403,730 496,325 381,105
===========================================
6 Financial instruments
Fair values of financial instruments
The carrying values reported on the balance sheet for cash, trade accounts
receivable, income tax recoverable, payroll tax refundable, trade accounts
payable and accrued liabilities and current portion of long-term debt
approximate their fair values due to the short-term to maturity of these
instruments. Deposits and non-current portion of long-term debt bear
interest approximating current market notes.
F-113
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
7 Commitments
The company leases an office space under long-term agreements. As at
November 30, 1999, annual minimum lease commitments through to expiry are
as follows:
$
2000 47,000
2001 61,000
2002 63,000
2003 64,000
8 Related party transactions
For the period from July 1, 1999 to November 30, 1999, the company sold
airline tickets to a related company with a gross ticket value of $224,686.
The trade accounts receivable balance as at November 30, 1999 includes due
from the related company of $6,312.
During the year ended June 30, 1999, the company sold airline tickets to a
related company with a gross ticket value of $389,770 (1998 - $nil). The
accounts receivable as at June 30, 1999 includes the due from the related
company of $59,522 (1998 - $nil).
The related party, Mr. Cheap's Travel, Ltd., is owned by the father of a
co-owner of the company.
Subsequent to June 30, 1999, Cheap Seats Inc. and the related company
became controlled by travelbyus.com ltd., a Canadian public company listed
on the Toronto, Winnipeg and Frankfurt Stock Exchanges.
9 Income taxes
The company is subject to U.S. federal and California state income taxes.
As at November 30, 1999, the company did not have any significant capital
or non-capital losses available for carryforward or other temporary
differences to reduce future years taxable income.
F-114
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The income tax recoverable/provision for the periods presented, differs
from the amount obtained by applying the applicable statutory income tax
rates to loss/earnings before income taxes as follows:
<TABLE>
<CAPTION>
Period from
July 1,
1999 to
November 30, Years ended June 30,
-----------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Statutory income tax rate 32.81% 32.81% 32.81%
Income tax (recovery) provision based on
statutory rate (5,011) (37,151) 18,143
Non-deductible expenses 1,651 12,328 28,594
---------------------------------------
(3,360) (24,823) 46,737
=======================================
</TABLE>
10 Subsequent event
Effective on December 1, 1999, all of the outstanding shares of the company
were acquired by travelbyus.com ltd., a Canadian public company listed on
the Toronto, Winnipeg and Frankfurt Stock Exchanges.
F-115
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Stockholders
MUFFIN COMMUNICATIONS, LTD.
(An Illinois Corporation)
We have audited the accompanying balance sheets of MUFFIN COMMUNICATIONS, LTD.
(An Illinois Corporation) as of December 31, 1999 and 1998, and the related
statements of income (loss) and retained earnings (accumulated deficit), changes
in stockholder's equity (deficit) and cash flows for the year ended December 31,
1999 and from February 6, 1998 (date of inception) through December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MUFFIN COMMUNICATIONS, LTD. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999 and from February 6, 1998 (date of
inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Friduss, Lukee, Schiff & Co., P.C.
FRIDUSS, LUKEE, SCHIFF & CO., P.C.
Certified Public Accountants
Chicago, Illinois
April 26, 2000
F-116
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
BALANCE SHEETS
--------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
A S S E T S
-----------
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS
--------------
Cash $ - $ 175 $ 1,218
Due from Stockholder (Note 4) 2,986 - -
Prepaid Expenses - 1,490 1,433
-------- ------- -------
TOTAL CURRENT ASSETS $ 2,986 $ 1,665 $ 2,651
-------------------- -------- ------- -------
PROPERTY AND EQUIPMENT (Note 2)
----------------------
Equipment $ 11,214 $11,214
Furniture and Fixtures - 9,745 9,745
-------- ------- -------
TOTAL PROPERTY AND
------------------
EQUIPMENT $ - $20,959 $20,959
---------
Less: Accumulated Depreciation - (9,109) (4,356)
-------- ------- -------
NET PROPERTY AND
----------------
EQUIPMENT $ - $11,850 $16,603
--------- -------- ------- -------
TOTAL ASSETS $ 2,986 $13,515 $19,254
------------ ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-117
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
BALANCE SHEETS
--------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
-------------------
Accounts Payable $ 2,986 $ 3,202 $ 1,660
Due to Stockholder (Note 4) - 34,788 7,949
-------- -------- -------
TOTAL CURRENT LIABILITIES $ 2,986 $ 37,990 $ 9,609
------------------------- -------- -------- -------
STOCKHOLDER'S EQUITY (DEFICIT)
------------------------------
Common Stock - 1,000 Shares Authorized
No Par Value, 100 Shares Issued and
Outstanding $ 100 $ 100 $ 100
Paid in Capital 52,338 - -
Retained Earnings (Accumulated Deficit) (52,438) (24,575) 9,545
-------- -------- -------
TOTAL STOCKHOLDER'S EQUITY
--------------------------
(DEFICIT) $ - $(24,475) $ 9,645
--------- -------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S
-----------------------------------
EQUITY (DEFICIT) $ 2,986 $ 13,515 $19,254
---------------- ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-118
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
STATEMENTS OF INCOME (LOSS) AND
-------------------------------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
---------------------------------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
<TABLE>
<CAPTION>
From
Six Month February 6, 1998
Period Ended Year Ended (Date of Inception)
June 30, December 31, through
2000 1999 December 31,1998
------------- ---------- --------------------
<S> <C> <C> <C>
NET SALES $ - $ - $ 345,000
---------
COST OF SALES - - 288,785
------------- -------- -------- ------------
GROSS PROFIT $ - $ - $ 56,215
------------
SELLING, GENERAL AND
--------------------
ADMINISTRATIVE EXPENSES 18,389 34,120 46,670
----------------------- -------- -------- ------------
(LOSS) INCOME FROM OPERATIONS $(18,389) $(34,120) $ 9,545
-----------------------------
LOSS ON DISPOSAL OF PROPERTY AND
--------------------------------
EQUIPMENT (9,474) - -
--------- -------- -------- ------------
NET (LOSS) INCOME FOR THE PERIOD $(27,863) $(34,120) $ 9,545
--------------------------------
(ACCUMULATED DEFICIT) RETAINED
------------------------------
EARNINGS, BEGINNING OF PERIOD (24,575) 9,545 -
----------------------------- -------- -------- ------------
(ACCUMULATED DEFICIT) RETAINED
------------------------------
EARNINGS, END OF PERIOD $(52,438) $(24,575) $ 9,545
----------------------- ======== ======== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-119
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
-------------------------------------------------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
<TABLE>
<CAPTION>
Common Stock
-----------------
Retained
Number Additional Earnings
Of Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance - February 6, 1998 100 100 $ - $ - $ 100
Net Income - - - 9,545 9,545
------ ------ ---------- --------- ---------
Balance - December 31, 1998 100 100 - $ 9,545 $ 9,645
Net Loss - - - (34,120) (34,120)
------ ------ ---------- --------- ---------
Balance - December 31, 1999 100 100 $ - $ (24,575) $ (24,475)
Capital Contribution of
Balance Due to Stockholder
(Note 4) 52,338 - 52,338
Net Loss - - - (27,863) (27,863)
------ ------ ---------- --------- ---------
Balance - June 30, 2000 100 100 $ 52,338 $ (52,438) $ -
====== ====== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-120
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
STATEMENTS OF CASH FLOWS
------------------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
<TABLE>
<CAPTION>
From
Six Month February 6, 1998
Period Ended Year Ended (Date of Inception)
June 30, December 31, through
2000 1999 December 31,1998
------------ ------------ ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
------------------------------------
Net (Loss) Income $(27,863) $(34,120) $ 9,545
-------- -------- --------
Adjustments to Reconcile Net (Loss) Income
to Net Cash (Used in) Provided By Operating
Activities:
Depreciation $ 2,376 $ 4,753 $ 4,356
Loss on Disposal of Property and
Equipment 9,474 - -
Decrease (Increase) in Prepaid Expenses 1,490 (57) (1,433)
(Decrease) Increase in Accounts Payable (216) 1,542 1,660
-------- -------- --------
TOTAL ADJUSTMENTS $ 13,124 $ 6,238 $ 4,583
----------------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
----------------------------------------
ACTIVITIES $(14,739) $(27,882) $ 14,128
---------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
------------------------------------
Proceeds from Issuance of Common Stock $ - $ - $ 100
Advances (Repayments) Due to Stockholder 14,564 26,839 (13,010)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
----------------------------------------
ACTIVITIES $ 14,564 $ 26,839 $(12,910)
----------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH $ (175) $ (1,043) $ 1,218
-------------------------------
CASH - BEGINNING OF PERIOD 175 1,218 -
-------------------------- -------- -------- --------
CASH - END OF PERIOD $ 175 $ 1,218
-------------------- ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
Cash Paid During the Periods for:
Interest $ - $ 603 $ 2,212
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
---------------------------------------------
AND FINANCING ACTIVITIES:
------------------------
Due from Stockholder $ (2,986) $ - $ -
Equipment - - (11,214)
Furniture and Fixtures - - (9,745)
Due to Stockholder (49,352) - 20,959
Additional Paid in Capital 52,338 - -
-------- -------- --------
$ - $ - $ -
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-121
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
THE SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-----------------------------------------------------
NOTE 1 - NATURE OF ACTIVITIES
--------------------
The Company was formed on February 6, 1998 and is engaged in the
magazine publications industry.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying financial
statements follows:
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 and 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.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment were stated at their fair market value when the
stockholder contributed the assets. The fair market value approximated
cost. Expenditures for repairs and maintenance which did not extend
the useful lives of the assets were charged to expense as incurred.
For financial accounting purposes, depreciation was calculated
primarily on a straight-line basis over the estimated useful lives of
the related assets ranging from 4 to 5 years. The assets and related
accumulated depreciation were relieved for such assets retired or
otherwise disposed of, and any resulting profit or loss was included
in the year of sale or retirement. The property and equipment was
disposed of as of June 30, 2000.
Depreciation expense was $2,376 for the six months ended June 30,
2000, $4,753 for the year ended December 31, 1999 and $4,356 for the
period February 6, 1998 (date of inception) though December 31, 1998.
F-122
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
THE SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-----------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
------------------------------------------
INCOME TAXES
------------
There is no provision for federal corporate income taxes because the
stockholder has elected to pay these taxes in accordance with S
Corporation rules of the Internal Revenue Code. A provision for state
replacement tax has not been made due to a current net operating loss.
NOTE 3 - SUBSEQUENT EVENTS
-----------------
The Company's stock was sold to an unrelated party on July 20, 2000.
NOTE 4 - RELATED PARTY TRANSACTIONS
--------------------------
The Company leases office space and an automobile from the sole
stockholder of the Company. There is no signed lease between the
related parties. The Company paid the stockholder for the office space
$3,407 for the six months ended June 30, 2000. The Company paid the
stockholder for the office space $6,128 and $6,093 in 1999 and 1998,
respectively. The Company paid the stockholder for the lease of the
automobile $1,315 for the six months ended June 30, 2000. The Company
paid the stockholder for the lease of the automobile $3,384 and $4,324
in 1999 and 1998, respectively.
The stockholder has advanced to the Company $14,564 during the six
months ended June 30, 2000. The stockholder had advanced to the
Company $26,839 and $7,949 during 1999 and 1998, respectively.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
Due to Stockholder $ - $(34,788) $(7,949)
Due from Stockholder 2,986 - -
------ -------- ---------
$2,986 $(34,788) $(7,949)
====== ======== =========
</TABLE>
At June 30, 2000 the stockholder's loan was reclassified to Additional
Paid-In Capital.
NOTE 5 - MAJOR CUSTOMERS
---------------
100% of the 1998 sales were derived from one customer.
F-123
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Prosoft Corporation
We have audited the accompanying balance sheet of Prosoft Corporation as of
December 31, 1999, and the related statements of income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prosoft Corporation as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Swenson Advisors, LLP
SWENSON ADVISORS, LLP
An Accountancy Firm
San Diego, California
August 23, 2000
Except for Note 8, as to
which the date is
September 14, 2000.
F-124
<PAGE>
PROSOFT CORPORATION
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets
Cash $ 120,508
Accounts receivable 209,411
Prepaid expenses 618
-------------
Total current assets 330,537
-------------
Property and equipment, net of depreciation 18,669
-------------
Other assets
Investments 150,000
Deposits 3,819
-------------
153,819
-------------
Total assets $ 503,025
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 76,419
Accrued expenses 178,196
Income taxes payable 79,079
Other current liabilities 2,067
------------
Total current liabilities 335,761
------------
Commitments and contingencies -
Long term debt 6,633
------------
Stockholders' equity
Common stock - no par value, 10,000,000 shares authorized
1,140,000 shares issued and outstanding -
Additional paid-in capital 7,945
Retained earnings 152,686
------------
Total stockholders' equity 160,631
------------
Total liabilities and stockholders' equity $ 503,025
============
</TABLE>
See accompanying notes to financial statements
F-125
<PAGE>
PROSOFT CORPORATION
Statement of Income
For the Year Ended December 31, 1999
Consulting contract revenues $ 1,638,729
------------
Cost of consulting contract revenues:
Salaries and related expenses 458,100
Materials 284,119
------------
Total cost of contract revenues 742,219
------------
Gross profit 896,510
------------
General and administrative expenses:
Salaries and employee benefits 541,922
Computer expenses 22,943
Depreciation and amortization 7,785
Rent 46,058
Interest expense 1,188
Professional fees 20,224
Training 28,524
Telephone and utilities 9,204
Other expenses 59,034
------------
Total general and administrative 736,882
------------
Operating income 159,628
------------
Other income 2,074
------------
Income before income tax provision 161,702
------------
Income tax provision 84,123
------------
Net income $ 77,579
------------
See accompanying notes to financial statements
F-126
<PAGE>
PROSOFT CORPORATION
Statement of Stockholders' Equity
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Additional
Number of Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 336 $ - $ 7,945 $ 75,107 $ 83,052
Stock Split 1,139,664
Net Income - - - 77,579 77,579
----------- ---------- ----------- ----------- -----------
Balance,
December 31, 1998 1,140,000 $ - $ 7,945 $ 152,686 $ 160,631
=========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-127
<PAGE>
PROSOFT CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities
Net Income $ 77,579
Adjustments to reconcile net income to net cash
used by operations:
Depreciation and amortization 7,785
(Increase) decrease in assets
Accounts receivable (2,057)
Prepaid expenses (618)
Increase (decrease) in liabilities
Accounts payable 51,052
Accrued expenses 100,508
---------
Net cash provided by operating activities 234,249
---------
Cash flows from investing activities
Investment in affiliate (150,000)
---------
Net cash used by investing activities (150,000)
Cash flows from financing activities:
Payments on capital lease (1,871)
---------
Net cash used by financing activities (1,871)
---------
Net increase in cash 82,378
Cash and cash equivalents at beginning of year 38,130
---------
Cash and cash equivalents at end of year $ 120,508
=========
</TABLE>
See accompanying notes to financial statements
F-128
<PAGE>
PROSOFT CORPORATION
Notes to the Financial Statements
December 31, 1999
Note 1 - Summary of Organization and Significant Accounting Policies
Organization - ProSoft Corporation (the Company) develops software and
------------
e-business solutions on a contract basis for established and emerging
companies for the aerospace, healthcare and travel industries.
Cash and Cash Equivalents - The Company considers all unrestricted
-------------------------
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents. The carrying value of cash equivalents
approximates fair value.
Concentration of Credit Risk - It is the Company's practice to maintain
----------------------------
its cash and cash equivalents primarily with one major banking
institution. At times, the Company may maintain cash balances at this
institution that exceed the Federal Deposit Insurance Corporation
insurance limit of $100,000 per bank. The Company considers its credit
risk associated with cash and cash equivalents to be minimal.
Substantially all of the Company's revenue is derived from a limited
number of customers, with one major customer providing approximately
66% of all revenues.
Accounts Receivable - Accounts receivable consists primarily of fees
-------------------
relating to time and material consulting contracts. As of December 31,
1999, an allowance for doubtful accounts was not required.
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, and 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.
Fair Value of Financial Instruments - The carrying amounts of cash and
-----------------------------------
cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair market value because of the short maturity of
those instruments.
Equipment - Property and equipment is stated at cost, less accumulated
---------
depreciation and amortization. Depreciation is determined using
straight-line and accelerated methods based on estimated useful lives
of the assets, generally from three to seven years.
Revenue Recognition - The Company recognizes revenue as services are
-------------------
performed in accordance with time and materials consulting contracts.
Stock Split - In December, 1999, each outstanding share of common stock
-----------
was split and converted into approximately 3,404 shares of common
stock.
F-129
<PAGE>
PROSOFT CORPORATION
Notes to the Financial Statements, Continued
Note 2 - Income Taxes
The Company reports income taxes using an asset and liability based
approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases
of assets and liabilities that result in taxable or deductible amounts
in the future. A valuation allowance is established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Income tax expense is the tax payable or refundable for the period net
of any change in deferred tax assets or liabilities.
There is a deferred tax asset of $3,869. For financial reporting
purposes, the deferred tax asset has been fully offset by a valuation
allowance. The deferred income taxes arise from differences in
financial reporting and income tax accounting methods, principally
depreciation and accrued expenses. The income tax provision consists of
the following:
<TABLE>
<S> <C>
Current:
Federal $ 64,337
State 19,786
--------
84,123
Less: estimated payments 5,044
--------
Income taxes payable $ 79,079
========
Deferred:
Federal $ (2,280)
State (1,589)
--------
(3,869)
Less: valuation allowance 3,869
--------
$ 0
========
</TABLE>
Note 3 - Line of Credit
The Company has a bank line of credit for $10,000. The line of credit
bears interest at 17% and is collateralized by the assets of the
Company and personal guarantees of shareholders of the Company. As of
December 31, 1999, there is no balance due.
Note 4 - Commitments
Currently, the Company has an agreement to lease office space on a
month to month basis. The current monthly rent is approximately $5,415
per month. Rent expense for the year ended December 31, 1999 is
$46,058.
F-130
<PAGE>
PROSOFT CORPORATION
Notes to the Financial Statements, Continued
Note 5 - Capitalized Lease
The Company has a capitalized equipment lease. Future obligations under
this lease are as follows:
<TABLE>
<CAPTION>
Minimum
Lease
For the period ending December 31, Payments
--------
<S> <C>
2000 $ 2,844
2001 2,844
2002 2,844
2003 1,896
-------
Total 10,428
Less amounts representing interest 1,728
-------
Total $ 8,700
=======
</TABLE>
Note 6 - Investments and Related Party Transactions
In November, 1999, the Company entered into an agreement with a company
that develops and markets internet based application service products.
Under this agreement, the Company invested $150,000 for a 13% interest
in the company; subsequent sales of stock have diluted the Company's
ownership to 10%.
The Company also agreed to ultimately provide 4,100 hours of software
development programming for the development of internet based
application software. Through June, 2000, the Company has provided
approximately 3,300 hours of software development programming. The
labor and material costs provided by the Company have been expensed.
Note 7 - Subsequent Events
In July, 2000, the Company agreed to the sale of all the outstanding
shares of the Company to Travelbyus.com in exchange for 1,680,000
shares of Travelbyus.com.
A new line of credit was established in June, 2000 for $250,000. The
line of credit bears interest at the prime rate plus 1.75% and expires
June, 2001. The line of credit is collateralized by the assets of the
Company and personal guarantees of shareholders of the Company.
Effective January 1, 2000, the Company has elected S corporation status
under the Internal Revenue Code. Under these provisions, the Company
generally does not pay federal corporate income taxes on its taxable
income. Instead the stockholders are liable for individual federal
income taxes on their respective shares of the Company's taxable
income. The state of California has imposed a franchise tax on S
corporations' taxable income of 1.5%.
Note 8 - Acquisition by Travelbyus.com (Unaudited)
Prosoft Corporation was acquired by Travelbyus.com on September 14,
2000. Travelbyus.com will issue 1,680,000 of its common shares to
ProSoft Corporation for all its outstanding common shares. The number
of shares is adjusted based on the SEC approval of the Aviation Group
Form S-4 registration statement with the aggregate value of the total
shares guaranteed at U.S. $4,200,000 or U.S. $2.50 per share.
F-131
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
SiteRabbit.com
We have audited the accompanying consolidated balance sheets of SiteRabbit.com
(a development stage company), a California corporation, as of June 30, 2000,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended June 30, 2000 and 1999,
and the period from inception (July 21, 1997) to June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SiteRabbit.com as of June 30,
2000, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company incurred a net loss of $1,472,507 during the year ended June 30, 2000,
and, as of that date, had a working capital deficiency of $499,517 and
accumulated deficit of $1,806,985. (See Note 12 to the financial statements).
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Swenson Advisors, LLP
SWENSON ADVISORS, LLP
An Accountancy Firm
San Diego, California
August 23, 2000
Except for Note 13 as to which
the date is September 14, 2000.
F-132
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Balance Sheets
June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15,629 $ 48,852 $ 8,219
Accounts receivable, net 716 63,546 -
Loans receivable from officer 70,771 50,460 26,500
Other current assets 6,104 40,667 2,868
----------- --------- ---------
Total current assets 93,220 203,525 37,587
----------- --------- ---------
Property and equipment, net 154,890 130,945 77,872
----------- --------- ---------
Other assets 21,762 30,426 14,822
----------- --------- ---------
Total assets $ 269,872 $ 364,896 $ 130,281
=========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 110,000 $ 55,000
Accounts payable and accrued expenses 574,225 402,547 -
Other current liabilities - 7,906 3,788
Deferred revenue 9,227 176,921 518,977
Current portion long term debt 9,285 - -
----------- --------- ---------
Total current liabilities 592,737 697,374 577,765
----------- --------- ---------
Long-term debt, less current portion 49,920 - -
----------- --------- ---------
Stockholders' deficit:
Preferred Stock - no par value, 1,000,000 shares authorized - - -
Common stock - no par value, 10,000,000 shares authorized;
426,433, 200,000 and 200,000 shares issued and outstanding
at June 30, 2000, 1999 and 1998, respectively. 2,000 2,000 2,000
Additional paid in capital 1,432,200 - -
Retained deficit (1,806,985) (334,478) (449,484)
----------- --------- ---------
Total stockholders' deficit (372,785) (332,478) (447,484)
=========== ========= =========
Total liabilities and stockholders' deficit $ 269,872 $ 364,896 $ 130,281
=========== ========= =========
</TABLE>
See accompanying notes to the financial statements
F-133
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Statements of Operations
For the Years Ended June 30, 2000 and 1999, and Period From Inception (July 21,
1997) to June 30, 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue $ 432,296 $ 1,125,238 $ 11,811
------------ ------------ -----------
Operating expenses:
Payroll and employee benefits 780,460 474,788 179,234
Selling, general and administrative 573,324 327,116 263,681
Research and development expense 282,200 - -
Membership related costs 195,534 170,072 -
Depreciation and amortization expense 55,598 30,020 12,406
Interest expense 23,991 10,000 5,000
------------ ------------ -----------
Total operating expenses 1,911,107 1,011,996 460,321
------------ ------------ -----------
Operating (loss) income (1,478,811) 113,242 (448,510)
Other income 7,904 3,364 626
------------ ------------ -----------
Income (loss) before income tax provision (1,470,907) 116,606 (447,884)
Income tax provision 1,600 1,600 1,600
------------ ------------ -----------
Net (loss) income $ (1,472,507) $ 115,006 $ (449,484)
============ ============ ===========
</TABLE>
See accompanying notes to the financial statements
F-134
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2000 and 1999, and Period From Inception (July
21, 1997) to June 30, 1998
<TABLE>
<CAPTION>
Common Stock Retained
------------
Number of Paid in Earnings
Shares Amount Capital (Deficit) Total
--------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Inception, July 21, 1997 -
Issuance of common stock 200,000 $ 2,000 $ 2,000
Net loss $ (449,484) (449,484)
------- -------- ----------- ------------ -----------
Balance, June 30, 1998 200,000 2,000 - (449,484) (447,484)
------- -------- ----------- ------------ -----------
Net income 115,006 115,006
------- -------- ----------- ------------ -----------
Balance, June 30, 1999 200,000 2,000 - (334,478) (332,478)
------- -------- ----------- ------------ -----------
Issuance of common stock 226,433 1,432,200 1,432,200
Net loss (1,472,507) (1,472,507)
------- -------- ----------- ------------ -----------
Balance, June 30, 2000 426,433 $ 2,000 $ 1,432,200 $ (1,806,985) $ (372,785)
======= ======== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-135
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000 and 1999, and Period From Inception (July
21, 1997) to June 30, 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,472,507) $ 115,006 $ (449,484)
Adjustments to reconcile net income (loss) to net cash from
operations:
Depreciation and amortization 55,598 30,020 12,406
Research and development costs 282,200
- -
(Increase) decrease in assets:
Accounts receivable 62,830 (63,546)
Other current assets 34,563 (37,799) (2,868)
Other assets 3,198 (16,685) (15,818)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 171,678 402,547
Deferred revenue (167,694) (342,056) 518,977
Other current liabilities (7,906) 4,117 3,788
------------ ---------- ----------
Net cash (used) provided by operating activities (1,038,040) 91,604 67,001
------------ ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (31,003) (82,011) (89,282)
------------ ---------- ----------
Net cash used by investing activities (31,003) (82,011) (89,282)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from note payable 12,000 110,000 55,000
Payments of capital lease (2,929) - -
Payments of note payable (340) (55,000) -
Loan receivable (12,911) (23,960) (26,500)
Proceeds from sale of common stock 1,040,000 - 2,000
------------ ---------- ----------
Net cash provided by financing activities 1,035,820 31,040 30,500
------------ ---------- ----------
Net (decrease) increase in cash and cash equivalents (33,223) 40,633 8,219
Cash and cash equivalents at beginning of period 48,852 8,219 -
------------ ---------- ----------
Cash and cash equivalents at end of period $ 15,629 $ 48,852 $ 8,219
============ ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 7,829 $ 5,000 $ -
============ ========== ==========
Cash paid during the year for income taxes $ 1,600 $ 800 $ -
============ ========== ==========
</TABLE>
See accompanying notes to financial statements
F-136
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
For Years Ended June 30, 2000, 1999 and 1998
Note 1 - Summary of Organization and Significant Accounting Policies
Organization - SiteRabbit.com (the Company) (formerly known as
------------
Corporate Cruise Events, Inc.) was formed in July 1997. The Company was
organized to develop corporate sponsored cruise travel events and to
market internet based application service products. Cruise Vacation
Professionals, Inc., a wholly owned subsidiary of SiteRabbit.com, was
organized in 1997 to sell and distribute travel packages and services.
As of late 1999, the Company predominantly develops and markets
internet based application service products and is in the development
stage.
Corporate Reorganization and Principles of Consolidation - On December
--------------------------------------------------------
15, 1998, SiteRabbit.com became the sole shareholder of Cruise Vacation
Professionals, Inc. when 100,000 shares of SiteRabbit.com were issued
in exchange for all the outstanding shares of Cruise Vacation
Professionals, Inc. This transaction, accounted for at book value in a
manner similar to a pooling of interests, was a stock exchange between
sole stockholders with common ownership of these two entities. The
consolidated financial statements include the accounts of
SiteRabbit.com and Cruise Vacation Professionals, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Cash, Cash Equivalents and Credit Risk - The Company considers all
--------------------------------------
unrestricted highly liquid investments purchased with maturities of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates fair value. The Company maintains its cash
accounts at institutions that are insured by the Federal Deposit
Insurance Corporation. At times, the Company maintains cash balances
that exceed the insurance limit of $100,000 per bank. However, the
Company considers its credit risk associated with cash and cash
equivalents to be minimal.
Estimates - The process of preparing financial statements in conformity
---------
with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues, and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
Depreciation - Property and equipment is stated at cost. Depreciation
------------
is provided using the straight line method over the estimated useful
lives of the assets which range from three to five years.
Fair Value of Financial Instruments - The carrying amounts of cash and
-----------------------------------
cash equivalents, loans receivable, and notes payable approximate fair
market value due to the short maturity of these instruments.
Accounts Receivable - Accounts receivable consist primarily of
-------------------
membership fees payable in installments. As of June 30, 2000, 1999 and
1998, the Company recorded an allowance for doubtful accounts of $0,
$120,000 and $0, respectively.
F-137
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 1 - Summary of Organization and Significant Accounting Policies, continued
Revenue Recognition - Revenue represents commissions received from the
-------------------
sale of corporate charters and the sale of travel club memberships. The
membership fees are amortized over the membership period since the
members receive benefits throughout the period. Commissions relating to
corporate charters are recognized as income when the charter occurs.
Other income includes interest income. As of June 30, 2000, there has
been no revenue from the sale of internet based application service
products.
Costs of Start-Up Activities - According to Statement of Position 98-5,
----------------------------
Reporting on the Costs of Start-Up Activities, organization costs have
been expensed. The effect of this change in accounting principle is
immaterial.
Note 2 - Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Office equipment, furniture, and fixtures $ 154,336 $ 123,333 $ 53,321
Leasehold improvements 13,661 13,661 13,661
Assets acquired under capital lease 50,474 - -
Automobiles 22,300 34,300 22,300
----------------- ------------------ ----------------
240,771 171,294 89,282
Less: accumulated depreciation 85,881 40,349 11,410
----------------- ------------------ ----------------
Property and equipment, net $ 154,890 $ 130,945 $ 77,872
================= ================== ================
</TABLE>
Note 3 - Income Taxes
The Company provides for income taxes using an asset and liability
based approach. Deferred income tax assets and liabilities are recorded
to reflect the tax consequences on future years of temporary
differences of revenue and expense items for financial statement and
income tax purposes. As of June 30, 2000, 1999 and 1998 there are
deferred tax assets of $596,553, $128,909 and 184,638, respectively.
For financial reporting purposes the deferred tax assets have been
fully offset by a valuation allowance.
Components of the deferred tax asset are as follows:
2000 1999 1998
---- ---- ----
Net operating loss carryforward $ 577,813 $ 123,174 $ 179,794
Other, net 18,740 5,735 4,844
---------- --------- ---------
596,553 128,909 184,638
Less valuation allowance 596,553 128,909 184,638
---------- --------- ---------
Deferred tax asset, net $ - $ - $ -
========== ========= =========
F-138
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 3 - Income Taxes, continued
Income tax expense for the years ended June 30, 2000, 1999 and 1998 is
$1,600, which represents the statutory franchise tax. There are no
federal income tax provisions for the years ended June 30, 2000, 1999,
and 1998, respectively.
As of June 30, 2000, the Company had net operating loss (NOL)
carryforwards of approximately $1,452,000 for federal income tax
purposes. Such carryforwards expire in varying amounts through the tax
year 2019. As of June 30, 2000, the Company has state NOL carryforwards
of approximately $1,443,000. These NOL carryforwards expire in varying
amounts through the tax year 2005.
Note 4 - Related Party Transactions
Loans Receivable from an Officer
--------------------------------
The loans receivable are from an officer of the Company and are payable
on demand. Interest accrues at a rate of 8% annually. At June 30, 2000,
1999 and 1998, the balance of loans receivable from an officer was
$70,771, $50,460 and $26,500, respectively. Interest income related to
the loans receivable was $4,197, $3,823 and $593, for the years ended
June 30, 2000, 1999 and 1998, respectively.
Note Payable to an Officer
--------------------------
The note payable is payable on demand and bears interest at Libor plus
2%. The balance at June 30, 1999 was $110,000, including accrued
interest of $10,000. The balance at June 30, 1998 was $55,000,
including accrued interest of $5,000. (See Note 12)
Software Development
--------------------
A stockholder with an 11% ownership interest in the Company provided
computer programming services for the development of application
software. The stockholder has provided approximately 3,300 hours of
software development programming as of June 30, 2000. (See Note 5)
Note 5 - Research and Development Costs
The Company developed the SiteRabbit.com application software under
terms of an agreement for computer programming services with a software
development company that has provided approximately 3,300 hours of
programming services as of June 30, 2000. The value of the programming
services has been recorded as research and development expenses. Under
the computer programming services agreement, a total of 4,100 hours of
programming will be ultimately provided to the Company. The programming
services are valued at the fair market value of such services offered
by the software development company.
F-139
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 6 - Deferred Revenue
As of June 30, 2000 and 1999, the balance in deferred revenue is $9,227
and $176,921, respectively. These amounts are related to the
unrecognized portion of membership fees that are recognized ratably
over the life of the membership contract. The membership contracts are
one year in duration. As of June 30, 1998, deferred revenue totaling
$518,977 related to commissions received for corporate charters that
occurred after June 30, 1998.
Note 7 - Commitments
Office Lease
------------
The Company entered into an agreement to lease office space from an
outside party, commencing December 1, 1998 and ending November 30,
2000. Effective April, 2000, the Company renegotiated the lease to be
payable on a month-to-month basis.
Rent expense for the years ended June 30, 2000, 1999 and 1998, was
$66,240, $40,677 and $19,504, respectively.
Capital Lease
-------------
The Company acquired certain software and consulting services under a
capital lease arrangement. The lease was entered into in January, 2000.
The term of the lease is 60 months at a monthly payment amount of
$1,198. Interest paid on the lease was $3,059 for the year ended June
30, 2000. Principal payments due within one year are $7,815.
Following is a schedule of future minimum lease payments:
For the years ending June 30: Minimum Lease Payments
2001 $14,373
2002 14,373
2003 14,373
2004 14,373
2005 8,383
-------
65,875
Less amounts representing interest 18,330
-------
$47,545
=======
Note 8 - Commission Advance
In January, 1999, the Company was advanced $250,000 in commissions
relating to the sale of future travel events according to an agreement
with a provider of travel package services. The commission advance is
to be repaid as the travel events occur. As of June 30, 2000 and 1999,
the Company has been advanced $202,815 and $250,000, respectively.
In April, 2000 the Company was notified that the agreement would be
terminated. Revenue from all travel events booked through December 31,
2000, will be utilized to reduce the advance. Management of the Company
is negotiating a plan as to the settlement of any commission advance
balance still outstanding as of December 31, 2000.
F-140
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 9 - Statement of Cash Flows
<TABLE>
<CAPTION>
The following are noncash investing and financing activities for the year ended June 30, 2000:
<S> <C>
Capital lease obligation incurred to obtain software and consulting services $ 50,474
=========
Distribution of automobile to stockholder at book value $ 7,400
=========
Conversion of notes payable to common stock $ 110,000
=========
</TABLE>
Note 10 - Common Stock and Warrants
The Company has 7,500 warrants outstanding, as of June 30, 2000, to
directors of the Company. In accordance with the terms of APB No. 25,
the Company records no compensation expense for these warrants. As
required by SFAS No. 123, the Company provides the following disclosure
of hypothetical values for these warrants. The warrants are valued as
of February 25, 2000 and June 13, 2000 at $1.83 per warrant. This value
was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility of 50.0%;
risk free interest rate of 6.18%; and expected life of 5.0 years. In
addition, a 30.0% discount for lack of marketability was applied to the
value of the underlying securities, and a 35.0% discount for lack of
marketability was applied to the warrants to derive the final value.
Had compensation expense been recorded based on these hypothetical
values, the Company's net loss for the year ended June 30, 2000, would
have increased by $34,125. (See Note 12)
Note 11 - Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
Note payable to a financial institution with monthly principal and
interest payments of $238.99, with interest at 12.7%; collateralized
by an automobile $ 11,660
Less current maturities 1,470
--------
Non-current portion $ 10,190
========
</TABLE>
Maturities of long term debt are as follows:
For the years ending June 30:
2001 $ 1,470
2002 1,669
2003 1,893
2004 2,149
2005 2,438
2006 2,041
-------
$11,660
=======
F-141
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 12 - Liquidity and Subsequent Events
Acquisition by Travelbyus.com
-----------------------------
In July 2000, the Company entered into a letter of intent to sell all
the outstanding shares of the Company to Travelbyus.com in exchange
for 4,000,000 shares of Travelbyus.com. Terms of the sale include the
issuance of 4,900 shares of stock by the Company to certain employees
and consultants at the time of closing.
Conversion of Notes Payable by Stockholders
-------------------------------------------
At June 30, 2000, the Company has a convertible note payable to a
stockholder. The note is payable on June 12, 2001 and bears interest
at Libor plus 2%. The balance at June 30, 2000 and 1999, was $250,000
and $110,000, including accrued interest of $12,061 and $10,000,
respectively. The note can be converted at the option of the
stockholder for up to 25,000 shares of the Company's common stock at a
specified price per share of $10.00. The stockholder elected to
convert the note in August, 2000, in accordance with the terms of the
note.
At June 30, 2000, the Company has two convertible notes payable to
another stockholder in the aggregate amount of $150,000. The notes are
payable in February, 2001 and June, 2001, and bear interest at 9%. The
interest accrued on the notes is $4,125 as of June 30, 2000. The notes
can be converted at the stockholder's option for up to 15,000 shares
of the Company's common stock at a specified price per share of
$10.00. The stockholder elected to convert the full amount of the
notes in August, 2000, in accordance with the terms of the note.
The balance sheet for June 30, 2000 has been restated to reflect the
conversion of the notes payable by the stockholders into 40,000 shares
of common stock.
Exercise of Option and Warrants
-------------------------------
In August, 2000, a stockholder exercised his option to purchase 11,625
shares of common stock at a price of $8.60 per share and exercised his
common stock purchase warrants at a price of $20 for 7,500 shares of
common stock. (See Note 10).
Liquidity
---------
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has an
accumulated deficit of $1,806,985 and negative working capital of
$499,517 as of June 30, 2000. The ability of the Company to continue
as a going concern is dependent on raising additional capital and/or
the acquisition of the Company by Travelbyus.com. Without additional
capital and/or the acquisition by Travelbyus.com there is uncertainty
about the Company's ability to meet its current working capital
requirements and achieve profitability.
Note 13 - Acquisition by Travelbyus.com (Unaudited)
SiteRabbit.com was acquired by Travelbyus.com on September 14, 2000.
Travelbyus.com will issue 4,000,000 of its common shares to
SiteRabbit.com for all its outstanding common shares. The number of
shares is adjustable based on the SEC approval of the Aviation Group
Form S-4 registration statement with the aggregate value of the total
shares guaranteed at U.S. $10,000,000 or U.S. $2.50 per share.
F-142
<PAGE>
================================================================================
APPENDIX A
ARRANGEMENT AGREEMENT
AMONG
AVIATION GROUP, INC.
AVIATION GROUP CANADA LTD.
AND
TRAVELBYUS.COM LTD.
May 3, 2000
================================================================================
<PAGE>
-2-
This Agreement (the "Agreement") is entered into as of May 3, 2000, among
Aviation Group, Inc., a Texas corporation ("Parent"), Aviation Group Canada
Ltd., an Ontario corporation and a wholly owned subsidiary of Parent ("Aviation
Subco") and travelbyus.com Ltd., an Ontario corporation (the "Company").
RECITALS
WHEREAS the Boards of Directors of Parent, Aviation Subco and the Company have
deemed it advisable and in the best interests of their respective
securityholders to effect the merger of their respective businesses (the
"Arrangement") through the arrangement of Parent, Aviation Subco and the Company
pursuant to this Agreement and the Plan of Arrangement (as hereinafter defined);
WHEREAS in furtherance of the Arrangement, the respective Boards of Directors of
Parent, Aviation Subco and the Company have approved the transactions
contemplated hereby;
NOW THEREFORE in consideration of the premises and the representations,
warranties, covenants and agreements contained in this Agreement, the parties
hereto, intending to be legally bound, do hereby covenant and agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
For purposes of this Agreement, the following terms shall have the following
meanings unless otherwise specified:
"Acquisition Proposal" shall mean any reorganization, recapitalization,
reclassification, combination, merger, consolidation, amalgamation, plan of
arrangement, take-over bid, sale of material assets (or any lease, long-term
supply agreement or other arrangement having the same economic effect as a
sale), any material sale of shares or rights or their respective interests
therein or thereto or similar transactions involving the Company or Parent, as
the case may be, or any of their respective Subsidiaries or a proposal to do so,
excluding the Arrangement, the Global Merger and the Acquisition Transactions.
"Acquisition Transactions" shall have the meaning ascribed thereto in section
3.7.1.
"Adjustment" shall have the meaning ascribed thereto in section 2.3(a).
"Affiliate" shall mean any Person which, directly or indirectly, Controls, is
Controlled by, or is under common Control with, such Person.
"AMEX" shall mean the American Stock Exchange.
"Applicable Laws" shall mean, with respect to any Person all Laws by which such
Person, any of its Subsidiaries or any of their respective securities, material
assets or properties is bound or which is applicable to it, any of its
Subsidiaries or any of their respective securities, material assets or
properties.
"Arrangement" shall have the meaning ascribed thereto in section 2.2.1.
"Articles of Arrangement" shall mean the Articles of Arrangement filed and
certified by the Director appointed under the OBCA, giving effect to the
Arrangement.
"Bankruptcy Laws" shall mean; (i) all bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and other Laws of general application
affecting the rights and remedies of creditors; and (ii) general principles of
equity (regardless of whether enforcement is considered in a proceeding in
equity or at law).
"Benefit Plans" shall mean all employee benefit plans, including, without
limitation employee benefit plans within the meaning of section 3(3) of ERISA,
and any related or separate contracts, plans, trusts, programs, policies,
arrangements, practices, customs and understandings, in each case whether formal
or informal, written or oral and
<PAGE>
-3-
whether maintained by or binding upon the Company or Parent, as the case may be,
or any of their respective Subsidiaries that provide rights or benefits of
economic value to their respective current or former employees or any current or
former beneficiary, dependent or assignee of any such employees or former
employees. Without limiting the scope of Applicable Laws, where specific
references are made to ERISA, ERISA shall be deemed, for that purpose, to be an
Applicable Law.
"Business Day" shall mean any day on which commercial banks are open for
business in Toronto, Ontario and any day other than a Saturday, Sunday or a day
observed as a holiday in Toronto, Ontario.
"Closing" shall have the meaning ascribed thereto in section 2.13.
"Code" shall mean the US Internal Revenue Code of 1986, as amended.
"Commercial Software" shall mean packaged commercial software programs generally
available to the public through retail computer software dealers or available
directly from the manufacturer which have been licensed to the Company or
Parent, as the case may be, or any of their respective Subsidiaries pursuant to
End-User Licenses and which are used in the business of the Company or Parent,
as the case may be, or any of their respective Subsidiaries but are in no way a
component of or incorporated in or specifically required to develop or support
any of the products and related trademarks, technology and know-how of the
Company or Parent, as the case may be, or any of their respective Subsidiaries.
"Commissions" shall have the meaning ascribed thereto in section 2.11.4.
"Company Affiliate" shall have the meaning ascribed thereto in section 7.12.
"Company Balance Sheet" shall have the meaning ascribed thereto in section
3.7.1.
"Company Benefit Plans" shall mean all benefit plans sponsored or maintained by
the Company or any of its Subsidiaries or under which the Company or any of its
Subsidiaries is obligated.
"Company Bidder" shall have the meaning ascribed thereto in section 7.15.3.
"Company Comfort Letters shall have the meaning ascribed thereto in section
7.8.1.
"Company Common Shares" shall mean the common shares in the capital of the
Company.
"Company Disclosure Schedule" shall have the meaning ascribed thereto in Article
3.
"Company Insurance Contracts" shall have the meaning ascribed thereto in section
3.19.
"Company Plans" shall mean, collectively, all Company Benefit Plans and all
plans, programs or arrangements described in subsection 3.18.1(a).
"Company Proprietary Rights" shall have the meaning ascribed thereto in section
3.17.1.
"Company Securities" shall have the meaning ascribed thereto in subsection
2.3(g).
"Company Securities Reports" shall have the meaning ascribed thereto in section
3.6.
"Company Shareholder Meeting" shall have the meaning ascribed thereto in section
2.2.1.
"Company Superior Proposal" shall have the meaning ascribed thereto in section
7.15.2.
"Consent" shall have the meaning ascribed thereto in section 3.4
<PAGE>
-4-
"Contract" shall mean any written or oral agreement, contract, instrument,
indenture, bond, debenture, note, credit agreement, mortgage, lease, permit,
concession, grant, franchise, license, guarantee or commitment to which a Person
or any of its Subsidiaries is a party or by which it, any of their respective
Subsidiaries or any of its material assets or properties is bound or which is
applicable to it, any of their respective Subsidiaries or any of their
respective material assets or properties.
"Control" (including with correlative meaning, controlled by and under common
control with) shall mean, with respect to any Person, the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting securities,
by contract or otherwise.
"Dollar" or "$" shall mean US dollars.
"Effective Time" shall mean the date and time upon which the Articles of
Arrangement shall be duly filed and certified by the Director under the OBCA.
"Encumbrance" shall mean any mortgage, pledge, lien, claim, charge, security
interest, lease, conditional sale or other title retention agreement, easement,
servitude, refusal, claim of infringement, condition or other restriction or
encumbrance of any kind, including any restriction on use, voting (in the case
of any security), transfer, receipt of income or exercise of any other attribute
of ownership on assets.
"End-User Licenses" shall mean End-User Licenses, under which the Company or
Parent, as the case may be, or any of their respective Subsidiaries is the
licensor and which provide for payments to the Company or Parent, as the case
may be, or any of their respective Subsidiaries of less than $250,000.
"Environmental Claim" shall mean any notice alleging potential liability
(including potential liability for investigatory costs, cleanup costs, response
or remediation costs, natural resource damages, property damages, personal
injuries, fines or penalties) arising out of, based on or resulting from; (a)
the presence or release of any Material of Environmental Concern, whether or not
the Material of Environmental Concern is present on or has been released from
property owned by that party or any of its Affiliates; or (b) circumstances
forming the basis for any violation or alleged violation of any Environmental
Law.
"Environmental Laws" shall mean any and all Laws relating to the protection of
public health, safety or the environment.
"ERISA" shall mean the US Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the US Securities Exchange Act of 1934, as amended.
"Exchange Ratio" shall have the meaning ascribed thereto in subsection 2.3(a).
"Exchangeable Shares" shall have the meaning ascribed thereto in section 2.5.
"Final Order" shall have the meaning ascribed thereto in section 2.2.2.
"First Company Comfort Letter" shall have the meaning ascribed thereto in
section 7.8.1.
"First Parent Comfort Letter" shall have the meaning ascribed thereto in section
7.8.2.
"Global" shall mean Global Leisure Travel, Inc., a Washington corporation.
"Global Merger" shall have the meaning ascribed thereto in the preambles to this
Agreement.
"Global Merger Agreement" shall mean the Agreement and Plan of Merger dated as
of March 17, 2000 as amended among Parent, Global and US Subco.
<PAGE>
-5-
"Governmental Entity" shall mean; (a) any United States, Canadian,
multinational, foreign, federal, provincial, state, regional, territorial,
municipal, local or other government, governmental or public department, central
bank, court, tribunal, arbitral body, commission, board, bureau or agency; (b)
any subdivision, agent, commission, board, authority or instrumentality of any
of the foregoing; or (c) any quasi-governmental or private body exercising any
regulatory, expropriation or taxing authority under or for the account of any of
the foregoing. The term "Governmental Entity" shall include the SEC, the OSC,
Nasdaq, the TSE, the Winnipeg Stock Exchange, The Canadian Venture Exchange and
the Frankfurt Stock Exchange.
"HSR Act" shall mean the US Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Indebtedness" shall mean; (a) all items (except items of capital, shareholders'
equity, surplus or retained earnings and general contingency reserves) that, in
accordance with generally accepted accounting principles, would be included in
determining total liabilities of the Company or Parent, as the case may be, and
their respective Subsidiaries as of the date at which Indebtedness is to be
determined; (b) indebtedness secured by any Encumbrance to which any property or
asset owned or held by the Company or Parent, as the case may be, and their
respective Subsidiaries is subject, whether or not the indebtedness secured
thereby shall have been assumed; and (c) indebtedness of others which the
Company or Parent, as the case may be, and their respective Subsidiaries have
directly or indirectly guaranteed, endorsed (other than for collection or
deposit in the ordinary course of business), sold or discounted with recourse
(contingently or otherwise) or to purchase or repurchase or otherwise acquire or
in respect of which the Company or Parent, as the case may be, and their
respective Subsidiaries have agreed to supply or advance funds (whether by way
of loan, share purchase, capital contribution or otherwise) or otherwise become
directly or indirectly liable.
"Indemnified Directors" shall have the meaning ascribed thereto in section 7.17.
"Indemnified Party" shall have the meaning ascribed thereto in section 10.1.
"Indemnifying Party" shall have the meaning ascribed thereto in section 10.1.
"Information Circular" shall have the meaning ascribed thereto in section
2.11.1.
"Interim Order" shall have the meaning ascribed thereto in section 2.2.1.
"Laws" shall mean all laws, statutes, ordinances, regulations, rules, published
policies and guidelines of any Governmental Entity and the terms and conditions
of any Permit, judgment, order or decree of any Governmental Entity.
"Leases" shall mean each lease, sublease, license or other agreement under which
the Company or Parent, as the case may be, or any of their respective
Subsidiaries uses, occupies or has the right to occupy any real property or
interest therein that; (a) provides for future minimum payments of $10,000 or
more (ignoring any right of cancellation or termination); or (b) the
cancellation or termination of which would have a Material Adverse Effect.
"Liabilities" shall have the meaning ascribed thereto in section 3.7.2.
"Material Adverse Effect" shall mean, among other things, any event, change or
effect that is or is reasonably expected to be materially adverse to; (a) the
financial condition, business, operations, assets, properties, personnel or
results of operations of the Company or Parent, as the case may be, and their
respective Subsidiaries taken as a whole; or (b) the ability of the Company or
Parent, as the case may be, and their respective Subsidiaries to perform their
respective obligations under this Agreement, the Plan of Arrangement or to
consummate the Arrangement, or any of the other transactions contemplated
hereby. "Material Adverse Effect" shall not include any adverse effect resulting
from changes in general economic conditions or conditions generally affecting
the industry in which the Company or Parent, as the case may be, operates.
<PAGE>
-6-
"Materials of Environmental Concern" shall mean petroleum and its by-products,
all hazardous substances and all substances or constituents that are regulated
by or form the basis for liability under any Environmental Laws.
"Nasdaq" shall mean The Nasdaq Stock Market, Inc.
"OBCA" shall mean the Business Corporations Act, Ontario.
"OSC" shall mean the Ontario Securities Commission.
"Parent Affiliate" shall have the meaning ascribed thereto in section 7.12.
"Parent Balance Sheet" shall have the meaning ascribed thereto in section 4.7.1.
"Parent Benefit Plans" shall mean all benefit plans sponsored or maintained by
Parent or any of its Subsidiaries or under which Parent or any of its
Subsidiaries is obligated.
"Parent Bidder" shall have the meaning ascribed thereto in section 7.13.3.
"Parent Comfort Letters" shall have the meaning ascribed thereto in section
7.8.2.
"Parent Common Stock" shall have the meaning ascribed thereto in section 4.5.1.
"Parent Disclosure Schedule" shall have the meaning ascribed thereto in Article
4.
"Parent Insurance Contracts" shall have the meaning ascribed thereto in section
4.19.
"Parent Plans" shall mean, collectively, all Parent Benefit Plans and all plans,
programs and agreements described in subsection 4.18.1(a).
"Parent Proprietary Rights" shall have the meaning ascribed thereto in section
4.17.1.
"Parent Securities" shall have the meaning ascribed thereto in subsection
2.3(g).
"Parent Securities Reports" shall have the meaning ascribed thereto in section
4.6.
"Parent Superior Proposal" shall have the meaning ascribed thereto in section
7.13.2.
"Parties" shall mean Parent, Aviation Subco and the Company.
"Permit" shall mean any permit, concession, approval, permission, authorization,
certificate or license from any Governmental Entity.
"Permitted Encumbrances" shall mean; (a) liens for current taxes and other
statutory liens and trusts not yet due and payable or that are being contested
in good faith; (b) liens that were incurred in the ordinary course of business,
such as carriers', warehousemen's, landlords' and mechanics' liens and other
similar liens arising in the ordinary course of business; (c) liens on personal
property leased under operating leases; (d) liens, pledges or deposits incurred
or made in connection with workers' compensation, unemployment insurance and
other social insurance and social security benefits or securing the performance
of bids, tenders, leases, contracts (other than for the repayment of borrowed
money), statutory obligations, progress payments, surety and appeal bonds and
other obligations of like nature, in each case incurred in the ordinary course
of business; (e) pledges of or liens on manufactured products as security for
any drafts or bills of exchange drawn in connection with the importation of such
manufactured products in the ordinary course of business; (f) liens under
Article 2 of the applicable Uniform Commercial Code in effect in any given state
in the United States
<PAGE>
-7-
or under applicable Canadian provincial personal property security Laws that are
special property interests in goods identified as goods to which a contract
refers; and (g) liens under Article 9 of the applicable Uniform Commercial Code
in effect in any given state in the United States or under applicable Canadian
provincial personal property security Laws that are purchase money security
interests, none of which are material in the aggregate or individually.
"Person" shall mean any individual, corporation, association, partnership,
limited liability company, estate, trust or other entity or organization.
"Plan of Arrangement" shall have the meaning ascribed thereto in section 2.2.1.
"Registration Statement" shall have the meaning ascribed thereto in section
2.11.2.
"Representative" shall have the meaning ascribed thereto in section 7.2.
"SEC" shall mean the US Securities and Exchange Commission.
"Second Company Comfort Letter" shall have the meaning ascribed thereto in
section 7.8.1.
"Second Parent Comfort Letter" shall have the meaning ascribed thereto in
section 7.8.2.
"Securities Act" shall mean the US Securities Act of 1933, as amended.
"Special Voting Share" shall have the meaning ascribed thereto in section 2.9.
"Subsidiary" shall mean any corporation, association or other business entity a
majority of the shares or other voting interests (by number of votes to the
election of directors or persons holding positions with similar
responsibilities) of which is owned by the Company or Parent, as the case may
be, or any of their respective Subsidiaries; provided however, such term when
used with respect to Parent shall exclude Global and any corporations or other
business entities controlled by Global.
"Tax" shall mean any Canadian, United States, multinational, foreign, federal,
provincial, state, regional, territorial, municipal and local capital, capital
stock, disability, customs duties, employment, environmental (including taxes
under section 59A of the Code), estimated, excise, franchise, capital gains,
employer health, income, license, alternative or add-on minimum, occupation,
payroll, premium, profits, windfall profits, personal property, real property,
gross receipts, registration, gross revenue, sales, goods and services,
severance, social security (or similar), stamp, transfer, turnover,
unemployment, use, value added, withholding, net worth or other tax of any kind
whatsoever including employment insurance and Canada Pension Plan premiums as
well as any interest or penalty in respect thereof and any addition thereto,
whether disputed or not.
"Tax Return" shall mean any return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto and any amendment thereof.
"Termination Expenses" shall have the meaning ascribed thereto in section 9.4.
"Transfer Agent" shall mean Montreal Trust Company.
"Trustee" shall mean Montreal Trust Company acting as trustee under the Voting
and Exchange Trust Agreement.
"TSE" shall mean The Toronto Stock Exchange.
"United States" means the United States of America, including any state thereof
and its territories and assigns.
"US Subco" shall have the meaning ascribed thereto in the preambles to this
Agreement.
"Violation" shall mean, with respect to any provision, with or without the
giving of notice or the lapse of time, or both; (a) any conflict with, violation
or breach of, or default under, such provision; (b) the arising of any right of
termination, amendment, cancellation or acceleration of any obligation contained
in or the loss of any material
<PAGE>
-8-
benefit under, such provision; or (c) the arising of any Encumbrance upon any of
the properties or assets of the Person or any of its Subsidiaries subject to the
provision.
"Voting and Exchange Trust Agreement" shall mean the agreement to be executed by
and among Parent, the Company and the Trustee.
ARTICLE 2
GENERAL
2.1. Global Merger and Bridge Financing
2.1.1 The Global Merger has been effected, or will be effected as soon as
practicable, as contemplated in the Global Merger Agreement.
2.1.2. Global and Parent have completed, or will complete as soon as
practicable, a bridge financing as set forth in Schedule 2.1.2.
2.1.3. As a result of the consummation of the Global Merger and bridge
financing, the share capital of Parent and Global will be as set forth in
Schedule 2.1.3.
2.2. Court Approvals
2.2.1. Interim Order. As promptly as practicable, the Company shall apply to
the Court pursuant to section 182(5) of the OBCA for an interim order in form
and substance reasonably satisfactory to Parent (the "Interim Order") providing
for, among other things, the calling and holding of a special meeting of the
shareholders of the Company (the "Company Shareholder Meeting") for the purpose
of considering and, if deemed advisable, approving the arrangement (the
"Arrangement") under section 185 of the OBCA and pursuant to this Agreement and
the Plan of Arrangement substantially in the form of Schedule "A" together with
such changes, modifications and additions thereto as the Parties may reasonably
agree upon (the "Plan of Arrangement"). The notice of motion for the application
for the Interim Order shall request that the Interim Order provide: (a) for the
class of Persons to whom notice shall be provided in respect of the Arrangement
and the Company Shareholder Meeting and for the manner in which such notice
shall be provided; (b) that the requisite shareholder approval for the special
resolution approving the Arrangement shall be 66-2/3% of the votes cast on such
special resolution by holders of Company Common Shares present in person or by
proxy at the Company Shareholder Meeting; (c) that, in all other respects, the
terms, restrictions and conditions of the Articles of Incorporation and By-Laws
of the Company, including quorum requirements and all other matters, shall apply
in respect of the Company Shareholder Meeting: and (d) for the grant of the
rights of dissent in respect of the Arrangement described in the Plan of
Arrangement and the OBCA.
2.2.2. Final Order. If the shareholders of the Company shall approve the
Arrangement in accordance with the Interim Order, and subject to the
satisfaction or waiver of the other conditions set forth in Article 8, the
Company shall as promptly as practicable: (a) take all necessary steps to submit
the Arrangement to the Court and apply for and shall obtain a final order of the
Court approving the Arrangement (including without limitation, the fairness
thereof) in such fashion as the Court may direct (the "Final Order"); and (b)
upon obtaining the Final Order, send to the Director appointed under the OBCA
for endorsement and filing by such entity, the Articles of Arrangement and such
other documents as may be required in connection therewith under the OBCA to
give effect to the Arrangement.
2.3. Exchange Ratio. (a) The "Exchange Ratio" on completion of the
consummation shall be one Exchangeable Share of the Company for each one Company
Common Share. The Exchange Ratio shall be adjusted to reflect fully the effect
of any share split, reverse split, share dividend (including any dividend or
distribution of securities convertible into Parent Common Stock or Company
Common Shares), reorganization, recapitalization or other like change with
respect to the Parent Common Stock or the Company Common Shares occurring after
the date hereof and prior to the Effective Time (the "Adjustment").
<PAGE>
-9-
(b) Upon completion of the Arrangement and satisfaction of all conditions
precedent thereto including, without limitation, the filing and certification of
the Articles of Arrangement, each one Company Common Share outstanding
immediately prior to the Effective Time shall be converted into the right to
receive one Exchangeable Share of the Company, and each Company Common Share
theretofore outstanding will cease to be outstanding and will cease to exist,
and each holder of a certificate for Company Common Shares will thereafter cease
to have any rights with respect to such shares, except the right to receive,
without interest, the Exchangeable Shares as calculated pursuant to this
section, upon the surrender of such certificate for Company Common Shares.
(c) As of the Effective Time, the Company will deposit with the Transfer Agent
for the benefit of the holders of certificates representing Company Common
Shares for exchange in accordance with this section, certificates representing
Exchangeable Shares to be issued pursuant to this Agreement. Promptly after the
Effective Time, the Company will cause the Transfer Agent to mail to each holder
of record of Company Common Shares as of the Effective Time a letter of
transmittal which will specify; (i) that delivery will be effected, and risk of
loss and title to the certificates therefor will pass, only upon delivery of
such certificates to the Transfer Agent, and will be in such form and have such
other provisions as the Company may reasonably specify; and (ii) instructions
for use in effecting the surrender of such certificates in exchange for
certificates representing Exchangeable Shares. All certificates representing
Company Common Shares so surrendered will be cancelled forthwith.
(d) From and after the Effective Time, there will be no transfers on the stock
transfer books of the Company Common Shares which were outstanding immediately
prior to the Effective Time.
(e) Any portion of the certificates representing Exchangeable Shares made
available to the Transfer Agent pursuant to the terms hereof which remain
unclaimed by the holders of Company Common Shares for 180 calendar days after
the Effective Time will be delivered to the Company and any former Company
common shareholders who have not theretofore complied with this section may look
only to the Company for delivery of certificates representing the Exchangeable
Shares.
(f) In the event any certificate representing Company Common Shares shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the Person claiming such certificate to be lost, stolen or destroyed and, if
required by the Company, the posting by such Person of a bond in such reasonable
amount as the Company may direct as indemnity against any claim that may be made
against it with respect to such certificate, the Transfer Agent or the Company
will issue in exchange for such lost, stolen or destroyed certificate the
Exchangeable Shares deliverable in respect thereof pursuant to this Agreement.
(g) Schedule 2.2.1 sets forth a list of all outstanding Company Securities
including without limitation, all options and warrants (the "Company
Securities"). As of the Effective Time, each outstanding option forming a part
of the Company Securities will be exchanged for a similar security of the Parent
issued under Parent's 1997 Share Option Plan (the "Parent Securities"), based on
the Exchange Ratio, and whether or not then exercisable or vested will continue
to have, and be subject to, the same vesting schedule and exercise price, as
adjusted for conversion from Canadian dollars to U.S. dollars. The stock option
plan of the Company will thereafter be cancelled. As of the Effective Time, in
accordance with the respective terms thereof, the warrants forming a part of the
Company Securities shall be exercisable into Exchangeable Shares based on the
Exchange Ratio.
2.4. Dissenting Shares. Holders of Company Common Shares may exercise rights
of dissent in connection with the Arrangement pursuant to and in the manner set
forth in the Plan of Arrangement and the OBCA. The Company shall give Parent
prompt written notice of any written demands for a right of dissent and
withdrawals of such demands.
2.5. Articles of Arrangement. Following receipt of the Final Order and the
waiver or satisfaction of the conditions set forth in Article 8, Aviation Subco
and the Company shall file Articles of Arrangement under the name of
"travelbyus.com Ltd." among other things, establishing exchangeable shares as
part of the authorized capital of the Company having those attributes set forth
on Schedule 2.5 (the "Exchangeable Shares").
<PAGE>
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2.6. Other Effects of the Arrangement. From and after the Effective Time, the
individuals identified on or determined in accordance with Schedule 2.6 will
serve as directors and officers of the Company and Parent, as the case may be,
until the earlier of the resignation or removal of any such individual or until
their respective successors are duly elected and qualified, as the case may be.
Parent's Board of Directors shall take the necessary actions to effect any
change in the directors and officers of Parent represented by Schedule 2.6,
including where necessary, the resignation of existing directors and the
appointment of new directors to fill any vacancies in the Parent's Board of
Directors.
2.7. Voting and Exchange Trust Agreement. On or before the Effective Time,
the Parties and the Trustee shall authorize, execute and deliver a voting and
exchange trust agreement (the "Voting and Exchange Trust Agreement"), on terms
and conditions satisfactory to the Parties. On or before the Effective Time,
Parent shall issue and deposit with the Trustee, for the benefit of the holders
of Exchangeable Shares and pursuant to the Voting and Exchange Trust Agreement,
the Special Voting Share.
2.8. Support Agreement. On or before the Effective Time, the Parties shall
execute and deliver a support agreement (the "Support Agreement"), on terms and
conditions satisfactory to the Parties.
2.9. Articles of Amendment. On or before the Effective Time, Parent shall
create the Special Voting Share having those attributes set forth on Schedule
2.9 (the "Special Voting Share"), and increase its authorized number of shares
of Parent Common Stock to 250,000,000.
2.10. Securityholder Meeting. Following the execution and delivery hereof, as
promptly as practicable, the Company, Parent and Aviation Subco shall take all
action necessary in accordance with Applicable Laws and their respective charter
documents to call and hold joint or contemporaneous shareholders' meetings for
the purpose of voting upon the Arrangement and such other matters as shall
require approval of the shareholders of the Company or Parent, as the case may
be, in order to consummate the Arrangement and the other transactions
contemplated hereby. The Board of Directors of the Company and Parent, as the
case may be, shall give their unqualified recommendation to their respective
shareholders that they approve the Arrangement and such other matters. The
Company shall additionally take all action necessary in accordance with
Applicable Laws to procure the consent of the applicable holders of the Company
Securities.
2.11. Information Circular and Registration Statement
2.11.1. Information Circular. As promptly as practicable, each of the Company
and Parent shall prepare a joint proxy statement with respect to the Arrangement
(the "Information Circular"), together with any other documents required by
Applicable Laws in connection with the Arrangement including without limitation,
the Interim Order, and the other transactions contemplated hereby. The Company
and Parent shall cause the Information Circular and such other required
documents to be sent to their respective shareholders entitled to vote in
accordance with Applicable Laws. The Company and Parent shall ensure that the
Information Circular provides their respective shareholders entitled to vote
with information in sufficient detail to permit them to form a reasoned judgment
concerning the matters to be placed before them and that the Information
Circular is accurate and complete in all material respects.
2.11.2. Registration Statement. As promptly as practicable, Parent shall file
with the SEC the Information Circular as and by way of a registration statement
(the "Registration Statement") to register the Parent Common Stock to be issued
from time to time after the Effective Time upon exchange of the Exchangeable
Shares and exercise of the Parent Securities in accordance with their respective
terms. Parent and the Company shall use their reasonable best efforts to cause
the Registration Statement to become effective and to maintain the effectiveness
of the Registration Statement for the period that the Exchangeable Shares and
the Parent Securities remain outstanding.
2.11.3. Approval of Canadian Authorities. Parent and the Company shall use their
reasonable best efforts to obtain all orders required from applicable Canadian
securities regulatory authorities to permit the issuance and first resale of;
(a) the Exchangeable Shares; (b) the Parent Common Stock issuable upon exchange
of the Exchangeable Shares from time to time; and (c) the Parent Common Stock
issuable from time to time upon the exercise of the Parent Securities; in each
case without qualification with or approval of or the filing of any document
(including any
<PAGE>
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prospectus or similar document) or the taking of any proceeding with or the
obtaining of any further order, ruling or consent from any Governmental Entity
under Applicable Laws or the fulfillment of any other legal requirement in any
such jurisdiction (other than, with respect to such first resales, any
restrictions on transfer by reason of, among other things, a holder being a
"control person" of Parent or the Company for the purposes of Canadian federal,
provincial or territorial securities Laws).
2.11.4. Provision of Information. Each Party shall promptly furnish to the other
Parties all information concerning such Party and its securityholders as may be
reasonably required in connection with any action contemplated by this
Agreement. The Information Circular, the Registration Statement and the other
documents required by Applicable Laws in connection with the Arrangement and the
other transactions contemplated hereby shall comply in all material respects
with all requirements of Applicable Laws. No information provided by Parent or
the Company for inclusion in the Information Circular, the Registration
Statement or any other documents to be filed with the SEC, the OSC or other
applicable Canadian provincial securities regulators (together with the OSC, the
"Commissions"), the TSE or to be mailed to the securityholders of the Company
and Parent in connection with the Arrangement and the other transactions
contemplated hereby shall contain any untrue statement of a material fact or
shall omit to state a material fact required to be stated therein or necessary
to make the statements therein in light of the circumstances under which they
were made not misleading. Parent and the Company shall notify the other Party
promptly of the receipt of any comments from the SEC, the Commissions or the TSE
and of any request by the SEC, the Commissions or the TSE for amendments or
supplements to the Information Circular or the Registration Statement or for
additional information. Parent and the Company shall supply the other Party with
copies of all correspondence with the SEC, the Commissions, the TSE and Nasdaq
with respect to the Information Circular and the Registration Statement.
Whenever any event shall occur that should be set forth in an amendment or
supplement to the Information Circular or the Registration Statement, Parent or
the Company, as the case may be, shall promptly inform the other Party of such
occurrence and shall cooperate in filing with the SEC, the Commissions, the TSE
and/or Nasdaq and/or mailing to securityholders of the Company and Parent
entitled to vote, such amendment or supplement.
2.11.5. Blue Sky Laws. Parent and the Company shall promptly take all action
required to be taken under any Applicable state or provincial securities Laws
(including "blue sky" Laws) in connection with the Arrangement and the issuance
of the Exchangeable Shares and the Parent Securities with respect to Canadian
provincial qualifications. Neither Parent nor the Company shall be required to
register or qualify as a foreign corporation or a reporting issuer where either
such Party is not now so registered or qualified.
2.12. Listings. Parent shall take such action as shall be necessary to
authorize for listing on Nasdaq or AMEX the Parent Common Stock issuable upon
exchange of the Exchangeable Shares and upon exercise of the Parent Securities.
Parent and the Company shall take such action as shall be necessary to authorize
for listing on the TSE, the Exchangeable Shares as of and from the Effective
Time until December 31, 2001.
2.13. Closing. Closing of the Arrangement and the other transactions
contemplated hereby (the "Closing") shall take place at a location to be agreed
upon by the Parties, on the Effective Date after the later of the satisfaction
or waiver of the conditions set forth in Article 8. Concurrently with Closing,
the Parties shall cause to be filed with the Director under the OBCA, Articles
of Arrangement and such other documents as may be required in connection
therewith under the OBCA to give effect to the Arrangement and the other
transactions contemplated hereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Aviation Subco that the
statements in this Article 3 are true and correct, except as set forth in the
disclosure schedule delivered by the Company to Parent on the date hereof (the
"Company Disclosure Schedule"). The Company Disclosure Schedule shall be
arranged in sections and paragraphs corresponding to the numbered and lettered
sections and paragraphs in this Article 3. The disclosure in any section or
paragraph of the Company Disclosure Schedule shall qualify other sections and
paragraphs in this Article 3 only to the extent that it is reasonably apparent
from a reading of such disclosure that it also qualifies or
<PAGE>
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applies to such other sections or paragraphs. As and when necessary, prior to
the Effective Time, as and when required by reason of completion of any of the
Acquisition Transactions, the Company Disclosure Schedules shall be amended.
3.1. Corporate Status of the Company and its Subsidiaries. Each of the
Company and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the Laws of its jurisdiction of incorporation, with
the requisite corporate or organizational power and authority to carry on its
business as currently being conducted and to own, lease and operate the
properties currently owned, leased and operated by it. Each of the Company and
its Subsidiaries is duly qualified or licensed to do business and is in good
standing as an extra-provincial or foreign corporation or organization
authorized to do business in all jurisdictions in which the character of the
properties owned or held under lease by it or the nature of the business
transacted by it makes such qualification or licensing necessary, except in
jurisdictions in which the failure to be so qualified or licensed would not
result in a Material Adverse Effect. Section 3.1 of the Company Disclosure
Schedule sets forth a complete list of the Company's Subsidiaries, their
jurisdictions of incorporation and a complete list of each jurisdiction in which
each of the Company and its Subsidiaries is duly qualified and in good standing
to do business.
3.2. Articles of Incorporation, By-Laws, Directors and Officers. The Company
has delivered to Parent true and complete copies of the Articles of
Incorporation and By-laws of the Company, including all amendments thereto, as
in effect on the date hereof. Each of the minute books of the Company and its
Subsidiaries made available to Parent and/or its agents contains accurate
records of all meetings and consents in lieu of meetings of the Board of
Directors (or similar governing body) of the Company or its Subsidiaries, as the
case may be (and any committees thereof) and of its securityholders (or other
equity holders having rights to vote or consent) since the date of incorporation
and such records accurately reflect all transactions referred to in such minutes
and consents. Section 3.2 of the Company Disclosure Schedule sets forth a list
of the directors and officers of the Company and its Subsidiaries and the
respective offices held by them.
3.3. Authority for Agreement; Noncontravention
3.3.1. Authority. The Company has all requisite corporate power and authority
to enter into this Agreement and the other agreements contemplated hereby to be
executed by it and subject to approval of the Company's shareholders and
securityholders as contemplated in section 3.3.1 of the Company Disclosure
Schedule and the Court as provided in this Agreement, to consummate the
Arrangement and the other transactions contemplated hereby and to execute and
deliver the other agreements contemplated hereby. The execution and delivery by
the Company of this Agreement and such other agreements and the consummation by
the Company of the Arrangement and the other transactions contemplated hereby
and thereby have been duly and validly authorized by the Board of Directors of
the Company. Except for the approval of the Company's shareholders and
securityholders as provided in this Agreement and as provided in section 3.3.1
of the Company Disclosure Schedule, no other corporate proceedings on the part
of the Company are necessary to authorize the execution and delivery by the
Company of this Agreement and such other agreements and the consummation by the
Company of the Arrangement and the other transactions contemplated hereby and
thereby. This Agreement has been duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, subject to the qualifications that;
(a) enforcement of the rights and remedies created hereby are subject to
Bankruptcy Laws; and (b) the consummation of the Arrangement is subject to the
approval of the Company's shareholders and other securityholders as provided in
section 3.3.1 of the Company Disclosure Schedule and to receipt by the Company
of each of the Interim Order and the Final Order as provided in section 2.2. On
or before the Effective Time, the other agreements contemplated hereby to be
executed and delivered by the Company on or before the Effective Time will have
been executed and delivered by the Company and upon such execution and delivery
will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their respective terms, subject to the
qualifications that; (a) enforcement of the rights and remedies created thereby
will be subject to Bankruptcy Laws; and (b) the consummation of the Arrangement
is subject to the approval of the Company's shareholders and securityholders as
provided in this Agreement and the Company's securityholders as provided in
section 3.3.1 of the Company Disclosure Schedule and to receipt by the Company
of each of the Interim Order and the Final Order as provided in section 2.2.
<PAGE>
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3.3.2. No Conflict. None of the execution and delivery by the Company of this
Agreement, the Plan of Arrangement and the other agreements contemplated hereby,
the performance by the Company of its obligations hereunder and thereunder and
the consummation by the Company of the transactions contemplated hereby and
thereby will cause a Violation of any term, condition or provision of the
Articles of Incorporation or By-Laws of the Company or any of its Subsidiaries
or any contract, judgment, decree or order to which the Company or any of its
Subsidiaries is a party or by which it, any of its Subsidiaries or any of their
respective material assets or properties is bound or to the knowledge of the
Company, any Applicable Laws, other than such Violations which individually or
in the aggregate would not result in a Material Adverse Effect.
3.4. Governmental Consents. No consent, approval, order or authorization of
or registration or filing with or declaration or notice to any Governmental
Entity (the "Consents"), is required to be obtained by the Company or any of its
Subsidiaries in connection with the execution and delivery by the Company of
this Agreement or the other agreements contemplated hereby, the performance by
the Company of its obligations hereunder and thereunder and the other
transactions contemplated hereby or thereby except; (a) the filing with and
approval of the Commissions; (b) the filing with and approval of the SEC of such
registration statements, reports and information under the Securities Act and
the Exchange Act and the rules and regulations promulgated by the SEC thereunder
as may be required in connection with this Agreement and the transactions
contemplated hereby; (c) the filing of the Articles of Arrangement and documents
required by the OBCA; (d) such filings, authorizations, orders and approvals as
may be required under state or provincial "control share acquisition",
"anti-takeover" or other similar statutes and any other approvals required under
applicable federal, provincial or state securities Laws and the rules of the
Nasdaq and the TSE; (e) such filings and notices as may be necessary under the
HSR Act and the early termination or expiration of the required waiting period;
(f) such filings and notices as may be necessary under the Investment Canada Act
and under the Competition Act (Canada); (g) the receipt by the Company of the
Interim Order and the Final Order; and (h) where the failure to obtain or make
such Consents would not prevent or delay the consummation of the Arrangement or
the other transactions contemplated hereby or otherwise prevent the Company from
performing its obligations under this Agreement, the Arrangement or the other
agreements contemplated hereby and would not result in a Material Adverse
Effect.
3.5. Capitalization
3.5.1. Authorized Share Capital of the Company. The authorized and issued share
capital of the Company is as set forth in section 3.5.1 of the Company
Disclosure Schedule. All of the issued Company Common Shares have been duly
authorized and validly issued and are fully paid and nonassessable. None of the
issued Company Common Shares was issued in violation of the terms of any
agreement or other understanding binding upon the Company. All of the issued
Company Common Shares were issued in compliance with all applicable charter
documents of the Company and all Applicable Laws. There are and have been no
preemptive rights with respect to the issuance of the Company Common Shares.
3.5.2. Options and Convertible Securities of the Company. Section 3.5.2 of the
Company Disclosure Schedule sets forth a complete list of; (a) each stock option
plan, stock purchase plan and each other plan, arrangement or agreement under
which the Company or any of its Subsidiaries has reserved shares or any
securities or obligations convertible into or exercisable or exchangeable for
any shares, to any employee, director, consultant, service provider or other
Person (collectively, the "Company Plans"); and (b) the number of shares,
securities or obligations reserved for issuance under such plan, arrangement or
agreement. All such plans, arrangements and agreements are in compliance with
all Applicable Laws and have been approved by the TSE. Except as set forth in
section 3.5.2 of the Company Disclosure Schedule, there are no outstanding
subscriptions, options, warrants or conversion rights or other rights,
securities, agreements, calls or commitments (contingent or otherwise) that
obligate the Company to issue, sell, deliver or otherwise dispose of shares or
any securities or obligations convertible into or exercisable or exchangeable
for any shares. None of the execution and delivery by the Company of this
Agreement and the other agreements contemplated hereby, the performance by the
Company of its obligations hereunder and thereunder and the consummation by the
Company of the other transactions contemplated hereby and thereby and any other
event that occurred on or prior to the date hereof will accelerate the vesting
under any item set forth in section 3.5.2 of the Company Disclosure Schedule.
There are no voting trusts or other agreements or understandings to which the
Company or to the knowledge of the Company, any securityholder of the Company is
a party with respect to the voting of the Company Common Shares. Except as set
forth in section 3.5.2
<PAGE>
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of the Company Disclosure Schedule, the Company is not a party to or bound by
any outstanding restrictions, puts, options or other obligations, agreements or
commitments to repurchase, redeem or otherwise acquire any outstanding Company
Common Shares or other equity securities of the Company.
3.5.3. Subsidiaries. Section 3.5.3 of the Company Disclosure Schedule sets
forth the authorized and issued shares of each of the Company's Subsidiaries.
All of the issued shares of each of the Company's Subsidiaries have been duly
authorized and validly issued and are fully paid and nonassessable. None of the
issued securities of any of the Company's Subsidiaries was issued in violation
of the terms of any agreement or other understanding binding upon the issuing
Subsidiary and all of such issued securities were issued in compliance with all
applicable charter documents of the issuing Subsidiary and all Applicable Laws.
There are no outstanding subscriptions, options, warrants or conversion rights
or other rights, securities, agreements, calls or commitments (contingent or
otherwise) that obligate any of the Company's Subsidiaries to issue, sell,
deliver or otherwise dispose of shares or any securities or obligations
convertible into or exercisable or exchangeable for any shares. There are and
have been no preemptive rights with respect to the issuance of securities of any
of the Company's Subsidiaries. The Company owns beneficially and of record all
of the outstanding securities of each of its Subsidiaries, free and clear of all
Encumbrances save and except as set forth in section 3.5.3 of the Company
Disclosure Schedule. Other than the Company's Subsidiaries, the Company does not
own, directly or indirectly, any shares or other equity interest or securities
in any Person.
3.6. Securities Reports; Financial Statements. The Company has timely filed
all forms, reports and documents (including prospectuses, offering memoranda and
TSE filing statements) with the Commissions and the TSE required to be filed by
it pursuant to Applicable Laws (collectively, the "Company Securities Reports").
As of their respective dates, the Company Securities Reports complied in all
material respects with Applicable Laws and did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading. The financial
statements (including any related notes) of the Company included in the Company
Securities Reports complied in all material respects with applicable accounting
requirements and with Applicable Laws, were prepared in conformity with Canadian
generally accepted accounting principles applied on a consistent basis (except
as otherwise stated in the financial statements) and present fairly the
consolidated financial position, results of operations, shareholders' equity,
liabilities (contingent or otherwise) and cash flows, as the case may be, of the
Company and its consolidated Subsidiaries as of the dates and for the periods
indicated, subject, in the case of unaudited interim financial statements to;
(i) the absence of certain notes thereto; and (ii) normal year-end audit
adjustments. The information to be contained in the Information Circular
(including any information referred to therein or incorporated therein by
reference) relating to the Company will be accurate and complete in all material
respects as of the date thereof and will not contain a misrepresentation (as
defined in the Securities Act (Ontario)) as of such date.
3.7. Absence of Material Adverse Changes and Undisclosed Liabilities
3.7.1. Changes. Since the date of the most recent consolidated balance sheet
filed by the Company with the Commissions (the "Company Balance Sheet"), the
Company has not experienced a Material Adverse Effect. Without limiting the
generality of the foregoing, except as set forth in section 3.7.1 of the Company
Disclosure Schedule, since the date of the Company Balance Sheet and, save and
except for acquisitions by the Company or joint venture and/or strategic
alliance transactions (collectively, the "Acquisition Transactions") entered
into by the Company and/or its Subsidiaries in the ordinary course of business,
which transactions are or may be the subject matter of agreements, contracts
and/or letters of intent which have been provided to Parent or its legal counsel
prior to or after the date hereof, neither the Company nor any of its
Subsidiaries has:
(a) sold, leased, transferred or assigned any of its assets,
tangible or intangible, other than in the ordinary course of
business;
(b) accelerated, terminated, modified or canceled any contract,
lease, sublease, license or sublicense (or series of related
contracts, leases, subleases, licenses and sublicenses)
involving more than $100,000;
<PAGE>
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(c) cancelled, compromised, waived or released any right or claim
(or series of related rights and claims) either involving more
than $100,000 or outside the ordinary course of business;
(d) experienced material damage, destruction or loss (whether or not
covered by insurance) to its material property (other than
ordinary wear and tear not caused by neglect);
(e) created or suffered to exist any Encumbrance (other than
Permitted Encumbrances) upon any of the assets, tangible or
intangible, of the Company or any Subsidiary;
(f) issued, sold, delivered or otherwise disposed of any shares or
any securities or obligations convertible into or exercisable or
exchangeable for any shares of the Company or any of its
Subsidiaries or undergone any reorganization, recapitalization,
reclassification, stock split or reverse stock split; provided
always that it is understood and agreed that notwithstanding the
foregoing, prior to the Effective Time and upon written notice
to Parent or its counsel, the Company may grant stock options
pursuant to the terms of its stock option plan and that the
Company may issue Company Common Shares pursuant to Acquisition
Transactions so long as it advises Parent or its counsel of such
issuances;
(g) accelerated, amended, repriced or changed the period of
exercisability of any outstanding security or authorized cash
payments in exchange for any options granted under any of the
Company Plans;
(h) declared, set aside or paid any dividend or distribution with
respect to its shares (whether in cash or in kind) or directly
or indirectly redeemed, purchased or otherwise acquired any of
its shares;
(i) entered into financial arrangements for the benefit of any
director, officer or securityholder of the Company other than in
connection with such Person's employment by the Company in the
ordinary course of its business and consistent with past
practice;
(j) made or committed to make any capital expenditures or entered
into any other material transaction outside the ordinary course
of business or involving an expenditure in excess of $100,000;
(k) amended or modified in any respect any employment contract or
arrangement or any profit sharing, bonus, incentive
compensation, severance, employee benefit or multi-employer
plans;
(l) entered into any employment agreement or collective bargaining
agreement or increased the compensation of any of its employees
other than in the ordinary course of its business and consistent
with past practice; or
(m) committed (orally or in writing) to do any of the foregoing.
3.7.2. Liabilities. Except for liabilities and obligations; (i) set forth in
the Company Securities Reports; or (ii) set forth in section 3.7.2 of the
Company Disclosure Schedule; or (iii) specifically contemplated to be incurred
in connection with this Agreement or the Global Merger; neither Company nor any
of its Subsidiaries has any Liabilities required by generally accepted
accounting principles to be set forth on a consolidated balance sheet of the
Company or in the notes thereto and which, individually or in the aggregate,
could be reasonably expected to have a Material Adverse Effect.
3.8. Litigation and Audits. Except as set forth in section 3.8 of the Company
Disclosure Schedule, there is no investigation or inquiry by any Governmental
Entity with respect to the Company or any of its Subsidiaries pending or to the
knowledge of the Company threatened, nor has any Governmental Entity indicated
to the Company or any of its Subsidiaries an intention to conduct the same.
Except as set forth in section 3.8 of the Company Disclosure Schedule, there is
no claim, action, suit, arbitration or proceeding pending or to the knowledge of
the Company threatened against or involving the Company, any of its Subsidiaries
or any of their respective assets or properties, at law or in equity or before
any arbitrator or Governmental Entity, which if determined adversely to the
Company or
<PAGE>
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any Subsidiary could result in a Material Adverse Effect. There are no
judgments, decrees, injunctions, orders or rulings of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries, which if
existed, would result in a Material Adverse Effect.
3.9. Compliance with Applicable Law, Articles of Incorporation and By-Laws.
Each of the Company and its Subsidiaries has all requisite Permits necessary to
carry on its respective business as currently being conducted and to own, lease
and operate the respective properties currently owned, leased and operated by it
in the manner currently owned, leased and operated, except where the failure to
have such Permits would not result in a Material Adverse Effect. There are no
proceedings pending or to the knowledge of the Company threatened, which might
result in the revocation, cancellation, suspension or adverse modification of
any such Permit. The business of the Company and its Subsidiaries has not been
conducted in Violation of Applicable Laws, except for Violations which
individually or in the aggregate would not result in a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is in Violation of nor has any
event occurred that has resulted or will result in a Violation of any term,
condition or provision of the Articles of Incorporation or By-Laws of the
Company and its Subsidiaries.
3.10. Books and Records; Accounting Matters. The books, records and accounts
of the Company and its Subsidiaries; (a) have been maintained in accordance with
good business practices; (b) are stated in reasonable detail and accurately and
fairly reflect in all material respects the transactions and dispositions of the
respective assets of the Company and its Subsidiaries; and (c) accurately and
fairly reflect in all material respects the basis for the Company Balance Sheet.
The Company has devised and maintains a system of internal accounting controls
sufficient to provide reasonable assurances that; (i) transactions are executed
in accordance with management's general or specific authorizations; and (ii)
transactions are recorded as necessary; (a) to permit preparation of accurate
financial statements in conformity with Canadian generally accepted accounting
principles or any other criteria applicable to such statements; and (b) to
maintain accountability for assets. There has been no change in the Company's
accounting policies or the methods of making accounting estimates or changes in
estimates that are material to the Company's financial statements except as
described in the notes thereto.
3.11. Tax Matters
3.11.1. Filing of Returns. Each of the Company and its Subsidiaries has prepared
and timely filed with all appropriate Governmental Entities all Tax Returns that
it was required to file. All such Tax Returns were correct and complete in all
material respects. Neither the Company nor any of its Subsidiaries currently is
the beneficiary of any extension of time within which to file any Tax Return
other than extensions for which the Company or any of its Subsidiaries has filed
a request which request has resulted in the automatic granting of such
extension. No Governmental Entity in any jurisdiction in which any of the
Company and any of its Subsidiaries does not file Tax Returns has ever claimed
that the Company or any of its Subsidiaries is or may be subject to taxation by
that jurisdiction.
3.11.2. Payment of Taxes. All Taxes payable or owed by the Company and its
Subsidiaries (whether or not shown on any Tax Return) have been paid when due,
and all Taxes due on or before the Effective Time will be paid when due. In the
case of Taxes accruing on or before the date hereof that are not due on or
before the date hereof, the Company has made adequate provision in its books and
records and financial statements for such payment. There are no security
interests on any assets of the Company or any of its Subsidiaries that arose in
connection with any failure (or alleged failure) to pay any Tax.
3.11.3. Withholding. Each of the Company and its Subsidiaries has withheld from
every payment made to each of its current or former employees, officers,
directors, shareholders, independent contractors, creditors, non-residents and
other Persons all amounts required by Applicable Law to be withheld and, where
required, has remitted such amounts within the applicable periods to the
appropriate Governmental Entity.
3.11.4. Assessments. Neither the Company nor any of its Subsidiaries expects any
authority to assess any additional Taxes in excess of tax reserves provided for
in the Company's financial statements against the Company or any of its
Subsidiaries for any period for which Tax Returns have been filed. No Tax Return
of the Company or any of its Subsidiaries has been audited or currently is the
subject of audit. No Governmental Authority has raised any dispute or claim
concerning any Tax liability of the Company or any of its Subsidiaries. Neither
the Company nor any of its
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Subsidiaries has waived any statute of limitations with respect to Taxes or has
agreed to any extension of time with respect to a Tax assessment or deficiency.
3.11.5. Access to Returns. The Company has provided Parent with a copy of or
access to all Canadian and other federal, provincial, state and local income and
capital Tax returns filed by the Company and its Subsidiaries after September
30, 1999. The Company has provided Parent with a copy of or access to all
assessments, extensions and waivers resulting from any examinations or audits of
the Company or any of its Subsidiaries by a Governmental Entity in respect of
Taxes and all such assessments and related penalties and interest have been paid
in full unless being contested in good faith by the Company or any of its
Subsidiaries and described in section 3.11 of the Company Disclosure Schedule.
3.12. Employee Benefit Plans
3.12.1. List of Plans. Section 3.12 of the Company Disclosure Schedule sets
forth a complete list of all Company Benefit Plans. The Company has delivered to
Parent; (a) accurate and complete copies of all Company Benefit Plan documents
and all other material documents relating thereto, including (if applicable) all
summary plan descriptions, summary annual reports and insurance contracts; (b)
accurate and complete detailed summaries of all unwritten Company Benefit Plans;
(c) accurate and complete copies of the most recent financial statements and
actuarial reports with respect to all Company Benefit Plans for which financial
statements or actuarial reports are required or have been prepared; (d) accurate
and complete copies of all information returns and annual reports for all
Company Benefit Plans (for which information returns or annual reports are
required or have been prepared) prepared within the last three years; (e) all
material professional opinions relating to the Company Benefit Plans; and (f)
accurate and complete copies of material correspondence with all regulatory
authorities.
3.12.2. Claims. There are no pending or to the knowledge of the Company
threatened claims by or on behalf of any Company Benefit Plans or by or on
behalf of any individual participants or beneficiaries of any Company Benefit
Plans alleging any breach of fiduciary duty on the part of the Company or any of
its Subsidiaries or any of their respective officers, directors, employees or
agents under any Applicable Laws or claiming benefit payments (other than those
made in the ordinary operation of such Company Benefit Plans) nor to the
knowledge of the Company is there any basis therefor that if existed would cause
a Material Adverse Effect.
3.12.3. Contributions. The Company and each of its Subsidiaries has timely made
all required contributions under the Company Benefit Plans.
3.12.4. Company Benefit Plans. All of the Company Benefit Plans in which
employees of the Company and each of its Subsidiaries participate or are
eligible to participate are and have been established, registered, qualified,
invested and administered in all respects in accordance with all laws,
regulations, orders or other legislative, administrative or judicial
promulgations applicable to the Company Benefit Plans. With respect to Company
Benefit Plans having special Tax status, no fact or circumstance exists that
could adversely affect the intended Tax status of such Company Benefit Plan. All
obligations regarding the Company Benefit Plans have been satisfied and there
are no actions, outstanding defaults or violations by any party to any Company
Benefit Plan that could subject the Company or any of its Subsidiaries to any
material penalty or Tax and no Tax, penalty or fee is owing or eligible under or
in respect of any Company Benefit Plan. Neither the Company nor its applicable
Subsidiary, subject to the limitations or conditions set forth in other
provisions hereof, may unilaterally amend, modify, vary, revoke or terminate, in
whole or in part, any Company Benefit Plan maintained by it or may take
contribution holidays under or withdraw surplus from such Company Benefit Plans,
subject only to approvals required by Applicable Laws. Subject to Applicable
Laws and all limitations and conditions in other provisions hereof, the Company
or its applicable Subsidiaries may amend, revise or merge any Company Benefit
Plan or transfer or merge the assets or liabilities of any Company Benefit Plan
with any other arrangement, plan or fund. No Company Benefit Plan nor any
related trust or other funding medium thereunder is subject to any pending
investigation, examination or other proceeding, action or claim initiated by any
Governmental Entity or by any other party (other than routine claims for
benefits) and there exists no state of facts which after notice or lapse of time
or both could reasonably be expected to give rise to any such investigation,
examination or other proceeding, action or claim or to affect the registration
of any Company Benefit Plan required to be registered. All contributions or
premiums required to be made by the Company or any of its Subsidiaries under the
terms of a Company Benefit Plan or by Applicable Laws have been
<PAGE>
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made in a timely fashion in accordance with Applicable Laws and the terms of the
Company Benefit Plan, and neither the Company nor any of its Subsidiaries has
and, as of the Effective Time, will have any Liability (other than Liabilities
accruing after the Effective Time) with respect to any of the Company Benefit
Plans. Contributions or premiums will be paid by the Company and its
Subsidiaries on an accrual basis for the period up to the Effective Time even
though not otherwise required to be made until a later date. No amendments have
been made to any Company Benefit Plan and no improvements to any Company Benefit
Plan have been promised, and except as required by Applicable Laws, no
amendments or improvements to any Company Benefit Plan will be made or promised
by the Company or any of its Subsidiaries before the Effective Time. No
statement, either written or oral, has been made by or on behalf of the Company
or its Subsidiaries that was not in accordance with the terms of the Company
Benefit Plans which would have a Material Adverse Effect. There have been no
withdrawals, applications or transfers of assets from any Company Benefit Plan
or the trusts or other funding media relating thereto in violation of Applicable
Laws or the terms of the Company Benefit Plans and neither the Company nor any
of its Subsidiaries or any agent thereof has been negligent, or in breach of any
fiduciary obligation, with respect to the administration of the Company Benefit
Plans or the trusts or other funding media relating thereto or engaged in any
transaction in violation of section 406(9) or (10) of ERISA with a resulting tax
penalty or other liability which has a Material Adverse Effect. Each Company
Benefit Plan is fully funded or fully insured on both an ongoing and solvency
basis. All employee data necessary to administer each Company Benefit Plan has
been provided to Parent and is true and correct. No insurance policy or other
contract or agreement affecting the Company Benefit Plans requires or permits a
retroactive increase in premiums or payments due thereunder. The level of
insurance reserves under each insured Company Benefit Plan is reasonable and
sufficient to provide for all incurred claims. No Company Benefit Plan provides
benefits to retired employees or to the beneficiaries or dependants of retired
employees. No Company Benefit Plan is a plan or arrangement to which more than
one employer that is not the Company nor any of its Subsidiaries is required or
permitted to contribute and no Company Benefit Plan is a multi-employer plan or
other plan, subject to Title IV of ERISA.
3.13. Employment-Related Matters. Neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or other contract
or agreement with any labor organization or other representative of any of the
employees of the Company or any of its Subsidiaries nor are any of such
contracts or agreements pending or contemplated. There is no labor strike,
dispute, slowdown, work stoppage or lockout that is pending or to the knowledge
of the Company, threatened against or otherwise affecting the Company or any of
its Subsidiaries and neither the Company nor any of its Subsidiaries has
experienced the same. Except as set forth in section 3.13 of the Company
Disclosure Schedule neither the Company nor any of its Subsidiaries has closed
any plant or facility, effectuated any layoffs of employees or implemented any
early retirement or separation program at any time from or after December 31,
1999 nor has the Company or any of its Subsidiaries planned or announced any
such action or program for the future with respect to which the Company or any
of its Subsidiaries may have any liability. All salaries, wages, vacation pay,
bonuses, commissions and other compensation payable by the Company or any of its
Subsidiaries to their respective employees before the date hereof have been paid
or accrued in all material respects as of the date hereof. No Person has
asserted any claim or to the knowledge of the Company, has any reasonable basis
to assert any valid claim against the Company or any of its Subsidiaries that
either the continued employment by or association with the Company or any of its
Subsidiaries of any of the current officers or employees of or consultants to
the Company or any of its Subsidiaries contravenes any agreements or Applicable
Laws relating to unfair competition, trade secrets or proprietary information.
Closing will not result in the payment, vesting or acceleration of any benefit,
payment or amount under any of the Company Benefit Plans.
3.14. Environmental
3.14.1. Environmental Laws. The Company and its Subsidiaries are in compliance
in all material respects with all applicable Environmental Laws. Neither the
Company nor any of its Subsidiaries has received any communication that alleges
that the Company or any of its Subsidiaries was or is not in compliance in all
respects with or has any liability under any applicable Environmental Law. To
the knowledge of the Company there are no circumstances that may prevent or
interfere with compliance in the future with all applicable Environmental Laws.
3.14.2. Environmental Claims. There is no Environmental Claim pending or to the
knowledge of the Company, threatened against or involving the Company or any of
its Subsidiaries or against any Person whose liability for any
<PAGE>
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Environmental Claim the Company or any of its Subsidiaries has or may have
retained or assumed either contractually or by operation of law that if existed,
would cause a Material Adverse Effect.
3.15. Assets Other Than Real Property
3.15.1. Title. The Company and its Subsidiaries have good and marketable title
to all of the tangible assets shown on the Company Balance Sheet, in each case,
free and clear of any Encumbrances except; (a) assets disposed of since the date
of the Company Balance Sheet in the ordinary course of business and in a manner
consistent with past practice and not material in amount; (b) Encumbrances
reflected in the Company Balance Sheet or otherwise in the most recent
consolidated financial statements filed by the Company with the Commissions; (c)
Permitted Encumbrances; and (d) Encumbrances set forth in section 3.15 of the
Company Disclosure Schedule. None of such Encumbrances in sections (a) through
(d) individually or in the aggregate, would result in a Material Adverse Effect.
3.15.2. Condition. Except as set forth in section 3.15.2 of the Company
Disclosure Schedule, all receivables shown on the Company Balance Sheet and all
receivables accrued by the Company and its Subsidiaries since the date of the
Company Balance Sheet have been collected or are collectible in the aggregate
amount shown. All material plant, equipment and personal property owned by the
Company and its Subsidiaries and regularly used in their respective business are
in good operating condition and repair, ordinary wear and tear excepted.
3.16. Real Property
3.16.1. Company Real Property. Neither the Company nor its Subsidiaries own any
real property.
3.16.2. Company Leases. Section 3.16.2 of the Company Disclosure Schedule lists
all of the Leases of the Company and its Subsidiaries. The Company has delivered
to Parent complete copies of the Leases and all material amendments thereto
(which are identified in section 3.16.2 of the Company Disclosure Schedule). The
Company Leases grant to the Company or its Subsidiaries leasehold estates free
and clear of all Encumbrances except Permitted Encumbrances. The Company Leases
are in full force and effect and are binding and enforceable against each of the
parties thereto in accordance with their respective terms. Neither the Company
nor any of its Subsidiaries nor to the knowledge of the Company, any other party
to a Company Lease is in material Violation of any Company Lease nor are there
any facts or circumstances that would reasonably indicate that the Company or
any of its Subsidiaries is likely to be in material Violation of any Company
Lease. Section 3.16.2 of the Company Disclosure Schedule correctly identifies
each Company Lease that requires the consent of any Person in connection with
the transactions contemplated hereby. No material construction, alteration or
other leasehold improvement work with respect to the real property covered by
any of the Company Leases remains to be paid for or to be performed by the
Company or any of its Subsidiaries.
3.16.3. Condition. All buildings, structures and fixtures or parts thereof used
by the Company or any of its Subsidiaries in the conduct of their respective
business are in good operating condition and repair, ordinary wear and tear
excepted and are insured with all coverages that are usual and customary for
similar properties and similar businesses and that pursuant to the terms of the
Company Leases, are required to be insured by third parties.
3.17. Intellectual Property
3.17.1. Right to Intellectual Property. Except as set forth in section 3.17.1 of
the Company Disclosure Schedule, the Company and its Subsidiaries own or have
perpetual, fully paid, worldwide rights to use all patents, industrial designs,
trademarks, trade names, service marks, copyrights and any applications
therefor, maskworks, net lists, schematics, technology, websites, domain names,
inventions, know-how, trade secrets, algorithms, computer software programs or
applications (in both source code and object code form) and tangible or
intangible proprietary information or material that are used in the business of
the Company and its Subsidiaries (the "Company Proprietary Rights"), free and
clear of any and all Encumbrances. To the knowledge of the Company, there is no
reason why the Company and its Subsidiaries will not be able to continue to own
or have perpetual, fully paid, worldwide rights to use all Company Proprietary
Rights necessary for the lawful conduct of their respective business as
currently conducted and as currently proposed to be conducted without any
infringement or conflict with the rights of others. Except as set forth in
section 3.17.1 of the Company Disclosure Schedule all of the rights of the
<PAGE>
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Company and its Subsidiaries in and to the Company Proprietary Rights are freely
assignable in the name of the Company or one of its Subsidiaries including the
right to create derivatives and the Company and its Subsidiaries are under no
obligation to obtain any approval or consent for use of any of the Company
Proprietary Rights.
3.17.2. List of Company Proprietary Rights. Section 3.17.2 of the Company
Disclosure Schedule sets forth a complete list of the Company Proprietary Rights
specifying, where applicable, the jurisdictions in which each of the Company
Proprietary Rights has been issued or registered or in which an application for
such issuance or registration has been filed including the respective
registration or application numbers and the names of all registered owners and
inventors, as applicable. Except as set forth in section 3.17.2 of the Company
Disclosure Schedule, none of the products of the Company and its Subsidiaries as
currently marketed or supported have been registered for patent protection or
for copyright protection in any jurisdiction nor has the Company or any of its
Subsidiaries been requested to make any such registration.
3.17.3. Royalties. Except as set forth in section 3.17.3 of the Company
Disclosure Schedule neither the Company nor any of its Subsidiaries is obligated
to pay any royalties or other compensation to any Person in respect of its
ownership, use or license of any of their respective Company Proprietary Rights.
3.17.4. Licenses. Section 3.17.4 of the Company Disclosure Schedule sets forth a
complete list of all material licenses, sublicenses and other agreements to
which the Company or any of its Subsidiaries is a party and pursuant to which
the Company or any of its Subsidiaries is authorized to use any Company
Proprietary Right (excluding End-User Licenses). The Company Proprietary Rights
include all trademarks, trade names, service marks, trade secrets, websites and
domain names and software and all patent rights and industrial design rights
that are necessary for the Company and its Subsidiaries to satisfy and perform
such licenses, sublicenses and agreements. None of the Company, any of its
Subsidiaries and the other contracting parties thereto is in violation of any
license, sublicense or agreement included in such list except for violations
that do not materially impair the rights of the Company or its Subsidiaries
under such license, sublicense or agreement, except as would not have a Material
Adverse Effect. Such licenses, sublicenses and agreements are in full force and
effect and are binding and enforceable against each of the parties thereto in
accordance with their respective terms. The execution and delivery by the
Company of this Agreement and the other agreements contemplated hereby, the
performance by the Company of its obligations hereunder and thereunder and the
consummation by the Company of the transactions contemplated hereby and thereby
will not cause the Company or any of its Subsidiaries to be in violation or in
default under any material license, sublicense or agreement nor will entitle any
other party to any such license, sublicense or agreement to terminate or modify
such license, sublicense or agreement.
3.17.5. Status of Registrations. All of the Company Proprietary Rights set forth
in section 3.17.2 of the Company Disclosure Schedule as having been issued by,
registered with or filed with any patent or trademark office have been duly so
issued, registered or filed, as the case may be and have been properly
maintained and renewed in accordance with all Applicable Laws. The Company and
each of its Subsidiaries have diligently protected their respective Company
Proprietary Rights and have diligently maintained the confidentiality of their
trade secrets, know-how and other confidential Company Proprietary Rights. To
the knowledge of the Company there have been no acts or omissions by the Company
or any of its Subsidiaries the result of which has been or would be to
compromise the rights of the Company or any of its Subsidiaries to apply for or
enforce appropriate legal protection of the Company Proprietary Rights.
3.17.6. No Conflict. Except as set forth in section 3.17.6 of the Company
Disclosure Schedule, no claims with respect to the Company Proprietary Rights
are pending, have been asserted or to the knowledge of the Company are
threatened by any Person nor to the knowledge of the Company are there any valid
grounds for any bona fide claims; (a) to the effect that the development, sale,
licensing or use of any of the products of the Company and its Subsidiaries as
now developed, sold, licensed or used or as proposed for development, sale,
licensing or use by the Company and its Subsidiaries infringes on any patent,
industrial design, trademark, trade name, service mark, copyright, trade secret,
website or domain name or other proprietary right of any Person; (b) against the
use by the Company or any of its Subsidiaries of any patents, industrial
designs, trademarks, trade names, service marks, copyrights, website or domain
name and any applications therefor, maskworks, net lists, schematics,
technology, know-how, trade secrets, algorithms, computer software programs or
applications and tangible or intangible proprietary information or material used
in the business of the Company and its Subsidiaries as currently conducted
<PAGE>
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or as proposed to be conducted; or (c) challenging the ownership by the Company
or any of its subsidiaries of the validity of any registration for any
application relating to or the effectiveness of any of the Company Proprietary
Rights. To the knowledge of the Company there is no unauthorized use,
infringement or misappropriation of any of the Company Proprietary Rights by any
third Person including without limitation, any current or former employee of the
Company or any of its Subsidiaries. No Company Proprietary Right or product of
the Company or any of its Subsidiaries is subject to any outstanding decree,
order, judgment or stipulation restricting in any manner the use or licensing
thereof by the Company or any of its Subsidiaries.
3.17.7. Employee Agreements. To the knowledge of the Company, no employee,
officer or consultant of the Company or any of its Subsidiaries is in violation
of any term of any employment or consulting contract, proprietary information
and inventions agreement, non-competition agreement or any other contract or
agreement relating to the relationship of any such employee, officer or
consultant with the Company or any of its Subsidiaries.
3.18. Agreements, Contracts and Commitments
3.18.1. Company Agreements. Except as set forth in section 3.18 of the Company
Disclosure Schedule or as may be contemplated pursuant to Acquisition
Transactions, neither the Company nor any of its Subsidiaries is a party to or
has:
(a) any pension, profit sharing, retirement, deferred compensation,
welfare, legal services, medical, dental or other employee
benefit or health insurance plans, life insurance or other death
benefit plans, disability, stock option, stock purchase, stock
compensation, bonus, vacation pay, severance pay or other
similar plans, programs or agreements or material personnel
policy which is not set forth in section 3.12 of the Company
Disclosure Schedule (other than normal policies regarding
holidays, vacations and salary continuation during short
absences for illnesses or other reasons);
(b) any employment agreement which provides for a payment which, if
paid pro rata on a monthly basis, would exceed $5,000 per month,
or any employment agreement which is binding on the Company for
a period in excess of one year, with any present employee,
officer, director or consultant (or former employees, officers,
directors or consultants to the extent there remain at the date
hereof obligations to be performed by the Company or any of its
Subsidiaries);
(c) any agreement for personal services or employment that upon
termination requires any payments greater than those that would
otherwise be imposed by Applicable Law;
(d) any agreement of guarantee or indemnification;
(e) any agreement or commitment containing a covenant limiting or
purporting to limit the freedom of the Company or any of its
Subsidiaries; (i) to compete with any Person in any geographic
area; (ii) to engage in any line of business; or (iii) to hire
or solicit any individual for employment or consulting services;
(f) any lease, other than the Leases, under which the Company or any
of its Subsidiaries is a lessee or lessor that involves payments
of $100,000 or more per annum or is material to the conduct of
the business of the Company or any of its Subsidiaries;
(g) any joint venture or profit-sharing agreement;
(h) except for trade indebtedness incurred in the ordinary course of
business and reflected on the Company Balance Sheet, any loan or
credit agreements providing for the extension of credit to the
Company or any instrument evidencing or related in any way to
indebtedness incurred in the acquisition of companies or other
entities or indebtedness for borrowed money by way of direct
loan, sale of debt securities, purchase money obligation,
conditional sale, lease, guarantee or otherwise that
individually is in the amount of $100,000 or more;
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(i) any agreement or arrangement with any third Person to develop
any intellectual property or other asset expected to be used or
currently used or useful in the business of the Company or any
of its Subsidiaries;
(j) any agreement or arrangement for the Company or any of its
Subsidiaries to develop any intellectual property or other asset
for any third Person;
(k) any agreement or arrangement providing for the payment of any
commission based on sales other than in the ordinary course of
business and consistent with past practice;
(l) any agreement for the sale or license by or to the Company or
any of its Subsidiaries of materials, products, services or
supplies that involves future payments to the Company or any of
its Subsidiaries of more than $100,000;
(m) any agreement for the purchase by the Company or any of its
Subsidiaries of any materials, equipment, services or supplies
that either; (i) involves a binding commitment by the Company or
such Subsidiary to make future payments in excess of $100,000
and cannot be terminated by the Company or such Subsidiary
without penalty upon less than three months' notice; or (ii) was
not entered into in the ordinary course of business;
(n) any agreement or commitment for the acquisition, construction or
sale of fixed assets owned or to be owned by the Company or any
of its Subsidiaries that involves future payments by it of more
than $100,000;
(o) any agreement or commitment to which present or former directors
or officers (or members of their immediate families) or
Affiliates (or directors or officers of an Affiliate) are also
parties;
(p) any agreement not described above (ignoring solely for this
purpose any dollar amount thresholds in those descriptions)
involving the payment or receipt by the Company or any of its
Subsidiaries of more than $100,000, other than the Leases; or
(q) any agreement not described above that was not made in the
ordinary course of business and that is material to the
financial condition, business, operations, assets, results of
operations or prospects of the Company and its Subsidiaries
taken as a whole.
Notwithstanding the foregoing, the Parties agree that between the date hereof
and the Effective Time, the Company and its Subsidiaries may enter into the
Acquisition Transactions in the ordinary course of business, which may be the
subject matter of agreements, contracts and letters of intent and which would
involve the execution and delivery of Company Agreements which should form a
part of the Company Disclosure Schedule. In such event, the Company shall not be
required to procure the consent of Parent prior to the execution and delivery
thereof; however, the Company shall provide prior written notice thereof to
Parent or its legal counsel and, on or before both the effectiveness of the
Registration Statement and the Effective Time, the Company shall provide to
Parent updates of section 3.18 of the Company Disclosure Schedule.
3.18.2. Validity, Violation and Consent. The contracts, including those listed
in section 3.18 of the Company Disclosure Schedule are valid and in full force
and effect. Neither the Company nor any of its Subsidiaries is in Violation of
any term, condition or provision of any Contract to which the Company or any of
its Subsidiaries is a party or by which it, any of its Subsidiaries or any of
their respective material assets or properties is bound or which is applicable
to it, any of its Subsidiaries or any of their respective material assets or
properties except for such Violations which, individually or in the aggregate,
would not result in a Material Adverse Effect. Section 3.18.2 of the Company
Disclosure Schedule identifies each Contract that requires the consent of a
third Person in connection with the transactions contemplated hereby.
3.19. Insurance Contracts. Section 3.19 of the Company Disclosure Schedule
lists all material contracts of insurance and indemnity (other than those
identified as such in other sections of the Company Disclosure Schedule)
<PAGE>
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in force at the date hereof with respect to the Company and its Subsidiaries.
Such contracts of insurance and indemnity and those identified as such in other
sections of the Company Disclosure Schedule (collectively, the "Company
Insurance Contracts") insure against such risks and are in such amounts as are
reasonable and appropriate considering the Company and its Subsidiaries and
their respective property, business and operations. Except as set forth in
section 3.19 of the Company Disclosure Schedule, all of the Company Insurance
Contracts are in full force and effect with no default thereunder by the Company
or any of its Subsidiaries which could permit the insurer to deny payment of
claims thereunder. The execution and delivery by the Company of this Agreement
and the other agreements contemplated hereby, the performance by the Company of
its obligations hereunder and thereunder and the consummation by the Company of
the other transactions contemplated hereby and thereby will not cause the
Company or any of its Subsidiaries to be in Violation of any Company Insurance
Contracts nor entitle any other party thereto to terminate or modify a Company
Insurance Contract. Neither the Company nor any of its Subsidiaries has received
notice from any of their respective insurance carriers that any insurance
premiums will be materially increased in the future or that any insurance
coverage provided under the Company Insurance Contracts will not be available in
the future on substantially the same terms as now in effect. Neither the Company
nor any of its Subsidiaries has received nor has given a notice of cancellation
with respect to any of the Company Insurance Contracts.
3.20. Banking Relationships. Section 3.20 of the Company Disclosure Schedule
sets forth the names and locations of all banks and trust companies in which the
Company or any of its Subsidiaries has accounts, lines of credit or safety
deposit boxes.
3.21. Suppliers, Distributors and Customers. The relationships of the Company
and its Subsidiaries with their respective suppliers, distributors and customers
are satisfactory commercial working relationships. Except as set forth in
section 3.21 of the Company Disclosure Schedule since the date of the Company
Balance Sheet no material supplier, distributor or customer of the Company or
any of its Subsidiaries has cancelled or otherwise adversely modified its
relationship with the Company or any of its Subsidiaries and to the knowledge of
the Company no supplier, distributor or customer of the Company or any of its
Subsidiaries has any intention to do so and to the knowledge of the Company none
of the execution and delivery by the Company of this Agreement and the other
agreements contemplated hereby, the performance by the Company of its
obligations hereunder and thereunder and the consummation by the Company of the
Arrangement and the other transactions contemplated hereby and thereby will
materially adversely affect any such relationship.
3.22. Products. Each product sold, leased, licensed or delivered by the
Company or any of its Subsidiaries has been in material conformity with all
applicable contractual commitments.
3.23. Investment Canada. The Company and its Subsidiaries do not carry on the
business of the publication, distribution or sale of books, magazines or
periodicals in print or machine readable form other than as provided in section
3.23 of the Company Disclosure Schedule.
3.24. Director Approval. The Board of Directors of the Company has; (a)
determined unanimously that the Arrangement is fair to the holders of Company
Common Shares and is in the best interests of the Company; and (b) determined to
recommend that the holders of Company Common Shares vote in favour of the
Arrangement.
3.25. No Broker's or Finder's Fees. Except for Wellington West Capital Inc.,
none of the Company, any of its Subsidiaries and their respective directors,
officers, employees and agents has employed any broker, finder, financial
advisor or intermediary or has paid or incurred any liability for any fee or
commission to any broker, finder, financial advisor or intermediary in
connection with this Agreement, the Arrangement or any other transaction
contemplated hereby. The Company has made available to Parent a complete and
correct copy of any engagement letter or other agreement or arrangement between
Wellington West Capital Inc. on the one hand and the Company on the other hand.
3.26. Full Disclosure. This Agreement does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements contained herein and therein not false or misleading. To the
knowledge of the Company there is no fact existing on the date hereof that the
Company has not disclosed to Parent in writing that could result in a Material
Adverse Effect.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT AND AVIATION SUBCO
Parent and Aviation Subco jointly and severally represent and warrant to the
Company that the statements in this Article 4 are true and correct except as set
forth in the disclosure schedule delivered by Parent to the Company on the date
hereof (the "Parent Disclosure Schedule"). The Parent Disclosure Schedule shall
be arranged in sections and paragraphs corresponding to the numbered and
lettered sections and paragraphs in this Article 4. The disclosure in any
section or paragraph of Parent Disclosure Schedule shall qualify other sections
and paragraphs in this Article 4 only to the extent that it is reasonably
apparent from a reading of such disclosure that it also qualifies or applies to
such other sections or paragraphs.
4.1. Corporate Status of the Company and its Subsidiaries. Each of Parent and
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the Laws of its jurisdiction of incorporation with the requisite
corporate power and authority to carry on its business as currently being
conducted and to own, lease and operate the properties currently owned, leased
and operated by it. Each of Parent and its Subsidiaries is duly qualified or
licensed to do business and is in good standing as a foreign corporation
authorized to do business in all jurisdictions in which the character of the
properties owned or held under lease by it or the nature of the business
transacted by it makes such qualification or licensing necessary, except in
jurisdictions in which the failure to be so qualified or licensed would not
result in a Material Adverse Effect. Section 4.1 of the Parent Disclosure
Schedule sets forth a complete list of Parent's Subsidiaries, their
jurisdictions of incorporation and a complete list of each jurisdiction in which
each of Parent and its Subsidiaries is duly qualified and in good standing to do
business.
4.2. Articles of Incorporation, By-Laws, Directors and Officers. Parent has
delivered to the Company true and complete copies of the Articles of
Incorporation and By-laws of Parent, including all amendments thereto, as in
effect on the date hereof. Each of the minute books of Parent and its
Subsidiaries made available to the Company and/or its agents contains accurate
records of all meetings and consents in lieu of meetings of the Board of
Directors (or similar governing body) of Parent or its Subsidiaries, as the case
may be (and any committees thereof) and of its securityholders (or other equity
holders having rights to vote or consent) since the date of incorporation and
such records accurately reflect all transactions referred to in such minutes and
consents. Section 4.2 of the Parent Disclosure Schedule sets forth a list of the
directors and officers of Parent and its Subsidiaries and the respective offices
held by them.
4.3. Authority for Agreement; Noncontravention
4.3.1. Authority. Parent has all requisite corporate power and authority to
enter into this Agreement and the other agreements contemplated hereby to be
executed by it and subject to approval of Parent's shareholders as provided in
this Agreement, to consummate the Arrangement and the other transactions
contemplated hereby and to execute and deliver the other agreements contemplated
hereby. The execution and delivery by Parent of this Agreement and such other
agreements and the consummation by Parent of the Arrangement and the other
transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of Parent. Except for the approval of
Parent's shareholders as provided in this Agreement and as provided in section
4.3.1 of the Parent Disclosure Schedule, no other corporate proceedings on the
part of Parent are necessary to authorize the execution and delivery by Parent
of this Agreement and such other agreements and the consummation by Parent of
the Arrangement and the other transactions contemplated hereby and thereby. This
Agreement has been duly executed and delivered by Parent and constitutes a valid
and binding obligation of Parent, enforceable against Parent in accordance with
its terms, subject to the qualifications that; (a) enforcement of the rights and
remedies created hereby are subject to Bankruptcy Laws; and (b) the consummation
of the Arrangement is subject to the approval of Parent's shareholders and other
securityholders as provided in section 4.3.1 of the Parent Disclosure Schedule.
On or before the Effective Time, the other agreements contemplated hereby to be
executed and delivered by Parent on or before the Effective Time will have been
executed and delivered by Parent and, upon such execution and delivery will
constitute valid and binding obligations of Parent, enforceable against Parent
in accordance with their respective terms, subject to the qualifications that:
(a) enforcement of the rights and remedies created thereby will be subject to
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Bankruptcy Laws; and (b) the consummation of the Arrangement is subject to the
approval of Parent's stockholders and securityholders as provided in section
4.3.1 of the Parent Disclosure Schedule.
4.3.2. No Conflict. None of the execution and delivery by Parent of this
Agreement, the Arrangement and the other agreements contemplated hereby, the
performance by Parent of its obligations hereunder and thereunder and the
consummation by Parent of the transactions contemplated hereby and thereby will
cause a Violation of any term, condition or provision of the Articles of
Incorporation or By-Laws of Parent or any of its Subsidiaries or any contract,
judgement, decree or order to which Parent or any of its Subsidiaries is a party
or by which it, any of its Subsidiaries or any of their respective material
assets or properties is bound or to the knowledge of Parent, any Applicable
Laws, other than such Violations which individually or in the aggregate would
not result in a Material Adverse Effect.
4.4. Governmental Consents. No Consent is required to be obtained by Parent or
any of its Subsidiaries in connection with the execution and delivery by Parent
of this Agreement or the other agreements contemplated hereby, the performance
by Parent of its obligations hereunder and thereunder and the other transactions
contemplated hereby or thereby except: (a) the filing with and approval of the
Commissions; (b) the filing with and approval of the SEC of such registration
statements, reports and information under the Securities Act and the Exchange
Act and the rules and regulations promulgated by the SEC thereunder as may be
required in connection with this Agreement and the transactions contemplated
hereby; (c) the filing of a Certificate of Designation creating the Special
Voting Share; (d) such filings, authorizations, orders and approvals as may be
required under state or state "control share acquisition", "anti-takeover" or
other similar statutes and any other approvals required under applicable federal
or state securities Laws and the rules of Nasdaq; (e) such filings and notices
as may be necessary under the HSR Act and the early termination or expiration of
the required waiting period; and (f) where the failure to obtain or make such
Consents would not prevent or delay the consummation of the Arrangement or the
other transactions contemplated hereby or otherwise prevent Parent from
performing its obligations under this Agreement, the Arrangement or the other
agreements contemplated hereby and would not result in a Material Adverse
Effect.
4.5. Capitalization
4.5.1. Authorized Share Capital of Parent. The authorized and issued share
capital of Parent is as set forth in section 4.5.1 of the Parent Disclosure
Schedule. All of the issued Parent Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable. None of the issued Parent
Common Stock was issued in violation of the terms of any agreement or other
understanding binding upon Parent. All of the issued Parent Common Stock were
issued in compliance with all applicable charter documents of Parent and all
Applicable Laws. There are and have been no preemptive rights with respect to
the issuance of Parent Common Shares.
4.5.2. Options and Convertible Securities of Parent. Section 4.5.2 of the Parent
Disclosure Schedule sets forth a complete list of: (a) each stock option plan,
stock purchase plan and each other plan, arrangement or agreement under which
Parent or any of its Subsidiaries has reserved shares or any securities or
obligations convertible into or exercisable or exchangeable for any shares, to
any employee, director, consultant, service provider or other Person
(collectively, the "Parent Plans"); and (b) the number of shares, securities or
obligations reserved for issuance under such plan, arrangement or agreement. All
such plans, arrangements and agreements are in compliance with all Applicable
Laws. Except as set forth in section 4.5.2 of the Parent Disclosure Schedule,
there are no outstanding subscriptions, options, warrants or conversion rights
or other rights, securities, agreements, calls or commitments (contingent or
otherwise) that obligate Parent to issue, sell, deliver or otherwise dispose of
shares or any securities or obligations convertible into or exercisable or
exchangeable for any shares. None of the execution and delivery by Parent of
this Agreement and the other agreements contemplated hereby, the performance by
Parent of its obligations hereunder and thereunder and the consummation by
Parent of the other transactions contemplated hereby and thereby and any other
event that occurred on or prior to the date hereof will accelerate the vesting
under any item set forth in section 4.5.2 of the Parent Disclosure Schedule.
There are no voting trusts or other agreements or understandings to which Parent
or to the knowledge of Parent, any securityholder of Parent is a party with
respect to the voting of the Parent Common Stock. Except as set forth in section
4.5.2 of the Parent Disclosure Schedule, Parent is not a party to or bound by
any outstanding restrictions, puts, options or other obligations, agreements or
commitments to repurchase, redeem or otherwise acquire any outstanding Parent
Common Stock or other equity securities of Parent.
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4.5.3. Subsidiaries. Section 4.5.3 of the Parent Disclosure Schedule sets forth
the authorized and issued shares of each of Parent's Subsidiaries. All of the
issued shares of each of Parent's Subsidiaries have been duly authorized and
validly issued and are fully paid and nonassessable. None of the issued
securities of any of Parent's Subsidiaries was issued in violation of the terms
of any agreement or other understanding binding upon the issuing Subsidiary, and
all of such issued securities were issued in compliance with all applicable
charter documents of the issuing Subsidiary and all Applicable Laws. There are
no outstanding subscriptions, options, warrants or conversion rights or other
rights, securities, agreements, calls or commitments (contingent or otherwise)
that obligate any of Parent's Subsidiaries to issue, sell, deliver or otherwise
dispose of shares or any securities or obligations convertible into or
exercisable or exchangeable for any shares. There are and have been no
preemptive rights with respect to the issuance of securities of any of Parent's
Subsidiaries. Parent owns beneficially and of record all of the outstanding
securities of each of its Subsidiaries, free and clear of all Encumbrances save
and except as set forth in section 4.5.3 of the Parent Disclosure Schedule.
Other than Parent's Subsidiaries, Parent does not own, directly or indirectly,
any shares or other equity interests or securities in any Person.
4.6. Securities Reports; Financial Statements. Parent has filed all forms,
reports and documents with the SEC and Nasdaq (including prospectuses, offering
memoranda and filing statements) required to be filed by it pursuant to
Applicable Laws (collectively, the "Parent Securities Reports"). Parent has
delivered or made available to the Company true and complete copies of; (a) its
Annual Reports on Form 10-K for the fiscal years ended June 30, 1998 and 1999;
(b) all proxy statements relating to Parent's meetings of stockholders (whether
annual or special) held since June 30, 1999; (c) all other Forms 10-K and 10-Q
filed by Parent with the SEC since June 30, 1999; and (d) all amendments and
supplements to all such forms, reports and documents filed by Parent with the
SEC. As of their respective dates, the Parent Securities Reports complied in all
material respects with Applicable Laws and did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading. The financial
statements (including any related notes) of Parent included in the Parent
Securities Reports complied in all material respects with applicable accounting
requirements and with Applicable Laws, were prepared in conformity with United
States generally accepted accounting principles applied on a consistent basis
(except as otherwise stated in the financial statements) and present fairly the
consolidated financial position, results of operations, shareholders' equity,
liabilities (contingent or otherwise) and cash flows, as the case may be, of
Parent and its consolidated Subsidiaries as of the dates and for the periods
indicated, subject, in the case of unaudited interim financial statements to;
(i) the absence of certain notes thereto; and (ii) normal year-end audit
adjustments. The information to be contained in the Information Circular
(including any information referred to therein or incorporated therein by
reference) relating to Parent will be accurate and complete in all material
respects as of the date thereof and will not contain a misrepresentation (as
defined in the Securities Act (Ontario)) as of such date.
4.7. Absence of Material Adverse Changes and Undisclosed Liabilities
4.7.1. Changes. Since the date of the most recent consolidated balance sheet
filed by Parent with the SEC (the "Parent Balance Sheet"), Parent has not
experienced a Material Adverse Effect. Without limiting the generality of the
foregoing, except as set forth in section 4.7.1 of the Parent Disclosure
Schedule, since the date of the Parent Balance Sheet neither Parent nor any of
its Subsidiaries has:
(a) sold, leased, transferred or assigned any of its assets, tangible or
intangible, other than in the ordinary course of business;
(b) accelerated, terminated, modified or canceled any contract, lease,
sublease, license or sublicense (or series of related contracts,
leases, subleases, licenses and sublicenses) involving more than
$50,000;
(c) cancelled, compromised, waived or released any right or claim (or
series of related rights and claims) either involving more than
$50,000 or outside the ordinary course of business;
(d) experienced material damage, destruction or loss (whether or not
covered by insurance) to its material property (other than ordinary
wear and tear not caused by neglect);
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(e) created or suffered to exist any Encumbrance (other than Permitted
Encumbrances) upon any of the assets, tangible or intangible, of
Parent or any Subsidiary;
(f) issued, sold, delivered or otherwise disposed of any shares or any
securities or obligations convertible into or exercisable or
exchangeable for any shares of Parent or any of its Subsidiaries or
undergone any reorganization, recapitalization, reclassification,
stock split or reverse stock split;
(g) accelerated, amended, repriced or changed the period of
exercisability of any outstanding security or authorized cash
payments in exchange for any options granted under any of the Parent
Plans;
(h) declared, set aside or paid any dividend or distribution with
respect to its shares (whether in cash or in kind) or directly or
indirectly redeemed, purchased or otherwise acquired any of its
shares;
(i) entered into financial arrangements for the benefit of any director,
officer or securityholder of Parent other than in connection with
such Person's employment by Parent in the ordinary course of its
business and consistent with past practice;
(j) made or committed to make any capital expenditures or entered into
any other material transaction outside the ordinary course of
business or involving an expenditure in excess of $50,000;
(k) amended or modified in any respect any employment contract or
arrangement or any profit sharing, bonus, incentive compensation,
severance, employee benefit or multi-employer plans except to comply
with Applicable Laws;
(l) entered into any employment agreement or collective bargaining
agreement or increased the compensation of any of its employees
other than in the ordinary course of its business and consistent
with past practice; or
(m) committed (orally or in writing) to do any of the foregoing.
4.7.2. Liabilities. Except for liabilities and obligations set forth in; (i) the
Parent Securities Reports; or (ii) section 4.7.2 of the Parent Disclosure
Schedule; or for liabilities and obligations specifically contemplated to be
incurred in connection with this Agreement or the Global Merger, neither Parent
nor any of its Subsidiaries has any Liabilities required by United States
generally accepted accounting principles to be set forth on a consolidated
balance sheet of Parent or in the notes thereto and which, individually or in
the aggregate, could be reasonably expected to have a Material Adverse Effect.
4.8. Litigation and Audits. Except as set forth in section 4.8 of the Parent
Disclosure Schedule, there is no investigation or inquiry by any Governmental
Entity with respect to Parent or any of its Subsidiaries pending or to the
knowledge of Parent threatened, nor has any Governmental Entity indicated to
Parent or any of its Subsidiaries an intention to conduct the same. Except as
set forth in section 4.8 of the Parent Disclosure Schedule, there is no claim,
action, suit, arbitration or proceeding pending or to the knowledge of Parent,
threatened against or involving Parent, any of its Subsidiaries or any of their
respective assets or properties, at law or in equity or before any arbitrator or
Governmental Entity, which if determined adversely to Parent or any Subsidiary
could result in a Material Adverse Effect. There are no judgments, decrees,
injunctions, orders or rulings of any Governmental Entity or arbitrator
outstanding against Parent or any of its Subsidiaries, which if existed, would
result in a Material Adverse Effect.
4.9. Compliance with Applicable Law, Articles of Incorporation and By-Laws. Each
of Parent and its Subsidiaries has all requisite Permits necessary to carry on
its respective business as currently being conducted and to own, lease and
operate the respective properties currently owned, leased and operated by it in
the manner currently owned, leased and operated, except where the failure to
have such Permits would not result in a Material Adverse Effect. There are no
proceedings pending or to the knowledge of Parent threatened, which might result
in
<PAGE>
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the revocation, cancellation, suspension or adverse modification of any such
Permit. The business of Parent and its Subsidiaries has not been conducted in
Violation of Applicable Laws, except for Violations which individually or in the
aggregate would not result in a Material Adverse Effect. Neither Parent nor any
of its Subsidiaries is in Violation of nor has any event occurred that has
resulted or will result in any Violation of any term, condition or provision of
the Articles of Incorporation or By-Laws of Parent and its Subsidiaries.
4.10. Books and Records; Accounting Matters. The books, records and accounts of
Parent and its Subsidiaries: (a) have been maintained in accordance with good
business practices; (b) are stated in reasonable detail and accurately and
fairly reflect in all material respects the transactions and dispositions of the
respective assets of Parent and its Subsidiaries; and (c) accurately and fairly
reflect in all material respects the basis for the Parent Balance Sheet. Parent
has devised and maintains a system of internal accounting controls sufficient to
provide reasonable assurances that: (i) transactions are executed in accordance
with management's general or specific authorizations; (ii) transactions are
recorded as necessary: (a) to permit preparation of accurate financial
statements in conformity with United States generally accepted accounting
principles or any other criteria applicable to such statements; and (b) to
maintain accountability for assets. There has been no change in Parent's
accounting policies or the methods of making accounting estimates or changes in
estimates that are material to Parent's financial statements except as described
in the notes thereto.
4.11. Tax Matters
4.11.1. Filing of Returns. Each of Parent and its Subsidiaries has prepared and
timely filed with all appropriate Governmental Entities all Tax Returns that it
was required to file. All such Tax Returns were correct and complete in all
material respects. Neither Parent nor any of its Subsidiaries currently is the
beneficiary of any extension of time within which to file any Tax Return other
than extensions for which Parent or any of its Subsidiaries has filed a request
which request has resulted in the automatic granting of such extension. No
Governmental Entity in any jurisdiction in which Parent and any of its
Subsidiaries does not file Tax Returns has ever claimed that Parent or any of
its Subsidiaries is or may be subject to taxation by that jurisdiction.
4.11.2. Payment of Taxes. All Taxes payable or owed by Parent and its
Subsidiaries (whether or not shown on any Tax Return) have been paid when due,
and all Taxes due on or before the Effective Time will be paid when due. In the
case of Taxes accruing on or before the date hereof that are not due on or
before the date hereof, Parent has made adequate provision in its books and
records and financial statements for such payment. There are no security
interests on any assets of Parent or any of its Subsidiaries that arose in
connection with any failure (or alleged failure) to pay any Tax.
4.11.3. Withholding. Each of Parent and its Subsidiaries has withheld from
payments made to each of its current or former employees, officers, directors,
shareholders, independent contractors, creditors, non-residents and other
Persons all amounts required by Applicable Laws to be withheld and, where
required, has remitted such amounts within the applicable periods to the
appropriate Governmental Entity.
4.11.4. Assessments. Neither Parent nor any of its Subsidiaries expects any
authority to assess any additional Taxes in excess of tax reserves provided for
in Parent's financial statements against Parent or any of its Subsidiaries for
any period for which Tax Returns have been filed. No Tax Return of Parent or any
of its Subsidiaries has been audited or currently is the subject of audit. No
Governmental Authority has raised any dispute or claim concerning any Tax
liability of Parent or any of its Subsidiaries. Neither Parent nor any of its
Subsidiaries has waived any statute of limitations with respect to Taxes or has
agreed to any extension of time with respect to a Tax assessment or deficiency.
4.11.5. Access to Returns. Parent has provided the Company with a copy of or
access to all United States and other state and local income and capital Tax
returns filed by Parent and its Subsidiaries after June 30, 1999. Parent has
provided the Company with a copy of or access to all assessments, extensions and
waivers resulting from any examinations or audits of Parent or any of its
Subsidiaries by a Governmental Entity in respect of Taxes, and all such
assessments and related penalties and interest have been paid in full unless
being contested in good faith by Parent or any of its Subsidiaries and described
in section 4.11 of the Parent Disclosure Schedule.
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4.12. Employee Benefit Plans
4.12.1. List of Plans. Section 4.12 of the Parent Disclosure Schedule sets forth
a complete list of all Parent Benefit Plans. Parent has delivered to the
Company: (a) accurate and complete copies of all Parent Benefit Plan documents
and all other material documents relating thereto, including (if applicable) all
summary plan descriptions, summary annual reports and insurance contracts; (b)
accurate and complete detailed summaries of all unwritten Parent Benefit Plans;
(c) accurate and complete copies of the most recent financial statements and
actuarial reports with respect to all Parent Benefit Plans for which financial
statements or actuarial reports are required or have been prepared; (d) accurate
and complete copies of all information returns and annual reports for all Parent
Benefit Plans (for which information returns or annual reports are required or
have been prepared) prepared within the last three years; (e) all material
professional opinions relating to Parent Benefit Plans; and (f) accurate and
complete copies of material correspondence with all regulatory authorities.
4.12.2. Claims. There are no pending or to the knowledge of Parent threatened
claims by or on behalf of any Parent Benefit Plans or by or on behalf of any
individual participants or beneficiaries of any Parent Benefit Plans alleging
any breach of fiduciary duty on the part of Parent or any of its Subsidiaries or
any of their respective officers, directors, employees or agents under any
Applicable Laws or claiming benefit payments (other than those made in the
ordinary operation of such Parent Benefit Plans) nor is there to the knowledge
of Parent any basis therefor, that if existed, would cause a Material Adverse
Effect.
4.12.3. Contributions. The Parent and each of its Subsidiaries has in a timely
manner made all required contributions under the Parent Benefit Plans.
4.12.4. Parent Benefit Plans. All of the Parent Benefit Plans in which employees
of Parent and each of its Subsidiaries participate or are eligible to
participate are and have been established, registered, qualified, invested and
administered in all respects in accordance with all laws, regulations, orders or
other legislative, administrative or judicial promulgations applicable to the
Parent Benefit Plans. With respect to Parent Benefit Plans having special tax
status, no fact or circumstance exists that could adversely affect the intended
Tax status of such Parent Benefit Plan. All obligations regarding the Parent
Benefit Plans have been satisfied and there are no actions, outstanding defaults
or violations by any party to any Parent Benefit Plan that could subject Parent
or any of its Subsidiaries to any material penalty or Tax and no Tax, penalty or
fee is owing or eligible under or in respect of any Parent Benefit Plan. Neither
Parent nor its applicable Subsidiary, subject to the limitations or conditions
set forth in the other provisions hereof, may unilaterally amend, modify, vary,
revoke or terminate, in whole or in part, any Parent Benefit Plan maintained by
it or may take contribution holidays under or withdraw surplus from such Parent
Benefit Plans, subject only to approvals required by Applicable Laws. Subject to
Applicable Laws and all limitations and conditions in other provisions hereof,
Parent or its applicable Subsidiaries may amend, revise or merge any Parent
Benefit Plan or transfer or merge the assets or liabilities of any Parent
Benefit Plan with any other arrangement, plan or fund. No Parent Benefit Plan
nor any related trust or other funding medium thereunder is subject to any
pending investigation, examination or other proceeding, action or claim
initiated by any Governmental Entity or by any other party (other than routine
claims for benefits) and there exists no state of facts which after notice or
lapse of time or both could reasonably be expected to give rise to any such
investigation, examination or other proceeding, action or claim or to affect the
registration of any Parent Benefit Plan required to be registered. All
contributions or premiums required to be made by Parent or any of its
Subsidiaries under the terms of a Parent Benefit Plan or by Applicable Laws have
been made in a timely fashion in accordance with Applicable Law and the terms of
the Parent Benefit Plan and neither Parent nor any of its Subsidiaries has and
as of the Effective Time will not have any Liability (other than Liabilities
accruing after the Effective Time) with respect to any of the Parent Benefit
Plans. Contributions or premiums will be paid by Parent and its Subsidiaries on
an accrual basis for the period up to the Effective Time even though not
otherwise required to be made until a later date. No amendments have been made
to any Parent Benefit Plan and no improvements to any Parent Benefit Plan have
been promised and except as required by Applicable Laws, no amendments or
improvements to any Parent Benefit Plan will be made or promised by Parent or
any of its Subsidiaries before the Effective Time. No statement, either written
or oral, has been made by or on behalf of Parent or its Subsidiaries that was
not in accordance with the terms of the Parent Benefit Plan which would have a
Material Adverse Effect. There have been no withdrawals, applications or
transfers of assets from any Parent Benefit Plan or the trusts or other funding
media relating thereto in violation of Applicable Laws or the terms of the
Parent Benefit Plans which would have a Material Adverse Effect and neither
Parent nor any of its
<PAGE>
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Subsidiaries or any agent thereof has been negligent or in breach of any
fiduciary obligation with respect to the administration of the Parent Benefit
Plans or the trusts or other funding media relating thereto or engaged in any
transaction in violation of section 406(9) or (10) of ERISA with a resulting tax
penalty or other liability which has a Material Adverse Effect. Each Parent
Benefit Plan is fully funded or fully insured on both an ongoing and solvency
basis. No Parent Benefit Plan enjoys any special tax status under Applicable
Laws nor have any advance tax rulings or interpretations been sought or received
in respect of the Parent Benefit Plans. All employee data necessary to
administer each Parent Benefit Plan has been provided to the Company and is true
and correct. No insurance policy or other contract or agreement affecting the
Parent Benefit Plans requires or permits a retroactive increase in premiums or
payments due thereunder. The level of insurance reserves under each insured
Parent Benefit Plan is reasonable and sufficient to provide for all incurred
claims. No Parent Benefit Plan provides benefits to retired employees or to the
beneficiaries or dependants of retired employees. No Parent Benefit Plan is a
plan or arrangement to which more than one employer that is not Parent nor any
of its Subsidiaries is required or permitted to contribute and no Parent Benefit
Plan is a multi-employer plan or other plan, subject to Title IV of ERISA.
4.13. Employment-Related Matters. Neither Parent nor any of its Subsidiaries is
a party to any collective bargaining agreement or other contract or agreement
with any labor organization or other representative of any of the employees of
Parent or any of its Subsidiaries nor are any of such contracts or agreements
pending or contemplated. There is no labor strike, dispute, slowdown, work
stoppage or lockout that is pending or to the knowledge of Parent, threatened
against or otherwise affecting Parent and neither Parent nor any of its
Subsidiaries has ever experienced same. Except as set forth in section 4.13 of
the Parent Disclosure Schedule neither Parent nor any of its Subsidiaries has
closed any plant or facility, effectuated any layoffs of employees or
implemented any early retirement or separation program at any time from or after
February 11, 2000 nor has Parent or any of its Subsidiaries planned or announced
any such action or program for the future with respect to which Parent or any of
its Subsidiaries may have any liability. All salaries, wages, vacation pay,
bonuses, commissions and other compensation payable by Parent or any of its
Subsidiaries to their respective employees before the date hereof have been paid
or accrued in all material respects as of the date hereof. No Person has
asserted any claim or to the knowledge of Parent has any reasonable basis to
assert any valid claim against Parent or any of its Subsidiaries that either the
continued employment by or association with Parent or any of its Subsidiaries of
any of the current officers or employees of or consultants to Parent or any of
its Subsidiaries contravenes any agreements or Applicable Laws relating to
unfair competition, trade secrets or proprietary information. Closing will not
result in the payment, vesting, or acceleration of any benefit, payment or
amount under any of the Parent Benefit Plans.
4.14. Environmental
4.14.1. Environmental Laws. Parent and its Subsidiaries are in compliance in all
material respects with all applicable Environmental Laws. Neither Parent nor any
of its Subsidiaries has received any communication that alleges that Parent or
any of its Subsidiaries was or is not in compliance in all respects with or has
any liability under any applicable Environmental Law. To the knowledge of
Parent, there are no circumstances that may prevent or interfere with compliance
in the future with all applicable Environmental Laws.
4.14.2. Environmental Claims. There is no Environmental Claim pending or to the
knowledge of Parent threatened against or involving Parent or any of its
Subsidiaries or against any Person whose liability for any Environmental Claim
Parent or any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law that, if existed, would cause a Material
Adverse Effect.
4.15. Assets Other Than Real Property
4.15.1. Title. Parent and its Subsidiaries have good and defensible title to all
of the tangible assets shown on the Parent Balance Sheet, in each case, free and
clear of any Encumbrances except; (a) assets disposed of since the date of the
Parent Balance Sheet in the ordinary course of business and in a manner
consistent with past practice and not material in amount; (b) Encumbrances
reflected in the Parent Balance Sheet or otherwise in the most recent
consolidated financial statements filed by Parent with the SEC; (c) Permitted
Encumbrances; and (d) Encumbrances set forth in section 4.15 of the Parent
Disclosure Schedule.
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4.15.2. Condition. Except as set forth in section 4.15.2 of the Parent
Disclosure Schedule, all receivables shown on the Parent Balance Sheet and all
receivables accrued by Parent and its Subsidiaries since the date of the Parent
Balance Sheet have been collected or are collectible in the aggregate amount
shown. All material plant, equipment and personal property owned by Parent and
its Subsidiaries and regularly used in their respective business are in good
operating condition and repair, ordinary wear and tear excepted.
4.16. Real Property
4.16.1. Company Real Property. Except as set forth on section 4.16.1 of the
Parent Disclosure Schedule, neither Parent nor its Subsidiaries own any real
property.
4.16.2. Company Leases. Section 4.16.2 of the Parent Disclosure Schedule lists
all of the Leases of Parent and its Subsidiaries. Parent has delivered or made
available to the Company complete copies of the Leases and all material
amendments thereto (which are identified in section 4.16.2 of the Parent
Disclosure Schedule). The Parent Leases grant to Parent or its Subsidiaries
leasehold estates free and clear of all Encumbrances except Permitted
Encumbrances. The Parent Leases are in full force and effect and are binding and
enforceable against each of the parties thereto in accordance with their
respective terms. Neither Parent nor any of its Subsidiaries nor to the
knowledge of Parent, any other party to a Parent Lease is in material Violation
of any Parent Lease nor are there any facts or circumstances that would
reasonably indicate that Parent or any of its Subsidiaries is likely to be in
material Violation of any Parent Lease. Section 4.16.2 of the Parent Disclosure
Schedule correctly identifies each Parent Lease that requires the consent of any
Person in connection with the transactions contemplated hereby. No material
construction, alteration or other leasehold improvement work with respect to the
real property covered by any of the Parent Leases remains to be paid for or to
be performed by Parent or any of its Subsidiaries.
4.16.3. Condition. All buildings, structures and fixtures or parts thereof used
by Parent or any of its Subsidiaries in the conduct of their respective business
are in good operating condition and repair, ordinary wear and tear excepted, and
are insured with all coverages that are usual and customary for similar
properties and similar businesses and that, pursuant to the terms of the Parent
Leases, are required to be insured by third parties.
4.17. Intellectual Property
4.17.1. Right to Intellectual Property. Except as set forth in section 4.17.1 of
the Parent Disclosure Schedule, Parent and its Subsidiaries own or have
perpetual, fully paid, worldwide rights to use all patents, industrial designs,
trademarks, trade names, service marks, copyrights and any applications
therefor, maskworks, net lists, schematics, technology, websites, domain names,
inventions, know-how, trade secrets, algorithms, computer software programs or
applications (in both source code and object code form) and tangible or
intangible proprietary information or material that are used in the business of
Parent and its Subsidiaries (the "Parent Proprietary Rights"), free and clear of
any and all Encumbrances. To the knowledge of Parent, there is no reason why
Parent and its Subsidiaries will not be able to continue to own or have
perpetual, fully paid, worldwide rights to use all Parent Proprietary Rights
necessary for the lawful conduct of their respective business as currently
conducted and as currently proposed to be conducted without any infringement or
conflict with the rights of others. Except as set forth in section 4.17.1 of the
Parent Disclosure Schedule, all of the rights of Parent and its Subsidiaries in
and to the Parent Proprietary Rights are freely assignable in the name of Parent
or one of its Subsidiaries including the right to create derivatives and Parent
and its Subsidiaries are under no obligation to obtain any approval or consent
for use of any of the Parent Proprietary Rights.
4.17.2. List of Company Proprietary Rights. Section 4.17.2 of the Parent
Disclosure Schedule sets forth a complete list of the Parent Proprietary Rights
specifying, where applicable, the jurisdictions in which each of the Parent
Proprietary Rights has been issued or registered or in which an application for
such issuance or registration has been filed including the respective
registration or application numbers and the names of all registered owners and
inventors, as applicable. None of the products of Parent and its Subsidiaries as
currently marketed or supported have been registered for patent protection or
for copyright protection in any jurisdiction nor has Parent or any of its
Subsidiaries been requested to make any such registration.
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4.17.3. Royalties. Except as set forth in section 4.17.3 of the Parent
Disclosure Schedule, neither Parent nor any of its Subsidiaries is obligated to
pay any royalties or other compensation to any Person in respect of its
ownership, use or license of any of their respective Parent Proprietary Rights.
4.17.4. Licenses. Section 4.17.4 of the Parent Disclosure Schedule sets forth a
complete list of all material licenses, sublicenses and other agreements to
which Parent or any of its Subsidiaries is a party and pursuant to which Parent
or any of its Subsidiaries is authorized to use any Parent Proprietary Right
(excluding End-User Licenses). The Parent Proprietary Rights include all
trademarks, trade names, service marks, trade secrets, websites and domain names
and software and all patent rights and industrial design rights that are
necessary for Parent and its Subsidiaries to satisfy and perform such licenses,
sublicenses and agreements. None of Parent, any of its Subsidiaries and the
other contracting parties thereto is in violation of any license, sublicense or
agreement included in such list except for violations that do not materially
impair the rights of Parent or its Subsidiaries under such license, sublicense
or agreement, except as would not have a Material Adverse Effect. Such licenses,
sublicenses and agreements are in full force and effect and are binding and
enforceable against each of the parties thereto in accordance with their
respective terms. The execution and delivery by Parent of this Agreement and the
other agreements contemplated hereby, the performance by Parent of its
obligations hereunder and thereunder and the consummation by Parent of the
transactions contemplated hereby and thereby will not cause Parent or any of its
Subsidiaries to be in violation or in default under any such license, sublicense
or agreement nor will entitle any other party to any material license,
sublicense or agreement to terminate or modify such license, sublicense or
agreement.
4.17.5. Status of Registrations. All of the Parent Proprietary Rights set forth
in section 4.17.2 of the Parent Disclosure Schedule as having been issued by,
registered with or filed with any patent or trademark office have been duly so
issued, registered or filed, as the case may be and have been properly
maintained and renewed in accordance with all Applicable Laws. Parent and each
of its Subsidiaries have diligently protected their respective Parent
Proprietary Rights and have diligently maintained the confidentiality of their
trade secrets, know-how and other confidential Parent Proprietary Rights. To the
knowledge of Parent there have been no acts or omissions by Parent or any of its
Subsidiaries the result of which has been or would be to compromise the rights
of Parent or any of its Subsidiaries to apply for or enforce appropriate legal
protection of the Parent Proprietary Rights.
4.17.6. No Conflict. Except as set forth in section 4.17.6 of the Parent
Disclosure Schedule, no claims with respect to the Parent Proprietary Rights are
pending, have been asserted or to the knowledge of Parent are threatened by any
Person nor to the knowledge of Parent are there any valid grounds for any bona
fide claims; (a) to the effect that the development, sale, licensing or use of
any of the products of Parent and its Subsidiaries as now developed, sold,
licensed or used or as proposed for development, sale, licensing or use by
Parent and its Subsidiaries infringes on any patent, industrial design,
trademark, trade name, service mark, copyright, trade secret, website or domain
name or other proprietary right of any Person; (b) against the use by Parent or
any of its Subsidiaries of any patents, industrial designs, trademarks, trade
names, service marks, copyrights, website or domain name and any applications
therefor, maskworks, net lists, schematics, technology, know-how, trade secrets,
algorithms, computer software programs or applications and tangible or
intangible proprietary information or material used in the business of Parent
and its Subsidiaries as currently conducted or as proposed to be conducted; or
(c) challenging the ownership by Parent or any of its Subsidiaries of the
validity of any registration for any application relating to or the
effectiveness of any of the Parent Proprietary Rights. To the knowledge of
Parent there is no unauthorized use, infringement or misappropriation of any of
the Parent Proprietary Rights by any third Person, including without limitation,
any current or former employee of Parent or any of its Subsidiaries. No Parent
Proprietary Right or product of Parent or any of its Subsidiaries is subject to
any outstanding decree, order, judgment or stipulation restricting in any manner
the use or licensing thereof by Parent or any of its Subsidiaries.
4.17.7. Employee Agreements. To the knowledge of Parent, no employee, officer or
consultant of Parent or any of its Subsidiaries is in violation of any term of
any employment or consulting contract, proprietary information and inventions
agreement, non-competition agreement or any other contract or agreement relating
to the relationship of any such employee, officer or consultant with Parent or
any of its Subsidiaries.
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4.18. Agreements, Contracts and Commmitments
4.18.1. Company Agreemments. Except as set forth in section 4.18 of the Parent
Disclosure Schedule, neither Parent nor any of its Subsidiaries is a party to or
has:
(a) any pension, profit sharing, retirement, deferred compensation,
welfare, legal services, medical, dental or other employee benefit
or health insurance plans, life insurance or other death benefit
plans, disability, stock option, stock purchase, stock compensation,
bonus, vacation pay, severance pay or other similar plans, programs
or agreements or material personnel policy which is not already set
forth in section 3.12 of the Parent Disclosure Schedule (other than
normal policies regarding holidays, vacations and salary
continuation during short absences for illnesses or other reasons);
(b) any employment agreement which provides for a payment which, if paid
pro rata on a monthly basis, would exceed $5,000 per month, or any
employment agreement which is binding on Parent for a period in
excess of one year, with any present employee, officer, director or
consultant (or former employees, officers, directors or consultants
to the extent there remain at the date hereof obligations to be
performed by Parent or any of its Subsidiaries);
(c) any agreement for personal services or employment that upon
termination requires any payments greater than those that would
otherwise be imposed by Applicable Law;
(d) any agreement of guarantee or indemnification;
(e) any agreement or commitment containing a covenant limiting or
purporting to limit the freedom of Parent or any of its
Subsidiaries; (i) to compete with any Person in any geographic area;
(ii) to engage in any line of business; or (iii) to hire or solicit
any individual for employment or consulting services;
(f) any lease, other than the Leases, under which Parent or any of its
Subsidiaries is a lessee or lessor that involves payments of $50,000
or more per annum or is material to the conduct of the business of
Parent or any of its Subsidiaries;
(g) any joint venture or profit-sharing agreement;
(h) except for trade indebtedness incurred in the ordinary course of
business and reflected on the Parent Balance Sheet, any loan or
credit agreements providing for the extension of credit to Parent or
any instrument evidencing or related in any way to indebtedness
incurred in the acquisition of companies or other entities or
indebtedness for borrowed money by way of direct loan, sale of debt
securities, purchase money obligation, conditional sale, lease,
guarantee or otherwise that individually is in the amount of $50,000
or more;
(i) any agreement or arrangement with any third Person to develop any
intellectual property or other asset expected to be used or
currently used or useful in the business of Parent or any of its
Subsidiaries;
(j) any agreement or arrangement for Parent or any of its Subsidiaries
to develop any intellectual property or other asset for any third
Person;
(k) any agreement or arrangement providing for the payment of any
commission based on sales other than in the ordinary course of
business and consistent with past practice;
(l) any agreement for the sale or license by or to Parent or any of its
Subsidiaries of materials, products, services or supplies that
involves future payments to Parent or any of its Subsidiaries of
more than $50,000;
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(m) any agreement for the purchase by Parent or any of its Subsidiaries
of any materials, equipment, services or supplies that either: (i)
involves a binding commitment by Parent or such Subsidiary to make
future payments in excess of $50,000 and cannot be terminated by
Parent or such Subsidiary without penalty upon less than three
months' notice; or (ii) was not entered into in the ordinary course
of business;
(n) any agreement or commitment for the acquisition, construction or
sale of fixed assets owned or to be owned by Parent or any of its
Subsidiaries that involves future payments by it of more than
$50,000;
(o) any agreement or commitment to which present or former directors or
officers (or members of their immediate families) or Affiliates (or
directors or officers of an Affiliate) are also parties;
(p) any agreement not described above (ignoring solely for this purpose
any dollar amount thresholds in those descriptions) involving the
payment or receipt by Parent or any of its Subsidiaries of more than
$100,000, other than the Leases; or
(q) any agreement not described above that was not made in the ordinary
course of business and that is material to the financial condition,
business, operations, assets, results of operations or prospects of
Parent and its Subsidiaries taken as a whole.
4.18.2. Validity, Violation and Consent. The Contracts listed in section 4.18 of
the Parent Disclosure Schedule are valid and in full force and effect. Neither
Parent nor any of its Subsidiaries is in Violation of any term, condition or
provision of any material contract to which Parent or any of its Subsidiaries is
a party or by which it, any of its Subsidiaries or any of their respective
material assets or properties is bound or which is applicable to it, any of its
Subsidiaries or any of their respective material assets or properties, except
for such Violations which, individually or in the aggregate, would not result in
a Material Adverse Effect. Section 4.18.2 of the Parent Disclosure Schedule
identifies each Contract that requires the consent of a third Person in
connection with the transactions contemplated hereby.
4.19. Insurance Contracts. Section 4.19 of the Parent Disclosure Schedule lists
all material contracts of insurance and indemnity (other than those identified
as such in other sections of the Parent Disclosure Schedule) in force at the
date hereof with respect to Parent and its Subsidiaries. Such contracts of
insurance and indemnity and those identified as such in other sections of the
Parent Disclosure Schedule (collectively, the "Parent Insurance Contracts")
insure against such risks and are in such amounts as are reasonable and
appropriate considering Parent and its Subsidiaries and their respective
property, business and operations. Except as set forth in section 4.19 of the
Parent Disclosure Schedule, all of the Parent Insurance Contracts are in full
force and effect with no default thereunder by Parent or any of its Subsidiaries
which could permit the insurer to deny payment of claims thereunder. The
execution and delivery by Parent of this Agreement and the other agreements
contemplated hereby, the performance by Parent of its obligations hereunder and
thereunder and the consummation by Parent of the other transactions contemplated
hereby and thereby will not cause Parent or any of its Subsidiaries to be in
Violation of any Parent Insurance Contracts nor entitle any other party thereto
to terminate or modify a Parent Insurance Contract. Neither Parent nor any of
its Subsidiaries has received notice from any of their respective insurance
carriers that any insurance premiums will be materially increased in the future
or that any insurance coverage provided under the Parent Insurance Contracts
will not be available in the future on substantially the same terms as now in
effect. Neither Parent nor any of its Subsidiaries has received or has given a
notice of cancellation with respect to any of the Parent Insurance Contracts.
4.20. Banking Relationships. Section 4.20 of the Parent Disclosure Schedule
sets forth the names and locations of all banks and trust companies in which
Parent or any of its Subsidiaries has accounts, lines of credit or safety
deposit boxes.
4.21. Suppliers, Distributors and Customers. The relationships of Parent and its
Subsidiaries with their respective suppliers, distributors and customers are
satisfactory commercial working relationships. Except as set forth in
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section 4.21 of the Parent Disclosure Schedule, since the date of the Parent
Balance Sheet, no material supplier, distributor or customer of Parent or any of
its Subsidiaries has cancelled or otherwise adversely modified its relationship
with Parent or any of its Subsidiaries, and to the knowledge of Parent, no
supplier, distributor or customer of Parent or any of its Subsidiaries has any
intention to do so. To the knowledge of Parent, none of the execution and
delivery by Parent of this Agreement and the other agreements contemplated
hereby, the performance by Parent of its obligations hereunder and thereunder
and the consummation by Parent of the Arrangement and the other transactions
contemplated hereby and thereby will materially adversely affect any such
relationship.
4.22. Products. Each product sold, leased, licensed or delivered by Parent or
any of its Subsidiaries has been in material conformity with all applicable
contractual commitments.
4.23. Director Approval. The Board of Directors of Parent has; (a) determined
unanimously that the Arrangement is fair to the holders of the Parent Common
Stock and is in the best interests of Parent; and (b) determined to recommend
that the holders of the Parent Common Stock vote in favour of the Arrangement.
4.24. No Broker's or Finder's Fees. Except for Doerge Capital Management and
CIBC World Markets Corp., none of Parent, any of its Subsidiaries and their
respective directors, officers, employees and agents has employed any broker,
finder, financial advisor or intermediary or has paid or incurred any liability
for any fee or commission to any broker, finder, financial advisor or
intermediary in connection with this Agreement, the Arrangement or any other
transaction contemplated hereby. Parent has made available to the Company a
complete and correct copy of any engagement letter or other agreement or
arrangement between Doerge Capital Management or CIBC World Markets Corp. on the
one hand and Parent on the other hand.
4.25. Full Disclosure. This Agreement does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
contained herein not false or misleading. To the knowledge of Parent there is no
fact existing on the date hereof that Parent has not disclosed to the Company in
writing that could result in a Material Adverse Effect.
4.26. Aviation Subco. Aviation Subco has been formed solely for purposes of the
Arrangement. Aviation Subco will not have any Liabilities nor will Aviation
Subco agree before the Effective Time to assume any Liabilities.
ARTICLE 5
COVENANTS OF THE COMPANY AS TO CONDUCT OF BUSINESS
During the period from the date hereof and until Closing except as expressly
contemplated hereby or as consented to by Parent in writing or as set forth
herein or in Article 5 of the Company Disclosure Schedule, the Company agrees
that:
5.1. Ordinary Course. The Company and its Subsidiaries shall carry on their
respective business in the ordinary course consistent with prior practice,
including the payment of all debts and taxes owed by them, in substantially the
same manner as heretofore and shall use all reasonable efforts to preserve
intact their present business organization and keep available the services of
their respective directors, officers, employees, consultants and others having
business dealings with them to the end that their goodwill and business shall be
maintained. For greater certainty and without limitation, the Parties agree that
between the date hereof and the Effective Time, the Company and its Subsidiaries
may enter into the Acquisition Transactions in the ordinary course of business
and the Company shall not be required to procure the consent of Parent prior to
the consummation thereof, but shall provide prior written notice to Parent and
its legal counsel.
5.2. Corporate Organization. The Company shall not cause, permit or propose any
amendment to its Articles of Incorporation or By-Laws or merge, consolidate,
amalgamate or otherwise combine with any Person.
5.3. Capital Structure. The Company shall not; (a) declare or pay any dividend
or other distribution (whether in cash, shares or property or any combination
thereof) in respect of its capital; (b) save and except in connection with the
Acquisition Transactions, issue, deliver or sell or authorize the issuance,
delivery or sale of any shares of any
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class (except upon the exercise of Company Securities) or save and except with
respect to the grant of options in the ordinary course pursuant to the Company's
stock option plan, options, warrants, calls, rights or agreements that obligate
Company to issue, deliver or sell any shares of any class or to grant, extend or
enter into any such option, warrant, call, right or agreement; (c) split,
combine or reclassify any shares; or (d) purchase, redeem or otherwise acquire,
directly or indirectly, any shares.
5.4. Options and Warrants. Neither the Company nor any of its Subsidiaries shall
accelerate, amend, reprice or change the period of exercisability of any
outstanding Company Securities or authorize cash payments in exchange for any
options granted under any of the Company Plans.
5.5. Compliance with Applicable Laws. The Company and its Subsidiaries shall
duly comply in all material respects with all Applicable Laws.
5.6. Investments and Acquisitions. In connection with the Acquisition
Transactions neither the Company nor any of its Subsidiaries shall acquire or
license any assets, that are material, individually or in the aggregate to the
Company and its Subsidiaries except in the ordinary course of business
consistent with prior practice.
5.7. Capital Expenditures. Other than in connection with the Acquisition
Transactions and transactions in the ordinary course of business, including the
acquisition of computer hardware and software, neither the Company nor any of
its Subsidiaries shall make or enter into any commitments or agreements with
respect to capital expenditures in excess of $250,000 (in the aggregate).
5.8. Indebtedness. Other than in connection with the Acquisition Transactions,
neither the Company nor any of its Subsidiaries shall or shall propose to incur
any Indebtedness for borrowed money, incur any other Indebtedness except in the
ordinary course of business or guarantee any Indebtedness of others. Neither the
Company nor any of its Subsidiaries shall pay, discharge or satisfy, in an
amount in excess of $250,000 (in the aggregate), any claims, liabilities or
obligations reflected or reserved against in the Company Balance Sheet except in
the ordinary course of business consistent with past practice or except with the
prior written approval of Parent, which approval shall not be unreasonably
withheld or delayed.
5.9. Litigation. Neither the Company nor any of its Subsidiaries shall commence
any litigation other than for the routine collection of bills. The Company and
its Subsidiaries shall cooperate and consult with Parent with respect to all
matters regarding any proceeding set forth in the Company Disclosure Schedule
including any settlement proposed by any Person and neither the Company nor any
of its Subsidiaries shall take any significant actions with respect to such
proceedings (including the entering into of any such settlement) without the
prior written approval of Parent, which approval shall not be unreasonably
withheld or delayed.
5.10. Properties. The Company and its Subsidiaries shall maintain their
respective properties and assets in customary repair, order and condition,
reasonable wear and tear excepted. Neither the Company nor any of its
Subsidiaries shall sell, lease, license, encumber or otherwise dispose of any of
their respective property or assets, except in the ordinary course of business
consistent with prior practice.
5.11. Contracts. Neither the Company nor any of its Subsidiaries shall; (a) save
and except with respect to the Acquisition Transactions enter into any Contract
or engage in any transaction not in the ordinary course of business consistent
with past practice; (b) amend or otherwise modify any Contract pursuant to which
any other party is granted marketing, distribution or similar rights of any type
or scope with respect to any products of the Company or any of its Subsidiaries;
(c) amend or otherwise modify any Contract except in the ordinary course of
business consistent with past practice; or (d) do or omit to do any act or
permit any act or omission to act, which act or omission shall result in a
Violation of any provision of any material Contract. For greater certainty and
without limitation, the Company shall comply with its obligations under that
certain preferred stock purchase agreement between the Company and Parent dated
as of March 1, 2000, as amended.
5.12. Books and Records. The Company and its Subsidiaries shall maintain their
respective books and records in the usual course of business consistent with
past practice. The Company shall prepare its financial statements in accordance
with Canadian generally accepted accounting principles applied on a consistent
basis. The Company
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and its Subsidiaries shall not revalue any of their assets including writing
down the value of inventory or writing off notes or accounts receivable, except
in the ordinary course of business, consistent with past practice.
5.13. Taxes. Neither the Company nor any of its Subsidiaries shall make or
change any material election in respect of Taxes, file any material Tax Return
or any amendment to a material Tax Return, adopt or change any accounting method
in respect of Taxes, enter into any closing agreement, settle any claim or
assessment in respect of Taxes or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes,
except with the prior written approval of Parent, which approval shall not be
unreasonably withheld or delayed.
5.14. Company Benefit Plans. Other than in connection with the Acquisition
Transactions, neither the Company nor any of its Subsidiaries shall adopt, or
enter into any agreement, which if adopted or entered into would be a Company
Plan.
5.15. Insurance. The Company and its Subsidiaries shall maintain insurance of
the types, in the amounts and with deductibles and exclusions consistent with
past practice.
5.16. Employee Matters. Neither the Company nor any of its Subsidiaries shall;
(a) adopt any collective bargaining agreement; (b) grant any severance or
termination pay to any director, officer or other employee of the Company or any
of its Subsidiaries; (c) pay, or agree to pay, any general or uniform increase
in the rates of pay of employees of the Company or any of its Subsidiaries or,
without limitation, in the benefits under any bonus plan or other compensation
arrangements; (d) increase the compensation payable or to become payable to any
officer or salaried employee earning in excess of $120,000 per year; or (e)
enter into or amend any employment agreement save and except in connection with
the Acquisition Transactions.
5.17. General. Neither the Company nor any of its Subsidiaries shall take,
propose to take or agree in writing or otherwise to take any of the actions that
it or they agreed in this Article not to take nor shall the Company or any of
its Subsidiaries fail to take, propose not to take or agree in writing or
otherwise not to take any of the actions it or they agreed in this Article to
take, nor shall the Company or any of its Subsidiaries take or fail to take any
other action that would prevent the Company or any of its Subsidiaries from
performing or cause the Company or any of its Subsidiaries not to perform their
covenants and other obligations in this Agreement, the Arrangement or any other
agreement contemplated hereby.
ARTICLE 6
COVENANTS OF PARENT AS TO CONDUCT OF BUSINESS
During the period from the date hereof and until the Closing except as expressly
contemplated hereby or as consented to by the Company in writing, or as set
forth herein or in Article 6 of the Parent Disclosure Schedule, Parent agrees
that:
6.1. Ordinary Course. Parent and its Subsidiaries shall carry on their
respective business in the ordinary course consistent with prior practice,
including the payment of all debts and taxes owed by them, in substantially the
same manner as heretofore and shall use all reasonable efforts to preserve
intact their present business organization and keep available the services of
their directors, officers, employees, consultants and others having business
dealings with them to the end that their goodwill and business shall be
maintained.
6.2. Corporate Organization. Parent shall not cause, permit or propose any
amendment to its Articles of Incorporation or By-Laws or merge, consolidate,
amalgamate or otherwise combine with any other Person, save and except for the
filing of Articles of Amendment to create the Special Voting Share and to amend
its name to "travelbyus.com, Inc." following the Closing.
6.3. Capital Structure. Parent shall not; (a) declare or pay any dividend or
other distribution (whether in cash, stock or property or any combination
thereof); (b) issue, deliver or sell or authorize the issuance, delivery or sale
of any shares of any class (except upon the exercise of outstanding securities)
or any options, warrants, calls, rights or
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agreements that obligate Parent to issue, deliver or sell additional shares or
to grant, extend or enter into any such option, warrant, call, right or
agreement; (c) split, combine or reclassify any of its capital stock; or (d)
purchase, redeem or otherwise acquire, directly or indirectly, any of its
capital stock.
6.4. Options and Warrants. Neither Parent nor any of its Subsidiaries shall
accelerate, amend, reprice or change the period of exercisability of any
outstanding Parent Securities or authorize cash payments in exchange for any
options granted under any Parent Plans.
6.5. Compliance with Applicable Laws. Parent and its Subsidiaries shall duly
comply in all material respects with all Applicable Laws.
6.6. Investments and Acquisitions. Neither Parent nor any of its Subsidiaries
shall; (a) acquire any equity interest in or make any investment in the equity
capital of any Person; (b) acquire by merging or consolidating with or by
purchase, a substantial portion of the assets of any other Person or by any
other manner; (c) otherwise acquire or license any assets that are material,
individually or in the aggregate to Parent except in the ordinary course of
business consistent with prior practice; or (d) enter into any partnership,
joint venture, joint development, strategic alliance, voluntary association,
cooperative or business trust agreement or arrangement.
6.7. Capital Expenditures. Neither Parent nor any of its Subsidiaries shall make
or enter any commitments or agreements with respect to capital expenditures in
excess of $50,000 (in the aggregate).
6.8. Indebtedness. Neither Parent nor any of its Subsidiaries shall or shall
propose to incur any Indebtedness for borrowed money, incur any other
Indebtedness except in the ordinary course of business or guarantee any
Indebtedness of others. Neither Parent nor any of its Subsidiaries shall pay,
discharge or satisfy, in an amount in excess of $50,000 (in the aggregate), any
claims, liabilities or obligations reflected or reserved against in the Parent
Balance Sheet except in the ordinary course of business consistent with past
practice or except with the prior written approval of the Company, which
approval shall not be unreasonably withheld or delayed.
6.9. Litigation. Neither Parent nor any of its Subsidiaries shall commence any
litigation other than for the routine collection of bills. Parent and its
Subsidiaries shall cooperate and consult with the Company with respect to all
matters regarding any proceeding set forth in the Parent Disclosure Schedule
including any settlement proposed by any Person and neither Parent nor any of
its Subsidiaries shall take any significant actions with respect to such
proceedings (including the entering into of any such settlement) without the
prior written approval of the Company, which approval shall not be unreasonably
withheld or delayed.
6.10. Properties. Parent and its Subsidiaries shall maintain their respective
properties and assets in customary repair, order and condition, reasonable wear
and tear excepted. Neither Parent nor any of its Subsidiaries shall sell, lease,
license, encumber or otherwise dispose of any of their respective property or
assets, except in the ordinary course of business consistent with prior
practice.
6.11. Contracts. Neither Parent nor any of its Subsidiaries shall; (a) enter
into any Contract or engage in any transaction not in the ordinary course of
business consistent with past practice; (b) amend or otherwise modify any
Contract pursuant to which any other party is granted marketing, distribution or
similar rights of any type or scope with respect to any products of Parent or
any of its Subsidiaries; (c) amend or otherwise modify any Contract except in
the ordinary course of business consistent with past practice; or (d) do or omit
to do any act or permit any act or omission to act, which act or omission shall
result in a Violation of any provision of any material Contract.
6.12. Books and Records. Parent and its Subsidiaries shall maintain their books
and records in the usual course of business consistent with past practice and
shall prepare their financial statements in accordance with generally accepted
accounting principles applied on a consistent basis. Parent and its Subsidiaries
shall not revalue any of their assets including writing down the value of
inventory or writing off notes or accounts receivable, except in the ordinary
course of business consistent with past practice.
6.13. Taxes. Neither Parent nor any of its Subsidiaries shall make or change any
material election in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, adopt or change any accounting
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method in respect of Taxes, enter into any closing agreement, settle any claim
or assessment in respect of Taxes or consent to any extension or waiver of the
limitation period applicable to any claim or assessment in respect of Taxes,
except with the prior written approval of the Company, which approval shall not
be unreasonably withheld or delayed.
6.14. Parent Benefit Plans. Other than with respect to the Parent Securities or
Acquisition Transactions, neither Parent nor any of its Subsidiaries shall adopt
any Parent Benefit Plan or amend any Parent Benefit Plan.
6.15. Insurance. Parent and its Subsidiaries shall maintain insurance of the
types, in the amounts and with deductibles and exclusions consistent with past
practice.
6.16. Employee Matters. Neither Parent nor any of its Subsidiaries shall; (a)
adopt any collective bargaining agreement; (b) grant any severance or
termination pay to any director, officer or other employee of Parent or any of
its Subsidiaries; (c) pay, or agree to pay, any general or uniform increase in
the rates of pay of employees of Parent or any of its Subsidiaries or in the
benefits under any bonus plan or other compensation arrangements; (d) increase
the compensation payable or to become payable to any officer or salaried
employee earning in excess of $120,000 per year; or (e) enter into or amend any
employment agreement.
6.17. General. Neither Parent nor Aviation Subco nor any of the Subsidiaries of
Parent shall take, propose to take or agree in writing or otherwise to take any
of the actions that they agreed in this Article not to take nor shall Parent,
its Subsidiaries or Aviation Subco fail to take, propose not to take or agree in
writing or otherwise not to take any of the actions they agreed in this Article
to take nor shall Parent, its Subsidiaries or Aviation Subco take or fail to
take any other action that would prevent Parent or Aviation Subco from
performing or cause Parent, its Subsidiaries or Aviation Subco not to perform
their covenants and other obligations in this Agreement, the Arrangement or any
other agreement contemplated hereby.
ARTICLE 7
ADDITIONAL COVENANTS
7.1. Further Assurances; Consents. During the term hereof, each of the Parties
shall use their reasonable best efforts to satisfy or cause to be satisfied all
the conditions precedent that are set forth herein. Each of the Parties shall
use their reasonable best efforts to cause the Arrangement and the other
transactions contemplated hereby to be consummated. The Parties shall cooperate
with each other to provide such information, to execute and deliver such other
documents, instruments of transfer or assignment, files, books and records and
to do all such further acts and things as may be reasonably required to carry
out the transactions contemplated hereby. The Parties shall use all reasonable
efforts to comply promptly with all legal requirements that may be imposed upon
them with respect to the consummation of the Arrangement and the other
transactions contemplated hereby and to obtain any Consent or any exemption by
and to make any registration, declaration or filing with any Governmental Entity
or other third Person required to be obtained or made by such Person in
connection with the taking of any action contemplated hereby. Without limiting
the generality of the foregoing, as promptly as practicable after the execution
of this Agreement, each Party shall make all required filings and provide such
other information as may be required, under the HSR Act, the Investment Canada
Act and the Competition Act (Canada). No Party shall take or shall fail to take
any action that would or would be reasonably likely to result in any of its
representations and warranties set forth in this Agreement being untrue. The
Parties covenant and agree to proceed diligently and in a coordinated fashion to
apply for and obtain all necessary approvals.
7.2. Access to Information. The Company shall afford to Parent and Parent and
Aviation Subco shall afford to the Company and each shall cause its independent
accountants to afford to the other Party and the officers, directors, employees,
financial advisors, counsel, accountants, agents and other representatives of
such Party and such Party's Subsidiaries (each, a "Representative"), reasonable
access during normal business hours during the period prior to Closing to all of
such Party's and its Subsidiaries' properties, books, contracts, commitments and
records. During such period, each Party shall use reasonable efforts to furnish
promptly to the other Party all other information concerning the business,
properties and personnel of such Party and its Subsidiaries as the other Party
may reasonably request, including such information as may be necessary to verify
the representations and warranties of
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the other Party. For greater certainty, Parent shall make available to Company
any and all information and due diligence material received by Parent or its
Representatives with respect to Global and its Subsidiaries.
7.3. Transfer and Other Taxes. Each of the Parties shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp Taxes, any transfer, recording,
registration and other fees and any similar Taxes which become payable in
connection with the transactions contemplated by this Agreement.
7.4 Frustration of Closing Conditions. No Party may rely on the failure of any
condition set forth in Article 8 to be satisfied if such failure was caused by
such Party's failure to use reasonable efforts to consummate the Arrangement and
the other transactions contemplated by this Agreement.
7.5. Confidentiality. For purposes of this section 7.5, a "Party" shall refer
to, as the case may be: (i) collectively, the Company and its Subsidiaries; or
(ii) collectively, Parent and its Subsidiaries. Each Party shall treat as
confidential and shall cause its Representatives to treat as confidential all
documents and information concerning the other Party furnished by the other
Party or its Representatives to such Party or its Representatives (including
documents and information furnished prior to the date hereof) in connection with
the transactions contemplated hereby, except to the extent that such document or
information: (a) at the time of its disclosure to the receiving Party or its
Representatives by the disclosing Party or its Representatives is already known
or available to the receiving Party or its Representatives (but this Agreement
shall not relieve the receiving Party from any obligations of confidentiality
owed to third Persons with respect to such information); (b) is or becomes known
or available to the public other than as a result of an unauthorized disclosure
by the receiving Party or its Representatives; (c) is or becomes known or
available to the receiving Party or its Representatives without restrictions of
confidentiality similar to those set forth herein from a source other than the
disclosing Party or its Representatives provided that the receiving Party does
not know, after reasonable inquiry, that such source is bound by a
confidentiality agreement with or other obligation of secrecy to, the disclosing
Party or its Representatives that would prohibit such disclosures to the
receiving Party or its Representatives by such source; (d) is independently
generated by the receiving Party or its Representatives and is not derived from
confidential information; or (e) is required to be disclosed by the receiving
Party or its Representatives by Applicable Law or other legal process. Subject
to the foregoing, each Party and its Representatives shall not release or
disclose such documents or information to any Person other than those
Representatives of such Party that need to review such documents or to know such
information in order to perform their respective duties in connection with this
Agreement and shall not use such documents or information for purposes other
than as contemplated hereby. In the event of termination of this Agreement each
Party shall and shall cause its Representatives to deliver to the other Party
the originals of all documents obtained by such Party or its Representatives
from the other Party or its Representatives in connection with this Agreement,
whether so obtained before or after the execution hereof and each Party shall
and shall cause its Representatives to destroy all copies thereof. Within 30
days of such termination, such Party shall certify to the other Party in writing
that such Party and its Representatives shall have complied with their
obligations contained in this section 7.5. The agreements contained in this
section 7.5 shall survive any termination of this Agreement and shall remain in
effect for a period of one year from the date hereof.
7.6. Public Disclosure. Any press release or other public disclosure of
information regarding the transactions contemplated hereby (including the
existence and terms of this Agreement) shall be developed jointly by Parent and
the Company. If Applicable Law or any stock exchange shall require either Party
to disclose publicly any such information such Party may disclose publicly such
information after reasonable consultation with the other Party.
7.7. Takeover and Other Laws. If any takeover Law or other Law shall become
applicable to the transactions contemplated hereby, the Company and its Board of
Directors or Parent and its Board of Directors, as the case may be, shall use
their reasonable best efforts to obtain such approvals and to take such actions
as are necessary so that the transactions contemplated hereby may be consummated
as promptly as practicable on the terms contemplated hereby and otherwise to
minimize the effects of such takeover Law or other Law on the transactions
contemplated hereby.
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7.8. Comfort Letters
7.8.1. Company. The Company shall use its reasonable best efforts to cause
PricewaterhouseCoopers LLP to deliver to Parent a letter addressed to Parent
with respect to the financial information of the Company contained in the
Information Circular (the "First Company Comfort Letter") and a second letter
addressed to Parent with respect to the financial information of the Company
contained in the Registration Statement (the "Second Company Comfort Letter").
The First Company Comfort and the Second Company Comfort Letter are collectively
referred to as the "Company Comfort Letters". The First Company Comfort Letter
shall be dated as of a date within five days before the date the Information
Circular is first mailed to the Company's securityholders. The Second Company
Comfort Letter shall be dated as of a date within five days before the date on
which the Registration Statement shall become effective. The Company Comfort
Letters shall be in form and substance reasonably satisfactory to Parent and
customary in scope and substance for "COMFORT" letters delivered by independent
public accountants in connection with proxy statements and registration
statements similar to the Information Circular and the Registration Statement.
7.8.2. Parent. Parent shall use its reasonable best efforts to cause Hein &
Associates and BDO Seidman, to deliver to the Company a letter addressed to the
Company with respect to the financial information of Parent and Global,
respectively, contained in the Information Circular (the "First Parent Comfort
Letter") and a second letter addressed to the Company with respect to the
financial information of Parent and Global, respectively, contained in the
Registration Statement (the "Second Parent Comfort Letter"). The First Parent
Comfort Letter and the Second Parent Comfort Letter are collectively referred to
as the "Parent Comfort Letters". The First Parent Comfort Letter shall be dated
as of a date within five days before the date the Information Circular is first
mailed to Parent's securityholders. The Second Parent Comfort Letter shall be
dated as of a date within five days before the date on which the Registration
Statement shall become effective. The Parent Comfort Letters shall be in form
and substance reasonably satisfactory to the Company and customary in scope and
substance for "comfort" letters delivered by independent public accountants in
connection with proxy statements and registration statements similar to the
Information Circular and the Registration Statement.
7.9. Notice of Certain Matters. Parent and the Company shall promptly notify the
other Party in writing; (i) if such Party shall become aware that any of its
representations and warranties in this Agreement is untrue or inaccurate in any
material respect; (ii) if there shall have been or is reasonably expected to be,
a Material Adverse Effect on such Party; and (iii) if there shall have been, or
is reasonably expected to be any material breach of any covenant or agreement of
such Party contained in this Agreement.
7.10. Reservation and Registration of Parent Common Stock. Parent shall take all
corporate action necessary to reserve for issuance a sufficient number of Parent
Common Stock for delivery upon exchange of the Exchangeable Shares and upon
exercise of the Parent Securities. As soon as practicable after the Effective
Time, Parent shall file a registration statement on Form S-8 or S-3 (or any
successor or other appropriate forms), a post-effective amendment to the Form
S-4 registration statement for the Arrangement or another appropriate form to
register the offer and sale of the Parent Common Stock underlying the Parent
Securities and shall maintain in the same manner as Parent's registration
statements for its stock option plans the effectiveness of such registration
statement or registration statements (and shall maintain the current status of
the prospectus or prospectuses contained therein) for as long as the Parent
Securities shall remain outstanding.
7.11. Obligations of Aviation Subco. Parent shall take all action necessary to
cause Aviation Subco to perform its obligations under this Agreement and to
consummate the Arrangement on the terms and conditions set forth in this
Agreement.
7.12. Affiliate Agreements. Simultaneously with the execution of this Agreement,
the Company shall provide Parent with a list of each Person who is or who may be
deemed to be an Affiliate of the Company (a "Company Affiliate") and shall cause
each Company Affiliate to deliver simultaneously with the execution of this
Agreement to Parent an executed affiliate agreement on satisfactory terms and
conditions. The Company shall notify Parent if any Person not on the list
provided to Parent pursuant to this section 7.12 shall become or shall be deemed
to be a Company Affiliate, and shall cause each such Person to deliver to Parent
an executed agreement.
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7.13. Covenants of Parent Regarding Non-Solicitation
7.13.1. Non-Solicitation. Until the Effective Time neither Parent nor any of its
Subsidiaries shall, directly or indirectly, through any Representative or
otherwise; (a) solicit, initiate, encourage or take any other action to
facilitate (including by way of disclosing information, affording access to the
properties, books or records of Parent or any of its Subsidiaries or entering
into any agreement, arrangement or understanding) the making of any inquiry,
proposal or offer that constitutes or could be expected to lead to an
Acquisition Proposal; (b) participate in any discussions or negotiations
regarding any Acquisition Proposal; (c) withdraw or modify in a manner adverse
to the Company, the approval of Parent's Board of Directors of the transactions
contemplated hereby or make or authorize any statement, recommendation or
solicitation in support of any Acquisition Proposal; (d) approve or accept any
Acquisition Proposal; or (e) cause Parent to enter into any agreement related to
any Acquisition Proposal. Parent and its Subsidiaries shall immediately cease
any and all existing solicitations, initiations, encouragements, activities,
discussions or negotiations with any Person (other than the Company) with
respect to the foregoing. Notwithstanding the foregoing, in response to an
unsolicited tender or exchange offer, Parent may comply with its obligations
under applicable securities laws relating to the provision of directors'
circulars and disclosures to Parent's securityholders.
7.13.2. Compliance with Fiduciary Obligations. Subject to compliance with the
terms of sections 7.13.3, 7.13.4 and 7.14 and notwithstanding any other
provision of this Agreement, Parent, its Subsidiaries and their Representatives
at any time prior to the approval of the Arrangement by Parent's securityholders
may take any action with respect to an Acquisition Proposal received by Parent
that would otherwise be prohibited by section 7.13 if and only to the extent
that; (a) the Acquisition Proposal shall be an unsolicited bona fide written
Acquisition Proposal; (b) after receiving the written advice of Parent's
financial advisors and after receiving a written opinion of outside counsel to
the effect that the fiduciary duties of Parent's Board of Directors require such
Board to take such action in order to discharge properly its fiduciary duties,
Parent's Board of Directors shall have reasonably determined in good faith that
such Acquisition Proposal; (i) would result in a transaction that; (A) is more
favorable from a financial point of view to Parent's securityholders than the
transactions contemplated hereby; and (B) has a value per Parent Common Stock
greater than the value per Company Common Share of the transactions contemplated
hereby; (ii) is a transaction for which financing, to the extent required, is
then committed or which, in the good faith reasonable judgment of Parent's Board
of Directors (based upon the good faith written advice of Parent's financial
advisors) is capable of being financed by the Person or Persons making the
Acquisition Proposal; and (iii) if accepted by Parent, would be more likely than
not to be consummated (any such Acquisition Proposal being referred to herein as
a "Parent Superior Proposal").
7.13.3. Notice of Company of Acquisition Proposals. Parent shall immediately
notify the Company, at first orally and then in writing of; (a) all Acquisition
Proposals of which any Representative of Parent and its Subsidiaries shall
become aware; (b) any amendments to any Acquisition Proposal; or (c) any request
for information relating to Parent or any of its Subsidiaries or for access to
the properties, books or records of Parent or any of its Subsidiaries by any
Person that any Representative of Parent and its Subsidiaries knows, believes or
suspects is considering making or has made, an Acquisition Proposal (each, a
"PARENT BIDDER"). Such notice shall include a description of all of the terms
and conditions of any proposal and shall provide such details of the proposal,
request, inquiry or contact as the Company may request, including the identity
of the Parent Bidder. Parent shall keep the Company informed on a current basis
of the status of any terms, discussions and negotiations in respect of each
Acquisition Proposal.
7.13.4. Procedures. Parent shall not take any action prohibited by section
7.13.1 unless at the time of the taking of such action Parent shall have; (a)
complied with section 7.13.3; (b) obtained from the Parent Bidder a
confidentiality agreement containing provisions substantially similar to those
set forth in section 7.3;(c) delivered via facsimile a copy of such
confidentiality agreement to the Company immediately upon its execution; and (d)
provided the Company with the same information and documents provided to the
Parent Bidder at the same time and in the same manner so provided (unless such
information or documents shall have been previously provided to the Company, in
which case Parent shall have provided the Company with a list of the information
and documents provided to the Parent Bidder).
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7.14. Procedures Following Parent Superior Proposal Determination
7.14.1. Notice of Parent Superior Proposal Determination. None of Parent, its
Subsidiaries and their Representatives shall accept, approve, recommend or enter
into any agreement in respect of any Acquisition Proposal (other than the
confidentiality agreement contemplated by section 7.13.3) on the basis that it
would constitute a Superior Proposal unless; (a) Parent shall have provided the
Company with a copy of the Acquisition Proposal document that Parent's Board of
Directors shall have determined would be a Parent Superior Proposal; and (b)
five Business Days shall have elapsed from the later of; (i) the date Parent
shall have received notice of Parent's proposed determination to accept,
approve, recommend or enter into an agreement in respect of such Acquisition
Proposal; and (ii) the date the Company shall have received a copy of the
Acquisition Proposal document.
7.14.2. Opportunity to Bid. During such five Business Day period, Parent shall
afford the Company the opportunity, in the Company's discretion, to offer to
amend the terms of this Agreement and the Arrangement. Parent's Board of
Directors shall convene a meeting to review in good faith any offer made by the
Company to amend the terms of this Agreement and the Arrangement in order to
determine, in its discretion in the exercise of its fiduciary duties, whether
the Company's offer upon acceptance by Parent would result in the Acquisition
Proposal not being a Parent Superior Proposal. If Parent's Board of Directors
shall so determine, Parent shall enter into an amended agreement with the
Company reflecting the Company's offer. Each successive material amendment to
any Acquisition Proposal shall constitute a new Acquisition Proposal for
purposes of this section 7.14 and shall thereby initiate an additional five
Business Day period under this section 7.14.
7.15. Covenants of the Company Regarding Non-Solicitation
7.15.1. Non-Solicitation. Until the Effective Time, neither the Company nor any
of its Subsidiaries shall, directly or indirectly, through any Representative or
otherwise; (a) solicit, initiate, encourage or take any other action to
facilitate (including by way of disclosing information, affording access to the
properties, books or records of the Company or any of its Subsidiaries or
entering into any agreement, arrangement or understanding) the making of any
inquiry, proposal or offer that constitutes or could be expected to lead to an
Acquisition Proposal; (b) participate in any discussions or negotiations
regarding any Acquisition Proposal; (c) withdraw or modify in a manner adverse
to Parent, the approval of the Company's Board of Directors of the transactions
contemplated hereby or make or authorize any statement, recommendation or
solicitation in support of any Acquisition Proposal; (d) approve or accept any
Acquisition Proposal; or (e) cause the Company to enter into any agreement
related to any Acquisition Proposal. The Company and its Subsidiaries shall
immediately cease any and all existing solicitations, initiations,
encouragements, activities, discussions or negotiations with any Person (other
than Parent and Aviation Subco) with respect to the foregoing. Notwithstanding
the foregoing, in response to an unsolicited tender or exchange offer, the
Company may comply with its obligations under applicable securities Laws
relating to the provision of directors' circulars and disclosures to the
Company's shareholders.
7.15.2. Compliance with Fiduciary Obligations. Subject to compliance with the
terms of sections 7.15.3, 7.15.4 and 7.16 and notwithstanding any other
provision of this Agreement, the Company, its Subsidiaries and their
Representatives at any time prior to the approval of the Arrangement by the
Company's shareholders may take any action with respect to an Acquisition
Proposal received by the Company that would otherwise be prohibited by section
7.15 if and only to the extent that; (a) the Acquisition Proposal shall be an
unsolicited bona fide written Acquisition Proposal; (b) after receiving the
written advice of the Company's financial advisors and after receiving a written
opinion of outside counsel to the effect that the fiduciary duties of the
Company's Board of Directors require such Board to take such action in order to
discharge properly its fiduciary duties, the Company's Board of Directors shall
have reasonably determined in good faith that such Acquisition Proposal; (i)
would result in a transaction that; (A) is more favorable from a financial point
of view to the Company's shareholders than the transactions contemplated hereby;
and (B) has a value per Company Common Stock greater than the value per Parent
Common Stock of the transactions contemplated hereby; (ii) is a transaction for
which financing, to the extent required, is then committed or which, in the good
faith reasonable judgment of the Company's Board of Directors (based upon the
good faith written advice of the Company's financial advisors) is capable of
being financed by the Person or Persons making the Acquisition Proposal; and
(iii) if accepted by the Company, would be more likely than not to be
consummated (any such Acquisition Proposal being referred to herein as a
"Company Superior Proposal").
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7.15.3. Notice to Parent of Acquisition Proposals. The Company shall immediately
notify Parent, at first orally and then in writing of; (a) all Acquisition
Proposals of which any Representative of the Company and its Subsidiaries shall
become aware; (b) any amendments to any Acquisition Proposal; or (c) any request
for information relating to the Company or any of its Subsidiaries or for access
to the properties, books or records of the Company or any of its Subsidiaries by
any Person that any Representative of the Company and its Subsidiaries knows,
believes or suspects is considering making or has made, an Acquisition Proposal
(each, a "Company Bidder"). Such notice shall include a description of all of
the terms and conditions of any proposal and shall provide such details of the
proposal, request, inquiry or contact as Parent may request, including the
identity of the Company Bidder. The Company shall keep Parent informed on a
current basis of the status of any terms, discussions and negotiations in
respect of each Acquisition Proposal.
7.15.4. Procedures. The Company shall not take any action prohibited by section
7.15.1 unless at the time of the taking of such action the Company shall have;
(a) complied with section 7.15.3; (b) obtained from the Company Bidder a
confidentiality agreement containing provisions substantially similar to those
set forth in section 7.3; (c) delivered via facsimile a copy of such
confidentiality agreement to Parent immediately upon its execution; and (d)
provided Parent with the same information and documents provided to the Company
Bidder at the same time and in the same manner so provided (unless such
information or documents shall have been previously provided to Parent, in which
case the Company shall have provided Parent with a list of the information and
documents provided to the Company Bidder).
7.16. Procedures following Company Superior Proposal Determination
7.16.1. Notice of Company Superior Proposal Determination. None of the Company,
its Subsidiaries and their Representatives shall accept, approve, recommend or
enter into any agreement in respect of any Acquisition Proposal (other than the
confidentiality agreement contemplated by section 7.15.3) on the basis that it
would constitute a Company Superior Proposal unless: (a) the Company shall have
provided Parent with a copy of the Acquisition Proposal document that the
Company's Board of Directors shall have determined would be a Company Superior
Proposal; and (b) five Business Days shall have elapsed from the later of: (i)
the date Parent shall have received notice of the Company's proposed
determination to accept, approve, recommend or enter into an agreement in
respect of such Acquisition Proposal; and (ii) the date Parent shall have
received a copy of the Acquisition Proposal document.
7.16.2. Opportunity to Bid. During such five Business Day period, the Company
shall afford Parent the opportunity, in Parent's discretion, to offer to amend
the terms of this Agreement and the Arrangement. The Company's Board of
Directors shall convene a meeting to review in good faith any offer made by
Parent to amend the terms of this Agreement and the Arrangement in order to
determine, in its discretion in the exercise of its fiduciary duties, whether
Parent's offer upon acceptance by the Company would result in the Acquisition
Proposal not being a Company Superior Proposal. If the Company's Board of
Directors shall so determine, the Company shall enter into an amended agreement
with Parent reflecting Parent's offer. Each successive material amendment to any
Acquisition Proposal shall constitute a new Acquisition Proposal for the
purposes of this section 7.16 and shall thereby initiate an additional five
Business Day period under this section 7.16.
7.17. Indemnification. (a) From and after the Effective Time, Parent will
provide exculpation and indemnification for each individual who is now or has
been at any time prior to the date hereof or who becomes prior to the Effective
Time, an officer or director of Parent or any Subsidiary of Parent (the
"Indemnified Directors") which is the same as the exculpation and
indemnification provided to the Indemnified Parties by Parent and its
Subsidiaries immediately prior to the Effective Time in the Parent's Articles of
Incorporation and Bylaws or the applicable charter or other organizational
document of such Parent Subsidiary, as in effect on the date hereof; provided,
that such exculpation and indemnification covers actions on or prior to the
Effective Time, including without limitation all transactions contemplated by
this Agreement and the documents and agreements contemplated by this Agreement.
(b) Parent will continue in force and effect after the Effective Time any
indemnification agreements between Parent or any Parent Subsidiary, on the one
hand, and any individual, on the other hand, which was in force and effect
immediately prior to the Effective Time.
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(c) The provisions of this section 7.17 are intended to be for the benefit of,
and will be enforceable by, each Indemnified Director or other individual
referred to in this section 7.17, his or her heirs or personal representatives
and will be binding on all successors and assigns of Parent and the Company.
(d) In the event that Parent or any of its respective successors or assigns (i)
consolidates with or merges into any other Person and will not be the continuing
or surviving corporation or entity of such consolidation or merger, or (ii)
transfers all or substantially all of its properties and assets to any Person,
then, in each such case the successors and assigns of such entity will assume
the obligations set forth in this section 7.17, which obligations are expressly
intended to be for the irrevocable benefit of, and will be enforceable by, each
Indemnified Director or other individual.
7.18 Tax Opinion. The Company will provide Parent an opinion from Shearman &
Sterling relating to certain U.S. tax matters in form and substance satisfactory
to its counsel.
ARTICLE 8
CONDITIONS PRECEDENT TO OBLIGATIONS
8.1. Conditions Precedent to Obligations of Parent. The obligations of Parent to
consummate and to effect the Arrangement and the other transactions contemplated
hereby shall be subject to the satisfaction or waiver on or before the Effective
Time of each of the following conditions all of which may only be waived in
writing by Parent:
8.1.1. Representations and Warranties. The representations and warranties of the
Company in this Agreement shall be true and correct on the date hereof and shall
also be true and correct on and as of the Effective Time with the same force and
effect as if made on and as of the Effective Time except; (a) for changes
specifically contemplated hereby; (b) for representations and warranties that
address matters only as of a particular date (which representations and
warranties shall remain true and correct as of such date); and (c) where the
failure or failures of such representations and warranties to be so true and
correct (without regard to materiality qualifiers contained therein),
individually and in the aggregate, shall not have resulted in a Material Adverse
Effect.
8.1.2. Securityholder Approval. The Arrangement and such other matters as shall
require approval of the securityholders of Parent and the Company in order to
consummate the Arrangement and the other transactions contemplated hereby shall
have been approved and adopted by the securityholders of Parent and the Company
as contemplated by this Agreement.
8.1.3. No Legal Action. There shall not be in effect nor shall there be pending
or threatened any action or proceeding by or before any Governmental Entity that
in the good faith judgment of the Board of Directors of Parent shall have a
reasonable probability of resulting in any temporary restraining order,
preliminary injunction permanent injunction or other order or decree nor shall
there have been any Law enacted, promulgated, issued or deemed applicable to the
Arrangement or any of the other transactions contemplated hereby by any
Governmental Entity or any other action taken by any Governmental Entity that
would prevent or make illegal the consummation of the Arrangement or any of the
other transactions contemplated hereby.
8.1.4. Expiration of Waiting Periods and Related Matters. All waiting periods
required by the HSR Act shall have expired with respect to the transactions
contemplated hereby or early termination with respect thereto shall have been
obtained. The Company shall have filed all notices and information (if any)
required under Part IX of the Competition Act (Canada) and the applicable
waiting periods and any extensions thereof shall have expired or the Company
shall have received an Advance Ruling Certificate pursuant to section 102 of the
Competition Act (Canada) setting out that the Director under such Act is
satisfied that he would not have sufficient grounds on which to apply for an
order in respect of the Arrangement. The Arrangement shall have received the
allowance or approval or deemed allowance or approval by the responsible
Minister under the Investment Canada Act in respect of the Arrangement to the
extent such allowance or approval is required, on terms and conditions
satisfactory to Parent and the Company.
<PAGE>
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8.1.5. Securities Matters. All necessary orders shall have been obtained from
the Commissions and other relevant United States and Canadian securities
regulatory authorities (including the TSE and Nasdaq) in connection with the
Arrangement and the other transactions contemplated hereby including without
limitation, the Interim Order and the Final Order. The Registration Statement
shall have been declared effective under the Securities Act on or before the
Effective Time and the Registration Statement shall not at its effective date or
on the Effective Time be the subject of any stop order or proceedings seeking a
stop order. On the Effective Time the Information Circular shall not be subject
to any similar proceedings commenced or threatened by the Commissions or the
SEC.
8.1.6. Listings. The Parent Common Stock to be issued from time to time after
the Effective Time upon exchange of the Exchangeable Shares and upon exercise of
the Parent Securities shall have been approved for listing on AMEX or Nasdaq's
Small Cap Market or National Market, subject only to notice of issuance.
8.1.7. Voting and Exchange Trust Agreement. All other parties shall have
executed and delivered the Voting and Exchange Trust Agreement.
8.1.8. Support Agreement. All other parties shall have executed and delivered
the Support Agreement.
8.1.9. Global Merger. The Global Merger and related bridge financing shall have
been completed as contemplated.
8.1.10. Covenants and Agreements. The Company shall have performed and complied
in all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by the Company on or before the
Effective Time.
8.1.11. No Material Adverse Change. Since the date of this Agreement, the
Company and its Subsidiaries shall not have experienced a Material Adverse
Effect.
8.1.12. Certificate. Parent shall have received from the Company a certificate
dated the Effective Time in form and substance reasonably satisfactory to Parent
certifying as to the representations and warranties of the Company being true
and complete, unamended and that all covenants and agreements to be fulfilled by
the Company have been so fulfilled.
8.1.13. Opinion of the Company's Canadian Counsel. Parent shall have received an
opinion from Cassels Brock & Blackwell LLP with respect to the Company (but not,
for greater certainty and without limitation, as to tax matters) in form and
substance satisfactory to its counsel.
8.1.14. Fairness Opinion. Parent shall have received a fairness opinion of CIBC
World Markets Corp. with respect to the Exchange Ratio, on terms and conditions
acceptable to Parent.
8.1.15. Comfort Letter. Parent shall have received the First Company Comfort
Letter and the Second Company Comfort Letter.
8.1.16. Certificates and Resolutions. Parent shall have received such other
certificates, resolutions and other documents of the Company as may be
reasonably required in connection with the consummation of the transactions
contemplated hereby, including without limitation, the Articles of Arrangement.
8.1.17. Consents of Third Parties. The Company and its Subsidiaries shall have
received and delivered to Parent all written consents, assignments, waivers,
authorizations or other certificates necessary to provide for the continuation
in full force and effect of all its and their material contracts and leases and
for the Company and its Subsidiaries to consummate the transactions contemplated
hereby (including those set forth in section 3.18.2 of the Company Disclosure
Schedule), except where, in the opinion of Parent, the failure to receive such
consents, assignments, waivers, authorizations or other certificates would not
have a Material Adverse Effect.
8.2. Conditions Precedent to Obligations of the Company. The obligations of the
Company to consummate and to effect the Arrangement and the other transactions
contemplated hereby shall be subject to the satisfaction or
<PAGE>
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waiver on or before the Effective Time of each of the following conditions, any
of which may only be waived in writing by the Company:
8.2.1. Representations and Warranties. The representations and warranties of
Parent and Aviation Subco in this Agreement shall be true and correct on the
date hereof and shall also be true and correct on and as of the Effective Time
with the same force and effect as if made on and as of the Effective Time
except; (a) for changes specifically contemplated hereby; (b) for
representations and warranties that address matters only as of a particular date
(which representations and warranties shall remain true and correct as of such
date); and (c) where the failure or failures of such representations and
warranties to be so true and correct (without regard to materiality qualifiers
contained therein), individually and in the aggregate, shall not have resulted
in a Material Adverse Effect.
8.2.2. Securityholder Approval. The Arrangement and such other matters as shall
require approval of the securityholders of Parent and the Company in order to
consummate the Arrangement and the other transactions contemplated hereby shall
have been approved and adopted by the securityholders of Parent and the Company
as contemplated by this Agreement.
8.2.3. No Legal Action. There shall not be in effect nor shall there be pending
or threatened any action or proceeding by or before any Governmental Entity that
in the good faith judgment of the Board of Directors of the Company shall have a
reasonable probability of resulting in any temporary restraining order,
preliminary injunction permanent injunction or other order or decree nor shall
there have been any Law enacted, promulgated, issued or deemed applicable to the
Arrangement or any of the other transactions contemplated hereby by any
Governmental Entity or any other action taken by any Governmental Entity that
would prevent or make illegal the consummation of the Arrangement or any of the
other transactions contemplated hereby.
8.2.4. Expiration of Waiting Periods and Related Matters. All waiting periods
required by the HSR Act shall have expired with respect to the transactions
contemplated hereby or early termination with respect thereto shall have been
obtained. The Company shall have filed all notices and information (if any)
required under Part IX of the Competition Act (Canada) and the applicable
waiting periods and any extensions thereof shall have expired or the Company
shall have received an Advance Ruling Certificate pursuant to section 102 of the
Competition Act (Canada) setting out that the Director under such Act is
satisfied that he would not have sufficient grounds on which to apply for an
order in respect of the Arrangement. The Arrangement shall have received the
allowance or approval or deemed allowance or approval by the responsible
Minister under the Investment Canada Act in respect of the Arrangement to the
extent such allowance or approval is required, on terms and conditions
satisfactory to Parent and the Company.
8.2.5. Securities Matters. All necessary orders shall have been obtained from
the Commissions and other relevant United States and Canadian securities
regulatory authorities (including the TSE and Nasdaq) in connection with the
Arrangement and the other transactions contemplated hereby including, without
limitation, the Interim Order and the Final Order. The Registration Statement
shall have been declared effective under the Securities Act on or before the
Effective Date and the Registration Statement shall not at its effective date or
on the Closing Date be the subject of any stop order or proceedings seeking a
stop order. On the Closing Date the Information Circular shall not be subject to
any similar proceedings commenced or threatened by the Commissions or the SEC.
8.2.6. Listings. The Parent Common Stock to be issued from time to time after
the Effective Time upon exchange of the Exchangeable Shares and upon exercise of
the Parent Securities shall have been approved for listing on AMEX or Nasdaq's
Small Cap Market or National Market, subject only to notice of issuance and the
Exchangeable Shares shall have been approved for listing on the TSE.
8.2.7. Voting and Exchange Trust Agreement. All other parties shall have
executed and delivered the Voting and Exchange Trust Agreement.
8.2.8. Support Agreement. All other parties shall have executed and delivered
the Support Agreement.
8.2.9. Global Merger. The Global Merger and related bridge financing shall have
been completed.
<PAGE>
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8.2.10. Covenants and Agreements. Parent and Aviation Subco shall have performed
and complied in all material respects with all covenants and agreements required
by this Agreement to be performed or complied with by Parent and Aviation Subco
on or before the Effective Time.
8.2.11. No Matreial Adverse Change. Since the date of this Agreement, Parent
and its Subsidiaries shall not have experienced a Material Adverse Effect.
8.2.12. Certificate. The Company shall have received from Parent a certificate
dated the Effective Time in form and substance reasonably satisfactory to the
Company certifying as to the representations and warranties of Parent and
Aviation Subco being true and complete, unamended and that all covenants and
agreements to be fulfilled by Parent and Aviation Subco have been so fulfilled.
8.2.13. Opinion of Parent Counsel. The Company shall have received an opinion
from Jenkens & Gilchrist, a Professional Corporation, with respect to Parent in
form and substance satisfactory to its counsel.
8.2.14. Fairness Opinion. The Company shall have received a fairness opinion of
Wellington West Capital Inc. with respect to the Exchange Ratio, on terms and
conditions acceptable to the Company.
8.2.15. Comfort Letter. The Company shall have received the First Parent Comfort
Letter and the Second Parent Comfort Letter.
8.2.16. Certificates and Resolutions. The Company shall have received such other
certificates, resolutions and other documents of Parent and Aviation Subco as
may be reasonably required in connection with the consummation of the
transactions contemplated hereby, including without limitation, the Certificate
of Designation creating the Special Voting Share.
8.2.17. Dissent Rights. On or prior to the Effective Time, the Company shall not
have received notice from the holders of more than five percent of the issued
and outstanding Company Common Shares of their intention to exercise their
rights of dissent with respect to the Arrangement.
8.2.18. Consents of Third Parties. Parent and its Subsidiaries shall have
received and delivered to the Company all written consents, assignments,
waivers, authorizations or other certificates necessary to provide for the
continuation in full force and effect of all its and their material contracts
and leases and for Parent and its Subsidiaries to consummate the transactions
contemplated hereby (including those set forth in section 4.18.2 of the Parent
Disclosure Schedule), except where, in the opinion of the Company, the failure
to receive such consents, assignments, waivers, authorizations or other
certificates would not have a Material Adverse Effect.
ARTICLE 9
TERMINATION
9.1. Termination. This Agreement may be terminated at any time on or before the
Effective Time, whether before or after approval of the transactions
contemplated hereby by the securityholders entitled to vote of the Company or of
Parent, as follows:
9.1.1. By mutual written agreement of Parent and the Company;
9.1.2. By Parent, if there shall have been a material breach of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of the Company or if any representation or warranty of the Company
shall have become untrue in any material respect and the Company shall have
failed to cure such breach within 10 Business Days after written notice thereof
to the Company.
9.1.3. By the Company, if there shall have been a material breach of any
representation, warranty, covenant or agreement set forth in this Agreement on
the part of Parent or Aviation Subco or if any representation or warranty of
Parent or Aviation Subco shall have become untrue in any material respect and
Parent shall have failed to cure such breach within 10 Business Days after
written notice thereof to Parent.
<PAGE>
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9.1.4. By either Party if the Arrangement and the other transactions
contemplated hereby shall not have been consummated on or before 5:00 p.m.,
Toronto time on September 30, 2000. If the Arrangement and the other
transactions contemplated hereby shall not have been consummated solely due to
the waiting period (or any extension thereof) under the HSR Act, the Investment
Canada Act or the Competition Act (Canada), then such date shall be extended to
December 31, 2000. The right to terminate this Agreement under this section
9.1.4 shall not be available to any Party whose failure to fulfil any material
obligation under this Agreement shall have been the cause of or shall have
resulted in the failure of the Effective Time to occur on or before such date.
9.1.5. By either Party if the shareholders of the Company or the securityholders
of the Company as contemplated by section 2.10 or the shareholders of Parent
shall not approve the Arrangement and all such other matters as shall require
approval of their respective securityholders in order to consummate the
Arrangement and the other transactions contemplated hereby.
9.1.6. By either Party if; (a) a final, non-appealable order shall have been
entered in any action or proceeding before any Governmental Entity that shall
prevent or make illegal the consummation of the Arrangement or any of the other
transactions contemplated hereby; (b) there shall be any final action taken or
any Law enacted, promulgated, issued or deemed applicable to the Arrangement or
any of the other transactions contemplated hereby by any Governmental Entity
that would prevent or make consummation of the Arrangement or any of such other
transactions illegal; or (c) the Interim Order or the Final Order shall not be
received by the Company as contemplated herein.
9.1.7. By the Company, prior to the approval of the transactions contemplated
hereby by the shareholders entitled to vote of the Company, if, after the
Company's Board of Directors shall have determined that an Acquisition Proposal
is a Company Superior Proposal; (a) the Company shall have complied with
sections 7.15 and 7.16; (b) the Company's Board of Directors shall thereafter
conclude in good faith that the Acquisition Proposal is a Company Superior
Proposal; and (c) the Company shall have paid to Parent the Termination Fee
required by section 9.4.1.
9.1.8. By Parent, prior to the approval of the transactions contemplated hereby
by the securityholders entitled to vote of Parent, if, after Parent's Board of
Directors shall have determined that an Acquisition Proposal is a Parent
Superior Proposal: (a) Parent shall have complied with sections 7.13 and 7.14;
(b) Parent's Board of Directors shall thereafter conclude in good faith that the
Acquisition Proposal is a Parent Superior Proposal; and (c) Parent shall have
paid to the Company the Termination Fee required by section 9.4.2.
9.2. Notice of Termination. Any termination of this Agreement pursuant to
section 9.1, other than pursuant to section 9.1.1 shall be effected by the
delivery of written notice of termination by the terminating Party to the other
Party, which notice shall state the grounds for termination and the subsection
of section 9.1 pursuant to which such terminating Party shall be terminating
this Agreement.
9.3. Effect of Termination. If either Parent or the Company shall terminate this
Agreement pursuant to section 9.1 and the terminating Party shall have provided
the notice required under section 9.2, this Agreement shall forthwith become
null and void and have no effect save and except for Articles 1, 9 and 10 and
sections 7.4, 7.5 and 7.6 and there shall be no liability or obligation under
this Agreement on the part of Parent, Aviation Subco or the Company or their
respective Representatives, save and except that: (a) the provisions of section
7.5, this Article 9 and Article 10 (and any defined terms used therein) shall
survive any such termination; and (b) no Party shall be released or relieved
from any liability to the extent that such termination shall result from the
breach by such Party of any of its representations, warranties, covenants or
agreements in this Agreement.
<PAGE>
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9.4. Termination Fee or Expenses
9.4.1. If this Agreement shall be terminated pursuant to section 9.1.2 or 9.1.7
(unless such action is a direct result of and in direct response to a material
breach by Parent of any representation, warranty, covenant or agreement set
forth in this Agreement or the occurrence of a Parent Material Adverse Effect),
the Company shall pay to Parent a cash termination fee of $1,000,000 (the
"TERMINATION FEE") at the time of such termination. Neither Party may enter into
any agreement providing for an Acquisition Proposal unless, prior thereto, this
Agreement is terminated in accordance with its terms and the required
Termination Fee is paid or otherwise provided for.
9.4.2. If this Agreement shall be terminated pursuant to section 9.1.3 or 9.1.8
(unless such action is a direct result of and in direct response to a material
breach by the Company of any representation, warranty, covenant or agreement set
forth in this Agreement or the occurrence of a Company Material Adverse Effect),
then Parent shall pay to the Company the Termination Fee at the time of such
termination.
9.4.3. Any Termination Fee payable pursuant to this section 9.4 shall be paid
not later than two Business Days after the delivery of written notice of
termination pursuant to section 9.2. Payment shall be made by wire transfer of
immediately available funds to an account designated by the payee.
9.4.4. If this Agreement shall be terminated pursuant to section 9.1.5 by either
Party because the shareholders of the other Party shall have failed to approve
the Arrangement and such other matters as shall require approval in order to
consummate the Arrangement and the other transactions contemplated hereby, then
the other Party shall pay such terminating Party an amount equal to such Party's
out-of-pocket costs and expenses incurred in connection with this Agreement and
the transactions contemplated hereby (the "Termination Expenses").
9.4.5. Parent and the Company agree that it may be difficult and impractical to
measure in money the damages that will accrue upon the termination of this
Agreement pursuant to any provision of section 9.1 that shall require the
payment of a Termination Fee or the Termination Expenses pursuant to this
section 9.4. Accordingly, Parent and the Company agree that payment of any
Termination Fee or Termination Expenses payable pursuant to this section 9.4
(together with any other amounts payable pursuant to this section 9.4) shall:
(a) constitute liquidated damages and not a penalty; (b) be the sole and
exclusive remedy of the payee of the Termination Fee or Termination Expenses for
the breach of any representation, warranty, covenant or agreement in this
Agreement by the payor; and (c) constitute an irrevocable waiver and release by
the payee of any other remedy against the payor for the breach of any
representation, warranty, covenant or agreement in this Agreement by the payor.
ARTICLE 10
MISCELLANEOUS
10.1. Survival of Representations and Warranties. The representations and
warranties of Parent, Aviation Subco and the Company in this Agreement shall
terminate as of the Effective Time.
10.2. Amendments and Supplements. This Agreement may be amended by the Parties
in writing by action of their respective Boards at any time before or after any
applicable securityholder approvals are obtained and prior to the filing of the
Articles of Arrangement; provided, however, that, after such applicable
securityholder approvals are obtained, no such amendment, modification or
supplement will be made which by Law requires the further approval of
stockholders without obtaining such further approval.
10.3. Waiver. The terms and conditions of this Agreement may be waived only by a
written instrument signed by the Party waiving compliance. The failure of any
Party hereto to enforce at any time any of the provisions of this Agreement
shall in no way be construed to be a waiver of any such provision nor in any way
to affect the validity of this Agreement or any part hereof or the right of such
Party thereafter to enforce each and every such provision. No waiver of any
breach of or non-compliance with this Agreement shall be construed to be a
waiver of any other or subsequent breach or non-compliance.
<PAGE>
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10.4. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the Province of Ontario and the federal
laws of Canada applicable therein.
10.5. Notice. All notices and other communications hereunder shall be in writing
and shall be deemed given to a Party if sent by facsimile transmission with
confirmation of transmission, sent via a reputable overnight delivery service
with confirmation of receipt requested, to the Party at the following address
and facsimile number (or at such other address or facsimile number for the Party
as the Party shall specify by like notice) and shall be deemed given on the date
of confirmation of receipt or transmission:
To Parent or Aviation Subco:
Aviation Group, Inc.
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Attention: Lee B. Sanders
Facsimile number: (214) 922-9242
With copies to:
Jenkens & Gilchrist, PC
1445 Ross Avenue
Suite 3200
Dallas, Texas 75202-2799
Attention: Daryl B. Robertson, Esq
Facsimile number: (214) 855-4300
To the Company:
travelbyus.com Ltd.
204-3237 King George Highway
White Rock, British Columbia V4P 1B7
Attention: Bill Kerby
Facsimile number: (604) 541-2450
With a copy to:
Cassels Brock & Blackwell LLP
Scotia Plaza, Suite 2100
40 King Street West
Toronto, Ontario M5H 3C2
CANADA
Attention: John H. Craig
Facsimile number: (416) 360-8877
and
<PAGE>
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Shearman & Sterling
Commerce Court West
199 Bay Street, Suite 4405
P.O. Box 247
Toronto, Ontario M5L 1E8
CANADA
Attention: Bruce Czachor
Facsimile number: (416) 360-2958
10.6. Entire Agreement. This Agreement, the Company Disclosure Schedule, the
Parent Disclosure Schedule and the other documents, instruments and agreements
among the Parties and referred to herein constitute the entire agreement among
the Parties with respect to the subject matter hereof and supersede all other
prior agreements and understandings, both written and oral, among the Parties
with respect to the subject matter hereof. Each Party acknowledges that in
entering into this Agreement and completing the transactions contemplated hereby
such Party is not relying on any representation, warranty, covenant or agreement
not expressly stated in this Agreement or in the schedules, documents and
instruments and other agreements among the Parties and referred to herein.
10.7. Binding Effect; Assignability. This Agreement shall be binding upon and
shall enure to the benefit of the Parties and their respective successors and
permitted assigns. This Agreement is not intended to confer upon any Person
other than the Parties (and such Parties' respective successors and permitted
assigns) any rights or remedies hereunder. Neither this Agreement nor any of the
rights and obligations of the Parties hereunder shall be assigned or delegated,
whether by operation of law or otherwise without the written consent of all
Parties.
10.8. Interpretation. The headings in this Agreement are for reference purposes
only and shall not affect the meaning or interpretation of any provision of this
Agreement. The word "include" and its derivatives when used in this Agreement
shall be deemed to be followed by the words "without limitation." The Parties
agree that they have been represented by counsel during the negotiation and
execution of this Agreement and therefore waive the application of any Law,
holding or rule of construction providing that ambiguities in an agreement or
other document shall be construed against the party that drafted such agreement
or document.
10.9. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, each of which shall remain in full force and effect.
10.10. Counterparts. This Agreement may be executed in one or more counterparts
by original or telefacsimile signature, all of which together shall constitute
one and the same agreement and shall become effective when one or more
counterparts shall have been signed by each Party and delivered to the other
Parties, it being understood that all Parties need not sign the same
counterpart.
IN WITNESS WHEREOF the Parties have caused this Arrangement Agreement to be
executed as an agreement under seal as of the date first above written.
AVIATION GROUP, INC.
Per: /s/ RICHARD L. MORGAN
----------------------------------
AVIATION GROUP CANADA LTD.
Per: /s/ RICHARD L. MORGAN
----------------------------------
<PAGE>
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TRAVELBYUS.COM LTD.
Per: /s/ BILL R. KERBY
----------------------------------
<PAGE>
FIRST AMENDMENT TO ARRANGEMENT AGREEMENT
This First Amendment to Arrangement Agreement (the "Amendment") is made and
entered into as of the 18th day of September, 2000, by and among AVIATION GROUP,
INC., a Texas corporation ("Parent"), AVIATION GROUP CANADA LTD., an Ontario
corporation and wholly-owned subsidiary of Parent ("Aviation Subco"), and
TRAVELBYUS.COM LTD., an Ontario corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Parent, Aviation Subco and the Company have previously entered
into that certain Arrangement Agreement, dated as of May 3, 2000 (the
"Arrangement Agreement"); and
WHEREAS, Parent, Aviation Subco and the Company now desire to amend the
Arrangement Agreement as set forth below.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used
-------------
herein shall have the meanings, if any, assigned to them in the Arrangement
Agreement.
2. Amendments to the Arrangement Agreement.
---------------------------------------
(a) Section 2.3(a) of the Arrangement Agreement shall be amended by adding
at the end thereof the following:
"If Parent effects a reverse split or consolidation of the Parent Common
Stock in connection with the Arrangement, the Exchange Ratio shall not be
adjusted except as otherwise provided in Section 2.3(g), save and except
that the number of Exchangeable Shares which must be tendered for each
share of Parent Common Stock will be adjusted. For example purposes, if
prior to completion of or in connection with the Arrangement,
<PAGE>
Aviation completes a one-for-five reverse split or consolidation, after
completion of the Arrangement, five Exchangeable Shares must be tendered to
receive one share of Parent Common Stock therefor."
(b) Section 2.3(g) of the Arrangement Agreement shall be amended by adding
at the end thereof the following:
"If Parent effects a one-for-five reverse split or consolidation of the
Parent Common Stock prior to completion of or in connection with the
Arrangement, each outstanding option forming a part of the Company
Securities will be exchanged for a similar security of the Parent issued
under Parent's 1997 Share Option Plan (the "Parent Securities"), based on a
ratio of five Company Common Shares for one share of Parent Common Stock
and whether or not then exercisable or vested will continue to have and be
subject to the same vesting schedule and exercise price (multiplied by
five), as adjusted for conversion from Canadian dollars to U.S. dollars."
(c) The first sentence of Section 9.1.4 of the Arrangement Agreement is
-------------
hereby amended and restated in its entirety to read as follows:
"By either party if the Arrangement and the other transactions contemplated
hereby shall not have been consummated on or before 5:00 p.m., Toronto time
on November 15, 2000."
3. Effective Date. This Amendment will become effective upon the
--------------
execution hereof by each of the parties set forth on the signature page hereto.
4. Miscellaneous.
-------------
(a) The Arrangement Agreement, as amended hereby, shall remain in
full force and effect.
2
<PAGE>
(b) This Amendment shall be binding upon and enure to the benefit of
the parties hereto and the permitted successors, assigns, heirs, executors and
administrators of the parties.
(c) This Amendment shall be governed by and construed and enforced in
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable therein.
(d) This Amendment, together with the Arrangement Agreement, as
amended, constitutes the full and entire understanding and agreement among the
parties with regard to the subjects hereof and thereof.
(e) This Amendment may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. A telecopy or facsimile transmission of a signed
counterpart of this Amendment shall be sufficient to bind the party or parties
whose signature(s) appear(s) hereon.
[The remainder of this page is intentionally left blank;
signature page follows.]
3
<PAGE>
IN WITNESS WHEREOF, Parent, Aviation Subco and the Company have executed
and delivered this Amendment as of the day and year first above written.
PARENT:
AVIATION GROUP, INC.
By: /s/ RICHARD L. MORGAN
------------------------------
Name: Richard L. Morgan
Title: Executive Vice President
AVIATION SUBCO:
AVIATION GROUP CANADA LTD.
By: /s/ RICHARD L. MORGAN
------------------------------
Name: Richard L. Morgan
Title: Vice President
THE COMPANY
TRAVELBYUS.COM LTD.
By: /s/ BILL KERBY
------------------------------
Name: Bill Kerby
Title: CEO
<PAGE>
APPENDIX B
PLAN OF ARRANGEMENT
<PAGE>
PLAN OF ARRANGEMENT
UNDER SECTION 182
OF THE BUSINESS CORPORATIONS ACT, ONTARIO
INVOLVING AND AFFECTING TRAVELBYUS.COM LTD.
AND THE HOLDERS OF ITS COMMON SHARES
OPTIONS AND WARRANTS
ARTICLE 1
INTERPRETATION
Section 1.1 DEFINITIONS. In this Plan of Arrangement unless there is something
in the subject matter or context inconsistent therewith, the following terms
shall have the respective meanings set out below and grammatical variations of
such terms shall have corresponding meanings:
"ARRANGEMENT" means the arrangement under section 182 of the OBCA on the terms
and subject to the conditions set out in this Plan of Arrangement, subject to
any amendments thereto made; (i) pursuant to the Arrangement Agreement; (ii) in
accordance with section 6.1 hereof; or (iii) at the direction of the Court in
the Final Order.
"ARRANGEMENT AGREEMENT" means the agreement by and among Parent, Aviation Subco
and the Company, dated as of May 3, 2000, as amended and restated from time to
time, providing for, among other things, this Plan of Arrangement and the
Arrangement.
"ARRANGEMENT RESOLUTION" means the special resolution passed by the holders of
the Company Common Shares at the Meeting.
"AUTOMATIC REDEMPTION DATE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"AVIATION SUBCO" means Aviation Group Canada Ltd.
"BUSINESS DAY" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"COMPANY" means travelbyus.com ltd.
"COMPANY COMMON SHARES" means common shares in the capital of the Company.
"COMPANY SECURITIES" means those securities listed in Exhibit "B" attached
hereto.
"COURT" means the Ontario Court of Justice (General Division).
"DEPOSITARY" means Montreal Trust Company at its principal transfer office in
Toronto, Ontario.
"DIRECTOR" means the Director appointed under the OBCA.
"DISSENT PROCEDURES" has the meaning set out in section 3.1.
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the date and time upon which
the Articles of Arrangement shall be duly certified and filed with the Director
under the OBCA.
"EXCHANGE PUT RIGHT" has the meaning ascribed thereto in section 5.3.
"EXCHANGE RATIO" means the ratio of exchange of Exchangeable Shares for Company
Common Shares, as determined under the Arrangement Agreement, being one
Exchangeable Share for each one Company Common Share, subject to adjustment as
provided in the Arrangement Agreement.
<PAGE>
3
"EXCHANGEABLE SHARE CONSIDERATION" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"EXCHANGEABLE SHARE PRICE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges, restrictions and
conditions attaching to the Exchangeable Shares, which are set forth in Exhibit
"A" attached hereto.
"EXCHANGEABLE SHARES" means the Exchangeable Shares in the capital of the
Company provided for in this Plan of Arrangement.
"FINAL ORDER" means the final order of the Court approving the Arrangement.
"LIQUIDATION CALL PURCHASE PRICE" has the meaning ascribed thereto in section
5.1.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in section 5.1.
"LIQUIDATION DATE" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"MEETING" means the special meeting of the shareholders of the Company to be
held to consider this Plan of Arrangement.
"OBCA" means the Business Corporations Act, Ontario.
"OPTIONS" means all options to purchase Company Common Shares outstanding as at
the Effective Time.
"OPTIONHOLDERS" means holders of Options.
"PARENT" means Aviation Group, Inc.
"PARENT COMMON STOCK" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in section
5.2.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in section 5.2.
"SUBSIDIARY" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"TRANSFER AGENT" means the duly appointed transfer agent for the time being of
the Exchangeable Shares and if there is more than one such transfer agent then
the principal Canadian agent.
"VOTING AND EXCHANGE TRUST AGREEMENT" means the agreement among Parent, Aviation
Subco, the Company and the Trustee named therein to be dated as of the Effective
Time and provided for in the Arrangement Agreement, as amended from time to
time.
"WARRANTS" means the warrants to purchase Company Common Shares forming part of
the Company Securities.
"WARRANTHOLDERS" means holders of Warrants.
<PAGE>
4
Section 1.2 SECTIONS, HEADINGS AND APPENDIXES. The division of this Plan of
Arrangement into sections and the insertion of headings are for reference
purposes only and shall not affect the interpretation of this Plan of
Arrangement. Unless otherwise indicated, any reference in this Plan of
Arrangement to a section or an Exhibit refers to the specified section of or
Exhibits to this Plan of Arrangement. The Exhibits are incorporated herein and
are part hereof.
Section 1.3 NUMBER, GENDER AND PERSONS. In this Plan of Arrangement, unless
the context otherwise requires, words importing the singular number include the
plural and vice versa, words importing any gender include all genders and words
importing persons include individuals, bodies corporate, partnerships,
associations, trusts, unincorporated organizations, governmental bodies and
other legal or business entities of any kind.
Section 1.4 DATE FOR ANY ACTION. In the event that any date on or by which any
action is required or permitted to be taken hereunder is not a Business Day,
such action shall be required or permitted to be taken on or by the next
succeeding day which is a Business Day.
Section 1.5 CURRENCY. Unless otherwise expressly stated herein, all references
to currency and payments in cash or money in this Plan of Arrangement are to
United States dollars.
Section 1.6 STATUTORY REFERENCES. Any reference in this Plan of Arrangement to
a statute includes such statute as amended, consolidated or re-enacted from time
to time, all regulations made thereunder, all amendments to such regulations
from time to time, and any statute or regulation which supersedes such statute
or regulations.
ARTICLE 2
ARRANGEMENT
Section 2.1 ARRANGEMENT. At the Effective Time, the following reorganization
of capital and other transactions shall occur and shall be deemed to occur in
the following order without any further act or formality and shall become
effective at, and be binding at and after, the Effective Time on: (i) Parent and
Aviation Subco; (ii) the Company; (iii) all holders of Company Common Shares;
(iv) all holders of Exchangeable Shares; and (v) all holders of Company
Securities:
(a) The Articles of Incorporation of the Company shall be amended to
create and authorize an unlimited number of Exchangeable Shares
and one Class X Preferred Share.
(b) The Company shall issue to Aviation Subco one Class X Preferred
Share in consideration for the payment by Aviation Subco to the
Company of an amount equal to the fair market value, as determined
by the board of directors of the Company, of one Company Common
Share. No certificate shall be issued in respect of the Class X
Preferred Share.
(c) Each Company Common Share (other than Company Common Shares held
by holders who have exercised their rights of dissent in
accordance with section 3.1 hereof and who are ultimately entitled
to be paid the fair value for such shares and other than Company
Common Shares held by Parent, Aviation Subco or any Subsidiary
thereof) will be exchanged at the Exchange Ratio for a number of
Exchangeable Shares, and each such holder thereof will receive a
whole number of Exchangeable Shares resulting therefrom.
(d) Upon the exchange referred to in subsection (c) above, each such
holder of a Company Common Share shall cease to be such a holder,
shall have his name removed from the register of holders of
Company Common Shares and shall become a holder of the number of
fully paid Exchangeable Shares to which he is entitled as a result
of the exchange referred to in subsection (c) and such holder's
name shall be added to the register of holders of Exchangeable
Shares accordingly.
(e) The aggregate stated capital of the Exchangeable Shares shall be
equal to the aggregate stated capital immediately prior to the
Effective Time of the Company Common Shares which are exchanged
pursuant to such subsection 2.1(c) above, thereby excluding the
stated capital attributable to the fractional shares for which
payment is made as contemplated in subsection (c) above.
<PAGE>
5
(f) The Articles of Incorporation of the Company shall be amended to
reduce the number of authorized Company Common Shares to one and
the rights, privileges, restrictions and conditions attaching to
the Company Common Share shall be changed and restated as set
forth in Exhibit "A".
(g) The one outstanding Class X Preferred Share will be exchanged for
one fully-paid and non-assessable Company Common Share and the
holder thereof shall cease to be a holder of the Class X Preferred
Share, shall have its name removed from the register of holders of
the Class X Preferred Share and shall become a holder of the
Company Common Share to which it is entitled as a result of the
exchange referred to in this subsection (g) and such holder's name
shall be added to the register as holder of the Company Common
Share accordingly.
(h) The stated capital of the one Company Common Share shall be equal
to the stated capital of the one Class X Preferred Share
immediately prior to the exchange contemplated in subsection (g).
(i) The Articles of Incorporation of the Company shall be amended to
delete the Class X Preferred Share and the authorized but unissued
Class of Preferred Shares in the capital of the Company from the
authorized share capital so that, after giving effect to the
foregoing provisions of this section 2.1, the authorized capital
of the Company shall consist of an unlimited number of
Exchangeable Shares having the rights, privileges, restrictions
and conditions set forth in Exhibit "A" attached hereto and one
Common Share having the rights, privileges, restrictions and
conditions set forth in Exhibit "A" attached hereto.
(j) Each of the then outstanding Options, with the consent of each
Optionholder, shall be converted into an option issued under
Parent's 1997 Stock Option Plan to purchase the number of shares
of Parent Common Stock equal to the number determined by
multiplying the number of Company Common Shares subject to such
Option at the Effective Time by the Exchange Ratio, at an exercise
price per share of Parent Common Stock equal to the exercise price
per share of such Option immediately prior to the Effective Time
divided by the Exchange Ratio and converted from Canadian dollars
to U.S. dollars at the noon spot exchange rate announced by the
Bank of Canada on the third Business Day immediately preceding the
Effective Time. If Parent effects a one-for-five reverse split or
consolidation of the Parent Common Stock prior to completion of or
in connection with the Arrangement, the Exchange Ratio for
purposes of the preceding sentence shall be deemed to be one fifth
(1/5). If the foregoing calculation results in an exchanged Option
being exercisable for a fraction of a share of Parent Common
Stock, then the number of shares of Parent Common Stock subject to
such Option shall be rounded down to the nearest whole number of
shares and the exercise price per whole share of Parent Common
Stock will be as determined above. The Options as so converted
shall be further modified as necessary to effect such conversion.
The term, exercisability and vesting schedule of the Options will
otherwise be unchanged by the provisions of this subsection (j)
and shall operate in accordance with their terms. The Options will
be subject to the terms and conditions of Parent's 1997 Stock
Option Plan. The obligations of the Company under the Options as
so converted shall be assumed by Parent.
(k) Each of the then outstanding Warrants will be deemed to be
exercisable for Exchangeable Shares without any further action on
the part of any Warrantholder.
ARTICLE 3
RIGHTS OF DISSENT
Section 3.1 RIGHTS OF DISSENT. Holders of Company Common Shares may exercise
rights of dissent with respect to such shares pursuant to and in the manner set
forth in section 185 of the OBCA and this section 3.1 (the "DISSENT PROCEDURES")
in connection with the Arrangement, provided that, notwithstanding section 185
of the OBCA, the written objection to the Arrangement Resolution referred to in
section 185 of the OBCA must be received by the Company not later than 5:00 p.m.
(Toronto time) on the Business Day preceding the Meeting. Holders of Company
Common Shares who duly exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for their Company
Common Shares shall be deemed to have transferred such Company
Common Shares to the Company for cancellation at the Effective
Time; or
<PAGE>
6
(b) are ultimately not entitled, for any reason, to be paid the fair
value for their Company Common Shares shall be deemed to have
participated in the Arrangement on the same basis as any non
dissenting holder of Company Common Shares;
but in no case shall the Company or any other person be required to recognize
such holders as holders of Company Common Shares on and after the Effective Time
and the names of such persons shall be deleted from the registers of holders of
Company Common Shares as at the Effective Time.
ARTICLE 4
CERTIFICATES AND FRACTIONAL SHARES
Section 4.1 ISSUANCE OF CERTIFICATES REPRESENTING EXCHANGEABLE SHARES. At or
promptly after the Effective Time, the Company shall deposit with the
Depositary, for the benefit of the holders of Company Common Shares exchanged
pursuant to subsection 2.1(c), certificates representing the Exchangeable Shares
issued pursuant to subsection 2.1(c) upon the exchange. Upon surrender to the
Depositary of a certificate which immediately prior to the Effective Time
represented outstanding Company Common Shares together with such other documents
and instruments as would have been required to effect the transfer of the shares
formerly represented by such certificate under the OBCA and the by-laws of the
Company and such additional documents and instruments as the Depositary may
reasonably require, the holder of such surrendered certificate shall be entitled
to receive in exchange therefor, and the Depositary shall deliver to such
holder, a certificate representing that number (rounded down to the nearest
whole number) of Exchangeable Shares which such holder has the right to receive
(together with any dividends or distributions with respect thereto pursuant to
section 4.2) and the certificate so surrendered shall forthwith be cancelled. In
the event of a transfer of ownership of Company Common Shares which is not
registered in the transfer records of the Company, a certificate representing
the proper number of Exchangeable Shares may be issued to a transferee if the
certificate representing such Company Common Shares is presented to the
Depositary, accompanied by all documents required to evidence and effect such
transfer. Until surrendered as contemplated by this section 4.1, each
certificate which immediately prior to the Effective Time represented
outstanding Company Common Shares, shall be deemed at any time after the
Effective Time, but subject to section 4.5, to represent only the right to
receive upon such surrender; (a) the certificate representing Exchangeable
Shares as contemplated by this section 4.1; and (b) any dividends or
distributions with a record date after the Effective Time theretofor paid or
payable with respect to Exchangeable Shares as contemplated by section 4.2.
Section 4.2 DISTRIBUTIONS WITH RESPECT TO UNSURRENDERED CERTIFICATES. No
dividends or other distributions declared or made after the Effective Time with
respect to Exchangeable Shares with a record date after the Effective Time shall
be paid to the holder of any formerly outstanding Company Common Shares which
were exchanged pursuant to section 2.1, unless and until the certificate
representing such shares shall be surrendered in accordance with section 4.1.
Subject to applicable law and to section 4.5, at the time of such surrender of
any such certificate, there shall be paid to the holder of the Exchangeable
Shares resulting from exchange, in all cases without interest, the amount of
dividends or other distributions with a record date after the Effective Time
theretofor paid with respect to such Exchangeable Shares, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender.
Section 4.3 NO FRACTIONAL SHARES. No certificates or scripts representing
fractional Exchangeable Shares, if applicable, shall be issued upon the
surrender for exchange of certificates pursuant to section 4.1 and such
fractional interests shall not entitle the owner thereof to vote or to possess
or exercise any rights as a security holder of the Company. If applicable, all
fractions shall be rounded down to the next lowest number.
Section 4.4 LOST CERTIFICATES. If any certificate which immediately prior to
the Effective Time represented outstanding Company Common Shares which were
exchanged pursuant to section 2.1 has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such certificate to
be lost, stolen or destroyed, the Depositary will issue in exchange for such
lost, stolen or destroyed certificate, certificates representing Exchangeable
Shares (and any dividends or distributions with respect thereto) deliverable in
respect thereof as determined in accordance with section 2.1. When authorizing
such payment in exchange for any lost, stolen or destroyed certificate, the
person to whom certificates representing Exchangeable Shares are to be issued
shall, as a condition precedent to the issuance thereof, give a bond
satisfactory to the Company, Parent, Aviation Subco and the Transfer Agent, as
the case may be, in such sum as the Company may direct, or otherwise indemnify
the Company, Parent, Aviation Subco and the
<PAGE>
7
Transfer Agent in a manner satisfactory to the Company, Parent, Aviation Subco
and the Transfer Agent against any claim that may be made against the Company,
Parent, Aviation Subco or the Transfer Agent with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 4.5 EXTINGUISHMENT OF RIGHTS. Any certificate which immediately prior
to the Effective Time represented outstanding Company Common Shares which was
exchanged pursuant to section 2.1 and has not been deposited, with all other
instruments required by section 4.1, on or prior to January 1, 2003 shall cease
to represent a claim or interest of any kind or nature as a shareholder of the
Company. On such date, the Exchangeable Shares to which the former registered
holder of the certificate referred to in the preceding sentence was ultimately
entitled shall be deemed to have been surrendered to the Company, together with
all entitlements to dividends, distributions and interest thereon held for such
former registered holder, for no consideration and shall thereupon be cancelled
and the name of the former registered holder shall be removed from the register
of holders of such shares.
Section 4.6 WITHHOLDING RIGHTS. The Company, Parent, Aviation Subco and the
Depositary shall be entitled to deduct and withhold from any dividend or
consideration otherwise payable to any holder of Company Common Shares or
Exchangeable Shares such amounts as the Company, Parent, Aviation Subco or the
Depositary is required or permitted to deduct and withhold with respect to such
payment under the Income Tax Act (Canada), the United States Internal Revenue
Code of 1986 or any provision of provincial, state, local or foreign tax law, in
each case, as amended. To the extent that amounts are so withheld, such withheld
amounts shall be treated for all purposes hereof as having been paid to the
holder of the shares in respect of which such deduction and withholding was
made, provided that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount so required or
permitted to be deducted or withheld from any payment to a holder exceeds the
cash portion of the consideration otherwise payable to the holder, the Company,
Parent, Aviation Subco and the Depositary are hereby authorized to sell or
otherwise dispose of such portion of the consideration as is necessary to
provide sufficient funds to the Company, Parent, Aviation Subco or the
Depositary, as the case may be, to enable it to comply with such deduction or
withholding requirement and the Company, Parent, Aviation Subco or the
Depositary shall notify the holder thereof and remit any unapplied balance of
the net proceeds of such sale.
ARTICLE 5
CERTAIN RIGHTS AND OBLIGATIONS OF PARENT AND
AVIATION SUBCO TO ACQUIRE EXCHANGEABLE SHARES
Section 5.1 PARENT AND AVIATION SUBCO LIQUIDATION CALL RIGHT.
(a) Parent and Aviation Subco (as they shall determine) shall have the
overriding right (the "LIQUIDATION CALL RIGHT"), in the event of
and notwithstanding the proposed liquidation, dissolution or
winding-up of the Company as referred to in Article 5 of the
Exchangeable Share Provisions, to purchase from all but not less
than all of the holders (other than Parent, Aviation Subco and any
Subsidiary thereof) of Exchangeable Shares on the Liquidation Date
all but not less than all of the Exchangeable Shares held by such
holders on payment by Parent or Aviation Subco, as the case may
be, to each holder of Exchangeable Shares, the Exchangeable Share
Price applicable on the last Business Day prior to the Liquidation
Date (the "LIQUIDATION CALL PURCHASE PRICE"). In the event of the
exercise of the Liquidation Call Right by Parent or Aviation
Subco, each holder shall be obligated to sell all of the
Exchangeable Shares held by the holder to Parent or Aviation
Subco, as the case may be, on the Liquidation Date on payment by
Parent or Aviation Subco to the holder of the Liquidation Call
Purchase Price for each such share.
(b) To exercise the Liquidation Call Right, Parent or Aviation Subco
must notify the Transfer Agent in writing, as agent for the
holders of Exchangeable Shares, and the Company of its intention
to exercise such right at least 20 days before the Liquidation
Date in the case of a voluntary liquidation, dissolution or
winding-up of the Company and at least five Business Days before
the Liquidation Date in the case of an involuntary liquidation,
dissolution or winding-up of the Company. Parent or Aviation
Subco, as the case may be, shall also notify the Transfer Agent
accordingly if they do not intend to exercise the Liquidation Call
Right. The Transfer Agent shall notify the holders of Exchangeable
Shares as to whether or not Parent or Aviation Subco have
exercised the Liquidation
<PAGE>
8
Call Right forthwith after the expiry of the date by which the
same may be exercised by Parent or Aviation Subco. If neither
Parent nor Aviation Subco exercise the Liquidation Call Right, on
the Liquidation Date the Company will purchase and the holders
will sell all of the Exchangeable Shares then outstanding for a
price per share equal to the Liquidation Call Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable
Shares pursuant to the Liquidation Call Right, Parent or Aviation
Subco, as the case may be, shall deposit with the Transfer Agent,
on or before the Liquidation Date, the Exchangeable Share
Consideration representing the total Liquidation Call Purchase
Price. Provided that such Exchangeable Share Consideration has
been so deposited with the Transfer Agent, on and after the
Liquidation Date the right of each holder of Exchangeable Shares
will be limited to receiving such holder's proportionate part of
the total Liquidation Call Purchase Price payable by Parent or
Aviation Subco, as the case may be, without interest upon
presentation and surrender by the holder of certificates
representing the Exchangeable Shares held by such holder and the
holder shall on and after the Liquidation Date be considered and
deemed for all purposes to be the holder of the Parent Common
Stock delivered to it. Upon surrender to the Transfer Agent of a
certificate or certificates representing Exchangeable Shares,
together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the
OBCA and the by-laws of the Company and such additional documents
and instruments as the Transfer Agent may reasonably require, the
holder of such surrendered certificate or certificates shall be
entitled to receive in exchange therefor and the Transfer Agent on
behalf of Parent or Aviation Subco, as the case may be, shall
deliver to such holder the Exchangeable Share Consideration to
which the holder is entitled. If neither Parent nor Aviation Subco
exercises the Liquidation Call Right in the manner described
above, on the Liquidation Date the holders of the Exchangeable
Shares will be entitled to receive in exchange therefor the
liquidation price otherwise payable by the Company in connection
with the liquidation, dissolution or winding-up of the Company
pursuant to Article 5 of the Exchangeable Share Provisions.
Notwithstanding the foregoing, until such Exchangeable Share
Consideration is delivered to the holder, the holder shall be
deemed to remain a holder of Exchangeable Shares for purposes of
all voting rights with respect thereto under the Voting and
Exchange Trust Agreement.
Section 5.2 PARENT AND AVIATION SUBCO REDEMPTION CALL RIGHT.
(a) Parent and Aviation Subco (as they shall determine) shall have the
overriding right (the "REDEMPTION CALL RIGHT"), notwithstanding the
proposed redemption of the Exchangeable Shares by the Company pursuant to
Article 7 of the Exchangeable Share Provisions, to purchase from all but
not less than all of the holders (other than Parent, Aviation Subco or any
Subsidiary thereof) of Exchangeable Shares on the Automatic Redemption
Date all but not less than all of the Exchangeable Shares held by each
such holder on payment by Parent or Aviation Subco, as the case may be, to
the holder of Exchangeable Shares the Exchangeable Share Price applicable
on the last Business Day prior to the Automatic Redemption Date (the
"REDEMPTION CALL PURCHASE PRICE"). In the event of the exercise of the
Redemption Call Right by Parent or Aviation Subco, each holder shall be
obligated to sell all the Exchangeable Shares held by the holder to Parent
or Aviation Subco, as the case may be, on the Automatic Redemption Date on
payment by Parent or Aviation Subco to the holder of the Redemption Call
Purchase Price for each such share.
(b) To exercise the Redemption Call Right, Parent or Aviation Subco must
notify the Transfer Agent in writing, as agent for the holders of
Exchangeable Shares, and the Company of its intention to exercise such
right not later than the date by which the Company is required to give
notice of the Automatic Redemption Date. If Parent or Aviation Subco
exercise the Redemption Call Right, on the Automatic Redemption Date it
will purchase and the holders will sell all of the Exchangeable Shares
then outstanding for a price per share equal to the Redemption Call
Purchase Price.
(c) For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Redemption Call Right, Parent or Aviation Subco, as the
case may be, shall deposit with the Transfer Agent, on or before the
Automatic Redemption Date, the Exchangeable Share Consideration
representing the total Redemption Call Purchase Price. Provided that such
Exchangeable Share Consideration has been so deposited with the Transfer
<PAGE>
9
Agent, on and after the Automatic Redemption Date the rights of each
holder of Exchangeable Shares will be limited to receiving such holder's
proportionate part of the total Redemption Call Purchase Price payable by
Parent or Aviation Subco, as the case may be, upon presentation and
surrender by the holder of certificates representing the Exchangeable
Shares held by such holder and the holder shall on and after the Automatic
Redemption Date be considered and deemed for all purposes to be the holder
of the Parent Common Stock delivered to such holder. Upon surrender to the
Transfer Agent of a certificate or certificates representing Exchangeable
Shares, together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the OBCA and
the by-laws of the Company and such additional documents and instruments
as the Transfer Agent may reasonably require, the holder of such
surrendered certificate or certificates shall be entitled to receive in
exchange therefor, and the Transfer Agent on behalf of Parent or Aviation
Subco, as the case may be, shall deliver to such holder, the Exchangeable
Share Consideration to which the holder is entitled. If neither Parent nor
Aviation Subco exercises the Redemption Call Right in the manner described
above, on the Automatic Redemption Date the holders of the Exchangeable
Shares will be entitled to receive in exchange therefor the redemption
price otherwise payable by the Company in connection with the redemption
of the Exchangeable Shares pursuant to Article 7 of the Exchangeable Share
Provisions. Notwithstanding the foregoing, until such Exchangeable Share
Consideration is delivered to the holder, the holder shall be deemed to
still be a holder of Exchangeable Shares for purposes of all voting rights
with respect thereto under the Voting and Exchange Trust Agreement.
Section 5.3 EXCHANGE PUT RIGHT. Upon and subject to the terms and conditions
contained in the Exchangeable Share Provisions and the Voting and Exchange Trust
Agreement:
(a) a holder of Exchangeable Shares shall have the right (the
"EXCHANGE PUT RIGHT") at any time to require Parent or Aviation
Subco (as they shall determine) to purchase all or any part of the
Exchangeable Shares of the holder; and
(b) upon the exercise by the holder of the Exchange Put Right, the
holder shall be required to sell to Parent or Aviation Subco, as
the case may be, and Parent or Aviation Subco, as the case may be,
shall be required to purchase from the holder, no later than the
time or times prescribed therefor herein or in the Exchangeable
Share Provisions or the Voting and Exchange Trust Agreement, that
number of Exchangeable Shares in respect of which the Exchange Put
Right is exercised, in consideration of the payment by Parent or
Aviation Subco, as the case may be, of the Exchangeable Share
Price applicable thereto and delivery by or on behalf of Parent or
Aviation Subco, as the case may be, of the Exchangeable Share
Consideration representing the total applicable Exchangeable Share
Price.
ARTICLE 6
AMENDMENT
Section 6.1 PLAN OF ARRANGEMENT AMENDMENT. The Company reserves the right to
amend, modify and/or supplement this Plan of Arrangement at any time and from
time to time provided that any such amendment, modification or supplement must
be contained in a written document that is: (a) agreed to by Parent and Aviation
Subco; (b) filed with the Court and, if made following the Meeting, approved by
the Court; and (c) communicated to holders of Company Common Shares in the
manner required by the Court (if so required). Any amendment, modification or
supplement to this Plan of Arrangement may be proposed by the Company at any
time prior to or at the Meeting (provided that Parent and Aviation Subco shall
have consented thereto) with or without any other prior notice or communication,
and if so proposed and accepted by the persons voting at the Meeting (other than
as may be required under the Court's interim order), shall become part of this
Plan of Arrangement for all purposes. Any amendment, modification or supplement
to this Plan of Arrangement which is approved by the Court following the Meeting
shall be effective only: (a) if it is consented to by the Company; (b) if it is
consented to by Parent and Aviation Subco; and (c) if required by the Court or
applicable law, it is consented to by the holders of the Company Common Shares
or the Exchangeable Shares as the case may be.
<PAGE>
Exhibit "A"
10
SHARE PROVISIONS FOR TRAVELBYUS.COM LTD. (THE "CORPORATION")
ARTICLE 1
INTERPRETATION
For the purposes of these rights, privileges, restrictions and conditions, the
following defined terms shall have the respective meanings set forth below:
1.1 "ACT" means the Business Corporations Act (Ontario), as amended,
consolidated or reenacted from time to time.
"AGGREGATE EQUIVALENT VOTE AMOUNT" means with respect to any matter, proposition
or question on which holders of Aviation Common Stock are entitled to vote,
consent or otherwise act, the product of; (i) the number of Exchangeable Shares
then issued and outstanding and held by holders other than Aviation, Aviation
Subco and their respective Subsidiaries; divided by five; and multiplied by (ii)
the number of votes to which a holder of one share of Aviation Common Stock is
entitled with respect to such matter, proposition or question.
"AUTOMATIC REDEMPTION DATE" means the date for the automatic redemption by the
Corporation of Exchangeable Shares pursuant to Article 7, which date shall be
the first to occur of; (a) January 1, 2003; (b) the date selected by the Board
of Directors at a time when less than 15% of the Exchangeable Shares issuable on
the Effective Date (other than Exchangeable Shares held by Aviation, Aviation
Subco and their respective Subsidiaries and as such number of shares may be
adjusted as deemed appropriate by the Board of Directors to give effect to any
subdivision or consolidation of or stock dividend on the Exchangeable Shares,
any issuance or distribution of rights to acquire Exchangeable Shares or
securities exchangeable for or convertible into or carrying rights to acquire
Exchangeable Shares, any issue or distribution of other securities or rights or
evidences of indebtedness or assets or any other capital reorganization or other
transaction involving or affecting the Exchangeable Shares) are outstanding; (c)
the Business Day prior to the record date for any meeting or vote of the
shareholders of the Corporation to consider any matter on which the holders of
Exchangeable Shares would not be entitled to vote as shareholders of the
Corporation, but excluding any meeting or vote as described in clause (d) below
or; (d) the Business Day following the day on which the holders of Exchangeable
Shares fail to take the necessary action at a meeting or other vote of holders
of Exchangeable Shares, if and to the extent such action is required to approve
or disapprove as applicable, any change to or in the rights of the holders of
Exchangeable Shares if the approval or disapproval as applicable of such change
would be required to maintain the economic and legal equivalence of the
Exchangeable Shares and the Aviation Common Stock; or (e) an Aviation Control
Transaction or a TBU Control Transaction occurs in which case provided the Board
of Directors determines, in good faith and in its sole discretion, that it is
not reasonably practicable in the circumstances of such Aviation Control
Transaction or TBU Control Transaction to substantially replicate the terms and
conditions of the Exchangeable Shares in connection with such Aviation Control
Transaction or TBU Control Transaction and that the redemption of all but not
less than all of the outstanding Exchangeable Shares is necessary to enable the
completion of such Aviation Control Transaction or TBU Control Transaction in
accordance with its terms, the Board of Directors may accelerate such redemption
date to such date prior to January 1, 2003 as they may determine upon such
number of days' prior written notice to the registered holders of the
Exchangeable Shares as the Board of Directors may determine to be reasonably
practicable in such circumstances.
"AVIATION" means Aviation Group, Inc., a corporation incorporated under the laws
of the State of Texas and includes any successor corporation.
"AVIATION CALL NOTICE" has the meaning ascribed thereto in section 6.3.
"AVIATION COMMON STOCK" means the post-Consolidation shares of common stock of
Aviation with a par value of US$0.01 per share, having one vote per share and
any other securities resulting from the application of section 2.7 of the
Support Agreement.
"AVIATION CONTROL TRANSACTION" means any sale of a majority of the outstanding
voting shares of Aviation or any merger, amalgamation or tender offer or any
proposal to do so.
"AVIATION DIVIDEND DECLARATION DATE" means the date on which the board of
directors of Aviation declares any dividend on the Aviation Common Stock.
"AVIATION SPECIAL SHARE" means the one share of Special Voting Stock of Aviation
with a par value of US$0.01 and having voting rights at meetings of holders of
Aviation Common Stock equal to the Aggregate Equivalent Vote Amount.
"AVIATION SUBCO" means Aviation Group Canada Ltd., a corporation incorporated
under the laws of the Province of Ontario and includes any successor
corporation.
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11
"BOARD OF DIRECTORS" means the Board of Directors of the Corporation and any
committee thereof acting within its authority.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day when banks
are not open for business in one or more of Toronto, Ontario and Dallas, Texas.
"CANADIAN DOLLAR EQUIVALENT" means in respect of an amount expressed in a
foreign currency (the "FOREIGN CURRENCY AMOUNT") at any date the product
obtained by multiplying: (i) the Foreign Currency Amount; by (ii) the noon spot
exchange rate on such date for such foreign currency expressed in Canadian
dollars as reported by the Bank of Canada or in the event such spot exchange
rate is not available, such spot exchange rate on such date for such foreign
currency expressed in Canadian dollars as may be deemed by the Board of
Directors to be appropriate for such purpose.
"CLASS X PREFERRED SHARE" means the Class X Preferred Share of the Corporation
having the rights, privileges, restrictions and conditions set forth herein.
"COMMON SHARES" means the common shares in the capital of the Corporation.
"CONSOLIDATION" means the consolidation of the shares of Aviation Common Stock,
which is to occur prior to or in connection with the initial issuance of the
Exchangeable Shares, pursuant to which five pre-Consolidation shares of Aviation
common stock are to be combined into one post-Consolidation share of Aviation
Common Stock.
"CORPORATION" means travelbyus.com ltd., a corporation incorporated under the
laws of the Province of Ontario and includes any successor corporation.
"CURRENT MARKET PRICE" in respect of a share of Aviation Common Stock means on
any date, the average of the closing prices of Aviation Common Stock during the
period of 20 consecutive trading days ending not more than five trading days
before such date on Nasdaq or if Aviation Common Stock is not then traded on
Nasdaq, on such other principal U.S. stock exchange or automated quotation
system on which the Aviation Common Stock is listed or quoted, as the case may
be, as may be selected by the Board of Directors for such purpose. If in the
opinion of the Board of Directors the public distribution or trading activity of
the Aviation Common Stock during such period does not create a market which
reflects the fair market value of Aviation Common Stock then the Current Market
Price per share of Aviation Common Stock shall be determined by the Board of
Directors based upon the advice of such qualified independent financial advisors
as the Board of Directors may deem to be appropriate. Any such selection,
opinion or determination by the Board of Directors shall be conclusive and
binding.
"EXCHANGE PUT DATE" has the meaning ascribed thereto in section 8.2.
"EXCHANGE PUT RIGHT" has the meaning ascribed thereto in subsection 8.1(a).
"EXCHANGEABLE SHARE CONSIDERATION" means for any acquisition of or redemption of
or distribution of assets of the Corporation in respect of or purchase pursuant
to the Exchange Put Right of Exchangeable Shares pursuant to these share
provisions, the Support Agreement or the Voting and Exchange Trust Agreement:
(a) certificates representing the aggregate number of shares of Aviation Common
Stock deliverable in connection with such action on the basis of five
Exchangeable Shares for each one share of Aviation Common Stock (after the
Consolidation occurs);
(b) a cheque or cheques payable at par at any branch of the bankers of the payor
in the amount of all declared and unpaid and undeclared but payable cash
dividends deliverable in connection with such action; and
(c) such stock or property constituting any declared and unpaid non-cash
dividends deliverable in connection with such action;
provided that: (i) the part of the consideration which is the Current Market
Price of a share of Aviation Common Stock shall be fully paid and satisfied by
the delivery of one share of Aviation Common Stock (which as a result of the
Consolidation will be on the basis of five Exchangeable Shares for each one
share of Aviation Common Stock); (ii) the part of the consideration which
represents non-cash dividends remaining unpaid shall be fully paid and satisfied
by delivery of such non-cash items; (iii) any such stock shall be duly issued as
fully paid and non-assessable and any such property shall be delivered free and
clear of any lien, claim, encumbrance, security interest or adverse claim or
interest; and (iv) such consideration shall be paid less any tax required to be
deducted or withheld therefrom and without interest. In the event that the
foregoing provisions would require the delivery of a fractional share of
Aviation Common Stock, such fractional share shall be rounded up to the next
whole share of Aviation Common Stock.
"EXCHANGEABLE SHARE PRICE" means for each Exchangeable Share, an amount equal to
the aggregate of:
(a) the Current Market Price of a share of Aviation Common Stock divided by five
(based on the Consolidation); plus
(b) an additional amount equal to the full amount of all cash dividends declared
and unpaid and undeclared but payable cash dividends deliverable in connection
with such action on such Exchangeable Share; plus
(c) an additional amount equal to all dividends declared on a share of Aviation
Common Stock which have not been declared on such Exchangeable Share in
accordance herewith divided by five (based on the Consolidation); plus
(d) an additional amount representing non-cash dividends declared and unpaid on
such Exchangeable Share.
"EXCHANGEABLE SHARES" means the Exchangeable Shares of the Corporation having
the rights, privileges, restrictions and conditions set forth herein.
"LIQUIDATION AMOUNT" has the meaning ascribed thereto in section 5.1.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in section 5.4.
"LIQUIDATION DATE" has the meaning ascribed thereto in section 5.1.
"LIQUIDATION EVENT" has the meaning ascribed thereto in section 5.1.
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"NASDAQ" shall mean The Nasdaq Stock Market, Inc.'s National Market or SmallCap
Market.
"PURCHASE PRICE" has the meaning ascribed thereto in section 6.3.
"REDEMPTION CALL PURCHASE PRICE" has the meaning ascribed thereto in section
7.3.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in section 7.3.
"REDEMPTION PRICE" has the meaning ascribed thereto in section 7.1.
"RETRACTED SHARES" has the meaning ascribed thereto in subsection 6.1(i).
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in subsection 6.1(iii).
"RETRACTION DATE" has the meaning ascribed thereto in subsection 6.1(ii).
"RETRACTION PRICE" has the meaning ascribed in section 6.1.
"RETRACTION REQUEST" has the meaning provided in section 6.1.
"SUBSIDIARY" in relation to any person means any body corporate, partnership,
joint venture, association or other entity of which more than 50% of the total
voting power of shares or units of ownership or beneficial interest entitled to
vote in the election of directors (or members of a comparable governing body) is
owned or controlled, directly or indirectly, by such person.
"SUPPORT AGREEMENT" means the Support Agreement among Aviation, Aviation Subco
and the Corporation made as of ________, 2000.
"TBU CONTROL TRANSACTION" means any sale of a majority of the outstanding voting
shares of the Corporation by Aviation or any affiliate of Aviation to an arm's
length third party, any merger, amalgamation or tender offer or any proposal to
do so.
"TRANSFER AGENT" means the duly appointed transfer agent for the time being of
the Exchangeable Shares and if there is more than one such agent then the
principal Canadian agent.
"TRUSTEE" means the Trustee appointed under the Voting and Exchange Trust
Agreement and any successor trustee.
"VOTING AND EXCHANGE TRUST AGREEMENT" means the Voting and Exchange Trust
Agreement among Aviation, Aviation Subco, the Corporation and the Trustee made
as of __________________, 2000.
ARTICLE 2
RANKING OF EXCHANGEABLE SHARES
2.1 The Exchangeable Shares shall be entitled to a preference over the Common
Shares and any other shares ranking junior to the Exchangeable Shares with
respect to the payment of dividends and the distribution of assets in the event
of the liquidation, dissolution or winding-up of the Corporation whether
voluntary or involuntary or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding-up its affairs.
ARTICLE 3
DIVIDENDS
3.1 Subject to applicable law, on each Aviation Dividend Declaration Date a
holder of an Exchangeable Share shall be entitled to receive and the Board of
Directors shall declare a dividend on each Exchangeable Share; (a) in the case
of a cash dividend declared on the Aviation Common Stock, in an amount in cash
for each Exchangeable Share in U.S. dollars or the Canadian Dollar Equivalent
thereof on the Aviation Dividend Declaration Date, in each case, corresponding
to one-fifth of the cash dividend declared on each share of Aviation Common
Stock; or (b) in the case of a stock dividend declared on the Aviation Common
Stock to be paid in Aviation Common Stock, in such number of Exchangeable Shares
for each Exchangeable Share as is equal to the number of shares of Aviation
Common Stock to be paid on each share of Aviation Common Stock, divided by
five; or (c) in the case of a dividend declared on the Aviation Common Stock in
property other than cash or Aviation Common Stock in such type and amount of
property for each Exchangeable Share as is the same as the type and amount of
property declared as a dividend on each share of Aviation Common Stock, divided
by five. Such dividends shall be paid out of money, assets or property of the
Corporation properly applicable to the payment of dividends or out of authorized
but unissued shares of the Corporation.
3.2 Cheques of the Corporation payable at par at any branch of the bankers of
the Corporation shall be issued in respect of any cash dividends contemplated by
subsection 3.1(a) and the sending of such a cheque to each holder of an
Exchangeable Share (less any tax required to be deducted and withheld from such
dividends paid or credited by the Corporation) shall satisfy the cash dividends
represented thereby unless the cheque is not paid on presentation. Certificates
registered in the name of the registered holder of Exchangeable Shares shall be
issued or transferred in respect of any stock dividends contemplated by
subsection 3.1(b) and the sending of such a certificate to each holder of an
Exchangeable Share shall satisfy the stock dividend represented thereby. Such
other type and amount of property in respect of any dividends contemplated by
subsection 3.1(c) hereof shall be issued, distributed or transferred by the
Corporation in such manner as it shall determine and the issuance, distribution
or transfer thereof by the Corporation to each holder of an Exchangeable Share
shall satisfy the dividend represented thereby. In all cases any such dividends
shall be subject to any reduction or adjustment for tax required to be deducted
and withheld
<PAGE>
13
from such dividends paid or credited by the Corporation. No holder of an
Exchangeable Share shall be entitled to recover by action or other legal process
against the Corporation any dividend which is represented by a cheque that has
not been duly presented to the Corporation's bankers for payment or which
otherwise remains unclaimed for a period of six years from the date on which
such dividend was payable.
3.3 The record date for the determination of the holders of Exchangeable Shares
entitled to receive payment of and the payment date for any dividend declared on
the Exchangeable Shares under section 3.1 shall be the same dates as the record
date and payment date, respectively, for the corresponding dividend declared on
the Aviation Common Stock.
3.4 If on any payment date for any dividends declared on the Exchangeable Shares
under section 3.1 the dividends are not paid in full on all of the Exchangeable
Shares then outstanding any such dividends which remain unpaid shall be paid on
a subsequent date or dates determined by the Board of Directors on which the
Corporation shall have sufficient moneys, assets or property properly applicable
to the payment of such dividends.
3.5 Except as provided in this Article 3 the holders of Exchangeable Shares
shall not be entitled to receive dividends in respect thereof.
ARTICLE 4
CERTAIN RESTRICTIONS
4.1 So long as any of the Exchangeable Shares are outstanding, the Corporation
shall not do any of the following without the approval of the holders of the
Exchangeable Shares given as specified in Article 10:
(a) pay any dividends on the Common Shares or any other shares ranking junior to
the Exchangeable Shares (other than stock dividends payable in any such other
shares ranking junior to the Exchangeable Shares);
(b) redeem or purchase or make any capital distribution in respect of Common
Shares or any other shares ranking junior to the Exchangeable Shares with
respect to the payment of dividends or on any liquidation distribution;
(c) redeem or purchase any other shares of the Corporation ranking equally with
the Exchangeable Shares with respect to the payment of dividends or on any
liquidation distribution.
The restrictions in subsections (a), (b) and (c) above shall not apply if all
dividends on the outstanding Exchangeable Shares corresponding to dividends
declared on the Aviation Common Stock shall have been declared on the
Exchangeable Shares and paid in full.
ARTICLE 5
DISTRIBUTION ON LIQUIDATION
5.1 In the event of the liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among its
shareholders for the purpose of winding-up its affairs (a "LIQUIDATION EVENT") a
holder of Exchangeable Shares shall be entitled, subject to applicable law, to
receive from the assets of the Corporation in respect of each Exchangeable Share
held by such holder on the effective date of such liquidation, dissolution or
winding-up (the "LIQUIDATION DATE"), before any distribution of any part of the
assets of the Corporation to the holders of Common Shares or any other shares
ranking junior to the Exchangeable Shares, an amount equal to the Exchangeable
Share Price applicable on the last Business Day prior to the Liquidation Date
(the "LIQUIDATION AMOUNT"). The Corporation shall be entitled to liquidate some
of the Aviation Common Stock which would otherwise be deliverable to the
particular holder of Exchangeable Shares in order to fund any statutory
withholding tax obligation.
5.2 On or promptly after the Liquidation Date and subject to the exercise by
Aviation or Aviation Subco of the Liquidation Call Right, the Corporation shall
cause to be delivered to the holders of Exchangeable Shares the Liquidation
Amount for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent may reasonably
require, at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of the Exchangeable Shares. Payment of the total Liquidation Amount for such
Exchangeable Shares shall be made by delivery to each holder at the address of
the holder recorded in the securities register of the Corporation for the
Exchangeable Shares or by holding for pick up by the holder at the registered
office of the Corporation or at any office of the Transfer Agent as may be
specified by the Corporation by notice to the holders of Exchangeable Shares, on
behalf of the Corporation of the Exchangeable Share Consideration representing
the total Liquidation Amount. On and after the Liquidation Date the holders of
the Exchangeable Shares shall cease to be holders of such Exchangeable Shares
and shall not be entitled to exercise any of the rights of holders in respect
thereof, other than the right to receive their proportionate part of the total
Liquidation Amount, unless payment of the total Liquidation
<PAGE>
14
Amount for such Exchangeable Shares shall not be made upon presentation and
surrender of share certificates in accordance with the foregoing provisions, in
which case the rights of the holders shall remain unaffected until the total
Liquidation Amount has been paid in the manner hereinbefore provided. The
Corporation shall have the right at any time on or after the Liquidation Date to
deposit or to cause to be deposited the Exchangeable Share Consideration in
respect of the Exchangeable Shares represented by certificates that have not at
the Liquidation Date been surrendered by the holders thereof in a custodial
account or for safe keeping, in the case of non-cash items, with any chartered
bank or trust company in Canada whereupon the Corporation's obligations with
respect to the Liquidation Amount shall be deemed to have been fully satisfied.
Upon such deposit being made the rights of the holders of Exchangeable Shares
after such deposit shall be limited to receiving their proportionate part of the
total Liquidation Amount for such Exchangeable Shares so deposited against
presentation and surrender of the said certificates held by them, respectively,
in accordance with the foregoing provisions. Upon payment or deposit of the
Exchangeable Share Consideration and surrender of certificates representing the
Exchangeable Shares, the holders of the Exchangeable Shares shall thereafter be
considered and deemed for all purposes to be the holders of the Aviation Common
Stock delivered to them. Notwithstanding the foregoing until such payment or
deposit of such Exchangeable Share Consideration the holder shall be deemed to
be a holder of Exchangeable Shares for purposes of all voting rights with
respect thereto under the Voting and Exchange Trust Agreement.
5.3 After the Corporation has satisfied its obligations to pay the holders of
the Exchangeable Shares the Liquidation Amount per Exchangeable Share such
holders shall not be entitled to share in any further distribution of the assets
of the Corporation.
5.4 In the event of a Liquidation Event, Aviation and Aviation Subco (as they
shall determine) shall have the overriding right to purchase from all but not
less than all of the holders (other than Aviation, Aviation Subco and any
Subsidiary thereof) of Exchangeable Shares on the Liquidation Date all but not
less than all of the Exchangeable Shares held by such holders (the "LIQUIDATION
CALL RIGHT") on payment by Aviation or Aviation Subco, as the case may be, to
each holder of Exchangeable Shares, the Liquidation Amount. In the event of the
exercise of the Liquidation Call Right by Aviation or Aviation Subco, as the
case may be, each holder shall be obligated to sell all the Exchangeable Shares
held by the holder to Aviation or Aviation Subco, as the case may be, on the
Liquidation Date on payment by Aviation or Aviation Subco, as the case may be,
to the holder of the Liquidation Amount for each such share.
5.5 To exercise the Liquidation Call Right, Aviation or Aviation Subco, as the
case may be, must notify the Corporation and the Transfer Agent in writing of
their intention to exercise such right at least 55 days before the Liquidation
Date in the case of a Liquidation Event or in the case of an involuntary
liquidation, dissolution or winding-up of the Corporation. Aviation shall also
notify the Transfer Agent accordingly if they do not intend to exercise the
Liquidation Call Right. The Transfer Agent will notify the holders of
Exchangeable Shares as to whether or not Aviation or Aviation Subco, as the case
may be, has exercised the Liquidation Call Right forthwith after the expiry of
the date by which the same may be exercised by Aviation or Aviation Subco, as
the case may be. If Aviation or Aviation Subco, as the case may be, exercises
the Liquidation Call Right on the Liquidation Date, Aviation or Aviation Subco,
as the case may be, will purchase and the holders will sell all of the
Exchangeable Shares then outstanding for a price per share equal to the
Liquidation Amount.
5.6 For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Liquidation Call Right, Aviation or Aviation Subco, as the case
may be, shall deposit with the Transfer Agent, on or before the Liquidation
Date, the Exchangeable Share Consideration representing the Liquidation Amount.
If such Exchangeable Share Consideration has been so deposited with the Transfer
Agent, on and after the Liquidation Date the right of each holder of
Exchangeable Shares will be limited to receiving such holder's proportionate
part of the total Liquidation Amount payable by Aviation or Aviation Subco, as
the case may be, without interest upon presentation and surrender by the holder
of certificates representing the Exchangeable Shares held by such holder and the
holder shall on and after the Liquidation Date, provided such holder has
surrendered his certificates representing the Exchangeable Shares held by him,
be considered and deemed for all purposes to be the holder of the Aviation
Common Stock delivered to it. Upon surrender to the Transfer Agent of a
certificate or certificates representing Exchangeable Shares together with such
other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent may reasonably
require, the holder of such surrendered certificate or certificates shall be
entitled to receive in exchange therefor and the Transfer Agent on behalf of
Aviation or Aviation Subco, as the case may be, shall deliver to such holder the
Exchangeable Share Consideration to which the holder is entitled. If neither
Aviation nor Aviation Subco exercises the Liquidation Call Right in the manner
described above on the Liquidation Date the holders of the Exchangeable Shares
will be entitled to receive in exchange therefor the
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15
Liquidation Amount otherwise payable by the Corporation in connection with the
Liquidation Event. Notwithstanding the foregoing, until such Exchangeable Share
Consideration is delivered to the holder, the holder shall be deemed to be a
holder of Exchangeable Shares for purposes of all voting rights with respect
thereto under the Voting and Exchange Trust Agreement.
ARTICLE 6
RETRACTION OF EXCHANGEABLE SHARES BY HOLDER
6.1 Subject to the exercise by Aviation or Aviation Subco, as the case may be,
of the Retraction Call Right and otherwise upon compliance with the provisions
of this Article 6, a holder of Exchangeable Shares shall be entitled at any time
to require the Corporation to redeem any or all of the Exchangeable Shares
(in multiples of five if less than all fo the Exchangeable Shares are to be
redeemed) registered in the name of such holder for an amount equal to the
Exchangeable Share Price applicable on the last Business Day prior to the
Retraction Date (the "RETRACTION PRICE"). The Corporation shall be entitled to
liquidate some of the Aviation Common Stock that would otherwise be deliverable
to the holder of Exchangeable Shares in order to fund any statutory withholding
tax obligation. To effect such redemption, the holder shall present and
surrender at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation in Schedule "A" or by
notice to the holders of Exchangeable Shares the certificate or certificates
representing the Exchangeable Shares which the holder desires to have the
Corporation redeem together with such other documents and instruments as may be
required to effect a transfer of Exchangeable Shares under the Act and the by-
laws of the Corporation and such additional documents and instruments as the
Transfer Agent may reasonably require and together with a duly executed
statement (the "RETRACTION REQUEST") in the form of Schedule "A" or in such
other form as may be acceptable to the Corporation:
(i) specifying that the holder desires to have all or any number
specified therein of the Exchangeable Shares represented by such certificate
or certificates (the "RETRACTED SHARES") redeemed by the Corporation
(in multiples of five if less than all of the Exchangeable Shares are to be
redeemed);
(ii) stating the Business Day on which the holder desires to have the
Corporation redeem the Retracted Shares (the "RETRACTION DATE") provided
that the Retraction Date shall be not less than five Business Days nor more
than 10 Business Days after the date on which the Retraction Request is
received by the Corporation and further provided that in the event that no
such Business Day is specified by the holder in the Retraction Request the
Retraction Date shall be deemed to be the tenth Business Day after the date
on which the Retraction Request is received by the Corporation; and
(iii) acknowledging the overriding right (the "RETRACTION CALL RIGHT") of
Aviation and Aviation Subco (as they shall determine) to purchase all but
not less than all of the Retracted Shares directly from the holder and that
the Retraction Request shall be deemed to be a revocable offer by the holder
to sell the Retracted Shares in accordance with the Retraction Call Right on
the terms and conditions set out in section 6.3.
6.2 Subject to the exercise by Aviation or Aviation Subco, as the case may be,
of the Retraction Call Right, upon receipt by the Corporation or the Transfer
Agent in the manner specified in section 6.1 of a certificate or certificates
representing the number of Exchangeable Shares (in multiples of five if less
than all of the Exchangeable Shares are to be redeemed) which the holder desires
to have the Corporation redeem together with a Retraction Request, and provided
that the Retraction Request is not revoked by the holder in the manner specified
in section 6.7, the Corporation shall redeem the Retracted Shares effective at
the close of business on the Retraction Date and shall cause to be delivered to
such holder the total Retraction Price with respect to such shares in accordance
with section 6.4. If only a part of the Exchangeable Shares represented by any
certificate are redeemed or purchased by Aviation or Aviation Subco, as the case
may be, pursuant to the Retraction Call Right a new certificate for the balance
of such Exchangeable Shares shall be issued to the holder at the expense of the
Corporation.
6.3 Upon receipt by the Corporation of a Retraction Request, the Corporation
shall immediately notify Aviation and Aviation Subco thereof. In order to
exercise the Retraction Call Right, Aviation or Aviation Subco, as the case may
be, must notify the Corporation in writing of its determination to do so (the
"AVIATION CALL NOTICE") within two Business Days of such notification. If
neither Aviation nor Aviation Subco notifies the Corporation within two Business
Days, the Corporation will notify the holder as soon as possible thereafter that
Aviation or Aviation Subco, as the case may be, will not exercise the Retraction
Call Right. If Aviation or Aviation Subco, as the case may be, delivers the
Aviation Call Notice within such two Business Days, and provided that the
Retraction Request is not revoked by the holder in the manner specified in
section 6.7, the Retraction Request shall thereupon be considered only to be an
offer by the holder to sell the Retracted Shares to Aviation or Aviation Subco,
as the case may be, in accordance with the Retraction Call Right. In such event
the Corporation shall not redeem the Retracted Shares and Aviation or Aviation
Subco, as the case may be, shall purchase from such holder and such holder shall
sell to Aviation or Aviation Subco, as the case may be, on the Retraction Date
the Retracted Shares for a purchase price
<PAGE>
16
(the "PURCHASE PRICE") per share equal to the Retraction Price per share. For
the purposes of completing a purchase pursuant to the Retraction Call Right,
Aviation or Aviation Subco, as the case may be, shall deposit with the Transfer
Agent, on or before the Retraction Date, the Exchangeable Share Consideration
representing the total Purchase Price. If such Exchangeable Share Consideration
has been so deposited with the Transfer Agent the closing of the purchase and
sale of the Retracted Shares pursuant to the Retraction Call Right shall be
deemed to have occurred as at the close of business on the Retraction Date and
for greater certainty no redemption by the Corporation of such Retracted Shares
shall take place on the Retraction Date. In the event that neither Aviation nor
Aviation Subco delivers an Aviation Call Notice within two Business Days or
otherwise complies with these Exchangeable Share provisions in respect thereto
and provided that the Retraction Request is not revoked by the holder in the
manner specified in section 6.7, the Corporation shall redeem the Retracted
Shares on the Retraction Date and in the manner otherwise contemplated in this
Article 6.
6.4 The Corporation or Aviation or Aviation Subco, as the case may be, shall
deliver or cause the Transfer Agent to deliver to the relevant holder, at the
address of the holder recorded in the securities register of the Corporation for
the Exchangeable Shares or at the address specified in the holder's Retraction
Request or by holding for pick up by the holder at the registered office of the
Corporation or at any office of the Transfer Agent as may be specified by the
Corporation by notice to the holders of Exchangeable Shares, the Exchangeable
Share Consideration representing the total Retraction Price or the total
Purchase Price, as the case may be, and delivery of such Exchangeable Share
Consideration to the Transfer Agent shall be deemed to be payment of and shall
satisfy and discharge all liability for the total Retraction Price or the total
Purchase Price, as the case may be, except as to any cheque included therein
which is not paid on due presentation.
6.5 On and after the close of business on the Retraction Date, the holder of the
Retracted Shares shall not be entitled to exercise any of the rights of a holder
in respect thereof other than the right to receive his proportionate part of the
total Retraction Price or the total Purchase Price, as the case may be, unless
upon presentation and surrender of certificates in accordance with the foregoing
provisions, payment of the total Retraction Price or the total Purchase Price,
as the case may be, shall not be made, in which case the rights of such holder
shall remain unaffected until the Exchangeable Share Consideration representing
the total Retraction Price or the total Purchase Price, as the case may be, has
been paid in the manner hereinbefore provided. On and after the close of
business on the Retraction Date, provided that presentation and surrender of
certificates and payment of the Exchangeable Share Consideration representing
the total Retraction Price or the total Purchase Price, as the case may be, has
been made in accordance with the foregoing provisions, the holder of the
Retracted Shares so redeemed by the Corporation or purchased by Aviation or
Aviation Subco, as the case may be, shall thereafter be considered and deemed
for all purposes to be a holder of the Aviation Common Stock delivered to it.
Notwithstanding the foregoing until payment of such Exchangeable Share
Consideration to the holder, the holder shall be deemed to be a holder of
Exchangeable Shares for purposes of all voting rights with respect thereto under
the Voting and Exchange Trust Agreement.
6.6 Notwithstanding any other provision of this Article 6, the Corporation shall
not be obligated to redeem Retracted Shares specified by a holder in a
Retraction Request to the extent that such redemption of Retracted Shares would
be contrary to liquidity or solvency requirements or other provisions of
applicable law. If the Corporation believes that on any Retraction Date it would
not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date and provided that neither Aviation nor
Aviation Subco shall have exercised the Retraction Call Right with respect to
the Retracted Shares, the Corporation shall only be obligated to redeem
Retracted Shares specified by a holder in a Retraction Request to the extent of
the maximum number that may be so redeemed (rounded down to a whole number of
shares) as would not be contrary to such provisions and shall notify the holder
at least two Business Days prior to the Retraction Date as to the number of
Retracted Shares which will not be redeemed by the Corporation. In any case in
which the redemption by the Corporation of Retracted Shares would be contrary to
liquidity or solvency requirements or other provisions of applicable law, the
Corporation shall redeem Retracted Shares in accordance with section 6.2 on a
pro rata basis and shall issue to each holder of Retracted Shares a new
certificate, at the expense of the Corporation representing the Retracted Shares
not redeemed by the Corporation pursuant to section 6.2. If the Retraction
Request is not revoked by the holder in the manner specified in section 6.7, the
holder of any such Retracted Shares not redeemed by the Corporation pursuant to
section 6.2 as a result of liquidity or solvency requirements or applicable law
shall be deemed, by giving the Retraction Request to require Aviation or
Aviation Subco, as the case may be, to purchase such Retracted Shares from such
holder on the Retraction Date or as soon as practicable thereafter on payment by
Aviation or Aviation Subco, as the case may be, to such holder of the Purchase
Price for each such Retracted Share all as more specifically provided in the
Voting and Exchange Trust Agreement and Aviation or Aviation Subco, as the case
may be, shall make such purchase.
<PAGE>
17
6.7 By notice in writing given by the holder to the Corporation before the close
of business on the Business Day immediately preceding the Retraction Date, a
holder of Retracted Shares may withdraw its Retraction Request whereupon such
Retraction Request shall be null and void and for greater certainty and without
limitation, the revocable offer constituted by the Retraction Request to sell
the Retracted Shares to Aviation or Aviation Subco, as the case may be, shall be
deemed to have been revoked.
ARTICLE 7
REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION
7.1 Subject to applicable law and if neither Aviation nor Aviation Subco
exercise the Redemption Call Right, on the Automatic Redemption Date the
Corporation shall redeem all of the then outstanding Exchangeable Shares for an
amount equal to the Exchangeable Share Price applicable on the last Business Day
prior to the Automatic Redemption Date (the "REDEMPTION PRICE"). The Corporation
shall be entitled to liquidate some of the Aviation Common Stock which would
otherwise be deliverable to the holder of Exchangeable Shares in order to fund
any statutory withholding tax obligation.
7.2 In any case of a redemption of Exchangeable Shares under this Article 7, the
Corporation or the Transfer Agent on behalf of the Corporation, at least 45 days
before an Automatic Redemption Date or before a possible Automatic Redemption
Date which may result from a failure of the holders of Exchangeable Shares to
take necessary action as described in clause (d) of the definition of Automatic
Redemption Date, shall send or cause to be sent to each holder of Exchangeable
Shares a notice in writing of the redemption or possible redemption by the
Corporation or the purchase by Aviation or Aviation Subco, as the case may be,
under the Redemption Call Right, as the case may be, of the Exchangeable Shares
held by such holder. Such notice shall set out the formula for determining the
Redemption Price or the Redemption Call Purchase Price, as the case may be, the
Automatic Redemption Date and, if applicable, particulars of the Redemption Call
Right. In the case of any notice given in connection with a possible Automatic
Redemption Date, such notice will be given contingently and will be withdrawn if
the contingency does not occur.
7.3 Aviation and Aviation Subco (as they shall determine) shall have the
overriding right (the "REDEMPTION CALL RIGHT"), notwithstanding the proposed
redemption of the Exchangeable Shares by the Corporation pursuant to section
7.1, to purchase from all but not less than all of the holders (other than
Aviation, Aviation Subco or any Subsidiary thereof) of Exchangeable Shares on
the Automatic Redemption Date all but not less than all of the Exchangeable
Shares held by each such holder on payment by Aviation or Aviation Subco, as the
case may be, to the holder of Exchangeable Shares, the Exchangeable Share Price
applicable on the last Business Day prior to the Automatic Redemption Date (the
"REDEMPTION CALL PURCHASE PRICE"). In the event of the exercise of the
Redemption Call Right by Aviation or Aviation Subco, as the case may be, each
holder shall be obligated to sell all the Exchangeable Shares held by the holder
to Aviation or Aviation Subco, as the case may be, on the Automatic Redemption
Date on payment by Aviation or Aviation Subco, as the case may be, to the holder
of Exchangeable Shares, the Redemption Call Purchase Price for each such share.
To exercise the Redemption Call Right, Aviation or Aviation Subco, as the case
may be, must notify the Corporation and the Transfer Agent in writing of their
intention to exercise such right not later than the date by which the
Corporation is required to give notice of the Automatic Redemption Date. On the
Automatic Redemption Date, if either Aviation or Aviation Subco, as the case may
be, exercises the Redemption Call Right, Aviation or Aviation Subco, as the case
may be, will purchase and the holders will sell all of the Exchangeable Shares
then outstanding for a price per share equal to the Redemption Call Purchase
Price.
7.4 For the purposes of completing the purchase of the Exchangeable Shares
pursuant to the Redemption Call Right, Aviation or Aviation Subco, as the case
may be, shall deposit with the Transfer Agent, on or before the Automatic
Redemption Date, the Exchangeable Share Consideration representing the total
Redemption Call Purchase Price. If such Exchangeable Share Consideration has
been so deposited with the Transfer Agent, on and after the Automatic Redemption
Date the rights of each holder of Exchangeable Shares will be limited to
receiving such holder's proportionate part of the total Redemption Call Purchase
Price payable by Aviation or Aviation Subco, as the case may be, upon
presentation and surrender by the holder of certificates representing the
Exchangeable Shares held by such holder and the holder shall on and after the
Automatic Redemption Date be considered and deemed for all purposes to be the
holder of the Aviation Common Stock delivered to such holder. Upon surrender to
the Transfer Agent of a certificate or certificates representing Exchangeable
Shares, together with such other documents and instruments as may be required to
effect a transfer of Exchangeable Shares under the Act and the by-laws of the
Corporation and such additional documents and instruments as the Transfer Agent
may reasonably require, the holder of such surrendered certificate or
certificates shall be entitled to receive in exchange therefor and the Transfer
Agent on behalf of Aviation or Aviation Subco, as the case may be, shall deliver
to such holder, the
<PAGE>
18
Exchangeable Share Consideration to which the holder is entitled. If neither
Aviation nor Aviation Subco exercises the Redemption Call Right in the manner
described above, on the Automatic Redemption Date the holders of the
Exchangeable Shares will be entitled to receive in exchange therefor the
Redemption Price otherwise payable by the Corporation. Notwithstanding the
foregoing, until such Exchangeable Share Consideration is delivered to the
holder, the holder shall be deemed to be a holder of Exchangeable Shares for
purposes of all voting rights with respect thereto under the Voting and Exchange
Trust Agreement.
7.5 On or after the Automatic Redemption Date and subject to the exercise by
Aviation or Aviation Subco, as the case may be, of the Redemption Call Right,
the Corporation shall cause to be delivered to the holders of the Exchangeable
Shares to be redeemed the Redemption Price for each such Exchangeable Share upon
presentation and surrender at the registered office of the Corporation or at any
office of the Transfer Agent as may be specified by the Corporation in such
notice of the certificates representing such Exchangeable Shares, together with
such other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent may reasonably
require. Payment of the total Redemption Price for such Exchangeable Shares
shall be made by delivery to each holder, at the address of the holder recorded
in the securities register or at any office of the Transfer Agent as may be
specified by the Corporation in such notice, on behalf of the Corporation of the
Exchangeable Share Consideration representing the total Redemption Price. On and
after the Automatic Redemption Date the holders of the Exchangeable Shares
called for redemption shall cease to be holders of such Exchangeable Shares and
shall not be entitled to exercise any of the rights of holders in respect
thereof other than the right to receive their proportionate part of the total
Redemption Price, unless payment of the total Redemption Price for such
Exchangeable Shares shall not be made upon presentation and surrender of
certificates in accordance with the foregoing provisions in which case the
rights of the holders shall remain unaffected until the total Redemption Price
has been paid in the manner hereinbefore provided. The Corporation shall have
the right at any time after the sending of notice of its intention to redeem the
Exchangeable Shares as aforesaid to deposit or cause to be deposited the
Exchangeable Share Consideration with respect to the Exchangeable Shares so
called for redemption or of such of the said Exchangeable Shares represented by
certificates that have not at the date of such deposit been surrendered by the
holders thereof in connection with such redemption in a custodial account or for
safe keeping in the case of non-cash items with any chartered bank or trust
company in Canada named in such notice whereupon the obligations of the
Corporation with respect thereto shall be deemed to have been satisfied in full.
Upon the later of such deposit being made and the Automatic Redemption Date, the
Exchangeable Shares in respect whereof such deposit shall have been made shall
be redeemed and the rights of the holders thereof after such deposit or
Automatic Redemption Date, as the case may be, shall be limited to receiving
their proportionate part of the total Redemption Price for such Exchangeable
Shares so deposited against presentation and surrender of the said certificates
held by them, respectively in accordance with the foregoing provisions. Upon
such payment or deposit of such Exchangeable Share Consideration and surrender
by the holder of certificates representing his Exchangeable Shares, the holders
of the Exchangeable Shares shall thereafter be considered and deemed for all
purposes to be holders of the Aviation Common Stock delivered to them.
Notwithstanding the foregoing until such payment or deposit of such Exchangeable
Share Consideration is made the holder shall be deemed to still be a holder of
Exchangeable Shares for purposes of all voting rights with respect thereto under
the Voting and Exchange Trust Agreement.
ARTICLE 8
EXCHANGE PUT RIGHT
8.1 Upon and subject to the terms and conditions contained in the Voting and
Exchange Trust Agreement:
(a) a holder of Exchangeable Shares shall have the right (the "EXCHANGE PUT
RIGHT") at any time to require Aviation or Aviation Subco (as they shall
determine) to purchase all or any part of the Exchangeable Shares of the holder
(in multiples of five if less than all of the Exchangeable Shares are to be
purchased); and
(b) upon the exercise by the holder of the Exchange Put Right, the holder shall
be required to sell to Aviation or Aviation Subco and Aviation or Aviation
Subco, as the case may be, shall be required to purchase from the holder that
number of Exchangeable Shares in respect of which the Exchange Put Right is
exercised in consideration of the payment by Aviation or Aviation Subco, as the
case may be, of the Exchangeable Share Price applicable thereto (which shall be
the Exchangeable Share Price applicable on the last Business Day prior to
receipt of notice required under section 8.2) and delivery by or on behalf of
Aviation or Aviation Subco, as the case may be, of the Exchangeable Share
Consideration representing the total applicable Exchangeable Share Price.
8.2 The Exchange Put Right provided in section 8.1 above and in Article 5 of the
Voting and Exchange Trust Agreement may be exercised at any time by notice in
writing given by the holder to and received by the Trustee (the
<PAGE>
19
date of such receipt, the "EXCHANGE PUT DATE") accompanied by presentation and
surrender of the certificates representing such Exchangeable Shares, together
with such documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Trustee may reasonably require at
the principal transfer office in Toronto, Ontario of the Trustee or at such
other office or offices of the Trustee or of other persons designated by the
Trustee for that purpose as may from time to time be maintained by the Trustee
for that purpose. Such notice may be: (i) in the form of the panel as set out on
Schedule "B", if any, on the certificates representing Exchangeable Shares; (ii)
in the form of the notice and election contained in any letter of transmittal
distributed or made available by the Corporation for that purpose; or (iii) in
other form satisfactory to the Trustee (or such other persons aforesaid). Such
notice shall also stipulate the number of Exchangeable Shares in respect of
which the right is exercised (which may not exceed the number of shares
represented by certificates surrendered to the Trustee), shall be irrevocable
unless the exchange is not completed in accordance herewith and with the Voting
and Exchange Trust Agreement and shall constitute the holder's authorization to
the Trustee (and such other persons aforesaid) to effect the exchange on behalf
of the holder.
8.3 The completion of the sale and purchase referred to in section 8.1 shall be
required to occur and Aviation or Aviation Subco, as the case may be, shall be
required to take all actions on its part necessary to permit it to occur not
later than the close of business on the third Business Day following the
Exchange Put Date.
8.4 The surrender by the holder of Exchangeable Shares under section 8.2 shall
constitute the representation, warranty and covenant of the holder that the
Exchangeable Shares so purchased are sold free and clear of any lien,
encumbrance, security interest or adverse claim or interest.
8.5 If a part only of the Exchangeable Shares represented by any certificate are
to be sold and purchased pursuant to the exercise of the Exchange Put Right, a
new certificate for the balance of such Exchangeable Shares shall be issued to
the holder at the expense of the Corporation.
8.6 Upon receipt by the Trustee of the notice, certificates and other documents
or instruments required by section 8.2, the Trustee shall deliver or cause to be
delivered, on behalf of Aviation or Aviation Subco, as the case may be, and
subject to receipt by the Trustee from Aviation or Aviation Subco, as the case
may be, of the applicable Exchangeable Share Consideration, to the relevant
holder at the address of the holder specified in the notice or by holding for
pick-up by the holder at the registered office of the Corporation or at any
office of the Trustee (or other persons aforesaid) maintained for that purpose,
the Exchangeable Share Consideration representing the total applicable
Exchangeable Share Price within the time stipulated in section 8.3. Delivery by
Aviation or Aviation, as the case may be, to the Trustee of such Exchangeable
Share Consideration shall be deemed to be payment of and shall satisfy and
discharge all liability for the total applicable Exchangeable Share Price except
as to any cheque included therein which is not paid on due presentation.
8.7 On and after the close of business on the Exchange Put Date, the holder of
the Exchangeable Shares in respect of which the Exchange Put Right is exercised
shall not be entitled to exercise any of the rights of a holder in respect
thereof other than the right to receive the total applicable Exchangeable Share
Price unless upon presentation and surrender of certificates in accordance with
the foregoing provisions payment of the Exchangeable Share Consideration shall
not be made in which case the rights of such holder shall remain unaffected
until such payment has been made. On and after the close of business on the
Exchange Put Date, provided that presentation and surrender of certificate and
payment of the Exchangeable Share Consideration has been made in accordance with
the foregoing provisions, the holder of the Exchangeable Shares so purchased by
Aviation or Aviation Subco, as the case may be, shall thereafter be considered
and deemed for all purposes to be a holder of the Aviation Common Stock
delivered to it. Notwithstanding the foregoing, until payment of the
Exchangeable Share Consideration to the holder, the holder shall be deemed to
still be a holder of Exchangeable Shares for purposes of all voting rights with
respect thereto under the Voting and Exchange Trust Agreement.
ARTICLE 9
VOTING RIGHTS
9.1 Except as required by applicable law and the provisions hereof, the holders
of the Exchangeable Shares shall not be entitled as such to receive notice of or
to attend any meeting of the shareholders of the Corporation or to vote at any
such meeting.
ARTICLE 10
AMENDMENT AND APPROVAL
<PAGE>
20
10.1 The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but except as
hereinafter provided only with the approval of the holders of the Exchangeable
Shares given as hereinafter specified.
10.2 Any approval given by the holders of the Exchangeable Shares to add to,
change or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of the
holders of the Exchangeable Shares shall be deemed to have been sufficiently
given if it shall have been given in accordance with applicable law subject to a
minimum requirement that such approval be evidenced by resolution passed by not
less than 50% (or such higher percentage as may be required by law) of the votes
cast on such resolution by persons represented in person or by proxy at a
meeting of holders of Exchangeable Shares duly called and held at which the
holders of at least 50% of the outstanding Exchangeable Shares at that time are
present or represented by proxy (excluding Exchangeable Shares beneficially
owned by Aviation or its Subsidiaries). If at any such meeting the holders of at
least 50% of the outstanding Exchangeable Shares at that time are not present or
represented by proxy within one-half hour after the time appointed for such
meeting then the meeting shall be adjourned to such date not less than 10 days
thereafter and to such time and place as may be designated by the Chairman of
such meeting. At such adjourned meeting the holders of Exchangeable Shares
present or represented by proxy thereat may transact the business for which the
meeting was originally called and a resolution passed thereat by the affirmative
vote of not less than 50% (or such higher percentage as may be required by law)
of the votes cast on such resolution by persons represented in person or by
proxy at such meeting shall constitute the approval or consent of the holders of
the Exchangeable Shares. For the purposes of this section, any spoiled votes,
illegible votes, defective votes and abstinences shall be deemed to be votes not
cast.
ARTICLE 11
RECIPROCAL CHANGES, ETC. IN RESPECT OF AVIATION COMMON STOCK
11.1 (a) Each holder of an Exchangeable Share acknowledges that the Support
Agreement provides, in part, that Aviation will not:
(i) issue or distribute Aviation Common Stock (or securities
exchangeable for or convertible into or carrying rights to acquire
shares of Aviation Common Stock) to the holders of all or
substantially all of the then outstanding Aviation Common Stock by
way of stock dividend or other distribution; or
(ii) issue or distribute rights, options or warrants to the holders of
all or substantially all of the then outstanding Aviation Common
Stock entitling them to subscribe for or to purchase shares of
Aviation Common Stock (or securities exchangeable for or
convertible into or carrying rights to acquire shares of Aviation
Common Stock); or
(iii) issue or distribute to the holders of all or substantially all of
the then outstanding shares of Aviation Common Stock; (A) shares or
securities of Aviation of any class other than Aviation Common
Stock (other than shares convertible into or exchangeable for or
carrying rights to acquire Aviation Common Stock); (B) rights,
options or warrants other than those referred to in subsection
11.1(a)(ii) above; (C) evidences of indebtedness of Aviation; or
(D) assets of Aviation;
unless one or each of the Corporation, Aviation and Aviation Subco is permitted
under applicable law to issue and distribute the economic equivalent on a per
share basis of such rights, options, warrants, securities, shares, evidences of
indebtedness or assets and the items referred to in clauses (i), (ii) and (iii)
above, as applicable, are issued or distributed simultaneously to holders of
Exchangeable Shares on the basis of the Consolidation.
(b) Each holder of an Exchangeable Share acknowledges that the Support
Agreement further provides, in part, that, subject to the Consolidation as
herein provided, Aviation will not:
(i) subdivide, redivide or change the then outstanding shares of
Aviation Common Stock into a greater number of shares of Aviation
Common Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of Aviation Common Stock into a lesser number of shares of
Aviation Common Stock; or
(iii) reclassify or otherwise change the shares of Aviation Common Stock
or effect an amalgamation, merger, reorganization or other
transaction involving or affecting the shares of Aviation Common
Stock;
unless the Corporation is permitted under applicable law to simultaneously make
the same or an economically equivalent change to or in the rights of the holders
of the Exchangeable Shares and the same or an economically equivalent change is
simultaneously made to or in the rights of the holders of the Exchangeable
Shares.
The Support Agreement further provides in part that with the exception of
certain ministerial amendments the aforesaid provisions of the Support Agreement
shall not be changed without the approval of Aviation, Aviation Subco, the
Corporation and the holders of the Exchangeable Shares given in accordance with
Article 10.
<PAGE>
21
ARTICLE 12
ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT
12.1 The Corporation shall take all such actions and do all such things as shall
be necessary or advisable to perform and comply with and to ensure performance
and compliance by Aviation and Aviation Subco with all provisions of the Support
Agreement, the Voting and Exchange Trust Agreement and Aviation's Articles of
Incorporation, as amended, applicable to the Corporation, Aviation and Aviation
Subco, respectively, in accordance with the terms thereof including without
limitation taking all such actions and doing all such things as shall be
necessary or advisable to enforce to the fullest extent possible for the direct
benefit of the Corporation all rights and benefits in favour of the Corporation
under or pursuant thereto.
12.2 The Corporation shall not propose, agree to or otherwise give effect to any
amendment to or waiver or forgiveness of its rights or obligations under the
Support Agreement, the Voting and Exchange Trust Agreement or Aviation's
Articles of Incorporation, as amended, without the approval of the holders of
the Exchangeable Shares given in accordance with Article 10 other than such
amendments, waivers and/or forgiveness as may be necessary or advisable for the
purpose of:
(a) adding to the covenants of the other party or parties to such agreement for
the protection of the Corporation or the holders of Exchangeable Shares;
(b) making such provisions or modifications not inconsistent with such agreement
or certificate as may be necessary or desirable with respect to matters or
questions arising thereunder which, in the opinion of the Board of Directors, it
may be expedient to make provided that the Board of Directors shall be of the
opinion, after consultation with counsel, that such provisions and modifications
will not be prejudicial to the interests of the holders of the Exchangeable
Shares; or
(c) making such changes in or corrections to such agreement or certificate
which, on the advice of counsel to the Corporation, are required for the purpose
of curing or correcting any ambiguity or defect or inconsistent provision or
clerical omission or mistake or manifest error contained therein provided that
the Board of Directors shall be of the opinion, after consultation with counsel,
that such changes or corrections shall not be prejudicial to the interests of
the holders of the Exchangeable Shares.
ARTICLE 13
LEGEND
13.1 The certificate evidencing the Exchangeable Shares shall contain or have
affixed thereto a legend in form and on terms approved by the Board of Directors
with respect to the Support Agreement and the Voting and Exchange Trust
Agreement (including the provisions with respect to the voting rights and
exchange provisions thereunder).
ARTICLE 14
MISCELLANEOUS
14.1 Any notice, request or other communication to be given to the Corporation
by a holder of Exchangeable Shares shall be in writing and shall be valid and
effective if given by mail (postage prepaid) or by telecopy or by delivery to
the registered office of the Corporation and addressed to the attention of the
Chief Executive Officer of the Corporation. Any such notice, request or other
communication, if given by mail, telecopy or delivery, shall be deemed to have
been given and received upon actual receipt thereof by the Corporation.
14.2 Any presentation and surrender by a holder of Exchangeable Shares to the
Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with a Liquidation Event or the retraction, redemption or
exchange of Exchangeable Shares shall be made by registered mail (postage
prepaid) or by delivery to the registered office of the Corporation or to such
office of the Transfer Agent as may be specified by the Corporation, in each
case addressed to the attention of the Chief Executive Officer of the
Corporation. Any such presentation and surrender of certificates shall only be
deemed to have been made and to be effective upon actual receipt thereof by the
Corporation or the Transfer Agent, as the case may be, and the method of any
such presentation and surrender of certificates shall be at the sole risk of the
holder.
14.3 Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the securities register of the
Corporation or in the event of the address of any such holder not being so
recorded then at the last known address of such holder. Any such notice, request
or other communication, if given by mail, shall be deemed to have been given and
received on the fifth Business Day following the date of mailing and, if given
by delivery, shall be deemed to have been given and received on the date of
delivery. Accidental failure or omission to give any notice, request or other
communication
<PAGE>
22
to one or more holders of Exchangeable Shares shall not invalidate or otherwise
alter or affect any action or proceeding to be or intended to be taken by the
Corporation.
14.4 For greater certainty, the Corporation shall not be required for any
purpose under these share provisions to recognize or take account of persons who
are not so recorded in such securities register.
14.5 All Exchangeable Shares acquired by the Corporation upon the redemption,
retraction, exchange or purchase shall be cancelled.
<PAGE>
23
PROVISIONS ATTACHING TO THE COMMON SHARE
The common shares ("COMMON SHARES") in the capital of the Corporation shall have
attached thereto the following rights, privileges, restrictions and conditions:
DIVIDENDS
Subject to the prior rights of the Exchangeable Shares and any other shares
ranking prior to the Common Shares, the holders of the Common Shares shall be
entitled to receive such dividends as may be declared by the Board of Directors
out of property of the Corporation legally available therefor.
LIQUIDATION
Subject to the prior rights of the Exchangeable Shares and any other shares
ranking prior to the Common Shares, the holders of the Common Shares shall, upon
any liquidation, dissolution or winding-up of the Corporation, whether voluntary
or involuntary, or other distribution of the assets of the Corporation for the
purpose of winding-up its affairs, be entitled to receive the remaining property
and assets of the Corporation.
VOTING
The holders of the Common Shares shall be entitled to receive notice of and to
attend all meetings of shareholders (other than separate meetings of other
classes or series of shares) and the Common Shares shall be entitled to one
vote.
RESTRICTIONS
So long as any of the Exchangeable Shares of the Corporation are outstanding the
Corporation shall not at any time without, but may at any time with, the
approval of the Board of Directors and of the holders of the Common Shares issue
any further Exchangeable Shares of the Corporation except as specifically
required in accordance with the rights, privileges, restrictions and conditions
attaching to the Exchangeable Shares.
PROVISIONS ATTACHING TO THE CLASS X PREFERRED SHARE
The Class X Preferred Share in the capital of the Corporation shall have
attached thereto the following rights, privileges, restrictions and conditions:
DIVIDENDS
Subject to the prior rights of the holders of any shares ranking senior to the
Class X Preferred Share with respect to priority in the payment of dividends,
the holder of the Class X Preferred Share shall be entitled to receive dividends
and the Corporation shall pay dividends thereon, as and when declared by the
board of directors of the Corporation as cumulative dividends in the amount of
$1.00 per share per annum payable annually on December 31 in each year in
arrears. Such dividends shall accrue from the date of issue to and including the
date to which the computation of dividends is to be made. A cheque for the
amount of the dividend less any required deduction shall be mailed by first
class mail to the address of the registered holder thereof. Notwithstanding the
foregoing, no dividend shall be payable if the Class X Preferred Share is
cancelled on the same day it is issued.
DISSOLUTION
In the event of the liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary or any other distribution of assets of the
Corporation among its shareholders for the purpose of winding-up its affairs,
subject to the prior rights of the holders of any shares ranking senior to the
Class X Preferred Share with respect to priority in the distribution of assets
upon liquidation, dissolution or winding-up, the holder of the Class X Preferred
Share shall be entitled to receive an amount equal to the stated capital in
respect of the Class X Preferred Share and dividends remaining unpaid, including
all cumulative dividends, whether or not declared. After payment to the holder
of the Class X Preferred Share of such amounts, such holder shall not be
entitled to share in any further distribution of the assets of the Corporation.
VOTING RIGHTS
Except where specifically provided by the Act, the holder of the Class X
Preferred Share shall not be entitled to receive notice of or to attend meetings
of the shareholders of the Corporation and shall not be entitled to vote at any
meeting of
<PAGE>
24
shareholders of the Corporation.
<PAGE>
--------------------------------------------------------------------------------
SCHEDULE "*"
STOCK TRANSFER POWER
Please insert social insurance number or tax payer identification number of
------------------------------------
------------------------------------
transferee, if applicable
For value received, the undersigned hereby sells, assigns and transfers unto
(Please print or typewrite name and address of transferee)
shares represented by this certificate,
and does hereby irrevocably constitute and appoint attorney
to transfer the said shares on the register of the within named Corporation with
full power of substitution in the premises.
(Date) (Signature of Shareholder) (Guarantee of Signature)
--------------------------------------------------------------------------------
<PAGE>
2
SCHEDULE "A"
NOTICE OF RETRACTION
To: travelbyus.com ltd. (the "CORPORATION"), Aviation Group, Inc.
("AVIATION") and Aviation Group Canada Ltd. ("AVIATION SUBCO")
c/o Montreal Trust Company of Canada (the "TRANSFER AGENT")
Pursuant to Article 6 of the Share Provisions of the Corporation the undersigned
hereby notifies the Corporation that, subject to the Retraction Call Right
referred to below, the undersigned desires to have the Corporation redeem on the
Retraction Date in accordance with Article 6 of the Share Provisions:
[ ] all shares represented by this certificate; or
[ ] shares only, in multiples of five;
The undersigned hereby notifies the Corporation that the Retraction Date shall
be:
NOTE: The Retraction Date must be a Business Day and must not be less than five
Business Days nor more than 10 Business Days after the date upon which this
notice and the accompanying shares are received by the Corporation. In the event
that no such business day is correctly specified above the Retraction Date shall
be deemed to be the tenth Business Day after the date on which this notice is
received by the Corporation.
The undersigned acknowledges the Retraction Call Right of Aviation and Aviation
Subco (as they shall determine) to purchase all but not less than all of the
Retracted Shares from the undersigned and that this notice shall be deemed to be
a revocable offer by the undersigned to sell the Retracted Shares to Aviation or
Aviation Subco, as the case may be, in accordance with the Retraction Call Right
on the Retraction Date for a price per share equal to the Retraction Price and
on the other terms and conditions set out in section 6.3 of the Share Provisions
of the Corporation. If Aviation and Aviation Subco determine not to exercise the
Retraction Call Right, the Corporation will notify the undersigned of such fact
as soon as possible. This notice of retraction and offer to sell the Retracted
Shares to Aviation or Aviation Subco, as the case may be, may be revoked and
withdrawn by the undersigned by notice in writing given to the Corporation at
any time before the close of business on the Business Day immediately preceding
the Retraction Date.
The undersigned acknowledges that if, as a result of liquidity or solvency
requirements or other provisions of applicable law, the Corporation is unable to
redeem all Retracted Shares, an Insolvency Event (as defined in the Voting and
Exchange Trust Agreement) shall be deemed to have occurred and the undersigned
shall be deemed to have exercised the Exchange Right (as defined in the Voting
and Exchange Trust Agreement) so as to require Aviation or Aviation Subco, as
the case may be, to purchase the unredeemed Retracted Shares.
The undersigned hereby represents and warrants to the Corporation, Aviation and
Aviation Subco that the undersigned:
[ ] is (select one)
[ ] is not
a non-resident of Canada for purposes of the Income Tax Act (Canada). THE
UNDERSIGNED ACKNOWLEDGES THAT IN THE ABSENCE OF A REPRESENTATION THAT THE
UNDERSIGNED IS NOT A NON-RESIDENT OF CANADA, ANY APPLICABLE WITHHOLDING ON
ACCOUNT OF CANADIAN TAX WILL BE MADE FROM THE AMOUNTS PAYABLE HEREUNDER TO THE
UNDERSIGNED.
The undersigned hereby represents and warrants to the Corporation, Aviation and
Aviation Subco that the undersigned has full power and authority to give this
notice and that the acquirer will acquire good title to the shares represented
by this certificate to be acquired, free and clear of all liens, claims,
encumbrances, security interests and adverse claims and interests.
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check box if the securities and any cheque(s) or other non-cash
assets resulting from the retraction or purchase of the Retracted Shares
are to be held for pick-up by the shareholder at the principal transfer
office of the Transfer Agent in Toronto, Ontario, failing which the
securities and any cheque(s) or other non-cash assets will be mailed to
the last address of the shareholder as it appears on the register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may require, must
be deposited with the Transfer Agent at its principal transfer office in
Toronto, Ontario. The securities and any cheque(s) or other non-cash assets
resulting from the retraction or purchase of the Retracted Shares will be issued
and registered in and made payable to, or transferred into respectively the name
of
<PAGE>
3
the shareholder as it appears on the register of the Corporation and the
securities, cheque(s) or other non-cash assets resulting from such retraction or
purchase will be delivered to such shareholder as indicated above, unless the
form appearing immediately below is duly completed and all exigible transfer
taxes are paid.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
<S> <C>
Name of Person in Whose Name Securities or Cheque(s) or Other Non-Cash Date
Assets Are to Be Registered, Issued or Delivered (please print)
--------------------------------------------------------------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
--------------------------------------------------------------------------------------------------------
City - Province Signature Guaranteed By
--------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: If the notice of retraction is for less than all of the shares represented
by this certificate, a certificate representing the remaining shares will be
issued and registered in the name of the shareholder as it appears on the
register of the Corporation, unless the Share Transfer Power hereon is duly
completed in respect of such shares.
U.S. Residents/Citizens must provide their Taxpayer Identification Number here:
<PAGE>
4
SCHEDULE "B*"
NOTICE OF EXERCISE OF EXCHANGE RIGHT UPON INSOLVENCY EVENT
To: travelbyus.com ltd. (the "CORPORATION"), Aviation Group, Inc.
("AVIATION"), Aviation Group Canada Ltd. ("AVIATION SUBCO") and
Montreal Trust Company of Canada (the "TRUSTEE")
In accordance with, and subject to, the Voting and Exchange Trust Agreement, the
undersigned hereby instructs the Trustee to exercise the Exchange Right (as
defined in the Voting and Exchange Trust Agreement) upon the occurrence and
during continuance of an Insolvency Event (as defined in the Voting and Exchange
Trust Agreement) so as to require Aviation or Aviation Subco (as they shall
determine) to purchase from the undersigned:
[ ] all shares represented by this certificate; or
[ ] shares only.
The undersigned hereby represents and warrants to the Corporation, Aviation and
Aviation Subco and that the undersigned:
[ ] is (select one)
[ ] is not
a non-resident of Canada for purposes of the Income Tax Act (Canada). THE
UNDERSIGNED ACKNOWLEDGES THAT IN THE ABSENCE OF A REPRESENTATION THAT THE
UNDERSIGNED IS NOT A NON-RESIDENT OF CANADA, ANY APPLICABLE WITHHOLDING ON
ACCOUNT OF CANADIAN TAX WILL BE MADE FROM THE AMOUNTS PAYABLE HEREUNDER TO THE
UNDERSIGNED.
The undersigned hereby represents and warrants to the Corporation, Aviation and
Aviation Subco, as the case may be, that the undersigned has full power and
authority to give this notice and that Aviation or Aviation Subco, as the case
may be, will acquire good title to the shares represented by this certificate to
be acquired, free and clear of all liens, claims, encumbrances, security
interests and adverse claims and interests.
(Date) (Signature of Shareholder) (Guarantee of Signature)
[ ] Please check box if the securities and any cheque(s) or other non-cash
assets resulting from the exercise of the Exchange Right are to be held
for pick-up by the shareholder at the principal transfer office of
Montreal Trust Company of Canada in Toronto, Ontario failing which the
securities and any cheque(s) or other non-cash assets will be mailed to
the last address of the shareholder as it appears on the register.
NOTE: This panel must be completed and this certificate, together with such
additional documents as the Transfer Agent and the Corporation may require, must
be deposited with the Transfer Agent at its principal transfer office in
Toronto, Ontario. The securities and any cheque(s) or other non-cash assets
resulting from the exercise of the Exchange Right will be issued and registered
in and made payable to or transferred into respectively the name of the
shareholder as it appears on the register of the Corporation and the securities
and cheque(s) or other non-cash assets resulting from such exchange will be
delivered to such shareholder as indicated above unless the form appearing
immediately below is duly completed and all exigible transfer taxes are paid.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
<S> <C>
Name of Person in Whose Name Securities or Cheque(s) or Other Non-Cash Date
Assets Are to Be Registered, Issued or Delivered (please print)
-----------------------------------------------------------------------------------------------------------
Street Address or P.O. Box Signature of Shareholder
-----------------------------------------------------------------------------------------------------------
City - Province Signature Guaranteed By
-----------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: If the election to exchange is for less than all of the shares represented
by this certificate, a certificate representing the remaining shares will be
issued and registered in the name of the shareholder as it appears on the
register of the Corporation, unless the Stock Transfer Power hereon is duly
completed in respect of such shares.
U.S. Residents/Citizens must provide their Taxpayer Identification Number here:
<PAGE>
NOTICE: THE SIGNATURE TO THE STOCK TRANSFER POWER, NOTICE OF RETRACTION OR
NOTICE OF EXERCISE OF EXCHANGE RIGHT MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THIS CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK, TRUST
COMPANY, MEMBER OF A RECOGNIZED STOCK EXCHANGE IN CANADA OR A MEMBER OF THE
SECURITIES TRANSFER ASSOCIATION MEDALLION (STAMP) PROGRAM.
<PAGE>
Exhibit "B"
LIST OF COMPANY SECURITIES
<PAGE>
APPENDIX D
FORM OF VOTING AND EXCHANGE TRUST AGREEMENT
THIS VOTING AND EXCHANGE TRUST AGREEMENT is entered into as of _________, by and
among Aviation Group, Inc. a corporation incorporated under laws of the State of
Texas ("PARENT"), Aviation Group Canada Ltd., a corporation incorporated under
the laws of the Province of Ontario ("AVIATION SUBCO"), travelbyus.com Ltd. a
corporation incorporated under the laws of the Province of Ontario (the
"COMPANY"), and Montreal Trust Company of Canada, a trust company incorporated
under the laws of Canada (the "TRUSTEE").
WHEREAS pursuant to an Arrangement Agreement dated May 3, 2000 (the "ARRANGEMENT
AGREEMENT") by and among the Company, Parent and Aviation Subco (collectively,
the "TRANSACTION PARTIES"), the Transaction Parties agreed that at or prior to
the Effective Time (as defined in the Arrangement Agreement), the Transaction
Parties and the Trustee would execute and deliver a Voting and Exchange Trust
Agreement on terms and conditions satisfactory to the parties thereto;
WHEREAS all capitalized terms when not otherwise defined in this Agreement shall
have the respective meanings ascribed thereto in the Arrangement Agreement;
WHEREAS pursuant to the arrangement effected by the Articles of Arrangement
dated ___________ (the "ARTICLES OF ARRANGEMENT") filed pursuant to the Business
Corporations Act (Ontario), each issued and outstanding common share (a "COMMON
SHARE") of the Company (other than those Common Shares held by dissenters who
have exercised their dissent rights and who are ultimately entitled to be paid
the fair value for such Common Shares and other than those Common Shares held by
Parent, Aviation Subco or any of their respective Subsidiaries) was exchanged
for one Exchangeable Share of the Company. (individually an "EXCHANGEABLE SHARE"
and collectively, the "EXCHANGEABLE SHARES");
WHEREAS the Articles of Arrangement set forth the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares (collectively,
the "EXCHANGEABLE SHARE PROVISIONS");
WHEREAS Parent is to provide voting rights to each holder from time to time of
Exchangeable Shares, such voting rights per Exchangeable Share to be equivalent
to the voting rights per Parent Common Stock;
WHEREAS Parent is to grant to and in favor of the holders from time to time of
Exchangeable Shares certain rights to require Parent to purchase all or any part
of the Exchangeable Shares held by the holders;
WHEREAS the parties desire to make appropriate provision and to establish a
procedure (i) whereby voting rights in Parent shall be exercisable from time to
time by holders of Exchangeable Shares by and through the Trustee which will
hold legal title to one share of Special Voting Stock of Parent, par value
US$0.01 (the "SPECIAL VOTING STOCK") to which voting rights attach for the
benefit of such holders; and (ii) whereby the rights to require Parent to
purchase Exchangeable Shares from the holders thereof shall be exercisable by
such holders from time to time by and through the Trustee, which will hold legal
title to such rights for the benefit of such holders; and
WHEREAS these recitals and all statements of fact in this Agreement are made
by the Transaction Parties and not by the Trustee;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties hereto do
hereby covenant and agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
<PAGE>
2
1.1 DEFINITIONS. In this Agreement the following terms shall have the
following meanings:
"AGGREGATE EQUIVALENT VOTE AMOUNT" means with respect to any matter, proposition
or question on which holders of Parent Common Stock are entitled to vote,
consent or otherwise act, the product of; (a) the number of Exchangeable Shares
then issued and outstanding and held by Holders (as hereinafter defined);
multiplied by (b) the number of votes to which a holder of one share of Parent
Common Stock is entitled with respect to such matter, proposition or question.
"APPLICABLE LAWS" has the meaning ascribed thereto in section 5.11.
"ARRANGEMENT" has the meaning ascribed thereto in the preambles to this
Agreement.
"ARRANGEMENT AGREEMENT has the meaning ascribed thereto in the preambles to this
Agreement.
"ARTICLES OF ARRANGEMENT" has the meaning ascribed thereto in the preambles to
this Agreement.
"AUTOMATIC EXCHANGE RIGHTS" means the obligation of Parent or Aviation Subco (as
they shall determine) to effect the automatic exchange of Parent Common Stock
for Exchangeable Shares pursuant to section 5.13.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"BUSINESS DAY" has the meaning ascribed thereto in the Arrangement Agreement.
"COMMON SHARES" has the meaning ascribed thereto in the preambles to this
Agreement.
"EQUIVALENT VOTE AMOUNT" means with respect any matter, proposition or question
on which holders of Parent Common Stock are entitled to vote, consent or
otherwise act, the number of votes to which a holder of one share of Parent
Common Stock is entitled with respect to such matter, proposition or question.
"EXCHANGE PUT RIGHT" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"EXCHANGE RIGHT" has the meaning ascribed thereto in section 5.1.
"EXCHANGEABLE SHARE CONSIDERATION" has the meaning ascribed thereto in the
Exchangeable Share Provisions.
"EXCHANGEABLE SHARE PRICE" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"EXCHANGEABLE SHARE PROVISIONS" has the meaning ascribed thereto in the
preambles to this Agreement.
"EXCHANGEABLE SHARES" has the meaning ascribed thereto in the preambles to this
Agreement.
"HOLDER VOTES" has the meaning ascribed thereto in section 4.3.
"HOLDERS" means the registered holders from time to time of Exchangeable Shares,
other than Parent and its Subsidiaries.
"INSOLVENCY EVENT" means the institution by the Company of any proceeding to be
adjudicated a bankrupt or insolvent or to be dissolved or wound-up or the
consent of the Company to the institution of bankruptcy, insolvency, dissolution
or winding-up proceedings or the filing of a petition, answer or consent seeking
dissolution or winding-up under any bankruptcy, insolvency or analogous laws
including without limitation, the Companies Creditors' Arrangement Act (Canada)
and the Bankruptcy and Insolvency Act (Canada) and the failure by the Company to
contest in good faith any such proceedings commenced in respect of the Company
within 30 days of becoming aware thereof or the consent by the Company to the
filing of any such petition or to the appointment of a receiver or the making by
the Company of a general assignment for the benefit of creditors or the
admission in writing by the Company of its inability to pay its debts
<PAGE>
3
generally as they become due or the Company not being permitted, pursuant to
liquidity or solvency requirements of Applicable Laws, to redeem any Retracted
Shares pursuant to section 6.6 of the Exchangeable Share Provisions.
"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"LIQUIDATION EVENT" has the meaning ascribed thereto in subsection 5.13(b).
"LIQUIDATION EVENT EFFECTIVE TIME" has the meaning ascribed thereto in
subsection 5.13(c).
"LIST" has the meaning ascribed thereto in section 4.7.
"OBCA" means the Business Corporations Act (Ontario).
"OFFICER'S CERTIFICATE" means with respect to Parent, Aviation Subco or the
Company, as the case may be, a certificate signed by the President, Chairman or
any Vice-President of Parent, Aviation Subco or the Company, as the case may be.
"PARENT COMMON STOCK" means a share of common stock of Parent, par value
US$0.01.
"PARENT CONSENT" has the meaning ascribed thereto in section 4.3.
"PARENT MEETING" has the meaning ascribed thereto in section 4.3.
"PARENT SUCCESSOR" has the meaning ascribed thereto in subsection 11.1(a).
"PERSON" includes an individual, body corporate, partnership, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator and other legal representative.
"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"RETRACTED SHARES" has the meaning ascribed thereto in section 5.8.
"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the Exchangeable
Share Provisions.
"SPECIAL VOTING STOCK" has the meaning ascribed thereto in the preambles to this
Agreement.
"SUBSIDIARY" has the meaning ascribed thereto in the Exchangeable Share
Provisions.
"SUPPORT AGREEMENT" means that certain support agreement made as of even date
hereof among the Transaction Parties.
"TRUST" means the trust created by this Agreement.
"TRUST ESTATE" means the Special Voting Stock, any other securities, the
Exchange Put Right, the Exchange Right, the Automatic Exchange Rights and any
money or other property which may be held by the Trustee from time to time
pursuant to this Agreement.
"VOTING RIGHTS" means the voting rights attached to the Special Voting Stock.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this
Agreement into Articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement. Unless otherwise indicated, all references to
an "ARTICLE" or "SECTION" followed by a number and/or a letter refer to the
specified Article or section of this Agreement. The terms "THIS AGREEMENT",
"HEREOF",
<PAGE>
4
"HEREIN" and "HEREUNDER" and similar expressions refer to this Agreement and not
to any particular Article, section or other portion hereof and include any
agreement or instrument supplementary or ancillary hereto.
1.3 NUMBER, GENDER, ETC. In this Agreement, words importing the singular
number only shall include the plural and vice versa. Words importing the use of
any gender shall include all genders.
1.4 DATE FOR ANY ACTION. If any date on which any action is required to be
taken under this Agreement is not a Business Day such action shall be required
to be taken on the next succeeding Business Day.
ARTICLE 2
PURPOSE OF AGREEMENT
2.1 ESTABLISHMENT OF TRUST. The purpose of this Agreement is to
create the Trust for the benefit of the Holders as herein provided. The Trustee
will hold the Special Voting Stock to enable the Trustee to exercise the Voting
Rights. The Trustee will hold the Exchange Put Right, the Exchange Right and the
Automatic Exchange Rights in order to enable the Trustee to exercise such
rights.
ARTICLE 3
SPECIAL VOTING STOCK
3.1 ISSUANCE AND OWNERSHIP OF THE SPECIAL VOTING STOCK. Parent hereby issues
to and deposits with the Trustee the Special Voting Stock to be hereafter held
of record by the Trustee as trustee for and on behalf of and for the use and
benefit of the Holders and in accordance with the provisions of this Agreement.
Parent hereby acknowledges receipt from the Trustee as trustee for and on behalf
of the Holders of good and valuable consideration (and the adequacy thereof) for
the issuance of the Special Voting Stock by Parent to the Trustee. During the
term of the Trust and subject to the terms and conditions of this Agreement the
Trustee shall possess and be vested with full legal ownership of the Special
Voting Stock and shall be entitled to exercise all of the rights and powers of
an owner with respect to the Special Voting Stock, provided that:
(a) the Trustee shall hold the Special Voting Stock and the legal
title thereto as trustee solely for the use and benefit of the
Holders in accordance with the provisions of this Agreement; and
(b) except as specifically authorized by this Agreement, the Trustee
shall have no power or authority to sell, transfer, vote or
otherwise deal with the Special Voting Stock and the Special
Voting Stock shall not be used or disposed of by the Trustee for
any purpose other than the purposes for which the Trust is
created pursuant to this Agreement.
3.2 LEGENDED SHARE CERTIFICATES. The Company will cause each certificate
representing Exchangeable Shares to bear an appropriate legend notifying the
Holders of their right to instruct the Trustee as to exercise of the Voting
Rights with respect to the Exchangeable Shares held by the Holders.
3.3 SAFE KEEPING OF CERTIFICATE. The certificate representing the Special
Voting Stock shall at all times be held in safe keeping by the Trustee.
ARTICLE 4
EXERCISE OF VOTING RIGHTS
4.1 VOTING RIGHTS. As the holder of record of the Special Voting Stock, the
Trustee shall be entitled to all of the Voting Rights including the right to
consent to or to vote in person or by proxy the Special Voting Stock on any
matter, question or proposition whatsoever that may properly come before the
stockholders of Parent at a Parent Meeting or in
<PAGE>
5
connection with a Parent Consent. The Voting Rights shall be and shall remain
vested in and exercised by the Trustee. Subject to section 7.15:
(a) the Trustee shall exercise the Voting Rights only on the basis
of instructions received pursuant to this Article 4 from Holders
entitled to instruct the Trustee as to the voting thereof at the
time at which a Parent Consent is sought or a Parent Meeting is
held; and
(b) to the extent that no instructions are received from a Holder
with respect to the Voting Rights to which such Holder is
entitled the Trustee shall not exercise or permit the exercise
of such Holder's Voting Rights.
The Trustee acknowledges that the holder of the Special Voting Stock and the
holders of Parent Common Stock shall vote or consent as a single class in
respect of each matter, question or proposition to be voted on at a Parent
Meeting or being consented to in connection with a Parent Consent, it being
further acknowledged that in certain circumstances the holder of the Special
Voting Stock shall additionally have a further vote as a separate class or
series in respect of any particular matter, question or proposition.
4.2 CLASS MEETINGS OF SPECIAL VOTING STOCK. Provided that the holder of the
Special Voting Stock is also entitled to vote with the holders of Parent Common
Stock as a single class in accordance with the terms of the Special Voting
Stock, with respect to any vote proposed for consideration by the holder of the
Special Voting Stock voting separately as a series or class, either at a Parent
Meeting (as defined below) or by Parent Consent (as defined below), other than a
vote which, if passed, would affect the Voting Rights of each Holder, the
President of Parent shall instruct the Trustee as to the manner in which the
votes attached to the Special Voting Stock shall be cast in such class or series
vote. When the holder of the Special Voting Stock is not entitled to vote with
the holders of Parent Common Stock as a single class in accordance with the
terms of the Special Voting Stock, the Holders may instruct the Trustee as to
the exercise of the votes attached to the Special Voting Stock in such class or
series vote.
4.3 NUMBER OF VOTES. With respect to all meetings of stockholders of Parent
at which holders of Parent Common Stock are entitled to vote (a "PARENT
MEETING") and with respect to all written consents sought by Parent from its
stockholders including the holders of Parent Common Stock (a "PARENT CONSENT"),
each Holder shall be entitled to instruct the Trustee to cast and exercise, in
the manner instructed, a number of votes (the "HOLDER VOTES") equal to the
Equivalent Vote Amount for each Exchangeable Share owned of record by such
Holder on the record date established by Parent or by applicable law for such
Parent Meeting or Parent Consent, as the case may be, in respect of each matter,
question or proposition to be voted on at such Parent Meeting or to be consented
to in connection with such Parent Consent.
4.4 MAILINGS TO SHAREHOLDERS. With respect to each Parent Meeting and Parent
Consent, the Trustee will mail or cause to be mailed (or will otherwise
communicate in the same manner as Parent utilizes in communications to holders
of Parent Common Stock) to each of the Holders named in the List on the same day
as the initial mailing or notice or other communication with respect thereto is
commenced or given by Parent to its stockholders:
(a) a copy of such notice together with any related materials to be
provided to stockholders of Parent;
(b) a statement that such Holder is entitled to instruct the Trustee
as to the exercise of the Holder Votes with respect to such
Parent Meeting or Parent Consent, as the case may be, or
pursuant to section 4.8, to attend such Parent Meeting and to
exercise personally the Holder Votes thereat;
(c) a statement as to the manner in which such instructions may be
given to the Trustee including an express indication that
instructions may be given to the Trustee to give:
(i) a proxy to such Holder or his designee to exercise
personally the Holder Votes; or
<PAGE>
6
(ii) a proxy to a designated agent or other representative of
the management of Parent to exercise such Holder Votes;
(d) a statement that if no such instructions are received from the
Holder, the Holder Votes to which such Holder is entitled will
not be exercised;
(e) a form of direction whereby the Holder may so direct and
instruct the Trustee as contemplated herein; and
(f) a statement as to the time and date by which such instructions
must be received by the Trustee in order to be binding upon it,
which in the case of a Parent Meeting shall not be earlier than
the close of business on the second Business Day prior to such
meeting and the method for revoking or amending such
instructions.
The materials referred to above are to be provided by Parent to the Trustee but
shall be subject to review and comment by the Trustee. For the purpose of
determining Holder Votes to which a Holder is entitled in respect of any such
Parent Meeting or Parent Consent, the number of Exchangeable Shares owned of
record by the Holder shall be determined at the close of business on the record
date established by Parent or by applicable law for the purposes of determining
stockholders entitled to vote at such Parent Meeting or to give written consent
in connection with such Parent Consent. Parent will notify the Trustee of any
decision of the board of directors of Parent with respect to the calling of any
such Parent Meeting or the seeking of any such Parent Consent. Parent shall
provide all necessary information and materials to the Trustee in each case
promptly and in any event in sufficient time to enable the Trustee to perform
its obligations contemplated in this section 4.4.
4.5 COPIES OF STOCKHOLDER INFORMATION. Parent will deliver to the Trustee
copies of all proxy materials (including notices of Parent Meetings but
excluding proxies to vote Parent Common Stock) information statements, reports
(including without limitation. all interim and annual financial statements) and
other written communications that are to be distributed from time to time to
holders of Parent Common Stock in sufficient quantities and in sufficient time
so as to enable the Trustee to send those materials to each Holder at the same
time as such materials are first sent to holders of Parent Common Stock. The
Trustee will mail or otherwise send to each Holder, at the expense of Parent,
copies of all such materials (and all materials specifically directed to the
Holders or to the Trustee for the benefit of the Holders by Parent) received by
the Trustee from Parent at the same time as such materials are first sent to
holders of Parent Common Stock. The Trustee will also make available for
inspection by any Holder at the Trustee's principal trust office in the City of
Toronto all proxy materials, information statements, reports and other written
communications that are:
(a) received by the Trustee as the registered holder of the Special
Voting Stock and made available by Parent generally to holders
of Parent Common Stock; or
(b) specifically directed to the Holders or to the Trustee for the
benefit of the Holders by Parent.
4.6 OTHER MATERIALS. As soon as reasonably practicable after receipt by
Parent or any stockholder of Parent (if such receipt is known by Parent) of any
material sent or given generally to the holders of Parent Common Stock by or on
behalf of a third Person, including without limitation dissident proxy and
information circulars and related information and material and tender and
exchange offer circulars and related information and material, Parent shall use
its reasonable efforts to obtain and deliver to the Trustee copies thereof in
sufficient quantities so as to enable the Trustee to forward such material
unless the same has been provided directly to Holders by such third Person to
each Holder as soon as possible thereafter. As soon as practicable after receipt
thereof the Trustee will mail or otherwise send to each Holder, at the expense
of Parent, copies of all such materials received by the Trustee from Parent. The
Trustee will also make copies of all such materials available for inspection by
any Holder at the Trustee's principal trust office in the City of Toronto.
<PAGE>
7
4.7 LIST OF PERSONS ENTITLED TO VOTE. The Company shall; (a) prior to each
annual and special Parent Meeting or the seeking of any Parent Consent; and (b)
forthwith upon each request made at any time by the Trustee in writing; prepare
or cause to be prepared a list (a "LIST") of the names and addresses of the
Holders arranged in alphabetical order and showing the number of Exchangeable
Shares held of record by each such Holder, in each case at the close of business
on the date specified by the Trustee in such request or in the case of a List
prepared in connection with a Parent Meeting or a Parent Consent, at the close
of business on the record date established by Parent or pursuant to applicable
law for determining the holders of Parent Common Stock entitled to receive
notice of and/or to vote at such Parent Meeting or to give consent in connection
with such Parent Consent. Each such List shall be delivered to the Trustee
promptly after receipt by the Company of such request or the record date for
such meeting or seeking of consent, as the case may be and in any event within
sufficient time as to enable the Trustee to perform its obligations under this
Agreement. Parent shall give the Company written notice (with a copy to the
Trustee) of the calling of any Parent Meeting or the seeking of any Parent
Consent, together with the record dates therefor, sufficiently prior to the date
of the calling of such meeting or seeking of such consent so as to enable the
Company to perform its obligations under this section 4.7.
4.8 ENTITLEMENT TO DIRECT VOTES. Any Holder named in a List prepared in
connection with any Parent Meeting or any Parent Consent will be entitled; (a)
to instruct the Trustee in the manner described in section 4.3 with respect to
the exercise of the Holder Votes to which such Holder is entitled; or (b) to
attend such meeting and personally to exercise thereat (or to exercise with
respect to any written consent), as the proxy of the Trustee, the Holder Votes
to which such Holder is entitled.
4.9 VOTING BY TRUSTEES AND ATTENDANCE OF TRUSTEE REPRESENTATIVE AT MEETING.
(a) In connection with each Parent Meeting and Parent Consent, the
Trustee shall exercise, either in person or by proxy, in
accordance with the instructions received from a Holder pursuant
to section 4.3, the Holder Votes as to which such Holder is
entitled to direct the vote (or any lesser number thereof as may
be set forth in the instructions). Such written instructions
must be received by the Trustee from the Holder prior to the
time and date fixed by the Trustee for receipt of such
instructions in the notice given by the Trustee to the Holder
pursuant to section 4.4.
(b) The Trustee shall cause a representative who is empowered by the
Trustee to sign and deliver, on behalf of the Trustee, proxies
for Voting Rights to attend each Parent Meeting. Upon submission
by a Holder (or its designee) of identification satisfactory to
the Trustee's representative and at the Holder's request such
representative shall sign and deliver to such Holder (or its
designee) a proxy to exercise personally the Holder Votes as to
which such Holder is otherwise entitled hereunder to direct the
vote, if such Holder either:
(i) has not previously given the Trustee instructions
pursuant to section 4.3 in respect of such meeting; or
(ii) submits to the Trustee's representative written
revocation of any such previous instructions.
At such meeting the Holder exercising Holder Votes shall have the same rights as
the Trustee to speak at the meeting in respect of any matter, question or
proposition to vote by way of ballot at the meeting in respect of any matter,
question or proposition and to vote at such meeting by way of a show of hands in
respect of any matter, question or proposition.
4.10 DISTRIBUTION OF WRITTEN MATERIALS. Any written materials to be
distributed by the Trustee to the Holders pursuant to this Agreement shall be
sent by mail (or otherwise communicated in the same manner as Parent utilizes in
communications to holders of Parent Common Stock) to each Holder at its address
as shown on the books of the Company. The Company shall provide or cause to be
provided to the Trustee for this purpose on a timely basis and without charge or
other expense:
(a) a current List; and
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8
(b) at the request of the Trustee, mailing labels to enable the
Trustee to carry out its duties hereunder.
4.11 TERMINATION OF VOTING RIGHTS. Except as otherwise provided herein or in
the Exchangeable Share Provisions, the rights of a Holder with respect to the
Holder Votes exercisable in respect of the Exchangeable Shares held by such
Holder, including the right to instruct the Trustee as to the voting of or to
vote personally such Holder Votes, shall be deemed to be surrendered by the
Holder to Parent and such Holder Votes and the Voting Rights represented thereby
shall cease immediately upon the delivery by such Holder to the Trustee of the
certificates representing such Exchangeable Shares in connection with the
exercise by the Holder of the Exchange Put Right or the Exchange Right or the
occurrence of the Automatic Exchange Right as specified in Article 5 (unless in
any case neither Parent nor Aviation Subco shall have delivered the Exchangeable
Share Consideration deliverable in exchange therefor to the Trustee for delivery
to the Holders) or upon the redemption of Exchangeable Shares pursuant to the
Exchangeable Share Provisions or upon the effective date of the liquidation,
dissolution or winding-up of the Company or any other distribution of the assets
of the Company among its shareholders for the purpose of winding up its affairs
pursuant to the Exchangeable Share Provisions or upon the purchase of
Exchangeable Shares from the holder thereof by Parent or Aviation Subco, as the
case may be, pursuant to the exercise by Parent or Aviation Subco, as the case
may be, of the Retraction Call Right, the Redemption Call Right or the
Liquidation Call Right.
ARTICLE 5
EXCHANGE RIGHT AND AUTOMATIC EXCHANGE
5.1 GRANT AND OWNERSHIP OF THE EXCHANGE RIGHT. The Company hereby grants to
the Trustee as trustee for and on behalf of and for the use and benefit of the
Holders; (a) the Exchange Put Right; and (b) the right (the "EXCHANGE RIGHT")
upon the occurrence and during the continuance of an Insolvency Event, to
require Parent or Aviation Subco (as they shall determine) to purchase from each
Holder all or any part of the Exchangeable Shares held by the Holders, all in
accordance with the provisions of this Agreement and the Exchangeable Share
Provisions. Parent and Aviation Subco hereby acknowledge receipt from the
Trustee as trustee for and on behalf of the Holders of good and valuable
consideration (and the adequacy thereof) for the grant of the Exchange Put Right
and the Exchange Right by Parent and Aviation Subco to the Trustee. During the
term of the Trust and subject to the terms and conditions of this Agreement, the
Trustee shall possess and be vested with full legal ownership of the Exchange
Put Right and the Exchange Right and shall be entitled to exercise all of the
rights and powers of an owner with respect to the Exchange Put Right and the
Exchange Right, provided that:
(a) the Trustee shall hold the Exchange Put Right and the Exchange
Right and the legal title thereto as trustee solely for the use
and benefit of the Holders in accordance with the provisions of
this Agreement; and
(b) except as specifically authorized by this Agreement, the Trustee
shall have no power or authority to exercise or otherwise deal
in or with the Exchange Put Right or the Exchange Right and the
Trustee shall not exercise any such rights for any purpose other
than the purposes for which this Trust is created pursuant to
this Agreement.
5.2 GRANT AND OWNERSHIP OF THE AUTOMATIC EXCHANGE RIGHTS. Parent and
Aviation Subco hereby grant to the Trustee for and on behalf of and for the use
and benefit of the Holders, the Automatic Exchange Rights in accordance with the
provisions of this Agreement. Parent and Aviation Subco hereby acknowledge
receipt from the Trustee for and on behalf of the Holders of good and valuable
consideration (and the adequacy thereof) for the grant of the Automatic Exchange
Rights by Parent and Aviation Subco to the Trustee. During the term of the Trust
and subject to the terms and conditions of this Agreement, the Trustee shall
possess and be vested with full legal ownership of the Automatic Exchange Rights
and shall be entitled to exercise all of the rights and powers of an owner with
respect to the Automatic Exchange Rights, provided that:
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9
(a) the Trustee shall hold the Automatic Exchange Rights and the
legal title thereto as trustee solely for the use and benefit of
the Holders in accordance with the provisions of this Agreement;
and
(b) except as specifically authorized by this Agreement, the Trustee
shall have no power or authority to exercise or otherwise deal
in or with the Automatic Exchange Rights and the Trustee shall
not exercise such rights for any purpose other than the purposes
for which this Trust is created pursuant to this Agreement.
5.3 LEGENDED SHARE CERTIFICATES. The Company will cause each
certificate representing Exchangeable Shares to bear an appropriate legend
notifying the Holders of:
(a) their right to instruct the Trustee with respect to the exercise
of the Exchange Put Right and the Exchange Right in respect of
the Exchangeable Shares held by a Holder; and
(b) the Automatic Exchange Rights.
5.4 GENERAL EXERCISE OF EXCHANGE PUT RIGHT AND EXCHANGE RIGHT. The Exchange
Put Right and the Exchange Right shall be and remain vested in and exercised by
the Trustee. Subject to section 7.15, the Trustee shall exercise the Exchange
Put Right and the Exchange Right only on the basis of instructions received
pursuant to this Article 5 from Holders entitled to instruct the Trustee as to
the exercise thereof. To the extent that no instructions are received from a
Holder with respect to the Exchange Put Right and the Exchange Right, the
Trustee shall not exercise or permit the exercise of the Exchange Put Right and
the Exchange Right.
5.5 PURCHASE PRICE. The purchase price payable by Parent or Aviation Subco,
as the case may be, for each Exchangeable Share to be purchased by Parent or
Aviation Subco, as the case may be; (a) under the Exchange Put Right shall be
the amount determined under the Exchangeable Share Provisions; and (b) under the
Exchange Right shall be an amount equal to the Exchangeable Share Price on the
last Business Day prior to the day of closing of the purchase and sale of such
Exchangeable Share under the Exchange Right. In connection with each exercise of
the Exchange Right, Parent or Aviation Subco, as the case may be, will provide
to the Trustee an Officer's Certificate setting forth the calculation of the
applicable Exchangeable Share Price for each Exchangeable Share. The applicable
Exchangeable Share Price for each such Exchangeable Share so purchased may be
satisfied only by the Parent or Aviation Subco, as the case may be, issuing and
delivering or causing to be delivered to the Trustee, on behalf of the relevant
Holder, the applicable Exchangeable Share Consideration representing the total
applicable Exchangeable Share Price (less any amounts withheld pursuant to
section 5.14).
5.6 EXERCISE INSTRUCTIONS. Subject to the terms and conditions set forth
herein, upon the occurrence and during the continuance of an Insolvency Event,
the Holder shall be entitled to instruct the Trustee to exercise the Exchange
Right with respect to all or any part of the Exchangeable Shares registered in
the name of such Holder on the books of the Company. To cause the exercise of
the Exchange Right by the Trustee, the Holder shall deliver to the Trustee, in
person or by certified or registered mail, at its principal trust office in
Toronto, Ontario or at such other places in Canada as the Trustee may from time
to time designate by written notice to the Holders, the certificates
representing the Exchangeable Shares which such Holder desires Parent or
Aviation Subco, as the case may be, to purchase, duly endorsed in blank and
accompanied by such other documents and instruments as may be required to effect
a transfer of Exchangeable Shares under the OBCA and the by-laws of the Company
and such additional documents and instruments as the Trustee may reasonably
require, together with:
(a) a duly completed form of notice of exercise of the Exchange
Right, contained on the reverse of or attached to the
Exchangeable Share certificates, stating:
(i) that the Holder thereby instructs the Trustee to
exercise the Exchange Right so as to require Parent or
Aviation Subco, as the case may be, to purchase from the
Holder the number of Exchangeable Shares specified
therein,
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10
(ii) that such Holder has good title to and owns all such
Exchangeable Shares to be acquired by Parent or Aviation
Subco, as the case may be, free and clear of all liens,
claims, encumbrances, security interests and adverse
claims or interests,
(iii) the names in which the certificates representing Parent
Common Stock issuable in connection with the exercise of
the Exchange Right are to be issued, and
(iv) the names and addresses of the persons to whom the
Exchangeable Share Consideration should be delivered;
and
(b) payment (or evidence satisfactory to the Trustee and the Company
of payment) of the taxes (if any) payable as contemplated by
section 5.9.
If only a part of the Exchangeable Shares represented by any certificate or
certificates delivered to the Trustee are to be purchased by Parent or Aviation
Subco, as the case may be, under the Exchange Right a new certificate for the
balance of such Exchangeable Shares shall be issued to the Holder at the expense
of the Company.
5.7 DELIVERY OF EXCHANGEABLE SHARE CONSIDERATION; EFFECT OF
EXERCISE. Promptly after receipt of the certificates duly endorsed for transfer
to Parent or Aviation Subco, as the case may be, representing the Exchangeable
Shares which the Holder desires Parent or Aviation Subco, as the case may be, to
purchase under the Exchange Put Right or the Exchange Right, together with such
documents and instruments of transfer and a duly completed form of notice of
exercise of the Exchange Put Right or the Exchange Right (and payment of taxes,
if any, payable as contemplated by section 5.9), the Trustee shall notify the
Company of its receipt of the same, which notice to the Company shall constitute
exercise of the Exchange Put Right or the Exchange Right by the Trustee on
behalf of the Holder of such Exchangeable Shares and Parent shall immediately
thereafter deliver or cause to be delivered to the Trustee, for delivery to the
Holder of such Exchangeable Shares (or to such other persons, if any, properly
designated by such Holder), the Exchangeable Share Consideration deliverable in
connection with the exercise of the Exchange Put Right or the Exchange Right
(less any amounts withheld pursuant to section 5.14) provided that no such
delivery shall be made unless and until the Holder requesting the same shall
have paid (or shall have provided evidence satisfactory to the Trustee and the
Company of the payment of) the taxes (if any) payable as contemplated by section
5.9. Immediately upon the giving of notice by the Trustee to the Company of the
exercise of the Exchange Put Right or the Exchange Right, as provided in this
section 5.7; (a) the closing of the transaction of purchase and sale
contemplated by the Exchange Put Right or the Exchange Right shall be deemed to
have occurred; (b) Parent or Aviation Subco, as the case may be, shall be
required to take all action necessary to permit it to occur including delivery
to the Trustee of the relevant Exchangeable Share Consideration no later than
the close of business on the fifth Business Day following the receipt by the
Trustee of notice, certificates and other documents as aforesaid; and (c) the
Holder of such Exchangeable Shares; (i) shall be deemed to have transferred to
Parent all of its right, title and interest in and to the Exchangeable Shares
and the related interest in the Trust Estate; (ii) shall cease to be a holder of
such Exchangeable Shares; and (iii) shall not be entitled to exercise any of the
rights of a holder in respect thereof other than the right to receive its
proportionate part of the total purchase price therefor unless such Exchangeable
Share Consideration is not delivered by Parent or Aviation Subco, as the case
may be, to the Trustee by the date specified above in which case the rights of
the Holder shall remain unaffected until such Exchangeable Share Consideration
is delivered by Parent or Aviation Subco, as the case may be, and any cheque
included therein is paid. Concurrently with such Holder ceasing to be a holder
of Exchangeable Shares, the Holder shall be considered and deemed for all
purposes to be the holder of Parent Common Stock delivered to it pursuant to the
Exchange Put Right or the Exchange Right. Notwithstanding the foregoing, until
the Exchangeable Share Consideration is delivered to the Holder, the Holder
shall be deemed to still be a holder of the sold Exchangeable Shares for
purposes of voting rights with respect thereto under this Agreement.
5.8 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION. In the event that a
Holder has exercised its rights under the Exchangeable Share Provisions to
require the Company to redeem any or all of the Exchangeable Shares held by it
(the "RETRACTED SHARES") and is notified by the Company pursuant to the
Exchangeable Share Provisions that the
<PAGE>
11
Company will not be permitted as a result of liquidity or solvency requirements
of applicable law to redeem all such Retracted Shares, subject to receipt by the
Trustee of written notice to that effect from the Company and provided that
Parent or Aviation Subco, as the case may be, shall not have exercised the
Retraction Call Right with respect to the Retracted Shares and that the Holder
has not revoked the retraction request delivered by the Holder to the Company
pursuant to the Exchangeable Share Provisions, the retraction request will
constitute and will be deemed to constitute notice from the Holder to the
Trustee instructing the Trustee to exercise the Exchange Right with respect to
those Retracted Shares which the Company is unable to redeem. In any such event
the Company shall immediately notify the Trustee of such prohibition against the
Company's redeeming all of the Retracted Shares and shall immediately forward or
cause to be forwarded to the Trustee all relevant materials delivered by the
Holder to the Company or to the transfer agent of the Exchangeable Shares
(including without limitation a copy of the retraction request delivered
pursuant to the Exchangeable Share Provisions) in connection with such proposed
redemption of the Retracted Shares and the Trustee will thereupon exercise the
Exchange Right with respect to the Retracted Shares which the Company is not
permitted to redeem and will require Parent or Aviation Subco, as the case may
be, to purchase such shares in accordance with the provisions of this Article 5.
5.9 STAMP OR OTHER TRANSFER TAXES. Upon any sale of Exchangeable Shares to
Parent or Aviation Subco, as the case may be, pursuant to the Exchange Put Right
or the Exchange Right or any sale of Exchangeable Shares to Parent or Aviation
Subco, as the case may be, pursuant to the Automatic Exchange Rights, the share
certificate or certificates representing Parent Common Stock to be delivered in
connection with the payment of the total purchase price therefor shall be issued
in the name of the Holder of the Exchangeable Shares so sold or in such names as
such Holder may otherwise direct in writing without charge to the holder of the
Exchangeable Shares so sold provided that such Holder:
(a) shall pay (and none of Parent, Aviation Subco, the Company or
the Trustee shall be required to pay) any documentary, stamp,
transfer or other taxes that may be payable in respect of any
transfer involved in the issuance or delivery of such shares to
a person other than such Holder; or
(b) shall have established to the satisfaction of the Trustee or
Parent or Aviation Subco, as the case may be (in the case of the
sale of Exchangeable Shares to Parent or Aviation Subco, as the
case may be, pursuant to the Automatic Exchange Rights) and the
Company that such taxes, if any, have been paid.
5.10 NOTICE OF INSOLVENCY EVENT. As soon as practicable following the
occurrence of an Insolvency Event or any event which with the giving of notice
or the passage of time or both would be an Insolvency Event, the Company shall
give written notice thereof to the Trustee. As soon as practicable after
receiving notice from the Company of the occurrence of an Insolvency Event the
Trustee will mail to each Holder, at the expense of the Parent, a notice of such
Insolvency Event in the form provided by Parent or Aviation Subco, as the case
may be, which notice shall contain a brief statement of the right of the Holders
with respect to the Exchange Right.
5.11 QUALIFICATION OF PARENT COMMON STOCK. Parent covenants that if any
Parent Common Stock is to be issued and delivered pursuant to the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights require registration
or qualification with or approval of or the filing of any document including any
prospectus or similar document, the taking of any proceeding with or the
obtaining of any order, ruling or consent from any governmental or regulatory
authority under any Canadian or United States federal, provincial or state law
or regulation or pursuant to the rules and regulations of any regulatory
authority or the fulfillment of any other legal requirement (collectively the
"APPLICABLE LAWS") before such shares may be issued by Parent and delivered by
Parent or Aviation Subco, as the case may be, to the initial holder thereof or
in order that such shares may be freely traded thereafter (other than
contractual restrictions and any restrictions on transfer by reason of a holder
being a "CONTROL PERSON" of Parent for purposes of Canadian federal or
provincial securities law or an "AFFILIATE" of Parent or the Company for
purposes of United States federal or state securities law), Parent will in good
faith expeditiously take all such actions and do all such things as are
necessary to cause such Parent Common Stock to be and remain duly registered,
qualified or approved. Parent represents and warrants that it has in good faith
taken all actions and has done all things as are necessary under Applicable Laws
as they exist on the date hereof to cause the shares of Parent Common Stock to
be issued and delivered pursuant to the Exchange Put Right, the Exchange Right
and the Automatic Exchange Rights and to be freely tradeable thereafter (other
than
<PAGE>
12
contractual restrictions and restrictions on transfer by reason of a holder
being a "CONTROL PERSON" of Parent for the purposes of Canadian federal and
provincial securities law or an "AFFILIATE" of Parent or the Company for the
purposes of United States federal or state securities law). Parent will in good
faith expeditiously take all such actions and do all such things as are
necessary to cause all Parent Common Stock to be delivered pursuant to the
Exchange Put Right, the Exchange Right or the Automatic Exchange Rights to be
listed, quoted or posted for trading on all stock exchanges and quotation
systems on which such shares are listed, quoted or posted for trading at such
time.
5.12 PARENT COMMON STOCK. Parent hereby represents, warrants and covenants
that the Parent Common Stock issuable and deliverable as described herein will
be duly authorized and validly issued as fully paid and non-assessable.
5.13 AUTOMATIC EXCHANGE ON LIQUIDATION OF PARENT.
(a) Parent will give the Trustee written notice of each of the
following events at the time set forth below:
(i) in the event of any determination by the board of
directors of Parent to institute voluntary liquidation,
dissolution or winding-up proceedings with respect to
Parent or to effect any other distribution of assets of
Parent among its stockholders for the purpose of winding
up its affairs, at least 60 days prior to the proposed
effective date of such liquidation, dissolution,
winding-up or other distribution; and
(ii) as soon as practicable following the earlier of: (A)
receipt by Parent of notice of; or (B) Parent otherwise
becoming aware of any threatened claim, suit, petition
or other proceedings with respect to the involuntary
liquidation, dissolution or winding-up of Parent or to
effect any other distribution of assets of Parent among
its stockholders for the purpose of winding up its
affairs, in each case where Parent has failed to contest
in good faith any such proceeding commenced in respect
of Parent within 30 days of becoming aware thereof.
(b) Immediately following receipt by the Trustee from Parent of
notice of any event (a "LIQUIDATION EVENT") contemplated by
section 5.13(a)(i) or (ii), the Trustee will give notice thereof
to the Holders. Such notice shall include a brief description of
the automatic exchange of Exchangeable Shares for Parent Common
Stock provided for in section 5.13(c).
(c) To enable the Holders to participate on a pro rata basis with
the holders of Parent Common Stock in the distribution of assets
of Parent in connection with a Liquidation Event, immediately
prior to the effective time (the "LIQUIDATION EVENT EFFECTIVE
TIME") of a Liquidation Event, all of the then outstanding
Exchangeable Shares shall be automatically exchanged for Parent
Common Stock. To effect such automatic exchange, Parent shall be
deemed to have purchased each Exchangeable Share outstanding
immediately prior to the Liquidation Event Effective Time and
held by Holders and each Holder shall be deemed to have sold the
Exchangeable Shares held by it at such time, for a purchase
price per share equal to the Exchangeable Share Price applicable
at such time. In connection with such automatic exchange, Parent
will provide to the Trustee an Officer's Certificate setting
forth the calculation of the purchase price for each
Exchangeable Share.
(d) The closing of the transaction of purchase and sale contemplated
by section 5.13(c) shall be deemed to have occurred immediately
prior to the Liquidation Event Effective Time and each Holder of
Exchangeable Shares shall be deemed to have transferred to
Parent all of the Holder's right, title and interest in and to
such Exchangeable Shares and the related interest in the Trust
Estate and shall cease to be a holder of such Exchangeable
Shares and Parent shall deliver to the Holder the Exchangeable
Share Consideration deliverable upon the automatic exchange of
Exchangeable Shares (less any amounts withheld pursuant to
section 5.14). Concurrently with such Holder ceasing to be a
holder of Exchangeable Shares, the Holder shall be considered
and deemed for all purposes to be the holder of Parent Common
Stock delivered to it pursuant to the automatic exchange of
Exchangeable Shares for
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13
Parent Common Stock and the certificates held by the Holder
previously representing the Exchangeable Shares exchanged by the
Holder with Parent pursuant to such automatic exchange shall
thereafter be deemed to represent Parent Common Stock delivered
to the Holder pursuant to such automatic exchange.
(e) Upon the request of a Holder and the surrender by the Holder of
Exchangeable Share certificates deemed to represent Parent
Common Stock, duly endorsed in blank and accompanied by such
instruments of transfer as Parent may reasonably require, Parent
shall deliver or cause to be delivered to the Holder
certificates representing the shares of Parent Common Stock of
which the Holder is the holder. Notwithstanding the foregoing,
until each Holder is actually entered on the register of holders
of Parent Common Stock, such Holder shall be deemed to still be
a holder of the transferred Exchangeable Shares for purposes of
all voting rights with respect thereto under this Agreement.
5.14 WITHHOLDING RIGHTS. Parent, Aviation Subco, the Company and the Trustee
shall be entitled to deduct and withhold from any consideration otherwise
payable under this Agreement to any holder of Exchangeable Shares or shares of
Parent Common Stock such amounts as Parent, Aviation Subco, the Company or the
Trustee is required or permitted to deduct and withhold with respect to such
payment under the Income Tax Act (Canada), the United States Internal Revenue
Code of 1986 or any provision of provincial, state, local or foreign tax law, in
each case as amended or succeeded. To the extent that amounts are so withheld,
such withheld amounts shall be treated for all purposes as having been paid to
the holder of the shares in respect of which such deduction and withholding was
made, provided that such withheld amounts are actually remitted to the
appropriate taxing authority. To the extent that the amount so required or
permitted to be deducted or withheld from any payment to a holder exceeds the
cash portion of the consideration otherwise payable to the holder, Parent,
Aviation Subco and the Trustee are hereby authorized to sell or otherwise
dispose of such portion of the consideration as is necessary to provide
sufficient funds to Parent, Aviation Subco or the Trustee, as the case may be,
to enable it to comply with such deduction or withholding requirement and
Parent, Aviation Subco or the Trustee shall notify the holder thereof and shall
remit to such holder any unapplied balance of the net proceeds of such sale.
ARTICLE 6
RESTRICTIONS ON ISSUANCE OF SPECIAL VOTING STOCK
During the term of this Agreement, without the consent of the Holders at the
relevant time of the Exchangeable Shares given in accordance with the
Exchangeable Share Provisions, Parent will not issue any Parent Special Voting
Stock in addition to the Special Voting Stock.
ARTICLE 7
CONCERNING THE TRUSTEE
7.1 POWERS AND DUTIES OF THE TRUSTEE. The rights, powers and authorities of
the Trustee under this Agreement, in its capacity as trustee of the Trust, shall
include:
(a) receipt and deposit of the Special Voting Stock from Parent as
trustee for and on behalf of the Holders in accordance with the
provisions of this Agreement;
(b) granting proxies and distributing materials to Holders as
provided in this Agreement;
(c) voting the Holder Votes in accordance with the provisions of
this Agreement;
(d) receiving the Exchange Put Right and the Exchange Right from
Parent and Aviation Subco and receiving the Automatic Exchange
Rights from Parent and Aviation Subco as trustee for and on
behalf of the Holders in accordance with the provisions of this
Agreement;
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14
(e) exercising the Exchange Put Right and the Exchange Right and
enforcing the benefit of the Automatic Exchange Rights, in each
case in accordance with the provisions of this Agreement and in
connection therewith receiving from Holders, Exchangeable Shares
and other requisite documents and distributing to such Holders
Parent Common Stock and cheques, if any, to which such Holders
are entitled upon the exercise of the Exchange Put Right and the
Exchange Right or pursuant to the Automatic Exchange Rights, as
the case may be;
(f) holding title to the Trust Estate;
(g) investing any moneys forming, from time to time, a part of the
Trust Estate as provided in this Agreement;
(h) taking action at the direction of a Holder or Holders to enforce
the obligations of Parent, Aviation Subco and the Company under
this Agreement; and
(i) taking such other actions and doing such other things as are
specifically provided in this Agreement.
In the exercise of such rights, powers and authorities the Trustee shall have
and is granted such incidental and additional rights, powers and authority not
in conflict with any of the provisions of this Agreement as the Trustee, acting
in good faith and in the reasonable exercise of its discretion, may deem
necessary, appropriate or desirable to effect the purpose of the Trust. Any
exercise of such discretionary rights, powers and authorities by the Trustee
shall be final, conclusive and binding upon all persons. The Trustee in
exercising its rights, powers, duties and authorities hereunder shall act
honestly and in good faith with a view to the best interests of the Holders and
shall exercise the care, diligence and skill that a reasonably prudent trustee
would exercise in comparable circumstances.
7.2 NO CONFLICT OF INTEREST. The Trustee represents to the Company, Parent
and Aviation Subco that at the date of execution and delivery of this Agreement
there exists no material conflict of interest in the role of the Trustee as a
fiduciary hereunder and the role of the Trustee in any other capacity. Within 60
days after the Trustee becomes aware that such a material conflict of interest
exists the Trustee shall either eliminate such material conflict of interest or
resign in the manner and with the effect specified in Article 10 hereof. If
notwithstanding the foregoing provisions of this section 7.2 the Trustee has
such a material conflict of interest, the validity and enforceability of this
Agreement shall not be affected in any manner whatsoever by reason only of the
existence of such material conflict of interest. If the Trustee contravenes the
foregoing provisions of this section 7.2, any interested party may apply to the
Ontario Court of Justice (General Division) for an order that the Trustee be
replaced as trustee hereunder.
7.3 DEALINGS WITH TRANSFER AGENTS, REGISTRARS, ETC. The Company, Parent and
Aviation Subco irrevocably authorize the Trustee, from time to time, to:
(a) consult, communicate and otherwise deal with the respective
registrars and transfer agents and with any such subsequent
registrar or transfer agent, of the Exchangeable Shares and
Parent Common Stock; and
(b) requisition, from time to time: (i) from any such registrar or
transfer agent any information readily available from the
records maintained by it which the Trustee may reasonably
require for the discharge of its duties and responsibilities
under this Agreement; and (ii) from the transfer agent of Parent
Common Stock and any subsequent transfer agent of such shares to
complete the exercise from time to time of the Exchange Put
Right, the Exchange Right and the Automatic Exchange Rights in
the manner specified in Article 5 hereof, the share certificates
issuable upon such exercise.
The Company, Parent and Aviation Subco irrevocably authorize their respective
registrars and transfer agents to comply with all such requests. Parent and
Aviation Subco covenant that they will supply their transfer agent with duly
executed
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15
share certificates for the purpose of completing the exercise from time to time
of the Exchange Put Right, the Exchange Right and the Automatic Exchange Rights
in each case pursuant to Article 5 hereof.
7.4 BOOKS AND RECORDS. The Trustee shall keep available for inspection by
Parent, Aviation Subco and the Company, at the Trustee's principal trust office
in Toronto, Ontario, correct and complete books and records of account relating
to the Trustee's actions under this Agreement, including without limitation, all
information relating to mailings and instructions to and from Holders and all
transactions pursuant to the Voting Rights, the Exchange Put Right, the Exchange
Right and the Automatic Exchange Rights for the term of this Agreement. On or
before December 15, 2000 and on or before December 15 in every year thereafter
so long as the Special Voting Stock is on deposit with the Trustee, the Trustee
shall transmit to Parent, Aviation Subco and the Company a brief report, dated
as of the preceding with respect to:
(a) property and funds comprising the Trust Estate as of that date;
(b) the number of exercises of the Exchange Put Right and the
Exchange Right, if any and the aggregate number of Exchangeable
Shares received by the Trustee on behalf of Holders in
consideration of the issue and delivery by Parent or Aviation
Subco, as the case may be, of Parent Common Stock in connection
with the Exchange Put Right and the Exchange Right, during the
calendar year ended on such date; and
(c) all other actions taken by the Trustee in the performance of its
duties under this Agreement which it had not previously
reported.
7.5 INCOME TAX RETURNS AND REPORTS. To the extent necessary the Trustee
shall prepare and file on behalf of the Trust appropriate United States and
Canadian income tax returns and any other returns or reports as may be required
by applicable law or pursuant to the rules and regulations of any securities
exchange or other trading system through which the Exchangeable Shares are
traded.
7.6 INDEMNIFICATION PRIOR TO CERTAIN ACTIONS BY TRUSTEE. The Trustee shall
exercise any or all of the rights, duties, powers or authorities vested in it by
this Agreement at the request, order or direction of any Holder upon such Holder
furnishing to the Trustee reasonable funding, security and indemnity against the
costs, expenses and liabilities which may be incurred by the Trustee therein or
thereby. No Holder shall be obligated to furnish to the Trustee any such
funding, security or indemnity in connection with the exercise by the Trustee of
any of its rights, duties, powers and authorities with respect to the Special
Voting Stock pursuant to Article 4, subject to section 7.15 and with respect to
the Exchange Put Right and the Exchange Right pursuant to Article 5, subject to
section 7.15 and with respect to the Automatic Exchange Rights pursuant to
Article 5. None of the provisions contained in this Agreement shall require the
Trustee to expend or risk its own funds or otherwise incur financial liability
in the exercise of any of its rights, powers, duties or authorities unless
funded, given funds, security and indemnified as aforesaid.
7.7 ACTIONS BY HOLDERS. No Holder shall have the right to institute any
action, suit or proceeding or to exercise any other remedy authorized by this
Agreement for the purpose of enforcing any of its rights or for the execution of
any trust or power hereunder unless the Holder has requested the Trustee to take
or institute such action, suit or proceeding and has furnished the Trustee with
the funding, security and indemnity referred to in section 7.6 and the Trustee
shall have failed to act within a reasonable time thereafter. In such case, but
not otherwise, the Holder shall be entitled to take proceedings in any court of
competent jurisdiction such as the Trustee might have taken, it being understood
and intended that no one or more Holders shall have any right in any manner
whatsoever to affect, disturb or prejudice the rights hereby created by any such
action or to enforce any right hereunder or under the Voting Rights, the
Exchange Put Right, the Exchange Right or the Automatic Exchange Rights, except
subject to the conditions and in the manner herein provided and that all powers
and trusts hereunder shall be exercised and all proceedings at law shall be
instituted, had and maintained by the Trustee, except only as herein provided
and in any event for the equal benefit of all Holders.
<PAGE>
16
7.8 RELIANCE UPON DECLARATIONS. The Trustee shall not be considered to be in
contravention of any of its rights, powers, duties and authorities hereunder if,
when required, the Trustee acts and relies in good faith upon lists, mailing
labels, notices, statutory declarations, certificates, opinions, reports or
other papers or documents furnished pursuant to the provisions hereof or
required by the Trustee to be furnished to it in the exercise of its rights,
powers, duties and authorities hereunder and such lists, mailing labels,
notices, statutory declarations, certificates, opinions, reports or other papers
or documents comply with the provisions of section 7.9, if applicable and with
any other applicable provisions of this Agreement.
7.9 EVIDENCE AND AUTHORITY TO TRUSTEE. The Company, Parent and Aviation
Subco shall furnish to the Trustee evidence of compliance with the conditions
provided for in this Agreement relating to any action or step required or
permitted to be taken by either of them or the Trustee under this Agreement or
as a result of any obligation imposed under this Agreement, including without
limitation in respect of the Voting Rights or the Exchange Put Right, the
Exchange Right or the Automatic Exchange Rights and the taking of any other
action to be taken by the Trustee at the request of or on the application of the
Company, Parent or Aviation Subco forthwith if and when:
(a) such evidence is required by any other section of this Agreement
to be furnished to the Trustee in accordance with the terms of
this section 7.9; or
(b) in the exercise of its rights, powers, duties and authorities
under this Agreement, the Trustee gives the Company, Parent or
Aviation Subco written notice requiring it to furnish such
evidence in relation to any particular action or obligation
specified in such notice.
Such evidence shall consist of an Officer's Certificate of the Company, Parent
or Aviation Subco or a statutory declaration or a certificate made by Persons
entitled to sign an Officer's Certificate stating that any such condition has
been complied with in accordance with the terms of this Agreement. Whenever such
evidence relates to a matter other than the Voting Rights or the Exchange Put
Right, the Exchange Right or the Automatic Exchange Rights and except as
otherwise specifically provided herein such evidence may consist of a report or
opinion of any solicitor, auditor, accountant, appraiser, valuer, engineer or
other expert or any other person whose qualifications give authority to a
statement made by such Person provided that if such report or opinion is
furnished by a director, officer or employee of the Company, Parent or Aviation
Subco, it shall be in the form of an Officer's Certificate or a statutory
declaration. Each statutory declaration, Officer's Certificate, opinion or
report furnished to the Trustee as evidence of compliance with a condition
provided for in this Agreement shall include a statement by the Person giving
the evidence:
(a) declaring that such Person has read and understands the
provisions of this Agreement relating to the condition in
question;
(b) describing the nature and scope of the examination or
investigation upon which such Person based the statutory
declaration, Officer's Certificate, opinion or report; and
(c) declaring that such Person has made such examination or
investigation as such Person believes is necessary to enable
such. Person to make the statements or give the opinions
contained or expressed therein.
7.10 EXPERTS, ADVISERS AND AGENTS. The Trustee may: (a) in relation to these
presents act and rely on the opinion or advice of or information obtained from
or prepared by any solicitor, auditor, accountant, appraiser, valuer, engineer
or other expert, whether retained by the Trustee, the Company, Parent or
Aviation Subco or otherwise and may employ such assistants as may be necessary
to the proper determination and discharge of its powers and duties and
determination of its rights hereunder and may pay proper and reasonable
compensation for all such legal and other advice or assistance as aforesaid; and
(b) employ such agents and other assistants as it may reasonably require for the
proper determination and discharge of its powers and duties hereunder and may
pay reasonable remuneration for all services performed for it (and shall be
entitled to receive reasonable remuneration for all services performed by it) in
the discharge of the trusts
<PAGE>
17
hereof and compensation for all disbursements, costs and expenses made or
incurred by it in the determination and discharge of its duties hereunder and in
the management of the Trust.
7.11 INVESTMENT OF MONEYS HELD BY TRUSTEE. Unless otherwise provided in this
Agreement, any moneys held by or on behalf of the Trustee which under the terms
of this Agreement may or ought to be invested or which may be on deposit with
the Trustee or which may be in the hands of the Trustee, may be invested and
reinvested in the name or under the control of the Trustee in securities in
which under the laws of the Province of Ontario, trustees are authorized to
invest trust moneys provided such securities are stated to mature within two
years after their purchase by the Trustee and the Trustee shall so invest such
moneys on the written direction of the Company. Pending the investment of any
moneys as hereinbefore provided such moneys may be deposited in the name of the
Trustee in any chartered bank in Canada or with the consent of the Company in
the deposit department of the Trustee or any other loan or trust company
authorized to accept deposits under the laws of Canada or any province thereof
at the rate of interest then current on similar deposits.
7.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee shall not be required
to give any bond or security in respect of the execution of the trusts, rights,
duties, powers and authorities of this Agreement or otherwise in respect of the
premises.
7.13 TRUSTEE NOT BOUND TO ACT ON REQUEST. Except as otherwise specifically
provided in this Agreement, the Trustee shall not be bound to act in accordance
with any direction or request of the Company, Parent or Aviation Subco or of the
directors thereof until a duly authenticated copy of the instrument or
resolution containing such direction or request shall have been delivered to the
Trustee and the Trustee shall be empowered to act and rely upon any such copy
purporting to be authenticated and believed by the Trustee to be genuine.
7.14 AUTHORITY TO CARRY ON BUSINESS. The Trustee represents to the Company,
Parent and Aviation Subco that at the date of execution and delivery by it of
this Agreement, it is authorized to carry on the business of a trust company in
each of the Provinces of Canada but if, notwithstanding the provisions of this
section 7.14, the Trustee ceases to be so authorized to carry on business, the
validity and enforceability of this Agreement and the Voting Rights, the
Exchange Put Right, the Exchange Right and the Automatic Exchange Rights shall
not be affected in any manner whatsoever by reason only of such event. Within 60
days after ceasing to be authorized to carry on the business of a trust company
in any Province of Canada, the Trustee shall become so authorized or shall
resign in the manner specified in Article 10.
7.15 CONFLICTING CLAIMS. If conflicting claims or demands are made or
asserted with respect to any interest of any Holder in any Exchangeable Shares,
including any disagreement between the heirs, representatives, successors or
assigns succeeding to all or any part of the interest of any Holder in any
Exchangeable Shares resulting in conflicting claims or demands being made in
connection with such interest the Trustee shall be entitled, at its sole
discretion, to refuse to recognize or to comply with any such claim or demand.
In so refusing, the Trustee may elect not to exercise any Voting Rights,
Exchange Put Right, Exchange Right or Automatic Exchange Rights subject to such
conflicting claims or demands and in so doing the Trustee shall not be or become
liable to any person on account of such election or its failure or refusal to
comply with any such conflicting claims or demands. The Trustee shall be
entitled to continue to refrain from acting and to refuse to act until:
(a) the rights of all adverse claimants with respect to the Voting
Rights, Exchange Put Right, Exchange Right or Automatic Exchange
Rights subject to such conflicting claims or demands have been
adjudicated by a final judgment of a court of competent
jurisdiction; or
(b) all differences with respect to the Voting Rights, Exchange Put
Right, Exchange Right or Automatic Exchange Rights subject to
such conflicting claims or demands have been conclusively
settled by a valid written agreement binding on all such adverse
claimants and the Trustee shall have been furnished with an
executed copy of such agreement.
<PAGE>
18
If the Trustee elects to recognize any claim or comply with any demand made by
any such adverse claimant, it may in its discretion require such claimant to
furnish such surety bond or other security satisfactory to the Trustee as it
shall deem appropriate fully to indemnify it as between all conflicting claims
or demands.
7.16 ACCEPTANCE OF TRUST. The Trustee hereby accepts the Trust created by and
provided for in this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and to hold all rights, privileges and benefits
conferred hereby and by law in trust for the various persons who shall from time
to time be Holders, subject to all the terms and conditions herein set forth.
ARTICLE 8
COMPENSATION
8.1 COMPENSATION. Parent, Aviation Subco and the Company jointly and
severally agree to pay to the Trustee reasonable compensation for all the
services rendered by the Trustee under this Agreement and will reimburse the
Trustee for all reasonable expenses (including taxes other than taxes based on
the net income of the Trustee) and disbursements, including the cost and expense
of any suit or litigation of any character and any proceedings before any
governmental agency, reasonably incurred by the Trustee in connection with its
rights and duties under this Agreement provided that Parent, Aviation Subco and
the Company shall have no obligation to reimburse the Trustee for any expenses
or disbursements paid, incurred or suffered by the Trustee in any suit or
litigation in which the Trustee is determined to have acted fraudulently or in
bad faith or with negligence, recklessness or willful misconduct.
ARTICLE 9
INDEMNIFICATION AND LIMITATION OF LIABILITY
9.1 INDEMNIFICATION OF THE TRUSTEE. Parent, Aviation Subco and the Company
jointly and severally agree to indemnify and hold harmless the Trustee and each
of its directors, officers and agents appointed and acting in accordance with
this Agreement (collectively, the "INDEMNIFIED PARTIES") against all claims,
losses, damages, costs, penalties, fines and reasonable expenses (including
reasonable expenses of the Trustee's legal counsel) which, without fraud,
negligence, recklessness, willful misconduct or bad faith on the part of such
Indemnified Party, may be paid, incurred or suffered by the Indemnified Party by
reason of or as a result of the Trustee's acceptance or administration of the
Trust, its compliance with its duties set forth in this Agreement or any written
or oral instructions delivered to the Trustee by Parent, Aviation Subco or the
Company pursuant hereto. In no case shall Parent, Aviation Subco or the Company
be liable under this indemnity for any claim against any of the Indemnified
Parties until Parent, Aviation Subco and the Company shall be notified by the
Trustee of the written assertion of a claim or of any action commenced against
the Indemnified Parties, after any of the Indemnified Parties shall have
received any such written assertion of a claim or shall have been served with a
summons or other first legal process giving information as to the nature and
basis of the claim. Subject to (ii) below, Parent, Aviation Subco and the
Company shall be entitled to participate at their own expense in the defense and
if Parent, Aviation Subco or the Company so elect at any time after receipt of
such notice, any of them may assume the defense of any suit brought to enforce
any such claim. The Trustee shall have the right to employ separate counsel in
any such suit and participate in the defense thereof but the fees and expenses
of such counsel shall be at the expense of the Trustee unless: (i) the
employment of such counsel has been authorized by Parent, Aviation Subco or the
Company; or (ii) the named parties to any such suit include both the Trustee and
Parent, Aviation Subco or the Company and the Trustee shall have been advised by
counsel acceptable to Parent, Aviation Subco or the Company that there may be
one or more legal defenses available to the Trustee that are different from or
in addition to those available to Parent, Aviation Subco or the Company and that
in the judgment of such counsel, would present a conflict of interest were a
joint representation to be undertaken (in which case Parent, Aviation Subco and
the Company shall not have the right to assume the defense of such suit on
behalf of the Trustee but shall be liable to pay the reasonable fees and
expenses of counsel for the Trustee). This indemnity shall survive the removal
of the Trustee.
9.2 LIMITATION OF LIABILITY. The Trustee shall not be held liable for any
loss which may occur by reason of depreciation of the value of any part of the
Trust Estate or any loss incurred on any investment of funds pursuant to this
Agreement
<PAGE>
19
except to the extent that such loss is attributable to the fraud,
negligence, recklessness, willful misconduct or bad faith on the part of the
Trustee.
ARTICLE 10
CHANGE OF TRUSTEE
10.1 RESIGNATION. The Trustee or any trustee hereafter appointed may at any
time resign by giving written notice of such resignation to Parent, Aviation
Subco and the Company specifying the date on which it desires to resign,
provided such notice shall never be given less than 60 days before such desired
resignation date unless Parent, Aviation Subco and the Company otherwise agree
and provided further that such resignation shall not take effect until the date
of the appointment of a successor trustee and the acceptance of such appointment
by the successor trustee. Upon receiving such notice of resignation, Parent,
Aviation Subco and the Company shall promptly appoint a successor trustee by
written instrument in duplicate, one copy of which shall be delivered to the
resigning trustee and one copy to the successor trustee. Failing acceptance by a
successor trustee, a successor trustee may be appointed by an order of the
Ontario Court of Justice (General Division) upon application of one or more of
the parties hereto.
10.2 REMOVAL. The Trustee or any trustee hereafter appointed may be removed
with or without cause at any time on not less than 30 days' prior notice by
written instrument executed by Parent, Aviation Subco and the Company in
duplicate one copy of which shall be delivered to the trustee so removed and one
copy to the successor trustee, provided that in connection with such removal
provision is made for a replacement trustee similar to that contemplated in
section 10.1.
10.3 SUCCESSOR TRUSTEE. Any successor trustee appointed as provided under
this Agreement shall execute, acknowledge and deliver to Parent, Aviation Subco
and the Company and to its predecessor trustee an instrument accepting such
appointment. Thereupon the resignation or removal of the predecessor trustee
shall become effective and such successor trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, duties and
obligations of its predecessor under this Agreement with like effect as if
originally named as trustee in this Agreement. However on the written request of
Parent, Aviation Subco and the Company or of the successor trustee, the trustee
ceasing to act, shall upon payment of any amounts then due it pursuant to the
provisions of this Agreement, shall execute and deliver an instrument
transferring to such successor trustee all the rights and powers of the trustee
so ceasing to act. Upon the request of any such successor trustee, Parent,
Aviation Subco, the Company and such predecessor trustee shall execute any and
all instruments in writing for more fully and certainly vesting in and
confirming to such successor trustee all such rights and powers.
10.4 NOTICE OF SUCCESSOR TRUSTEE. Upon acceptance of appointment by a
successor trustee as provided herein, Parent, Aviation Subco and the Company
shall cause to be mailed notice of the succession of such trustee hereunder to
each Holder specified on the List. If Parent, Aviation Subco or the Company
shall fail to cause such notice to be mailed within 10 days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of Parent, Aviation Subco and the Company.
ARTICLE 11
PARENT SUCCESSORS
11.1 CERTAIN REQUIREMENTS IN RESPECT OF COMBINATION, ETC. Parent shall not
enter into any transaction (whether by way of reconstruction, reorganization,
consolidation, merger, transfer, sale, lease or otherwise) whereby all or
substantially all of its undertaking, property and assets would become the
property of any other Person or in the case of a merger of the continuing
corporation resulting therefrom but the Parent may do so if:
(a) such other Person or continuing corporation (the "PARENT
Successor") by operation of law becomes bound by the terms and
provisions of this Agreement or if not so bound, prior to or
contemporaneously with the consummation of such transaction
executes an Agreement supplemental hereto and such other
instruments (if any) as are satisfactory to the Trustee, acting
reasonably and in the opinion of legal
<PAGE>
20
counsel to the Trustee are necessary or advisable to evidence
the assumption by the Parent Successor of liability for all
moneys payable and property deliverable hereunder, the covenant
of such Parent Successor to pay and deliver or cause to be
delivered the same and its agreement to observe and perform all
the covenants and obligations of Parent under this Agreement;
and
(b) to the satisfaction of the Trustee and in the opinion of legal
counsel to the Trustee such transaction shall be upon such terms
which substantially preserve and do not impair in any material
respect any of the rights, duties, powers and authorities of the
Trustee or of the Holders hereunder.
11.2 VESTING OF POWERS IN PARENT SUCCESSOR. Whenever the conditions of
section 11.1 have been duly observed and performed, if required by section 11.1,
the Parent Successor, the Company and the Trustee shall execute and deliver the
supplemental agreement provided for in Article 12, and thereupon the Parent
Successor shall possess and from time to time may exercise each and every right
and power of Parent under this Agreement in the name of Parent or otherwise and
any act or proceeding by any provision of this Agreement required to be done or
performed by the board of directors of Parent or any officers of Parent may be
done and performed with like force and effect by the directors or officers of
such Parent Successor.
11.3 WHOLLY-OWNED SUBSIDIARIES. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of Parent
with or into Parent or the winding-up, liquidation or dissolution of any
wholly-owned subsidiary of Parent provided that all of the assets of such
subsidiary are transferred to Parent or another wholly-owned subsidiary of
Parent and any such transactions are expressly permitted by this Article 11.
ARTICLE 12
AMENDMENTS AND SUPPLEMENTAL AGREEMENTS
12.1 AMENDMENTS, MODIFICATIONS, ETC. Subject to section 12.4, this Agreement
may not be amended, modified or waived except by an agreement in writing
executed by the Company, Parent and Aviation Subco and the Trustee and approved
by the Holders in accordance with the Exchangeable Share Provisions. No
amendment to or modification or waiver of any of the provisions of this
Agreement otherwise permitted hereunder shall be effective unless made in
writing and signed by all of the parties hereto.
12.2 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section 12.1,
the parties to this Agreement may in writing, at any time and from time to time,
without the approval of the Holders, amend or modify this Agreement for the
purposes of:
(a) adding to the covenants of any or all of the parties hereto for
the protection of the Holders hereunder;
(b) making such amendments or modifications not inconsistent with
this Agreement as may be necessary or desirable with respect to
matters or questions which, in the opinion of the board of
directors of each of Parent, Aviation Subco and the Company and
in the opinion of the Trustee and its counsel, having in mind
the best interests of the Holders as a whole, it may be
expedient to make, provided that such boards of directors and
the Trustee and its counsel shall be of the opinion that such
amendments and modifications will not be prejudicial to the
interests of the Holders as a whole; or
(c) making such changes or corrections which, on the advice of
counsel to the Company, Parent, Aviation Subco and the Trustee,
are required for the purpose of curing or correcting any
ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error. The Trustee and its
counsel and the board of directors of each of the Company,
Parent and Aviation Subco must be of the opinion that such
changes or corrections will not be prejudicial to the interests
of the Holders as a whole.
12.3 MEETING TO CONSIDER AMENDMENTS. At the request of Parent, Aviation Subco
or the Company, the Trustee shall call a meeting or meetings of the Holders for
the purpose of considering any proposed amendment or modification
<PAGE>
21
requiring approval pursuant hereto. Any such meeting or meetings shall be called
and held in accordance with the by-laws of the Company, the Exchangeable Share
Provisions and all applicable laws.
12.4 CHANGES IN CAPITAL OF PARENT AND THE COMPANY. At all times after the
occurrence of an event pursuant to section 2.7 or section 2.8 of the Support
Agreement, as a result of which either Parent Common Stock or the Exchangeable
Shares or both are in any way changed, this Agreement shall forthwith be amended
and modified as necessary in order that it shall apply with full force and
effect, mutatis mutandis, to all new securities into which Parent Common Stock
or the Exchangeable Shares or both are so changed and the parties hereto shall
execute and deliver a supplemental agreement giving effect to and evidencing
such necessary amendments and modifications.
12.5 EXECUTION OF SUPPLEMENTAL AGREEMENTS. From time to time the Company
(when authorized by a resolution of its Board of Directors), Parent or Aviation
Subco (when authorized by a vote of their respective board of directors) and the
Trustee may, subject to the provisions of these presents and they shall, when so
directed by these presents, execute and deliver by their proper officers,
agreements or other instruments supplemental hereto, which thereafter shall form
part hereof, for any one or more of the following purposes:
(a) evidencing the succession of any Parent Successors to Parent and
the covenants of and obligations assumed by each such Parent
Successor in accordance with the provisions of Article 11 and
the successor of any successor trustee in accordance with the
provisions of Article 10;
(b) making any additions to, deletions from or alterations of the
provisions of this Agreement or the Voting Rights, the Exchange
Put Right, the Exchange Right or the Automatic Exchange Rights
which in the opinion of the Trustee and its counsel, will not be
prejudicial to the interests of the Holders as a whole or are in
the opinion of counsel to the Trustee necessary or advisable in
order to incorporate, reflect or comply with any legislation the
provisions of which apply to Parent, Aviation Subco, the
Company, the Trustee or this Agreement; and
(c) for any other purposes not inconsistent with the provisions of
this Agreement including without limitation to make or evidence
any amendment or modification to this Agreement as contemplated
hereby provided that in the opinion of the Trustee and its
counsel the rights of the Trustee and the Holders as a whole
will not be prejudiced thereby.
ARTICLE 13
TERMINATION
13.1 TERM. The Trust created by this Agreement shall continue until the
earliest to occur of the following events:
(a) no outstanding Exchangeable Shares are held by a Holder; and
(b) the Company, Parent and Aviation Subco elect in writing to
terminate the Trust and such termination is approved by the
Holders in accordance with the Exchangeable Share Provisions.
13.2 SURVIVAL OF AGREEMENT. This Agreement shall survive any termination of
the Trust and shall continue until there are no Exchangeable Shares outstanding
held by a Holder provided that the provisions of Articles 8 and 9 shall survive
any such termination of this Agreement.
ARTICLE 14
GENERAL
14.1 SEVERABILITY. If any provision of this Agreement is held to be invalid,
illegal or unenforceable, the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or impaired thereby
and the Agreement shall be carried out as nearly as possible in accordance with
its original terms and conditions.
<PAGE>
22
14.2 ENUREMENT. This Agreement shall be binding upon and shall enure to the
benefit of the parties hereto and their respective successors and permitted
assigns and to the benefit of the Holders.
14.3 NOTICES TO PARTIES. All notices and other communications between the
parties hereunder shall be in writing and shall be deemed to have been given if
delivered personally or by confirmed telecopy to the parties at the following
addresses (or at such other address for such party as shall be specified in like
notice):
To Parent or Aviation Subco:
Aviation Group, Inc.
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Attention: Lee B. Sanders
Facsimile Number: (214) 922-9242
With copies to:
Jenkens & Gilchrist, P.C.
1445 Ross Avenue
Suite 3200
Dallas, Texas 75202-2799
Attention: Daryl B. Robertson, Esq.
Facsimile Number: (214) 855-4300
To the Company:
travelbyus.com Ltd.
204 - 3237 King George Highway
South Surrey, British Columbia
V4P 1B7
Attention: Bill Kerby
Facsimile Number: (604) 541-2450
<PAGE>
23
With a copy to:
Cassels Brock & Blackwell LLP
Scotia Plaza, Suite 2100
40 King Street West
Toronto, Ontario M5H 3C2
CANADA
Attention: John H. Craig
Facsimile number: (416) 360-8877
And to:
Shearman & Sterling
Commerce Court West
199 Bay Street, Suite 4405
Toronto, Ontario
M5L 1E8
CANADA
Attention: Bruce Czachor
Facsimile number: (416) 360-2958
To the Trustee:
-------------
Attention:
------------------
Facsimile number:
---------------
Any notice or other communication given personally shall be deemed to have been
given and received upon delivery thereof and if given by telecopy shall be
deemed to have been given and received on the date of receipt thereof unless
such day is not a Business Day in which case it shall be deemed to have been
given and received upon the immediately following Business Day.
14.4 NOTICE TO HOLDERS. Any and all notices to be given and any documents to
be sent to any Holders may be given or sent to the address of such Holder shown
on the register of Holders of Exchangeable Shares in any manner permitted by the
Exchangeable Share Provisions and shall be deemed to be received if given or
sent in such manner at the time specified in such Exchangeable Share Provisions,
the provisions of which Exchangeable Share Provisions shall apply mutatis
mutandis to notices or documents as aforesaid sent to such Holders.
14.5 COUNTERPARTS. This Agreement may be executed in counterpart by original
or telefacsimile signature, each of which shall be deemed an original but all of
which taken together shall constitute one and the same instrument.
14.6 JURISDICTION. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable therein and shall in all respects be treated as an Ontario
contract.
14.7 ATTORNMENT. Parent agrees that any action or proceeding arising out of
or relating to this Agreement may be instituted in the courts of the Province of
Ontario, waives any objection which it may have now or hereafter to the venue of
any such action or proceeding, irrevocably submits to the jurisdiction of such
courts in any such action or proceeding, agrees to be bound by any judgment of
such courts and agrees not to seek and hereby waives, any review of the merits
of any such judgment by the courts of any other jurisdiction and hereby appoints
the Company at its registered office in the Province of Ontario as attorney for
service of process.
<PAGE>
24
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
date and year first above written.
AVIATION GROUP, INC.
PER:
----------------------------------
AVIATION GROUP CANADA LTD.
PER:
----------------------------------
TRAVELBYUS.COM LTD.
PER:
----------------------------------
MONTREAL TRUST COMPANY OF
CANADA
PER:
----------------------------------
PER:
----------------------------------
<PAGE>
APPENDIX E
FORM OF SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT is entered into as of ______, by and among Aviation
Group, Inc., a corporation incorporated under laws of the State of Texas
("PARENT"), Aviation Group Canada Ltd., a corporation incorporated under the
laws of the Province of Ontario ("AVIATION SUBCO"), and travelbyus.com Ltd., a
corporation incorporated under the laws of the Province of Ontario (the
"COMPANY").
WHEREAS pursuant to an Arrangement Agreement dated May 3, 2000 (the "ARRANGEMENT
AGREEMENT"), by and among the Company, Parent and Aviation Subco, the parties
agreed that on the Effective Date (as defined in the Arrangement Agreement),
Parent, Aviation Subco and Company would execute and deliver a Support Agreement
on terms and conditions satisfactory to the parties thereto;
WHEREAS pursuant to an arrangement (the "ARRANGEMENT") effected by the Articles
of Arrangement dated ______ (the "ARTICLES OF ARRANGEMENT") filed pursuant to
the Business Corporations Act (Ontario) (the "OBCA"), each issued and
outstanding common share (a "COMMON SHARE") of the Company (other than those
Common Shares held by dissenters who have exercised their dissent rights and who
are ultimately entitled to be paid the fair value for such Common Shares and
other than those Common Shares held by Parent, Aviation, Subco or their
respective Subsidiaries), was exchanged for one Exchangeable Share of the
Company (individually an "EXCHANGEABLE SHARE" and collectively, the
"EXCHANGEABLE SHARES");
WHEREAS the Articles of Arrangement set forth the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares;
WHEREAS all capitalized terms when not otherwise defined herein shall have the
respective meanings ascribed thereto in the share provisions, as amended, of the
Company contained in the Articles of Arrangement (collectively, the "SHARE
PROVISIONS");
WHEREAS the parties hereto desire to make appropriate provision and to establish
a procedure whereby Parent will take certain actions and make certain payments
and deliveries necessary to ensure that the Company will be able to make certain
payments and to deliver or cause to be delivered common stock of Parent, par
value US$0.01 per share (the "PARENT COMMON STOCK") in satisfaction of the
obligations of the Company under the Share Provisions with respect to the
payment and satisfaction of dividends, Liquidation Amounts, Retraction Prices
and Redemption Prices, all in accordance with the Share Provisions;
NOW THEREFORE in consideration of the respective covenants and agreements
provided in this Agreement and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), the parties hereto
hereby covenant and agree as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC. The division of this
Agreement into Articles, sections and paragraphs and the insertion of headings
are for convenience of reference only and shall not affect the construction or
interpretation of this Agreement. Unless otherwise indicated, all references to
an "ARTICLE" or "SECTION" followed by a number and/or a letter refer to the
specified Article or section of this Agreement. The terms "THIS AGREEMENT",
"HEREOF", "HEREIN" and "HEREUNDER" and similar expressions refer to this
Agreement and not to any particular Article, section or other portion hereof and
include any agreement or instrument supplementary or ancillary hereto.
1.2 NUMBER, GENDER, ETC. In this Agreement words importing the singular
number only shall include the plural and vice versa. Words importing the use of
any gender shall include all genders.
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1.3 DATE FOR ANY ACTION. If any date on which any action is required to be
taken under this Agreement is not a Business Day, such action shall be required
to be taken on the next succeeding Business Day.
ARTICLE II
COVENANTS
2.1 COVENANTS OF PARENT REGARDING EXCHANGEABLE SHARES. So long as any
Exchangeable Shares are outstanding:
(a) Parent will not declare or pay any dividend on the Parent Common Stock
unless: (i) the Company will have sufficient assets, funds and other property
available to enable the due declaration and the due and punctual payment in
accordance with applicable law of an equivalent dividend per share on the
Exchangeable Shares; and (ii) subsection 2.1(b) shall be complied with in
connection with such dividend;
(b) Parent will cause the Company to declare simultaneously with the
declaration of any dividend on the Parent Common Stock an equivalent dividend
per share on the Exchangeable Shares and when such dividend is paid on the
Parent Common Stock will cause the Company to pay simultaneously therewith such
equivalent dividend on the Exchangeable Shares, in each case in accordance with
the Share Provisions;
(c) Parent will advise the Company sufficiently in advance of the
declaration by Parent of any dividend on the Parent Common Stock and shall take
all such other actions as are necessary in cooperation with the Company to
ensure that the respective declaration date, record date and payment date for a
dividend on the Exchangeable Shares shall be the same as the record date,
declaration date and payment date for the corresponding dividend on the Parent
Common Stock and that such dividend on the Exchangeable Shares will correspond
with any requirement of the principal quotation system or stock exchange on
which the Exchangeable Shares are listed, as applicable;
(d) Parent will ensure that the record date for any dividend declared on the
Parent Common Stock is not less than ten Business Days after the declaration
date for such dividend;
(e) Parent will take all such actions and do all such things as are
reasonably necessary or desirable to enable and permit the Company, in
accordance with applicable law, to pay and otherwise perform its obligations
with respect to the satisfaction of the Liquidation Amount, the Retraction Price
or the Redemption Price in respect of each issued and outstanding Exchangeable
Share upon the liquidation, dissolution or winding-up of the Company, the
delivery of a Retraction Request by a holder of Exchangeable Shares or a
redemption of Exchangeable Shares by the Company, as the case may be, including
without limitation, all such actions and all such things as are reasonably
necessary or desirable to enable and permit the Company to cause to be delivered
the Parent Common Stock to the holders of Exchangeable Shares in accordance with
the Share Provisions; and
(f) Parent will take all such actions and do all such things as are
reasonably necessary or desirable in accordance with applicable law to perform
its obligations or Aviation Subco's obligations, as the case may be, arising
upon; (i) the exercise by Parent or Aviation Subco, as the case may be, of the
Liquidation Call Right, the Retraction Call Right or the Redemption Call Right;
or (ii) the exercise by a holder of Exchangeable Shares of the Exchange Put
Right or the Exchange Right; or (iii) the automatic exchange of a holder's
Exchangeable Shares in accordance with the rights set forth in section 5.13 of
the Voting and Exchange Trust Agreement (the "AUTOMATIC EXCHANGE RIGHTS")
including without limitation, all such actions and all such things as are
reasonably necessary or desirable to cause the Parent Common Stock to be
delivered to the holders of Exchangeable Shares in accordance with the Share
Provisions and the Voting and Exchange Trust Agreement.
2.2 SEGREGATION OF FUNDS. Parent will cause the Company to deposit a
sufficient amount of funds in a separate account and segregate a sufficient
amount of such assets and other property as is necessary to enable the Company
to pay or otherwise satisfy the applicable dividends, Liquidation Amount,
Retraction Price or Redemption Price, in each case for the benefit of holders
from time to time of the Exchangeable Shares. The Company will use such funds,
assets and other property so segregated exclusively for the payment of dividends
and the payment or other
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satisfaction of the Liquidation Amount, the Retraction Price or the Redemption
Price, as applicable, net of any corresponding withholding tax obligations and
for the remittance of such withholding tax obligations.
2.3 RESERVATION OF SHARES OF PARENT COMMON STOCK. Parent hereby represents,
warrants and covenants that Parent has irrevocably reserved for issuance and
Parent will at all times keep available, free from preemptive and other rights,
out of its authorized and unissued capital stock, such number of shares of
Parent Common Stock or other shares or securities into which Parent Common Stock
may be reclassified or changed as contemplated by section 2.7 hereof: (i) as is
equal to the sum of: (1) the number of Exchangeable Shares issued and
outstanding from time to time; and (2) the number of Exchangeable Shares
issuable upon the exercise of all rights to acquire Exchangeable Shares
outstanding from time to time; and (ii) as are now and may hereafter be required
to enable and permit Parent and Aviation Subco to meet their respective
obligations hereunder, under the Voting and Exchange Trust Agreement and under
any other security or commitment pursuant to which Parent and/or Aviation Subco
may now or hereafter be required to issue Parent Common Stock and to enable and
permit the Company to meet its obligations or exercise its rights hereunder and
under the Share Provisions.
2.4 NOTIFICATION OF CERTAIN EVENTS. In order to assist Parent and Aviation
Subco to comply with their respective obligations hereunder and under the Voting
and Exchange Trust Agreement the Company will give or cause the Transfer Agent
to give Parent and Aviation Subco notice of each of the following events at the
times set forth below:
(a) immediately in the event of any determination by the Board of Directors
of the Company to take any action which would require a vote of the holders of
Exchangeable Shares for approval;
(b) immediately upon the earlier of: (i) receipt by the Company of notice
of, and (ii) the Company otherwise becoming aware of, any threatened or
instituted claim, suit, petition or other proceeding with respect to the
involuntary liquidation, dissolution or winding-up of the Company or to effect
any other distribution of the assets of the Company among its shareholders for
the purpose of winding-up its affairs;
(c) immediately upon receipt by the Company of a Retraction Request;
(d) if reasonably practicable, at least 130 days prior to any Automatic
Redemption Date determined by the Board of Directors of the Company in
accordance with the definition of Automatic Redemption Date in the Share
Provisions unless the Automatic Redemption Date is January 1, 2003;
(e) as soon as practicable upon the issuance by the Company of any
Exchangeable Shares or rights to acquire Exchangeable Shares.
2.5 DELIVERY OF SHARES OF PARENT COMMON STOCK. Upon notice from the Company
of any event which requires the Company to cause to be delivered Parent Common
Stock to any holder of Exchangeable Shares, Parent shall forthwith issue and
deliver or cause to be delivered to the Company or Aviation Subco, as the case
may be, the requisite Parent Common Stock to be received by and issued to the
order of the former holder of the surrendered Exchangeable Shares as the Company
or Aviation Subco, as the case may be, shall direct. All such Parent Common
Stock shall be duly issued as fully paid and non-assessable. In consideration of
the issuance and delivery of each such share of Parent Common Stock, to the
extent possible, the Company shall issue to Parent, Aviation Subco or as Parent
or Aviation Subco shall direct, shares or other securities having equivalent
value.
2.6 QUALIFICATION OF SHARES OF PARENT COMMON STOCK. If any Parent Common
Stock or other shares or securities into which the Parent Common Stock may be
reclassified or changed as contemplated by section 2.7 to be issued and
delivered hereunder require registration or qualification with or approval of or
the filing of any document including any prospectus or similar document, the
taking of any proceeding with or the obtaining of any order, ruling or consent
from any governmental or regulatory authority under any Canadian or United
States federal, provincial or state law or regulation or pursuant to the rules
and regulations of any regulatory authority or the fulfillment of any other
legal requirement (collectively, the "APPLICABLE LAWS") before such shares (or
such other shares or securities) may be issued by Parent and delivered by Parent
or Aviation Subco, as the case may be, at the direction of the Company, if
applicable, to the holder of surrendered Exchangeable Shares or in order that
such
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shares or such other shares or securities may be freely traded thereafter other
than contractual restrictions or any restrictions on transfer by reason of a
holder being a "CONTROL PERSON" of Parent for purposes of Canadian federal or
provincial securities law or an "AFFILIATE" of Parent or the Company for
purposes of United States federal or state securities law, Parent will in good
faith expeditiously take all such actions and do all such things as are
necessary to cause such Parent Common Stock or such other shares or securities
to be and remain duly registered, qualified or approved. Parent will in good
faith take all actions and do all things as are reasonably necessary or
desirable under Applicable Laws as they exist on the date hereof to cause the
Parent Common Stock and such other shares or securities to be issued and
delivered hereunder to be freely tradeable thereafter other than contractual
restrictions or any restrictions on transfer by reason of a holder being a
"CONTROL PERSON" of Parent for the purposes of Canadian federal and provincial
securities law or an "AFFILIATE" of Parent or the Company for purposes of United
States federal or state securities law. Parent will in good faith expeditiously
take all such actions and do all such things as are reasonably necessary to
cause all Parent Common Stock or such other shares or securities to be delivered
hereunder to be listed, quoted or posted for trading on all stock exchanges and
quotation systems on which outstanding Parent Common Stock or such other shares
or securities are listed, quoted or posted for trading at such time.
2.7 ECONOMIC EQUIVALENCE.
(a) Without the prior approval of the Company or the holders of the
Exchangeable Shares given in accordance with the Share Provisions, Parent will
not:
(i) issue or distribute Parent Common Stock or securities
exchangeable for or convertible into or carrying rights to
acquire Parent Common Stock to the holders of all or
substantially all of the then outstanding Parent Common Stock by
way of stock dividend or other distribution; or
(ii) issue or distribute rights, options or warrants to the holders
of all or substantially all of the then outstanding Parent
Common Stock entitling them to subscribe for or to purchase
Parent Common Stock or securities exchangeable for or
convertible into or carrying rights to acquire Parent Common
Stock; or
(iii) issue or distribute to the holders of all or substantially all
of the then outstanding Parent Common Stock; (1) shares or
securities of Parent of any class other than Parent Common Stock
or other than shares convertible into or exchangeable for or
carrying rights to acquire Parent Common Stock; (2) rights,
options or warrants other than those referred to in subsection
2.7(a)(ii) above; (3) evidences of indebtedness of Parent; or
(4) assets of Parent;
unless one or both of the Company, Parent and/or Aviation Subco is permitted
under applicable law to issue and distribute the economic equivalent on a per
share basis of such rights, options, warrants, securities, shares, evidences of
indebtedness or assets to holders of the Exchangeable Shares and the economic
equivalent on a per share basis of the items referred to in subsections
2.7(a)(i), (ii) and (iii) above, as applicable, is simultaneously issued or
distributed to holders of the Exchangeable Shares.
(b) Without the prior approval of the Company and the prior approval of the
holders of the Exchangeable Shares given in accordance with Article 10 of the
Share Provisions, Parent will not:
(i) subdivide, redivide or change the then outstanding shares of
Parent Common Stock into a greater number of shares of Parent
Common Stock; or
(ii) reduce, combine or consolidate or change the then outstanding
shares of Parent Common Stock into a lesser number of shares of
Parent Common Stock; or
(iii) reclassify or otherwise change the Parent Common Stock or effect
an amalgamation, merger, reorganization or other transaction
affecting the Parent Common Stock;
<PAGE>
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unless the Company is permitted under applicable law to make the same or an
economically equivalent change to or in the rights of holders of the
Exchangeable Shares and the same or an economically equivalent change is
simultaneously made to or in the rights of the holders of the Exchangeable
Shares.
(c) Parent will ensure that the record date for any event referred to in
subsection 2.7 (a) or (b) above, or if no record date is applicable for such
event, the effective date for any such event, is not less than 10 Business Days
after the date on which such event is declared or announced by Parent (with
simultaneous notice thereof to be given by Parent to the Company).
(d) To the extent required upon due notice from Parent, the Company will use
its best efforts to take or cause to be taken such steps as may be necessary for
the purposes of ensuring that appropriate dividends are paid or other
distributions are made by the Company or subdivisions, redivisions or changes
are made to the Exchangeable Shares in order to implement the required economic
equivalence with respect to the Parent Common Stock and Exchangeable Shares as
provided for in this section 2.7.
(e) The Board of Directors of the Company shall determine, in good faith and
in its sole discretion, economic equivalence for the purposes of any event
referred to in section 2.7(a) or (b) above. Each such determination shall be
conclusive and binding on Parent. In making each such determination, the
following factors, without excluding other factors determined by the Board of
Directors of the Company to be relevant, shall be considered by the Board of
Directors of the Company:
(i) in the case of any stock dividend or other distribution payable
in Parent Common Stock, the number of such shares issued in
proportion to the number of shares of Parent Common Stock
previously outstanding;
(ii) in the case of the issuance or distribution of any rights,
options or warrants to subscribe for or purchase Parent Common
Stock or securities exchangeable for or convertible into or
carrying rights to acquire Parent Common Stock, the relationship
between the exercise price of each such right, option or warrant
and the current market value as determined by the Board of
Directors of the Company in the manner contemplated below of
Parent Common Stock;
(iii) in the case of the issuance or distribution of any other form of
property including without limitation any shares or securities
of Parent of any class other than Parent Common Stock, any
rights, options or warrants other than those referred to in
subsection 2.7 (e)(ii) above, any evidences of indebtedness of
Parent or any assets of Parent, the relationship between the
fair market value as determined by the Board of Directors of the
Company in the manner contemplated below of such property to be
issued or distributed with respect to each outstanding share of
Parent Common Stock and the current market value of shares of
Parent Common Stock as determined by the Board of Directors of
the Company in the manner contemplated below;
(iv) in the case of any subdivision, redivision or change of the then
outstanding Parent Common Stock into a greater number of shares
of Parent Common Stock or the reduction, combination,
consolidation or change of the then outstanding shares of Parent
Common Stock into a lesser number of Parent Common Stock or any
amalgamation, merger, reorganization or other transaction
affecting Parent Common Stock, the effect thereof upon the then
outstanding Parent Common Stock; and
(v) in all such cases, the general tax consequences of the relevant
event to holders of Exchangeable Shares to the extent that such
consequences may differ from the tax consequences to holders of
Parent Common Stock as a result of differences between tax laws
of Canada and the United States (except for any differing
consequences arising as a result of differing marginal taxation
rates and without regard to the individual circumstances of
holders of Exchangeable Shares).
For purposes of the foregoing determinations, the current market value of any
security listed and traded or quoted on a securities exchange shall be the
weighted average of the daily trading prices of such security during a period of
not
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less than 20 consecutive trading days ending not more than three trading days
before the date of determination on the principal securities exchange on which
such securities are listed and traded or quoted. If in the opinion of the Board
of Directors of the Company the public distribution or trading activity of such
securities during such period does not create a market which reflects the fair
market value of such securities, then the current market value thereof shall be
determined by the Board of Directors of the Company, in good faith and in its
sole discretion. Any such determination by the Board of Directors of the Company
shall be conclusive and binding on Parent.
2.8 TENDER OFFERS, ETC. If a tender offer, share exchange offer, issuer bid,
take-over bid or similar transaction with respect to Parent Common Stock (an
"OFFER") is proposed by Parent or is proposed to Parent or its shareholders and
is recommended by the Board of Directors of Parent or is otherwise effected or
to be effected with the consent or approval of the Board of Directors of Parent
and the Exchangeable Shares are not redeemed by the Company or purchased by
Parent or Aviation Subco, as the case may be, pursuant to the Redemption Call
Right, Parent will use its reasonable efforts expeditiously and in good faith to
take all such actions and to do all such things as are necessary or desirable to
enable holders of Exchangeable Shares to participate in such Offer to the same
extent and on an equivalent basis as the holders of Parent Common Stock, without
discrimination. Without limiting the generality of the foregoing, Parent will
use its reasonable efforts expeditiously and in good faith to ensure that
holders of Exchangeable Shares may participate in all such Offers without being
required to retract Exchangeable Shares as against the Company (or, if so
required, to ensure that any such retraction shall be effective only upon and
shall be conditional upon, the closing of the Offer and only to the extent
necessary to tender or deposit to the Offer). Nothing herein shall affect or
limit the rights of the Company to redeem or Parent or Aviation Subco, as the
case may be, to purchase, pursuant to the Redemption Call Right, Exchangeable
Shares, as applicable, in the event of an Offer or an Automatic Redemption Date.
2.9 OWNERSHIP OF OUTSTANDING SHARES OF THE COMPANY. Without the prior
approval of the Company and the prior approval of the holders of the
Exchangeable Shares given in accordance with the Share Provisions, Parent
covenants and agrees in favor of the Company that as long as any outstanding
Exchangeable Shares are owned by any person or entity other than Parent or any
of its Subsidiaries, Parent will be and remain the direct or indirect beneficial
owner of all issued and outstanding voting shares in the capital of the Company.
Notwithstanding the foregoing, nothing contained herein shall affect or limit
the rights of the Company to redeem or Parent or Aviation Subco to purchase,
pursuant to the Redemption Call Right, Exchangeable Shares, as applicable, in
the event of an Automatic Redemption Date.
2.10 PARENT, AVIATION SUBCO AND SUBSIDIARIES NOT TO VOTE EXCHANGEABLE Shares.
Parent covenants and agrees that Parent will appoint and cause to be appointed
proxyholders with respect to all Exchangeable Shares held by Parent, Aviation
Subco and their respective Subsidiaries for the sole purpose of attending each
meeting of holders of Exchangeable Shares in order to be counted as part of the
quorum for each such meeting. Parent further covenants and agrees that it will
not and will cause its Subsidiaries including without limitation, Aviation
Subco, not to exercise any voting rights which may be exercisable by holders of
Exchangeable Shares from time to time pursuant to the Share Provisions or
pursuant to the provisions of the OBCA (or any successor or other corporate
statute by which the Company may in the future be governed) with respect to any
Exchangeable Shares held by it or by its Subsidiaries in respect of any matter
considered at any meeting of holders of Exchangeable Shares.
2.11 STOCK EXCHANGE LISTING. Parent covenants that as long as any
outstanding Exchangeable Shares are owned by any person or entity other than
Parent or any of its Subsidiaries, Parent will use its reasonable efforts to
maintain a listing for such Exchangeable Shares on the TSE until December 31,
2001.
ARTICLE III
PARENT SUCCESSORS
3.1 CERTAIN REQUIREMENTS IN RESPECT OF ARRANGEMENT, ETC. Parent shall not
enter into any transaction whether by way of reorganization, consolidation,
merger, transfer, sale, lease or otherwise whereby all or substantially all of
its undertaking, property and assets would become the undertaking, property and
assets of any other Person or, in the case of a merger, of the continuing
corporation resulting therefrom provided that Parent may do so if:
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(a) such other Person or continuing corporation (the "PARENT SUCCESSOR") by
operation of law becomes automatically bound by the terms and provisions of this
Agreement or, if not so bound, executes prior to or contemporaneously with the
consummation of such transaction, an agreement supplemental hereto and such
other instruments (if any) as are reasonably necessary or advisable to evidence
the assumption by the Parent Successor of liability for all moneys payable and
property deliverable hereunder and the covenant of such Parent Successor to pay
and deliver or cause to be delivered the same and its agreement to observe and
perform all the covenants and obligations of Parent under this Agreement; and
(b) such transaction shall be upon such terms as substantially preserve and
do not impair in any material respect any of the rights, duties, powers and
authorities of the other parties hereunder.
3.2 VESTING OF POWERS IN PARENT SUCCESSOR. Whenever the conditions of
section 3.1 hereof, have been duly observed and performed if required by section
3.1 hereof, the Parties shall execute and deliver the supplemental agreement
hereto and thereupon the Parent Successor shall possess and from time to time
may exercise each and every right and power of Parent under this Agreement in
the name of Parent or otherwise and any act or proceeding by any provision of
this Agreement required to be done or performed by the board of directors of
Parent or any officers of Parent may be done and performed with like force and
effect by the directors or officers of such Parent Successor.
3.3 WHOLLY-OWNED SUBSIDIARIES. Nothing herein shall be construed as
preventing the amalgamation or merger of any wholly-owned subsidiary of Parent
with or into Parent or the winding-up, liquidation or dissolution of any
wholly-owned subsidiary of Parent provided that all of the assets of such
subsidiary are transferred to Parent or another wholly-owned subsidiary of
Parent and any such transactions are expressly permitted by this Article 3.
ARTICLE IV
GENERAL
4.1 TERM. This Agreement shall come into force and be effective as of the
date hereof and shall terminate and be of no further force and effect at such
time as no Exchangeable Shares or securities or rights convertible into or
exchangeable for or carrying rights to acquire Exchangeable Shares are held by
any party other than Parent, Aviation Subco and any of their respective
Subsidiaries.
4.2 CHANGES IN CAPITAL OF PARENT AND THE COMPANY. Notwithstanding the
provisions of section 4.4 at all times after the occurrence of any event
effected pursuant to section 2.7 or 2.8 as a result of which either Parent
Common Stock or the Exchangeable Shares or both are in any way changed, this
Agreement shall forthwith be amended and modified as necessary in order that it
shall apply with full force and effect, mutatis mutandis, to all new securities
into which Parent Common Stock or the Exchangeable Shares or both are so changed
and the parties hereto shall execute and deliver an agreement in writing giving
effect to and evidencing such necessary amendments and modifications.
4.3 SEVERABILITY. If any provision of this Agreement is held to be invalid,
illegal or unenforceable the validity, legality or enforceability of the
remainder of this Agreement shall not in any way be affected or impaired thereby
and this Agreement shall be carried out as nearly as possible in accordance with
its original terms and conditions.
4.4 AMENDMENTS, MODIFICATIONS, ETC. This Agreement may not be amended,
modified or waived except by an agreement in writing executed by the Company,
Parent and Aviation Subco and approved by the holders of the Exchangeable Shares
in accordance with the Share Provisions.
4.5 MINISTERIAL AMENDMENTS. Notwithstanding the provisions of section 4.4,
the parties to this Agreement may in writing at any time and from time to time
without the approval of the holders of the Exchangeable Shares, amend or modify
this Agreement for the purposes of:
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(a) adding to the covenants of any or all parties provided that the Board of
Directors of each of Parent, Aviation Subco and the Company shall be of the good
faith opinion that such additions will not be prejudicial to the rights or
interests of the holders of the Exchangeable Shares;
(b) making such amendments or modifications not inconsistent with this
Agreement as may be necessary or desirable with respect to matters or questions
which, in the opinion of each of the Board of Directors of Parent, Aviation
Subco and the Company it may be expedient to make provided that each such Board
of Directors shall be of the opinion that such amendments or modifications will
not be prejudicial to the interests of the holders of the Exchangeable Shares;
or
(c) making such changes or corrections which, on the advice of counsel to
Parent, Aviation Subco and the Company, are required for the purpose of curing
or correcting any ambiguity or defect or inconsistent provision or clerical
omission or mistake or manifest error provided that the Boards of Directors of
Parent, Aviation Subco and the Company shall be of the good faith opinion that
such changes or corrections will not be prejudicial to the interests of the
holders of the Exchangeable Shares.
4.6 MEETING TO CONSIDER AMENDMENTS. At the request of Parent the Company
shall call a meeting or meetings of the holders of the Exchangeable Shares for
the purpose of considering any proposed amendment or modification requiring
approval of such shareholders pursuant to section 4.4. Any such meeting or
meetings shall be called and held in accordance with the by-laws of the Company,
the Share Provisions and all applicable laws.
4.7 AMENDMENTS ONLY IN WRITING. No amendment to or modification or waiver of
any of the provisions of this Agreement otherwise permitted hereunder shall be
effective unless made in writing and signed by the parties hereto.
4.8 ENUREMENT. This Agreement shall be binding upon and shall enure to the
benefit of the parties hereto and the holders from time to time of the
Exchangeable Shares and each of their respective heirs, administrators, legal
representatives, successors and permitted assigns.
4.9 NOTICE. All notices and other communications hereunder shall be in
writing and shall be deemed given to a party if delivered by hand, sent by
facsimile transmission with confirmation of transmission, sent via a reputable
overnight delivery service with confirmation of receipt requested to the party
at the following address and facsimile number (or at such other address or
facsimile number for the party as the party shall specify by like notice) and
shall be deemed given on the date on which delivered by hand or otherwise on the
date of confirmation of receipt or transmission:
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To Parent or Aviation Subco:
Aviation Group, Inc.
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Attention: Lee B. Sanders
Facsimile Number: (214) 922-9242
With copies to:
Jenkens & Gilchrist, P.C.
1445 Ross Avenue
Suite 3200
Dallas, Texas 75202-2799
Attention: Daryl B. Robertson, Esq.
Facsimile Number: (214) 855-4300
To the Company:
travelbyus.com Ltd.
204 - 3237 King George Highway
South Surrey, British Columbia
V4P 1B7
Attention: Bill Kerby
Facsimile Number: (604) 541-2450
With a copy to:
Cassels Brock & Blackwell LLP
Scotia Plaza, Suite 2100
40 King Street West
Toronto, Ontario M5H 3C2
CANADA
Attention: John H. Craig
Facsimile number:(416) 360-8877
And with a copy to:
Shearman & Sterling
Commerce Court West
199 Bay Street, Suite 4405
Toronto, Ontario
M5L 1E8
CANADA
Attention: Bruce Czachor
Facsimile number:(416) 360-2958
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4.10 COUNTERPARTS. This Agreement may be executed in counterparts by original
or telefacsimile signature, each of which shall be deemed an original and all of
which taken together shall constitute one and the same instrument.
4.11 JURISDICTION. This Agreement shall be construed and enforced in
accordance with the laws of the Province of Ontario and the federal laws of
Canada applicable therein and shall in all respects be treated as an Ontario
contract.
4.12 ATTORNMENT. Parent agrees that any action or proceeding arising out of
or relating to this Agreement may be instituted in the courts of the Province of
Ontario, waives any objection which it may have now or hereafter to the venue of
any such action or proceeding, irrevocably submits to the jurisdiction of such
courts in any such action or proceeding, agrees to be bound by any judgment of
such courts and not to seek and hereby waives any review of the merits of any
such judgment by the courts of any other jurisdiction and hereby appoints the
Company at its registered office in the Province of Ontario as attorney for
service of process.
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IN WITNESS WHEREOF the parties have caused this Agreement to be executed as of
the date and year first above written.
AVIATION GROUP, INC.
Per:
--------------------------------------
AVIATION GROUP CANADA LTD.
Per:
--------------------------------------
TRAVELBYUS. COM LTD.
Per:
--------------------------------------
<PAGE>
Appendix F
SPECIAL RESOLUTION FOR TRAVELBYUS.COM SHAREHOLDERS
BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. the arrangement (the "Arrangement") among travelbyus.com Ltd., Aviation
Group, Inc. and Aviation Group Canada Ltd. pursuant to Section 182 of the
Business Corporations Act (Ontario) as set out in the Plan of Arrangement
and the Arrangement Agreement dated May 3, 2000 (the "Arrangement
Agreement"), which are attached as Appendices B and A, respectively, to the
Joint Proxy Statement/Prospectus dated June _____, 2000, be and is hereby
approved and authorized;
2. the Arrangement Agreement among travelbyus.com Ltd., Aviation Group, Inc.
and Aviation Group Canada Ltd. is hereby confirmed, ratified, approved and
adopted;
3. the Board of Directors of travelbyus.com Ltd. be and is hereby authorized,
in its sole discretion, to determine when to proceed with the
implementation of the Arrangement and to determine the effective date
thereof;
4. notwithstanding that this special resolution has been duly passed by the
shareholders of travelbyus.com Ltd. and that the Arrangement has been
approved by the Ontario Superior Court of Justice, the Board of Directors
of travelbyus.com Ltd. is hereby authorized, at its discretion, to revoke
this special resolution, to terminate the Arrangement Agreement, in
accordance with the terms thereof, at any time prior to the final order of
the Ontario Superior Court of Justice approving the Arrangement, and to
determine not to proceed with the Arrangement, without further approval of
shareholders of travelbyus.com Ltd.; and
5. any one director or officer of travelbyus.com Ltd. is hereby authorized and
directed, acting for, in the name of and on behalf of travelbyus.com Ltd.,
to execute or to cause to be executed, under the corporate seal of
travelbyus.com Ltd. or otherwise, and to deliver or to cause to be
delivered, all such other documents and instruments, and to do or cause to
be done all such other acts and things, as in the opinion of such director
or officer of travelbyus.com Ltd. that may be necessary or desirable to
carry out the intent of the foregoing special resolutions, such necessity
to be conclusively evidenced by the execution and delivery of any such
documents or instruments or the taking of any such actions.
<PAGE>
[LETTERHEAD OF WELLINGTON WEST CORPORATE FINANCE]
Appendix G
May 11, 2000
Board of Directors
travelbyus.com.com Ltd.
204- 3237 King George Highway
South Surrey, British Columbia
VP4 1B7
Gentlemen:
RE: Fairness Opinion - Exchange Ratio - Aviation Group, Inc. Transaction
--------------------------------------------------------------------------
You have requested that we provide a written opinion (the "Fairness Opinion") to
the Board of Directors as to the fairness to the shareholders of
travelbyus.com Ltd. ("travelbyus.com") from a financial point of view of the
Exchange Ratio as contemplated in the Arrangement Agreement dated May 3, 2000
(the "Arrangement Agreement") by and among Aviation Group, Inc. ("AGI"),
Aviation Group Canada Ltd. ("AGC") and travelbyus.com. Wellington West Capital
Inc. ("WWC") was first contacted and was engaged as of April 11, 2000 to provide
the Fairness Opinion. WWC is receiving an advisory fee from travelbyus.com for
preparing the Fairness Opinion. The fee is not contingent on any conclusions
reached by WWC or on the success of the transactions contemplated by the
Arrangement Agreement.
WWC is a full service investment dealer based in Winnipeg, Manitoba that is
actively engaged in corporate finance initiatives involving public and private
company debt and/or equity financing, merger and acquisition analysis and other
financial advisory assignments including business valuation and fairness
opinions. Responsibility for the engagement was undertaken by Kevin M. Hooke,
Director and Vice President, Corporate Finance. Mr. Hooke has practiced in this
area since 1993 and has conducted valuations in many industries.
WWC was engaged previously by travelbyus.com as an agent on a debenture offering
that was completed in September 1999 and as agent on a Special Warrant offering
completed in December 1999. WWC is not an insider, associate or affiliate of
travelbyus.com and there is no understanding, commitment or agreement between
WWC and travelbyus.com with respect to future dealings, although WWC may perform
financial advisory services for travelbyus.com in the future. In the ordinary
course of its business, WWC, its officers, employees and or its clients may
trade securities of AGI and travelbyus.com and accordingly, may at any time hold
a long or short position in such securities.
This Fairness Opinion has been prepared for the use the Board of Directors of
travelbyus.com. This Fairness opinion was rendered solely with respect to the
fairness from a financial point of view of the Exchange Ratio to the holders of
travelbyus.com common shares. This Fairness Opinion does not constitute an
opinion with respect to the fairness of the arrangement as a whole or any other
aspect of the transaction contemplated by the Arrangement Agreement (including,
without limiting the generality of the foregoing, the fairness of any potential
tax consequences to shareholders of travelbyus.com), other than the Exchange
Ratio. It is not to be used, circulated, quoted or otherwise referred to without
our prior written permission in each specific circumstance. The analysis
contained herein must be considered as a whole. Selecting portions of our
analysis and of the factors considered could create a misleading view of the
processes underlying the Fairness Opinion. In our analysis,
<PAGE>
2
WWC has made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of any party involved in the Arrangement Agreement. In rendering our
Fairness Opinion we relied upon and assumed, without independent verification or
investigation, the accuracy and completeness of all of the financial and other
information provided to us by AGI and travelbyus.com and their respective
employees, representatives and affiliates. With respect to forecasts of future
financial condition and operating results of AGI provided to us, we assumed at
the direction of AGI's management, without independent verification or
investigation, that such forecasts were reasonably prepared on a basis
reflecting the best available information, estimates and judgment of AGI's
management. With respect to forecasts of future financial condition and
operating results of travelbyus.com provided to us, we assumed at the direction
of travelbyus.com's management, without independent verification or
investigation, that such forecasts were reasonably prepared on a basis
reflecting the best available information, estimates and judgment of
travelbyus.com's management. We have neither made nor obtained any independent
evaluations or appraisals of the assets or the liabilities of AGI or
travelbyus.com or their affiliated entities. We are not expressing any opinion
as to the underlying valuation, future performance or long term viability of
travelbyus.com or the combined operation following the transactions contemplated
by the Arrangement Agreement or the price at which AGI Common Stock or the
Exchangeable Shares will trade subsequent to the transactions contemplated by
the Arrangement Agreement. Our opinion is necessarily based on the information
available to us and general economic, financial and stock market conditions and
circumstances as they exist, and can be evaluated by us on the date thereof. It
should be understood that, although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm this
opinion.
We understand, based on representations of the management of AGI and
travelbyus.com, as applicable, and documentation provided to date (without any
verification), and are assuming that:
. The Arrangement Agreement is predicated on the basis of travelbyus.com
shareholders receiving Exchangeable Shares (as defined in the Arrangement
Agreement) at an Exchange Ratio (as defined in the Arrangement Agreement) of
one Exchangeable Share for each one Company Common Share (as defined in the
Arrangement Agreement).
. Each Exchangeable Share will be exchangeable, immediately or at any later
time, at the holder's option for one share of Parent Common Stock (as defined
in the Arrangement Agreement). On or before January 1, 2003 all outstanding
Exchangeable Shares will be automatically exchanged.
. The acquisition of Global Leisure Travel Inc. by AGI as contemplated in the
Arrangement Agreement is based on the following consideration: (i.) issuance
of AGI Convertible Preferred Shares convertible prior to February 28, 2001, at
US$3.00 per share; (ii.) the issuance of warrants to purchase 750,000 common
shares of AGI at US$3.50 per share; and (iii.) warrants to purchase 3,500,000
common shares of AGI at US$2.50 per share.
. On completion of the transaction contemplated by the Arrangement Agreement,
travelbyus.com shareholders would hold approximately 94.9% of the outstanding
AGI shares.
. The Arrangement Agreement is structured to provide, among other things that:
(i.) travelbyus.com shareholders receive a tax-free exchange of their existing
common shares into Exchangeable Shares and (ii.) the Exchangeable Shares be
listed on the Toronto Stock Exchange.
In arriving at our opinion, we have examined and relied without further
verification upon the following:
1. the Arrangement Agreement dated May 3, 2000.
2. audited financial statements for AGI for the fiscal years ending June 30,
1997, 1998 and 1999 and the unaudited statements of AGI for the six months
ending December 31, 1999, together with financial projections prepared by
the management of AGI.
<PAGE>
3
3. audited financial statements for travelbyus.com for the fiscal years ending
December 31, 1998 and September 30, 1999 and the unaudited statements of
travelbyus.com for the three months ending December 31, 1999 together with
financial projections prepared by the management of travelbyus.com.
4. offering presentation materials prepared by the management of travelbyus.com
respecting the September, 1999 travelbyus.com debenture offering and
December, 1999 travelbyus.com Special Warrant offering, together with
discussions with management respecting the key assumptions entailed in the
forecasted performance.
5. due diligence and closing documentation relating to travelbyus.com
acquisitions made to date.
6. historical trading prices and trading volumes for AGI and travelbyus.com.
7. industry data and information; current and historical trading prices and
volumes for publicly traded shares of comparable companies; comparable
company offering documents, financial statements and investment company
research reports; publicly available commentary and information of a general
nature relating to the aviation and travel and leisure industries; and
information pertaining to general economic conditions.
8. such other public and confidential information, discussions, investigations
and analyses as we considered necessary to properly render the opinion
below.
In assessing the fairness of the consideration to be received by the
shareholders of travelbyus.com as contemplated by the Arrangement Agreement, and
in particular as to whether the Exchange Ratio is fair, from a financial point
of view, to the holders of travelbyus.com common shares, we have:
1. assessed the Exchange Ratio relative to valuations of AGI and travelbyus.com
applying both discounted cash flow analysis and comparable companies
analysis.
2. assessed the Exchange Ratio in light of valuations reflected in recent
financing agreements.
3. assessed the Exchange Ratio in light of the current share trading prices of
AGI and travelbyus.com and the trading prices of AGI and travelbyus.com
prior to the public announcement of the transaction contemplated by the
Arrangement Agreement.
4. reviewed with the management of travelbyus.com the Arrangement Agreement and
the transaction contemplated therein and the likelihood of a party, other
than AGI, concluding an arrangement on terms more favorable than those of
the Arrangement Agreement.
5. considered any other factors or analyses, which we judged, based on our
experience in rendering such opinions, to be relevant.
Conclusion
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio provided for in the Arrangement Agreement is fair to
the shareholders of travelbyus.com from a financial point of view. Wellington
West Capital Inc. consents to the inclusion of this opinion in its entirety and
any reference to this opinion in any prospectus, proxy statement or
solicitation/recommendation statement, as the case may be, filed by Aviation or
travelbyus.com in connection with the transaction contemplated by the
Arrangement Agreement.
<PAGE>
4
Yours truly,
WELLINGTON WEST CAPITAL INC.
/s/ Kevin M. Hooke
Kevin M. Hooke,
Director & Vice-President, Corporate Finance
<PAGE>
APPENDIX H
May 3, 2000
CONFIDENTIAL
Board of Directors
Aviation Group, Inc.
700 North Pearl Street, Suite 2170
Dallas, Texas 75201
Gentlemen:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion (the "Fairness Opinion") to the Board of Directors as to the
fairness to the stockholders of Aviation Group, Inc. ("Aviation"), from a
financial point of view, of the consideration to be received by the stockholders
of travelbyus.com ltd. ("Travelbyus") in connection with the business
combination of Travelbyus with Aviation (the "Business Combination"), as
provided in the Arrangement Agreement (the "Arrangement Agreement") by and among
Aviation, Aviation Group Canada Ltd. (a wholly-owned subsidiary of Aviation),
and Travelbyus. The consideration to be received by the stockholders of
Travelbyus in the Business Combination consists of shares of a new class of
capital stock of Travelbyus called "Exchangeable Shares," at an exchange ratio
of one Exchangeable Share for each share of Travelbyus Common Stock. Each
Exchangeable Share will have rights that will make it equivalent in substance to
one share of Aviation Common Stock, will be redeemable at the option of the
holder in exchange for one share of Aviation Common Stock and will be
automatically redeemed no later than January 1, 2003 in exchange for one share
of Aviation Common Stock.
In arriving at our Fairness Opinion, we:
(a) reviewed the draft of the Arrangement Agreement dated May 1, 2000 that
was distributed on May 2, 2000;
(b) reviewed the audited financial statements of Aviation for the fiscal
years ended June 30, 1997, 1998 and 1999, and the unaudited financial
statements of Aviation for the six months ended December 31, 1999;
(c) reviewed the audited financial statements of Travelbyus for the fiscal
years ended December 31, 1998 and September 30, 1999 and the unaudited
financial statements of Travelbyus for the three months ended December
31, 1999;
(d) reviewed financial projections for Aviation, prepared and supplied by
Aviation's management;
(e) reviewed financial projections for Travelbyus, prepared and supplied by
Travelbyus' management;
(f) reviewed the historical market prices and trading volume for Aviation
Common Stock;
<PAGE>
Board of Directors
Aviation Group, Inc.
May 3, 2000
Page 2
(g) reviewed the historical market prices and trading volume for Travelbyus
Common Stock;
(h) held discussions with senior management of Aviation and Travelbyus with
respect to the business and prospects for future growth of Aviation and
Travelbyus;
(i) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to Aviation;
(j) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to Travelbyus;
(k) performed discounted cash flow analyses of Aviation using certain
assumptions of future performance provided to us by the management of
Aviation;
(l) performed discounted cash flow analyses of Travelbyus using certain
assumptions of future performance provided to us by the management of
Travelbyus;
(m) reviewed and analyzed certain publicly available financial information
for transactions that we deemed comparable to the Business Combination;
(n) reviewed public information concerning Aviation and Travelbyus; and
(o) performed such other analyses and reviewed such other information as we
deemed appropriate.
In rendering our Fairness Opinion we relied upon and assumed, without
independent verification or investigation, the accuracy and completeness of all
of the financial and other information provided to us by Aviation and Travelbyus
and their respective employees, representatives and affiliates. With respect to
forecasts of future financial condition and operating results of Aviation
provided to us, we assumed at the direction of Aviation's management, without
independent verification or investigation, that such forecasts were reasonably
prepared on bases reflecting the best available information, estimates and
judgment of Aviation's management. With respect to forecasts of future financial
condition and operating results of Travelbyus provided to us, we assumed at the
direction of Travelbyus' management, without independent verification or
investigation, that such forecasts were reasonably prepared on bases reflecting
the best available information, estimates and judgment of Travelbyus'
management. We have neither made nor obtained any independent evaluations or
appraisals of the assets or the liabilities of Aviation or Travelbyus or their
affiliated entities. We are not expressing any opinion as to the underlying
valuation, future performance or long term viability of Aviation or the combined
operations following the Business Combination, or the price at which Aviation
Common Stock will trade subsequent to the Business Combination. We have assumed
that the Business Combination will be completed in accordance with the terms of
the Arrangement Agreement. Our opinion is necessarily based on the information
available to us and general economic, financial and stock market conditions and
circumstances as they exist and can be evaluated by us on the date hereof. It
should be understood that, although subsequent developments may affect this
opinion, we do not have any obligation to update, revise or reaffirm the
opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
2
<PAGE>
Board of Directors
Aviation Group, Inc.
May 3, 2000
Page 3
We have acted as financial advisor to the Board of Directors of Aviation in
rendering this opinion and will receive a fee for our services. CIBC World
Markets may in the future provide investment banking or other financial advisory
services to Aviation or Travelbyus.
In the ordinary course of its business, CIBC World Markets and its affiliates
may also actively trade securities of Aviation and Travelbyus for their own
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
Based upon and subject to the foregoing, and such other factors as we deem
relevant, it is our opinion that, as of the date hereof, the consideration to be
received by the stockholders of Travelbyus pursuant to the Arrangement Agreement
is fair to the stockholders of Aviation from a financial point of view. This
Fairness Opinion is for the use of the Board of Directors of Aviation. Neither
this Fairness Opinion nor the services provided by CIBC World Markets in
connection herewith may be publicly disclosed or referred to in any manner by
Aviation without the prior written approval by CIBC World Markets. CIBC World
Markets consents to the inclusion of this opinion in its entirety and any
reference to this opinion, subject to the approval by CIBC World Markets of
references to it or this opinion therein, in any prospectus, proxy statement or
solicitation/recommendation statement, as the case may be, filed by Aviation or
Travelbyus in connection with the Business Combination.
Very Truly Yours,
/s/ CIBC World Markets Corp.
----------------------------
CIBC World Markets Corp.
3
<PAGE>
Appendix I
BUSINESS CORPORATIONS ACT (ONTARIO)
185. (1) Rights of dissenting shareholders. Subject to subsection (3) and to
sections 186 and 248, if a corporation resolves to,
(a) amend its articles under section 168 to add, remove or change
restrictions on the issue, transfer or ownership of shares of a class
or series of the shares of the corporation;
(b) amend its articles under section 168 to add, remove or change any
restriction upon the business or businesses that the corporation may
carry on or upon the powers that the corporation may exercise;
(c) amalgamate with another corporation under sections 175 and 176;
(d) be continued under the laws of another jurisdiction under section 181;
or
(e) sell, lease or exchange all or substantially all its property under
subsection 184(3);
a holder of shares of any class or series entitled to vote on the resolution may
dissent.
(2) Idem. If a corporation resolves to amend its articles in a manner
referred to in subsection 170(1), a holder of shares of any class or series
entitled to vote on the amendment under section 168 or 170 may dissent, except
in respect of an amendment referred to in,
(a) clause 170(1)(a), (b) or (e) where the articles provide that the
holders of shares of such class or series are not entitled to dissent;
or
(b) subsection 170(5) or (6).
(3) Exception. A shareholder of a corporation incorporated before the
29th day of July, 1983 is not entitled to dissent under this section in respect
of an amendment of the articles of the corporation to the extent that the
amendment,
(a) amends the express terms of any provision of the articles of the
corporation to conform to the terms of the provision as deemed to be
amended by section 277; or
(b) deletes from the articles of the corporation all of the objects of the
corporation set out in its articles, provided that the deletion is
made by the 29th day of July, 1986.
(4) Shareholders right to be paid fair value. In addition any other right
the shareholder may have, but subject to subsection (30), a shareholder who
complies with this section is entitled, when the action approved by the
resolution from which the shareholder dissents becomes effective, to be paid by
the corporation the fair value of the shares held by the shareholder in respect
of which the shareholder dissents, determined as of the close of business on the
day before the resolution was adopted.
(5) No partial dissent. A dissenting shareholder may only claim under this
section with respect to all the shares of a class held by the dissenting
shareholder on behalf of any one beneficial owner and registered in the name of
the dissenting shareholder.
<PAGE>
-2-
(6) Objection. A dissenting shareholder shall send to the corporation, at
or before any meeting of sh areholders at which a resolution referred to in
subsection (1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the purpose of
the meeting or of the shareholder's right to dissent.
(7) Idem. The execution or exercise of a proxy does not constitute a
written objection for purposes of subsection (6).
(8) Notice of adoption of resolution. The corporation shall, within ten
days after the shareholders adopt the resolution, send to each shareholder who
has filed the objection referred to in subsection (6) notice that the resolution
has been adopted, but such notice is not required to be sent to any shareholder
who voted for the resolution or who has withdrawn the objection.
(9) Idem. A notice sent under subsection (8) shall set out the rights of
the dissenting shareholder and the procedures to be followed to exercise those
rights.
(10) Demand for payment of fair value. A dissenting shareholder entitled
to receive notice under subsection (8) shall, within twenty days after receiving
such notice, or, if the shareholder does not receive such notice, within twenty
days after learning that the resolution has been adopted, send to the
corporation a written notice containing,
(a) the shareholder's name and address;
(b) the number and class of shares in respect of which the shareholder
dissents; and
(c) a demand for payment of the fair value of such shares.
(11) Certificates to be sent in. Not later than the thirtieth day after
the sending of a notice under subsection (10), a dissenting shareholder shall
send the certificates representing the shares in respect of which the
shareholder dissents to the corporation or its transfer agent.
(12) Idem. A dissenting shareholder who fails to comply with subsections
(6), (10) and (11 ) has no right to make a claim under this section.
(13) Endorsement on certificate. A corporation or its transfer agent
shall endorse on any share certificate received under subsection (11 ) a notice
that the holder is a dissenting shareholder under this section and shall return
forthwith the share certificates to the dissenting shareholder.
(14) Rights of dissenting shareholder. On sending a notice under
subsection (10), a dissenting shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of the shares as
determined under this section except where,
(a) the dissenting shareholder withdraws notice before the corporation
makes an offer under subsection (15);
(b) the corporation fails to make an offer in accordance with subsection
(15) and the dissenting shareholder withdraws notice; or
(c) the directors revoke a resolution to amend the articles under
subsection 168(3), terminate an amalgamation agreement under
subsection 176(5) or an application for continuance under subsection
181(5), or abandon a sale, lease or exchange under subsection 184(8),
in which case the dissenting shareholder's rights are reinstated as of the date
the dissenting shareholder sent the notice referred to in subsection (10), and
the dissenting shareholder is entitled, upon presentation and surrender to the
corporation or its transfer agent of any certificate representing the shares
that has been endorsed in accordance
<PAGE>
-3-
with subsection (13), to be issued a new certificate representing the same
number of shares as the certificate so presented, without payment of any fee.
(15) Offer to pay. A corporation shall, not later than seven days after
the later of the day on which the action approved by the resolution is effective
or the day the corporation received the notice referred to in subsection (10),
send to each dissenting shareholder who has sent such notice,
(a) a written offer to pay for the dissenting shareholder's shares in an
amount considered by the directors of the corporation to be the fair
value thereof, accompanied by a statement showing how the fair value
was determined; or
(b) if subsection (30) applies, a notification that it is unable lawfully
to pay dissenting shareholders for their shares.
(16) Idem. Every offer made under subsection (15) for shares of the same
class or series shall be on the same terms.
(17) Idem. Subject to subsection (30), a corporation shall pay for the
shares of a dissenting shareholder within ten days after an offer made under
subsection (15) has been accepted, but any such offer lapses if the corporation
does not receive an acceptance thereof within thirty days after the offer has
been made.
(18) Application to court to fix fair value. Where a corporation fails to
make an offer under subsection (15) or if a dissenting shareholder fails to
accept an offer, the corporation may, within fifty days after the action
approved by the resolution is effective or within such further period as the
court may allow, apply to the court to fix a fair value for the shares of any
dissenting shareholder.
(19) Idem. If a corporation fails to apply to the court under subsection
(18), a dissenting shareholder may apply to the court for the same purpose
within a further period of twenty days or within such further period as the
court may allow.
(20) Idem. A dissenting shareholder is not required to give security for
costs in an application made under subsection (18) or (19).
(21) Costs. If a corporation fails to comply with subsection (15), then
the costs of a shareholder application under subsection (19) are to be borne by
the corporation unless the court otherwise orders.
(22) Notice to Shareholders. Before making application to the court under
subsection (18) or not later than seven days after receiving notice of an
application to the court under subsection (19), as the case may be, a
corporation shall give notice to each dissenting shareholder who, at the date
upon which the notice is given,
(a) has sent to the corporation the notice referred to in subsection
(10); and
(b) has not accepted an offer made by the corporation under subsection
(15), if such an offer was made,
of the date, place and consequences of the application and of the dissenting
shareholder's right to appear and be heard in person or by counsel, and a
similar notice shall be given to each dissenting shareholder who, after the date
of such first mentioned notice and before termination of the proceedings
commenced by the application, satisfies the conditions set out in clauses (a)
and (b) within three days after the dissenting shareholder satisfies such
conditions.
(23) Parties joined. All dissenting shareholders who satisfy the
conditions set out in clauses (22)(a) and (b) shall be deemed to be joined as
parties to an application under subsection (18) or (19) on the later of the date
upon which the application is brought and the date upon which they satisfy the
conditions, and shall be bound by the decision rendered by the court in the
proceedings commenced by the application.
<PAGE>
-4-
(24) Idem. Upon an application to the court under subsection (18) or
(19), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court shall fix a fair
value for the shares of all dissenting shareholders.
(25) Appraisers. The court may in its discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(26) Final Order. The final order of the court in the proceedings
commenced by an application under subsection (18) or (19) shall be rendered
against the corporation and in favour of each dissenting shareholder who,
whether before or after the date of the order, complies with the conditions set
out in clauses (22) (a) and (b).
(27) Interest. The court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder from the date the
action approved by the resolution is effective until the date of payment.
(28) Where corporation unable to pay. Where subsection (30) applies, the
corporation shall, within ten days after the pronouncement of an order under
subsection (26), notify each dissenting shareholder that it is unable lawfully
to pay dissenting shareholders for their shares.
(29) Idem. Where subsection (30) applies, a dissenting shareholder, by
written notice sent to the corporation within thirty days after receiving a
notice under subsection (28), may,
(a) withdraw a notice of dissent, in which case the corporation is deemed
to consent to the withdrawal and the shareholder's full rights are
reinstated; or
(b) retain a status as a claimant against the corporation, to be paid as
soon as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors of
the corporation but in priority to its shareholders.
(30) Idem. A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds for believing
that,
(a) the corporation is or, after the payment, would be unable to pay its
liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby be
less than the aggregate of its liabilities.
(31) Court order. Upon application by a corporation that proposes to take
any of the actions referred to in subsection (1) or (2), the court may, if
satisfied that the proposed action is not in all the circumstances one that
should give rise to the rights arising under subsection (4), by order declare
that those rights will not arise upon the taking of the proposed action, and the
order may be subject to compliance upon such terms and conditions as the court
thinks fit and, if the corporation is an offering corporation, notice of any
such application and a copy of any order made by the court upon such application
shall be served upon the Commission.
(32) Commission may appear. The Commission may appoint counsel to assist
the court upon the hearing of an application under subsection (31 ) if the
corporation is an offering corporation.
<PAGE>
PROSPECTUS SUPPLEMENT
(To Joint Proxy Statement/Prospectus dated October __, 2000)
SUBJECT TO COMPLETION, DATED OCTOBER 5, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING ANY OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
AVIATION GROUP, INC.
Offer to Exchange 2,153 Shares of Series C Convertible Preferred Stock
for 2,153 Shares of Series B Preferred Stock
The Exchange Offer Will Expire at 5:00 p.m.,
Dallas, Texas Time, on October __, 2000, Unless Extended
Terms of the Exchange Offer
We, Aviation Group, Inc., are offering to the holders of outstanding shares
of our Series B preferred stock to exchange shares of our Series C convertible
preferred stock for their shares. The exchange ratio is one share of Series C
convertible preferred for each share of Series B preferred stock. Both series of
preferred stock have similar liquidation values. Tenders of outstanding shares
of Series C convertible preferred stock may be withdrawn at any time prior to
the expiration of the exchange offer.
At the same time as this offer, we have mailed to our common shareholders
the accompanying joint proxy statement/prospectus to obtain their approval to an
arrangement under Ontario, Canada law between our Canadian subsidiary and
travelbyus.com ltd. and to the issuance of the Series C convertible preferred
stock. The closing of our exchange offer to you is conditioned on the completion
of the arrangement and the approval of the issuance of the Series C convertible
preferred stock.
There is currently no established trading market for the Series B or Series
C preferred stock. We do not expect that a trading market for the preferred
stock will develop following the completion of the exchange offer. Our common
stock is traded on the Nasdaq SmallCap Market and the Boston Stock Exchange
under the symbol "AVGP". On September 11, 2000, the closing price of our common
stock, as reported on the Nasdaq SmallCap Market, was $1.94 per share.
Terms of the Series C Convertible Preferred Stock
Offered in Exchange for the Series B Preferred Stock
Dividends: 9% cumulative annual dividends, payable monthly in arrears in cash,
if and when declared by our board of directors.
Liquidation Preference: $10,000 per share.
Voting Rights: The shares of Series C convertible preferred stock will vote
together, as a single class, with shares of our common stock on an as-converted
basis, after the earlier of September 30, 2000 or the completion of our
arrangement with travelbyus.com.
Redemption: The Series C convertible preferred stock is not redeemable after
September 30, 2000.
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Conversion Right: The Series C convertible preferred stock is convertible by you
into our common stock at the applicable conversion ratio at any time after the
earlier of October 31, 2000 or our notice of redemption.
Conversion Price: The greater of $6 per share, subject to adjustment, or the
mean of the closing bid prices for our common stock for the 21 trading days
prior to conversion. If the minimum conversion price of $6 applies, this equates
to an initial conversion ratio of 1,666 2/3 shares of our common stock for each
share of Series C convertible preferred stock.
Conversion at our Option: At any time after February 28, 2001, we may convert
shares of Series C convertible preferred stock into our common stock at the
conversion price.
----------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "SUPPLEMENTAL RISK FACTORS"
ON PAGE S-5 OF THIS SUPPLEMENT AND "RISK FACTORS" BEGINNING ON PAGE 20 OF THE
ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
The date of this prospectus supplement is ________, 2000.
S-2
<PAGE>
SUMMARY TERM SHEET
Principal Terms of the Exchange Offer
We, Aviation Group, Inc., are offering to the holders of outstanding shares
of our Series B preferred stock to exchange shares of our Series C convertible
preferred stock for your shares. The exchange ratio is one share of Series C
convertible preferred for each share of Series B preferred stock. Both series of
preferred stock have similar liquidation values.
The exchange offer is being made in connection with the solicitation of our
common shareholders for approval of a proposed arrangement under Ontario, Canada
law between our Canadian subsidiary and travelbyus.com ltd. This exchange offer
is required by the terms of our agreement with travelbyus.com entered into on
March 1, 2000. The purpose of the exchange offer is to provide the holders of
Series B preferred shares the opportunity to obtain preferred stock that is
freely transferable and convertible into common stock after completion of
Aviation Group's proposed arrangement with travelbyus.com ltd. For more
information about the proposed arrangement with travelbyus.com ltd., see
"Proposal No. 1 - The Arrangement" on page 42 of the joint proxy
statement/prospectus which accompanies this supplement.
The exchange offer will expire at 5:00 p.m., Dallas time, on October __,
2000, unless we, in our sole discretion, choose to extend the expiration date.
Conditions of the Exchange Offer
The exchange offer is not conditioned on any minimum number of shares being
tendered in the exchange. The only conditions to the exchange offer are:
- the completion of the arrangement; and
- the approval by our shareholders of the issuance of the Series C
convertible preferred stock.
Our shareholders will have the opportunity to vote on the proposals to
complete the arrangement and to approve the issuance of the Series C convertible
preferred stock at a special meeting of the shareholders to be held on October
__, 2000. For more information on these proposals, see "Proposal No. 1 - The
Arrangement" on page 42 and "Proposal No. 5: Ratification of Certain Securities
Issued or to be Issued in Connection With Aviation Group's Acquisition of Global
Leisure Travel, Inc." on page 110 of the joint proxy statement/prospectus.
Terms of the Series C Convertible Preferred Stock Offered in Exchange for the
Series B Preferred Stock
The Series C convertible preferred stock contains the following terms:
- 9% cumulative annual dividends, payable monthly in arrears in cash, if
and when declared by our board of directors;
- $10,000 liquidation preference per share;
- voting rights equal to that of our common stock, on an as-converted
basis;
- a conversion option whereby you may convert the shares into common
stock of our company at time after the earlier of October 31, 2000 or
our notice of redemption;
- a conversion option whereby we may convert the shares into common
stock of our company at any time after February 28, 2001; and
- a minimum conversion price of $6.00 per share, subject to adjustment
upon stock splits and adjustments.
S-3
<PAGE>
For a more detailed explanation of how the terms of the Series C convertible
preferred stock compare to those of the Series B preferred stock, see
"Comparison of Series B Preferred Stock and Series C Preferred Stock" on page S-
8 of this prospectus supplement.
Procedures for Tendering
To accept the exchange offer, you must:
- read, complete and sign the letter of transmittal included with this
prospectus supplement; and
- return the letter of transmittal, along with the certificate(s) for
your shares of Series B preferred stock, to us at the address
indicated on the letter of transmittal.
If and when the exchange offer is closed, we will forward to you a certificate
representing the number of Series C preferred shares to which you are entitled.
If any of the conditions to the exchange offer are not satisfied and not waived
by us, we will return to you any shares of the Series B preferred stock that you
tendered pursuant to this offer. We will pay all expenses incident to this
offer.
Withdrawal Rights
You may withdraw the tender of your Series B preferred shares at any time
prior to the expiration of the exchange offer. To withdraw, you must:
- provide us with a written notice of withdrawal at the address
indicated on the letter of transmittal;
- specify your name, the number of shares withdrawn and your Series B
certificate number(s); and
- sign the notice of withdrawal in the same manner as the original
letter of transmittal.
Market for Series B and Series C Preferred Shares
There is currently no established trading market for the Series B or Series
C preferred stock. We do not expect that a trading market for the preferred
stock will develop following the completion of the exchange offer. Our common
stock is traded on the Nasdaq SmallCap Market and the Boston Stock Exchange
under the symbol "AVGP", and we have applied for listing of our common stock on
the Nasdaq National Market. On September 11, 2000, the closing price of our
common stock, as reported on the Nasdaq SmallCap Market, was $1.94 per share.
Risks Involved with the Exchange Offer
There are risks involved with this investment. For a more detailed
explanation of the risks involved with this transaction, see "Risk Factors"
beginning on page 20 of the Prospectus and "Supplemental Risk Factors" beginning
on page S-5 of the Prospectus Supplement.
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<PAGE>
SUPPLEMENTAL RISK FACTORS
In addition to the risk factors beginning on page 20 of the accompanying
joint proxy statement/prospectus, you should consider the following risk factors
in evaluating whether to accept this exchange offer. These factors should be
considered in conjunction with the other information included elsewhere in this
prospectus supplement and in the joint proxy statement/prospectus.
The Series C convertible preferred stock may be converted into common stock by
Aviation Group at any time after February 28, 2001.
Aviation Group may elect to exercise its right to cause the conversion of
the Series C convertible preferred stock into common stock at any time after
February 28, 2001. If this occurs, holders of the Series C convertible preferred
stock will lose their rights as preferred shareholders, including for instance
any preference on liquidation and any cumulative dividends. In addition, the
investment of the holders will be diluted if the trading price of the common
stock is less than $6.00 per share, which is the minimum conversion price,
subject to adjustment for stock splits and dividends.
There is no established market for our preferred stock.
Although the Series C convertible preferred stock may be resold or
otherwise transferred by holders who are not affiliates of our company without
compliance with the registration requirements under the Securities Act, they
will be new securities for which there is currently no established trading
market. Similarly, there is no established trading market for our Series B
preferred stock. We do not intend to apply for listing of either series of our
preferred stock on a national securities exchange or for quotation on an
automated dealer quotation system. The liquidity of any market for our preferred
stock will depend upon the number of holders of the series of stock, the
interest of securities dealers in making a market in such stock and other
factors. Accordingly, there can be no assurance as to the development or
liquidity of any market for either series of our preferred stock. If an active
trading market for our preferred stock does not develop, the market price and
liquidity of the stock may be adversely affected. If shares of our preferred
stock are traded, they may trade at a discount from their current value,
depending upon the market for similar securities, our performance and other
factors. Although our common stock is presently listed on the Nasdaq SmallCap
Market and the Boston Stock Exchange and we intend to apply for listing of our
common stock on the Nasdaq National Market and the Frankfurt Stock Exchange,
there can be no assurance that these listings will be maintained or approved.
There are also substantial risks relating to the market for and liquidity of the
common stock, as described in the accompanying joint proxy statement/prospectus.
We do not plan to pay dividends on our common stock.
Unlike the Series C convertible preferred stock, the common stock into
which the Series C convertible preferred stock is convertible does not give the
holder a right to receive dividends. We have paid no dividends on our common
stock. We cannot assure you that we will achieve sufficient earnings to pay cash
dividends on our common stock in the near future. Further, we intend to retain
earnings to fund our operations. Therefore, we do not anticipate paying any cash
dividends on our common stock for the foreseeable future.
Our ability to pay the liquidation preference and dividends on our preferred
stock depends on our financial condition at that time.
Our obligations to the holders of our debt and other creditors take
priority over our obligations to the holders of the Series C convertible
preferred stock or Series B preferred stock. Additionally, under Texas law, we
may not redeem our preferred stock for its stated liquidation preference if at
that time our remaining assets are not sufficient to pay our outstanding
obligations or if that redemption would impair our capital.
The payment of dividends on our preferred stock is subject to the discretion of
our board of directors.
The holders of the Series C convertible preferred stock and Series B
preferred stock are entitled to receive dividends on their shares only when and
if declared by our board of directors. There is no obligation to pay a
S-5
<PAGE>
dividend until our board of directors declares the dividend. If we do not
declare and pay dividends on the preferred stock, the dividends will accumulate,
but the holders will have no other rights or remedies and will be required to
wait until we declare a dividend on the preferred stock.
S-6
<PAGE>
EXCHANGE OFFER
We are offering to issue new shares of our Series C convertible preferred
stock in exchange for outstanding shares of our Series B preferred stock. The
exchange ratio is one share of Series C convertible preferred for each share of
Series B preferred stock. The series of preferred stock have similar liquidation
values.
This exchange offer is being made in connection with the solicitation of
our common shareholders for approval of a proposed arrangement under Ontario,
Canada law between our Canadian subsidiary and travelbyus.com ltd. The details
of the proposed arrangement are described in the accompanying joint proxy
statement/prospectus which we have mailed to our common shareholders. In
addition, our common shareholders are being solicited to approve the issuance of
the Series C convertible preferred stock. This exchange offer is required by the
terms of our agreement with travelbyus.com entered into on March 1, 2000.
The exchange offer is not conditioned upon any minimum number of shares
being tendered for exchange. The only conditions to the exchange offer are the
declaration of the effectiveness of the registration statement of which this
prospectus supplement constitutes a part, the completion of the arrangement,
and the approval by our shareholders of the issuance of the Series C convertible
preferred stock.
Cumulative dividends on each share of Series C convertible preferred stock
will accrue from the date immediately following the last date on which dividends
were paid on the share of Series B preferred stock exchanged for Series C
convertible preferred share. If no dividends have been paid on the Series B
preferred stock, cumulative dividends will accrue from the date the share of the
Series B preferred stock was originally issued.
The exchange offer will expire at 5:00 p.m., Dallas, Texas time, on October
__, 2000, unless we, in our sole discretion, choose to extend the expiration
date. Tenders of outstanding shares of Series C convertible preferred stock may
be withdrawn at any time prior to the expiration of the exchange offer. In order
to withdraw your tender, you must provide us with a written notice of withdrawal
at the address indicated on the letter of transmittal, specifying your name and
the number of shares being withdrawn, including the certificate number of the
certificate representing the Series B preferred stock being withdrawn. The
notice of withdrawal must be signed by the same person and in the same manner as
the person who tendered the shares.
Enclosed with this prospectus supplement is a form of letter of transmittal
to tender your shares for exchange. Please complete and sign the letter of
transmittal and return it, together with the certificate for your shares of
Series B preferred stock, to us at the address indicated on the letter of
transmittal. If and when the exchange offer is closed, we will promptly forward
to you a certificate representing the shares of Series C convertible preferred
stock to which you are entitled under this exchange offer. If any of the
conditions to the exchange offer are not satisfied and not waived by us, we will
return to you any shares of the Series B preferred stock that you tendered
pursuant to this exchange offer.
We will pay all expenses incident to the exchange offer. We have not
retained an exchange agent in connection with the exchange offer as we will act
as our own exchange agent. If you have any questions or desire further
information with respect to the exchange offer, please contact Richard Morgan at
(214) 922-8100, ext. 1102, or by facsimile at (214) 922-9242.
References in this prospectus supplement to "we" or "our" are to Aviation
Group, Inc.
S-7
<PAGE>
COMPARISON OF SERIES B PREFERRED STOCK AND SERIES C PREFERRED STOCK
Descriptions of the terms of both the Series B preferred stock and the
Series C convertible preferred stock are set forth in the accompanying joint
proxy statement/prospectus under "Description of Aviation Group Capital Stock."
The following is a brief description of some of the material differences in the
rights, preferences and limitations between the Series B preferred stock and the
Series C convertible preferred stock.
Dividends
The annual dividend rate on the Series B preferred stock is 12% as compared
to 9% for the Series C convertible preferred stock. Dividends are payable
quarterly in arrears on the Series B preferred stock, compared to monthly in
arrears on the Series C convertible preferred stock, in each case only if and
when declared by our board of directors.
Liquidation Preference
The liquidation value of the Series B preferred stock and Series C
convertible preferred stock are identical and of equal rank.
Voting Rights
The holders of the Series B preferred stock are not entitled to vote on any
matters except as required by the Texas Business Corporation Act or if the
rights of the holders of the Series B preferred stock are adversely affected.
The holders of the Series C convertible preferred stock have the same rights
and, in addition, after the earlier of September 30, 2000 or the completion of
the arrangement, will have the right to vote as a shareholder of Aviation Group
on any matters for which holders of common stock have the right to vote, voting
together with the holders of common stock as a single class.
Conversion
The Series B preferred stock is not convertible into common stock at any
time. Holders of the Series C convertible preferred stock have the right to
convert their stock at any time after October 31, 2000 or earlier if we elect to
exercise our mandatory redemption right. In addition, we have the right to
require conversion of the Series C convertible preferred stock into shares of
common stock at any time after February 28, 2001. The conversion price is the
greater of $6 per share of common stock, subject to adjustment for stock splits,
dividends and other recapitalizations, or the arithmetic mean of the closing bid
price of the common stock for the 21 trading days preceding the date of
conversion. This amount is divided into the liquidation preference to determine
the number of shares into which each share is convertible.
Redemption
We have the right to redeem all or part of the Series B preferred stock. We
may not exercise this right until after February 28, 2001 for the Series B
preferred stock. We are required to redeem the Series B preferred stock to the
extent of any cash proceeds from the sale of any of our assets other than in the
ordinary course of business or the sale of public debt or equity securities
after completion of the arrangement. We have no right to redeem the Series C
convertible preferred stock after September 30, 2000.
Resales of Shares of Preferred Stock
The shares of Series B preferred stock were issued in a transaction that
was exempt from the registration requirements of the Securities Act of 1933 and
are, therefore, "restricted securities" which may not be resold except pursuant
to an effective registration statement or an applicable exemption from such
registration requirements. The Series C convertible preferred stock has been
registered under the Securities Act and, therefore, will not bear any legends
restricting transfer. These shares generally may be offered for resale, resold
and otherwise transferred by a holder (other than any affiliate within the
meaning of Rule 405 under the Securities Act) without registration and
S-8
<PAGE>
compliance with the prospectus delivery provisions of the Securities Act. Any
shares of Series B preferred stock that are not tendered will, following the
expiration of the exchange offer, continue to be outstanding and will continue
to be subject to the existing restrictions upon their transfer.
LEGAL MATTERS
The validity of the shares of Series C convertible preferred stock offered
to you has been passed upon by Jenkens & Gilchrist, a Professional Corporation.
S-9
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description of Exhibit
-------- ----------------------
2.1 - Arrangement Agreement dated May 3, 2000 between travelbyus.com
ltd., Aviation Group Canada Ltd. and Aviation Group, Inc.
(included as Appendix A to the joint proxy statement/prospectus)
*2.2 - Interim Order issued by the Ontario Superior Court (included as
Appendix C to the joint proxy statement/prospectus)
2.3 - Plan of Arrangement, including Share Provisions for
travelbyus.com ltd. (included as Appendix B to the joint proxy
statement/prospectus)
**3.1 - Articles of Incorporation of Aviation Group, Inc. filed with the
Texas Secretary of State, as amended
**3.2 - Amended and Restated Bylaws of Aviation Group, Inc., as
amended
4.1 - Articles of Incorporation of Aviation Group, Inc., including
Certificates of Designation for Series A convertible preferred
stock, Series B preferred stock and Series C convertible
preferred stock (filed as Exhibit 3.1)
4.2 - Form of Certificate representing common stock (a)
4.3 - Form of Warrant Agreement dated August 13, 1997 between Aviation
Group, Inc., Continental Stock Transfer & Trust Co., Inc., and
Duke & Co., Inc. (a)
4.4 - Form of Warrant Certificate (attached as Exhibit A to Form of
Warrant Agreement filed as Exhibit 4.3) (a)
**4.5 - Resignation of Warrant Agent dated November 30, 1998 between
Aviation Group, Inc. and Continental Stock Transfer & Trust
Company, and Appointment of Warrant Agent and Assumption of
Warrant Agreement dated November 18, 1998 between Aviation Group,
Inc. and Securities Transfer Corporation
4.6 - Form of Underwriter's Warrant Agreement dated August 13, 1997 by
and between Aviation Group, Inc. and Duke & Co., Inc. (a)
5.1 - Opinion of Jenkens & Gilchrist, a Professional Corporation as to
legality
5.2 - Opinion of Cassels Brock & Blackwell LLP as to legality
8.1 - Opinion of Cassels Brock & Blackwell LLP as to tax matters
8.2 - Opinion of Shearman & Sterling as to tax matters
10.1 - Aviation Group, Inc. 1997 Stock Option Plan (a)
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<PAGE>
10.2 - Form of First Amendment to 1997 Stock Option Plan
10.3 - First Amended and Restated Employment Agreement between Aviation
Group, Inc. and Lee Sanders (a)
10.4 - Employment Agreement dated March 1, 1996, by and between Aviation
Group, Inc. and Paul Lubomirski (a)
10.5 - Form of Warrant Agreement for warrants granted as of April 28,
1998, and table listing directors or executive officers who
received warrants and related information (d)
10.6 - Lease and Operating Agreement between Aviation Exteriors
Louisiana, Inc. and Iberia Parish Airport Authority, dated
December 28, 1994, relating to Hangar No. 88-C (a)
10.7 - Warrant Agreement dated as of October 20, 1998 between Paul
Taboada and Aviation Group, Inc. (e)
10.8 - Warrant Agreement dated as of July 31, 1999 between Aviation
Group, Inc. and the Louisiana Economic Development Corporation
(e)
10.9 - Lease and Operating Agreement between Iberia Parish Airport
Authority and Aviation Exteriors Louisiana, Inc., dated July 23,
1991, relating to Hangar No. 88, as amended by that certain
Agreement dated December 10, 1992 (a)
10.10 - Loan and Security Agreement dated August 21, 1998 between the CIT
Group/Credit Finance, Inc. and Tri-Star Airline Services, Inc.,
Aviation Exteriors Louisiana, Inc., Casper Air Service, Aero
Design, Inc., and Aviation Exteriors Aviation Portland, Inc. (d)
10.11 - Guaranty dated August 21, 1998 from Aviation Group, Inc. in favor
of The CIT Group/Credit Finance, Inc. (d)
**10.12 - Warrant Agreement dated April 30, 2000 between Aviation Group,
Inc. and Securities Transfer Corporation, as Warrant Agent,
governing Series B warrants
**10.13 - Warrant Agreement dated April 30, 2000 between Aviation Group,
Inc. and Securities Transfer Corporation, as Warrant Agent,
governing Series C warrants
**10.14 - Warrant dated May 11, 2000 issued by Aviation Group, Inc. in
favor of Genesis Diversified Investments, Inc.
10.15 - Warrant Agreement dated as of June 11, 1999 between Aviation
Group, Inc. and John H. Chidlow (e)
10.16 - Warrant Agreement dated as of June 11, 1999 between Jerry R. Webb
and Aviation Group, Inc. (e)
10.17 - Warrant Agreement dated as of October 20, 1998 between RAS
Securities Corp. and Aviation Group, Inc. (e)
10.18 - Form of 10% Convertible Note maturing March 1, 2001 (a)
10.19 - Form of Pledge Agreement from Aviation Group, Inc. in favor of
holders of 10% Convertible Notes (a)
10.20 - Warrant Agreement dated as of August 31, 1999 between Aviation
Group, Inc. and Hank Clements (e)
10.21 - Employment Agreement between Aviation Group, Inc. and John Arcari
(a)
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<PAGE>
10.22 - First Amendment to Consulting Agreement between Aviation Group,
Inc. and Charles Weed (a)
10.23 - Warrant Agreement dated as of August 31, 1999 between Aviation
Group, Inc. and Robert Schneider (e)
10.24 - 747 Hangar Lease Agreement between Iberia Parish Government,
Iberia Parish Airport Authority and Aviation Exteriors Louisiana,
Inc., dated June 23, 1999 (e)
10.25 - Agreement between United Parcel Service Co. and Aviation
Exteriors Louisiana, Inc. (f/k/a Pride Aviation, Inc.) dated
January 1, 1999 (e)
10.26 - First Amendment to Employment Agreement between Aviation Group,
Inc. and Paul Lubomirski dated August 18, 1997 (a)
10.27 - First Amendment to First Amended and Restated Employment
Agreement between Aviation Group, Inc. and Lee Sanders dated
August 18, 1997 (a)
10.28 - Second Amendment to First Amended and Restated Employment
Agreement between Aviation Group, Inc. and Lee Sanders dated
August 28, 1998 (d)
10.29 - First Amendment to Stock Purchase Agreement among Aviation Group,
Aero Design, Inc., Battery Shop, LLC, Carolyn Lynn and Grady Lynn
dated as of April 30, 1999 (e)
10.30 - Aircraft Paint Services Agreement dated April 24, 1998 between
Federal Express Corporation and Aviation Exteriors Aviation, Inc.
(b)
10.31 - Stock Purchase Agreement dated as of August 28, 1998 among
Aviation Group, General Electrodynamics Corporation, Omega
Management Corporation and Thomas J. Smith (c)
10.32 - Forms of Amendments to Nonqualified Warrant Agreements and
Qualified Stock Option Agreements to amend exercise prices,
together with a listing of the options and warrants that were
amended and the new exercise prices per share (e)
10.33 - Amendment and Second Amendment to June 30, 1996 Warrant Agreement
between Aviation Group, Inc. and Richard L. Morgan (e)
10.34 - Preferred Stock Purchase Agreement dated March 1, 2000 among
Global Leisure Travel, Inc., Aviation Group, Inc. and the
shareholders of Global Leisure Travel, Inc., as amended (g)
10.35 - Asset Purchase Agreement dated as of February 8, 2000 between
Casper Air Service and Casper Jet Center Fueling, L.L.C. (f)
10.36 - Asset Purchase Agreement dated as of December 15, 1999 between
Tri-Star Acquisition Corp. d/b/a Servisair, Inc. and Tri-Star
Airline Services, Inc., joined for limited purposes by Aviation
Group, Inc. and Servisair USA, Inc. (f)
**10.37 - Warrant dated May 11, 2000 issued by Aviation Group, Inc. in
favor of Global Leisure, Inc.
10.38 - Preferred Stock Purchase Agreement dated March 1, 2000 between
Aviation Group, Inc. and travelbyus.com ltd., as amended (g)
10.39 - Agreement and Plan of Merger dated March 17, 2000 among Aviation
Group, Inc., Global Leisure Travel, Inc., the shareholders of
Global Leisure Travel, Inc. and certain debtholders of Global
Leisure Travel, Inc., as amended (g)
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<PAGE>
**10.40 - Purchase Agreement dated May 4, 2000 among Aviation Group, Inc.,
travelbyus.com ltd. and SW Pelham Fund, L.P.
**10.41 - Promissory Note dated May 9, 2000 in the principal amount of
$3,000,000 made by Aviation Group, Inc. payable to SW Pelham
Fund, L.P.
**10.42 - Warrant Agreement dated May 9, 2000 between Aviation Group, Inc.
and SW Pelham Fund, L.P.
10.43 - Form of two Warrant Agreements dated February 23, 2000 between
Aviation Group, Inc. and Richard Morgan or Lee Sanders, each for
the purchase of 250,000 shares of common stock (g)
10.44 - Form of three Warrant Agreements dated February 23, 2000 between
Aviation Group, Inc. and Hank Clements, Charles E. Weed or Gordon
Whitener, each for the purchase of 50,000 shares of common stock
(g)
**10.45 - Promissory Note dated May 25, 2000 in the principal amount of
$1,975,000 made by travelbyus.com ltd. payable to the order of
Aviation Group, Inc.
**10.46 - Pledge Agreement dated May 25, 2000 from travelbyus.com ltd. in
favor of Aviation Group, Inc.
**10.47 - Third Amendment to First Amended and Restated Employment
Agreement dated effective February 23, 2000 between Aviation
Group, Inc. and Lee Sanders
10.48 - Asset Purchase Agreement and Share Purchase Agreement dated
October 13, 1999 among International Tours, Inc., Galaxsea
Cruises and Tours, Inc., North American Gaming and Entertainment
Corporation, travelbyus.com ltd., Travelbyus-IT Incorporated and
Travelbyus-Galaxsea Incorporated
10.49 - Purchase Agreement dated November 1, 1999 among John Fenyes, The
John and Judy Fenyes Charitable Remainder Unitrust, Jon Snyder,
The Jon and Janet Snyder Charitable Remainder Unitrust, Eldorado
Resorts, LLC and travelbyus.com ltd., regarding Express
Vacations, LLC
10.50 - Employment Agreement dated November 1, 1999 between Express
Vacations, LLC and John Fenyes
10.51 - Employment Agreement dated November 1, 1999 between Express
Vacations, Inc. and Jon Snyder
10.52 - Share Purchase Agreement effective as of December 1, 1999 among
Robert Beaudet, travelbyus.com ltd. and Thomas Spagnola,
regarding Cheap Seats, Inc.
10.53 - Share Purchase Agreement dated December 1, 1999 between
travelbyus.com ltd. and John Whyte regarding Legacy Storage
Systems Corp.
10.54 - Asset Purchase Agreement dated December 7, 1999 among
travelbyus.com ltd., Express Vacations Inc., John M. Elliott,
Charles Farrell, Peter Adam and Gene Koch
10.55 - Agreement and Plan of Merger dated April 4, 2000 among Cruise
Shoppes America, Ltd., Travelbyus-Cruise Shoppes Inc.,
travelbyus.com ltd., Gary P. Brown and Michael J. Wild
10.56 - Stock Purchase Agreement dated as of May 23, 2000 among Robert J.
Sims, Jr., William Kepke, Dieter M. Bailly, Raymond T. Sims, Mark
L. Sims, Ron Heuer and travelbyus.com ltd. regarding Epoch
Technology, Inc.
10.57 - Share Exchange Agreement dated June 16, 2000 between
travelbyus.com ltd. and Travel24.com AG
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<PAGE>
10.58 - Promotional Agreement dated May 5, 2000 among travelbyus.com ltd.,
Aviation Group and Genesis Intermedia.com, Inc.
10.59 - Software License Agreement dated April 7, 2000 between
travelbyus.com ltd. and ITA Software, Inc.
10.60 - Management Services Agreement dated as of September 1, 2000 among
travelbyus.com ltd., Global Leisure Travel, Inc., Sunmakers, Inc.,
KWTI Company, Firstar International, Inc., Cruise Alaska Tours,
Inc. and AOI, Inc.
10.61 - Acquisition Agreement dated as of July 20, 2000 between
travelbyus.com ltd. and Michael H. Rosenblum regarding Muffin
Communications Ltd.
10.62 - Acquisition Agreement dated as of September 14, 2000 among
travelbyus.com ltd., Gary Saner, J. Michael Rucker, David P.
Vasil, Ralph Schneider, Ron Lindsay, Michael Nagy and Kenneth
Seene regarding ProSoft Corporation
10.63 - Acquisition Agreement dated as of September 14, 2000 among
travelbyus.com ltd., J. Michael London and Sheila London, David
Krych, Krych Management Services, LLC., ProSoft Corporation,
Walter Grant, Ambraw Asphalt Materials, Inc., Robert P. and Teresa
M. Hohenstein, Dan E. and Kay Hornsby, Kenneth M. and Lori A.
Kavanaugh, Rosilyn Mancinelli, Christopher E. McAteer, Joseph
Lesko and Michael Gibbore regarding SiteRabbit.com Inc.
11.1 - Computation of Net Loss per Common Share
**21.1 - List of Subsidiaries of Aviation Group, Inc.
23.1 - Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibit 5.1)
23.2 - Consent of Cassels Brock & Blackwell LLP (included in Exhibit 5.2)
23.3 - Consent of Shearman & Sterling (included in Exhibit 8.2)
23.4 - Consents of PricewaterhouseCoopers LLP
23.5 - Consent of Hein + Associates LLP
23.6 - Consent of BDO Seidman LLP
23.7 - Consent of CIBC World Markets Corp.
23.8 - Consent of Wellington West Capital Inc. (included in their opinion
in Appendix G in the joint proxy statement/prospectus)
23.9 - Consent of Ernst & Young LLP
23.10 - Consent of Friduss, Lukee, Schiff & Co., P.C.
23.11 - Consents of Swenson Advisors, LLP
24.1 - Power of Attorney (included on signature page)
27.1 - Financial Data Schedule
99.1 - Form of Proxy Card for Aviation Group, Inc.
99.2 - Form of Proxy Card for travelbyus.com ltd.
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<PAGE>
**99.3 - Consent of Michael A. Farrugia
**99.4 - Consent of John H. Craig
**99.5 - Consent of Alan Thompson
99.6 - Form of Voting and Exchange Trust Agreement among Aviation Group,
Inc., Aviation Group Canada Ltd., travelbyus.com ltd. and Montreal
Trust Company of Canada (included as Appendix D to the joint proxy
statement/prospectus)
99.7 - Form of Support Agreement among Aviation Group, Inc., Aviation
Group Canada Ltd. and travelbyus.com ltd. (included as Appendix E
to the joint proxy statement/prospectus)
-----------------------------------------
* To be filed by amendment.
** Previously filed.
(a) Incorporated herein by reference to the Form SB-2 Registration
Statement of Aviation Group, Inc. (File No. 333-22727).
(b) Incorporated herein by reference to the Form 10-QSB Quarterly Report
for the quarter ended March 31, 1998.
(c) Incorporated by reference to the Form 8-K Current Report dated August
28, 1998.
(d) Incorporated by reference to the Form 10-KSB Annual Report for the year
ended June 30, 1998.
(e) Incorporated by reference to the Form 10-KSB Annual Report for the year
ended June 30, 1999.
(f) Incorporated by reference to the Form 10-QSB Quarterly Report for the
quarter ended December 31, 1999.
(g) Incorporated by reference to the Form 10-QSB Quarterly Report for the
quarter ended March 31, 2000.
(b) Financial Statement Schedules. None
(c) Report, Opinion or Appraisal. The fairness opinions of
Wellington West Capital Inc. and CIBC World Markets Corp. are included in the
joint proxy statement/prospectus as Appendices G and H.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on
September 30, 2000.
AVIATION GROUP, INC.
By: /s/ William Kerby
------------------------------
William Kerby
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Lee B. Sanders and
Richard L. Morgan, or any of them, with full power to act alone, his true and
lawful attorney-in-fact, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the SEC, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact or
any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following persons on behalf of Aviation
Group, Inc. and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William Kerby President, Chief Executive Officer September 30, 2000
------------------------------------------
William Kerby and Director
/s/ Lee Sanders Chairman of the Board and Director September 30, 2000
------------------------------------------
Lee Sanders
/s/ Richard L. Morgan Director, Executive Vice President, September 30, 2000
------------------------------------------
Richard L. Morgan Chief Financial Officer and Chief
Accounting Officer
Charles Weed * Director
Gordon Whitener * Director
Hank Clements * Director
John Fenyes * Director
*By: /s/ Lee Sanders September 30, 2000
-------------------------------------
Lee Sanders, Attorney-in-Fact
</TABLE>
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