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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the fiscal year ended June 30, 2000
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from ____________ to ____________
Commission file number: 0-10124
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Aviation Group, Inc.
(Exact name of Small Business Issuer as specified in its charter)
Texas 75-2631373
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
(Address of Principal Executive Offices)
214/922-8100
(Issuer's Telephone Number)
Securities registered under Section 12(g) of the Exchange Act:
$.01 par value Common Stock
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(Title of class)
Redeemable Common Stock Warrants
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(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB ________.
State issuer's revenues for its most recent fiscal year. $13,381,000.
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $6,735,000 at the close on October 3, 2000.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
4,956,722 shares of Common Stock were outstanding as of October 10, 2000.
Transitional Small Business Disclosure Format (check one):
Yes _______ No X .
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PART I
Item 1. Description of Business
General
Aviation Group, Inc. 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 Travel, Inc.
and travelbyus.com ltd. to effect a three-way business combination intended to
effect a shift of its assets and capital into the e-commerce travel industry.
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.
On May 3, 2000, Aviation Group entered into an arrangement agreement under
Ontario, Canada law to acquire travelbyus.com, an e-commerce travel company.
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, 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. Aviation Group acquired a controlling
interest in Global Leisure in March 2000 and completed the acquisition in May
2000 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.
Aviation Service Businesses
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.
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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 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 Leisure'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
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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.
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, there can be no assurance that these laws or regulations
may not require Aviation Group 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.
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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, 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, there can be no assurance 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.
Risk Factors
Risks Relating to Aviation Group's Business
There is a risk of future losses from Aviation Group's operations.
Aviation Group has a history of net losses. Aviation Group experienced net
losses of $994,000, $1,796,000 and $7,128,000 for the years ended June 30, 1998,
1999 and 2000, respectively. There can be no assurance that Aviation Group will
be profitable or that its businesses will be successful in the future.
Aviation Group's dependence on only a few customers may have a negative impact
on the business of its subsidiaries.
Only two customers accounted for approximately 37% of our revenues for the
year ended June 30, 2000. Aviation Group provides aircraft stripping and
painting services to these customers. Any termination of a contract or material
curtailment of plane deliveries by one of these customers, including reductions
as a result of economic or competitive pressures, would adversely affect
Aviation Group's business, financial condition and results of operation.
Aviation Group may be unable to sell its non-travel businesses on acceptable
terms in the near future.
Aviation Group has had discussions with various parties regarding the sale
of its non-travel 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.
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An economic downturn could affect the airline industry and negatively impact
Aviation Group's business.
The airline industry is significantly affected by general economic
conditions. Because a substantial portion of business and personal airline
travel is discretionary, the industry tends to experience adverse financial
results during general economic downturns. Economic and competitive conditions
since deregulation of the airline industry in 1978 have contributed to a number
of bankruptcies and liquidations among airlines. A worsening of current economic
conditions, or an extended period of recession nationally or regionally, could
have a material adverse effect on Aviation Group's operations. Aviation Group
does not have any control over general economic conditions.
The seasonality of the aircraft painting business could negatively affect
Aviation Group's operations.
Aviation Group's aircraft painting business is seasonal, which can
adversely affect Aviation Group's results of operations from quarter to quarter.
Typically, customers will have fewer aircraft painted during the summer months
and the holiday season from approximately November 15 through January 1 of each
year.
The airline services industry is highly competitive, and Aviation Group may not
be able to compete successfully.
Each of Aviation Group's subsidiaries is in direct competition with other
companies. Because many of Aviation Group's competitors have greater resources
than it does, Aviation Group may not be able to compete successfully in
providing its products or services at a competitive but profitable price. See
"Business--Competition."
Failure to comply with environmental, health and safety regulations could
negatively impact Aviation Group's business.
The Environmental Protection Agency and state and local regulatory
authorities regulate Aviation Group's operations primarily in the areas of:
- usage, 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 Aviation Group's financial condition.
The FAA regulates most of Aviation Group's business operations. The
painting and stripping business and the battery manufacturing and repair
business must continue to comply with the requirements of the FAA and Aviation
Group must maintain the FAA's certifications of its subsidiaries. These
certifications allow Aviation Group's 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 Aviation
Group's operations and financial condition.
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Risks Relating to Aviation Group Common Stock
Aviation Group's common stock price could fluctuate significantly, and
shareholders may be unable to resell their shares at a profit.
The trading prices for small capitalization companies often fluctuate
significantly. In addition, if and after the arrangement with travelbyus.com is
completed, 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's
common stock could significantly decline, even if the decline in consolidated
revenue or earnings is not reflective of any long-term problems with Aviation
Group's business.
Aviation Group might fail to maintain a listing for Aviation Group's common
stock.
Aviation Group common stock is presently listed on the Nasdaq SmallCap
Market and the Boston Stock Exchange. Aviation Group has applied for listing on
the Nasdaq National Market in connection with the arrangement. If Aviation
Group fails to maintain such listing, the market value of Aviation Group's
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, Aviation Group's common stock.
Active trading markets for Aviation Group's common stock may not develop or
continue.
While the listing of Aviation Group's common stock is a condition to the
closing of the arrangement, an active and liquid trading market for Aviation
Group's common stock may not develop or be sustained in the future. In
addition, Aviation Group cannot predict the price at which Aviation Group's
common stock will trade.
Aviation Group's other equity securities may limit the price growth potential of
Aviation Group's common stock.
There are outstanding a substantial number of warrants and options to
purchase shares of common stock. Aviation Group also has outstanding shares of
preferred stock, some of which are convertible into shares of common stock. In
addition to limiting the trading price growth potential of Aviation Group's
common stock, these securities may impair Aviation Group's ability to raise
needed capital by depressing the price at which Aviation Group could sell
Aviation Group's 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 Aviation Group's 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 three-year terms, and each class is up for
reelection in a different year. 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 shareholders 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's common
stock.
Aviation Group may issue preferred stock that may adversely affect the rights of
holders of common stock.
Aviation Group's articles of incorporation authorize its board of directors
to issue "blank check" preferred stock, the relative rights, powers,
preferences, limitations, and restrictions of which may be fixed or altered from
time to time by the board of directors. Accordingly, the board of directors
may, without shareholder approval, issue preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power and other rights of the holders of common stock. The preferred
stock could be utilized, under certain
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circumstances, as a method of discouraging, delaying, or preventing a change in
ownership and management of the company that shareholders might consider to be
in their best interests. Aviation Group recently designated shares of Series A,
B and C preferred stock in connection with Aviation Group's acquisition of
Global Leisure and its proposed arrangement with travelbyus.com. For a
description of the rights and preferences of the preferred stock, see "Item 5.
Market for Common Equity and Related Stockholder Matters."
No dividends on Aviation Group's common stock may ever be declared.
Dividends will not be paid unless and until they are declared by the board
of directors. Holders of Aviation Group's common stock will have no authority
to compel the board to declare dividends.
Because of the significant number of shares owned by directors, officers and
principal shareholders, other shareholders may not be able to significantly
influence the management of Aviation Group.
Aviation Group's directors, officers, and principal shareholders
beneficially own a substantial portion of Aviation Group's outstanding common
stock. As a result, these persons have a significant influence on the affairs
and management of Aviation Group, as well as all matters requiring shareholder
approval, including election and removal of members of the board of directors,
transactions with directors, officers or affiliated entities, the sale or merger
of Aviation Group, and changes in dividend policy. This concentration of
ownership and control could have the effect of delaying, deferring, or
preventing a change in ownership and management of Aviation Group, even when a
change would be in the best interest of other shareholders.
Risks Relating to the Arrangement with travelbyus.com
The arrangement with travelbyus.com is subject to shareholder and court approval
and may not be completed.
While Aviation Group has entered into an agreement to complete the
arrangement with travelbyus.com, the actual completion of that transaction may
not occur. Aviation Group's shareholders and the shareholders of travelbyus.com
must approve the arrangement. An Ontario court must also approve the terms of
the arrangement after a hearing at which all interested parties may be heard.
While Aviation Group expects these approvals will be obtained, some or all of
them may not be obtained.
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 $41.4 million.
Even after the arrangement, Aviation Group expects 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.
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A failure to realize the benefits anticipated from the arrangement could
adversely affect the market value of the combined companies.
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.
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.
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.
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.
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.
Other Risks Relating to Both Businesses After the Arrangement
Future acquisitions or investments could negatively affect the operations and
financial results of travelbyus.com and Aviation Group or dilute the ownership
percentage of their shareholders after the completion of the arrangement.
Following completion of the arrangement, Aviation Group and travelbyus.com
expect to review acquisition and investment prospects that would complement or
expand their current services or otherwise offer growth opportunities to the
combined companies. travelbyus.com and Aviation Group have limited experience
in acquisition activities and may have to devote substantial time and resources
in order to complete potential
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acquisitions. The companies 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 the companies have
no or limited prior experience.
Any of these risks could harm the businesses and operating results.
Risks Relating to the E-Commerce Travel Business of travelbyus.com
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 travelbyus.com's prospective business
because it faces 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 potential failures to:
- attract additional travel suppliers and consumers to its services;
- maintain and enhance its brand;
- expand its service offerings;
- operate, expand and develop its operations and systems efficiently;
- maintain adequate control of its expenses;
- raise additional capital;
- attract and retain qualified personnel;
- respond to technological changes; and
- respond to competitive market conditions.
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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.;
- 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 travelbyus and Global Leisure 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, travelbyus.com believes 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 travelbyus.com's competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than travelbyus.com has and may enter
into strategic or commercial relationships with larger, more established and
better-financed companies. Some of travelbyus.com's 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 travelbyus.com is 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
travelbyus.com could have a material adverse effect on travelbyus.com's
business, operating results and financial condition.
If the Internet as a medium for commerce does not develop as expected,
travelbyus.com will fail to 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
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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
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.
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, new laws were passed in the U.S. in 1998 which impose
limitations on the ability of states to tax Internet-based sales. 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, state and local
governments could tax 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 decrease in 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.
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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.
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.
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 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.
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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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Item 2. Description of 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 was completed in the
summer of 2000, and the annual rent is $420,000. The approximate total cost to
build the hangar was $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.
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.
Dallas, Texas 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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Securities Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
On August 19,1997, Aviation Group closed an initial public offering (the
"IPO") of its $.01 par value common stock (symbol: AVGP) and redeemable common
stock warrants (symbol: AVGPW). Aviation Group sold 1,150,000 shares of common
stock, and 1,150,000 common stock purchase warrants. These securities have been
listed with and trade on the Nasdaq SmallCap Market and the Boston Stock
Exchange since completion of the IPO. There was no public trading market for
Aviation Group's securities prior to that time.
As of September 1, 2000, Aviation Group had 69 holders of record of common
stock and seven holders of record of redeemable common stock warrants.
The following table sets forth, for the fiscal quarters indicated, the high
and low closing sales prices of Aviation Group's Common Stock based on
information published by the Nasdaq SmallCap Market.
Aviation Group
Common Stock
----------------
High Low
---- ----
Fiscal Year 1999
----------------
First Quarter $3.875 $2.250
Second Quarter 3.250 1.625
Third Quarter 2.938 1.781
Fourth Quarter 2.250 1.250
Fiscal Year 2000
----------------
First Quarter 2.500 1.563
Second Quarter 2.375 1.125
Third Quarter 4.750 1.000
Fourth Quarter 3.438 1.500
On October 5, 2000, the closing trading price for Aviation Group's common
stock as reported by the Nasdaq SmallCap Market was $1.219.
During the fiscal year ended June 30, 2000, Aviation Group created three
new series of its preferred stock and issued shares of two of these series of
shares. The following summary describes the rights and preferences of these
series of preferred stock, as compared to Aviation Group's common stock and to
each other series of preferred stock .
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.
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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.
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.
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.
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.
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.
21
<PAGE>
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.
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, the Company 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.
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.
22
<PAGE>
Dividends
During the last two fiscal years, Aviation Group has not paid any dividends
on its common stock. Aviation Group does not anticipate payment of any dividends
on its common stock in the near future because Aviation Group intends to retain
earnings to fund growth of its operations.
Issuance of Unregistered Securities
The following table and discussion contains details of the prior issuances
of unregistered securities of Aviation Group for the fiscal year ended June 30,
2000:
<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>
July 7, 1999/(1)/ 40,000 $ 0
August 19, 1999/(2)/ 10,410 46,845
September 29, 1999/(3)/ 155,250 297,600
January 6, 2000/(2)/ 11,849 53,320
January 20, 2000/(4)/ 58,500 40,073
March 17, 2000/(5)/ 450 4,500,000
April 19, 2000/(2)/ 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/(5)/ 1,653 16,530,000
May 25, 2000/(8)/ 112,000 200,000
August 18, 2000/(9)/ 165,921 269,621
</TABLE>
____________________________________
(1) Aviation Group issued 40,000 shares of common stock as a finder's fee to
one of its directors in connection with a loan of $600,000 made by third
parties to Aviation Group. Aviation Group did not register these shares in
reliance on no sale having occurred.
(2) In August 1999, Aviation Group issued 10,410 shares of common stock on
conversion of a portion of Convertible Notes due March 31, 2001 at a
conversion price of $4.50 per share. In January 2000, Aviation Group issued
11,849 common shares on conversion of Convertible Notes due March 31, 2001
at a conversion price of $4.50 per share. In April 2000, Aviation Group
issued 11,575 shares on conversion of a Convertible Note at $3.00 per share
and 67,089 shares on conversion of Convertible Notes at $4.50 per share.
Aviation Group relied on the exemption from registration provided by
Section 4(2) or 3(a)(9) of the Securities Act of 1933, as amended.
(3) In connection with Aviation Group's purchase of Aero Design, Inc. and
Battery Shop, L.L.C., Aviation Group promised to pay a former owner a
royalty payment equal to 2.5% of the net sales of Aero Design and Battery
Shop obtained from new products developed through such former owner's
efforts. The common stock was issued in lieu of cash payment of such
obligation for royalties at $1.92 per share. These shares were issued in
reliance upon the exemption from registration provided by Section 4(2) or
3(a)(9) under the Securities Act of 1933, as amended. The individual
recipient of such shares is an existing shareholder of Aviation Group, and
executive officer of Aero Design, Inc., and is considered by Aviation Group
to be sophisticated and knowledgeable.
(4) Aviation Group issued these shares of Common Stock upon the "cashless"
exercise of 180,000 warrants held by Aviation Groups executive officer,
Richard L. Morgan, at an exercise price of $2.50 per share, with 121,500 of
these warrants being cancelled. Aviation Group relied on the exemption
provided by Section 4(2) or 3(a)(9) of the Securities Act of 1933, as
amended.
(5) 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
"Acquisition of Global Leisure Travel, Inc." Aviation Group issued the
Series B Preferred Stock to travelbyus.com ltd. and other private
accredited investors at a price of $10,000 per share. 500 shares of the
Series B Preferred Stock have been sold to travelbyus.com ltd. 1,653 shares
of the Series B Preferred Stock have been sold to private investors other
than travelbyus.com ltd. with attached Series C Warrants. Aviation Group
relied on the exemption from registration provided by Regulation D in
selling the Series B Preferred Stock and the Series C Warrants.
23
<PAGE>
(6) Issued to the former owners of Global Leisure in exchange for the transfer
or cancellation of stock and indebtedness owned by them and their
affiliates. This transaction was a negotiated acquisition with
sophisticated and knowledgeable owners/investors. Aviation Group relied on
the exemption from registration provided by Section 4 (2) of the Securities
Act of 1933, as amended.
(7) Issued through private purchase at $2.667 per share. See "Acquisition of
Global Leisure Travel, Inc." Aviation Group received $2,000,000 in return
for the sale of 750,000 shares of its common stock at the price of $2.667
per share to private accredited investors. Aviation Group relied on the
exemption provided by Regulation D.
(8) Issued in payment of an obligation arising from the settlement of a lawsuit
in June 1999. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) or 3(9) under the Securities Act. The
recipient of such shares is considered by Aviation Group to be
sophisticated and knowledgeable.
(9) Issued in connection with a note to satisfy outstanding aviation hangar
rental obligations. These shares were issued in reliance upon the exemption
from registration under the Securities Act provided by Section 4(2)
thereof. Aviation Group received representations from and considers the
recipient to be a sophisticated and knowledgeable investor.
In July 1999, Aviation Group issued to the Louisiana Economic Development
Corporation (the "LEDC") warrants to purchase 15,000 shares of common stock
exercisable at $2.125 per share expiring in July 2002. These warrants were
issued in consideration for the guaranty provided by the LEDC for $500,000 in
lease payments under Aviation Group's new hangar lease in New Iberia, Louisiana.
Aviation Group relied upon the exemption from registration provided by Section
4(2) of the Securities Act. Aviation Group considered the LEDC to be a
sophisticated and knowledgeable investor.
On February 23, 2000, Aviation Group's Board of Directors approved the
grant to two executive officers of Aviation Group of warrants to purchase
250,000 shares of common stock, each exercisable at $1.50 per share. The
warrants are not exercisable until the shareholders of Aviation Group approve
their issuance and until the earlier of January 1, 2001 or the sale of Aviation
Group's operating subsidiaries, other than Global Leisure Travel, Inc. The
warrants expire in February 2005. Aviation Group relied on the exemption from
registration provided by Section 4(2) of the Securities Act. These executive
officers of Aviation Group were sophisticated and possessed sufficient knowledge
of Aviation Group.
On February 23, 2000, Aviation Group's Board of Directors approved the
grant to each of three directors of Aviation Group of warrants to purchase
50,000 shares, each exercisable at $1.50 per share. The warrants are not
exercisable until the shareholders of Aviation Group approve their issuance and
until the completion of the proposed arrangement with travelbyus.com ltd. The
warrants expire in February 2005. Aviation Group relied on the exemption from
registration provided by Section 4(2) of the Securities Act. These directors of
Aviation Group were sophisticated and possessed sufficient knowledge of Aviation
Group.
In May 2000, Aviation Group issued warrants to purchase 225,000 shares of
common stock to SW Pelham Fund, L.P. in connection with a $3,000,000 loan made
by SW Pelham Fund to Aviation Group. The warrants have an exercise price of
$2.125 and expire on May 8, 2005. The warrants were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
Aviation Group believed that SW Pelham Fund was a sophisticated and
knowledgeable investor.
In May 2000, in connection with the acquisition of Global Leisure Travel,
Inc. and related financing, Aviation Group issued Series B warrants to purchase
3,500,000 shares of its common stock at an exercise price of $3.00 per share, to
existing warrantholders of Global Leisure in exchange for their outstanding
Global Leisure warrants. The Series B warrants expire at the earlier of March
31, 2005 or the second anniversary of the date the underlying shares of common
stock are registered for resale under the Securities Act. The Series B warrants
are not exercisable until their issuance is approved by Aviation Group's
shareholders. The transaction in which these securities were issued was a
heavily negotiated acquisition with Global Leisure and its owners represented by
legal counsel. These securities were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act. Aviation Group
believed that the recipients of these securities were sophisticated and
knowledgeable in business matters in general and had sufficient access to
information about Aviation Group.
In March 2000, in connection with the acquisition of Global Leisure and
related financing, Aviation Group sold Series C Warrants that were attached to
Series B Preferred Stock. Aviation Group issued Series C Warrants to purchase an
aggregate of 1,236,750 shares of common stock, exercisable at $3.00 per share,
expiring on the earlier of March 31, 2005 or the second anniversary of the date
the shares of common stock issuable on the exercise of the
24
<PAGE>
warrants are registered for resale under the Securities Act of 1933, as amended.
The Series C Warrants are not exercisable until approved by Aviation Group's
shareholders. Aviation Group relied on the exemption provided by Regulation D in
selling the Series B Preferred Stock and Series C Warrants.
In May 2000, in connection with the acquisition of Global Leisure and
related financing, Aviation Group issued Series A Warrants to purchase 750,000
shares of Aviation Group common stock at an exercise price of $5.00 per share to
former warrantholders of Global Leisure in exchange for the cancellation of
outstanding warrants they held in Global Leisure. The Series A Warrants expire
at the earlier of March 31, 2005 or the second anniversary of the date the
underlying shares of common stock are registered for resale under the Securities
Act. The Series A Warrants are not exercisable until approved by Aviation Group
shareholders. This transaction was a part of a negotiated acquisition with
sophisticated and knowledgeable investors. Aviation Group relied on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
In August 1999, Aviation Group issued warrants to purchase 2,500 shares to
a director in connection with his appointment to the Board of Directors. These
warrants are exercisable at $1.6875 per share and expire in August 2004. These
warrants were issued in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act. Aviation Group believed that the new
director was sophisticated and knowledgeable in business matters in general and
had sufficient knowledge of Aviation Group due to his position as a director.
Between September 1999 and February 2000, two executive officers of
Aviation Group loaned a total of $305,000 to Aviation Group. As part of the
consideration for making the loans, Aviation Group issued to the executive
officers warrants to purchase a total of 101,666 shares of common stock at an
exercise price of $1.00 per share. The warrants expire at various times between
September 2004 and February 2005. These securities were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act.
Aviation Group considered the executive officers to be sophisticated and
knowledgeable investors.
On August 17, 1999, Aviation Group issued warrants to purchase 6,000 shares
of common stock to a then existing director in consideration for the
cancellation of other warrants previously issued to the director. The warrants
are exercisable at $3.00 per share and expire in August 2001. These warrants
were issued in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act. Aviation Group considered the director to be a
sophisticated and knowledgeable investor.
25
<PAGE>
Item 6. 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
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.
26
<PAGE>
Year Ended June 30,
(000's)
-------
Total Aviation Group 2000 1999
-------------------- ---- ----
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
------- -------
(2,380) (1,796)
Corporate overhead (1,991) (674)
Depreciation and amortization (795) (509)
Loss from discontinued operations 600 -
Gain (loss) on sale of subsidiaries (23) 52
Other income (656) (461)
Interest expense $(7,128 $(2,106)
Pre-tax loss ======== ========
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.
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.
Year Ended June 30,
( 000's)
--------
Aircraft Paint Division 2000 1999
----------------------- ---- ----
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
======= =======
27
<PAGE>
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.
Year Ended June 30,
Aviation Parts Manufacturing & (000's)
-------
Service Division 2000 1999
---------------- ---- ----
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
======= =======
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
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.
28
<PAGE>
Year Ended June 30,
(000's)
-------
Leisure Travel Division 2000 1999
----------------------- ---- ----
Gross bookings $ 8,408 $ -
Cost of tickets (7,591) -
-------
Reportable revenues 817 -
Operating and other expenses (2,822) -
-------
Recurring division income (loss) $(2,005) -
=======
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.
Year Ended June 30,
(000's)
-------
Corporate Overhead 2000 1999
------------------ ---- ----
Operating and other expenses $(1,944) $(1,534)
Acquisition activity costs (436) (262)
------- -------
Total corporate expenses $(2,380) $(1,796)
======== ========
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.
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.
29
<PAGE>
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 repriced 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.
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.
During the nine months 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
30
<PAGE>
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. For the year
ended 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, when 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.
31
<PAGE>
Item 7. Financial Statements.
<TABLE>
<CAPTION>
Consolidated Financial Statements of Aviation Group, Inc. and Subsidiaries
<S> <C>
Report of Independent Accountants dated September 11, 2000 by Hein + Associates, LLP F-1
Consolidated balance sheets as of June 30, 2000 F-2
Consolidated statements of operations for the years ended June 30, 2000 and 1999 F-3
Consolidated statements of changes in shareholders' equity for the period from
June 30, 1998 through June 30, 2000 F-4
Consolidated statements of cash flows for the years ended June 30, 2000 and 1999 F-5
Notes to consolidated financial statements F-7
</TABLE>
32
<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>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
June 30, 2000 June 30, 1999
CURRENT ASSETS: --------------- ---------------
<S> <C> <C>
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-2
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUE $13,381,000 $15,097,000
COST OF REVENUE 8,805,000 10,129,000
----------- -----------
Gross profit 4,576,000 4,968,000
----------- -----------
OPERATING EXPENSES:
General and administrative expenses 8,839,000 5,482,000
Depreciation and amortization 1,991,000 674,000
----------- -----------
Total operating expenses 10,830,000 6,156,000
----------- -----------
Loss from operations (6,254,000) (1,188,000)
----------- -----------
OTHER INCOME (EXPENSE):
Other income (loss) (23,000) 52,000
Interest expense, net (656,000) (461,000)
----------- -----------
Total other income (expense) (679,000) (409,000)
----------- -----------
Loss from continuing operations before provision for
income taxes (6,933,000) (1,597,000)
(PROVISION) BENEFIT FOR INCOME TAXES - (199,000)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (6,933,000) (1,796,000)
DISCONTINUED OPERATIONS:
Loss from operations (795,000) (509,000)
Gain on sale of subsidiaries 600,000 -
----------- -----------
(195,000) (509,000)
----------- -----------
NET LOSS $(7,128,000) $(2,305,000)
=========== ===========
LOSS PER SHARE, basic and diluted:
Continuing operations $ (1.75) $ (0.53)
=========== ===========
Net loss $ (1.79) $ (0.67)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,972,094 3,419,161
=========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 30, 1998 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, 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 - - - - (7,128,000)
------------ ---------- ------------- -------------- ---------------
BALANCES, June 30, 2000 4,790,801 $ 48,000 $ 4,000 $ 55,448,000 $ (11,809,000)
============ ========== ============= ============== ===============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------
Years Ended June 30,
----------------------------
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,128,000) $(2,305,000)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 2,224,000 978,000
Accreted interest 303,000 16,000
Deferred income taxes - 191,000
(Gain) loss on disposal of assets (600,000) 36,000
Interest paid with common stock - 34,000
Warrants issued for services - 123,000
Decrease in accounts receivable 1,059,000 64,000
Decrease in inventories 498,000 676,000
Decrease in prepaids and other assets 148,000 107,000
Increase (decrease)in accounts payable (116,000) 519,000
Decrease in customer deposits (2,471,000) -
Increase (decrease) in accrued and other liabilities 918,000 (261,000)
Other (138,000) (75,000)
----------- -----------
Net cash provided (used) by operating activities (5,303,000) 103,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash included with acquisitions, net of amounts paid 811,000 41,000
Proceeds from sale of business segments 1,700,000 -
Advances from related parties - -
Decrease (increase) in restricted cash 1,640,000 (338,000)
Proceeds from redemption of certificate of deposit 200,000 -
Increase in note receivable (1,930,000) -
Proceeds from sale of marketable securities - -
Proceeds from sale of property and equipment - 17,000
Payments for long-lived asset additions (418,000) (344,000)
----------- -----------
Net cash provided (used) by investing activities 2,003,000 (624,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,000,000 1,859,000
Repayments of short-term borrowings (1,189,000) (855,000)
Repayment of notes payable - (425,000)
Proceeds from issuance of long-term debt 3,980,000 -
Payments on long-term debt and capital leases (4,183,000) (483,000)
Proceeds from issuance of common stock 2,040,000 -
----------- -----------
Net cash provided by financing activities 3,648,000 96,000
----------- -----------
</TABLE>
- Continued -
F-5
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
2000 1999
------------- ------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 348,000 (425,000)
CASH AND CASH EQUIVALENTS, beginning of period 84,000 509,000
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 432,000 $ 84,000
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR
INTEREST AND INCOME TAXES:
Cash paid for interest $ 533,000 $ 424,000
Cash paid for income taxes - -
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and warrants in connection with
acquisitions $ 11,348,000 $ 294,000
Machinery and equipment acquired under capital leases - 484,000
Conversion of liabilities to common stock 438,000 239,000
Issuance of preferred stock in connection with acquisition 31,500,000 -
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<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-7
<PAGE>
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 significant losses 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 commissions 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
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.
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
F-8
<PAGE>
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 and 1999 was
$1,387,000 and $217,000, 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 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.
F-9
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
and 1999 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 and 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-10
<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 $1,442,000 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-11
<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 and 1999 as if the GEC and
Global acquisitions had occurred as of the beginning of the Company's 1999
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.
2000 1999
------------ ------------
Revenues $ 18,959,000 $ 27,813,000
Net loss $(17,568,000) $(11,059,000)
Net loss per share (basic and diluted) $ (4.42) $ (2.65)
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:
June 30, 2000 June 30, 1999
------------- -------------
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
=========== ===========
Depreciation expense charged to operations for the years ended June 30, 2000
and 1999 was $587,000 and $761,000, 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-12
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts available for borrowings 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, $352,000 of the notes 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-13
<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 (Note C). The terms of the notes are currently under 3,700,000 -
negotiation.
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 414,000
payments
Less current portion (150,000)
---------
Long-term obligation $ 264,000
=========
F-14
<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 and 1999 were $1,617,000
and $1,493,000, 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:
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.
F-15
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
F-16
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 Note E.
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 and
1999.
F-17
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999
---- ----
Dividend yield none none
Risk free interest rate 6.50% 5.25%
Expected volatility 0.91 0.85
Expected lives (years) 2.0 1.0
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 and 1999:
2000 1999
----------- -----------
Net Loss
As reported $(7,128,000) $(2,305,000)
=========== ===========
Pro forma $(7,421,000) $(2,310,000)
=========== ===========
Loss per share - Basic and Diluted
As reported $ (1.79) $ (0.67)
=========== ===========
Pro forma $ (1.89) $ (0.67)
=========== ===========
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.
Weighted
Average
Exercise
Number Price
---------- --------
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
========= ========
Weighted
Average
Exercise
Number Price
Exercisable Warrants and Options:
June 30, 1999 841,000 $2.33
======= =====
June 3,1998 791,000 $1.94
======= =====
F-18
<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, 1999 $0.53 $0.71 $0.31
===== ===== =====
June 30, 2000 $1.10 $ - $0.63
===== ===== =====
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>
Weighted
Average Weighted
Remaining Average
Outstanding at Contractual Exercise
Exercise Prices: June 30, 2000 Life (months) Price
--------------- ------------- ------------- --------
$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
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-19
<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 and $48,000 for the years
ended June 30, 2000 and 1999, respectively.
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:
Year ending June 30,
--------------------
2001 $227,000
2002 144,000
2003 96,000
--------
$467,000
========
F-20
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 and I.
L. PROVISION FOR INCOME TAXES
The (provision) benefit for income taxes consist of the following components:
2000 1999
------- ---------
Current $ - $ -
Deferred - (199,000)
------- ---------
(Provision) benefit for income $ - $(199,000)
======= =========
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
----------- ---------
<S> <C> <C>
Tax benefit computed by applying federal statutory rate $(2,426,000) $(716,00)
Expenses not deductible for tax purposes (a) 485,000 74,000
Valuation allowance 1,941,000 841,000
----------- ---------
Provision (benefit) for income taxes $ - $ 199,000
=========== =========
</TABLE>
(a) Principally goodwill amortization.
Deferred tax assets and liabilities consisted of the following at June 30:
Assets: 2000 1999
----------- -----------
Net operating loss carryforward $ 4,420,000 $ 1,548,000
Investment tax credits 81,000 81,000
Other - 114,000
----------- -----------
4,501,000 1,743,000
Less: Valuation allowance (3,981,000) (1,233,000)
----------- -----------
Total deferred tax assets 520,000 520,000
----------- -----------
Deferred tax liabilities - property and equipment (520,000) (520,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
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 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-21
<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 and 1999. The Company's
other two business segments were discontinued as described in Note P.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net revenues:
Painting and maintenance $ 8,670,000 $11,162,000
Manufacturing 3,894,000 3,935,000
Travel 817,000 -
Corporate - -
----------- -----------
Total $13,381,000 $15,097,000
=========== ===========
Operating income (loss):
Painting and maintenance $ (695,000) $ 443,000
Manufacturing 158,000 187,000
Travel (3,305,000) -
Corporate (2,412,000) (1,818,000)
----------- -----------
Total $(6,254,000) $(1,188,000)
=========== ===========
</TABLE>
F-22
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
Total assets:
Painting and maintenance $ 3,979,000 $ 4,382,000
Manufacturing 4,989,000 2,196,000
Travel 51,937,000 -
Corporate 2,774,000 454,000
----------- -----------
Total $63,679,000 $ 7,032,000
=========== ===========
Depreciation and amortization:
Painting and maintenance $ 457,000 $ 442,000
Manufacturing 202,000 210,000
Travel 1,300,000 -
Corporate 32,000 22,000
----------- -----------
Total $ 1,991,000 $ 674,000
=========== ===========
Capital expenditures (including capital leases):
Painting and maintenance $ 89,000 $ 592,000
Manufacturing 123,000 87,000
Travel - -
Corporate - 29,000
----------- -----------
Total $ 212,000 $ 708,000
=========== ===========
-------------------------------------------------------------------------------
</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
---------- ----------
Casper $1,689,000 $5,903,000
Tri-Star $ 766,000 $1,553,000
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
F-23
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
addition, if the arrangement is approved, certain directors of the Company
will be entitled to exercise warrants 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-24
<PAGE>
Item 8. Changes in and Disagreement With Accountants on Accounting and
Financial Disclosure.
None.
33
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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 expire at the annual meeting of shareholders in 2001. The
terms of office of Mr. Sanders and Mr. Kerby expire 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 Development 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
34
<PAGE>
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 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.
35
<PAGE>
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.
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Aviation Group's directors, officers and persons who
own more than 10% of a registered class of Aviation Group's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission"). Directors, officers and greater than
10% beneficial owners are required by applicable regulations to furnish Aviation
Group with copies of all forms they file with the Commission pursuant to Section
16(a).
Based solely on a review of the Form 3, 4 and 5 reports filed with the
Commission, Aviation Group believes that all reports of ownership and changes in
ownership with respect to the fiscal year ended June 30, 2000 have been timely
filed with the Commission as required by Section 16(a) of the Exchange Act,
except as follows:
Richard Morgan, Lee Sanders and Charles Weed failed to file with the
Commission on a timely basis reports relating to transactions in shares of
common stock. Messrs. Morgan and Sanders corrected these deficiencies by timely
filing reports on Form 5 that reported the previously unreported transactions.
Mr. Weed also filed a Form 5 to correct the deficiency, but that report was
filed late.
36
<PAGE>
Item 10. 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 - 20,441/(1)/ 500,000/(7)/
and Chief Executive Officer/(6)/ 1999 144,000 - 13,000/(1)/ -
1998 144,000 75,000/(5)/ 13,000/(1)/ 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.
(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 $1.8563.
(8) Mr. Kerby was appointed President and Chief Executive Officer in March
2000.
Stock Options and Warrants
During the fiscal year ended June 30, 2000, the board of directors granted
certain warrants to the executive officers named in the summary compensation
table as described in the table blow.
Option/Warrant Grants in Last Fiscal Year
-----------------------------------------
<TABLE>
<CAPTION>
of Total Options
Number of Shares % Warrants Granted
Underlying Options/Warrants to Employees in Exercise
Name Granted Fiscal Year Price ($/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.
37
<PAGE>
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.
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
38
<PAGE>
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.
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.
39
<PAGE>
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
</TABLE>
officers as a group
______________________________________________
(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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information, as of September 30,
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>
Number of Shares
Name and Address --------------------
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
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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 2,209,949 36.9%
directors as a 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.
(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.
Item 12. 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.
41
<PAGE>
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.
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.
42
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(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. (h)
2.2 - Plan of Arrangement, including Share Provisions for travelbyus.com
ltd. (h)
3.1 - Articles of Incorporation of Aviation Group, Inc. filed with the
Texas Secretary of State, as amended (h)
3.2 - Amended and Restated Bylaws of Aviation Group, Inc., as amended (h)
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 (h)
4.6 - Form of Underwriter's Warrant Agreement dated August 13, 1997 by and
between Aviation Group, Inc. and Duke & Co., Inc. (a)
10.1 - Aviation Group, Inc. 1997 Stock Option Plan (a)
10.2 - Form of First Amendment to 1997 Stock Option Plan (h)
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)
43
<PAGE>
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 (h)
10.13 - Warrant Agreement dated April 30, 2000 between Aviation Group, Inc.
and Securities Transfer Corporation, as Warrant Agent, governing
Series C warrants (h)
10.14 - Warrant dated May 11, 2000 issued by Aviation Group, Inc. in favor of
Genesis Diversified Investments, Inc. (h)
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)
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)
44
<PAGE>
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. (h)
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)
45
<PAGE>
10.40 - Purchase Agreement dated May 4, 2000 among Aviation Group, Inc.,
travelbyus.com ltd. and SW Pelham Fund, L.P. (h)
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. (h)
10.42 - Warrant Agreement dated May 9, 2000 between Aviation Group, Inc. and
SW Pelham Fund, L.P. (h)
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. (h)
10.46 - Pledge Agreement dated May 25, 2000 from travelbyus.com ltd. in favor
of Aviation Group, Inc. (h)
10.47 - Third Amendment to First Amended and Restated Employment Agreement
dated effective February 23, 2000 between Aviation Group, Inc. and Lee
Sanders (h)
10.48 - 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. (h)
10.49 - Amendment to Management Services Agreement dated as of September 29,
2000
11.1 - Computation of Net Loss per Common Share (h)
21.1 - List of Subsidiaries of Aviation Group, Inc. (h)
________________________________
(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.
(h) Incorporated by reference to the Form S-4 Registration Statement of
Aviation Group, Inc. (File No. 333-40352).
46
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: October 11, 2000.
AVIATION GROUP, INC.
By: /s/ Richard L. Morgan
----------------------
Richard L. Morgan, Executive Vice
President & Chief Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Lee Sanders Chairman of the Board October 11, 2000
----------------
Lee Sanders
/s/ Richard L. Morgan Director, Executive Vice October 11, 2000
---------------------- President, Chief Financial
Richard L. Morgan Officer, and Chief Accounting
Officer
/s/ Bill Kerby Director, Chief Executive October 11, 2000
--------------- Officer
Bill Kerby
/s/ Charles Weed Director October 11, 2000
-----------------
Charles Weed
/s/ Gordon Whitener Director October 11, 2000
-------------------
Gordon Whitener
/s/ Hank Clements Director October 11, 2000
-----------------
Hank Clements
/s/ John Feynes Director October 11, 2000
---------------
John Feynes
47
