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As filed with the Securities and Exchange Commission on November 9, 2000
Registration No._____________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
Aviation Group, Inc.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Texas 4512 75-2631373
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
</TABLE>
700 North Pearl Street, Suite 2170
Dallas, Texas 75201
(214) 922-8100
(Address, including zip code and telephone
number, including area code, of
registrant's principal executive offices)
________________
With copies to:
Daryl B. Robertson John H. Craig
Jenkens & Gilchrist, Cassels Brock & Blackwell LLP
A Professional Corporation 40 King Street West
1445 Ross Avenue, Suite 3200 Toronto, Ontario
Dallas, Texas 75202-2799 Canada M5H 3C2
(214) 855-4500 (416) 869-5300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this registration statement becomes
effective.
_____________
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
___________
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus contained
herein is a combined Prospectus relating to securities registered hereby and
under Registration Statement No. 333-22727.
CALCULATION OF REGISTRATION FEE
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<CAPTION>
============================================================================================================================
Title of Securities Amount To Be Proposed Maximum Proposed Maximum Amount of
To Be Registered Registered Offering Price Per Unit (1) Aggregate Offering Price Registration Fee
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 (2) 12,455,704 $1.00 $12,455,704 $3,288.31
============================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(c) on the basis of the last trade price of
the Registrant's Common Stock on November 6, 2000, as reported by the Nasdaq
SmallCap Market.
(2) An additional 290,030 shares of Common Stock to be sold by shareholders,
2,162,500 shares of Common Stock that may be sold by the Registrant
pursuant to public warrants, underwriters warrants and underlying warrants
and 100,000 underlying warrants that may be sold by the Registrant pursuant
to underwriters warrants have been registered under an earlier Form SB-2
Registration Statement No. 333-22727 which was initially declared effective
by the Securities and Exchange Commission on August 13, 1997 and amended by
Post-Effective Amendment No. 1 on July 10, 1998. Accordingly, that
Registration Statement uses the Prospectus that is a part of this
Registration Statement. The filing fee associated with such securities that
was previously paid with the earlier registration statement was $13,681.31.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
AVIATION GROUP, INC.
14,908,234 Shares of Common Stock
This Prospectus relates to the offer and sale by Aviation Group, Inc.
of up to:
. 1,897,500 shares of its common stock, $.01 par value per share, pursuant to
outstanding publicly traded warrants,
. 100,000 shares of common stock and 100,000 underlying warrants pursuant to
outstanding underwriters' warrants, and
. 165,000 shares of common stock pursuant to the underlying warrants.
The public warrants and underlying warrants are exercisable until
August 13, 2002. Each public warrant and underlying warrant entitles its holder
to purchase 1.65 shares of common stock at an exercise price of $4.17 per share.
The public warrants may be redeemed by us upon 30 days' written notice at $0.06
per public warrant, if the closing bid quotations or sales prices of our common
stock have averaged at least $5.73 for a period of any 20 consecutive trading
days ending on the 10th day prior to the day on which we give notice. The
holders of the underwriters' warrants may purchase, at any time until August 13,
2002, up to 100,000 shares of common stock at $9.4875 per share and up to
100,000 underlying warrants at $11.38 per warrant.
This Prospectus also relates to the offer and sale by certain selling
securityholders named under "Selling Shareholders" of up to:
. 2,495,099 presently outstanding shares of common stock,
. a maximum of 6,748,916 shares of common stock issuable on exercise of
outstanding warrants, and
. a maximum of 3,481,719 preferred stock shares of common stock issuable on
conversion of outstanding convertible preferred stock or exchangeable
notes.
The shares of common stock may be sold from time to time by the
selling shareholders through public or private transactions, on or off the
Nasdaq SmallCap Market, the Boston Stock Exchange or any national securities
exchange or automated interdealer quotation system on which the common stock is
listed or traded, at prevailing market prices, or at privately negotiated
prices. We will not receive any of the proceeds of any sales by the selling
shareholders. We are paying all expenses of registration relating to this
offering except selling and other expenses incurred by selling shareholders will
be borne by the selling shareholders. Selling shareholders will not be able to
sell 6,139,750 shares purchasable under outstanding warrants or 2,750,000 shares
obtainable on conversion of preferred stock until required shareholder approvals
are obtained.
Our common stock and public warrants are traded under the symbols AVGP
and AVGPW, respectively, on the Nasdaq SmallCap Market and under the symbols AVG
and AVGW, respectively, on the Boston Stock Exchange. On November 2, 2000, the
closing trading prices for the common stock and public warrants were $1.00 and
$0.0938, respectively.
These securities involve a high degree of risk. Carefully consider the
Risk Factors beginning on page 9 of this prospectus.
_______________
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is November ___, 2000.
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY........................................................................ 4
The Company.......................................................................... 4
Recent Developments.................................................................. 4
travelbyus.com....................................................................... 4
The Offering......................................................................... 6
SELECTED CONSOLIDATED
FINANCIAL DATA OF AVIATION GROUP..................................................... 7
SELECTED CONSOLIDATED
FINANCIAL DATA OF TRAVELBYUS.COM..................................................... 8
RISK FACTORS.............................................................................. 9
Risks Relating to the Business of Aviation Group..................................... 9
Risks Relating to Aviation Group Common Stock........................................ 10
Risks Relating to the Arrangement with travelbyus.com................................ 12
Risks Relating to the Travel Business................................................ 13
Other Risks Relating to Both Businesses After the Arrangement........................ 14
Risks Relating to the e-Commerce Travel Business..................................... 14
Other Risks Relating to the Business of travelbyus.com............................... 17
FORWARD-LOOKING STATEMENTS................................................................ 18
MARKET FOR COMMON STOCK................................................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 20
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................................... 26
BUSINESS.................................................................................. 34
MANAGEMENT................................................................................ 42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................ 48
PRINCIPAL SHAREHOLDERS.................................................................... 49
DESCRIPTION OF CAPITAL STOCK.............................................................. 50
Common Stock......................................................................... 50
Preferred Stock...................................................................... 50
Warrants and Options................................................................. 54
Convertible Debt Securities.......................................................... 56
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Transfer Agent, Registrar and Warrant Agent...................................... 57
USE OF PROCEEDS....................................................................... 57
TRAVELBYUS.COM LTD.................................................................... 58
Business......................................................................... 58
Legal Proceedings................................................................ 68
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 68
Directors and Executive Officers................................................. 72
Executive Compensation........................................................... 74
Principal Shareholders of travelbyus.com......................................... 76
Description of Share Capital of travelbyus.com................................... 77
Prior Sales...................................................................... 78
SELLING SHAREHOLDERS.................................................................. 80
PLAN OF DISTRIBUTION.................................................................. 84
Distribution by Aviation Group................................................... 84
Distribution by Selling Shareholders............................................. 84
LEGAL MATTERS......................................................................... 86
EXPERTS............................................................................... 87
WHERE YOU CAN FIND ADDITIONAL INFORMATION............................................. 88
INDEX TO FINANCIAL STATEMENTS......................................................... 89
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus. It does
not contain all of the information that is important to you. We encourage you to
carefully read this entire prospectus and the documents to which we refer you.
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this registration statement.
The Company
We provide services and products to airline companies and other aviation
firms primarily in the United States. Our business consists of painting and
paint stripping services for commercial and freight aircraft and the
manufacture, sale and repair of aircraft batteries and aircraft and truck
weighing scales. Through our recently acquired Global Leisure subsidiary, we
sell travel packages on a retail and wholesale basis. For the fiscal year ended
June 30, 2000, we had revenues of $13,381,000 and a net loss of $7,128,000.
Our principal executive offices are located at 700 North Pearl Street,
Suite 2170, Dallas, Texas 75201, telephone number (214) 922-8100.
Recent Developments
Acquisition of Global Leisure. In March 2000, we acquired a controlling
stock interest in Global Leisure Travel, Inc. Global Leisure is primarily
engaged in the wholesale and retail sale of travel packages for both domestic
and Pacific Island and Australian destinations. Travel packages created by
Global Leisure include airline tickets, hotel accommodations, automobile rentals
and other land components. Global Leisure contracts with vendors and primarily
markets the packages directly to retail travel agents. We acquired 100%
ownership of Global Leisure in May 2000.
Proposed Arrangement With travelbyus.com. In May 2000, we reached an
agreement regarding a proposed business combination with travelbyus.com ltd., an
Ontario corporation. The business combination involves an arrangement under
Ontario law between travelbyus.com and an Ontario subsidiary of Aviation Group.
The arrangement is subject to approval by the shareholders of each company and
approval of an Ontario court. As part of the consummation of this transaction,
we expect to change the name of Aviation Group to travelbyus, Inc.
When the arrangement is completed, travelbyus.com will become an indirect
subsidiary of Aviation Group. travelbyus.com shareholders will receive one
exchangeable share of travelbyus.com for each common share they currently own.
Each exchangeable share may be exchanged at any time by the holder for one share
of Aviation Group common stock, except that if, as expected, we effect a
one-for-five reverse stock split of our common stock in connection with the
arrangement, the exchange ratio will be five exchangeable shares for one share
of our common stock. The exchangeable shares not previously exchanged will be
automatically exchanged into Aviation Group common stock on January 1, 2003, or
earlier upon certain events. For a more detailed discussion of the proposed
arrangement, see "Business - Proposed Arrangement with travelbyus.com."
travelbyus.com
travelbyus.com is an integrated travel company which provides travel
services via the Internet, through 1-800 call centers and through traditional
travel agencies. The common shares of travelbyus.com are traded on The Toronto
Stock Exchange and Frankfurt Stock Exchange under the symbols "TBU" and "TBV",
respectively. travelbyus.com's Web site, www.travelbyus.com, will provide
------------------
consumers with on-line travel options 24 hours per day. Through the
travelbyus.com Web site, consumers will have the ability to browse travel
options world-wide and book travel reservations. In addition to offering
consumers travel options through the Internet, travelbyus.com will also offer
the consumer travel options through 1-800 call centers and traditional travel
agencies. For the nine months ended June 30, 2000, travelbyus.com had revenues
of $12,016,173 and a net loss of $21,715,088. For the same period, it obtained
3%, 83% and 14% of its revenues from its Website, 1-800 call centers and travel
agencies, respectively.
Since April 1999, travelbyus.com has focused on completing strategic
acquisitions to build the components of travelbyus.com's business model, which
include product offerings, distribution, marketing and technology.
travelbyus.com provides a broad range of travel products, targeted primarily at
the leisure customer, including airline tickets, cruise packages and ground
packages. travelbyus.com distributes such products to the consumer through the
Internet and 1-800 call centers and will distribute through traditional travel
agencies. It utilizes each distribution channel and traditional advertising
sources for marketing purposes. travelbyus.com continuously seeks technology
that allows it to distribute its products to the consumer effectively and offer
consumers additional travel related options. As of November 1, 2000, the
4
<PAGE>
travelbyus.com Web site had destination content including descriptive text,
pictures, maps, weather information and currency conversion rates. It also had
vacation packages listed for Mexico, Hawaii, Florida, Colorado, Las Vegas,
California, Caribbean, Europe and other popular destinations. Airline, hotel,
rental car and cruise reservations can be made outside of the context of a
vacation package. In addition, vacation specials are available for specific
products in each of these areas. These specials and packages are available for
on-line reservation and booking. During the first quarter of fiscal year 2001,
travelbyus.com expects to implement advanced search technology that will
significantly enhance and simplify the booking capabilities for airline tickets.
For a more detailed discussion of travelbyus.com, its business, management
and financial condition, see "travelbyus.com" and the financial statements for
that company and its subsidiaries included elsewhere in the prospectus.
5
<PAGE>
The Offering
Common Stock Being Offered 2,162,500 shares total, consisting of:
by Us......................... . a maximum of 1,897,500 shares that may be
issued upon exercise of outstanding public
warrants at $4.17 per share,
. a maximum of 100,000 shares that may be
issued upon exercise of outstanding
underwriter's warrants at $9.4875 per
share, and
. a maximum of 165,000 shares that may be
issued upon exercise of the underlying
warrants at $4.17 per share
Common Stock Offered by 12,745,734 shares total, consisting of:
Selling Securityholders....... . 2,495,099 presently outstanding shares,
. a maximum of 6,748,916 shares that may be
issued upon exercise of outstanding
warrants, of which 6,139,750 are subject
to shareholder approval, and
. a maximum of 3,501,719 shares that may be
issued upon conversion of outstanding
convertible preferred stock or
exchangeable notes, of which 2,750,000
shares are subject to shareholder approval
Underlying Warrants Offered Up to 100,000 underlying warrants that may be
by Us......................... issued upon the exercise of outstanding
underwriters' warrants at $11.38 per
underlying warrant.
Public Warrants and Underlying
Warrants
Exercise Terms............... Each public warrant and underlying warrant
entitles the holder to purchase 1.65 shares
of common stock at an exercise price of $4.17
per share.
Expiration Date.............. August 13, 2002.
Redemption................... Subject to redemption, at a price of $0.06
per public warrant or underlying warrant upon
30 days written notice, if the average
closing bid quotations or sales prices of the
common stock equal or exceed $5.73 for 20
consecutive trading days ending on the tenth
day prior to the date on which we give notice
of redemption. See "Description of
Securities--Public Warrants."
Common Stock Outstanding....... 4,956,722 shares, as of November 1, 2000.
Public Warrants Outstanding.... 1,150,000 public warrants to purchase
1,897,500 shares of common stock.
Use of Proceeds................ Because the timing of receipt is
unpredictable, we expect to use the net
proceeds of any sales by us for working
capital and general corporate purposes. We
receive no proceeds from any sales of common
stock by the selling securityholders.
Shareholder Approval........... We are seeking shareholder approvals at a
special shareholders meeting to be held on
December 20, 2000 to enable the exercise of
warrants to purchase 6,139,750 shares of
common stock and the conversion of preferred
stock convertible into 2,750,000 shares of
common stock. Selling shareholders will not
be able to sell these shares until after
shareholder approval is obtained.
Risk Factors................... These securities involve a high degree of
risk. See "Risk Factors."
Nasdaq Symbols:
Common Stock.............. AVGP
Warrants.................. AVGPW
Boston Stock Exchange Symbols:
Common Stock.............. AVG
Warrants.................. AVGW
6
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA OF AVIATION GROUP
The selected consolidated financial data below is derived from our audited
consolidated financial statements for the period from inception on December 5,
1995 through June 30, 1996 and the years ended June 30, 1997, 1998, 1999 and
2000. All amounts are in U.S. dollars. The following data is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the accompanying notes contained elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Nine Months Year Ended
Year Ended June 30, Ended June 30, September 30,
---------------------------------------------------- -------------- -------------
2000 1999 1998 1997 1996 (1) 1995 (1)
----------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue $13,381,000 $15,097,000 $11,043,000 $8,096,000 $3,881,000 $2,533,000
Income (loss) from
continuing (6,933,000) (1,796,000) (994,000) (544,000) 34,000 342,000
operations
Income (loss) from
continuing
operations per (1.75) (0.53) (0.32) (0.31) 0.02
share - basic and
diluted
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets $63,744,000 $13,052,000 $11,600,000 $5,111,000 $4,524,000
Long-term obligations 728,000 1,319,000 919,000 1,392,000 1,350,000
</TABLE>
_________________________________
(1) The period prior to December 1995 includes the operations of Aviation
Group's predecessors, Tri-Star Airline Services, Inc. and Tri-Star Aircraft
Services, Inc.
7
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL DATA OF TRAVELBYUS.COM
The selected consolidated financial data below is derived from the
consolidated balance sheets of travelbyus.com ltd. (formerly LatinGold Inc.) as
of December 31, 1995, 1996, 1997, 1998, September 30, 1999 and June 30, 2000
(unaudited), and consolidated statements of operations and deficit for the years
ended December 31, 1995, 1996, 1997 and 1998, period from January 1, 1999 to
September 30, 1999 and the nine-month periods ended June 30, 1999 and 2000
(unaudited). The selected consolidated financial data as of June 30, 2000, and
for the nine-month periods ended June 30, 1999 and 2000, is derived from
travelbyus.com's unaudited financial statements prepared using U.S. generally
accepted accounting principles on a basis consistent with the audited
consolidated financial statements and the accompanying notes of travelbyus.com.
All amounts, other than share numbers, are in Canadian dollars. The following
data is qualified in its entirety by, and should be read in conjunction with
"travelbyus.com--Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and the
accompanying notes of travelbyus.com contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period From
Nine Months Nine Months January 1, to
Ended Ended September 30, Year Ended December 31,
----------------------------------------------------
June 30, 2000 June 30, 1999 1999 1998 1997 1996 1995
------------- ------------- ------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue (5) $ 12,016,173 $ - $ - $ - $ - $ 74,579 $ 166,243
Net Income (Loss) Before
Discontinued Operations
and Extraordinary Item (3) (21,070,196) (654,333) (1,697,820) (238,354) (4,339,078) (130,473) 78,028
Income (Loss) before
Extraordinary Item (2)(6) (20,647,020) (1,400,205) (1,772,219) (1,282,999) (10,780,020) (130,473) 78,028
Net Income (Loss) (21,715,088) (1,400,205) (1,772,219) (1,282,999) (10,780,020) (130,473) 78,028
Basic and Fully Diluted Loss
per Common Share From
Continuing Operations (0.32) (0.04) $ (0.05) $ (0.01) $ (0.28) $ (0.01) $ 0.01
Basic and Fully Diluted
Loss Per Share (0.33) (0.04) (0.05) (0.07) (0.69) (0.01) 0.01
Weighted Average Number of
Common Shares Outstanding 65,203,705 31,729,436 31,781,090 19,400,822 15,588,904 11,296,912 8,745,750
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
June 30, 2000 September 30, 1999 1998 1997 1996 1995
------------- ------------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $ 96,148,123 $12,465,014 $253,629 $ 1,609,404 $ 8,481,599 $1,747,110
Total Long Term Debt (1) 6,688,379 6,254,407 - - - 1,345,274
Other Data
Gross Bookings (4) 43,634,174 - - - - -
</TABLE>
____________________________
(1) During the period ended September 30, 1999, travelbyus.com raised Cdn$11.95
million from a debenture financing, with attached warrants. The debentures
earn interest at 12.5% per annum, payable semi-annually. The debentures
are to be repaid on September 9, 2001, with travelbyus.com retaining the
right to repay the debentures in full at any time.
(2) During the period ended December 31, 1997, travelbyus.com, formerly
LatinGold Inc., a gold exploration company with operations in Latin
American countries, ceased operations on their Columbia properties and
recognized a loss from discontinued operations of Cdn $6.4 million and, in
addition, recognized a loss on write-off of marketable securities of Cdn
$3.9 million.
(3) During the nine month period ended June 30, 2000, the increased loss is due
to the development of new business opportunities in the travel sector.
(4) Management uses gross bookings as a key indicator of general business
activity, success of promotional efforts, capacity to handle customer
demand and efficiency of reservation agents. Gross bookings is not a
financial measurement in accordance with generally accepted accounting
principles and should not be considered in isolation or as a substitute for
other information prepared in accordance with GAAP, and period-to-period
comparisons of gross bookings are not necessarily meaningful as a measure
of our revenues due to, among other things, changes in commission rates,
and, as with operating results, should not be relied upon as an indication
of future performance.
(5) In December 1999, the SEC issued Staff Accounting Bulletin No. 101- Revenue
Recognition in Financial Statements. This bulletin focuses on determining
whether the company in substance acts as principal, agent or broker in a
transaction, whether it takes title to the products, and whether it assumes
the risks and rewards of ownership. travelbyus.com has considered these
recent developments in determining its revenue recognition and reporting
policies and believes its current policies are conservative and consistent
with this guidance. However, it is possible that these evolving standards
may allow or require travelbyus.com to amend its practices for the
recognition and reporting of revenues.
(6) On March 9, 2000, travelbyus.com repaid $2,494,000 of debentures, resulting
in an extraordinary loss on settlement of $1,068,068.
8
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating us
and our business before purchasing the securities offered by this prospectus.
Risks Relating to the Business of Aviation Group
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.
We have incurred net losses from operations in each fiscal period since our
inception in December 1995. Global Leisure has incurred losses for each of the
three years ending December 31, 1999. travelbyus.com has incurred losses since
focusing its attention on the travel sector in mid-1999. travelbyus.com
previously incurred losses in its discontinued precious metals exploration
business. On a pro forma basis, for the nine months ended June 30, 2000, the
combined companies incurred net losses of approximately $37.8 million. Even
after the arrangement, we expect a net loss at least through calendar year 2000.
Significant costs have been expended by travelbyus.com in designing and
implementing its Web site, and additional costs are anticipated to be incurred
to fund increased marketing initiatives, strategic alliances, enhancements to
the Web site, and the consolidation of its operations in Reno, Nevada.
travelbyus.com has incurred operating losses to date. Significant operating
losses are anticipated through at least calendar year 2000 and may occur in
subsequent calendar years. Additionally, travelbyus.com expects to compete with
bigger, more established online travel agents such as Expedia and Travelocity,
neither of which have achieved profitability.
While our 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.
Our dependence on only a few customers may have a negative impact on the
business of our subsidiaries.
Only two customers accounted for approximately 37% of our revenues for the
year ended June 30, 2000. We provide 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 our business,
financial condition and results of operation.
We may be unable to sell our non-travel businesses on acceptable terms in the
near future.
We have had discussions with various parties regarding the sale of our
existing non-travel businesses. To date, no agreements have been reached on
acceptable terms. We intend to continue to investigate the sale of one or all of
these businesses.
An economic downturn could affect the airline industry and negatively impact our
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 our operations. We do not have any control
over general economic conditions.
9
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The seasonality of the aircraft painting business could negatively affect our
operations.
Our aircraft painting business is seasonal, which can adversely affect our
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 we may not be able to
compete successfully.
Each of our subsidiaries is in direct competition with other companies.
Because many of our competitors have greater resources than we do, we may not be
able to compete successfully in providing our products or services at a
competitive but profitable price. See "Business--Competition."
Failure to comply with environmental, health and safety regulations could
negatively impact our business.
The Environmental Protection Agency and state and local regulatory
authorities regulate our 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 our financial condition.
The FAA regulates most of our 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 we must maintain the
FAA's certifications of our subsidiaries. These certifications allow our
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 our operations and financial condition and any
plans to sell our current businesses.
Risks Relating to Aviation Group Common Stock
Our common stock price could fluctuate significantly, and you may be unable to
resell your shares at a profit.
The trading prices for small capitalization companies often fluctuate
significantly. In addition, if and after the arrangement is completed, we 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 our common stock could significantly decline,
even if the decline in consolidated revenue or earnings is not reflective of any
long-term problems with our business.
We might fail to maintain a listing for our common stock.
Our common stock is presently listed on the Nasdaq SmallCap Market and the
Boston Stock Exchange. We have applied for listing of our common stock on the
Nasdaq National Market in connection with the arrangement and we intend to apply
for listing on the Frankfurt Stock Exchange. Nasdaq has indicated that it will
not approve or disapprove the application until after the arrangement is
completed. There can be no assurance that we will be able to obtain a Nasdaq
National Market listing . If we fail to maintain such listing, the market value
of our common stock would likely decline. As a result, holders would
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likely find it more difficult to dispose of, or to obtain accurate quotations as
to the market value of, our common stock.
Active trading markets for our common stock may not develop or continue.
While the listing of our common stock is a condition to the closing of the
arrangement, an active and liquid trading market for our common stock may not
develop or be sustained in the future. In addition, we cannot predict the price
at which our common stock will trade.
Our other equity securities may limit the price growth potential of our common
stock.
There are outstanding a substantial number of warrants and options to
purchase shares of our common stock. We also have 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 our common stock,
these securities may impair our ability to raise needed capital by depressing
the price at which we could sell our common stock.
Certain provisions in our charter and bylaws and Texas law make a takeover of
our company more difficult.
Our basic corporate documents and Texas law contain provisions that might
enable our management to resist an attempted take over of our company. 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. Our 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 our company that you may find beneficial. These provisions could
also make it more difficult for shareholders to elect directors and take other
corporate action and could depress the price that investors are willing to pay
for our common stock.
We may issue preferred stock that may adversely affect the rights of holders of
common stock.
Our articles of incorporation authorize our 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 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 our best interests. We recently designated shares of
Series A, B and C preferred stock in connection with our acquisition of Global
Leisure and our proposed arrangement with travelbyus.com. For a description of
the rights and preferences of the preferred stock, see "Description of
Securities-Preferred Stock."
No dividends on our common stock may ever be declared.
Dividends will not be paid unless and until they are declared by the board
of directors. Holders of our 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, you may not be able to significantly influence the
management of our company.
Our directors, officers, and principal shareholders beneficially own a
substantial portion of our outstanding common stock. As a result, these persons
have a significant influence on our affairs and management of our company, as
well as all matters requiring shareholder approval, including election and
removal of members of our board of directors, transactions with directors,
officers or affiliated entities, the sale or merger of our company, and changes
in our dividend policy. This concentration of ownership and control could have
the effect of delaying, deferring, or preventing a change in ownership and
management of our company, even when a change would be in the best interest of
our other shareholders. See "Management," "Principal Shareholders" and
"Description of Securities."
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Our board of directors may authorize the issuance of additional incentive
warrants to our officers and directors in the future outside of our existing
stock option plan.
Our board has in the past authorized incentive warrants to be issued to our
executive officers and directors and is currently seeking shareholder approval
for the grant of similar warrants to executive officers and directors. These
grants of warrants have been and are being made outside of our existing stock
option plan and, according to Nasdaq's rules, require shareholder approval. The
grant of similar warrants may be authorized in the future by our board of
directors and may jeopardize the continued listing of our common stock. These
kinds of warrants may also dilute the interests of existing shareholders.
Risks Relating to the Arrangement with travelbyus.com
The arrangement with travelbyus.com is subject to shareholder and court
approvals and may not be completed.
While we have entered into an agreement to complete the arrangement with
travelbyus.com, its actual completion may not occur. Our 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 we expect these approvals will be
obtained, some or all of them may not be obtained.
Expected benefits from the arrangement between us and travelbyus.com may not be
realized.
A failure to realize the benefits anticipated from the arrangement could
adversely affect the market value of the combined companies.
The ownership interest of our current shareholders will be substantially
reduced, and the ownership of our company will change, as a result of the
arrangement.
Our current shareholders 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.
Some of our directors and some of travelbyus.com's directors had potential
conflicts of interest in approving and recommending the arrangement.
Three of our directors have been granted warrants to purchase our common
stock. Their right to exercise these warrants is conditioned upon completion of
the arrangement, as well as approval of our shareholders. Our board authorized
these warrants to reward the directors for past services and to incentivize the
directors to maximize the trading price for our 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 our board of directors at the time of the
final approval by our board of directors and the board of directors of
travelbyus.com of the arrangement in early May 2000. These two directors had
potential conflicts of interest as a result of their fiduciary duties to both
travelbyus.com and us.
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 our best interests or that of our shareholders. Our
board believes that neither its decision-making process nor its shareholders'
interests were adversely affected by these potential conflicts.
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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.
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:
- higher prices in the airline industry or other travel-related
industries;
- airline or other travel related strikes;
- political instability and hostilities;
- bad weather;
- higher fuel prices;
- an increase in travel-related accidents; and
- economic downturns and recessions.
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Other Risks Relating to Both Businesses After the Arrangement
Future acquisitions or investments could negatively affect our operations and
financial results or dilute the ownership percentage of our shareholders after
the completion of the arrangement.
While there are no current binding agreements not described in this
prospectus, following completion of the arrangement, we expect to review
acquisition and investment prospects that would complement or expand the current
services or otherwise offer growth opportunities to the combined companies.
travelbyus.com and we have limited experience in acquisition activities and may
have to devote substantial time and resources in order to complete potential
acquisitions. We 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,
we 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 our stock price to decline, including:
- potential loss of key employees of acquired organizations;
- problems integrating the acquired business, including its information
systems and personnel;
- unanticipated costs that may harm operating results;
- diversion of management's attention from business concerns;
- adverse effects on existing business relationships with customers; and
- risks associated with entering an industry in which we have no or
limited prior experience.
Any of these risks could harm our businesses and operating results.
Risks Relating to the e-Commerce Travel Business
travelbyus.com and we have only recently focused our businesses on the travel
sector and our 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. We have been in the business of providing
services and products to airline companies since our 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 our 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.
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 only recently launched
on January 21, 2000 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 failure to:
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- 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.
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 we do business. In particular, five U.S. airlines,
American Airlines, Continental Airlines, Delta Airlines, Northwest Airlines and
United Airlines, have announced their intention to launch a direct-distribution
Web site, named "Orbitz" in June 2001. Orbitz will offer a centralized
marketplace for a number of airlines, integrating fare, scheduling, seating
availability and booking data. Orbitz will also offer car, hotel, cruise and
vacation packages. As the market for online travel services grows, we believe
that travel suppliers, traditional travel agencies, travel industry information
providers and other companies will increase their efforts to sell inventory from
a wide variety of suppliers. travelbyus.com's operations may be unable to
compete successfully with any current or future competitors.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we have and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Some
of our competitors may be able to secure services and products from travel
suppliers on more favorable terms, devote greater resources to marketing and
promotional campaigns and commit more resources to Web site and systems
development than we are able to devote. In addition, the introduction of new
technologies and the expansion of existing technologies may increase competitive
pressures. Increased competition may result in reduced operating margins.
Competitive pressures faced by us could have a material adverse effect on our
business, operating results and financial condition.
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If the Internet as a medium for commerce does not develop as expected,
travelbyus.com will not grow as it expects.
Use of the Internet by consumers is at a relatively early stage of
development. Market acceptance of the Internet as a medium for commerce is
subject to a high level of uncertainty. travelbyus.com's ability to
significantly increase revenue will require the development and widespread
acceptance of the Internet as a medium for commerce. The Internet may not be a
successful channel for selling travel services. Additionally, the Internet may
not prove to be a viable commercial marketplace because of inadequate
development for commerce of the necessary infrastructure, such as reliable
network backbones, high speed modems and security procedures. The viability of
the Internet for commerce may prove uncertain due to delays in the development
and adoption of new standards and protocols to handle increased levels of
Internet activity or due to increased government regulation or taxation. In
addition, the nature of the Internet as an electronic marketplace may render it
inherently more competitive than conventional commerce formats.
Regulation of domain names is evolving and changing, and travelbyus.com may not
be able to maintain its domain name.
travelbyus.com currently holds certain Web domain names, including the
www.travelbyus.com domain name. The acquisition and maintenance of domain names
------------------
generally is regulated by governmental agencies and their designees. The
regulation of domain names in the United States and in foreign countries is
expected to change in the near future. Requirements for holding domain names
may be affected. As a result, travelbyus.com may not be able to acquire or
maintain relevant domain names in all countries in which it conducts business.
In addition, travelbyus.com may be unable to prevent third parties from
acquiring domain names that are similar to or otherwise decrease the value of
its trademarks and other proprietary rights. Any such inability would have a
material adverse effect on travelbyus.com's business.
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 decreased, the securities issued may have rights
and preferences senior to those of shareholders, and the terms of the securities
may impose restrictions on operations.
travelbyus.com may not be able to protect its intellectual property, causing the
value of its services to decline.
travelbyus.com relies on a combination of trademark, service mark,
copyright and trade secret laws to protect its intellectual property. It also
enters into confidentiality agreements with its suppliers, strategic partners
and key employees and consultants. Unauthorized parties may copy or infringe
upon aspects of travelbyus.com methodologies, copyrights, service marks or
trademarks. Existing trade secret, copyright and trademark laws offer only
limited protection. Effective trade secret, copyright and trademark protection
may not be available in every
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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. The employment agreements with Messrs. Snyder and
Fenyes expire in October 2001. 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.
FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements based on
our current expectations, assumptions, estimates and projections about us and
our industry. These forward-looking statements involve risks and uncertainties.
These statements include, in particular, statements about our plans, strategies
and prospects under the headings "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma Combined
Financial Information" and "Business." You can identify certain forward-looking
statements by our use of forward-looking terminology such as the words "may,"
"will," "believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of many factors,
including but not limited to the factors described in the "Risk Factors" section
and elsewhere in this prospectus. We are not obligated to update or revise
these forward-looking statements to reflect new events or circumstances.
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MARKET FOR COMMON STOCK
Our shares of common stock are listed on the Nasdaq SmallCap Market and the
Boston Stock Exchange under the ticker symbols "AVGP" and "AVG," respectively.
The following table sets forth on a calendar year basis the quarterly high
and low closing sale prices of Aviation Group common stock as reported by Nasdaq
SmallCap Market.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
------- -------
<S> <C> <C>
Calendar 1998
-------------
First Quarter.................. $8.375 $3.375
Second Quarter................. 4.375 3.000
Third Quarter.................. 3.875 2.250
Fourth Quarter................. 3.250 1.625
Calendar 1999
-------------
First Quarter.................. 2.938 1.781
Second Quarter................. 2.250 1.250
Third Quarter.................. 2.500 1.563
Fourth Quarter................. 2.375 1.125
Calendar 2000
-------------
First Quarter.................. 4.750 1.000
Second Quarter................. 3.438 1.875
Third Quarter.................. 2.125 1.250
</TABLE>
On November 2, 2000, the closing trading price for our common stock and
public warrants as reported by Nasdaq SmallCap Market was $1.00 and $0.0938
respectively.
As of November 1, 2000, Aviation Group had 61 holders of record of common
stock and seven holders of record of public warrants.
Dividend Policy
We have never paid or declared any cash dividends on the common stock and
do not intend to pay cash dividends in the foreseeable future. It is the
current policy of our board of directors to retain any earnings to finance the
operations of our business.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
A key element of our strategy historically involved growth through
acquisitions of other companies, assets or product or service lines that would
complement or expand our existing aviation service operations. Since 1996, we
have purchased five separate entities. Our management believed that
acquisitions would enable us to leverage our fixed costs of operations and
further expand the products and services that we could offer to our customers.
We intended to use our common stock as the major source of capital to execute
our acquisition strategy.
While management was successful in identifying candidates that met its
acquisition criteria, the trading price of our shares and the level of trading
volume experienced in the public marketplace created a significantly negative
environment for acquiring aviation businesses using our stock as consideration.
Our management has endeavored since 1998 to remedy this condition, while
continuing to incur high corporate overhead costs necessary to properly operate
and maintain our aviation service enterprises.
During the fiscal 2000 year, management concluded that (a) our stock has
traded below the potential value of our existing underlying companies, (b)
acquisitions of new aviation service companies at these lower share price levels
would dilute existing shareholders, and (c) continuation of our historical
corporate overhead strategy without growth from acquisitions would erode
shareholder value. Accordingly, in August 1999, our board of directors approved
a management plan to engage investment advisors and pursue the additional
strategy of selling all or part of our businesses, or merging with another
company with greater growth and shareholder appreciation potential.
During the quarter ended December 31, 1999, we sold our Tri-Star Airline
Services ground handling subsidiary operations. On February 8, 2000, we sold
our Casper Air Service general aviation fixed base operations. Both businesses
were sold to unrelated third parties, and together generated a net gain on sale
of $600,000.
In February 2000, we 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 us by travelbyus.com along with private investment capital raised by
Doerge Capital Management, our financial advisor for this transaction.
Additionally, we engaged the investment firm of CIBC World Markets Corp. to
review the transaction with travelbyus.com ltd. and express an opinion regarding
the fairness of the terms to our 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.
20
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------
Total Aviation Group 2000 1999
-------------------- ----------- ------------
<S> <C> <C>
Revenues $13,381,000 $ 15,097,000
Cost of revenue (8,805,000) (10,129,000)
Operating and other expenses (6,459,000) (3,686,000)
----------- ------------
Recurring division income (loss) (1,883,000) 1,282,000
----------- ------------
Corporate overhead (2,380,000) (1,796,000)
Depreciation and amortization (1,991,000) (674,000)
Loss from discontinued operations (795,000) (509,000)
Gain (loss) on sale of subsidiaries 600,000 -
Other income (23,000) 52,000
Interest expense (656,000) (461,000)
----------- ------------
Pre-tax loss $(7,128,000) $ (2,106,000)
=========== ============
</TABLE>
Paint Division
Revenues are generated primarily from stripping and painting and other
aircraft coating services to major passenger and freight airlines and corporate
aircraft and aviation related companies. For the last two years, the Paint
Division has operated out of three separate locations in Louisiana, Oregon, and
Mississippi. During fiscal 2000, we completed construction and executed a
hangar-facility operating lease on a new Boeing-747 sized hangar at our
Louisiana headquarters. This new location commenced operations in July 2000, and
its addition to our capacity should allow the Paint Division to consolidate much
of our operations in Louisiana, thus reducing costs and improving future
operating margins.
Our paint operations and related revenue and income can vary significantly
from quarter to quarter based upon seasonality and scheduling factors of our
major customers. During fiscal 2000, we experienced reductions in revenues
relating to the completion of our 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 our 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.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
Aircraft Paint Division 2000 1999
----------------------- ----------- -----------
<S> <C> <C>
Revenues $ 8,670,000 $11,162,000
Cost of revenue (6,794,000) (8,066,000)
Operating and other expenses (2,114,000) (2,211,000)
----------- -----------
Recurring division income (loss) $ (238,000) $ 885,000
=========== ===========
</TABLE>
Aviation Parts Manufacturing & Service Division
Our 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.
21
<PAGE>
<TABLE>
<CAPTION>
Aviation Parts Manufacturing & Year Ended June 30,
-------------------------
Service Division 2000 1999
---------------- ----------- -----------
<S> <C> <C>
Revenues $ 3,894,000 $ 3,935,000
Cost of revenue (2,011,000) (2,204,000)
Operating and other expenses (1,523,000) (1,334,000)
----------- -----------
Recurring division income (loss) $ 360,000 $ 397,000
=========== ===========
</TABLE>
Leisure Travel Division
In conjunction with our letter of intent agreement to merge with
travelbyus.com, on March 17, 2000, we executed agreements to purchase Global
Leisure. On May 10, 2000, we completed our acquisition of Global Leisure, and
Global Leisure is now our wholly-owned subsidiary. Global Leisure provides
travel related services primarily through retail travel agencies, and is a
seller of bulk travel services, maintaining several wholesale and discount non-
exclusive 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 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 offers in exchange for certain sales-based
commissions.
Since its acquisition, we have worked closely with travelbyus.com to fully
integrate Global Leisure's products and operations into those of travelbyus.com.
We have 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. Our management believes that this integration is vital to
the success of our leisure travel operations, and if successful, can allow
Global Leisure to grow and achieve profitability for us and travelbyus.com.
For financial reporting purposes, we have treated the Global Leisure
acquisition as if it occurred on March 31, 2000 and have included the balance
sheet of Global Leisure in our unaudited financial statements as of March 31,
2000.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
Leisure Travel Division 2000 1999
----------------------- ----------- --------
<S> <C> <C>
Gross bookings $ 8,408,000 $ -
Cost of tickets (7,591,000) -
-----------
Reportable revenues 817,000 -
Operating and other expenses (2,822,000) -
-----------
Recurring division income (loss) $(2,005,000) -
===========
</TABLE>
Aviation Group - Corporate Overhead
Operating expenses consist of all general and administrative and operating
costs to provide management to our 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
22
<PAGE>
the fiscal years ended June, 2000 and 1999, we incurred $436,000 and $262,000 in
non-amortizable acquisition related costs and direct costs associated with our
status as a public company. A key benefit of its intended merger with
travelbyus.com is the reduction in corporate expenses, which management believes
it generates upon its complete integration into the travelbyus.com business.
These costs include legal, accounting, public-company costs, and other overhead
items that significantly overlap with existing travelbyus.com operations.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------
Corporate Overhead 2000 1999
------------------ ----------- -----------
<S> <C> <C>
Operating and other expenses $(1,944,000) $(1,534,000)
Acquisition activity costs (436,000) (262,000)
----------- -----------
Total corporate expenses $(2,380,000) $(1,796,000)
=========== ===========
</TABLE>
Seasonality and Variability of Results
Our 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. Our aircraft painting operations can experience significant
seasonality and quarter-to-quarter variability in its stripping and painting
operations. Scheduling of our paint customer fleet deliveries can significantly
affect quarter-to-quarter results as well. During fiscal 2000, we experienced
reductions in revenues relating to the completion of our multi-year painting
contract with United Airlines. This reduction, along with the retention of
multiple paint facility locations pending the completion of our 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 our operations. Management, therefore, is required to plan cash flow
accordingly.
Year 2000 Compliance Issues
Our systems experienced no significant Year 2000 shutdowns, issues or
costs. We consider our present systems to be Year 2000 compliant and
operational. We continue to monitor our hardware and software systems for
potential Year 2000 operating risks and costs, however, and will continue such
oversight for the remainder of the calendar 2000 year.
Fiscal Year Ended June 30, 2000 Compared to the Fiscal Year Ended June 30, 1999
Our 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. Our 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 our short term note and $4.50 convertible note
financings.
Depreciation and amortization expense rose significantly during the year
ended June 30, 2000 to $1,899,000 from $674,000 for the year ended June 30,
1999. This increase relates to goodwill amortization associated with our
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, we 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
23
<PAGE>
associated with the lower operating levels of our fixed base operations in
anticipation of its eventual sale. We sold our 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 year 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
our stock price over the exercise prices of the options and warrants. This
could have a material effect on our future results of operations.
Fiscal Year Ended June 30, 1999 Compared to the Fiscal Year Ended June 30, 1998
Our net revenue from continuing operations increased by $4,054,000 or 37%,
for the year ended June 30, 1999 compared to the year ended June 30, 1998.
These increases were from our acquisition of Aero Design and General
Electrodynamics Corporation, and increases in paint operations at our Portland
location.
Our cost of revenues increased by $1,749,000 to $10,129,000 for the year
ended June 30, 1999 from $8,380,000 for the year ended June 30, 1998. This
increase in cost of revenues resulted primarily from our acquisitions of Aero
Design and General Electrodynamics Corporation. Cost of revenues decreased as a
percentage, relative to net revenue, to 67%, for the year ended June 30, 1999
from 75% for the year ended June 30, 1998. This improvement is the result of
improvements in paint operations and increases in battery sales, which generate
higher margins.
Our continuing operating expenses increased by $2,115,000 to $5,482,000 for
the year ended June 30, 1999 from $3,367,000 for the year ended June 30, 1998.
This increase in operating expenses resulted primarily from the acquisitions of
Aero Design and General Electrodynamics Corporation, and internal growth in our
paint operations. Corporate overhead also included $123,000 in expense related
to the value of our common stock warrants issued to certain financial and
investment advisors relating to acquisition activities.
Goodwill amortization and depreciation increased by $205,000 to $674,000
for the year ended June 30, 1999. This increase related to our acquisition of
Aero Design and General Electrodynamics Corporation. Interest expense was up
$261,000 during the 1999 fiscal year to $461,000 for the year ended June 30,
1999, versus $200,000 for the year ended June 30, 1998. This increase resulted
primarily from interest expense in our General Electrodynamics Corporation
subsidiary acquired in August 1998, and $133,000 in finance charges relating to
our restructuring of certain stock price guarantees in August 1998 as described
further in Note H to our financial statements.
Financial Condition and Liquidity
We have incurred significant losses, due principally to corporate overhead
associated with our acquisition strategy. Our management is continuing 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, we have worked closely with
travelbyus.com to fully integrate Global Leisure's products and operations into
those of travelbyus.com. We have 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 our 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. Our management believes that
this integration and the related arrangement with travelbyus.com is vital to our
long term success. For a discussion of the liquidity and capital resources of
travelbyus.com, see "travelbyus.com-Management's Discussion and Analysis of
Financial Condition and Results of Operation-Liquidity and Capital Resources."
24
<PAGE>
During the year ended June 30, 2000, we sold our Tri-Star Airline Services
ground handling and our Casper Air Service general aviation fixed base
operations. Both businesses were sold to unrelated third parties, and together
generated a gain on sale of $600,000. In connection with our acquisition of
Global Leisure, through March 31, 2000, we raised a total of $20.4 million in
capital. These funds were used primarily to finance Global Leisure, and we
retained approximately $500,000 in funds for operating and transaction cost
funding purposes. These funds have supplemented our existing revolving credit
facilities to fund our business. At June 30, 2000, we had a working capital
deficit of $9,611,000. We have negotiated with certain of our aviation service
vendors and lenders exchange agreements wherein these parties may receive our
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 us to meet our working capital
requirements during fiscal 2001, significant interruptions in our currently
scheduled operations would adversely affect our financial condition and require
additional capital from asset sales, borrowings, or equity financings in order
to allow us to meet our obligations. No assurance can be made that such sales or
financings will be available or available on terms deemed advantageous to us if
such events occur.
The combination with travelbyus.com, if approved, will allow our management
to begin immediately to reduce overlapping corporate overhead, complete the
integration of our Global Leisure travel operations into and with the travel
operations of travelbyus.com, and pursue the sale of our 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 our travel operations.
If our business combination with travelbyus.com is not approved by shareholders,
our 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 our
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.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements have been
prepared to reflect the transactions described below as if they had all occurred
as of June 30, 2000, with respect to the pro forma balance sheet, and as of the
beginning of the respective periods with respect to the pro forma statements of
operations. The transactions are as follows:
1. Our issuance of $16.5 million liquidation value of Series A convertible
preferred stock and warrants in March 2000 to certain debt holders and the
common stockholders and warrant holders of Global Leisure in exchange for
retirement of the debt and cancellation of the outstanding common stock.
2. Our sale of $21 million of Series B preferred stock and warrants in March
2000 and our purchase of Series B preferred stock of Global Leisure and the
retirement of Global Leisure debt and payables with the proceeds.
3. The proposed acquisition of us by travelbyus.com by the issuance of our
common stock to the travelbyus.com shareholders, resulting in the
travelbyus.com shareholders owning approximately 94% of our outstanding
common stock.
4. The acquisitions by travelbyus.com of Cheap Seats, Inc. and Express
Vacations, Inc. during the fourth calendar quarter of 1999, Cruise Shoppes
America, Ltd. in April 2000, Epoch Technology Inc. in May 2000, Muffin
Communications, Inc. in July 2000, and ProSoft Corporation and
SiteRabbit.com in September 2000.
The pro forma financial statements combine the historical financial
statements of the various companies and include adjustments to reflect the
effects of the transactions described above. The pro forma financial statements
are expressed in U.S. dollars. The travelbyus.com historical financial
statements, which are in Canadian dollars, have been converted to U.S. dollars
at the exchange rate in effect on June 30, 2000, for purposes of the pro forma
financial statements. The difference between the exchange rate in effect at June
30, 2000 and the average exchange rates in effect for the nine months ended June
30, 2000 and the year ended September 30, 1999 is not material. The pro forma
statements of operations are presented based upon the September 30 fiscal year
end of travelbyus.com. The fiscal year end of Express Vacations is also
September 30. The statements of operations of the other entities which do not
have a September 30 fiscal year end are combined with the appropriate fiscal
quarters to conform with the presentation. The pro forma statement of operations
for the year ended September 30, 1999 includes (a) the Aviation Group, Cruise
Shoppes, Cheap Seats and SiteRabbit statements of operations for the year ended
June 30, 1999, and (b) the Global Leisure, Epoch Technology and ProSoft
statements of operations for the year ended December 31, 1999. The pro forma
statement of operations for the nine months ended June 30, 2000 includes (a) the
Aviation Group, Cruise Shoppes, ProSoft and SiteRabbit statements of operations
for the nine months ended June 30, 2000; (b) the Global Leisure statement of
operations for the six months ended December 31, 1999; and (c) the Epoch
Technology statement of operations for the eight months ended May 31, 2000, the
Express Vacations statement of operations for the one month period ending
October 31, 1999 and the Cheap Seats statement of operations for the three month
period ending December 31, 1999, which are prior to their acquisition and
consolidation into the statement of operations of travelbyus.com. The Epoch
Technology, Global Leisure and ProSoft statements of operations for the three
month period ended December 31,1999 are included in both the pro forma
statements of operations for the year ended September 30, 1999 and the nine
months ended June 30, 2000. The statements of operations of Global Leisure for
the three months ended March 31, 2000 have not been included in the accompanying
pro forma statement of operations for the nine months ended June 30, 2000. The
effect would not be material and the information is not readily available,
because we are unable to prepare a statement of operations for Global Leisure
for the six months ended March 31, 2000, because we do not have separate
financial information for Global Leisure for the three months ended December 31,
1999. The acquisition of Muffin is effectively an asset acquisition. Therefore,
the operations of Muffin are excluded from the pro forma statement of
operations.
Our acquisition of Global Leisure has effectively occurred as of March 31,
2000 and was accounted for as a purchase and reflected in our historical
financial statements beginning March 31, 2000. Our acquisition,
26
<PAGE>
following our acquisition of Global Leisure, by travelbyus.com is accounted for
as a purchase combined with a recapitalization of travelbyus.com under our
capital structure.
Several of the adjustments in the pro forma financial information are based
on preliminary estimates, subject to change upon obtaining more information
about specific assets acquired and liabilities assumed and performing more
detailed appraisals and valuations of the assets acquired. Accordingly,
adjustments may be made to the purchase price allocations to the businesses
acquired by travelbyus.com and us prior to the consummation of the merger
between the two companies, the purchase price allocation on the acquisition by
travelbyus.com of us (including the allocation of the purchase price to our non-
travel business to be sold) and the estimates of the useful lives of the assets
acquired.
The unaudited pro forma combined financial statements should be read in
conjunction with the accompanying notes and with the historical financial
statements of the various companies involved in the transactions described
above, which are included elsewhere in this prospectus.
The unaudited pro forma combined financial statements are not indicative of
our financial position or results of operations which would actually have
occurred if the transactions described above had occurred at the dates presented
or which may be obtained in the future.
27
<PAGE>
AVIATION GROUP, INC. AND TRAVELBYUS.COM LTD.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 2000 (expressed in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Site Pro Forma Pro Forma
Aviation Group travelbyus Pro Soft Rabbit Adjustments Combined
-------------- ---------- -------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 432 $ 8,259 $ $ 16 $ (300) (5) $ 9,907
1,500 (1)
Accounts receivable 2,018 2,762 254 1 (1,901) (4) 3,134
Inventory and barter credits 1,049 947 (1,049) (4) 947
Other current assets 6,215 834 7 76 (2,662) (4) 2,495
(1,975) (14)
------- -------- ---- ---- ------------ --------
Total current assets 9,714 12,802 261 93 (6,387) 16,483
Property and equipment, net 2,653 2,567 21 155 (2,430) (4) 2,966
Investments 4,515 150 (3,015) (1) 150
(1,500) (1)
Goodwill 50,657 37,444 7,729 (1) 105,814
3,718 (5)
6,266 (5)
Software, contracts and other intangibles 2,258 3,000 (5) 12,579
7,000 (5)
321 (5)
Other assets 720 5,256 3 22 (404) (4) 5,597
------- -------- ---- ---- ------------ --------
Total assets $63,744 $ 64,842 $435 $ 270 $ 14,298 $143,589
======= ======== ==== ==== ============ ========
Notes payable and current maturities of long-term debt 8,288 3,392 2 9 (3,667) (4) 6,049
(1,975) (14)
Accounts payable and accrued expenses 1,000 (2) 19,568
450 (1)
1,000 (1)
11,037 9,274 265 583 (4,041) (4)
------- -------- ---- ---- ------------ --------
Total current liabilities 19,325 12,666 267 592 (7,233) 25,617
Long-term debt 728 4,510 7 50 (738) (4) 4,557
------- -------- ---- ---- ------------ --------
Total liabilities 20,053 17,176 274 642 (7,971) 30,174
Preferred stock 31,500 (3,015) (1) 27,485
(1,000) (2)
Common stock 48 115,106 2 806 (3) 854
(115,106) (3)
(2) (5)
Other stockholders' equity 23,952 13,027 8 1,432 (806) (3) 165,543
115,106 (3)
14,372 (1)
4,050 (1)
(23,952) (1)
4,200 (5)
8,894 (5)
6,700 (5)
(1,432) (5)
(8) (5)
Accumulated earnings (deficit) (11,809) (80,467) 153 (1,806) 11,809 (1)
(153) (5)
1,806 (5)
(80,467)
------- -------- ---- ---- ------------ --------
Total stockholders' equity (deficit) 43,691 47,666 161 (372) 22,269 113,415
------- -------- ---- ---- ------------ --------
Total liabilities and stockholders' equity
$63,744 $ 64,842 $435 $ 270 $ 14,298 $143,589
======= ======== ==== ==== ============ ========
</TABLE>
See notes to pro forma adjustments.
28
<PAGE>
AVIATION GROUP, INC. AND TRAVELBYUS.COM LTD.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2000
(expressed in thousands of U.S. Dollars, except per share amounts)
<TABLE>
<CAPTION>
Aviation Global Pro Forma Pro Forma Express Cheap
Group Leisure Adjustments Combined travelbyus Vacations/(11)/ Seats,Inc./(11)
----- ------- ----------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net $10,252 $ 4,530 $ - $ 14,782 $ 8,104 $ 17 $1,018
Operating expenses 6,948 14,266 - 21,214 4,199 5 716
General and administrative 7,282 - - 7,282 13,525 193 417
expenses
Depreciation and 1,821 552 2,533 (6) 4,906 2,704 3 10
amortization
------- -------- ------- -------- -------- ----- ------
Income (loss) from (5,799) (10,288) (2,533) (18,620) (12,324) (184) (125)
operations
Other income (expense):
Interest and other income - - 208 4 -
Interest expense (480) (3,152) 2,799 (7) (833) (2,077) - -
Other expense (23) - - (23) (16) - -
------- -------- ------- -------- -------- ----- ------
Total other income (503) (3,152) 2,799 (856) (1,885) 4 -
(expense)
Income (loss) from
continuing operations
before income taxes (6,302) (13,440) 266 (19,476) (14,209) (180) (125)
Income tax (expense)
benefit - - - 285 - -
------- -------- ------- -------- -------- ----- ------
Income (loss) from
continuing operations $(6,302) $(13,440) $ 266 $(19,476) $(13,924) $(180) $ (125)
======= ======== ======= ======== ======== ===== ======
Income (loss) from
continuing operations
per share, basic and
diluted $(1.59) $ (4.28) $ (0.22)
======= ======== ========
Weighted average shares
outstanding 3,972 583 (13) 4,555 65,204
======= ======= ======== ========
<CAPTION>
Cruise Pro Site Pro Forma Pro Forma
Shoppes/(11)/ Epoch /(11)/ Soft Rabbit Adjustments Combined
------------- ----- ---- ------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net $1,051 $270 $1,354 $ 268 (9,435) (12) $ 17,429
Operating expenses 465 212 765 901 (6,948) (12) 24,218
2,689 (8)
General and administrative 259 49 830 426 (4,100) (12) 19,275
expenses 394 (10)
Depreciation and - - 7 43 5,811 (8)
amortization 576 (8) 13,446
(614) (12)
------ ---- ------ ------- ------- --------
Income (loss) from 327 9 (248) (1,102) (7,243) (39,510)
operations
Other income (expense):
Interest and other income - - 1 18 231
Interest expense - - (32) 480 (12) (2,036)
426 (14)
Other expense (6) - - (45)
------ ---- ------ ------- ------- ----------
Total other income (6) - 1 (14) 906 (1,850)
(expense)
Income (loss) from
continuing operations
before income taxes 321 9 (247) (1,116) (6,337) (41,360)
Income tax (expense)
benefit (160) - (125) (15) -
------ ---- ------ ------- --------- --------
Income (loss) from
continuing operations $ 161 $ 9 $ (247) $(1,116) $(6,462) $(41,360)
====== ==== ====== ======= ======= ========
Income (loss) from
continuing operations per
share, basic and diluted $ (0.35)
========
Weighted average shares 22,319 (9) 119,292
outstanding 26,491 (9) ========
723 (13)
=======
</TABLE>
See notes to pro forma adjustments.
29
<PAGE>
AVIATION GROUP, INC. AND TRAVELBYUS.COM LTD.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1999
(expressed in thousands of U.S. Dollars, except per share amounts)
<TABLE>
<CAPTION>
Aviation Pro Forma Pro Forma Express Cheap
Group Global Adjustments Combined travelbyus Vacations Seats, Inc.
--------- ---------- -------------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net $15,097 $ 9,438 $ - $ 24,535 $ - $7,235 $4,163
Operating expenses 10,129 16,965 - 27,094 249 2,345 2,724
General and administrative 5,482 - - 5,482 757 2,611 1,536
expenses
Depreciation, amortization and
impairment 674 4,403 5,066 (6) 10,143 5 41 21
------- -------- ------- -------- ------- ------ ------
Income (loss) from operations (1,188) (11,930) (5,066) (18,184) (1,011) 2,238 (118)
Other income (expense):
Interest and other income 52 139 - 191 15 101 4
Interest expense (461) (5,263) 4,674 (7) (1,050) (198) - -
------- -------- ------- -------- ------- ------ ------
Total other income (409) (5,124) 4,674 (859) (183) 101 4
(expense)
Income (loss) from continuing
operations before income taxes (1,597) (17,054) (392) (19,043) (1,194) 2,339 (114)
Income tax (expense) benefit (199) - - (199) - - 25
------- -------- ------- -------- ------- ------ ------
Income (loss) from continuing $(1,796) $(17,054) $ (392) $(19,242) $(1,194) 2,339 $ (89)
operations ======= ======== ======= ======== ======= ====== ======
Income (loss) from continuing
operations per share, basic and $(0.53) $(4.62) $(0.04)
======= ======== =======
diluted
Weighted average shares
outstanding
3,419 750 (13) 4,169 29,083
======= ======= ======== =======
<CAPTION>
Cruise Epoch Site Pro Forma Pro Forma
Shoppes Technology ProSoft Rabbit Adjustments Combined
------------ ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net $2,629 $276 $1,639 $1,375 $(15,097) (12) $ 26,755
Operating expenses 1,855 216 742 645 (10,129) (12) 29,358
3,617 (8)
General and administrative 630 48 727 327 (5,002) (12) 7,641
expenses 525 (10)
Depreciation, amortization and (674) (12) 19,867
impairment - - 8 30 9,525 (8)
768 (8)
------ ------------- ------ ------ -------- --------
Income (loss) from operations 144 12 162 373 (13,727) (30,111)
Other income (expense):
Interest and other income 44 - 1 (52) (12) 304
Interest expense (9) - (1) (10) 461 (12) (1,334)
(527) (14)
------ ------------- ------ ------ -------- --------
Total other income 35 - (1) (9) (118) (1,030)
(expense)
Income (loss) from continuing
operations before income taxes 179 12 161 364 (13,845) (31,141)
199 (12)
Income tax (expense) benefit (30) - 5 (15) -
------ ------------- ------ ------ -------- --------
Income (loss) from continuing 149 $ 12 $ 161 $ 364 $(13,641) $(31,141)
operations ====== ============= ====== ====== ======== ========
Income (loss) from continuing
operations per share, basic and $(0.26)
========
diluted
Weighted average shares 930 (13)
outstanding 26,491 (9)
58,440 (9) 119,113
======== ========
</TABLE>
See notes to pro forma adjustments.
30
<PAGE>
Notes to Unaudited Pro Forma Adjustments
1. Adjustment to record our acquisition by travelbyus.com and the
recapitalization of travelbyus.com by recording the approximate market
value of the shares of common stock, options and warrants held by our
shareholders at the common share price immediately preceding the
announcement of the merger with travelbyus.com. The shares of common
stock, options and warrants held by our shareholders are treated as an
issuance of new equity by travelbyus.com. 4,790,801 shares of our common
stock at the quoted price of $3.00 per share results in an adjustment to
stockholders' equity of approximately $14,372,000. The value of the
options and warrants of $4,050,000 results in an additional adjustment to
stockholders' equity. The values of the options and warrants are estimated
using the Black Scholes option pricing model. These amounts, as well as
the estimated transaction costs of $1,000,000 and a $450,000 bonus due our
officers upon sale of our non-travel related assets are allocated to our
identifiable net assets based upon the estimated fair market values of
those assets with the remainder of $58,386,000 assigned to goodwill. The
goodwill that was recorded on our balance sheet of $50,657,000 was
increased by $7,729,000 as an adjustment to reflect the effect of the
acquisition. The adjustment also includes the removal of our other
stockholders' equity and accumulated deficit accounts and elimination of
$3,015,000 of our Series B preferred stock owned by travelbyus.com. The
adjustment also reflects the sale of $1,500,000 of Series B preferred stock
held by travelbyus.com to a third party after June 30, 2000. The estimated
costs to register the securities being issued in the transactions of
$1,000,000 will be a non-recurring charge to our operations in the period
following the transactions and are not included in the pro forma statement
of operations.
The components of the purchase adjustment are as follows:
<TABLE>
<CAPTION>
<S> <C>
Value of shares issued $ 14,372,000
Value of warrants and options 4,050,000
Transaction costs 1,000,000
Bonus liability assumed 450,000
Other 48,000
------------
Total consideration and costs $ 19,920,000
Fair value of identifiable assets $(13,087,000)
Fair value of liabilities 20,053,000
Fair value of preferred stock 31,500,000
------------
Net obligations acquired 38,466,000
------------
Goodwill $ 58,386,000
============
</TABLE>
Certain amounts in the purchase calculation above are based on the
preliminary estimates and the final amounts may differ.
2. Adjustment to record a $1 million payment related to arranging the Series B
preferred stock sale. The payment of this amount is contingent on
completion of the transactions.
3. Adjustment to record the $0.01 per share par value of our shares of common
stock to be issued to travelbyus.com shareholders, 80,600,066 shares
outstanding at June 30, 2000, and reflect the reorganization of
travelbyus.com's shareholders' equity accounts to our capital structure.
4. Adjustment to reclassify our assets and liabilities associated with our
non-travel related business segments to net assets for resale, because the
companies intend to sell those assets and repay the associated liabilities
following completion of the arrangement with travelbyus.com. The net
assets are recorded at book value, which does not exceed net realizable
value. The amount of net proceeds from the sale are uncertain and none are
assumed for the purpose of these pro forma financial statements. Any net
proceeds that would be received from the sale of the non-travel related
business segments are required to be used to redeem preferred stock.
5. Adjustment to record the acquisition by travelbyus.com of (a) Muffin in
July 2000 for approximately $300,000 in cash and 1,000,000 shares of common
stock (valued at $6,700,000); and (b) the acquisitions of ProSoft and
SiteRabbit for 1,680,000 and 3,558,000 shares of common stock,
respectively, valued at $4,200,000 and $8,894,000, respectively. The terms
of each acquisition require adjustment to the number of shares as necessary
to provide the values cited above. The effect of the potential adjustment
to the number of shares has not been considered in these pro forma
financial statements. The adjustment also includes removal of the ProSoft
and SiteRabbit stockholders' equity accounts. Each acquired company's
identifiable net assets are recorded at estimated fair value, with the
remainder of approximately $3,718,000 and $6,266,000 assigned to goodwill
for ProSoft and SiteRabbit, respectively. For Muffin, ProSoft and
SiteRabbit, $7,000,000, $321,000 and $3,000,000 have been assigned to
software, contracts or other intangibles.
31
<PAGE>
6. Adjustment to record the effect of the amortization of the goodwill
recorded upon the purchase of Global Leisure over 10 years as if the
acquisition had occurred October 1, 1998. The amortization is $5,066,000
for the year ended September 30, 1999 and $2,533,000 for the nine months
ended June 30, 2000.
7. Adjustment to record the reduction in interest expense for the retirement
of approximately $26.0 million in Global Leisure debt, as if the retirement
had occurred at October 1, 1998. The effective interest rates on the
retired debt were approximately 18% and 21% for the year ended September
30, 1999 and the nine months ended June 30, 2000, respectively. The
amounts of the interest reduction are $4,674,000 for the year ended
September 30, 1999 and $2,799,000 for the nine months ended June 30, 2000.
8. Adjustment to record the effect of the amortization of the goodwill,
software, contracts, as applicable, recorded upon the purchases of Cheap
Seats, Express Vacations, Cruise Shoppes, Epoch Technology, Muffin, ProSoft
and SiteRabbit as if these acquisitions had occurred at October 1, 1998.
The acquisition of Cheap Seats includes contingent consideration, the
resolution of which is currently unknown and has not been included in the
amortization calculation. The goodwill is amortized over 10 years for Cheap
Seats and Cruise Shoppes, five years for Express Vacations and Epoch, three
years for SiteRabbit and two years for ProSoft. The software, contracts
and other intangibles are amortized over three years for Muffin and
SiteRabbit and two years for ProSoft. The goodwill amortization of Cheap
Seats, Express Vacations, Cruise Shoppes and Epoch Technology are included
in the travelbyus.com historical statements of operations for the nine
months ended June 30, 2000 beginning January 1, 2000, November 1, 1999,
April 1, 2000 and June 1, 2000, respectively. The pro forma adjustments
record the additional amounts which would have been recorded if the
acquisitions had occurred at the beginning of the periods. The amounts of
the adjustments are as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year ended
----------------- ------------------
June 30, 2000 September 30, 1999
----------------- ------------------
<S> <C> <C>
Cheap Seats $ 265,000 $ 1,061,000
Express Vacations 59,000 703,000
Epoch Technology 1,340,000 2,010,000
Cruise Shoppes 380,000 759,000
Muffin 2,363,000 3,150,000
ProSoft 1,514,000 2,020,000
SiteRabbit 2,579,000 3,439,000
---------- -----------
Total $8,500,000 $13,142,000
========== ===========
</TABLE>
An additional adjustment is made to record the increase in amortization of
goodwill recorded upon our acquisition by travelbyus.com. This adjustment
is $768,000 and $576,000 for the year ended September 30, 1999 and the nine
months ended June 30, 2000, respectively.
The amortization of software and contract rights included in the above
table of $2,689,000 and $3,617,000 for the nine months ended June 30, 2000
and the year ended September 30, 1999, respectively, are classified as
adjustments to operating expenses.
9. Adjustment to the number of weighted average shares outstanding as if the
share exchange between us and travelbyus.com and the common stock issued in
the acquisitions of Cheap Seats, Express Vacations, Epoch Technology,
Cruise Shoppes, Muffin, ProSoft and SiteRabbit had occurred at October 1,
1998. The adjustments for the shares issued in the share exchange between
us and travelbyus.com are 58,440,000 and 22,319,000 for the year ended
September 30, 1999 and the nine months ended June 30, 2000, respectively.
These include warrants representing 6,922,000 shares, which have been
exercised. The adjustment for shares issued to acquire the companies is a
total of 26,491,000 for each period. Unexercised common stock options,
warrants and convertible securities are not considered because their effect
would be antidilutive.
10. Adjustment to record compensation expense for effect of $1,050,000 of
contingent stock consideration to be issued two years after the acquisition
of ProSoft if the individuals are still employed at that time. The expense
is accrued over the two year period and is $525,000 for the year ended
September 30, 1999 and $394,000 for the nine months ended June 30, 2000.
11. The operations of Express Vacations, Cheap Seats, Cruise Shoppes and Epoch
Technology that are presented in the pro forma statement of operations for
the nine months ended June 30, 2000 are for the periods prior to November
1,
32
<PAGE>
1999, January 6, 2000, April 3, 2000 and May 23, 2000 respectively,
after which the operations of these companies are consolidated with the
historical statement of operations of travelbyus.com.
12. Adjustment to remove statement of operations accounts of our non-travel
related segments, to reflect the expected sale of these assets and
repayment of associated liabilities following completion of the arrangement
with travelbyus.com. General and administrative expenses of $480,000 for
the year ended September 30, 1999 and $360,000 for the nine months ended
June 30, 2000 are not removed because these amounts are the estimated costs
that will continue with the ongoing entity.
13. Adjustment to the number of weighted average shares outstanding as if the
sale of 750,000 shares of common stock by us and 930,000 common shares by
travelbyus.com in connection with these transactions had occurred at
October 1, 1998. The adjustments for the nine months ended June 30, 2000
are 583,000 and 723,000 shares, respectively. The adjustments for the year
ended September 30, 1999 are 750,000 and 930,000 shares, respectively.
14. Adjustment to eliminate borrowing by travelbyus.com of $1,975,000 from us.
This borrowing was done to partially fund certain acquisitions described in
Note 5 above and was funded by a $3 million borrowing by us in May 2000.
An additional adjustment is made to record the interest expense that would
be incurred on the $3 million borrowing, as if the borrowing had occurred
at the beginning of the respective periods. The stated interest rate is
12% and the note is due nine months after issuance. The borrowing includes
five-year warrants to purchase 225,000 shares at $2.125 per share. The
interest expense is $527,000, for each of the year ended September 30, 1999
and the nine months ended June 30, 2000, which includes $257,000 for the
amortization of the discount on the debt related to the value of the
warrants issued with the debt. The adjustments are $527,000 for the year
ended September 30, 1999 and $426,000 for the nine months ended June 30,
2000. For the nine months ended June 30, 2000, $101,000 of the expense had
been recognized in the historical financial statements.
15. Adjustment to income tax expense or benefit to reflect the amounts that
would have occurred if the transactions had occurred on October 1, 1998.
33
<PAGE>
BUSINESS
General
We were organized in December 1995 to serve as a holding company for
businesses beneficially owned by our Chairman of the Board, Lee Sanders. In
August 1997, we completed our initial public offering of shares of our 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.
We provide services and products to airline companies and other aviation
firms primarily in the United States. Our 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, we determined to attempt to shift our assets and capital
into an industry with significant growth opportunity. In February 2000, we
entered into letters of intent with Global Leisure and travelbyus.com to effect
a three-way business combination intended to shift our assets and capital into
the e-commerce travel industry.
On May 3, 2000, we entered into an arrangement agreement under Ontario,
Canada law to acquire travelbyus.com, an e-commerce travel company.
In March 2000, we 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. We acquired 100% ownership of Global Leisure in May 2000.
Our principal executive offices are located at 700 North Pearl Street,
Suite 2170, Dallas, Texas 75201, and our telephone number is (214) 922-8100.
History
Our 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 our existing businesses. Since 1995, we have purchased
five separate companies. Management believed that acquisitions would enable us
to leverage our fixed costs of operations and that we would be able to use our
common stock as the major source of our capital to execute our acquisition
strategy.
We 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.
- 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.
34
<PAGE>
While management was successful in identifying additional candidates that
met its acquisition criteria, the trading price and volume of our shares created
a significantly negative environment for acquiring aviation businesses using its
stock as consideration. Our management has endeavored since 1998 to remedy this
condition, while continuing to incur high corporate overhead costs necessary to
properly operate and maintain a larger aviation service enterprise.
In August 1999, the our board of directors approved a management plan to
engage investment advisors and pursue the additional strategy of selling all or
part of our businesses. The major factors influencing this decision were:
- the board believed that our stock was trading below the value of its
existing underlying companies;
- acquisitions of new companies at then existing share price levels
would decrease the ownership percentage of our existing shareholders;
and
- continuation of its historical corporate overhead strategy would
decrease our share price.
We began discussions with third parties regarding a sale or merger of the
entire enterprise or the sale of certain remaining segments of our operations on
an individual basis. Various parties interested in our 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, our 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, we entered into letters of intent and publicly
announced a proposed three-way business combination with Global Leisure and
travelbyus.com. The business combination contemplated our acquisition of the
other two companies with financing provided by travelbyus.com and private
investment capital raised by Doerge Capital Management. Doerge Capital's
clients and affiliates had previously invested significant capital into Global
Leisure. On May 10, 2000, Aviation Group completed the acquisition of Global
Leisure as described below.
Acquisition of Global Leisure Travel, Inc.
On May 10, 2000, Aviation Group completed its acquisition of Global
Leisure. Global Leisure is now a wholly owned subsidiary of Aviation Group. As
consideration for the purchase, Aviation Group issued:
- $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.
35
<PAGE>
In connection with the acquisition, we 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 our investment in Global Leisure was
provided by:
- $5.0 million invested by travelbyus.com through the purchase of 500
shares of our Series B preferred stock at $10,000 per share;
- $2.0 million invested by private investors in the purchase of 750,000
shares of our common stock at $2.667 per share; and
- Approximately $16.5 million invested by private investors in the
purchase of 1,653 units of our 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 our
acquisition of Global Leisure and related financing, we 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 our common stock at a weighted average exercise price of
$4.07 per share.
Proposed Arrangement with travelbyus.com
In May 2000, we entered into an agreement to effect a proposed business
combination with travelbyus.com through an arrangement under Ontario law between
travelbyus.com and our Ontario subsidiary. The arrangement is subject to
approval of the shareholders of both companies and an Ontario court. When the
arrangement is completed, travelbyus.com will become our indirect subsidiary.
travelbyus.com shareholders will receive one exchangeable share of
travelbyus.com in exchange for each travelbyus.com common share held. The
exchangeable shares will be securities of travelbyus.com. They will entitle
their holders to dividends, distributions, and other rights that are, as nearly
as practicable, economically equivalent to those of our common stock. Through a
voting trust, they will also entitle their holders to vote at meetings of our
shareholders.
Each exchangeable share will be exchangeable at the option of the holder
for one share of our common stock. If, as expected, we effect a one-for-five
reverse split of our common stock in connection with the arrangement, the
exchange ratio will be adjusted to be five exchangeable shares for one share of
our common stock. We anticipate that most holders of exchangeable shares will
elect to exchange their shares into our common stock if they choose to sell
their shares at a later date. Any remaining exchangeable shares not previously
exchanged will be automatically exchanged into our common stock on January 1,
2003, or earlier upon the occurrence of certain events, including the winding up
or dissolution of Aviation Group or travelbyus.com.
We have applied for listing of our stock on the Nasdaq National Market and
intend to apply for listing on the Frankfurt Stock Exchange. Nasdaq has
indicated it will not act on the application until after the arrangement is
completed.
In connection with the closing of the arrangement, all of the current
directors of travelbyus.com and Lee Sanders, currently our Chairman and a
director, will be appointed as our directors. The officers of travelbyus.com
will become our officers at the time the arrangement becomes effective. See
"travelbyus.com-Directors and Executive Officers."
If the arrangement is completed, we will offer to issue approximately 97
million shares of our common stock in exchange for all of the exchangeable
shares. These shares will represent approximately 95% of our outstanding common
stock after consummation of the arrangement, assuming all exchangeable shares
are exchanged. Our current shareholders will represent approximately 5% of our
outstanding shares, assuming all exchangeable shares are exchanged. Under the
arrangement, our Ontario subsidiary will be issued one travelbyus.com common
share, which will be the only outstanding common share in travelbyus.com after
the arrangement. travelbyus.com will have no other authorized class of capital
stock, except the exchangeable shares.
The combined companies will account for the transaction under the purchase
method of accounting as if travelbyus.com had acquired us and had been
recapitalized under our capital structure. Accordingly, the combined companies
will record our assets and liabilities as being acquired by travelbyus.com in
the arrangement.
36
<PAGE>
Existing Business
In addition to Global Leisure, we have 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 our subsidiaries. These
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: We manufacture and sell certain types of
aircraft components and equipment through three of our subsidiaries.
Aero Design manufactures and sells aircraft batteries for the
commercial airline industry. Battery Shop repairs batteries for the
aviation industry. General Electrodynamics Corporation primarily
manufactures and sells aircraft and truck weighing scales.
Business of Global Leisure Travel, Inc.
Global Leisure provides travel related services primarily through retail
travel agencies. Global Leisure is a seller of bulk travel services,
maintaining several wholesale and discount contracts with leading providers of
travel in the industry. Global Leisure maintains non-exclusive contracts with
several major airlines, hotel operators and touring companies, including United
Airlines, Continental Airlines, Delta Airlines, Hawaiian Airlines, Alaskan
Airlines, Outrigger Hotels Hawaii, and Hotel Corporation of the Pacific d/b/a
Aston Hotels & Resorts. These contracts allow Global Leisure to purchase
airline tickets, hotel reservations and travel packages at wholesale prices.
Airlines enter into contracts with a limited number of wholesalers. Airlines
offer contracts to wholesalers who can enhance their marketing plan and who
perform for them from year to year. Global Leisure competes through its
expertise and marketing in the 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. Tradenames under which Global Leisure operates
include "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. In most of its contracts, Global Leisure competes for
a block of tickets with other wholesale travel suppliers.
Effective September 1, 2000, 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.
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<PAGE>
Recent Debt Financing
In May 2000, we 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 and after a recent
amendment, we issued to SW Pelham Series D warrants to purchase 250,000 shares
of our common stock at an exercise price of $1.50 per share. 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. We are 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. We are
also required to use the proceeds from the note to finance acquisitions by
travelbyus.com. The promissory note is payable in full on February 28, 2001. SW
Pelham will have the option to require us to repay the promissory note early if:
- the closing of the arrangement has not taken place on or before
December 31, 2000; or
- William Kerby ceases to be our chief executive officer and actively
involved in our management and operation.
On May 25, 2000, we 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.
travelbyus.com has been making payments due on the SW Pelham loan on behalf of
Aviation Group.
Advertising and Marketing
Most of our revenues from its aircraft paint and products businesses come
from direct sales and customer referrals. We also utilize direct mailings and
trade journal advertisements as a secondary source of advertising and public
relations. We have 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
We 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 we use in our operations and to the disposal of
batteries. We could be held liable as a current or former operator for releases
of hazardous substances at our facilities. We could also incur liability for
cleanup costs at off-site facilities to which we ship hazardous substances for
treatment, handling, storage, or disposal. Our management believes that its
operations and facilities are in material compliance with all federal, state and
local environmental laws and regulations and that our hazardous waste management
practices minimize the potential for release of hazardous substances into the
environment. We have not experienced any significant
38
<PAGE>
environmental regulatory problems in the past. To date, we have not been subject
to any significant fines, penalties or other liabilities under these laws and
regulations. However, we cannot assure you that these laws or regulations may
not require us to make significant expenditures or otherwise have a material
adverse impact on our future operations or financial condition.
Aviation Regulation
The FAA regulates all aspects of the airline and aircraft industries. Our
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 our 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. We believe that our
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 our future
operations and financial condition.
Competition
Each of our subsidiaries, other than Global Leisure, directly competes with
other companies in the airline services industry. Our Aviation Exteriors
subsidiaries compete primarily with many heavy maintenance facilities that
perform aircraft stripping and painting services as an adjunct to their
maintenance operations. The owners of these heavy maintenance facilities
include Dee Howard Company, Pemco, Tramco, Inc. and Raytheon. Aviation
Exteriors competes through price, reliability of services, flexibility in
scheduling aircraft for painting, availability of aircraft hangars and proven
expertise in painting aircraft.
Aero Design and Battery Shop compete primarily with SAFT America, Inc. and
Marathon Power Technologies Company, both of which are much larger and have
greater financial resources. As the battery components sold by Aero Design tend
to be generic, Aero Design primarily competes through lower prices and
comparable product reliability. General Electrodynamics competes with InterComp
Company, a privately held miscellaneous scale manufacturer, 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 October 1, 2000, we had approximately 178 employees. Aviation Exteriors
Louisiana and Aviation Exteriors Portland have approximately 150 employees,
depending upon seasonality. At October 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
We carry $200,000,000 of insurance for general aviation liability and
$200,000,000 of hangar keeper insurance, as required by our customers, and
customary coverage for other business insurance. While we believe our insurance
is adequate, we cannot assure you that this coverage will fully protect us
against all losses which it
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<PAGE>
might sustain. Our insurance for aircraft liability carries a deductible
requiring it to pay $20,000 of any loss or damage.
Properties
Hangar Facilities for Paint Operations
Aviation Exteriors Louisiana leases four aircraft hangars and office space
at Acadiana Regional Airport from the Iberia Parish Authority in New Iberia,
Louisiana. One lease having an annual rent of $120,000 expires August 1, 2000.
An adjacent hangar has a term expiring in October 2023 and requires annual rent
of $158,000. The third lease expires on February 1, 2001 and has an annual rent
of $60,000. Each of the three leases allows the Iberia Parish Authority and
Aviation Exteriors Louisiana to agree to extend the lease terms and provides for
10% rent increases every five years.
Aviation Exteriors Louisiana has also executed a 30-year operating lease
with the Iberia Parish Authority for a larger hangar for the housing and
maintenance of Boeing 747 aircraft. The State of Louisiana and the U.S.
government funded $4.5 million to pay part of the cost of construction of the
hangar at Acadiana Regional Airport. Iberia Parish Authority financed the
remaining cost of the hangar construction through a bond issuance. The
construction of the hangar was completed in July 2000. The annual rent is
$420,000. The total cost to build the hangar was approximately $10 million.
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.
Dallas Office Space
We also occupy 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.
We pay rent in the amount of $7,120 per month for this office space. We have
subleased 4,500 square feet of this space to third parties for $5,000 per month.
Nashville, Tennessee Facilities
Aero Design utilizes approximately 3,000 square feet of manufacturing and
office space in Nashville, Tennessee under a two-year lease at the monthly rate
of $1,500, plus expenses. These facilities are deemed adequate for the growth
of Aero Design and Battery Shop during the 2000 fiscal year. We believe that
there are suitable facilities in the area sufficient to support additional
growth.
Arlington, Texas Facilities
General Electrodynamics Corporation operates an approximately 20,000
square-foot manufacturing and operating facility in Arlington, Texas under a
short term lease. Rent payments are $5,000 per month plus all utilities and
taxes.
Legal Proceedings
We are not involved in any material pending legal proceeding other than
ordinary routine litigation considered to be incidental to our business.
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<PAGE>
Selected Financial Data
Certain of our selected financial data appears under the captions "Selected
Consolidated Financial Data of Aviation Group" and "Comparative Per Share Data"
in this prospectus.
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MANAGEMENT
Directors and Executive Officers
Our 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 43 President, Chief Executive Officer and White Oak, British Columbia
Director
Richard L. Morgan /(1)/ 42 Executive Vice President, Chief Dallas, Texas
Financial Officer and Director
Paul Lubomirski 46 President of Aviation Exteriors New Iberia, Louisiana
Louisiana, Inc., a subsidiary of Aviation
Group
John Arcari 59 Vice President - Marketing and Plano, Texas
Development
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 our
executive officers and directors, including their principal occupations:
Lee Sanders was appointed Chairman of the Board of Aviation Group in March
2000, and he previously served as Chief Executive Officer of Aviation Group and
its predecessors for more than five years. Mr. Sanders is also a founder and
principal owner of Aviation Group. As a result of his service for Aviation
Group and its predecessors, Mr. Sanders has experience in acquiring and managing
businesses. He also has a marketing background resulting from his experiences
in starting and operating private businesses. Mr. Sanders is a graduate of the
University of Tennessee, with a Bachelor of Science in Business Administration.
William Kerby was appointed President, Chief Executive Officer and a
director of Aviation Group in March 2000. Mr. Kerby has been Vice Chairman and
Chief Executive Officer of travelbyus.com since April 1999. Prior to joining
travelbyus.com, Mr. Kerby was the founder, President and Chief Executive Officer
of Leisure Canada Inc., a publicly traded company in the travel industry from
January 1995 to March 1999. During his tenure with Leisure Canada Inc., Mr.
Kerby engineered the development of that company's travel division assets.
These assets included TravelPlus (formerly Goliger's Travel and Travel Trade
International) with over 200 agencies across Canada, Altracs Publishing &
Multimedia, producing Leisure Canada Magazine and Canadian Traveller, Bluebird
Holidays/Tour Division in Great Britain and South Africa, Skyhigh Holidays and
Cook Island Holidays in Canada.
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<PAGE>
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 our painting subsidiaries, 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 our 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 our acquisition of the company 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.
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<PAGE>
No family relationships exist among our directors or executive officers.
Except as indicated above, none of our 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 our 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 our independent auditors
and reviews the results and scope of audits and other services provided by our
independent auditors, our accounting procedures, and the adequacy of our
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
our business and affairs, except when the board of directors is in session and
except for certain powers which may be exercised only by the board of directors.
Director Compensation
Directors are reimbursed for certain expenses in connection with attendance
at board of directors and committee meetings. Non-employee directors have also
been granted warrants for their services as directors. As a result of these
grants, Mr. Whitener owns warrants to purchase 15,000 shares of common stock.
Mr. Clements owns warrants to purchase 2,500 shares of common stock and Mr. Weed
owns warrants to purchase 20,000 shares of common stock, each share exercisable
at $1.6875 per share, which expire in 2003 and 2004. In February 2000, each of
the non-employee directors was granted warrants to purchase 50,000 shares of
common stock at $1.50 per share, which was the trading price of the common stock
at that time. These warrants may not be exercised unless they are approved by
the shareholders and the arrangement is completed.
Executive Compensation
The following table sets forth information, for the fiscal years ended June
30, 2000, 1999, and 1998, regarding the compensation of Lee Sanders, our
Chairman and former Chief Executive Officer and one other executive officer,
Richard Morgan, who received compensation of more than $100,000 for the fiscal
year ended June 30, 1999. No other executive officers had compensation
exceeding $100,000 for the fiscal year ended June 30, 1999. William Kerby, our
President and Chief Executive Officer, was appointed to these positions in March
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.
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<PAGE>
(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.
(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 our 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 $1.8563.
(8) Mr. Kerby was appointed President and Chief Executive Officer in March
2000.
Stock Options and Warrants
During the fiscal year ended June 30, 2000, our board of directors granted
certain warrants to the executive officers named in the summary compensation
table as described in the table blow.
Option/Warrant Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Shares % of Total Options/
Underlying Warrants Granted
Options/Warrants to Employees in Exercise Price
Name Granted Fiscal Year ($/Share) Expiration Date
---------------- ----------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Lee Sanders 250,000 /(1)/ 27% $ 1.50 2/23/05
200,000 /(2)/ 21 1.6875 4/28/05
50,000 /(2)/ 5 1.8563 8/22/04
Richard Morgan 250,000 /(1)/ 27 1.50 2/23/05
180,000 /(2)/ 20 1.6875 3/31/03
15,000 /(2)/ 1 1.6875 4/28/05
</TABLE>
____________________________
(1) Warrants are not exercisable until approved by the shareholders.
(2) Represents repricing of options and warrants in August 1999.
Following the end of the fiscal year, in August 1999, our board of directors
determined to amend the outstanding options and warrants for our employees and
directors, including Mr. Sanders and Mr. Morgan, by reducing the exercise price
to $1.6875 per share, which was the then current market price for the common
stock. In August 1999, our board of directors also extended the expiration date
of warrants to purchase 80,000 shares previously issued to Mr. Morgan, when he
was a consultant to us, from March 31, 1999 to March 31, 2003.
Aggregate Option/Warrant Exercises in Last Fiscal Year and
Fiscal Year End Option/Warrant Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money
Acquired on Value Options/Warrants Options/Warrants
Name Exercise(#) Realized($) 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
We have 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.
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<PAGE>
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 our painting subsidiary, Aviation Exterior Louisiana, Inc., for any fiscal
year exceeds certain amounts during the term of his agreement.
We 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, our 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 we terminate Mr. Sanders' employment at any time or if
Mr. Sanders terminates his employment within one year after a change in
ownership or control of the company, we are 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 our company
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 our
company if not approved in advance by Mr. Sanders, any material change in his
authority or duties and any breach by us of the employment agreement not
remedied within ten days after notice from him. The election of William Kerby as
Chief Executive Officer resulted in a change in control for purposes of Mr.
Sanders' employment agreement.
Effective February 23, 2000, we agreed to amend Lee Sanders' 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 us 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, we entered into a one-year employment
agreement with Richard Morgan 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 our existing operating subsidiaries or their assets, on terms acceptable
to our board of directors, or (c) our termination 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 our employees or customers or those of our
subsidiaries for one year following termination or expiration of his employment.
In consideration for entering into the employment agreement, our board of
directors granted to Mr. Morgan five-year warrants to purchase 250,000 shares of
our 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 our shareholders. Our board of directors believed
that the employment agreement and warrants for Mr. Morgan were advisable to
assure that we 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
Our 1997 stock option plan was adopted by our 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, we 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 our company to whom stock options are
granted (provided that incentive stock options only be granted
46
<PAGE>
to our employees). 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 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 an optionee terminates service with us. In
general, if an optionee is disabled, dies or retires from his or her service to
our company, this option may be exercised up to three months following the
disability or death unless the board of directors or Compensation Committee
determine to allow a longer period for exercise.
The exercise price of incentive stock options must not be less than the
fair market value of the common stock on the date of grant. The exercise price
of incentive stock options granted to any person who at the time of grant owns
stock possessing more than 10% of the total combined voting power of all classes
of stock must be at least 10% higher than the fair market value of the stock on
the date of grant, and the term of those options cannot exceed five years.
As of October 1, 2000, we had outstanding under our 1997 stock option plan
the following options:
<TABLE>
<CAPTION>
Shares of Exercise Market Value of
Common Stock Price Common Stock
Name Under Option Per Share /(1)/ Date of Grant on Date of Grant /(1)/ Expiration Date
---- ------------ --------------- ------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Five executive officers 4,000 $1.6875 Apr. 29/98 $3.50 Apr. 28/04
as a group 6,000 1.6875 Apr. 29/98 3.50 Apr. 29/05
50,000 1.8563 Apr. 29/98 3.50 Apr. 29/05
Employees who are not 4,000 1.6875 Apr. 29/98 3.50 Apr. 28/04
executive officers or 21,000 1.6875 Apr. 29/98 3.50 Apr. 29/05
directors as a group
Consultants or directors 0
who are not executive
officers as a group
</TABLE>
______________________________________________
(1) All options were repriced on August 18, 1999 to $1.6875, which was the
market value of the common stock on that date, except the 50,000 options to
Lee Sanders for which the repricing established the exercise price at
$1.8563 per share. The exercise prices before the repricing were $3.50 per
share for all options except that the exercise price for the option of Mr.
Sanders was $3.85.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles E. Weed, one of our directors, served as our consultant from March
1996 until February 2000. During the fiscal years ended June 30, 1998 and 1999,
we paid Mr. Weed $48,000 and $54,200 in consulting fees, respectively. As of
June 30, 1999, Mr. Weed held our convertible notes 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, we 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 of our shareholders, who were not affiliated with us,
loaned us $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 our behalf, Mr. Weed received 40,000 shares of our
common stock.
During the fiscal year ended June 30, 2000, Lee Sanders and Richard Morgan
provided us 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 us 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 our
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 us in June
1999.
In August 1998, under their prior acquisition agreements with us, two of
our former shareholders, who owned an aggregate of 82,165 shares of common
stock, claimed that they were entitled to receive certain payments from us upon
a resale of their shares. Charles Weed purchased 20,000 shares, and three other
existing shareholders purchased the remainder of the shares of these two
shareholders at a price of $3 per share. This price was in the range of closing
trading prices at the time of the sale in late August 1998. To facilitate the
transaction, we agreed with each of the shareholders, including Mr. Weed, that
the purchasers would receive at least $3.50 per share in sales proceeds upon any
resale of these shares after one year. Mr. Weed and each shareholder agreed not
to resell these shares for one year. As a result of this arrangement, we paid
Mr. Weed $10,000.
Our board of directors believes that all transactions between us and any of
our affiliates have been made on terms no less favorable to us than would have
been obtained from non-affiliated third parties. Any future transactions between
us and any of our 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 us than could be obtained from unaffiliated third
parties. We will not make any loans to our officers, directors, 5% shareholders
or affiliates, except for bona fide business purposes.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of November 1, 2000,
with respect to the beneficial ownership of shares of our 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 of our
directors and each of our executive officers named in the Summary Compensation
Table and (iii) by all of our directors and executive officers as a group.
Except as otherwise indicated, we believe that each person named below possesses
sole voting and investment power over his shares of common stock.
<TABLE>
<CAPTION>
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned/(1)/ Percent of Total/(2)/
------------------- ------------------------ ---------------------
<S> <C> <C>
Lee Sanders 1,493,966 /(3)/ 27.3%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Richard Morgan 398,500 /(4)/ 7.5%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Hank Clements 52,950 /(5)/ 1.1%
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
Charles E. Weed 145,283 /(6)/ 2.9%
84 Springlake Way
Shreveport, Louisiana 71106
Gordon Whitener 65,000 /(7)/ 1.3%
39 Carrington Drive
Cartersville, Georgia 30120
William Kerby /(8)/ - -
204-3237 King George Highway
South Surrey, B.C.
Canada V4P 1B7
John Fenyes /(8)/ - -
5270 Neil Road
Reno, Nevada 89502
All executive officers and directors as 2,209,949 36.9%
a group (9 persons) /(9)/
</TABLE>
_______________________________
(1) This information has been furnished by our 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
49
<PAGE>
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
us 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 us 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 our 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.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are a Texas corporation governed by our articles of incorporation,
bylaws and the Texas Business Corporation Act. We urge you to read our articles
of incorporation and bylaws, which are filed as exhibits to the registration
statement of which this prospectus is a part. Our authorized capital stock
consists of 10 million shares of common stock, $0.01 par value, and 5 million
shares of preferred stock, $0.01 par value. One of the proposals submitted for
approval at the special meeting of our shareholders scheduled for December 20,
2000, if adopted by shareholders, would increase the authorized number of shares
of common stock to 250 million. At the same meeting, shareholders are also being
asked to vote on a proposed one-for-five reverse split of our common stock.
Common Stock
As of November 1, 2000, we had approximately 61 holders of record of our
common stock. The holders of outstanding shares of common stock may receive
dividends out of assets legally available at the times and in the amounts as our
board of directors may, from time to time, determine. These dividends are
subject to any preferences which may be granted to the holders of preferred
stock. Holders of common stock do not have cumulative voting rights and are
entitled to one vote per share on all matters on which the holders of common
stock may vote. The common stock does not have preemptive rights and is not
subject to redemption or conversion. Upon liquidation, dissolution, or winding-
up of our company, the assets available for distribution to shareholders are
distributable ratably among the holders of the common stock after payment of all
of our debt and liabilities and the liquidation preference of any outstanding
class or series of preferred stock. All outstanding shares of common stock are,
and the shares of common stock to be issued in exchange for exchangeable shares
will be, when issued and delivered, validly issued, fully paid, and
nonassessable. The rights of holders of common stock are subject to the
preferential rights of any preferred stock that is outstanding or that we may
issue in the future.
Preferred Stock
Our board of directors may, without further action of our shareholders,
establish and issue shares of preferred stock in one or more series and fix the
rights, preferences and restrictions of the series of preferred stock. The
rights of holders of common stock are subject to, and may be adversely affected
by, the rights of holders of preferred stock. The issuance of additional shares
of preferred stock could adversely affect the voting power of holders of common
stock and could have the effect of delaying or preventing a change in ownership
of our company or other corporate action. The board has established three series
of preferred stock. We issued shares of preferred stock in connection with its
acquisition of Global Leisure and the related financing.
Series A Convertible Preferred Stock
We have designated 2,000 shares of Series A convertible preferred stock,
par value $0.01 per share. As of November 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 our board of directors, 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. Our board of directors does not
intend to declare any dividends on the Series A convertible preferred stock in
the near future.
Liquidation Preference. Upon liquidation, dissolution or winding up of our
company, 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 our capital stock, each share of
Series A convertible preferred stock will be entitled to be paid out of assets
available for distribution $10,000 plus all accrued unpaid dividends, calculated
through the date of liquidation.
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<PAGE>
Voting Rights. The holders of Series A convertible preferred stock are
entitled to vote as shareholders of Aviation Group on any matters. Each share is
entitled to one vote and votes together as a single class with the holders of
common stock. The holders of the Series A convertible preferred stock have the
right to vote as a separate class if required by the Texas Business Corporation
Act or on matters that adversely affect that series. Under the Texas Business
Corporation Act, the Series A convertible preferred stock are entitled to vote
as a class on:
- a proposed amendment to the articles of amendment that affects the
authorized number, par value, rights or preferences of the shares,
effects a reclassification, cancellation or exchange of the shares,
creates a new class or series of shares having equal or superior
rights to the shares, increases the rights of a junior class or series
of shares, affects any accrued dividends or includes in the articles
any provisions for a close corporation;
- a plan of merger that contains a provision which if contained in a
proposed amendment to the articles of incorporation would require a
separate vote of the Series A convertible preferred stock; and
- a plan of exchange that requires shares of Series A convertible
preferred stock to be exchanged.
Redemption. The Series A convertible preferred stock is not redeemable.
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 we have exercised our right to redeem the stock. In addition,
we have 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 we complete a new common stock, preferred stock or debt
financing after consummation of the arrangement that provides us with new gross
cash proceeds 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. We 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
We have designated 3,000 shares of Series B preferred stock, par value
$0.01 per share. As of November 1, 2000, 2,153 shares of Series B preferred
stock were issued and outstanding. The shares of Series B preferred stock were
issued as part of units with the Series C warrants.
Ranking. The Series B preferred stock ranks on parity with the Series C
convertible preferred stock and senior to common stock and any other series of
preferred stock as to dividends and liquidation preference.
Dividends. Dividends on the Series B preferred stock, if declared by our
board of directors, 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. Our board of directors does not intend to declare any dividends on
the Series B preferred stock in the near future.
Liquidation Preference. Upon liquidation, dissolution or winding up of our
company, and before payment of any amount to any other class or series of our
capital stock, 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.
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<PAGE>
Voting Rights. No holder of Series B preferred stock will be entitled to
vote as a shareholder of our company except to the extent required by the Texas
Business Corporation Act or on matters that adversely affect that series. The
matters on which the Series B preferred are entitled to vote under the Texas
Business Corporation Act are described above under "-Series A Convertible
Preferred Stock-Voting Rights."
Redemption. We have the right to redeem all or part of the outstanding
Series B preferred stock at any time after February 28, 2001. Additionally, we
are 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 of our assets
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. In connection with the arrangement with
travelbyus.com, we are offering to issue shares of this series in exchange for
outstanding shares of Series B preferred stock, on a one-for-one basis.
Ranking. The Series C preferred stock ranks on parity with Series B
preferred stock and senior to common stock and any other series of preferred
stock as to dividends and liquidation preference.
Dividends. If declared by our board of directors, 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 our
company, and before payment of any amount to any other class or series of our
capital stock, 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 our company. Each share of Series C
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. The Series C convertible preferred stock is not redeemable.
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. In addition, we have the right to require conversion of the Series C
convertible preferred stock into shares of common stock at any time after
February 28, 2001.
The conversion price is the greater of $6 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.
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<PAGE>
No fractional shares will be issued upon conversion of the Series C
convertible preferred stock. We will pay a cash amount to any holder of Series C
convertible preferred stock who otherwise would be entitled to a fractional
share.
Warrants and Options
Public Warrants
As of November 1, 2000, we have outstanding 1,150,000 redeemable common
stock purchase warrants that expire in August 2002. These warrants are publicly
held and traded on the Nasdaq SmallCap Market and Boston Stock Exchange. Each
warrant entitles the holder to purchase 1.65 shares of our common stock at an
exercise price of $4.19 per share, subject to adjustment if a merger,
reorganization, stock dividend, stock split or recapitalization occurs, unless
earlier redeemed.
We may redeem the warrants, in whole and not in part, if the average
closing price of the common stock for a period of any 20 consecutive trading
days is at least $5.76, subject to adjustment. The warrants are redeemable at a
price of $0.06 per warrant, subject to adjustment. A holder must either exercise
the warrant within 30 days of the notice of redemption or accept the redemption
price.
Holders of warrants have no voting, dividend or other rights as
shareholders of our company with respect to the shares underlying the warrants,
unless and until the warrants are exercised.
Employee Stock Options
As of November 1, 2000, we have outstanding incentive stock options to
purchase, at an exercise price of $1.685 per share, an aggregate of 35,000
shares of common stock. In addition., our Chairman, Lee Sanders, owns an
incentive stock option to purchase 50,000 shares of common stock at $1.8563 per
share. These options expire in 2004 and 2005.
Warrants Issued In Connection With Global Acquisition
We issued certain warrants in connection with its acquisition of Global
Leisure and related financing. On November 1, 2000, we had outstanding:
- Series A warrants to purchase a total of 750,000 shares of common
stock at an exercise price of $5 per share;
- Series B warrants to purchase a total of 3,500,000 shares of common
stock at an exercise price of $3 per share; and
- Series C warrants to purchase a total of 1,239,750 shares of common
stock at an exercise price of $3 per share.
These warrants are not exercisable until our 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.
We intend to register the underlying shares of common stock for resale under the
Securities Act. The exercise price and the number of shares of common stock
purchasable under the warrants are adjusted in the event of any stock dividend,
stock split, recapitalization or merger. Holders of the warrants do not possess
any rights as shareholders of our company before exercise.
Under the terms of the Series A warrant to purchase 500,000 shares of
common stock that was issued to the former controlling owner of Global Leisure,
we are required to redeem the 1,005 shares of Series A convertible preferred
stock held by that owner from and to the extent that the net cash proceeds from
the sale of any public debt or equity securities after completion of the
arrangement exceed $25 million and the amount needed to redeem
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<PAGE>
all outstanding shares of the Series B preferred stock. However, no redemption
is required from the sale of common stock or preferred stock that is junior to
the Series A preferred stock or to the extent we use the net cash proceeds to
effect a strategic acquisition. The total redemption price of the former owner's
Series A preferred stock would be $10,050,000, plus any accrued unpaid dividends
calculated through the date of redemption. The other Series A warrant to
purchase 250,000 shares of common stock was issued to a former minority owner of
Global Leisure, whose principal is involved in Global Leisure's management.
These warrants are not exercisable or transferable until the revenues of Global
Leisure exceed $80 million and Global Leisure has net income for any four
consecutive fiscal quarters.
We may redeem the Series C warrants, at $0.10 per warrant, if the closing
bid price of our common stock for 60 consecutive trading days exceeds $5 per
share. If we exercise this right, holders may exercise the warrants and pay the
exercise price or accept the redemption price. Holders who do not exercise their
warrants prior to our redemption will forfeit their right to purchase the shares
of common stock underlying the warrants. The Series C warrants were issued as
part of units with the Series B preferred stock. Prior to completion of the
arrangement, the Series C warrants may not be transferred separate from the
Series B preferred stock with which it was issued as a unit.
Publicly Traded Warrants
In connection with our initial public offering in 1997, we issued 1,150,000
publicly traded public warrants. Upon exercise of the underwriters' warrants, we
may issue up to 100,000 underlying warrants to the holders of the underwriters'
warrants. The underlying warrants have identical terms to the public warrants.
The following description of the public warrants is also intended to describe
the underlying warrants.
The public warrants are subject to the terms and conditions of a warrant
agreement between us and our transfer agent. The shares of common stock
underlying the public warrants will be fully paid and nonassessable when issued
to the holder upon exercise and payment of the purchase price.
Each public warrant entitles the holder to purchase 1.65 shares of new
common stock at any time after August 13, 1999 at an exercise price of $4.17 per
share, subject to adjustment in certain circumstances, unless earlier redeemed.
Pursuant to the terms of the warrant agreement as a result of our issuance of
shares of common stock and other options, warrants and convertible securities at
exercise or issue prices of less than $6.90, we adjusted the original exercise
price of the public warrants from $6.90 to $4.17, and we increased the number of
shares for which each public warrant may be exercised from one share to 1.65
shares.
We may redeem the public warrants in whole and not in part after August 13,
1999, upon 30 days' notice at a price of $0.06 per warrant, provided that the
closing bid quotations or sale prices of our common stock have averaged at least
$5.73 for a period of any 20 consecutive trading days ending on the tenth day
prior to the day on which we mail notice of redemption to the public warrant
holders. In the event we give notice of our intention to redeem the public
warrants, a holder would be forced to either exercise his warrant within 30 days
of the notice of redemption or accept the redemption price. The warrant holders
will have exercise rights until the close of business on the redemption date.
We may adjust the number and kind of securities or other property for which
the public warrants are exercisable upon the occurrence of certain events,
including mergers, reorganizations, stock dividends, stock splits, and
recapitalizations. The warrant holders have no voting, dividend, or other rights
as shareholders of our company, unless and until the public warrants are
exercised.
The public warrants may be exercised by filling out and signing the
appropriate form on the Warrants and mailing or delivering the Warrants to the
Warrant Agent in time to reach the Warrant Agent by the expiration date,
accompanied by payment in full of the exercise price for the Warrants being
exercised in United States funds (in cash or by check or bank draft payable to
the order of the Company). Common Stock certificates will be issued as soon as
practicable after exercise and payment of the exercise price as described above.
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<PAGE>
The shares of common stock underlying the purchase and underwriters'
warrants have been registered with the Securities and Exchange Commission. We
are required to file post-effective amendments to our registration statement in
order to maintain a current prospectus covering the issuance of these shares
upon exercise of the public warrants. We will use our best efforts to cause such
post-effective amendments to become effective. If we do not file a required
post-effective amendment or the amendment does not become effective or is not
maintained, the warrant holders may be prevented from exercising their public
warrants.
Warrant holders have the right to exercise the public warrants only if the
underlying shares of common stock are qualified, registered or exempt from
registration under applicable securities laws of the states of residence of the
warrant holders. We cannot issue shares of common stock to warrant holders in
states where such shares are not qualified, registered or exempt. We have
obtained a listing for the shares of common stock on Nasdaq and the Boston Stock
Exchange, which provides an exemption from state securities law registration in
many states, and have registered the shares of common stock in states where this
exemption is not available.
We may redeem the public warrants in certain circumstances. If we exercise
this right, we would force a warrant holder of the warrants to exercise the
warrants and pay the exercise price at a time when it may be disadvantageous for
the holder to do so, to sell the warrants at the then current market price when
the holder might otherwise wish to hold the warrants for possible additional
appreciation, or to accept the redemption price, which is likely to be
substantially less than the market value of the warrants at the time we redeem
Warrant holders who do not exercise their public warrants prior to our
redemption will lose their right to purchase the shares of common stock
underlying the public warrants.
Underwriters' Warrants
In connection with our initial public offering in 1997, we sold to our
underwriter, for $0.001 per warrant, warrants to purchase a combination of
100,000 shares of its common stock at an exercise price of $9.4875 per share and
100,000 redeemable common stock purchase warrants at an exercise price of $11.38
per warrant. The underwriters' warrants expire on August 13, 2002. The exercise
price and the number of shares of common stock purchasable under the
underwriters' warrants are subject to adjustment if a merger, reorganization,
stock dividend, stock split or recapitalization occurs. Holders of the
underwriters' warrants do not possess any rights as shareholders of our company
before exercise. They do have certain demand and piggyback registration rights.
Other Warrants
In addition to the options and warrants described above, as of October 1,
2000, we had outstanding warrants to purchase a total of 707,166 shares of our
common stock at exercise prices varying between $1 and $8 per share and expiring
at various dates up to February 2005.
In February 2000, we issued to three of our directors, Hank Clements,
Gordon Whitener and Charles E. Weed, contingent warrants to purchase a total of
150,000 shares of our common stock exercisable at $1.50 per share. The
exercisability of these warrants is subject to approval of our shareholders and
the completion of the arrangement with travelbyus.com.
In February 2000, we issued to two of our executive officers, Lee Sanders
and Richard Morgan, contingent warrants to purchase a total of 500,000 shares of
our common stock exercisable at $1.50 per share. The exercisability of these
warrants is contingent on the approval of our shareholders.
Convertible Debt Securities
We issued in 1996 notes convertible at the option of the holders at $4.50
per share into shares of our common stock. The convertible notes required equal
quarterly installments of principal in an amount necessary to fully amortize the
notes by March 1, 2001, when all remaining principal and accrued interest will
be due. In March 2000, holders of $340,600 in principal amount of the
convertible notes elected to convert their notes. However, as an inducement to
convert, we guaranteed that any resales of the shares obtained by these holders
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would result in proceeds of at least the conversion price. As of October 1,
2000, we had outstanding $25,000 in aggregate principal amount of unconverted
convertible notes.
Certain of our subsidiaries issued six promissory notes totaling
approximately 460,000 to trade creditors in cancellation of trade debt. The
notes are payable in full on January 31, 2001. These notes are exchangeable by
their holders for our common shares at an exchange price of $1.50 per share. We
have agreed to register these shares for resale by the noteholders under the
Securities Act. Our subsidiaries have agreed to indemnify the noteholders for a
period of one year from any loss realized upon the resale of the shares if the
notes are exchanged.
Transfer Agent, Registrar and Warrant Agent
Securities Transfer Corporation, Dallas, Texas, is the stock transfer agent
and registrar for the common stock and the warrant agent for our Series B and
Series C warrants and our public warrants. Aviation Group serves as its own
transfer agent and registrar for its preferred stock and other warrants.
USE OF PROCEEDS
The timing of any receipt by us of proceeds from sales of shares of common
stock upon exercise of the public warrants, the underwriters' warrants or the
underlying warrants is unpredictable. We expect to employ these proceeds, if
any, for working capital and general corporate purposes.
We will not receive any of the proceeds from sales of any of the shares of
common stock by the selling shareholders.
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TRAVELBYUS.COM LTD.
Business
Overview
travelbyus.com was incorporated under the laws of the Province of Ontario
on July 21, 1986 under the name MVP Capital Corp., and on October 23, 1996,
changed its name to LatinGold Inc. Prior to 1999, travelbyus.com was a precious
metals exploration company with a focus on Latin America and Mexico. In April
1999, because of changing market conditions, travelbyus.com focused its business
on the travel sector. On June 4, 1999, travelbyus.com filed articles of
amendment to change its name to its current name.
travelbyus.com is an integrated travel organization which provides travel
services via the Internet, through 1-800 call centers and through traditional
travel agencies, primarily to customers in the western United States and Canada.
travelbyus.com also provides advertising services to airlines and hotels. The
travelbyus.com website provides consumers with online travel options 24 hours a
day. Through its website, consumers are able to browse travel options world-wide
and book travel reservations. travelbyus.com also offers travel services and
products through its 1-800-i-Travel(R) phone number and traditional travel
agencies.
Since April 1999, travelbyus.com has focused on completing certain
strategic acquisitions to build the components of its business model, which
include product offering, distribution, marketing and technology. travelbyus.com
provides a broad range of travel products, targeted primarily at the leisure
customer, including airfare, hotel rooms, cruise packages and ground packages.
travelbyus.com utilizes three distribution channels to market its products: the
traditional travel agency base, 1-800 call centers and the Internet.
travelbyus.com continuously seeks technology that allows it to distribute its
travel products effectively and to offer consumers more travel related options.
As of November 1, 2000, the Web site had destination content including
descriptive text, pictures, maps, weather information, a worldwide directory of
hotels and currency conversion rates. It also had vacation packages listed for
Mexico, Hawaii, Florida, Colorado, Las Vegas, California, Caribbean, Europe and
other popular destinations with sample prices. In addition, vacation specials
are available for specific products in each of these areas. These specials and
packages are available for online reservation and booking. Airline, hotel,
rental car and cruise reservations can be made outside of the context of a
vacation package. During the first quarter of fiscal year 2001, travelbyus.com
expects to implement advanced search technology that will significantly enhance
and simplify the booking capabilities for airline tickets.
The registered office of travelbyus.com is located at Scotia Plaza, Suite
2100, 40 King Street, West, Toronto, Ontario, M5H 3C2. Currently, the head
office of travelbyus.com is located at 204-3237 King George Hwy., South Surrey,
British Columbia, V4P 1B7. By October 2000, travelbyus.com expects to move its
head office to Reno, Nevada. Through its acquisition of Express Vacations, the
bulk of its operations are already located in Reno. See "-Recent Acquisitions-
Express Vacations, LLC" below.
Business Model
The key components of travelbyus.com's business model include product
offerings, distribution, marketing and technology.
Product Offerings
travelbyus.com has made certain strategic acquisitions enabling it to offer
consumers various travel products. travelbyus.com provides a broad range of
travel products targeted primarily at the leisure customer, including airline
tickets, cruise packages and ground packages. For the nine months ended June 30,
2000, travelbyus.com received 70%, 8% and 21% of its travel sales revenues from
sales of airline tickets, cruise packages and ground packages, respectively.
Through travelbyus.com's marketing program with Mr. Cheaps Travel and Gotham
Media and through special net airfare contracts held by Cheap Seats,
travelbyus.com has the ability to offer airline tickets to consumers at
competitive prices.
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Airline Tickets. In October 1999, travelbyus.com acquired all of the issued
and outstanding shares of Gotham Media Group, Ltd. and Mr. Cheaps Travel, Ltd.
See "- Recent Acquisitions - Gotham Media Group, Ltd. and Mr. Cheaps Travel,
Ltd." Gotham Media and Mr. Cheaps combine a strategy of fulfilling marketing
programs for airfare suppliers in exchange for travel products. Mr. Cheaps was
founded in 1980 and is a full service travel agency specializing in discount and
last minute airfares. Gotham Media works in conjunction with Mr. Cheaps to
provide travelbyus.com with airline tickets and hotel rooms at a significant
discount to market. Gotham Media acquires the rights to billboard, radio,
television and print advertising which it exchanges with its airline and hotel
industry clients in return for travel credits to be applied toward the purchase
of travel products. These credits are converted into cash through sales to
customers from the Mr. Cheaps' operations.
The activities undertaken by Gotham Media allow airlines to market their
product without additional cash outlay. Airline suppliers that utilize the
marketing program include Frontier Airlines Inc., Proair Inc., AOM French
Airlines, Air Tahiti Nui, and City Bird.
On January 6, 2000, travelbyus.com acquired all of the issued and
outstanding shares of Cheap Seats, Inc. Cheap Seats was founded in 1988 and is a
net airfare consolidator with a wide range of net fare ticket contracts with
several U.S. and international airline carriers. The airlines use net airfare
consolidators to sell excess inventory without compromising their published
pricing structures. To purchase airfare at the lowest published rate, a consumer
is usually required to book their airfare 14 to 21 days in advance and stay at
their destination over a Saturday night. With the net fare program, the airline
companies grant travelbyus.com the ability to waive the advance purchase
restriction and the requirement to stay over a Saturday night. Since
travelbyus.com has the ability to waive the fare restrictions, travelbyus.com
can offer the airfare at a discounted price to consumers requiring a last minute
flight or short duration flight.
Cruise Packages. In October 1999, travelbyus.com acquired certain assets of
Galaxsea Cruises and Tours, Inc. and all outstanding shares of IT Cruise, Inc.
See "Recent Acquisitions--International Tours, Inc., Galaxsea Cruises and Tours,
Inc. and IT Cruise Inc." Through Galaxsea Cruises, travelbyus.com maintains an
office in California offering cruise packages directly to the consumer. These
cruise packages are also being offered directly to the consumer through the
travelbyus.com Web site and 1-800 call centers.
In April 2000, travelbyus.com acquired the travel operations of Bell Travel
Systems and all of the issued and outstanding shares of Cruise Shoppes America,
Ltd. See "- Recent Acquisitions - Bell Travel Systems" and "- Cruise Shoppes
America, Ltd." Bell Travel is a travel company with approximately 120 associate
cruise agency members. Cruise Shoppes is a nationwide cruise and leisure sales
organization with over 350 associate cruise agency members. The acquisitions
bring the total number of agency members associated with travelbyus.com to over
2,700. As a result of this large number of agency members associated with it,
travelbyus.com obtains favorable rates on cruise packages, which can be offered
to the agency members at a discount to market.
Ground Packages. Through its subsidiaries, travelbyus.com has developed a
comprehensive array of ground packages, including hotel, tour and car rental.
travelbyus.com has business arrangements with various hotel chains, hotel
properties and time share properties with concentration on Hawaii, Mexico, Las
Vegas, Reno, Florida, California and Europe. These hotels and properties provide
travelbyus.com with reservations at a discount to market. These discounted
reservations are then made available directly to consumers and to associated
agencies. travelbyus.com also has non-exclusive relationships with over 200
preferred suppliers. Preferred suppliers are travel entities that have
negotiated special override commissions and rates with travelbyus.com in order
to focus travelbyus.com on selling their products. The preferred supplier
arrangements that are offered to travelbyus.com by vendors are generally non-
exclusive. Rates and override commissions that vendors extend to travelbyus.com
may also be offered to other groups that sell travel. A list of some of the
preferred suppliers include Walt Disney Attractions, Inc., Starwood Hotels and
Resorts Worldwide, Inc., Continental Airlines, Inc., Delta Airlines, Inc.,
Holland America Line - Westours Inc., Princess Cruises, National Car Rental
System, The Hertz Corporation, Amadeus Global Travel Distribution LLC and The
Sabre Group, Inc.
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Distribution
travelbyus.com's distribution channels allow travelbyus.com to market its
products through the traditional travel agency base, 1-800 call centers and the
Internet.
Travel Agencies. In October 1999, travelbyus.com acquired certain assets of
International Tours, Inc. See "-Recent Acquisitions-International Tours, Inc.,
Galaxsea Cruises and Tours, Inc. and IT Cruise, Inc." In April 2000,
travelbyus.com acquired the travel operations of Bell Travel. International
Tours and Bell Travel maintain a network of associated travel agencies in the
United States. The acquisitions bring the total number of travel agency members
associated with travelbyus.com to over 2,700. As a result of the large number of
travel agency members associated with travelbyus.com, travelbyus.com obtains
favorable rates on travel packages, which can then be offered to the travel
agency members at a discount to market. The services that travelbyus.com offers
to these member agencies are two-tiered. As basic members of the travelbyus.com
marketing program, the travel agents are entitled to use travelbyus.com's trade
names and trademarks, to participate in the preferred supplier program, to
receive help desk support and newsletters, to have access to training programs,
travelbyus.com's cruise center, air desk, emergency assistance service and
1-800-i-Travel program and to receive the benefits of travelbyus.com's marketing
programs. For a higher annual fee, they can enjoy the benefits of
travelbyus.com's enhanced membership program, which includes one customized Web
site and access to travelbyus.com's booking engine, intranet and client database
management.
1-800 Call Centers. travelbyus.com's 1-800 call centers will offer small
and medium sized independent travel agents with the opportunity to increase
their client bases and travel product sales while earning higher commissions.
The cornerstone of the program will be the toll free 1-800-i-Travel(R) phone
number which is currently connected only to the Reno call center. As of October
20, 2000, the 1-800-i-Travel marketing program was not being offered to member
travel agents, and, consequently, there were no participants at that time. When
the program begins, each participating agency will purchase a protected
marketing territory from which it will be the exclusive recipient of all
advertising benefits. Customer calls will then be automatically routed to the
office phone of the member agent serving the zip code from which the call
originates. When any customer dials 1-800-i-Travel, the call will first be
answered by a professionally recorded digital announcement that will require the
entry of the consumer's home zip code. This system will enable consumers to dial
1-800-i-Travel from any touch-tone telephone in the United States and by
entering their home zip code, be immediately connected to a local travel agency.
Offsetting the normal marketing limitations of independent travel agents,
the 1-800-i-Travel co-operative marketing program pools agents' advertising
budgets and booking volumes to provide major media advertising, volume based
commission overrides and access to special travel packages previously
unavailable to small and medium sized independent travel agencies.
travelbyus.com will begin its marketing efforts through its current
associate members. The 1-800-i-Travel marketing program will be launched in
concert with the national marketing campaign in the first quarter of fiscal year
2001. travelbyus.com will not have a different legal relationship with the
participating agencies in the 1-800-i-travel program than exists today.
Participating agencies will only be required to pay an additional marketing fee.
The routing system and related call center infrastructure to implement the
1-800-i-travel marketing program to travel agents is already in place. To enable
travel agent members to participate in the program, there is no additional cost
to travelbyus.com involved. As members join the program, their zip code is pre-
programmed into the call routing system. As the marketing/advertising program
begins in different market areas, there will be varying percentages of the
population who are exposed to the 1-800-i-Travel advertising program, but who do
not live within a member agency's protected marketing territory. This will
result in many travel customer calls that cannot be routed to a local travel
agency. Though travelbyus.com will initially be assigning additional zip codes
to member agencies, creating a larger protected marketing territory for early
members, there will be many areas that remain unassigned. travelbyus.com
believes it is important to professionally serve every calling customer, and as
commission income may be generated in the process, travelbyus.com will operate a
full service call center to take the unallocated calls. Consequently,
travelbyus.com becomes a direct retail beneficiary of the overall marketing and
advertising program, commission overrides, bulk travel purchases and other areas
of service provided to member agencies.
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Internet. travelbyus.com's Web site provides consumers with on-line travel
options 24 hours a day. Through the Web site, consumers have the ability to
browse travel options world-wide and book travel reservations. The tour
operating system Epoch interfaces with the Web site to provide product
inventory, availability and booking data. It also provides the interface for
bookings in the call center. The integration of ITA software, which facilitates
the search for the lowest airfare, is anticipated to occur by November 15, 2000.
There are no further costs associated with the completion of the ITA software
integration. The Web site's travel vault feature is available to consumers to
securely store critical travel and other information. Travel documents,
personal information, schedules, and other critical data are encrypted and
stored for retrieval via the Internet anywhere in the world a consumer may
travel.
Customers will have the option to book travelbyus.com products via the Web
site, the call center or through a travel agent. Not all bookings are projected
to be made online. travelbyus.com will offer travel agents guaranteed
commissions on any consumer purchases made by their customers over the
travelbyus.com Web site or through travelbyus.com's 1-800 call center. In
addition, travelbyus.com will create personalized Web pages for its travel
agencies. These Web pages will be linked to and powered by the travelbyus.com
Web site. travelbyus.com member agencies are asked to register their clients'
names and addresses with travelbyus.com in order to track the bookings completed
by an agency's customers and also to pay commissions. In addition, member
agencies will have the facility to input client names and addresses into the
travelbyus.com client database. This process creates a concept of "client
ownership" for the agents, while allowing the travelbyus.com Web site to collect
data and to market directly to the agents' customers.
travelbyus.com believes that the travelbyus.com Web site will offer
consumers certain advantages over traditional "call-in" and "walk-in" travel
bookings, including the following:
Efficiency. The travelbyus.com Web site will provide consumers with a one-
stop convenient location to browse thousands of travel options world-wide.
Multiple Search Engines. Consumers will be able to search using one or a
combination of several search criteria, including type of vacation,
location, price range, date and time.
Live to the Internet. The travelbyus.com Web site will provide consumers
with access to travel reservations and information on the Internet 24 hours
a day.
Real Time Availability. The travelbyus.com Web site will provide consumers
with up-to-the-second reservation availability at selected destinations.
Travel Information. The travelbyus.com Web site will provide consumers
with information on selected destinations including, where available,
information on services and fees, facilities and amenities, promotions
offered and local weather forecasts.
Marketing
While travelbyus.com believes that the Internet has modified the business
model for the travel industry, travelbyus.com also offers the consumer the
ability to interact directly with travel professionals either by phone or in
person. travelbyus.com's marketing strategy places consumers at the center of
the process, allowing them the option to ask questions, obtain information,
order products and receive delivery from home, via telephone or the Internet or
from the traditional travel agency.
travelbyus.com's marketing strategy is built on the following key ideas:
- Traditional travel agencies introduce consumers to travelbyus.com and
allow for personal marketing of travelbyus.com's brand. These travel
agents have established relationships with their clients who in turn
have particular loyalties. travelbyus.com will provide materials,
including window decals and logos designed for office stationery and
business cards containing the travelbyus.com name, to create brand
awareness within their agency which will be
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subsequently shared with their clients. The agency takes advantage of
a direct mail promotion to introduce its new travelbyus.com
affiliation and website.
- Bricks-and-mortar outlets provide an opportunity to direct traffic to
the travelbyus.com Web site. travelbyus.com can market its
travelbyus.com web address on shopping bags, tags and bills.
- Travel agencies can offer travelbyus.com's products ahead of other
travel product suppliers. The ease of booking products through the
travelbyus.com Web site, versus the required phone call for other
similar products, preferred commissions particularly on Cheap Seats
and Mr. Cheaps airfare, and the ability to offer their own website
with booking functionality to clients will provide significant
incentive to sell travelbyus.com products.
- travelbyus.com can offer increased levels of service through its
distribution channels as all transactions will be routed through
travelbyus.com's Web site. For example, clients will be able to take
advantage of the 24/7 call center system and speak with a
travelbyus.com representative at any time.
- travelbyus.com can promote its products with highly targeted marketing
programs including television, radio, billboard and print. The Endless
Travel television program will showcase destinations sold by
travelbyus.com. Each show will highlight the web address and 1-800-i-
travel phone number. A magazine similarly promoting destinations
offered by travelbyus.com will be distributed to member agency
clients. Finally, traditional media will be employed to promote
products and the Web site.
- travelbyus.com offers consumers the ability to choose to do business
via the telephone, the Internet or through a traditional travel
agency.
travelbyus.com also markets its travel products through the television
series "The Travel Magazine." This travel show has been airing world-wide since
the early 1970s. New shows on The Travel Magazine will target specific content,
preferred locations and popular destination resorts for travelbyus.com. When
aired on television, the shows will include repeated mention of the 1-800-i-
Travel phone number and the travelbyus.com Web site. travelbyus.com will also
earn revenues from the distribution of television series in Canada and the U.S.
Additionally, pursuant to a promotional agreement dated March 8, 2000
between travelbyus.com and Genesis Intermedia Inc., travelbyus.com will be the
exclusive travel content provider, save for a link to American Express credit
cards, to appear on Genesis Intermedia's CenterLINQ kiosks and, when available,
on CenterLINQ's broadcast television network and Web site. CenterLINQ's kiosks
are located in malls across the United States. The term of the advertising
agreement is three years and is renewable.
Technology
As part of its business model, travelbyus.com continuously seeks technology
that allows it to distribute its products to its consumers effectively and offer
consumers additional travel related options. On March 30, 2000, travelbyus.com
entered into a licensing agreement with ITA Software for access to its
proprietary airfare search engine. Pursuant to the licensing agreement,
travelbyus.com has obtained a license, for a period of three years, to use
certain licensed software enabling online customers to obtain information
relating to airline routes and schedules, airfares and availability and to
search for low airfares. The basic license fee for the licensed software will
be based upon the number of transactions performed with the licensed software.
travelbyus.com also provides users with various services on its Web site.
The Web site will include a travel vault that will store personal information
for consumers, such as travel documentation, passport images, visas and
itineraries. Additionally, pursuant to an agreement between travelbyus.com and
HealthyConnect.com, Inc., HealthyConnect will provide travelbyus.com's customers
with global access to their personal health records, to healthcare content and
e-commerce products and supplies through a link from the travelbyus.com Web site
to
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HealthyConnect Inc.'s application Clinic@Home. Such services will be offered
as part of travelbyus.com's travel vault.
travelbyus.com has also entered into an agreement with Amadeus Global
Travel Distribution LLC. Amadeus operates a computer reservation system that
houses information on registered travel products, fares, schedules, conditions
and restrictions. The agreement provides for the sharing of revenues from
segment fees booked through travelbyus.com's system.
Competition
The markets for travelbyus.com's products are competitive. travelbyus.com
is subject to competition from both established competitors and potential new
market entrants. travelbyus.com faces competition from traditional travel
agencies, which remain the preferred source for travel reservations, and
Internet-based travel companies, including Microsoft Expedia, Travelocity and
Priceline.com Inc.
Both the e-commerce market and travel industry are highly competitive.
Since the introduction of e-commerce to the Internet, the number of e-commerce
Web sites competing for customers' attention has increased rapidly.
travelbyus.com expects future competition to intensify given the relative ease
with which new Web sites can be developed. travelbyus.com believes that the
primary competitive factors in e-commerce are brand recognition, Web site
content, ease of use, price, fulfillment speed, customer support and
reliability. Other factors that will affect travelbyus.com's success include
market acceptance of travelbyus.com's products, travelbyus.com's continued
ability to attract experienced marketing, technology, operations and management
talent and the success of travelbyus.com's marketing programs.
Intellectual Property
travelbyus.com protects its technology through a combination of copyrights,
trade secrets and contractual arrangements. travelbyus.com regards its
intellectual property as critical to its success, and relies on trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, suppliers, partners and others to protect its
proprietary rights. travelbyus.com will pursue the registration of its
trademarks and service marks in Canada and the United States as required.
Effective trademark, servicemark, copyright and trade secret protection may not
be available in every country in which travelbyus.com offers its services.
travelbyus.com expects that it may license certain of its proprietary rights,
such as trademarks or copyrighted material, to third parties in the future.
travelbyus.com has applied for a patent of the travelbyus.com business model,
but this patent has not and may not be granted. "See Risk Factors--Other Risks
Relating to the Business of travelbyus.com."
Personnel and Facilities
travelbyus.com maintains a leased facility in Reno, Nevada comprising
approximately 37,000 square feet. The lease is for a term of five years.
travelbyus.com also has leased offices in White Rock, Toronto, Los Angeles,
Portland, Louisiana and San Diego. As of October 20, 2000, travelbyus.com had
approximately 292 full-time employees.
Recent Acquisitions
Gotham Media Group, Ltd. and Mr. Cheaps Travel, Ltd.
On October 4, 1999, travelbyus.com acquired all of the issued and
outstanding common shares of Gotham Media Group Ltd. and all of the issued and
outstanding shares of Mr. Cheaps Travel, Ltd. pursuant to a share purchase
agreement. Mr. Cheaps is a full service travel agency specializing in discount
and last minute airfares. Gotham Media works in conjunction with Mr. Cheaps to
provide travelbyus.com with airline tickets and hotel rooms at a significant
discount to market. Gotham Media acquires the rights to billboard, radio,
television and print advertising which it exchanges with its airline and hotel
industry clients in return for credits to be applied toward the purchase of
travel products. These credits are converted into cash through sales to
customers from the
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Mr. Cheaps' operations. As consideration for the Gotham shares and the Mr.
Cheaps shares, travelbyus.com issued 2,000,000 of its common shares and paid
US$3,000,000 in cash to vendors of Gotham/Mr. Cheaps. A finder's fee of 150,000
common shares was paid to Peter Adam, a former officer of travelbyus.com.
Concurrent with the execution of the Gotham/Mr. Cheaps share purchase
agreement, travelbyus.com and Bridget Beaudet, a principal of Gotham and Mr.
Cheaps, entered into an employment agreement dated September 30, 1999. Pursuant
to the employment agreement, Bridget Beaudet became Chief Financial Officer of
Gotham Media for an initial term of two years commencing October 1, 1999.
Additionally, travelbyus.com and Georgetown Inc. entered into a consulting
agreement dated September 30, 1999, in which Georgetown Inc. agreed to provide
the services of George Beaudet as Chairman and Chief Operating Officer of Mr.
Cheaps for an initial term of two years.
International Tours, Inc., Galaxsea Cruises and Tours, Inc. and I.T.
Cruise, Inc.
Pursuant to an agreement dated October 13, 1999 among travelbyus.com,
travelbyus--IT Incorporated, Travelbyus Galaxsea Incorporated, International
Tours, Inc., Galaxsea Cruises and Tours, Inc. and North American Gaming and
Entertainment Company, travelbyus.com acquired certain assets of International
Tours, Inc., certain assets of Galaxsea Cruises and Tours, Inc. and all of the
issued and outstanding common shares of I.T. Cruise, Inc. International Tours
maintains a network of affiliated travel agencies in the United States and
Galaxsea Cruises maintains a network of affiliated cruise-only offices. As
consideration for the IT assets, travelbyus.com issued 333,333 of its common
shares and paid US$666,666 in cash. As consideration for the Galaxsea assets,
travelbyus.com paid US$285,000 in cash. As consideration for the IT Cruise
shares, travelbyus.com issued 666,667 of its common shares and paid US$1,048,334
in cash.
Concurrent with the execution of the IT agreement, travelbyus.com and
Ronald Blaylock, a principal of International Tours, entered into an employment
agreement dated October 13, 1999. Mr. Blaylock agreed to be employed as
President of travelbyus-IT for an initial term of three years commencing October
13, 1999.
Express Vacations, LLC
Pursuant to a unit purchase agreement dated November 1, 1999 between
travelbyus.com and John Fenyes, The John and Judy Fenyes Charitable Remainder
Unitrust, Jon Snyder, The Jon and Janet Snyder Charitable Remainder Unitrust and
Eldorado Resorts, LLC, travelbyus.com acquired all of the issued and outstanding
units of Express Vacations, LLC. Express Vacations is a call center based in
Reno, Nevada with a base of approximately 80 workstations. Additionally,
Express Vacations offers vacation packages to numerous destinations including
Hawaii, Mexico, Nevada, California and Europe. As consideration for the Express
Vacations units, travelbyus.com issued to the unit holders 3,462,000 of its
common shares and paid US$2.0 million in cash. A finder's fee of 150,000 common
shares was paid to a third party. On November 1, 1999 Express Vacations merged
with travelbyus.com's wholly owned subsidiary, Express Vacations, Inc. On May
2, 2000, the name of Express Vacations was changed to travelbyus.com USA Inc.
travelbyus.com expects travelbyus.com USA Inc. to be its primary operating
subsidiary in the near future.
Concurrent with the execution of the Express Vacations purchase agreement,
travelbyus.com and John Fenyes, a principal of Express Vacations, entered into
an employment agreement dated November 1, 1999, in which John Fenyes became
employed as Executive Vice President and Chief Operating Officer of
travelbyus.com and Express Vacations for an initial term of two years.
Additionally, travelbyus.com and Jon Snyder, a principal of Express Vacations,
entered into an employment agreement dated November 1, 1999, in which Jon Snyder
became President of travelbyus.com and Express Vacations for an initial term of
two years.
Travel Magazine
On November 15, 1999, travelbyus.com acquired from First Property Holding
Inc. all rights, interest and title to 120 episodes of the television series
known as "The Travel Magazine," except for some home video rights and television
distribution agency rights. As consideration for the series, travelbyus.com
issued 2,855,883 of its common shares to First Property. In addition,
travelbyus.com acquired the rights to 130 new half-hour Travel
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Magazine shows to be produced over the next few years. As consideration for the
new episodes, travelbyus.com issued to First Property 1,146,497 of its common
shares and will pay US$1.8 million upon delivery of 40 new episodes. Upon
receipt of the 40 episodes, travelbyus.com has the right to terminate the
arrangement or acquire the balance of 90 episodes for a further consideration of
US$4.5 million in cash or in its common shares. The Travel Magazine has been
airing world-wide since the early 1970s.
Cheap Seats, Inc.
Effective as of December 1, 1999, travelbyus.com acquired all of the issued
and outstanding common shares of Cheap Seats, Inc. Cheap Seats is a net airfare
consolidator with a wide range of net fare ticket contracts with several U.S.
airline carriers. As consideration for the Cheap Seats shares, travelbyus.com
issued to principals of Cheap Seats 5,000,000 of its common shares and paid
US$5,000,000 in cash. The Cheap Seats share purchase agreement also provides
that the purchase price may be increased by up to US$4.0 million based upon the
increase in certain gross revenues during the period from October 1, 1999 to
September 30, 2002.
Concurrent with the execution of the Cheap Seats share purchase agreement,
Cheap Seats and Robert Beaudet, a principal of Cheap Seats, entered into an
employment agreement dated January 6, 2000, in which Robert Beaudet became
President of Cheap Seats for an initial term of three years. Additionally,
Cheap Seats and Thomas Spagnola, a principal of Cheap Seats, entered into an
employment agreement dated January 6, 2000, in which Thomas Spagnola agreed to
be Vice President of Cheap Seats for an initial term of three years.
Legacy Storage Systems Corp.
Pursuant to a share purchase agreement dated December 1, 1999 between
travelbyus.com and John Whyte, travelbyus.com acquired all of the issued and
outstanding common shares of Legacy Storage Systems Corp. and a shareholder's
advance of $150,000 made by John Whyte to Legacy. Legacy designs and sells data
storage systems. As consideration for the Legacy shares and the shareholder's
advance, travelbyus.com issued to John Whyte 3,028,000 of its common shares. In
addition, the Legacy share purchase agreement provided for the repayment of
indebtedness of $50,000 owing to John Whyte by Legacy within 90 days of closing.
travelbyus.com repaid on closing indebtedness of $90,000 owing to the Canada
Customs and Revenue Agency by Legacy.
Concurrent with the execution of the Legacy share purchase agreement,
Legacy and John Whyte entered into an employment agreement dated December 1,
1999, in which John Whyte agreed to be employed as the President and Chief
Executive Officer of Legacy for an initial term of two years. On June 30, 2000,
John Whyte resigned from all positions with travelbyus.com and its subsidiaries.
1-800-i-Travel(R)
Pursuant to an asset purchase agreement dated December 7, 1999, among
travelbyus.com, Express Vacations, John M. Elliott, Charles Farrell, Peter Adam
and Gene Koch, Express Vacations acquired a co-operative marketing program and
related assets known as the 800-i-Travel Cooperative Marketing Program. This
program utilizes a sophisticated telephone switching technology that will route
customers' calls to the closest appropriate member travel agency or to
travelbyus.com's call center. As consideration for this marketing program,
travelbyus.com issued 350,000 of its common shares and warrants to purchase
50,000 of its common shares at an exercise price of US$1 per share expiring
December 7, 2002. As additional consideration, Express Vacations agreed to pay
for a period of 48 months, as determined under the agreement, a royalty in an
amount equal to US$0.10 per good faith consumer call placed to the toll-free
numbers 1-800-487-2835 and 1-800-287-2835 from any location, irrespective of
call duration. The warrants are exercisable prior to December 7, 2002, provided
certain performance criteria are fulfilled. Performance criteria are fulfilled
if certain minimum numbers of consumer calls to the two 1-800 numbers have been
achieved prior to May, 2001 or the average trading price of travelbyus.com's
common shares during November 2000, has been US$4 per common share. In the
event the performance criteria are not fulfilled, the 1-800 sellers can exercise
an automatic right to re-acquire the 1-800-i-Travel Cooperative Marketing
Program and in the event travelbyus.com determines it no longer seeks to utilize
the two 1-800 numbers or aggressively market these the 1-800 numbers,
travelbyus.com has the right to transfer the 1-800-i-Travel Cooperative
Marketing Program back to the sellers.
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Bell Travel Systems
Pursuant to an asset purchase agreement dated April 3, 2000, among Murray
L. "Jack" Bell, travelbyus.com and travelbyus-IT Incorporated, travelbyus.com
acquired Bell Travel Systems. Bell Travel is a travel company which currently
has approximately 1,200 travel agency members. As consideration for the assets,
travelbyus.com issued 690,558 of its common shares and paid US$1.9 million in
cash.
Concurrent with the execution of the purchase agreement, travelbyus-IT and
Murray L. "Jack" Bell entered into a consulting agreement dated April 3, 2000.
Mr. Bell agreed to provide services to travelbyus-IT and act as the President of
BTS Travel Network, a separate unincorporated division of travelbyus-IT, for an
initial term of two years.
Cruise Shoppes America, Ltd.
Pursuant to an agreement and plan of merger dated April 4, 2000, among
Cruise Shoppes America, Ltd., Gary P. Brown, Michael J. Wild, travelbyus.com and
travelbyus-Cruise Shoppes Inc., travelbyus.com acquired all of the issued and
outstanding common shares of Cruise Shoppes. Cruise Shoppes is a nationwide
cruise and leisure sales organization with over 350 associate travel agencies.
As consideration for the Cruise Shoppes shares, travelbyus.com issued 2,619,000
of its common shares and paid US$1.8 million in cash subject to adjustment. On
April 4, 2000, Cruise Shoppes merged with travelbyus.com's wholly owned
subsidiary, travelbyus-Cruise Shoppes Inc.
Concurrent with the execution of the Cruise Shoppes agreement,
travelbyus.com and Gary P. Brown entered into an employment agreement dated
April 4, 2000, in which Mr. Brown agreed to be President of Cruise Shoppes for
an initial term of two years.
Epoch Technology, Inc.
On May 23, 2000, travelbyus.com acquired all of the issued and outstanding
stock of Epoch Technology Inc. The consideration for the purchase was US$10
million, consisting of US$2 million in cash and 3,280,000 common shares of
travelbyus.com. To make this purchase, travelbyus.com borrowed US$1,975,000
from Aviation Group under a 12% note due February 28, 2001, or earlier in
certain events, and granted a security interest in the Epoch Technology stock to
Aviation Group to secure the loan. The security interest is subordinate to the
security interest of the holders of travelbyus.com's 12.5% senior redeemable
debentures. Aviation Group obtained the funds for this loan from a US$3 million
investor loan that has been guaranteed by travelbyus.com. See "Aviation Group-
Business-Recent Debt Financing."
Epoch Technology is a Dallas-based developer of integrated software for the
travel, leisure and hospitality industry. The reservations system developed by
Epoch Technology automates all reservations functions at a component level and
is integrated with marketing, sales, operations, administration, accounting and
finance systems. The reservations system is able to customize the itinerary of
an individual traveler within minutes.
Travel24.com
On June 16, 2000, travelbyus.com entered into a share exchange agreement
with Travel 24.com AG to create a strategic partnership through a cross
shareholding arrangement. Under this arrangement, travelbyus.com has issued 2
million common shares to Travel24.com in exchange for US $5 million.
travelbyus.com has also placed in escrow 11,800,000 newly issued common shares
of travelbyus.com that will be exchanged for 1,482,594 newly issued common
shares of Travel24.com if three conditions are satisfied. These conditions are
(a) receipt by travelbyus.com of required regulatory approvals, including
approval of the Toronto Stock Exchange, (b) receipt by travelbyus.com of a
certificate representing the Travel24.com shares, and (c) receipt by
Travel24.com of required regulatory approval, including approval of the German
Neuer Market. As a result, on a fully diluted basis if the arrangement were
completed concurrently, travelbyus.com would own approximately 13% of Travel
24.com's common shares and Travel24.com would own approximately 14% of
travelbyus.com's common shares. In addition, Travel 24.com has loaned US $3
million to travelbyus.com with a maturity date of June 16, 2002. This
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loan is convertible at Travel24.com's option into common shares at a conversion
price of US $2.50 per share, callable by Travel24.com after February 28, 2001 on
three months prior written notice, and secured by a lien on all of
travelbyus.com's assets, subject to existing liens and to normal bank
indebtedness.
The parties would also exchange information on their businesses and
financial plans and start to exchange mutual resources such as technology,
supplier contracts, tourist flows and similar matters on a preferred status.
The definitive agreements would require the appointment by each company of two
observers, to be substituted as soon as practical by two members, to the other
company's board of directors. Following completion of the strategic partnership
arrangements, the companies also intend to negotiate a full merger proposal
between them, to be completed no later than December 31, 2000. Their respective
financial advisors will be directed to prepare valuations of the companies to
serve as a basis for the merger negotiations.
Muffin Communications Ltd.
On July 20, 2000, travelbyus.com acquired all of the issued and outstanding
shares of Muffin Communications Ltd. pursuant to a share purchase agreement.
Muffin Communications was in the business of the creation, development and
production of travel publications, travel television series and e-commerce
website media as well as other travel-related media including wireless
communications, however, the company has been inactive since January 1, 1999,
except for certain contracts it has entered into during that time to provide
certain content for wireless communications. As consideration for the Muffin
Communication shares, travelbyus.com paid US$300,000 in cash and issued
1,000,000 of its common shares. Per the terms of the agreement, the share
consideration is subject to adjustment based on the price of the common shares
of travelbyus.com on December 15, 2000. If the market value of the stock at
December 15, 2000 falls below the guaranteed price of U.S. $6.70, additional
shares will be issued or cash will be paid to maintain the value of share
consideration at U.S. $6,700,000. The combination of shares and/or cash in
respect of this adjustment may be determined by travelbyus.com.
Concurrent with the execution of the Muffin Communications share purchase
agreement, travelbyus.com entered into an employment agreement with Michael
Rosenblum under which Michael Rosenblum will act as Senior Vice President of
Muffin Communications for a term of three years.
ProSoft Corporation
On September 14, 2000, travelbyus.com acquired all of the issued and
outstanding shares of ProSoft Corporation pursuant to a share purchase
agreement. ProSoft is in the business of creating custom software in the travel
business. ProSoft also holds 12% of the outstanding shares of SiteRabbit.com as
described below. As consideration for the ProSoft shares, travelbyus.com issued
1,680,000 of its common shares. Of such shares, 1,260,000 common shares were
issued at closing and 420,000 common shares will be issued two years following
closing provided certain employment conditions are completed. The share
purchase agreement also provides that travelbyus.com is required to issue
additional shares, to a maximum of 1,680,000, if certain conditions relating to
the travelbyus.com stock price are not fulfilled.
Concurrent with the execution of the ProSoft share purchase agreement,
travelbyus.com entered into an employment agreement with Gary Saner under which
Gary Saner will act as Chief Technical Officer of ProSoft for a term of three
years. Additionally, travelbyus.com and Michael Rucker entered into an
employment agreement under which Michael Rucker will act as the Vice-President,
Travel Technology of ProSoft for a term of three years. Additionally,
travelbyus.com and Ron Lindsay entered into an employment agreement under which
Ron Lindsay will act as the Vice-President, Systems Development of ProSoft for a
term of three years. Travelbyus.com also entered into an employment agreement
with David Vasil under which David Vasil will act as Vice President, Engg. of
ProSoft for a period of three years.
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SiteRabbit.com, Inc.
On September 14, 2000, travelbyus.com acquired the remaining issued and
outstanding shares of SiteRabbit.com Inc. pursuant to a share purchase
agreement. SiteRabbit sells corporate charters and travel club memberships and
develops software for Internet applications. Subsequent to the acquisition,
SiteRabbit will discontinue selling new charters and memberships and will focus
on developing websites for the travel agencies who want to have their own
customized travelbyus website. As consideration for the SiteRabbit shares,
travelbyus.com issued 3,557,712 of its common shares. The share purchase
agreement also provides that travelbyus.com is required to issue additional
shares, to a maximum of 4,000,000, if certain conditions relating to the
travelbyus.com stock price are not fulfilled.
Concurrent with the execution of the SiteRabbit share purchase agreement,
travelbyus.com entered into an employment agreement with Michael London under
which Michael London will act as President of SiteRabbit for a term of three
years. Additionally, travelbyus.com and Michael Gibbore entered into an
employment agreement under which Michael Gibbore will act as the Senior Vice-
President, Finance of SiteRabbit for a term of three years. Additionally,
travelbyus.com and Alex Franke entered into an employment agreement under which
Alex Franke will act as the Vice-President, Internet Development of SiteRabbit
for a term of three years.
Recent Financing
travelbyus.com has entered into a financing and loan commitment with Doerge
Capital Management whereby Doerge Capital directly and through its affiliates
will purchase from travelbyus.com up to US $1.5 million liquidation value of our
Series B preferred stock held by travelbyus.com at face value and provide to
travelbyus.com a line of credit for up to US $10 million. The line of credit
bears interest at 12% per annum, is collateralized by a security interest in
substantially all of travelbyus.com's assets, subject to the security interests
relating to its existing debentures, and expires on October 15, 2001. Doerge
Capital may elect to convert any amounts outstanding on the line of credit, plus
accrued and unpaid interest, to common shares of travelbyus.com at a conversion
price of US $2.00 per share. For each US $1 million drawn under the financing
and loan commitment, travelbyus.com will grant to Doerge Capital warrants to
acquire 100,000 common shares exercisable at US $2.00 per share and expiring
three years following their grant. The financing agreement requires
travelbyus.com to use its best efforts to complete the arrangement with us and
restricts travelbyus.com from paying dividends or entering into certain other
transactions without the consent of the lender.
Legal Proceedings
travelbyus.com is not involved in any material pending legal proceedings
other than ordinary routine litigation considered to be incidental to its
business.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with
travelbyus.com's consolidated financial statements and the accompanying notes
that appear elsewhere in this prospectus.
Overview
In November 1999, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued a discussion paper EITF 99-19, Reporting
Revenue Gross Versus Net, which was finalized in July 2000. In December 1999,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101
- Revenue Recognition in Financial Statements. Both of these reports include
guidelines for determining the appropriateness of gross versus net revenue
reporting practices specifically in the e-commerce and travel sectors. These
guidelines focus on determining whether a company in substance acts as
principal, agent or broker in a transaction, whether it takes title to the
products and whether it assumes the risks and rewards of ownership.
travelbyus.com has considered these recent developments in determining its
revenue recognition and reporting policies and believes its current policies are
consistent with this guidance.
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Travel sales revenues are derived from air ticket, hotel and car
reservations with air tickets making up the substantial majority of these
revenues. With certain air travel suppliers, travelbyus.com purchases airline
tickets in advance. Where travelbyus.com is considered to be the purchaser and
reseller of air tickets, the full amount charged to the customer is recognized
as revenue. In other situations where travelbyus.com is considered to act as an
agent and only makes an airline reservation when a customer requests an airline
booking, only the net commission or markup on the transaction is recognized as
revenue. Revenues earned for air travel, hotel and car reservations are
recognized when the travel services are ticketed to third parties. Revenues from
vacation packages are recognized on the date of departure. Override commissions
from travel suppliers are recognized at the end of each monthly or quarterly
measurement period if the specified target has been achieved and when
collectibility is reasonably assured.
travelbyus.com also derives revenues from its associate marketing programs.
Under these programs, travelbyus.com provides member retail travel agencies with
access to certain airline, hotel, cruise and car rental suppliers under
negotiated preferred supplier agreements. The member agencies are charged an
annual license fee for participation in the associate marketing programs. The
full amount of the license fee is recognized on a straight-line basis over the
license period.
Revenues from advertising are derived on the placement of advertising on
behalf of retail travel agencies. Revenues from technology sales are derived
from the sale of computer data storage systems.
Cost of travel sales consists of commissions paid to travel agencies and
the cost of airline tickets where travelbyus.com is considered to be the
purchaser and reseller of air tickets. Costs of advertising are derived from
the costs of placing advertising for travelbyus.com's customers. The cost of
technology sales consists of the manufacturing costs of the data storage
systems.
Results of Operations
In 1999, travelbyus.com changed its fiscal year end to September 30 to
synchronize the fiscal periods of travelbyus.com and its subsidiaries.
Accordingly, these financial statements compare the results for the nine months
ended June 30, 2000 with the nine months ended September 30, 1999. Certain
comparatives have been restated to reflect the current period presentation.
travelbyus.com's results in prior years do not provide a meaningful comparative,
due to changes in the nature of business. travelbyus.com anticipates that the
travel sales revenues and advertising revenues will increase significantly when
it completes its Web site in the fall of 2000. In addition, the acquisition of
Global Leisure and Aviation Group will provide additional product and content
for the Web site not currently available to travelbyus.com. travelbyus.com also
anticipates similar associate marketing program revenues and technology revenues
in future periods.
Nine-Month Period Ended June 30, 2000 Compared to Nine-Month Period Ended
September 30, 1999
Revenues. For the nine months ended June 30, 2000, travel product sales
revenues were $3,447,795, travel sales revenues were $6,396,961 on gross
bookings of $43,634,174, associate marketing program revenues were $485,014,
advertising revenues were $462,444, and technology revenues were $1,223,959.
Since none of travelbyus.com's travel acquisitions were completed until the fall
of 1999, there are no comparable amounts for travel, associate marketing,
advertising and technology revenues for the nine months ended September 30,
1999. travelbyus.com anticipates that the travel sales revenues and advertising
revenues will increase significantly when it completes its Web site in the fall
of 2000. In addition, the acquisition of Global Leisure and Aviation Group will
provide additional product and content for the Web site not currently available
to travelbyus.com. travelbyus.com also anticipates similar associate marketing
program revenues and technology revenues in future periods.
Interest and other revenues for the nine months were $308,358 compared to
$6,972 for the nine months ended September 30, 1999. The increase is due to
travelbyus.com holding significantly higher cash balances raised from
travelbyus.com's equity financings during the period.
Expenses. General and administrative expenses increased $16,224,490 from
$854,059 for the nine months ended September 30, 1999 to $17,078,549 for the
nine months ended June 30, 2000. The increase in
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expenses is due primarily to the decision to take travelbyus.com in a new
direction as a travel company. During the period, travelbyus.com decided to
center its operations in Reno, Nevada. As a result of this decision, staffing
levels have been increased significantly in Reno in anticipation of the higher
sales volumes to be realized in connection with the completion of the website
booking engine. The completion of the booking engine is scheduled for late 2000.
In February 2000, travelbyus.com announced a binding letter of intent with
Aviation Group, Inc. to effect a business combination. Aviation Group is listed
on the Nasdaq SmallCap Market. travelbyus.com is currently working with
Aviation Group to obtain shareholder approval for the business combination. The
costs to date, which have been included in general and administrative expenses,
are approximately $1,307,000.
For the nine months ended June 30, 2000, travelbyus.com incurred
advertising expenses of $2,729,959, versus none for the nine months ended
September 30, 1999, as the travelbyus.com brand name was introduced with the
brand names currently used by travelbyus.com's operating divisions.
Amortization expenses of $691,003, versus $6,928 for the nine months ended
September 30, 1999, included $365,510 related to capital and intangible assets
and $325,493 related to deferred finance costs. Both amounts have increased
significantly over the prior period as a result of travelbyus.com's investment
in new subsidiaries and related financing. travelbyus.com has also incurred
$390,000, versus none for the nine months ended September 30, 1999, for expenses
in connection with the integration of operations at travelbyus.com's new state-
of-the-art call center in Reno.
For the nine months ended June 30, 2000, interest expense of $1,070,937 was
incurred, versus $92,137 for the nine months ended September 30, 1999, as a
result of travelbyus.com's $11.95 million debenture financing in September 1999.
Net loss. The consolidated net loss before goodwill amortization for the
nine months ended June 30, 2000 was $18,435,897, or $0.28 per share, compared to
$1,772,215, or $0.05 per share, for the nine months ended September 30, 1999.
Goodwill amortization related to travelbyus.com's recent acquisitions was
$3,279,192 for the period or $0.05 per share. Accordingly, the consolidated net
loss for the nine months was $21,715,088, or $0.33 per share, compared to
$1,772,215, or $0.05 per share, for the nine months ended September 30, 1999.
The increased loss was due to the significant expenses incurred to move
travelbyus.com into the travel sector.
Nine-Month Period Ended September 30, 1999 Compared to Year Ended December
31, 1998
travelbyus.com incurred a loss of $1,772,215, or $0.05 per share during the
nine month period ended September 30, 1999 compared to a loss of $1,282,999, or
$0.07 per share for the year ended December 31, 1998. The increased loss
reflects management's decision to develop new business opportunities in the
Internet travel sector.
General and administrative expenses for the nine month period ended
September 30, 1999 were $1,039,059 as compared to $256,910 for the year ended
December 31, 1998. The increased expenditures for the nine month period ended
September 30, 1999 were due to professional services required to change
travelbyus.com's business from the resource sector to the travel sector,
salaries for travelbyus.com's new management team and travel and promotional
costs to promote shareholder interest in travelbyus.com's new business plan.
Web site development costs of $362,435, versus none for the year ended
December 31, 1998, were incurred during the nine month period ended September
30, 1999 primarily for the initial design work of travelbyus.com's Web site. The
official launch date of the travelbyus.com Web site was January 21, 2000.
Financing of the expenditures during the nine month period ended September
30, 1999 was primarily from the 12.5% debenture financing which resulted in
gross proceeds of $11,950,000. In addition, travelbyus.com raised net proceeds
of $1,136,000 by way of private placement and through the exercise of stock
options.
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Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
travelbyus.com incurred a loss of $1,282,999 for the year ended December
31, 1998, compared to a loss of $10,780,020 for the year ended December 31,
1997. The reduced loss in 1998 reflects significantly lower exploration costs
and general administrative costs. During the latter part of 1997 and 1998,
travelbyus.com focused on minimizing costs.
General administrative expenses for the year ended December 31, 1998 were
$256,910 compared to $528,215 during the prior year. The major components of
these costs were salaries and wages, shareholder communications expenses, costs
associated with the Toronto office, and travel costs. The lower costs in 1998
are the result of staff reductions and the significant reduction in exploration
activity.
Funding of expenditures in 1998 and 1997 was primarily from private
placements of travelbyus.com common shares. During the year ended December 31,
1998, 4,000,000 travelbyus.com common shares were issued under a private
placement for net proceeds of $464,634. During 1997, 3,100,000 travelbyus.com
common shares were issued under a private placement for net proceeds of
$4,683,663. In addition, 500,000 travelbyus.com common shares were issued for
net proceeds of $72,500 as part of the acquisition of certain Mexican
properties.
Liquidity and Capital Resources
Cash flow used from operating activities for the nine months ended June 30,
2000 was $8,282,925 compared to $984,433 for the period ended September 30,
1999. The increase in 2000 was attributed to the net loss before amortization
of capital assets and goodwill. travelbyus.com also funded operations through
an increase in accounts payable and accrued liabilities of $3.2 million, and due
to related parties of $3.1 million.
Investing activities for the period ended June 30, 2000 totaled $27,488,255
compared to $8,057,728 for the period ended September 30, 1999. The major
components of the 2000 expenditures include $16,840,054 for cash paid to acquire
travelbyus.com's subsidiaries, $6,695,392 in net advances for the purchase of
Series B preferred stock of Aviation Group, $939,769 in restricted cash deposits
for security for letters of credit issued to certain suppliers, and $2,621,577
paid to acquire capital assets for travelbyus.com's call center in Reno. The
investing activities in 1999 were limited to the placement of $7,200,000 in
trust to complete travelbyus.com's first acquisition in October 1999.
Total financing of $44,677,979 for travelbyus.com's acquisitions and
operating expenses during the nine months ended June 30, 2000 was received from
a private placement of special warrants to raise $20 million and a private
placement of common shares to raise an additional $10 million. travelbyus.com
has also raised $4.5 million from the issuance of a convertible debenture to
Travel24.com, a Frankfurt-listed travel company, and $2.9 million from the
issuance of a promissory note to Aviation Group. In addition, travelbyus.com
received $5.6 million from the exercise of stock options and share purchase
warrants.
During the nine months ended September 30, 1999, the $12,252,441 in
financing activities was attributed mainly to travelbyus.com's debenture
financing to raise a total of $11.95 million. In terms of commitments over the
next 12 months, travelbyus.com must pay approximately $1,200,000 in interest
payments on the $9.45 million in outstanding debentures, approximately $360,000
in interest on the Travel24.com loan, and approximately $1.4 million in
operating lease payments. In addition, travelbyus.com has also provided a
guarantee to support a U.S. $3 million loan to Aviation Group. This loan must
be repaid in February 2001.
Management believes that travelbyus.com has sufficient resources from
existing reserves, proposed private placements and ongoing operations to satisfy
ongoing cash requirements for operations, Web site costs, planned acquisitions
and material commitments. Additional cash acquisitions will require
travelbyus.com to raise additional funds through debt or equity financings or
through the sale of its investments. In the event sufficient financing is not
available, travelbyus.com may be required to postpone its acquisition activity.
Management believes that it has already acquired the key operating companies
required to substantially complete the travelbyus.com business model. Although
future acquisitions could improve the operations and add important content to
the website, in the opinion of management, no acquisition is critical to the
success of the model.
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Directors and Executive Officers
The names, ages, positions and municipalities of residence of the executive
officers and directors of travelbyus.com are as follows:
<TABLE>
<CAPTION>
Name Age Position Residence
------------------------------- --- ------------------------------------------------------ ----------------------------
<S> <C> <C> <C>
Michael A. Farrugia/(1) (2)/ 55 Director and Chairman of the Board Bermuda
William Kerby 43 Director, Vice Chairman and Chief Executive Officer White Rock, British Columbia
John Fenyes 52 Director, Executive Vice President and Chief Sparks, Nevada
Operating
Officer
John H. Craig/(1) (2)/ 52 Director and Secretary Toronto, Ontario
Alan Thompson/(1) (2)/ 60 Director Vancouver, British Columbia
Jon Snyder 53 President Reno, Nevada
Grant Kuramoto 33 Chief Financial Officer Richmond, British Columbia
Ian J. Hooker 52 Vice President-Call Center Operations Reno, Nevada
Robert M. Coffey 53 Senior Vice President-Business Development Reno, Nevada
Michael C. Gibbore 42 Senior Vice President-Finance San Diego, California
Gary Saner 49 Chief Technology Officer San Diego, California
J. Michael London 48 President-New Media Division San Diego, California
</TABLE>
_______________________________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
The following sets forth certain background information for the executive
officers and directors of travelbyus.com, including their principal occupations:
Michael A. Farrugia was appointed Director and Chairman of the Board in
April 1997. Mr. Farrugia has been the Chairman and President of MB Capital
Investments Ltd., a merchant bank, since June 1997. Prior thereto, Mr. Farrugia
was Chairman and President of MB Capital Corp., a securities dealer and merchant
bank from 1994. Mr. Farrugia also serves as a director on the boards of
directors for Scorpion Minerals Inc., MacMillan Gold Corp. and Martlet Venture
Management Ltd.
William Kerby has been Vice Chairman, Chief Executive Officer and a
director of travelbyus.com since April 1999. Prior to joining travelbyus.com,
Mr. Kerby was the founder, President and Chief Executive Officer of Leisure
Canada Inc., a publicly traded company in the travel industry, from January
1995 to March 1999. Leisure Canada Inc. specializes in the development of four
and five star hotel and resort properties. During his tenure with Leisure
Canada Inc., Mr. Kerby engineered the development of Leisure Canada's travel
division assets. These assets included TravelPlus (formerly Goliger's Travel)
and Travel Trade International with over 200 agencies across Canada, Altracs
Publishing & Multimedia, producing Leisure Canada Magazine and Canadian
Traveller, Bluebird Holidays/Tour Division in Great Britain and South Africa,
Skyhigh Holidays and Cook Island Holidays in Canada.
John Fenyes has been Executive Vice President, Chief Operating Officer and
director of travelbyus.com and Express Vacations since November 1999. Mr.
Fenyes has been involved in the travel industry for over 25 years, holding key
positions, including Vice President, Product Development with American Airlines
FlyAAway Vacations from August 1998 to November 1999. During his tenure with
American Airways FlyAAway Vacations, Mr. Fenyes developed one of the first in-
house vacation package programs. Most recently, Mr. Fenyes was Director of
Marketing Programs for ITT, Sheraton and General Manager of "Vacations by
Sheraton," now part of the Starwood Group, from December 1995 to August 1998.
John H. Craig has been Secretary and a director of travelbyus.com since
June 1996. Mr. Craig is a partner in the law firm Cassels Brock & Blackwell LLP
specializing in securities law since 1995. Mr. Craig also serves on the board of
directors for TVX Gold Inc.
Alan Thompson has been a director of travelbyus.com since April 1999. Mr.
Thompson has been involved in the tour and travel business for over 40 years,
operating in all aspects of the industry including airlines, wholesale and
retail. Mr. Thompson founded a wholesale and charter operation in Canada in
1964 which operated a fleet of five 747's with weekly tours to the United
Kingdom and Europe. In 1993, the operations were sold. In 1995, Mr. Thompson
started a telecommunications company that was a forerunner in the de-regulated
local dial
72
<PAGE>
tone business in British Columbia. Mr. Thompson sold the telecommunications
company to Texas Metronet Inc. in 1998. Mr. Thompson has been President of the
Millbank Group of Companies, which deals in financing, mortgages and venture
capital and operates a diversified group of companies since 1991.
Jon Snyder has been President of travelbyus.com and Express Vacations since
November 1999. Mr. Snyder has been involved in the travel industry for over 30
years and was one of the principals involved in the creation of American
Airlines FlyAAway Vacations program from August 1998 to November 1999. During
his tenure with American Airlines FlyAAway Vacations, Mr. Snyder served as
President. From September 1992 to August 1998, Mr. Snyder was a partner in FBN.
Due to divorce proceedings, Mr. Snyder filed for personal bankruptcy protection
in 1996.
Grant Kuramoto has been Chief Financial Officer of travelbyus.com since May
1999. Previously, Mr. Kuramoto served as corporate controller for Manex
Services, a company providing management services to publicly traded junior
resource companies, from April 1998 to May 1999. Prior to joining Manex
Services, Mr. Kuramoto was a business assurance manager with Coopers and Lybrand
(now PricewaterhouseCoopers LLP) from September 1990 to April 1998.
J. Michael London was appointed President New Media Division of
travelbyus.com in September 2000, when travelbyus.com purchased SiteRabbit.com.
Mr. London has been in the travel business for over 20 years, and has extensive
experience in the cruise, meetings and conventions, and travel consulting
segments of the travel industry. From 1990 to 1996, he was President of San
Diego-based Cruise Holiday International, one of the largest cruise marketing
businesses in the world. From 1996 to 1997, he served as Senior Vice President
of World Travel Meetings, a California-based travel marketing and consulting
business. Beginning 1997, Mr. London was a founder of SiteRabbit.com and served
as its President and Chief Executive Officer.
Michael C. Gibbore was appointed Vice President Finance of travelbyus.com
in September 2000, when travelbyus.com purchased SiteRabbit.com. From 1980 to
1988, Mr. Gibbore worked in the Emerging Business Services division of Coopers &
Lybrand, specializing in assisting start-up and high growth companies in the
creation of financial and accounting systems, and in initial and secondary
public offerings. From 1988 to 1995, Mr. Gibbore was Corporate Controller and
Chief Financial Officer for two healthcare start-up companies. From 1995 to
1998, Mr. Gibbore was Corporate Controller for the Americas for Mobile Systems
International. In 1998, Mr. Gibbore became Chief Financial Officer of
SiteRabbit.com.
Gary Saner was appointed Chief Technology Officer of travelbyus.com in
September 2000, when travelbyus.com purchased ProSoft Corporation. Mr. Sander
has worked in the software development field for over 18 years. From 1994 to
1995, Mr. Saner was Manager of Research & Development of Litton Software
Systems, a division of Litton Industries. In December 1995, Mr. Saner was a co-
founder and became President and Chief Executive Officer of ProSoft Corporation.
He is a member of the San Diego Software Internet & Industry Council and
Microsoft Development Network.
Ian J. Hooker has been Vice President-Call Center Operations at
travelbyus.com since September 2000. He was Vice President of Operations at Club
America Vacations in Atlanta, Georgia from April 1994 to September 2000.
Robert M. Coffey has been Senior Vice President-Business Development at
travelbyus.com since August 2000. He was Vice President at Certified Vacations
in Fort Lauderdale, Florida from July 1996 to November 1997. From July 1989 to
July 1996, Mr. Coffey was Vice President Product Development and Vice President
of Marketing at Alamo Vacation in Fort Lauderdale, Florida.
73
<PAGE>
Executive Compensation
Summary Compensation Table
The following table contains information about the compensation paid to or
earned by travelbyus.com's Vice Chairman and Chief Executive Officer for the
nine-month period ended September 30, 1999. During the nine-month period ended
September 30, 1999, travelbyus.com had no other named executive officer pursuant
to Ontario Regulation 638/93 made under the Ontario Securities Act because, as
at September 30, 1999, no executive officer earned more than $100,000 in total
salary and bonus. Specific aspects of the compensation of the named executive
officer are dealt with in further detail in subsequent tables.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------- -----------------------------------------
Grants Pay-outs
------------------------------ ---------
Restricted
Other Securities Shares or
Annual Under Restricted LTIP Other
Name and principal Fiscal Salary Bonus Remun- Option/SARs Share Payouts Compensation
position Year ($) ($) eration ($) Granted (#) Units ($) ($) ($)
--------------------- --------- -------- ------- ------------ --------------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William Kerby/(1)/ 1999/(2)/ - - 81,000/(3)/ 500,000 - - -
Chief Executive
Officer
Gary German 1998 146,000 - - - - - -
former President 1997 150,000 - - 50,000 - - -
</TABLE>
__________________________________
(1) Mr. Kerby joined travelbyus.com in April 1999. The information provided
for Mr. Kerby represents a six month period.
(2) travelbyus.com changed its year end to September 30 and as such year end
information for 1999 represents a nine-month period.
(3) Paid to 151156 Canada Ltd. as a consulting fee for the consulting services
of Mr. Kerby.
Option Grants in Nine Month Period Ended September 30, 1999
The following table provides details on stock options granted to William
Kerby during the nine-month period ended September 30, 1999 under the terms of
travelbyus.com's stock option plan.
Options Granted During the Nine Month Period Ended September 30, 1999
<TABLE>
<CAPTION>
Market Value of
Securities
Underlying
Common Shares % of Total Options Options on
Under Granted Exercise Price Date of Grant
Name Options Granted in Fiscal Year ($/sh.) ($/sh.) Expiration Date
---- --------------- ------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
William Kerby 250,000 9.1% $0.46 $0.35/(1)/ April 20, 2004
250,000 9.1% $1.00 $0.73/(2)/ June 03, 2004
</TABLE>
__________________________________
(1) Based on the closing price of the Common Shares on the TSE on April 20,
1999.
(2) Based on the closing price of the Common Shares on the TSE on June 3, 1999.
Options Exercised and Value of Unexercised Option
The following table provides detailed information regarding options
exercised by William Kerby during the nine-month period ended September 30,
1999. In addition, details on remaining options held are provided.
74
<PAGE>
Aggregated Option Exercises in the Nine Month Period Ended September 30, 1999
and Year End Option Values
<TABLE>
<CAPTION>
Unexercised options Value of Unexercised
Securities Aggregate at Financial Year End in-the-money options at
acquired on value Exercisable/ Financial Year End Exercisable/
Name Exercise (#) realized ($) Unexercisable (#) Unexercisable ($)
---- ------------ ------------ -------------------------- --------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
William Kerby 100,000 24,000/(1)/
150,000 46,500/(2)/ 250,000 - 287,500/(3)/ -
</TABLE>
_______________________________________
(1) Based on the closing price of the Common Shares on the TSE on August 23,
1999 of $0.70.
(2) Based on the closing price of the Common Shares on the TSE on August 24,
1999 of $0.77.
(3) Based on the closing price of the Common Shares on the TSE on September 30,
1999 of $2.15.
Other Compensation Matters
There were no long-term incentive awards made to William Kerby during the
nine month period ended September 30, 1999. There are no pension plan benefits
in place for William Kerby.
Indebtedness of Directors, Executive Officers and Senior Officers
During the nine month period ended September 30, 1999, no loans were made
by travelbyus.com to any senior officer or director or any key employee of
travelbyus.com or any of their other respective associates for any reason
whatsoever.
Compensation of Directors
None of the directors of travelbyus.com were compensated in their capacity
as a director by travelbyus.com during the nine month period ended September 30,
1999 pursuant to any arrangement or in lieu of any standard arrangement except
through the granting of stock options.
During the nine month period ended September 30, 1999, options to purchase
1,450,000 common shares of travelbyus.com were granted to directors of
travelbyus.com.
Employment Contracts
There are no employment contracts between travelbyus.com and William Kerby
and no compensatory plan or arrangement that results or will result from the
resignation, retirement or any other termination of employment of his employment
with travelbyus.com, from a change of control of travelbyus.com or a change in
his responsibilities following a change-in-control.
Stock Option Plan
travelbyus.com's stock option plan provides that its board of directors
may, from time to time, in its discretion, grant to directors, officers,
employees and consultants of travelbyus.com, or any subsidiary of
travelbyus.com, the option to purchase common shares, provided that the number
of common shares reserved for issuance under the stock option plan shall not
exceed 6,500,000 common shares, or such greater number as may be approved from
time to time by the shareholders of travelbyus.com. In addition, the number of
common shares reserved for issuance to any one person shall not exceed 5% of the
issued and outstanding common shares on a non-diluted basis at the time of such
grant. All options currently held by directors, officers and employees of
travelbyus.com have been granted pursuant to the stock option plan or its
predecessor. The stock option plan provides that the terms of the option and
the option price shall be fixed by the directors of travelbyus.com subject to
the price restrictions imposed by The Toronto Stock Exchange.
75
<PAGE>
The stock option plan also provides that no option shall be granted to any
person except upon recommendation of the directors of travelbyus.com and that
only optionees may receive stock options. Stock options granted under the stock
option plan may not be for a period of less than one year or longer than ten
years and the exercise price must be paid in full upon exercise of the option.
Options under the stock option plan are non-assignable. If prior to the exercise
of an option, the holder ceases to be an optionee as a result of his or her
resignation or discharge, all options granted to the optionee under the stock
option plan are terminated and are of no further force or effect. If prior to
the exercise of an option, the holder ceases to be an optionee for reasons other
than his or her resignation or discharge, the option of the holder shall be
limited to the number of shares purchasable by him immediately prior to the time
of his cessation of office or employment and he shall have no right to purchase
any other shares. Options must be exercised within eighteen months of
termination of employment or cessation of position with travelbyus.com, provided
that if the cessation of office, directorship, consulting arrangement or
employment was by reason of death, the option must be exercised within 12 months
after such death, subject to the expiry date of such option. As of October 20,
2000, travelbyus.com had outstanding the following options under the stock
option plan:
<TABLE>
<CAPTION>
Number of Exercise Market Value of
Common Price Common Shares
Shares Per Common Under Option on
Name Under Option Share Date of Grant Date of Grant Expiry Date
---- ------------ ----- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Six executive officers as a 250,000 $1.00 Jun. 30/99 $0.50 Jun. 30/04
group 500,000 $1.65 Nov. 03/99 $1.65 Nov. 03/04
519,000 $1.70 Sept. 14/00 $1.70 Sept. 14/03
245,000 $1.50 Aug. 15/00 $1.50 Aug. 15/05
175,000 $1.62 Aug. 28/00 $1.62 Aug. 28/05
Three directors who are not 250,000 $0.12 Mar. 09/98 $0.11 Mar. 09/03
executive officers as a group 600,000 $0.79 Jun. 03/99 $0.73 Jun. 03/04
250,000 $1.00 Jun. 30/99 $0.50 Jun. 30/04
100,000 $3.90 Jan. 13/00 $3.90 Jan. 13/05
Employees who are not 301,300 $0.46 Apr. 20/99 $0.35 Apr. 20/04
executive officers or directors 1,126,500 $4.28 Dec. 23/99 $4.28 Dec. 23/05
as a group 132,000 $3.80-$4.90 Jan. 05-27/00 $3.80-$4.90 Jan. 05-27/05
21,000 $3.30 Feb. 21/00 $3.30 Feb. 21/05
141,000 $4.39-$4.50 Mar. 06-27/00 $4.39-$4.50 Mar. 06-27/05
109,500 $3.75 Apr. 03/00 $3.75 Apr. 03/05
711,500 $2.35-$3.25 May 01-25/00 $2.35-$3.25 May 01-25/05
33,000 $2.05 July 04/00 $2.05 July 05/05
175,000 $1.50 July 20/00 $1.50 July 20/03
220,000 $1.65 July 23/00 $1.65 July 28/05
1,500 $1.50 Aug. 15/00 $1.50 Aug. 15/05
600,000 $1.70 Sept. 14/00 $1.70 Sept. 14/03
211,500 $1.70 Sept. 14/00 $1.70 Sept. 14/05
222,500 $1.15 Oct. 11/00 $1.15 Oct. 11/05
Consultants as a group 89,000 $0.55 Jul. 12/99 $0.48 Jul. 12/04
250,000 $3.30 Dec. 06/99 $3.30 Dec. 06/04
200,000 $3.20 Feb. 09/00 $3.05 Feb. 03/02
50,000 $3.75 Jan. 28/00 $3.75 Jan. 28/01
175,000 $1.65 Nov. 03/99 $1.65 Nov. 03/04
12,000 $3.40 May 09/00 $3.40 May 09/02
</TABLE>
Principal Shareholders of travelbyus.com
The following table sets forth certain information, as of October 20, 2000,
with respect to the beneficial ownership of shares of travelbyus.com's common
stock (i) by any person or "group," as that term is used in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended, known to us to own beneficially
more than 5% of the outstanding shares of common stock, (ii) by each director of
travelbyus.com and each executive officer of travelbyus.com named in the Summary
Compensation Table, and (iii) by all directors and executive officers of
travelbyus.com as a group. Unless otherwise indicated, travelbyus.com believes
that each person named below possesses sole voting and investment power over his
shares of common stock.
76
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED/(1)/ PERCENT OF TOTAL/(2)/
------------------- ------------------------- ------------------------
<S> <C> <C>
William Kerby 6,333,334/(3)/ 6.5%
204-3237 King George Highway
South Surrey, B.C.
Canada V4P 1B7
Michael Farrugia 1,800,000/(4)/ 1.8%
c/o MB Capital Investments Ltd.
Jardine House, 4/th/ Floor
33-35 Reid Street
Hamilton HM12
Bermuda
John Fenyes 1,279,000/(5)/ 1.3%
3301 South Virginia Street
Reno, Nevada 89502
John Craig 62,500/(6)/ *
c/o Cassels Brock & Blackwell LLP
40 King Street West, Suite 2100
Toronto, Ontario
Canada M5H 3C2
Jon Snyder 1,279,000/(7)/ 1.3%
3301 South Virginia Street
Reno, Nevada 89502
Alan Thompson 137,500/(8)/ *
c/o Millbank Marketing
210-1455 Bellview Avenue
West Vancouver, B.C.
Canada
All executive officers and directors as a 13,688,903/(9)/ 12.7%
group (12 persons)
</TABLE>
_______________________________
* Less than 1%
(1) This information has been furnished by the respective officers and
directors. A person is deemed to be the beneficial owner of securities that
can be acquired within 60 days from the date set forth above through the
exercise of any option, warrant or convertible or exchangeable note.
(2) In calculating percentage ownership, all common shares that the named
shareholder has the right to acquire upon exercise of any option, warrant
or convertible or exchangeable note are deemed to be outstanding for the
purpose of computing the percentage of common 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 97,004,569 common shares
outstanding.
(3) Includes options to purchase 250,000 common shares.
(4) Includes options to purchase 1,000,000 common shares.
(5) Includes options to purchase 125,000 common shares.
(6) Represents options to purchase 62,500 shares.
(7) Includes options to purchase 125,000 common shares.
(8) Represents options to purchase 137,500 common shares.
(9) Includes vested options to purchase 1,487,500 common shares.
Description of Share Capital of Travelbyus.com
The authorized capital of travelbyus.com consists of an unlimited number of
common shares of which 97,004,569 common shares were issued and outstanding as
of October 20, 2000. The following is a summary of the principal attributes of
the common shares.
The holders of the common shares are entitled to receive notice of, attend
and vote at any meeting of shareholders of travelbyus.com, except those meetings
where only the holders of another class or series of shares are entitled to vote
separately as a class or series. The common shares carry one vote per share.
The holders of common shares are entitled to receive on an equal basis such
dividends as may be declared by the board of directors of travelbyus.com, out of
funds legally available, subject to the preferential rights of any shares
ranking prior to the common shares.
77
<PAGE>
In the event of the liquidation, dissolution or winding-up of
travelbyus.com, the holders of travelbyus.com will be entitled to receive on a
pro rata basis all the assets of travelbyus.com remaining after payment of all
its liabilities, subject to the preferential rights of any shares ranking prior
to the common shares.
No pre-emptive or conversion rights attach to the common shares, and the
common shares when fully paid will not be liable to further call or assessment.
No other class of voting shares may be created without the approval of the
holders of the common shares voting separately as a class.
Prior Sales
The following table contains details of the prior sales of securities of
travelbyus.com for the 12-month period prior to the date hereof:
Number of Aggregate
Date of Issue Common Shares Proceeds (*)
------------- ------------- ------------
April 1999/(1)/ 20,000,000 $ 1,200,000
January 1999 to Sept. 2000/(2)/ 1,397,200 525,452
September 1999 to Oct. 2000/(3)/ 9,560,000 6,500,800
October 4, 1999/(4)/ 2,000,000 4,040,000
October 4, 1999/(5)/ 150,000 303,000
October 13, 1999/(6)/ 1,000,000 1,720,000
November 1, 1999/(7)/ 3,462,000 4,916,040
November 1, 1999/(8)/ 150,000 255,000
November 15, 1999/(9)/ 2,855,883 4,997,795
December 1, 1999/(10)/ 5,000,000 13,500,000
December 1, 1999/(11)/ 3,028,000 8,175,604
December 7, 1999/(12)/ 350,000 1,211,000
December 15, 1999/(13)/ 4,000,000 10,000,000
January 26, 2000 /(14)/ 1,146,497 1,777,070
January, 2000 to Sept. 2000/(15)/ 206,750 723,625
February 2000 to May 2000/(16)/ 215,000 537,500
April 3, 2000/(17)/ 690,558 2,589,583
April 4, 2000/(18)/ 2,619,000 9,428,400
April 2000 to May 2000/(19)/ 147,500 100,300
April 2000 to Aug. 2000/(20)/ 1,077,700 2,694,250
May 23, 2000/(21)/ 3,280,000 9,184,000
June 30, 2000/(22)/ 2,000,000 7,396,500
July 17, 2000/(23)/ 40,000 65,200
July 20, 2000/(24)/ 1,000,000 1,500,000
Aug. 8, 2000/(25)/ 2,541,591 0
September 14, 2000/(26)/ 1,260,000 4,682,475
September 14, 2000/(27)/ 3,557,712 13,221,347
September 25, 2000/(28)/ 3,280,000 0
(*) Shares issued for acquisitions are shown using market price on date
of issue.
_______________________________
(1) In April 1999, travelbyus.com issued and sold on a private placement
basis, 20,000,000 common shares at a price of $0.06 per common share.
(2) Issued upon exercise of stock options.
(3) Issued upon exercise of debenture warrants.
(4) Issued pursuant to the Gotham/Mr. Cheaps Share Purchase Agreement. See
"travelbyus.com -Business-Recent Acquisitions--Gotham Media Group, Ltd.
and Mr. Cheaps Travel, Ltd."
(5) Issued as a finders fee pursuant to the Gotham/Mr. Cheaps Share Purchase
Agreement. See "travelbyus.com-Business-Recent Acquisitions-Gotham Media
Group, Ltd. and Mr. Cheaps Travel, Ltd."
(6) Issued pursuant to the IT Agreement. See "travelbyus.com-Business-Recent
Acquisitions-International Tours, Inc., Galaxsea Cruises and Tours, Inc.
and IT Cruise, Inc."
(7) Issued pursuant to the Express Vacations Unit Purchase Agreement. See
"travelbyus.com-Business-Recent Acquisitions - Express Vacations, LLC."
(8) Issued as a finders fee pursuant to the Express Vacations Unit Purchase
Agreement. See "travelbyus.com-Business-Recent Acquisitions-Express
Vacations, LLC."
(9) Issued pursuant to the 1999 Travel Magazine Agreement. See
"travelbyus.com-Business-Recent Acquisitions-Travel Magazine."
(10) Issued pursuant to the Cheap Seats Share Purchase Agreement. See
"travelbyus.com-Business-Recent Acquisitions-Cheap Seats, Inc."
(11) Issued pursuant to the Legacy Share Purchase Agreement. See
"travelbyus.com-Business-Recent Acquisitions-Legacy Storage Systems
Corp."
(12) Issued pursuant to the 1-800 Agreement. See "travelbyus.com-Business-
Recent Acquisitions-1-800-i-Travel."
(13) A private placement of 4,000,000 units at a price of $2.50 per unit. Each
unit is comprised of one common share and one-half of one common share
purchase warrant. Each whole unit warrant entitles the holder thereof to
purchase one common share at a price of $3.50 per share at any time on or
before March 15, 2001. Pursuant to the private placement, travelbyus.com
issued 400,000 compensation options
78
<PAGE>
to the agent, each unit option is exercisable into one common share at an
exercise price of $2.50 per share at any time on or before 4:30 p.m.,
Toronto time, on March 15, 2001.
(14) Issued pursuant to the 2000 Travel Magazine Agreement. See
"travelbyus.com-Business-Recent Acquisitions-Travel Magazine."
(15) Issued upon exercise of unit warrants.
(16) Issued upon exercise of unit options.
(17) Issued pursuant to the BTS Agreement. See "travelbyus.com-Business-Recent
Acquisitions-Bell Travel Systems."
(18) Issued pursuant to the Cruise Shoppes Agreement. See "travelbyus.com-
Business-Recent Acquisitions-Cruise Shoppes America, Ltd."
(19) Issued upon exercise of brokers' warrants issued in connection with
debenture warrants.
(20) Issued upon exercise of special warrants.
(21) Issued upon the purchase of Epoch Technology Inc. See "travelbyus.com-
Business-Recent Acquisitions-Epoch Technology Inc."
(22) Issued at a price of $3.70 per share to Travel24.com.
(23) Issued to Euro Consulting Group for finder's fee in connection with ITA
Software Agreement.
(24) Issued pursuant to the acquisition of Muffin Communications, Ltd. See
"travelbyus.com-Business-Recent Acquisitions-Muffin Communications, Ltd."
(25) Issued additional common shares pursuant to the adjustment clause
contained in the Cruise Shoppes America Ltd. purchase agreement in order
to maintain the value of total consideration..
(26) Issued pursuant to the purchase of ProSoft Corporation. See
"travelbyus.com-Business-Recent Acquisitions-ProSoft Corporation."
(27) Issued pursuant to the purchase of SiteRabbit.com Inc. See
"travelbyus.com-Business-Recent Acquisitions-SiteRabbit.com Inc."
(28) Issued additional common shares pursuant to the adjustment clause
contained in the Epoch Technology Inc. purchase agreement in order to
maintain the value of total consideration.
79
<PAGE>
SELLING SHAREHOLDERS
Identity and Ownership of Selling Shareholders
The following table provides certain information with respect to the
selling shareholders and the number of shares of common stock owned, offered and
to be owned after the offering by each selling shareholder. Aviation Group will
not receive any of the proceeds from the sale of these shares by the selling
shareholder.
<TABLE>
<CAPTION>
Maximum Number of Shares of Common
Shares of Common Shares of Common Stock to be Owned
Selling Shareholders Stock Owned (1) Stock to be Sold After the Offering (2)
-------------------- ----------------- ----------------- ---------------------
<S> <C> <C> <C>
Paul Lubomirski 44,250 44,250 0
Charles E. Weed 158,627 (3) 158,627 0
Richard L. Morgan 389,500 (4) 389,500 0
Louisiana Economic Development Corp. 82,153 82,153 0
SW Pelham Fund, L.P. 250,000 (5) 225,000 0
Hank Clements 52,500 (6) 52,500 0
Gordon Whitener 70,000 (7) 70,000 0
Lee Sanders 1,266,666 (8) 1,266,666 0
Jerry Webb 166,667 (9) 166,667 0
Greg Despot 21,096 21,096 0
Patricia Hendrick 6,108 6,108 0
John Chidlow 43,979 (10) 43,979 0
Chidlow Properties 8,877 8,877 0
Charles Kemp 32,000 32,000 0
Anderson W. Jordan 10,000 10,000 0
Harry Owen 30,000 30,000 0
Grady Lynn 40,000 40,000 0
Alpine Air Group, Inc. 93,750 93,750 0
Whitecross Limited Partnership 93,750 93,750 0
Kevin F. Flynn June 1992 Non-Exempt Trust 375,000 375,000 0
Charles Reeder 187,500 187,500 0
Ramy Y. El-Batrawi 1,675,000 (11) 1,675,000 0
Genesis Diversified Investments, Inc. 500,000 (12) 500,000 0
Michael B. Lavigne 133,333 (13) 133,333 0
Global Leisure, Inc. 1,191,667 (14) 1,191,667 0
Stone Capital Group 41,516 (15) 41,516 0
Stone Family Trust 41,516 (15) 41,516 0
Ravina Investments 20,759 (15) 20,759 0
Elaine and Gerald Hirsch 20,759 (15) 20,759 0
Jon Freeman 16,607 (15) 16,607 0
David J. Doerge 181,509 (15) 181,509 0
Balis Lewittes & Coleman, Inc. 88,542 (15) 88,542 0
Doerge-Sunmakers, LLC 177,083 (15) 177,083 0
Doerge-Global Leisure II, LLC 398,436 (15) 398,436 0
Deere Park Partners Fund II 13,283 (15) 13,283 0
Doerge Capital Management,
a division of Balis Lewittes & Coleman, Inc. 1,999,992 (15) 1,999,992 0
William E. Curtis 499,998 (15) 499,998 0
Deere Park Partners, L.P. 37,500 (16) 37,500 0
James C. McGill 7,500 (16) 7,500 0
Joseph Shurman 15,000 (16) 15,000 0
Woodrow W. Chamberlain 13,500 (16) 13,500 0
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Maximum Number of Shares of Common
Shares of Common Shares of Common Stock to be Owned
Selling Shareholders Stock Owned (1) Stock to be Sold After the Offering (11)
-------------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
David and Nancy Frej 7,500 (16) 7,500 0
Lenore M. Schmick Trust 22,500 (16) 22,500 0
Cambridge Consultants, Inc.
Defined Benefit Pension Plan 11,250 (16) 11,250 0
Woodrow W. and Barbara G. Chamberlain 31,500 (16) 31,500 0
Ronald E. Tarrson 37,500 (16) 37,500 0
Morris Belzberg Roth IRA 37,500 (16) 37,500 0
Williams & Kleiner Living Trust 15,000 (16) 15,000 0
Stephen N. Engberg & Associates, Ltd. 16,500 (16) 16,500 0
Bertea Community Property Trust 30,000 (16) 30,000 0
Kevin Costner 75,000 (16) 75,000 0
Jon Freeman 22,500 (16) 22,500 0
Barry M. O'Brien IRA 5,625 (16) 5,625 0
Henry M. Staley Trust 15,000 (16) 15,000 0
Katherine Reed Berkey 1,875 (16) 1,875 0
Stone Capital Group, Inc. 18,750 (16) 18,750 0
TBW Investment Partners, L.P. 7,500 (16) 7,500 0
William S. Lear IRA 2,625 (16) 2,625 0
1993 GF Partnership, L.P. 7,500 (16) 7,500 0
Alonzo Spellman 7,500 (16) 7,500 0
Anita M. Stone Family Trust U/A/D 4/20/72 150,000 (16) 150,000 0
Avery J. Stone Trust 37,500 (16) 37,500 0
Beata Flatley 30,000 (16) 30,000 0
Charles Reeder 75,000 (16) 75,000 0
Claire Kovar 11,250 (16) 11,250 0
D. Michael Meyer 75,000 (16) 75,000 0
TST Holdings 52,500 (16) 52,500 0
First Fruit, Inc. 18,750 (16) 18,750 0
For His Adopted Children, Inc. 22,500 (16) 22,500 0
Frank Meyer 7,500 (16) 7,500 0
Genesee Mutual Investments LLC 30,000 (16) 30,000 0
James & Diane Connelly 18,750 (16) 18,750 0
James A. Belushi C/F Robert Belushi 3,750 (16) 3,750 0
James A. Belushi Declaration of Trust U/A/D
12/20/90 15,000 (16) 15,000 0
James F. Beedie 3,750 (16) 3,750 0
James R. Buck 3,750 (16) 3,750 0
Jerry Mickelson 15,000 (16) 15,000 0
Jessica M. Swift & Douglas B. Nelson 15,000 (16) 15,000 0
Katherine H. Buchanan 37,500 (16) 37,500 0
Kenneth H. Buchanan 3,750 (16) 3,750 0
Kevin P. Murphy 3,750 (16) 3,750 0
Lilly L. Nelson & Douglas B. Nelson 7,500 (16) 7,500 0
Maranello Limited 5,625 (16) 5,625 0
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Maximum Number of Shares of Common
Shares of Common Shares of Common Stock to be Owned
Selling Shareholders Stock Owned (1) Stock to be Sold After the Offering (11)
-------------------- ----------------- ----------------- ----------------------
<S> <C> <C> <C>
Mary M. Sievers 11,250 (16) 11,250 0
Michael McDonnell 3,750 (16) 3,750 0
Ochs Family Trust DTD 9/11/95 18,750 (16) 18,750 0
Paul A. Neff IRA 22,500 (16) 22,500 0
R&J Lucas Living Trust 30,000 (16) 30,000 0
R&M Lucas Revocable Trust 3,750 (16) 3,750 0
RBG Trust 15,000 (16) 15,000 0
RM Haugen Family Trust 18,750 (16) 18,750 0
Robert M. Danese 3,750 (16) 3,750 0
Roderick S. Walker 18,750 (16) 18,750 0
Frank Harrison 3,750 (16) 3,750 0
Oliver H. Van Horn Co., L.L.C. 60,000 (17) 60,000 0
TW Environmental 11,732 (17) 11,732 0
Solo Graphix 16,762 (17) 16,762 0
K&J Supplies, Inc. 8,632 (17) 8,632 0
ICT Group, LLC 40,000 (17) 40,000 0
Prime Equipment 123,122 (17) 123,122 0
Genie Financial 87,685 (17) 87,685 0
Liskow & Lewis 8,980 (18) 8,980 0
Oregon Public Employees Retirement Fund 331,842 331,842 0
Regions Bank 394,806 (17) 394,806 0
---------- ----------
Totals 12,745,734 12,745,734
</TABLE>
_______________________
(1) Includes shares that may be purchased under outstanding warrants or
convertible preferred stock or exchangeable notes.
(2) Assumes all shares are sold by each selling shareholder.
(3) Includes (i) 50,000 shares purchasable, at $1.50 per share, under
contingent warrants expiring February 2005 subject to shareholder approval
and completion of the arrangement with travelbyus.com, and (ii) 20,000
shares purchasable, at $1.6875 per share, under warrants expiring August
2003.
(4) Includes (i) 250,000 shares purchasable, at $1.50 per share, under
contingent warrants expiring February 2005 subject to shareholder approval,
(ii) 15,000 shares purchasable, at $1.6875 per share, under warrants
expiring August 2005, (iii) 33,333 shares purchasable at $1.00 per share,
under warrants expiring September 2004, and (iv) 41,667 shares purchasable,
at $1.00 per share, under warrants expiring February 2005.
(5) Represents shares purchasable, at $2.125 per share, under Series D Warrants
expiring May 8, 2005..
(6) Represents (i) 50,000 shares purchasable, at $1.50 per share, under
contingent warrants, subject to completion of the arrangement with
travelbyus.com and shareholder approval, and (ii) 2,500 shares purchasable,
at $1.6875 per share, under warrants expiring August 2004.
(7) Represents (i) 50,000 shares purchasable, at $1.50 per share, under
contingent warrants, subject to completion of the arrangement with
travelbyus.com and shareholder approval, and (ii) 20,000 shares
purchasable, at $1.6875 per share, under warrants expiring August 2003.
(8) Includes (i) 26,666 shares purchasable, at $1.00 per share, under warrants
expiring December 2004 and February 2005, and (ii) 250,000 shares
purchasable, at $1.50 per share, under contingent warrants, subject to
shareholder approval.
(9) Represents shares purchasable, at $1.00 per share, under warrants expiring
June 2004.
(10) Includes 33,333 shares purchasable, at $1.00 per share, under warrants
expiring June 2004.
(11) Represents shares that may be received upon conversion of 1,005 shares of
our Series A convertible preferred stock.
(12) Represents shares purchasable, at $5.00 per share, under Series A warrants
expiring on the earlier of March 31, 2005 or the second anniversary of the
date of registration of the common stock underlying the warrants, subject
to shareholder approval.
(13) Represents shares that may be received upon conversion of 80 shares of our
Series A convertible preferred stock.
(14) Represents (i) 941,667 shares that may be received upon conversion of 565
shares of our Series A convertible preferred stock, and (ii) 250,000
shares purchasable, at $5.00 per share, under Series A warrants expiring
on the earlier of March 31, 2005 or the second anniversary of the date of
registration of the common stock underlying the warrants, subject to
shareholder approval.
(15) Represents shares purchasable, at $3.00 per share, under Series B warrants
expiring on the earlier of March 31, 2005 or the second anniversary of the
date of registration of the common stock underlying the warrants, subject
to shareholder approval.
(16) Represents shares purchasable, at $3.00 per share, under Series C warrants
expiring on the earlier of March 31, 2005 or the second anniversary of the
date of registration of the common stock underlying the warrants, subject
to shareholder approval.
(17) Represents shares that may be obtained upon exchange of indebtedness owed
by a subsidiary, at an exchange price of $1.50 per share.
(18) Represents shares that may be obtained upon exchange of indebtedness owed
by a subsidiary, at an exchange price of $1.00 per share.
82
<PAGE>
Relationships With Certain Selling Shareholders
We have relationships with certain of the selling shareholders, other
than in their capacity as holders of our securities. Paul Lubomirski has served
as President of our aircraft paint subsidiaries since their organization or
acquisition and is considered one of our executive officers. Charles Weed has
served as a director since December 1996 and was a paid consultant from between
March 1996 and March 2000. Richard L. Morgan has served as a director since
February 1997 and an executive officer since April 1998. Hank Clements has
served as a director since August 1999. Gordon Whitener has served as a director
since December 1996. Lee Sanders is our founder and has served as a director and
executive officer since our inception. Grady Lynn has served as an officer of
our Battery Shop and Aero Design subsidiaries since their acquisition in March
1998.
83
<PAGE>
PLAN OF DISTRIBUTION
Distribution by Aviation Group
As part of our initial public offering in August 1997, we sold
1,150,000 public warrants at $0.10 per warrant. Each public warrant entitles the
holder to purchase until August 13, 2002, 1.65 shares of common stock at an
exercise price of $4.17 per share, subject to adjustment in certain
circumstances. See "Description of Securities--Warrants" for information
regarding the terms of the public warrants, including the manner of exercise.
This exercise price exceeds current trading prices for the common stock.
In connection with the consummation of our IPO in August 1997, we
entered into an underwriter's warrant agreement with our underwriter in the IPO,
Duke & Co., Inc. (the "Underwriter"), pursuant to which the underwriters'
warrants were issued. See "Description of Securities--Underwriter's Warrants"
for a description of the terms of the underwriter's warrants. The underwriter's
warrants may be exercised until August 13, 2002. The holders of the
underwriter's warrants may purchase (i) up to 100,000 shares of common stock at
$9.4875 per share and (ii) up to 100,000 underlying warrants at $11.38 per
warrant, subject to adjustment in certain circumstances. These exercise prices
exceed current trading prices for the common stock. The underwriter's warrants
to purchase common stock may be exercised in a cashless manner through the
surrender and exchange of underwriter's warrants having a value (based on the
market price of the common stock that may be purchased) equal to the total
exercise price for the common stock being purchased.
The underlying warrants, if issued upon an exercise of the
underwriter's warrants, would have terms similar to the outstanding public
warrants. See "Description of Securities--Warrants." The underlying warrants may
be exercised until August 13, 2002. Each underlying warrant entitles its holder
to purchase 1.65 shares of common stock at an exercise price of $4.17 per share.
The holders of the public warrants, underlying warrants and
underwriter's warrants have an opportunity to profit from a rise in the market
price of the common Stock, if and to the extent that the market price exceeds
the respective exercise prices of the public warrants, underlying warrants and
underwriter's warrants. If any warrants are exercised, the interest of our
shareholders may be diluted. We may have more difficulty in raising additional
capital while these warrants are outstanding. The holders of these warrants may
exercise them when we, in all likelihood, would be able to obtain needed
additional capital by a new offering of securities on terms more favorable than
those provided for by the warrants.
Distribution by Selling Shareholders
The selling shareholders may from time to time sell all or a portion
of their shares of common stock on the Nasdaq SmallCap Market or the Boston
Stock Exchange, in the over-the-counter market or on any national securities
exchange or automated interdealer quotation system on which the common stock may
be listed or traded, in negotiated transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The shares of common stock may be sold directly or through brokers or dealers or
in a distribution by one or more underwriters on a firm commitment or best
efforts basis. The methods by which the shares of common stock may be sold
include:
- a block trade (which may involve crosses) in which the broker or dealer
engaged will attempt to sell the shares of common stock as agent but may
position and resell a portion of the block as principal to facilitate the
transaction
- purchases by a broker or dealer as principal and resales by such broker
or dealer for its account pursuant to this prospectus,
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers or to or through marketmakers,
- transactions in put or call options or other rights (whether exchange-
listed or otherwise) established after the effectiveness of the
registration statement of which this prospectus is a part, and
- privately negotiated transactions.
84
<PAGE>
In addition, any of the shares of common stock that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold in transactions complying with
that Rule, rather than pursuant to this prospectus.
For sales to or through broker-dealers, these broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
selling shareholders or the purchasers of the shares, or both. We are not aware
as of the date of this prospectus of any agreements between any of the selling
shareholders and any broker-dealers with respect to the sale of the shares of
common stock.
The selling shareholders and any broker-dealers or agents participating in
the distribution of our securities may be deemed to be "underwriters" within the
meaning of the Securities Act and any commissions received by any such broker-
dealers or agents and profit on any resale of shares of common stock may be
deemed to be underwriting commissions under the Securities Act. The commissions
received by a broker-dealer or agent may be in excess of customary compensation.
If a selling shareholder is deemed to be an "underwriter," the shareholder may
have liability for the accuracy of the contents of this prospectus under the
Securities Act.
At a time a particular offer of shares is made by a selling shareholder, a
prospectus supplement, if required, will be distributed that will set forth the
names of any underwriters, dealers or agents and any discounts, commissions and
other terms constituting compensation from the selling shareholders and any
other required information.
In connection with distributions of the shareholders' shares or otherwise,
the selling shareholders may enter into hedging transactions with broker-dealers
or others prior to or after the effective time of the arrangement. These broker-
dealers may engage in short sales of shares or other transactions in the course
of hedging the positions assumed by or otherwise. The selling shareholders may
also
- sell shares short and redeliver shares to close out short positions;
- enter into option or other transactions with broker-dealers or others
which may involve the delivery to those persons of the shares, the
broker-dealers may resell those shares pursuant to this prospectus;
and
- pledge the shares to a broker or dealer or others and, upon a default,
these persons may effect sales of the shares pursuant to this
prospectus.
In order to comply with securities laws of certain states, if applicable,
the shares of our common stock may be sold only through registered or licensed
brokers or dealers.
The selling shareholders will be subject to applicable provisions of the
Securities Exchange Act and its rules and regulations, including without
limitation, Rule 102 under Regulation M. These provisions may limit the timing
of purchases and sales of any of the common stock by the selling shareholders.
Rule 102 under Regulation M provides, with certain exceptions, that it is
unlawful for a selling shareholder or its affiliated purchaser to, directly or
indirectly, bid for or purchase or attempt to induce any person to bid for or
purchase, for an account in which the selling shareholder or affiliated
purchaser has a beneficial interest in any securities that are the subject of
the distribution during the applicable restricted period under Regulation M. All
of the foregoing may affect the marketability of the common stock.
The selling shareholders may offer all of the shares of common stock for
sale. Further, because it is possible that a significant number of shares could
be sold at the same time under this prospectus, such sales, or that possibility,
may have a depressive effect on the market price of our common stock.
Until the distribution of the common stock is completed, SEC rules may
limit the ability of any underwriters to bid for and purchase common stock. As
an exception to these rules, underwriters are permitted to engage in certain
transactions that stabilize the price of the common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
85
<PAGE>
The lead underwriters may also impose a penalty bid on certain other
underwriters participating in the offering and selling group members. This means
that if the lead underwriters purchase common stock in the open market to reduce
the underwriters' short position or to stabilize the price of the common stock,
they may reclaim the amount of any selling concession from the underwriters and
selling group members who sold those shares of common stock as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resale of the security before the distribution is completed.
We make no representation or prediction as to the direction or magnitude of
any effect that the transactions described above might have on the price of the
common stock. In addition, we make no representation that underwriters will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
We will not receive any of the proceeds from the sale of any of the shares
of common stock by the selling shareholders.
We will pay all costs and expenses incurred in connection with the
registration under the Securities Act of the shares of common stock offered by
the selling shareholders, including all registration and filing fees, listing
fees, printing expenses, and our legal and accounting fees. Each selling
shareholder will pay all of his or her own brokerage fees and commissions, if
any, incurred in connection with the sale of his or her shares of common stock.
In addition, we have agreed to indemnify the selling shareholders, against
certain liabilities, including liabilities under the Securities Act.
We cannot assure you that any of the selling shareholders will sell any or
all of the shares of common stock they may offer.
LEGAL MATTERS
The validity of the issuance of the common stock and underlying warrants
that we are offering in this registration statement have been passed upon for us
by Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas.
86
<PAGE>
EXPERTS
The consolidated financial statements of Aviation Group as of June 30, 2000
and 1999 and for each of the two years ended June 30, 2000, have been included
herein in reliance on the report of Hein + Associates, LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Aviation Group as of June 30, 1998
and for each of the two years in the period ended June 30, 1998, have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Global Leisure as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999, have been included herein in reliance on the report of BDO Seidman LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of travelbyus.com as of September 30,
1999 and for the nine-month fiscal year ended September 30, 1999, have been
included herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of travelbyus.com as of December 31,
1998 and for each of the two years in the period ended December 31, 1998, have
been included herein in reliance on the report of Ernst & Young LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Cheap Seats as of June 30, 1999 and 1998 and
each of the two years in the period ended June 30, 1999, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Express Vacations as of September 30, 1999 and
for the period from August 5, 1998 to September 30, 1999 have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Cruise Shoppes as of June 30, 1999 and 1998 and
for each of the two years in the period ended June 30, 1999, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
The financial statements of Epoch Technology Inc. as of December 31, 1999
and 1998 and for each of the two years in the period ended December 31, 1999,
have been included herein in reliance on the report of Hein + Associates, LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of Muffin Communications as of December 31, 1999
and 1998 and for the period from February 6, 1998 to December 31, 1999, have
been included herein in reliance on the report of Friduss, Lukee, Schiff & Co.,
P.C., independent accountants, given on the authority of said firm as experts in
accounting and auditing.
The financial statements of ProSoft Corporation as of December 31, 1999 and
for the year ended December 31, 1999, have been included herein in reliance on
the report of Swenson Advisors, LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The financial statements of SiteRabbit.com as of June 30, 2000, 1999
and 1998 and for each of the years ended June 30, 2000 and 1999 and for the
period from July 21, 1997 to June 30, 1998, have been included herein in
reliance on the report of Swenson Advisors, LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
87
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form SB-2 to register the
securities being offered pursuant to this prospectus. In addition, we file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any reports,
statements or other information we file at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the Web site maintained by the SEC at "http://www.sec.gov." In
addition, our common stock and public warrants are listed on the Nasdaq SmallCap
Market under the symbol "AVGP" and "AVGPW," respectively. Materials filed by us
may be inspected at the offices of Nasdaq at 9801 Washingtonian Boulevard, Fifth
Floor, Gaithersburg, Maryland 20878. As allowed by SEC rules, this prospectus
does not contain all the information contained in the registration statement or
in the exhibits to the registration statement.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AVIATION GROUP, INC.
<S> <C>
Report of Hein + Associates LLP............................................................................. F-1
Report of PricewaterhouseCoopers LLP........................................................................ F-2
Consolidated Balance Sheets at June 30, 2000 and June 30,1999............................................... F-3
Consolidated Statements of Operations for Years ended June 30, 2000, 1999 and 1998.......................... F-4
Consolidated Statement of Changes in Shareholders' Equity for the Period From July 1, 1997
Through June 30, 2000.................................................................................. F-5
Consolidated Statements of Cash Flows for the Years ended June 30, 2000, 1999 and 1998...................... F-6
Notes to Consolidated Financial Statements.................................................................. F-8
GLOBAL LEISURE TRAVEL, INC.
Report of BDO Seidman LLP................................................................................... F-26
Consolidated Balance Sheets at December 31, 1999 and 1998................................................... F-27
Consolidated Statements of Loss for the Years ended December 31, 1999, 1998 and 1997........................ F-28
Consolidated Statements of Stockholders' Deficit for the Period from January 1, 1997 through
December 31, 1999...................................................................................... F-29
Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997.................. F-30
Notes to Financial Statements............................................................................... F-31
TRAVELBYUS.COM LTD.
Report of PricewaterhouseCoopers LLP........................................................................ F-41
Report of Ernst & Young LLP................................................................................. F-42
Consolidated Balance Sheets at June 30, 2000, September 30, 1999 and December 31, 1998...................... F-43
Consolidated Statement of Operations and Deficit for the Nine Months ended June 30, 2000 and 1999,
for the Period from January 1, 1999 to September 30, 1999 and for the Years ended December 31,
1998 and 1997.......................................................................................... F-45
Consolidated Statement of Changes in Shareholders' Equity for the Nine Months ended June 30, 2000
and 1999, for the Period from January 1, 1999 to September 30, 1999 and for the Years ended
December 31, 1998 and 1997............................................................................. F-46
Consolidated Statement of Cash Flows for the Nine Months ended June 30, 2000 and 1999, for the Period
from January 1, 1999 to September 30, 1999 and for the Years ended December 31, 1998 and 1997.......... F-47
Notes to Consolidated Financial Statements.................................................................. F-49
CRUISE SHOPPES AMERICA, LTD.
Report of PricewaterhouseCoopers LLP........................................................................ F-77
Balance Sheets at June 30, 1999 and 1998.................................................................... F-78
Statements of Earnings and Retained Earnings for the Years ended June 30, 1999 and 1998..................... F-79
Statements of Changes in Shareholders' Equity............................................................... F-80
Statements of Cash Flows for the Years ended June 30, 1999 and 1998......................................... F-81
Notes to Financial Statements............................................................................... F-82
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
EPOCH TECHNOLOGY, INC.
<S> <C>
Report of Hein + Associates LLP......................................................................... F-89
Consolidated Balance Sheets at March 31, 2000, December 31, 1999 and 1998............................... F-90
Consolidated Statements of Operations for the Three Months ended March 31, 2000 and 1999 and the
Years ended December 31, 1999 and 1998............................................................. F-91
Consolidated Statements of Stockholders' Deficiency for the Period from January 1, 1998 through
March 31, 2000..................................................................................... F-92
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2000 and 1999 and the
Years ended December 31, 1999 and 1998............................................................. F-93
Notes to Consolidated Financial Statements.............................................................. F-94
EXPRESS VACATIONS, LLC
Report of PricewaterhouseCoopers LLP.................................................................... F-97
Balance Sheets at October 31, 1999 and September 30, 1999 and 1998...................................... F-98
Statements of Members' Equity for the Period from August 5, 1998 to September 30, 1999, Year ended
September 30, 1999 and One-Month Period ended October 31, 1999..................................... F-99
Statements of Earnings for the Period from August 5, 1998 to September 30, 1999, Year ended
September 30, 1999 and One-Month Period ended October 31, 1999..................................... F-100
Statements of Cash Flows for the Period from August 5, 1998 to September 30, 1999, Year ended
September 30, 1999 and One-Month Period ended October 31, 1999..................................... F-101
Notes to Financial Statements........................................................................... F-102
CHEAP SEATS INC.
Report of PricewaterhouseCoopers LLP.................................................................... F-107
Balance Sheets at November 30, 1999 and June 30, 1999 and 1998.......................................... F-108
Statements of Operations and Retained Earnings for the Years ended June 30, 1999 and 1998 and the
Period from July 1, 1999 to November 30, 1999...................................................... F-109
Statements of Cash Flows for the Years ended June 30, 1999 and 1998 and the Period from July 1, 1999
to November 30, 1999............................................................................... F-110
Notes to Financial Statements........................................................................... F-111
MUFFIN COMMUNICATIONS, LTD.
Report of Friduss, Lukee, Schiff & Co., P.C............................................................. F-116
Balance Sheets at June 30, 2000 and December 31, 1999 and 1998.......................................... F-117
Statements of Income (Loss) and Retained Earnings (Accumulated Deficit) for the Six Months
ended June 30, 2000, the Year ended June 30, 1999 and the Period from February 6, 1998
(Inception) to December 31, 1998................................................................... F-119
Statements of Changes in Stockholder's Equity (Deficit) for the Period from February 6, 1998
to June 30, 2000................................................................................... F-120
Statements of Cash Flows for the Six Months ended June 30, 2000, the Year ended June 30, 1999
and the Period from February 6, 1998 (Inception) to December 31, 1998.............................. F-121
Notes to Financial Statements........................................................................... F-122
PROSOFT CORPORATION
Report of Swenson Advisors, LLP......................................................................... F-124
Balance Sheet at December 31, 1999...................................................................... F-125
Statement of Income for the Year ended December 31, 1999................................................ F-126
Statement of Stockholders' Equity for the Year ended December 31, 1999.................................. F-127
Statement of Cash Flow for the Year ended December 31, 1999............................................. F-128
Notes to Financial Statements........................................................................... F-129
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
SITERABBIT.COM
<S> <C>
Report of Swenson Advisors, LLP......................................................................... F-132
Consolidated Balance Sheets at June 30, 2000, 1999 and 1998............................................. F-133
Consolidated Statements of Operations for the Years ended June 30, 2000 and 1999 and for the
Period from July 21, 1997 to June 30, 1998......................................................... F-134
Consolidated Statements of Stockholders' Equity for the Years ended June 30, 2000 and 1999 and
the Period from July 21, 1997 to June 30, 1998..................................................... F-135
Consolidated Statements of Cash Flows for the Years ended June 30, 2000 and 1999 and
the Period from July 21, 1997 to June 30, 1998..................................................... F-136
Notes to Financial Statements........................................................................... F-137
</TABLE>
91
<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 in the United States. 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 in the United States.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Dallas, Texas
September 11, 2000
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Aviation Group, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in shareholders' equity and of cash flows present fairly, in all
material respects, the results of operations and cash flows of Aviation Group,
Inc. and its subsidiaries for the year ended June 30, 1998 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dallas, Texas
October 12, 1998, except for Note P,
which is dated May 15, 2000
F-2
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 432,000 $ 84,000
Restricted cash and time deposit 1,957,000 538,000
Accounts receivable, net of allowance of $35,000 and $138,000, respectively 2,018,000 2,200,000
Note receivable - affiliate 1,930,000 --
Inventory, net of reserve for obsolescence of $176,000 and $242,000, respectively 1,049,000 1,547,000
Prepaid expenses and other 685,000 170,000
Prepaid tour costs 1,643,000 --
------------- -------------
Total current assets 9,714,000 4,539,000
PROPERTY AND EQUIPMENT, at cost, net of accumulated depreciation 2,653,000 4,050,000
OTHER ASSETS:
Goodwill, net 50,657,000 4,144,000
Other 720,000 319,000
------------- -------------
Total other assets 51,377,000 4,463,000
------------- -------------
Total assets $ 63,744,000 $ 13,052,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,976,000 $ 463,000
Current portion of capital lease obligations 150,000 164,000
Short-term borrowings, net of discount of $206,000 and $140,000 at
June 30, 2000 and 1999 4,162,000 2,316,000
Accounts payable 4,216,000 2,334,000
Customer deposits 3,718,000 --
Accrued and other liabilities 3,103,000 1,335,000
------------- -------------
Total current liabilities 19,325,000 6,612,000
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities 431,000 880,000
Capital lease obligations, net of current maturities 264,000 439,000
Other 33,000 --
------------- -------------
Total long-term liabilities 728,000 1,319,000
------------- -------------
Total liabilities 20,053,000 7,931,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes G, H and K)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized:
Series A 9% convertible, 1,650 shares outstanding
(liquidation preference of $16,500,000) 2,000 --
Series B 12% cumulative, 2,100 shares outstanding
(liquidation preference of $21,000,000) 2,000 --
Common stock, $.01 par value, 10,000,000 shares authorized, 4,790,801
shares at June 30, 2000 and 3,573,929 shares at June 30, 1999 issued
and outstanding 48,000 36,000
Additional paid-in capital 55,448,000 9,766,000
Accumulated deficit (11,809,000) (4,681,000)
------------- -------------
Total shareholders' equity 43,691,000 5,121,000
------------- -------------
Total liabilities and shareholders' equity $ 63,744,000 $ 13,052,000
============= =============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
REVENUE $ 13,381,000 $ 15,097,000 $ 11,043,000
COST OF REVENUE 8,805,000 10,129,000 8,380,000
----------------- ----------------- ----------------
Gross profit 4,576,000 4,968,000 2,663,000
----------------- ----------------- ----------------
OPERATING EXPENSES:
General and administrative expenses 8,839,000 5,482,000 3,367,000
Depreciation and amortization 1,991,000 674,000 469,000
----------------- ----------------- ----------------
Total operating expenses 10,830,000 6,156,000 3,836,000
----------------- ----------------- ----------------
Loss from operations (6,254,000) (1,188,000) (1,173,000)
----------------- ----------------- ----------------
OTHER INCOME (EXPENSE):
Other income (loss) (23,000) 52,000 20,000
Interest expense, net (656,000) (461,000) (200,000)
----------------- ----------------- ----------------
Total other income (expense) (679,000) (409,000) (180,000)
----------------- ----------------- ----------------
Loss from continuing operations before provision for
income taxes (6,933,000) (1,597,000) (1,353,000)
(PROVISION) BENEFIT FOR INCOME TAXES - (199,000) 359,000
----------------- ----------------- ----------------
LOSS FROM CONTINUING OPERATIONS (6,933,000) (1,796,000) (994,000)
DISCONTINUED OPERATIONS:
Loss from operations (795,000) (509,000) (644,000)
Gain on sale of subsidiaries 600,000 - -
----------------- ----------------- ----------------
(195,000) (509,000) (644,000)
----------------- ----------------- ----------------
NET LOSS $ (7,128,000) $ (2,305,000) $ (1,638,000)
================= ================= ================
LOSS PER SHARE, basic and diluted:
Continuing operations $ (1.75) $ (0.53) $ (0.32)
================= ================= ================
Net loss $ (1.79) $ (0.67) $ (0.54)
================= ================= ================
WEIGHTED AVERAGE SHARES OUTSTANDING 3,972,094 3,419,161 3,059,632
================= ================= ================
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 30, 1997 THROUGH JUNE 30, 2000
<TABLE>
<CAPTION>
Additional
Common Stock Preferred Paid-in Accumulated
-------------------------
Shares Amount Stock Capital Deficit
-------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, June 30, 1997 1,600,250 $ 16,000 - $ 1,951,000 $ (738,000)
Issuance of shares and warrants in
connection with initial public offering 1,150,000 11,500 - 5,168,500 -
Issuance of shares in connection with
acquisition of Casper Air Service 153,565 1,600 - 881,400 -
Stock warrants issued in connection with
acquisitions - - - 26,000 -
Issuance of shares in connection with
acquisition of Aero Design, Inc. and
Battery Shop, LLC 134,068 1,400 - 545,600 -
Issuance of shares in connection with Bridge
Notes Warrants 43,478 400 - (400) -
Issuance of shares in connection with
conversion of LEDC convertible note
payable 82,153 800 - 367,200 -
Issuance of shares in connection with
conversion of 10% convertible note 975 - - 3,000 -
Stock warrants exercised 129,112 1,300 - (300) -
Issuance of shares in connection with
payment of note payable 3,000 - - 15,000 -
Net loss - - - - (1,638,000)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 1998 3,296,601 33,000 - 8,957,000 (2,376,000)
Issuance of shares in connection with
acquisition of General Electrodynamics
Corporation 112,029 1,000 - 293,000 -
Issuance of shares for principal
and interest payments on notes 126,428 2,000 - 237,000 -
Value of warrants issued and
shares granted with notes - - - 156,000 -
Value of warrants issued for services - - - 123,000 -
Exercise of warrants 38,871 - - - -
Net loss - - - - (2,305,000)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 1999 3,573,929 36,000 - 9,766,000 (4,681,000)
Issuance of common stock for cash 790,000 8,000 - 2,032,000 -
Issuance of common stock for conversion
of debt 215,122 2,000 438,000
Additional shares issued for acquisition of
Aero Design, Inc. and Battery Shop, LLC 153,250 1,000 - (1,000) -
Issuance of shares upon cashless conversion
of warrants 58,500 1,000 - - -
Series A preferred stock - - 2,000 10,498,000 -
Series B preferred stock - - 2,000 20,998,000 -
Issuance of warrants - - - 11,717,000
Net loss - - - - (7,158,000)
------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 2000 4,790,801 $ 48,000 $ 4,000 $ 55,448,000 $(11,839,000)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,128,000) $(2,305,000) $(1,638,000)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 2,224,000 978,000 694,000
Accreted interest 303,000 16,000 64,000
Deferred income taxes - 191,000 (359,000)
(Gain) loss on disposal of assets (600,000) 36,000 -
Interest paid with common stock - 34,000 -
Warrants issued for services - 123,000 -
(Increase) decrease in accounts receivable 1,059,000 64,000 (587,000)
Decrease in inventories 498,000 676,000 567,000
Decrease in prepaids and other assets 148,000 107,000 70,000
Increase (decrease)in accounts payable (116,000) 519,000 275,000
Decrease in customer deposits (2,471,000) - -
Increase (decrease) in accrued and other liabilities 918,000 (261,000) 410,000
Other (138,000) (75,000) 73,000
----------- ----------- -----------
Net cash provided (used) by operating activities (5,303,000) 103,000 (431,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash (paid for) included with acquisitions 811,000 41,000 (2,235,000)
Proceeds from sale of business segments 1,700,000 - -
Advances from related parties - - 29,000
Decrease (increase) in restricted cash 1,640,000 (338,000) (200,000)
Proceeds from redemption of certificate of deposit 200,000 - 100,000
Increase in note receivable (1,930,000) - -
Proceeds from sale of marketable securities - - 113,000
Proceeds from sale of property and equipment - 17,000 -
Payments for long-lived asset additions (418,000) (344,000) (811,000)
---------- ----------- -----------
Net cash provided by investing activities 2,003,000 (624,000) (3,004,000)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings 3,000,000 1,859,000 720,000
Repayments of short-term borrowings (1,189,000) (855,000) (607,000)
Repayment of notes payable - (425,000) (500,000)
Proceeds from issuance of long-term debt 3,980,000 - 225,000
Payments on long-term debt and capital leases (4,183,000) (483,000) (1,647,000)
Proceeds from issuance of common stock 2,040,000 - 5,565,000
--------- ----------- -----------
Net cash provided by financing activities 3,648,000 96,000 3,756,000
--------- ----------- -----------
</TABLE>
- Continued -
F-6
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 348,000 (425,000) 321,000
CASH AND CASH EQUIVALENTS, beginning of period 84,000 509,000 188,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 432,000 $ 84,000 $ 509,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR
INTEREST AND INCOME TAXES:
Cash paid for interest $ 533,000 $ 424,000 $ 287,000
Cash paid for income taxes - - 4,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and warrants in connection with
acquisitions $11,348,000 $ 294,000 $ 1,456,000
Machinery and equipment acquired under capital leases - 484,000 183,000
Conversion of liabilities to common stock 438,000 239,000 371,000
Issuance of preferred stock in connection with acquisition 31,500,000 - -
</TABLE>
See accompanying notes to these consolidated financial statements.
F-7
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND DESCRIPTION OF BUSINESS
Aviation Group, Inc. ("the Company") (a Texas corporation) was formed on
December 4, 1995 for the purposes of combining certain aircraft service
operations formerly owned by The Sanders Companies, Inc. ("Sanders") and to
acquire additional aircraft servicing related businesses. Sanders was 100%
owned by Lee Sanders, Chairman and chief executive officer of the Company.
On February 21, 1996, the Company acquired Pride Aviation, Inc. , which was
subsequently renamed Aviation Exteriors Louisiana, Inc. ("AvEx") in a
business combination accounted for as a purchase. AvEx operates a Federal
Aviation Administration ("FAA") approved repair station and provides
aircraft painting and maintenance services. In August 1997, the Company
acquired Casper Air Service ("CAS"). CAS was a full service fixed base
operation ("FBO") located at Natrona County International Airport in
Casper, Wyoming and offered aircraft line services, repair and maintenance,
parts distribution and aircraft sales. The operating assets of CAS were
sold in February 2000. In March 1998, the Company acquired all of the
outstanding common stock of Aero Design, Inc. and all of the outstanding
ownership interests of Battery Shop, LLC (collectively, "Aero Design"), two
sister companies involved in the manufacturing and overhaul of replacement
batteries for the aviation industry. Aero Design is located outside
Nashville, Tennessee. In August 1998, the Company acquired all the
outstanding common stock of General Electrodynamics Corporation ("GEC").
GEC manufactures and sells aircraft and truck scales and other aviation
components used by the aviation maintenance and transportation industries
and is located in Arlington, Texas. In March 2000, the Company acquired
control of Global Leisure Travel, Inc. ("Global"). Global provides
wholesale and retail travel-related services. See Note C.
If the proposed merger described in Note Q is approved by the companies'
shareholders, management anticipates its non-travel related businesses will
be sold.
In August 1997, the Company completed an initial public offering ("IPO") of
its common stock (See Note J).
Until March 31, 2000, the Company was organized into three operating
divisions: overhaul and service, ground handling and services, and fixed
base operation ("FBO") and airport management. As described above, the
Company acquired a travel business on March 31, 2000. The overhaul and
service division includes two business segments for financial reporting
purposes: painting and maintenance and manufacturing. The ground handling
and services and the FBO and airport management divisions were each
considered separate business segments for financial reporting purposes.
These two business segments were discontinued in December 1999 and February
2000, respectively, as described in Note P. The painting and maintenance
business segment provides painting and paint stripping services and certain
maintenance for commercial and freight aircraft at the Company's FAA
approved repair stations in New Iberia, Louisiana and Portland, Oregon. The
manufacturing business segment manufactures and sells aircraft batteries,
scales and other aviation components to customers throughout the United
States and Europe. The ground handling and services division provided
aircraft ground handling and light catering services to a variety of
passenger and freight airlines at the Dallas/Fort Worth International
Airport. Services at other airports were terminated in fiscal years 1998
and 1999. The FBO and airport management division provided fuel and light
maintenance services to general aviation, corporate and light freight
aircraft customers at an airport in Casper, Wyoming.
F-8
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated financial statements present the consolidated
results of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates in the
accompanying financial statements include the carrying values and the
estimated useful lives of intangible assets, goodwill and assets held for
sale. Actual results could differ materially from those estimates. The most
significant estimate is the approximately $49,000,000 of goodwill the
Company has recorded in connection with its acquisition of Global on March
31, 2000 (Note C). Global has incurred losses in the past and its future
results may be dependent on the successful integration of its business with
travelbyus.com (see Note Q). Therefore it is reasonably possible the
expected useful life of 10 years for the goodwill could materially change
in the near term.
Revenue Recognition
-------------------
For operations other than travel services, revenues are recognized as
services are performed or when products are shipped.
The Company earns commission from the sale of travel products including
airline tickets, hotel accommodations, car rentals, and other land
components. Net revenues consist primarily of markups on travel packages.
The Company generally recognizes net revenue when earned on the date of
travel net of estimated cancellations and returns.
Customer deposits represent unearned revenues and are initially recorded as
customer deposit liabilities on the balance sheet when received. Customer
deposits are subsequently recognized as revenue, generally in the month
of travel.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash and Time Deposit
--------------------------------
Restricted cash at June 30, 2000 consists of customer travel deposits of
$1,785,000 and collateral deposit account balances associated with a bank
line of credit of $172,000. At June 30, 1999, restricted cash consisted of
$338,000 of collateral deposit account balances and a $200,000 bank
certificate of deposit which matured, after renewal, in October 1999. The
certificate of deposit collateralized an open letter of credit and was
restricted as to withdrawal until the associated letter of credit expired
in October 1999.
F-9
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
-----------
Aircraft held for resale are valued at the lower of cost or market, with
cost determined by the specific identification method. Parts and supplies
inventories are stated at the lower of cost or market, with cost determined
by the average costing method. Aircraft and truck scales and aviation
components inventories are stated at the lower of cost or market, with cost
determined by the first-in-first-out method. Provision is made for
estimated excess and obsolete inventories.
Inventories consisted of the following:
June 30,
-------------------------------
2000 1999
------------ ------------
Aircraft held for sale $ - $ 170,000
Raw materials, parts and supplies 1,049,000 1,377,000
------------ ------------
$ 1,049,000 $ 1,547,000
============ ============
Goodwill
--------
Goodwill represents the cost in excess of fair value of the net assets
(including tax attributes) acquired in acquisitions. Goodwill is being
amortized on a straight-line basis over periods ranging from 10 to 25
years. Amortization expense for the years ended June 30, 2000,1999 and 1998
was $1,387,000, $217,000 and $99,000, respectively. Accumulated
amortization totaled $1,771,000 and $384,000 at June 30, 2000 and 1999,
respectively.
Property and Equipment
----------------------
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation has been provided using straight line and double declining
balance methods over the estimated useful lives of the assets which range
from 5 to 30 years.
Long-Lived Assets
-----------------
The Company's policy is to periodically review the net realizable value of
its long-lived assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. In the event that
assets are found to be carried at amounts in excess of estimated
undiscounted future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of
the underlying assets. Based upon its most recent analysis, the Company
believes no impairment of long-lived assets exists at June 30, 2000 or June
30, 1999. However, if the merger discussed in Note Q is approved by the
shareholders of both companies, it is anticipated most of the Company's
non-travel related operations would be sold. It is uncertain that a sale of
these assets would result in recovery of their carrying amounts.
Income Taxes
------------
The Company accounts for income taxes using an asset and liability
approach. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income.
Earnings (Loss) Per Share
-------------------------
Basic earnings or loss per share ("EPS") is calculated by dividing the
income or loss available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were
F-10
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exercised or converted into common stock. Debt and equity instruments
convertible into shares of common stock have been excluded from the
computation of diluted EPS because their inclusion would have been
antidilutive.
Comprehensive Income (Loss)
---------------------------
Comprehensive income or loss is defined as all changes in stockholders'
equity, exclusive of transactions with owners, such as capital investments.
Comprehensive income or loss includes net income or loss, changes in
certain assets and liabilities that are reported directly in equity such as
translation adjustments on investments in foreign subsidiaries, and certain
changes in minimum pension liabilities. The Company's comprehensive loss
was equal to its net loss for each period presented.
Fair Value of Financial Instruments
-----------------------------------
For certain of the Company's financial instruments, including cash
equivalents, accounts receivable, short-term borrowings and accounts
payable, the carrying amounts approximate fair value due to their short
maturities. Management believes the carrying amount reported for long-term
debt approximates fair value based on current interest rates for debt with
similar terms and maturities.
Liquidity
---------
The Company has incurred significant losses from operations in fiscal years
2000, 1999 and 1998 and has a working capital deficit of $9,611,000 at
June 30, 2000. Management has significantly reduced overhead costs after
June 30, 2000. Reductions in non-essential division operating expenses,
along with elimination of marginal products and services that do not
provide future growth or near-term profits have also been pursued. In
August 2000, the Company entered into exchange agreements with certain of
its aviation service vendors wherein these parties will receive Company
common stock of up to approximately $1,500,000 at $3.00 per share in
exchange for retirement of certain current payables and debt. The Company
agreed to register the shares prior to conversion by the creditors. If the
liabilities had been converted at the Company's stock price on September
11, 2000, approximately $940,000 of liabilities would have been converted
to common stock. On September 1, 2000, the Company entered into an
agreement with travelbyus.com (TBU) (see Note Q) in which TBU agreed to
manage and fund the operations of Global. TBU has also guaranteed
$3,000,000 in Company debt relating to the transactions described in Note
Q. Management believes the foregoing events combined with current operating
levels should allow the Company to meet its working capital requirements
during fiscal 2001, however, significant interruptions in currently
scheduled Company operations would adversely affect the Company's financial
condition and require additional capital from asset sales, borrowings, or
equity financings in order to allow the Company to meet its obligations.
The combination with TBU would allow management to immediately begin to
reduce overlapping corporate overhead, complete the integration of its
Global travel operations into and with TBU, and pursue the sale of its
remaining aviation service and manufacturing businesses. Proceeds from the
sale of these entities will be used first to fund repayment of Series B
Preferred Stock (see Note J), with the remainder, if any, invested in the
Company's travel operations. If the merger of the Company with TBU is not
approved by the shareholders, the Board of Directors intends to negotiate
and enact an arrangement with TBU that allows both companies to continue
their relationship with joint business activities, and thereby promote the
long-term viability of the Company's operations. However, if the Company
continues to experience losses and is unable to complete the merger with
TBU, the Company could have liquidity problems which could require it to
dispose of assets or enter into potentially unfavorable financing
arrangements.
Discontinued Operations
-----------------------
As described in Note P, in December 1999 and February 2000, the Company
sold two business segments. The results of operations from these two
segments have been netted and reclassified as loss from discontinued
operations in the accompanying statements of operations.
F-11
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
-----------------
Certain reclassifications have been made to prior period amounts to conform
to the current year presentation.
C. ACQUISITIONS
General Electrodynamics Corporation
-----------------------------------
In August 1998, the Company acquired all the outstanding common stock of
GEC in exchange for 112,029 shares of the Company's common stock valued at
approximately $294,000. In addition, the Company agreed to remit to the
former shareholder of GEC up to $300,000 of any collections from certain
government contracts, net of direct expenses, received by GEC after the
acquisition. The former shareholder of GEC relinquished the right to those
collections in a subsequent settlement with the Company. The acquisition
was accounted for using the purchase method and the purchase price has been
allocated to the net assets acquired based on their estimated fair values.
The results of GEC are included in the accompanying financial statements
beginning September 1, 1998. The excess of the purchase price over the fair
value of the net assets acquired of $1,244,000 has been recorded as
goodwill and is being amortized using the straight-line method over 20
years.
Casper Air Service
------------------
Concurrent with the IPO in August 1997, the Company acquired all of the
outstanding common stock of CAS. The purchase price of $2,400,000 included
$1,167,000 in cash, 153,565 shares of the Company's common stock valued at
approximately $883,000 and transaction costs. The acquisition was accounted
for using the purchase method and the purchase price was allocated to the
net assets acquired based on their estimated fair values. The results of
CAS are included in the accompanying financial statements beginning August
20, 1997. The excess of the purchase price over the fair value of the net
assets acquired (including tax attributes) of $1,041,000 was recorded as
goodwill and is being amortized using the straight-line method over 20
years. As described in Note P, CAS was sold in February 2000 and its
results have been reclassified as discontinued for all periods presented.
Aero Design, Inc. and Battery Shop, LLC
---------------------------------------
In March 1998, the Company acquired all of the outstanding common stock and
ownership interests of Aero Design. The purchase price of $1,550,000
included $753,000 in cash and 134,068 shares of the Company's common stock
valued at approximately $547,000 and transaction costs. The terms of the
acquisition agreement provide for additional consideration to be paid if
Aero Design's results of operations exceed certain targeted levels. The
Company also agreed to protect the sellers from losses (up to $450,000)
realized upon the resale of the Company's stock for a period of 540 days
from closing of the acquisition. The Company issued the sellers 153,250
shares of common stock in fiscal year 2000 to satisfy this guarantee. The
acquisition was accounted for using the purchase method and the purchase
price was allocated to the net assets acquired based on their estimated
fair values. The results of Aero Design are included in the accompanying
financial statements beginning March 24, 1998. The excess of the purchase
price over the fair value of the net assets acquired (including tax
attributes) of $1,44,000 was recorded as goodwill and is being amortized
using the straight-line method over 25 years.
Global Leisure Travel, Inc.
---------------------------
In March 2000, the Company entered into an agreement to acquire Global
Leisure Travel, Inc. ("Global"). The acquisition of Global involved (1) the
issuance by the Company of approximately $16,500,000 of liquidation value
Series A preferred stock and warrants to purchase 4,250,000 shares of the
Company's
F-12
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
common stock to certain debt holders and the common stockholders and
warrant holders of Global in exchange for retirement of the debt and
cancellation of the outstanding common stock of Global; and (2) the sale of
approximately $21,000,000 liquidation value Series B preferred stock and
warrants by the Company in March 2000 and the purchase of Series B voting
preferred stock of Global and the retirement of certain of Global's debt
and payables with the proceeds. The sale of Series B preferred stock was to
travelbyus.com (see Note Q) and other investors and included warrants to
purchase 1,239,750 shares of common stock. The preferred stock was recorded
at estimated fair value of $10,500,000 for the Series A and $21,000,000 for
the Series B.
Supplemental Pro Forma Results of Operations (Unaudited)
--------------------------------------------------------
The following unaudited pro forma summary presents the consolidated results
of operations for the years ended June 30, 2000, 1999 and 1998 as if the
CAS, Aero Design, GEC and Global acquisitions had occurred as of the
beginning of the Company's 1998 fiscal year. The summarized information
does not purport to be indicative of what would have occurred had the
acquisitions actually been made as of such dates or of results which may
occur in the future.
<TABLE>
<CAPTION>
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues $ 18,959,000 $ 27,813,000 $ 27,916,000
Net loss $ (17,568,000) $ (11,059,000) $ (12,112,000)
Net loss per share (basic and diluted) $ (4.42) $ (2.65) $ (3.00)
</TABLE>
Adjustments made in arriving at pro forma unaudited results of operations
included adjustment related to additional depreciation expense,
amortization of goodwill and related tax adjustments.
D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
--------------- --------------
<S> <C> <C>
Machinery and equipment $ 2,013,000 $ 3,624,000
Buildings and leasehold improvements 832,000 993,000
Furniture, fixtures and office equipment 1,302,000 491,000
Aircraft and vehicles 162,000 714,000
-------------- --------------
4,309,000 5,822,000
Less accumulated depreciation (1,656,000) (1,772,000)
-------------- --------------
$ 2,653,000 $ 4,050,000
============== ==============
</TABLE>
Depreciation expense charged to operations for the years ended June 30,
2000, 1999 and 1998 was $587,000, $761,000, and $595,000, respectively.
E. SHORT-TERM BORROWINGS
Line of Credit Facilities
-------------------------
In August 1998, the Company's operating subsidiaries (other than GEC)
obtained a $3,000,000 line of credit facility with the CIT Group/Credit
Finance, Inc. for working capital management purposes. The line of credit
bears interest at prime plus 1.5% (total of 7.75% at June 30, 2000) and
extends through August 2001.
F-13
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amount available for borrowing are based on the level and composition of
the Company's accounts receivable and inventory. Amounts borrowed are
repayable from lock box collections of the Company's accounts receivable.
Outstanding borrowings under this line of credit at June 30, 2000 were
$1,008,000. No additional borrowings were available under the terms of the
line of credit at June 30, 2000. The line of credit is collateralized by
substantially all of the assets of the Company's operating subsidiaries
(other than GEC and Global) and guaranteed by the Company.
In addition, GEC has a note payable to a bank under a revolving credit
agreement with a balance of $360,000 at June 30, 2000. Interest is at the
bank's index rate plus 0.25% (total of 10.5% at June 30, 2000). The note is
collateralized by equipment, inventory and accounts receivable of GEC and
is due in February 2001.
Other Short-Term Borrowings
---------------------------
The Company borrowed $3,000,000 from an investment fund on May 9, 2000. The
promissory note requires quarterly interest payments at an annual rate of
12%, and is due February 28, 2001. In connection with the promissory note,
the Company issued Series D warrants to purchase 225,000 shares of its
common stock at an exercise price of $2.125 per share. The value of the
warrants of $257,000 has been recorded as a discount, which is being
amortized to interest expense over the term of the note. The balance of the
note at June 30, 2000 is $2,794,000. The note is guaranteed by TBU (see
Note Q).
In June 1999, the Company borrowed $600,000 and executed notes payable to
two individuals. The principal and interest at 9% were repaid at maturity
of December 31, 1999. The notes were collateralized by stock of the
Company's subsidiaries (except GEC). In connection with the notes, the
Company issued the note holders warrants to purchase a total of 200,000
shares of the Company's common stock at $1.00 per share through June 2002.
The warrants include a cashless exercise feature and the exercise price may
be adjusted in certain circumstances, as specified in the agreement. The
Company also granted 40,000 shares of common stock to a director as a
finder's fee in connection with the notes. The shares were issued in July
1999. The estimated value of the warrants at the date of issuance of
$106,000 and the quoted value of the shares at the grant date of $50,000
have been accounted for as a discount to the notes which has been amortized
to expense over the seven-month life of the notes.
At June 30, 1999, the Company owed $200,000 without interest to a previous
owner of GEC in connection with a non-compete agreement. The entire balance
was satisfied as a conversion to stock through the issuance of 112,000
shares of common stock on May 26, 2000.
F. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Convertible notes payable, payable in quarterly installments
totaling $72,000 beginning April 1, 1998, bearing interest
at 10%, maturing March 1, 2001 and collateralized by the
Company's shares of common stock of Pride Exterior, Inc.
In March 2000 the outstanding balance and accrued interest
was converted into 78,864 shares of common stock at a
conversion price of $4.50 per share. See Note H. 25,000 $ 377,000
</TABLE>
F-14
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Note payable to a bank, interest at bank base rate (11.00% at
June 30, 2000); collateralized by equipment, inventories,
accounts receivable and intangibles of GEC. Due in monthly
payments of $17,000 plus interest through April 2003. 620,000 792,000
Various notes payable to an aircraft finance company, payable
in varying monthly installments, including interest at prime
plus 2.0% (9.75% at June 30, 1999, maturing December 1998 to
June 2000, collateralized by certain aircraft and equipment. - 53,000
Various notes payable to a bank, payable in varying installments,
including interest at rates ranging from 9.25% to 9.5%, maturing
through December 2002 and collateralized by certain aircraft. - 53,000
Note payable to two companies in connection with the acquisition
of Global (See Note C). The terms of the notes are currently
under negotiation. 3,700,000 -
Various other notes payable, including $25,000 loan from
shareholder 62,000 68,000
------------ ------------
Total 4,407,000 1,343,000
Less current maturities of long-term debt (3,976,000) (463,000)
------------ ------------
Total long-term debt $ 431,000 $ 880,000
============ ============
</TABLE>
Notes payable with due on demand provisions have been classified as a current
liability in the accompanying balance sheets.
Maturities of long-term debt as of June 30, 2000 were as follows:
Year ending June 30,
--------------------
2001 $ 3,976,000
2002 220,000
2003 204,000
2004 7,000
-------------
$ 4,407,000
=============
G. LEASES
Capital Leases
--------------
The Company leases certain machinery and equipment under arrangements
classified as capital leases. The net book value of machinery and equipment
recorded under capital leases totaled approximately $400,000 and $600,000
at June 30, 2000 and June 30, 1999, respectively. Amortization expense
associated with assets held under capital leases is included in
depreciation and amortization expense for all periods presented.
Future minimum lease payments at June 30, 2000, together with the present
value of the minimum lease payments are:
Years ended June 30, 2000
-------------------- ----------
2001 $ 213,000
2002 122,000
2003 110,000
----------
Total minimum lease payments 445,000
Less amount representing interest (31,000)
----------
Total present value of minimum lease payments 414,000
Less current portion (150,000)
----------
Long-term obligation $ 264,000
==========
F-15
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Leases
----------------
The Company leases various equipment and office and hanger facilities under
cancelable and non-cancelable rental arrangements. Rental expenses from
operating leases for the years ended June 30, 2000, 1999 and 1998 were
$1,617,000, $1,493,000 and $1,466,000, respectively.
At June 30, 2000, the minimum future lease payments for non-cancelable
operating leases for the next five years and thereafter were as follows:
(Need Global lease information)
Years ending June 30,
--------------------
2001 $ 1,676,000
2002 1,581,000
2003 1,015,000
2004 780,000
2005 785,000
Thereafter 18,538,000
-------------
$ 24,375,000
=============
H. COMMITMENTS AND CONTINGENCIES
In connection with the conversion of notes payable to 78,864 shares of
common stock (see Note F), the Company guaranteed the shareholders a
minimum stock price of $4.50 per share. The Company recorded a current
liability as of June 30, 2000 and an expense during the quarter ended June
30, 2000 of $197,000 to reflect the excess of the guarantee price over the
trading price of the stock at June 30, 2000. The maximum potential
liability the Company could experience under this guarantee is $355,000.
In connection with the acquisition of Aero Design discussed in Note C, the
Company entered into a royalty agreement which provides that the Company
will pay the former owners of Aero Design a royalty of 2.5% of net revenues
associated with new product license agreements developed during the seven
year period beginning with the acquisition date. The royalties earned under
the agreement were insignificant during all periods presented.
The Company, in connection with the production of revenue, produces
chemical waste, which is temporarily stored on the Company's premises.
Costs for disposal are expensed by the Company as waste is produced. The
provision for disposal of waste on hand totaled $4,000 and $9,000 as of
June 30, 2000 and 1999, respectively, and is included in accrued
liabilities in the accompanying balance sheet.
Certain of the Company's subsidiaries are partially self-insured for
employee medical claims. Insurance with independent insurance carriers is
maintained to cover medical claims in excess of self-insured limits. The
Company's self-insured limits vary by month and policy year and are based
on various factors including the number of employees and dependents covered
and certain experience factors. In addition to aggregate annual and monthly
limitations, the Company's exposure is further limited to specific limits
per covered individual.
The Company has employment agreements with two officers, which are
described in Note K.
The Company is involved in certain legal proceedings in the normal
course of business. Management believes none of these matters will have a
material effect on the Company's results of operations or financial
position.
I. STOCK OPTIONS AND WARRANTS
1997 Stock Option Plan
----------------------
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted by the
Company's Board of Directors and shareholders in February 1997. The purpose
of the Option Plan is to provide increased incentives to key employees and
directors of the Company to render services and exert maximum effort for
the business success of the Company. The Company has reserved 150,000
shares of its common stock for
F-16
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issuance upon exercise of such options. In May 2000, the Board of Directors
approved an increase in the number of shares reserved for issuance under
the Option Plan to 6,500,000 shares, effective if and when the arrangement
with TBU (see Note Q) is completed.
The Board of Directors or its Compensation Committee has the authority to
select key employees and directors to whom stock options are granted as
well as determining vesting schedules and other terms. The options vest
ratably over five years and can have a term of up to ten years. The
aggregate fair market value of the stock with respect to which incentive
stock options are first exercisable in any calendar year may not exceed
$100,000 per incident. The exercise price of incentive stock options must
not be less than the fair market value of the common stock on the date of
grant.
The Company's Board of Directors approved the issuance of 78,000 incentive
stock options in fiscal year 1998 and 10,000 in fiscal year 1999. Of these,
59,000 were issued in replacement for and cancellation of previously issued
options. The exercise price on all the options granted was the market price
at the date of grant except for options for 50,000 shares which were
granted at 110% of market price. All of the options were repriced in fiscal
1999 to the current market price of $1.69 per share, (except for the 50,000
shares which were repriced to $1.86 per share).
Warrant Issuances
-----------------
In connection with a private placement of stock in 1996, the Company issued
280,000 warrants to investment advisors and other parties. 200,000 warrants
were issued with an exercise price of $1.00 per share and 80,000 were
issued to a director with an exercise price of $2.50 per share. These
warrants were scheduled to expire February 28, 1999. The exercise price and
number of shares issuable under the warrants are subject to adjustment for
certain equity transactions and other circumstances. The warrants also
contain a "cashless" exercise feature whereby the warrants may be
surrendered in exchange for a number of shares to be determined based on
the difference between the exercise price and the market price for the
Company's common stock. During fiscal year 1998, holders of the $1.00
warrants surrendered 144,755 warrants to purchase 129,112 shares of common
stock. Additional warrants were surrendered to purchase 38,871 shares of
common stock and the remainder expired in fiscal year 1999. In August 1999,
the $2.50 warrants were extended to March 31, 2003 and repriced to the
current market price of $1.69 per share. These warrants were surrendered in
exchange for 26,000 shares of common stock in January 2000.
The Company issued 1,150,000 redeemable common stock purchase warrants in
connection with its IPO discussed in Note J. These warrants entitle the
holders to purchase, anytime after two years from the effective date of the
offering, 1.058 shares of common stock per each warrant for $6.52. The
exercise price and number of shares purchaseable is required to be adjusted
periodically as a result of the issuance of new warrants or shares of
common stock at exercise or issue prices lower than the exercise price of
the warrants. In October 1999, the exercise price of the warrants was
adjusted to $5.76 and the number of shares purchaseable was adjusted to
1.198 shares per warrant. The warrants expire five years from the effective
date of the IPO and are redeemable at a price of $0.10 per warrant, with
consent of the underwriter, upon 30 days written notice, provided that the
average closing bid quotations or sales prices of the common stock equal or
exceed $9.49 for 20 consecutive trading days ending on the tenth day prior
to the date on which the Company gives notice of redemption. None of the
warrants had been exercised as of June 30, 2000.
The Company also sold 100,000 warrants (the "Underwriter's Warrants") to
the Underwriters of its IPO, for $0.001 per warrant. Each warrant entitles
the holder to purchase a share of common stock at $9.49 and also
F-17
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to receive an Underlying Warrant whose term is identical to the warrants
described above except that the exercise price is $11.38. The Underwriter's
Warrants are exercisable for four years beginning one year after the
effective date of the IPO. None of these warrants had been exercised as of
June 30, 2000.
In April 1998, the Board of Directors elected to grant 345,000 warrants to
officers, directors and consultants of the Company. In addition, the Board
approved the issuance of warrants to purchase 52,000 shares of common stock
in replacement for and cancellation of previously issued warrants to
purchase an aggregate of 52,000 shares of common stock. The original
exercise price on all the warrants granted was the market price at the date
of grant. However, the 345,000 warrants were repriced to the current market
price of $1.69 per share in August 1999. In January 2000, 100,000 of the
warrants were surrendered to purchase 32,500 shares of common stock.
During fiscal year 1999, the Company granted warrants to various parties to
purchase a total of 260,000 warrants at per share prices ranging from $2.13
to $9.00 and terms ranging from two to five years. The warrants were
granted for services and were recorded as expense based on the estimated
fair values of the warrants, which totaled $123,000.
Additional warrants were issued in fiscal years 1999 and 2000 in connection
with notes payable as described in Notes E and F.
In connection with the acquisition of Global and the issuance of preferred
stock described in Note C, the company issued warrants that entitle the
holders to purchase shares of common stock as follows: (1) Series A
warrants - 750,000 shares at $5.00 per share, (2) Series B warrants -
3,500,000 shares at $3.00 per share, and (3) Series C warrants - 1,239,750
shares at $3.00 per share. The warrants are not exercisable until the
Company's shareholders approve the issuance of the warrants and increase
the authorized number of shares of common stock. The warrants expire on the
earlier of March 31, 2005 or the second anniversary of the date the shares
of common stock issuable upon the exercise of the warrants are registered
for resale under the Securities Act of 1933, as amended.
In February 2000, the Company's board of directors granted warrants to
certain officers and directors to acquire 650,000 shares of common stock at
$1.50 per share for three years. Warrants to purchase 500,000 of the shares
are subject to shareholder approval and warrants to purchase 150,000 shares
are subject to approval of both sets of shareholders in the arrangement
described in Note Q.
SFAS No. 123 Information
------------------------
Pro forma information regarding net loss and loss per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for
its outstanding stock purchase warrants and employee stock options under
the fair value method of that statement. The fair value of each warrant and
option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted- average assumptions for
2000, 1999 and 1998.
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Dividend yield none none none
Risk free interest rate 6.50% 5.25% 5.74%
Expected volatility 0.91 0.85 0.30
Expected lives (years) 2.0 1.0 5.5
</TABLE>
F-18
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period while the estimated
fair value of the warrants is expensed on the grant date. The Company's pro
forma net loss and loss per share were as follows for the years ending June
30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net Loss
As reported $ (7,128,000) $ (2,305,000) $ (1,638,000)
============= ============= =============
Pro forma $ (7,421,000) $ (2,310,000) $ (2,103,000)
============= ============= =============
Loss per share - Basic and Diluted
As reported $ (1.79) $ (0.67) $ (0.54)
============= ============= =============
Pro forma $ (1.89) $ (0.67) $ (0.69)
============= ============= =============
</TABLE>
A summary of stock purchase warrant transactions and stock option
transactions under the Option Plan is set forth below. Warrants issued with
the Global acquisition (Note C), the IPO and the Underwriter's Warrants are
not included in the tables.
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
---------------- ----------------
<S> <C> <C>
Outstanding at July 1, 1997 56,500 $ 5.53
Granted 513,000 3.96
Exercised - -
Forfeited/Canceled (99,500) 6.86
--------------- ---------------
Outstanding at June 30, 1998 470,000 3.54
Granted 470,000 $ 2.89
Repriced - previous (435,000) 3.50
Repriced - new 435,000 1.69
Exercised - -
Forfeited/Canceled (33,000) 3.50
--------------- ---------------
Outstanding at June 30, 1999 907,000 2.33
Granted 619,000 1.43
Exercised (180,000) 1.69
Forfeited/Canceled (55,000) 7.50
--------------- ---------------
Outstanding at June 30, 2000 1,291,000 $ 1.77
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Number Price
================ ===============
<S> <C> <C>
Exercisable Warrants and Options:
June 30, 1998 396,600 $ 3.50
================ ===============
June 30, 1999 841,000 $ 2.33
================ ===============
June 30, 2000 791,000 $ 1.94
================ ===============
</TABLE>
F-19
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Exercise Price Exercise Price Exercise Price
Less than Equal to Greater than
Market Price Market Price Market Price
----------------- ------------------ -----------------
<S> <C> <C> <C>
Weighted average fair value of warrants
and options granted during the years ended:
June 30, 1998 $ - $ 1.57 $ -
================= ================== =================
June 30, 1999 $ 0.53 $ 0.71 $ 0.31
================= ================== =================
June 30, 2000 $ 1.10 $ - $ 0.63
================= ================== =================
</TABLE>
The following table summarizes information about the stock purchase
warrants and the fixed price stock options outstanding June 30, 2000. All
the warrants and approximately 40,000 of the options are exercisable at
June 30, 2000.
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Outstanding at Contractual Exercise
Exercise Prices: June 30, 2000 Life (months) Price
---------------- -------------- -------------- --------
<S> <C> <C> <C>
$1.00 - $1.69 1,139,000 46 $ 1.42
$2.13 - $3.00 21,000 22 $ 2.38
$3.50 - $5.50 91,000 39 $ 4.23
$6.00 - $9.00 40,000 34 $ 7.13
</TABLE>
J. SHAREHOLDERS' EQUITY
Initial Public Offering
-----------------------
On August 19, 1997, the Company closed an initial public offering of its
common stock and redeemable common stock purchase warrants. The Company
sold 1,150,000 shares of common stock at a price of $5.75 per share and
1,150,000 common stock purchase warrants at a price of $0.10 per warrant.
Proceeds from the stock offering totaled $5,180,000, net of approximately
$1,548,000 of associated underwriting discounts and offering expenses.
Preferred Stock
---------------
The Company has 5,000,000 shares of preferred stock authorized. The
preferred stock may be issued in series and with rights and preferences as
determined by the Company's Board of Directors. As of June 30, 2000, the
Company has designated (1) 2,000 shares of Series A convertible voting
preferred stock, of which 1,650 shares were outstanding; and (2) 3,000
shares of Series B preferred stock of which 2,100 shares were outstanding.
The Series A and Series B preferred shares were issued in connection with
the acquisition of Global (Note C). The Series A and Series B preferred
shares each have a liquidation preference of $10,000 per share. The shares
were recorded at their estimated fair values of $10,500,000 for the Series
A and $21,000,000 for the Series B.
The Company has designated 3,000 shares of Series C convertible preferred
stock, par value $0.01 per share. As of June 30, 2000, no shares of Series
C preferred stock are outstanding. The Company is offering to issue shares
of this series in exchange for outstanding shares of Series B preferred
stock on a one-for-one basis.
F-20
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If declared by the board of directors, dividends on the Series A and Series
B preferred shares will be paid quarterly at an annual rate of 9% and 12%,
respectively on the liquidation preference amounts.
The Company has the right to redeem all or part of the outstanding Series A
preferred stock at any time on or before September 30, 2000. The redemption
price per share will be $10,000 plus all accrued unpaid dividends,
calculated through the date of redemption.
Holders of Series A preferred stock have the right to convert their stock
into shares of common stock at any time after October 31, 2000, or earlier
if the Company has exercised its right to redeem the stock. In addition,
the Company has the right to require conversion of the Series A preferred
stock into shares of common stock at any time. This right of the Company
terminates when the Company completes a new common stock, preferred stock
or debt financing after consummation of the arrangement described in Note Q
that provides new gross cash proceeds of at least $25,000,000. The
conversion price is the greater of $6 or the arithmetic mean of the closing
bid prices of the common stock for the 21 trading days preceding the date
of conversion. The Company has the right to redeem all or part of the
outstanding Series B preferred stock at any time after February 28, 2001.
Additionally, the Company is required to redeem shares of the outstanding
Series B preferred stock from and to the extent of the net cash proceeds
from the sale of any assets of Aviation Group other than in the ordinary
course of business or any public debt or equity securities offering after
completion of the arrangement described in Note Q. The Series B preferred
stock will be redeemed at a price per share equal to $10,000, plus all
accrued unpaid dividends, calculated through the date of redemption.
K. RELATED PARTY TRANSACTIONS
The Company had a consulting arrangement with a member of the Board of
Directors. The consulting arrangement provided for monthly fees of $4,000
and reimbursement of certain expenses. The agreement expired in February
2000. Fees paid under this arrangement totaled $32,000, $48,000 and $59,000
for the years ended June 30, 2000, 1999 and 1998, respectively.
In connection with the acquisition of Aero Design in fiscal year 1998, the
Company paid $25,000 in fees and issued 20,000 common stock warrants to RAS
Securities, a company affiliated with a member of the Company's Board of
Directors.
During the year ended June 30, 2000, two officers and directors of the
Company loaned the Company a total of $305,000 for working capital. The
loans were repaid in March 2000. In connection with the loans, the
individuals were granted warrants to purchase a total of approximately
102,000 shares of common stock at $1.00 per share anytime for three years.
The value of these warrants of $112,000 was charged to interest expense
during the year ended June 30, 2000.
Effective February 23, 2000, the Company amended and entered into
employment agreements with two officers and directors of the Company. Under
the terms of the agreements, the Company will provide minimum bonuses of
$450,000 to be paid the earlier of January 2, 2001 or upon sale of the
Company's operating subsidiaries. This obligation is being amortized into
expense on a straight-line basis through January 2, 2001. In addition, the
employment agreements require minimum salary payments as follows:
<TABLE>
<CAPTION>
Year ending June 30
-------------------
<S> <C>
2001 $227,000
2002 144,000
2003 96,000
--------
$467,000
========
</TABLE>
On May 25, 2000, the Company loaned $1,975,000 to travelbyus.com (TBU) for
its acquisition of another unrelated entity, Epoch Technology, Inc.
(EPOCH). The loan will mature in February 28, 2001 and is
F-21
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
collateralized by a security interest in the stock of EPOCH. The security
interest is subordinate to a security interest in EPOCH's stock in favor of
TBU's senior redeemable debentures. See Note Q.
Other related party transactions are described in Notes E, H and I.
L. PROVISION FOR INCOME TAXES
The (provision) benefit for income taxes consist of the following
components:
2000 1999 1998
---- ---- ----
Current $ - $ - $ -
Deferred - (199,000) 359,000
------- ---------- -----------
(Provision) benefit for income taxes $ - $ (199,000) $ 359,000
======= ========== ===========
The following is a reconciliation of taxes computed at the federal
statutory rate to the provision for income taxes included in the financial
statements:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Tax benefit computed by applying federal statutory rate $ 2,426,000 $ 716,000 $ 679,000
Expenses not deductible for tax purposes (a) (485,000) (74,000) (71,000)
Other - - 52,000
Valuation allowance (1,941,000) (841,000) (301,000)
---------------- ------------- ------------
Provision (benefit) for income taxes $ - $ (199,000) $ 359,000
================ ============= ============
(a) Principally goodwill amortization.
</TABLE>
Deferred tax assets and liabilities consisted of the following at June 30:
<TABLE>
<CAPTION>
Assets: 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net operating loss carryforward $ 4,420,000 $ 1,548,000 $ 984,000
Investment tax credits 81,000 81,000 81,000
Other - 114,000 88,000
------------- ------------- -----------
4,501,000 1,743,000 1,153,000
Less: Valuation allowance (3,981,000) (1,223,000) (382,000)
------------- ------------- -----------
Total deferred tax assets 520,000 520,000 771,000
------------- ------------- -----------
Deferred tax liabilities - property and equipment (520,000) (520,000) (571,000)
------------- ------------- -----------
Net deferred tax assets $ - $ - $ 200,000
============= ============= ===========
</TABLE>
For income tax purposes, the Company has available at June 30, 2000, unused
federal net operating loss carryforwards (NOL) of approximately
$13,000,000, which may be applied against future taxable income of the
Company, expiring in various years from 2005 to 2020. The NOL related to
businesses acquired are subject to certain annual limitations on their
usage. The Company's valuation allowance against deferred tax assets
increased from $382,000 at June 30, 1998 to $1,223,000 at June 30, 1999 due
to an increase in the NOL and to a change in the Company's assessment as to
the likelihood of utilization of the NOL in the future. The valuation
allowance increased by $2,758,000 in fiscal year 2000 due to an increase in
the NOL. Under the Internal Revenue Code, the utilization of the NOL could
be limited if certain changes in ownership of the Company's common stock
were to occur.
F-22
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
M. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution ("401(k)") employee benefit
plan, which is open to all employees meeting certain age and length of
service requirements. Employees may contribute up to 15% of their
compensation to the plan subject to statutory limits. Employer
contributions to the plan are discretionary and no employer contributions
have been made to date.
N. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Most of the Company's accounts receivable at June 30, 2000 and all of its
accounts receivable at 1999, resulted from sales to third party companies
in the airline industry. This concentration of customers may impact the
Company's overall credit risk either positively or negatively, in that
these entities may be similarly affected by changes in economic or other
conditions. The Company believes that the risk is mitigated by the size,
reputation and nature of its customers. Approximately $117,000 of the
Company's accounts receivable at June 30, 2000 result from travel-related
sales and are due from various customers and retail travel agents. Although
the Company generally does not require collateral or other security to
support customer receivables, it may have certain rights, such as the
ability to place liens on aircraft services, in the event of nonpayment by
its customers.
During the year ended June 30, 2000, the Company derived approximately 9%
and 28% of its revenues from United Airlines and Federal Express, customers
of its overhaul and service division. During the year ended June 30, 1999,
the Company derived approximately 16% and 15% of its revenues from United
Airlines and Federal Express, respectively, customers of its overhaul and
service division. Accounts receivable from five customers at June 30, 2000
represented approximately 40% of the total accounts receivable.
O. BUSINESS SEGMENT INFORMATION
The following table summarizes financial information by the Company's three
business segments and corporate for fiscal years 2000, 1999 and 1998. The
Company's other two business segments were discontinued as described in
Note P.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Painting and maintenance $ 8,670,000 $ 11,162,000 $ 10,729,000
Manufacturing 3,894,000 3,935,000 314,000
Travel 817,000 - -
Corporate - - -
-------------- ------------- ------------
Total $ 13,381,000 $ 15,097,000 $ 11,043,000
============== ============= ============
Operating income (loss):
Painting and maintenance $ (695,000) $ 443,000 $ 178,000
Manufacturing 158,000 187,000 155,000
Travel (3,305,000) - -
Corporate (2,412,000) (1,818,000) (1,506,000)
-------------- ------------- ------------
Total $ (6,254,000) $ (1,188,000) $ (1,173,000)
============== ============= ============
Total assets:
</TABLE>
F-23
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Painting and maintenance $ 3,979,000 $ 4,382,000 $ 4,226,000
Manufacturing 4,989,000 2,196,000 1,898,000
Travel 51,937,000 - -
Corporate 2,774,000 454,000 980,000
-------------- ------------- -------------
Total $ 63,679,000 $ 7,032,000 $ 7,104,000
============== ============= =============
Depreciation and amortization
Painting and maintenance $ 457,000 $ 442,000 $ 435,000
Manufacturing 202,000 210,000 22,000
Travel 1,300,000 - -
Corporate 32,000 22,000 7,000
-------------- ------------- -------------
Total $ 1,991,000 $ 674,000 $ 464,000
============== ============= =============
Capital expenditures (including capital leases):
Painting and maintenance $ 89,000 $ 592,000 $ 291,000
Manufacturing 123,000 87,000 -
Travel - - -
Corporate - 29,000 66,000
-------------- ------------- -------------
Total $ 212,000 $ 708,000 $ 357,000
============== ============= ============
</TABLE>
There were no significant intersegment sales or transfers for any period.
Operating income by business segment excludes interest and other
miscellaneous income and interest expense. Corporate assets consist
primarily of cash and cash equivalents, note receivable and prepaid
expenses.
P. SALE OF DISCONTINUED BUSINESS SEGMENTS
In December 1999, the Company sold its Tri-Star Airline Services ground
handling subsidiary operations for $1,500,000, which resulted in a gain on
disposal of $1,166,000. On February 8, 2000 the Company sold its Casper Air
Service general aviation fixed base operations for $200,000 and the
assumption of $600,000 in accounts payable, which resulted in an estimated
loss on disposal of $566,000. Both businesses were sold to unrelated third
parties. The Company retained certain assets of each entity, which were
substantially impaired as of June 30, 2000. The revenues of these two
business segments during the periods presented were as follows:
Years Ended June 30,
-------------------------------------------------
2000 1999 1998
---- ---- ----
Casper $ 1,689,000 $ 5,903,000 $ 5,739,000
Tri-Star $ 766,000 $ 1,553,000 $ 1,462,000
Q. PROPOSED BUSINESS COMBINATION
On May 3, 2000, the Company entered into an agreement to effect an
arrangement with travelbyus.com ("TBU"). The arrangement with TBU is to
involve the issuance of new shares of common stock to the TBU shareholders,
which will result in the TBU shareholders owning approximately 95% of the
ongoing company.
The arrangement with TBU is subject to approval of the shareholders of the
Company and TBU and approval of an Ontario court. If the arrangement with
TBU is approved, the Company anticipates it will attempt to sell the
remaining non-travel related assets of the Company. Two directors of the
Company will receive bonuses totaling $450,000 upon the earlier of the sale
of these assets or January 2, 2001 as described in Note K. In addition, if
the arrangement is approved, certain directors of the Company will be
entitled to exercise warrants
F-24
<PAGE>
AVIATION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to purchase an aggregate of 150,000 shares of the Company's common stock at
$1.50 per share after completion of the arrangement. Following completion
of the arrangement, the Company could be required to redeem Series B
preferred stock in certain circumstances as described in Note J.
In connection with the proposed arrangement, the Company will increase its
authorized number of common stock from 10,000,000 shares to 250,000,000
shares.
R. SUBSEQUENT EVENT
In August 2000, the Company entered into various resale price indemnity and
exchange agreements to satisfy various accrued liabilities, debt, and
unpaid hanger rental payments in the aggregate amount of approximately
$1,507,000. The agreements include provisions for the creditor to exchange
the outstanding debt for common stock of the Company at an exchange price
of $3.00 per share. The Company agreed to register the shares prior to the
exchange. If the value of The Company's common stock at the time of the
exchange is less than $3.00 per share, the amount of the liabilities that
are converted to stock will be reduced accordingly.
************************
F-25
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
Global Leisure Travel, Inc.
We have audited the accompanying consolidated balance sheets of Global Leisure
Travel, Inc. and Subsidiaries (the "Company") for the years ended December 31,
1999 and 1998 and the related consolidated statements of loss, stockholders'
deficit and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Global
Leisure Travel, Inc. and Subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles in the United States.
As discussed in Note 2 to the financial statements, the Company has been
acquired by Aviation group in accordance with the acquisition and Merger
Agreement dated March 17, 2000.
/s/ BDO Seidman, LLP
Seattle, Washington
March 31, 2000
F-26
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 1998
=======================================================================================================================
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 349,883 $ 212,854
Restricted cash 1,953,535 1,893,783
Accounts receivable, net of allowance for doubtful
accounts of $46,062 in 1999 and $45,000 in 1998 1,034,632 674,115
Accounts receivable from related party 71,800 35,593
Prepaid tour costs 1,905,142 2,358,510
Prepaid and other assets 311,633 868,566
-----------------------------------------------------------------------------------------------------------------------
Total Current Assets 5,626,625 6,043,421
Property and Equipment, net 638,618 2,967,664
Intangible Assets, net 3,217,533 4,723,464
Investments - 221,328
-----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,482,776 $ 13,955,877
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks issued in excess of deposits $ 730,251 $ 3,242,196
Accounts payable 8,197,820 9,503,014
Customer deposits 5,585,142 10,385,021
Accrued tour costs 2,110,866 2,565,480
Accrued expenses and other liabilities 1,445,305 2,185,311
Current portion of long-term debt 9,981,219 1,221,304
Notes Payable to Related Parties 15,764,319 9,415,000
Net current liabilities of discontinued operations - 938,431
-----------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 43,814,922 39,455,757
Long-Term Debt, less current portion 265,188 285,000
-----------------------------------------------------------------------------------------------------------------------
Total Liabilities 44,080,110 39,740,757
-----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, no par value, 20,000,000 shares authorized,
4,000,000 shares issued and outstanding 1,000 1,000
Accumulated deficit (34,598,334) (25,785,880)
-----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficit (34,597,334) (25,784,880)
-----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 9,482,776 $ 13,955,877
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Statements of Loss
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
=======================================================================================================================
<S> <C> <C> <C>
Net Commission Revenue $ 9,438,301 $ 11,906,394 $ 10,854,284
Selling, General and Administrative Expenses (16,964,862) (18,954,168) (16,384,573)
Impairment of Reservation System (3,473,337) - -
Impairment of Goodwill (929,664) - -
-----------------------------------------------------------------------------------------------------------------------
Loss from Operations (11,929,562) (7,047,774) (5,530,289)
Other Income (Expense)
Interest income 91,675 73,451 -
Interest expense (5,262,680) (578,288) (7,716)
Other 46,691 5,566 -
-----------------------------------------------------------------------------------------------------------------------
Total Other Expense (5,124,314) (499,271) (7,716)
-----------------------------------------------------------------------------------------------------------------------
Net Loss From Continuing Operations (17,053,876) (7,547,045) (5,538,005)
-----------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Gain (loss) from discontinued operations (260,521) 980,083 510,415
Gain on dispositions 8,501,943 - -
-----------------------------------------------------------------------------------------------------------------------
Income From Discontinued Operations 8,241,422 980,083 510,415
-----------------------------------------------------------------------------------------------------------------------
Net Loss $ (8,812,454) $ (6,566,962) $ (5,027,590)
=======================================================================================================================
Net income (loss) per share
From continuing operations $ (4.26) $ (1.89) $ (1.38)
From discontinued operations $ 2.06 $ 0.25 $ 0.12
-----------------------------------------------------------------------------------------------------------------------
Net loss per share $ (2.20) $ (1.64) $ (1.26)
======================================================================================================================
Weighted average shares outstanding, restated for stock
dividend 4,000,000 4,000,000 4,000,000
======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Total
Common Stock Accumulated Stockholders'
-----------------------------------
Shares Amount Deficit Deficit
=======================================================================================================================
<S> <C> <C> <C> <C>
Balance at January 1, 1997 4,000,000 $ 1,000 $ (14,191,328) $ (14,190,328)
Net loss - - (5,027,590) (5,027,590)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,000,000 1,000 (19,218,918) (19,217,918)
Net loss - - (6,566,962) (6,566,962)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 4,000,000 1,000 (25,785,880) (25,784,880)
Net loss - - (8,812,454) (8,812,454)
-----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 4,000,000 $ 1,000 $ (34,598,334) $ (34,597,334)
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
=======================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the year $ (8,812,454) $ (6,566,962) $ (5,027,590)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,003,846 639,545 558,305
Impairment of goodwill 929,664 - -
Impairment of fixed asset 3,473,337 - -
Change in net assets and liabilities of discontinued
operations (938,411) 147,826 (572,353)
Change in assets and liabilities
Restricted cash (59,752) (1,475,309) (107,041)
Accounts receivable (396,724) 244,180 87,253
Prepaid and other assets 1,010,301 335,424 (634,756)
Customer deposits (4,799,879) 498,018 1,966,387
Accounts payable (3,817,139) 3,298,957 1,979,648
Accrued tour costs (454,614) (128,450) 584,111
Accrued expenses and other liabilities (745,006) (658,751) 885,510
-----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Operating Activities (13,606,831) (3,665,522) (280,526)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for trade name purchase - (130,000) -
Additions to land, building and equipment (1,468,188) (2,148,632) (460,106)
Other (103,702) 93,697 (6,410)
-----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (1,571,890) (2,184,935) (466,516)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on debt 19,582,784 607,500 1,600,000
Payments on debt (10,245,232) (1,187,064) (239,380)
Proceeds from borrowings from related parties 26,016,334 6,395,000 -
Payments on notes payable to related parties (19,665,687) - (315,000)
Payments under capital lease obligation (372,449) (90,194) (43,802)
-----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 15,315,750 5,725,242 1,001,818
-----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 137,029 (125,215) 254,776
CASH AND CASH EQUIVALENTS, beginning of year 212,854 338,069 83,293
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 349,883 $ 212,854 $ 338,069
========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 1,575,000 $ 538,000 $ 142,000
Assets acquired by capital lease $ - $ 425,718 $ -
Pushdown of GLT debt $ - $ 3,020,000 $ -
Exchange of asset for debt relief $ 221,328 $ - $ -
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 1: Nature of Operations - Global Leisure Travel, Inc.
Description of Business ("GLT" or "the Company") is primarily engaged in
and Summary of wholesale and retail travel for both domestic and
Significant Accounting international destinations. Packages created by the
Policies Company, including airline seats, hotel accommodations,
automobile rentals and other land components, are
contracted with the vendors and primarily marketed
directly to retail travel agents.
Principles of Consolidation and Basis of Presentation -
The consolidated financial statements include the
accounts of GLT and its wholly owned subsidiaries:
Sunmakers, Inc. ("Sunmakers"), KWTI Company ("KWTI"),
Firstrav International, Inc., Cruise Alaska Tours, Inc.
("CAT") and AOI, Inc. ("AOI"). Jetset Tours, Inc. and
Maupintour were wholly owned subsidiaries until their
respective sales in late 1999. All significant
intercompany balances and transactions have been
eliminated in consolidation.
Effective February 28, 1997, the Company was purchased
by Global Leisure, Inc. for $2.7 million in cash and
notes. The accompanying financial statements have been
prepared on the historical cost basis, with the $18
million excess of Global Leisure, Inc.'s purchase price
over the net assets acquired remaining on Global
Leisure, Inc.'s books.
On December 22, 1998, Global Leisure Travel, Inc.
entered into an agreement to sell 95% of its common
stock to Genesis Diversified Investments, Inc.
("Genesis"). The accompanying financial statements have
been prepared on the historical cost basis, with the
$27 million excess of Genesis' purchase price over the
historical cost of net assets acquired on Genesis'
books.
Cash and Cash Equivalents - The Company considers all
highly liquid investments purchased with an original
maturity of three months or less to be cash
equivalents. Receivables from credit cards are treated
as cash equivalents.
Property and Equipment - Property and equipment are
stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method
over the estimated useful lives of three to five years.
F-31
<PAGE>
NOTE 1: Impairment of Long-Lived Assets - In accordance with
Description of Business the provisions of Statement of Financial Accounting
and Summary of Standards ("SFAS") No. 121, "Accounting for the
Significant Accounting Impairment of Long-lived Assets and for Long-lived
Policies Assets to be Disposed of", management of the Company
(continued) reviews the carrying value of its equipment and
intangible assets on a regular basis. Estimated
undiscounted future cash flows from operations are
compared to current carrying value. Reductions or
reserves against assets, if necessary, are recorded to
the extent the net book value of the asset exceeds the
estimate of future undiscounted cash flows.
Intangible Assets - The excess purchase price of
subsidiaries over the fair market value of net assets
acquired is recorded as an intangible asset and is
being amortized using the straight-line method over 15
years.
Revenue Recognition - In November 1999 the Emerging
Issues Task Force ("EITF") of the Financing Accounting
Standards Board issued a discussion paper EITF 99-19,
Reporting Revenue Gross Versus Net, which has not yet
been finalized and in December 1999, the U.S.
Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in
Financial Statements, both of which covered and
included guidelines for determining the appropriateness
of gross versus net revenue reporting practices
specifically in the e-commerce and travel sectors. The
guidelines contained therein focus on determining
whether the company in substance acts as principal,
agent or broker in a transaction, whether it takes
title to the products, and whether it assumes the risks
and rewards of ownership. The Company has considered
these very recent developments in determining its
revenue recognition and reporting policies and believes
its current policies are consistent with this guidance,
however, it is possible that these evolving standards
may allow or require the Company to amend its practices
for the recognition and reporting of revenue.
Net revenues consist primarily of markups on travel
packages. The Company generally recognizes net revenue
when earned on the date of travel net of all
cancellations and charges to reservations booked.
Customer deposits represent unearned revenues and are
initially recorded as customer deposit liabilities on
the balance sheet when received. Customer deposits are
subsequently recognized as revenue, generally upon the
month of travel.
F-32
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 1: Investments - The Company accounts for its investments
Description of Business in which it has significant influence, but not control
and Summary of (generally represented by ownership of more than 20%
Significant Accounting but less than 50% of the entity's outstanding common
Policies stock) using the equity method of accounting. See Note
(continued) 6 for details on the sale of investment during 1999.
Advertising Costs - Advertising costs, consisting
primarily of brochures, printing and postage
expenditures, are amortized over the period the tour
departs. Recognition of advertising costs is in
conformance with the provisions of The American
Institute of Certified Public Accountants Statement of
Position 93-7, "Reporting of Advertising Costs".
Advertising costs of approximately $900,000 in 1999,
$3.0 million in 1998, and $2.2 million in 1997 are
included in the accompanying Consolidated Statements of
Loss. Prepaid expenses includes prepaid advertising
costs of $0 and $400,000 at December 31, 1999 and 1998,
which will be reflected as an expense during the period
benefited.
Income Taxes - The Company accounts for income taxes in
accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". SFAS 109 requires the
recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary
differences between the financial statement carrying
amounts and the tax basis of assets and liabilities.
Deferred taxes are determined using enacted tax rates
expected to be in effect in the years in which the
temporary differences are expected to reverse.
Fair Value of Financial Instruments - Carrying amounts
reported in the balance sheet for cash and cash
equivalents, restricted cash, accounts receivable,
prepaid tour costs, prepaid and other current assets,
accounts payable and accrued expenses approximate fair
value because of their immediate or short-term nature.
The fair value of long-term debt approximates its
carrying value because the stated rates of the debt
either reflect recent market conditions or are variable
in nature.
Accounting Estimates - The presentation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the
financial statements, and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-33
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 1: Basic and Diluted Net Income (Loss) per Common Share -
Description of Business Basic earnings per share is computed by dividing net
and Summary of income by the weighted average number of common shares
Significant Accounting outstanding during the period. Diluted earnings per
Policies share is computed by dividing net loss, as adjusted, by
(continued) the weighted average number of shares of common stock,
common stock equivalents and other potentially dilutive
securities outstanding during each period. All per
share information has been restated to reflect the
stock dividend declared on December 22, 1998.
Reclassifications - Certain reclassifications have been
made to the prior years' financial statements to
conform to the current year's presentation.
New Accounting Standards - In July 1999, the Financial
Accounting Standards Board (the "FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of FASB No.
133". The Statement defers for one year the effective
date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The rule now will
apply to fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133, issued in June 1998,
establishes accounting and reporting standards
requiring that every derivative instrument (including
certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless
specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15,
1999. Management has considered the impact of this
statement, and believes it does not have a material
impact upon the Company's results of operations or
financial position.
In March 1998, the American Institute of Certified
Public Accountants (the "AICPA") issued Statement of
Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," ("SOP
98-1"). SOP 98-1 requires the Company to capitalize
internal computer software costs once the
capitalization criteria are met. SOP 98-1 is effective
January 1, 1999, and is applied to all projects in
progress upon initial application. Based on the
adoption of SOP 98-1, the Company capitalized
approximately $1.7 million and $2.0 million related to
the Company's internal reservation systems during the
years ended December 31, 1999 and 1998. Capitalized
software is amortized on a straight-line basis over a
five-year period. See Note 4 for details on reservation
system impairment losses recognized in 1999.
F-34
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 2: The Company continues to have significant
Financial Condition, operating losses, working capital deficiencies
Liquidity and and has not been able to generate adequate cash
Subsequent Events to meet its obligations.
In March 2000, the Company entered into an agreement to
be acquired by Aviation Group, Inc. ("Aviation"). The
acquisition of the Company is to involve (1) the
issuance by Aviation of approximately $16,500,000 of
Series A preferred stock; (2) the issuance of warrants
to purchase 4,250,000 shares of Aviation's common
stock; and (3) the repayment of approximately
$16,500,000 of the Company's outstanding debt. The
funds required to repay the Company's outstanding debt
are to be provided by the sale of preferred stock to
Travelbyus.com ("TBU") and a proposed private placement
of securities.
NOTE 3: In October 1999, the Company completed the sale of
Discontinued assets and assumption of certain liabilities of
Operations Maupintour to Ardsley, LLC, which after the forgiveness
of intercompany debt, resulted in a payment to Ardsley,
LLC of approximately $419,000. In November 1999, the
Company completed the sale of Jetset stock to Arnell
Corp. for approximately $6.3 million cash.
F-35
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
The results of operations of Jetset and Maupintour have
been classified as discontinued operations in the
accompanying financial statements as the respective
operations were geographically separate and operated
independently of the Company's operations in Seattle,
Washington. Additionally, after the sales, the Company
no longer handled bulk wholesale airfare transactions
(Jetset) or packaged tours which were directly
purchased by the tour operator (Maupintour). The gain
or loss incurred on the sales of Jetset and Maupintour
is presented separately as a component of discontinued
operations.
Travel sales and commissions and net income from
discontinued operations were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C>
Travel sales and commissions:
Maupintour $ 28,813,310 $ 41,794,311 $ 40,569,374
Jetset 71,824,144 65,117,650 33,388,930
------------------------------------------------------------------------------
Net income (loss):
Maupintour (593,480) 1,070,516 575,792
Jetset 332,959 (90,433) (65,377)
------------------------------------------------------------------------------
$ (260,521) $ 980,083 $ 510,415
==============================================================================
</TABLE>
NOTE 4: Property and equipment consists of the following at
Property and Equipment December 31:
<TABLE>
<CAPTION>
1999 1998
==========================================================================
<S> <C> <C>
Capital leases $ 157,043 $ 511,964
Buildings and leasehold improvements - 292,649
Furniture and equipment 778,819 649,928
Reservation system 300,000 2,058,791
--------------------------------------------------------------------------
1,235,862 3,513,332
Less accumulated depreciation 597,244 545,668
--------------------------------------------------------------------------
Property and equipment, net $ 638,618 $ 2,967,664
==========================================================================
</TABLE>
F-36
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
Depreciation expense was approximately $221,477,
$234,000 and $211,000 for the years ended December 31,
1999, 1998 and 1997. Depreciation expense on capital
leases was approximately $102,400, $147,000 and
$107,000 for the years ended December 31, 1999, 1998
and 1997.
The Company recorded a charge of $3,473,337 during 1999
for the write-down of the reservation system. Based on
the Company's history of operating losses and
projection of future cash flows, management determined
that it was necessary to write down the carrying value
of this asset to its estimated fair market value.
NOTE 5: Intangible assets in the amount of $929,664 were
Intangible Assets written off through a charge to operations in 1999, and
reflected in the Consolidated Statement of Loss as
"impairment of goodwill". The amount written off
relates to goodwill recorded upon various subsidiary
and trade name purchases, and represents the amount
necessary to reduce the carrying values of the
purchased goodwill to the Company's best estimate of
the future undiscounted cash flows from the acquired
assets.
Accumulated amortization at December 31, 1999 and 1998
was approximately $1.3 million and $2.0 million.
NOTE 6: GLT had a 45 percent interest in 4192 Meridian
Investments Associates (the "Venture"). The Venture was formed in
May 1994 to acquire and operate a commercial office
building in Bellingham, Washington. The Company leased
office space from the Venture under a non-cancelable
operating lease having a three-year term. Rent expense
paid to the Venture was approximately $28,000 for each
of the years ended December 31, 1999, 1998 and 1997.
During 1999, the investment was sold to two former
owners of the Company as settlement of a note payable
to them. Book value of the investment at the date of
sale was approximately $218,000.
F-37
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 7: Related party debt consists of the following at
Related Party December 31:
Transactions
<TABLE>
<CAPTION>
1999 1998
=============================================================================
<S> <C> <C>
Due to majority shareholder $ 9,549,319 $ 2,000,000
Due to minority shareholder and related
individuals 6,215,000 7,415,000
-----------------------------------------------------------------------------
$ 15,764,319 $ 9,415,000
=============================================================================
</TABLE>
The loans from shareholders carry an interest rate of
prime plus 2% (10.5% at December 31, 1999) and are
payable on demand. Interest paid to the related parties
was approximately $400,000, $414,000 and $32,000 for
the years ended December 31, 1999, 1998 and 1997.
NOTE 8: Long-term debt consists of the following at December
Long-Term Debt 31:
<TABLE>
<CAPTION>
1999 1998
=============================================================================
<S> <C> <C>
Notes payable to a company, due throughout
2000, 16% interest. $ 9,863,623 $ -
Signing bonus, monthly payments of
$8,333, non-interest bearing. 285,000 387,500
Capitalized lease obligations 97,784 470,233
Note payable to a company, due June 27,
1999, non-interest bearing, principal
payments of $71,428, collateralized by the
Company's 45% interest in 4192 Meridian
Associates. - 428,571
Note payable to an individual, due on
demand, 6% interest. - 110,000
Note payable to an individual, due on
demand, 6% interest. - 110,000
-----------------------------------------------------------------------------
Total long-term debt 10,246,407 1,506,304
Less current portion 9,981,219 1,221,304
-----------------------------------------------------------------------------
Long-term debt, less current portion $ 265,188 $ 285,000
=============================================================================
</TABLE>
F-38
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
Maturities of debt are as follows:
Year ending December 31, Amount
------------------------------------------------------
2000 $ 9,981,219
2001 117,596
2002 117,596
2003 29,996
------------------------------------------------------
$10,246,407
======================================================
NOTE 9: As of the year ended December 31, 1999, the Company has
Income Taxes net loss carryforwards of approximately $26 million.
The loss carryforwards are available, through their
expiration date of 2020, to offset future taxable
income. The utilization of these loss carryforwards is
subject to limitation due to the changes in control of
the Company.
Included in loss carryforwards is $410,000 attributable
to CAT that can only be offset against future earnings
of CAT.
At December 31, 1999 and 1998, the Company had a net
deferred long-term tax asset of $5.7 million and $8.8
million arising primarily from net operating loss
carryforwards offset by the use of accelerated methods
of depreciation of fixed assets. The Company has
recognized a valuation allowance on all of its net
deferred tax assets due to the uncertainty of realizing
the benefits thereof.
The provision for income taxes differs from expected
amounts, computed using the federal statutory rate of
34%, as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
=======================================================================================
<S> <C> <C> <C>
Expected benefit $ 2,996,235 $ 1,960,660 $ 1,709,381
Non-deductible expenses (657,924) (247,722) (271,132)
Change in valuation allowance (2,338,311) (1,712,938) (1,438,249)
---------------------------------------------------------------------------------------
Provision for income taxes $ - $ - $ -
=======================================================================================
</TABLE>
F-39
<PAGE>
Global Leisure Travel, Inc. and Subsidiaries
Notes to Financial Statements
================================================================================
NOTE 10: The Company leases certain facilities under agreements
Lease Commitments which expire at various dates. Annual minimum rental
commitments under operating leases that have initial or
remaining non-cancelable lease terms are as follows:
Year ending December 31, Amount
------------------------------------------------------
2000 $ 945,684
2001 894,578
2002 636,109
2003 36,656
------------------------------------------------------
$2,513,027
======================================================
Rent expense under operating leases was approximately
$618,000, $413,000 and $370,000 for the years ended
December 31, 1999, 1998 and 1997.
NOTE 11: The Company had outstanding irrevocable letters of
Letters of Credit credit in the amount approximately $1.9 million as of
the years ended December 31, 1999 and 1998. These
letters of credit were issued in the ordinary course of
the Company's business and are collateralized by
restricted cash of approximately $1.7 million.
NOTE 12: The Company has a 401(k) employee benefit plan for
Employee Benefit those employees who meet the eligibility requirements
Plans set forth in the plan. Eligible employees may
contribute up to 15% of their compensation. The Company
may make matching contributions at the discretion of
its board of directors. An employee becomes fully
vested with respect to employer contributions after 6
years of service. The Company contributed approximately
$68,000, $65,000 and $56,000 to the plan for the years
ended December 31, 1999, 1998 and 1997.
NOTE 13: As part of the 1995 purchase of Maupintour, the Company
Commitments and was contingently liable for additional payments to
Contingencies the former owners from 1997 to 2000. The additional
payments are a percentage of domestic and international
sales exceeding a specified minimum. The Company
settled the remaining obligation, in conjunction with
the sale of Maupintour, for $275,000. The Company
accrued $155,000 in 1998 which was also paid during
1999.
F-40
<PAGE>
Report of Independent Accountants
To the Directors of
travelbyus.com ltd.
We have audited the consolidated balance sheet of travelbyus.com ltd. (formerly
LatinGold Inc.) as at September 30, 1999 and the consolidated statements of
operations and deficit and cash flows and changes in shareholders' equity for
the period from January 1, 1999 to September 30, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at September 30,
1999 and the results of its operations, its cash flows and changes in
shareholders' equity for the period from January 1, 1999 to September 30, 1999
in accordance with generally accepted accounting principles in the United
States.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
December 2, 1999
(except as to note 12 which is as at December 7, 1999 and note 23, which is as
at November 8, 2000)
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors of
travelbyus.com ltd.
We have audited the consolidated balance sheet of travelbyus.com ltd. [formerly
LatinGold Inc.] as at December 31, 1998 and the consolidated statements of
operations and deficit, cash flows and changes in shareholders' equity for the
years ended December 31, 1998 and 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and the results of its operations, its cash flows and changes in shareholders'
equity for the years ended December 31, 1998 and 1997 in accordance with
generally accepted accounting principles in the United States.
Toronto, Canada, /s/ Ernst & Young LLP
April 21, 1999. Chartered Accountants
F-42
<PAGE>
travelbyus.com ltd.
Consolidated Balance Sheets
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 12,246,675 3,256,021 45,741
Accounts receivable and prepaid expenses (note 5) 4,095,451 50,504 9,535
Inventory and barter credits (note 5) 1,403,907 - -
Marketable securities (notes 4 and 14(h)) 1,236,980 326,355 179,175
----------------------------------------------------------
18,983,013 3,632,880 234,451
Cash deposits for acquisitions (note 7) 576,800 436,354 -
Cash in trust (note 8) 31,073 7,200,000 -
Security deposits (note 9) 943,153 - -
Deferred financing costs - net of accumulated
amortization of $325,493
(September 30, 1999 - $27,296) (note 13(a)) 448,440 922,861 -
Deferred acquisition costs - 194,281 -
Programming library (note 11) 5,794,814 - -
Investment (note 5) 6,695,392 - -
Property, plant and equipment - net of accumulated
amortization of $258,944 (September 30, 1999 -
$4,133; December 31, 1998 - $60,712) (note 10) 3,806,689 78,638 19,178
Goodwill - net of accumulated amortization of $3,279,191 55,521,555 - -
Other intangibles - net of accumulated amortization of
$110,699 (note 12) 3,347,194 - -
----------------------------------------------------------
96,148,123 12,465,014 253,629
==========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-43
<PAGE>
travelbyus.com ltd.
Consolidated Balance Sheets ...continued
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Liabilities
Current liabilities
Bank indebtedness (note 3) 591,950 - -
Accounts payable and accrued liabilities (note 5) 6,215,039 300,673 51,028
Due to related parties (note 6(h) and 17(c)) 4,036,123 218,684 2,968
Customer deposits 580,770 - -
Advances (note 14(g)) 2,920,000 - -
Convertible debenture (note 13(b)) 4,437,900 - -
----------------------------------------------------------
18,781,782 519,357 53,996
Debentures (note 13(a)) 6,688,379 6,254,407 -
----------------------------------------------------------
25,470,161 6,773,764 53,996
----------------------------------------------------------
Shareholders' Equity
Capital stock (note 14)
Authorized
Unlimited number of common shares without par value
Issued
80,600,066 common shares
(September 30, 1999 - 41,539,178;
December 31, 1998 - 20,989,178) 170,679,387 97,080,625 95,720,625
Additional paid-in capital 569,988 569,988 569,988
Compensation for future services (note 11) (4,407,223) - -
Warrants and special warrants (note 14(e)) 23,274,568 5,756,652 -
Accumulated other comprehensive loss - net of tax of $nil
(note 14(h)) (122,801) (115,146) (262,326)
Deficit (119,315,957) (97,600,869) (95,828,654)
----------------------------------------------------------
70,677,962 5,691,250 199,633
----------------------------------------------------------
96,148,123 12,465,014 253,629
==========================================================
</TABLE>
Commitments and contingencies (note 16)
Subsequent events (note 23)
Approved by the Board of Directors
/s/ Michael A. Farrugia Director /s/ Bill Kerby Director
--------------------------------- ---------------------------
Michael A. Farrugia Bill Kerby
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
travelbyus.com ltd.
Consolidated Statements of Operations and Deficit
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
------------------------------------ ----------------- -----------------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Travel product sales 3,447,795 - - - -
Travel commissions 6,396,961 - - - -
Associate marketing program 485,014 - - - -
Advertising 462,444 - - - -
Technology sales 1,223,959 - - - -
-------------------------------------------------------------------------------------------
12,016,173 - - - -
-------------------------------------------------------------------------------------------
Expenses
Cost of travel product sales 3,022,778 - - - -
Cost of services 1,144,735 - - - -
Cost of technology product sales 1,115,272 - - - -
Advertising 2,729,959 - - - -
Amortization of goodwill 3,279,192 - - - -
Amortization of other intangibles 436,192 - - - -
Amortization of property, plant
and equipment 254,811 6,804 6,928 - -
Capital taxes 286,471 - 185,000 - -
Foreign exchange loss (gain) 23,977 (2,268) (2,323) - -
General and administration 17,078,549 428,471 854,059 256,910 528,215
Interest 3,079,770 - 284,464 - -
Interest and other income (308,358) (5,474) (6,972) (18,556) (91,449)
Website costs 943,021 226,800 362,435 - -
Write-off of marketable
Securities 3,902,312
Write-off of property, plant and
equipment - - 14,229 - -
-------------------------------------------------------------------------------------------
33,086,369 654,333 1,697,820 238,354 4,339,078
-------------------------------------------------------------------------------------------
Loss from continuing operations
before income tax (21,070,196) (654,333) (1,697,820) (238,354) (4,339,078)
Income tax recovery 423,176 - - - -
Loss from discontinued operations
- net of tax of $nil (note 21) - (745,871) (74,395) (1,044,645) (6,440,942)
-------------------------------------------------------------------------------------------
Loss before extraordinary item (20,647,020) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Extraordinary loss from repayment
of debentures - net of tax of
$nil (note 13(a)) (1,068,068) - - - -
-------------------------------------------------------------------------------------------
Loss for the period (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Deficit - Beginning of period (97,600,869) (95,132,490) (95,828,654) (94,545,655) (83,765,635)
-------------------------------------------------------------------------------------------
Deficit - End of period (119,315,957) (96,532,694) (97,600,869) (95,828,654) (94,545,655)
===========================================================================================
Basic and diluted loss per common
share from continuing
operations and before
discontinued operations and
extraordinary item (0.32) (0.04) (0.05) (0.01) (0.28)
===========================================================================================
Basic and diluted loss per common
share (0.33) (0.04) (0.05) (0.07) (0.69)
===========================================================================================
Weighted average number of common
shares outstanding 65,203,705 31,729,436 31,781,090 19,400,822 15,588,904
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
travelbyus.com ltd.
Consolidated Statements of Changes in Shareholders' Equity
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Common stock
--------------------------------------------------------
Additional
paid-in Compensation
capital for future
Number of Amount amount services
shares $ $ $
<S> <C> <C> <C> <C>
Balance - January 1, 1997 13,389,178 91,069,816 - -
Private placement of 3,100,000 units (consisting of one common
share and one half warrant) at $1.63 per unit (note 14(a)) 3,100,000 4,175,210 - -
Compensation warrants on private placement (note 14(a)) - (61,535) - -
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------------
Balance - December 31, 1997 16,489,178 95,183,491 - -
Private placement of 4,000,000 common shares at $0.12 per share
(note 14(b)) 4,000,000 464,634 - -
Expiry of warrants - - 569,988 -
Issuance of shares to acquire Mexican properties (note 21) 500,000 72,500 - -
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------------
Balance - December 31, 1998 20,989,178 95,720,625 569,988 -
Private placement of 20,000,000 common shares at $0.06 per share
(note 14(c)) 20,000,000 1,175,000 - -
Issuance of shares for cash from exercised options 550,000 185,000 - -
Issuance of debenture financing warrants (notes 13 and 14(d)) - - - -
Issuance of warrants as financing fee for debenture financing
(notes 13(a) and 14(d)) - - - -
Costs of issuing debenture financing warrants (notes 13(a) and
14(d)) - - - -
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------------
Balance - September 30, 1999 41,539,178 97,080,625 569,988 -
Issuance of shares for cash from exercised options 472,200 234,952 - -
Issuance of shares on business combinations (note 6) 21,379,558 39,450,659 - -
Issuance of shares and warrants to purchase assets (notes 11 and
12) 3,285,256 6,513,381 - -
Exercise of debenture financing warrants 6,012,500 7,461,513 - -
Private placement of 4,000,000 units (consisting of one common
share and
one half warrant) at $2.50 per unit (note 14(f)) 4,000,000 6,077,696 - -
Exercise of private placement warrants to common shares 181,750 922,745 - -
Compensation warrants on private placements (note 14(e) and (f)) - (564,760) - -
Exercise of compensation warrants to common shares 215,000 971,155 - -
Shares issued for future services (note 11) 1,067,124 4,407,223 - (4,407,223)
Private placement of 8,000,000 special warrants (each special
warrant exercisable into one common share and one half
warrant) at $2.50 per special warrant - - - -
Exercise of private placement special warrants to common shares 300,000 544,650 - -
Exercise of financing fee warrants to common shares 147,500 183,048 - -
Private placement of 2,000,000 common shares at $3.70 (U.S.
$2.50) per share (note 12(b)) 2,000,000 7,396,500 - -
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Translation adjustment - - - -
Total comprehensive income (loss) (note 14(h))
------------------------------------------------------
Balance - June 30, 2000 (unaudited) 80,600,066 170,679,387 569,988 (4,407,223)
------------------------------------------------------
<CAPTION>
----------------------------------------------------
Special Amount Warrants Amount
warrants $ $
<S> <C> <C> <C> <C>
Balance - January 1, 1997 - - - -
Private placement of 3,100,000 units (consisting of one common
share and one half warrant) at $1.63 per unit (note 14(a)) - - 1,550,000 508,453
Compensation warrants on private placement (note 14(a)) - - 155,000 61,535
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------
Balance - December 31, 1997 - - 1,705,000 569,988
Private placement of 4,000,000 common shares at $0.12 per share
(note 14(b)) - - - -
Expiry of warrants - - (1,705,000) (569,988)
Issuance of shares to acquire Mexican properties (note 21) - - - -
Comprehensive income
Loss for the period - - - -
Unrealized loss on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------
Balance - December 31, 1998 - - - -
Private placement of 20,000,000 common shares at $0.06 per share
(note 14(c)) - - - -
Issuance of shares for cash from exercised options - - - -
Issuance of debenture financing warrants (notes 13 and 14(d)) - - 9,560,000 5,864,054
Issuance of warrants as financing fee for debenture financing
(notes 13(a) and 14(d)) - - 700,270 808,112
Costs of issuing debenture financing warrants (notes 13(a) and
14(d)) - - - (915,514)
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Total comprehensive income (loss)
--------------------------------------------------
Balance - September 30, 1999 - - 10,260,270 5,756,652
Issuance of shares for cash from exercised options - - - -
Issuance of shares on business combinations (note 6) - - - -
Issuance of shares and warrants to purchase assets (notes 11 and
12) - - 50,000 131,450
Exercise of debenture financing warrants - - (6,012,500) (3,373,013)
Private placement of 4,000,000 units (consisting of one common
share and
one half warrant) at $2.50 per unit (note 14(f)) - - 2,000,000 3,154,000
Exercise of private placement warrants to common shares - - (181,750) (286,620)
Compensation warrants on private placements (note 14(e) and (f)) - - 1,080,000 564,760
Exercise of compensation warrants to common shares - - (215,000) (433,655)
Shares issued for future services (note 11) - - - -
Private placement of 8,000,000 special warrants (each special
warrant exercisable into one common share and one half
warrant) at $2.50 per special warrant 8,000,000 18,388,392 - -
Exercise of private placement special warrants to common shares (300,000) (750,000) 150,000 205,350
Exercise of financing fee warrants to common shares - - (147,500) (82,748)
Private placement of 2,000,000 common shares at $3.70 (U.S.
$2.50) per share (note 13(b)) - - - -
Comprehensive income
Loss for the period - - - -
Unrealized gain on marketable securities - - - -
Translation adjustment - - - -
Total comprehensive income (loss) (note 14(h))
---------------------------------------------------
Balance - June 30, 2000 (unaudited) 7,700,000 17,638,392 6,983,176 5,636,176
---------------------------------------------------
<CAPTION>
Other capital accounts
-----------------------------------------
Accumulated
other
comprehensive
(Deficit) income Total
retained (net of tax shareholders'
earnings of $nil) equity
$ $ $
(note 13)
<S> <C> <C> <C>
Balance - January 1, 1997 (83,765,635) 3,131,071 10,435,252
Private placement of 3,100,000 units (consisting of one common
share and one half warrant) at $1.63 per unit (note 14(a)) - - 4,683,663
Compensation warrants on private placement (note 14(a)) - - -
Comprehensive income
Loss for the period (10,780,020) -
Unrealized loss on marketable securities - (3,131,031)
Total comprehensive income (loss) (13,911,051)
------------------------------------------
Balance - December 31, 1997 (94,545,655) 40 1,207,864
Private placement of 4,000,000 common shares at $0.12 per share
(note 14(b)) - - 464,634
Expiry of warrants - - -
Issuance of shares to acquire Mexican properties (note 21) - - 72,500
Comprehensive income
Loss for the period (1,282,999) -
Unrealized loss on marketable securities - (262,366)
Total comprehensive income (loss) (1,545,365)
------------------------------------------
Balance - December 31, 1998 (95,828,654) (262,326) 199,633
Private placement of 20,000,000 common shares at $0.06 per share
(note 14(c)) - - 1,175,000
Issuance of shares for cash from exercised options - - 185,000
Issuance of debenture financing warrants (notes 13 and 14(d)) - - 5,864,054
Issuance of warrants as financing fee for debenture financing
(notes 13(a) and 14(d)) - - 808,112
Costs of issuing debenture financing warrants (notes 13(a) and
14(d)) - - (915,514)
Comprehensive income
Loss for the period (1,772,215) -
Unrealized gain on marketable securities - 147,180
Total comprehensive income (loss) (1,625,035)
------------------------------------------
Balance - September 30, 1999 (97,600,869) (115,146) 5,691,250
Issuance of shares for cash from exercised options - - 234,952
Issuance of shares on business combinations (note 6) - - 39,450,659
Issuance of shares and warrants to purchase assets (notes 11 and
12) - - 6,644,831
Exercise of debenture financing warrants - - 4,088,500
Private placement of 4,000,000 units (consisting of one common
share and
one half warrant) at $2.50 per unit (note 14(f)) - - 9,231,696
Exercise of private placement warrants to common shares - - 636,125
Compensation warrants on private placements (note 14(e) and (f)) - - -
Exercise of compensation warrants to common shares - - 537,500
Shares issued for future services (note 11) - - -
Private placement of 8,000,000 special warrants (each special
warrant exercisable into one common share and one half
warrant) at $2.50 per special warrant - - 18,388,392
Exercise of private placement special warrants to common shares - - -
Exercise of financing fee warrants to common shares - - 100,300
Private placement of 2,000,000 common shares at $3.70 (U.S.
$2.50) per share (note 13(b)) - - 7,396,500
Comprehensive income
Loss for the period (21,715,088) -
Unrealized gain on marketable securities - 102,386
Translation adjustment - (110,041)
Total comprehensive income (loss) (note 14(h)) (21,722,743)
------------------------------------------
Balance - June 30, 2000 (unaudited) (119,315,957) (122,801) 70,677,962
------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE>
travelbyus.com ltd.
Consolidated Statements of Cash Flows
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
----------------------------- -------------- ----------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Loss for the period (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Items not affecting cash
Amortization of property, plant and
equipment 254,811 6,804 79,009 - -
Write-off of property, plant and equipment - - 14,229 - -
Amortization of goodwill 3,279,192 - - - -
Amortization of other intangibles 110,699 - - - -
Interest accreted on debentures 2,008,833 - 168,461 - -
Amortization of deferred financing costs 325,493 - 27,296 - -
Stock based compensation 91,500 - - - -
Loss from discontinued operations - 627,426 74,395 86,239 5,978,194
Extraordinary loss from repayment of
debentures (note 13(a)) 1,068,068 - - - -
Income tax recovery (423,176) - - - -
Net change in non-cash working capital items:
Accounts receivable and prepaid expenses (671,917) (16,385) (40,970) 363,760 288,191
Inventory and barter credits 1,413,232 - - - -
Marketable Securities 754,458
Increase in security deposits (736,981) - - - -
Accounts payable and accrued liabilities 3,248,819 120,693 465,362 (386,501) (486,230)
Due to related parties 3,077,789 - - - -
Customer deposits (644,592) - - - -
Accrued interest 275,935 - - - -
-------------------------------------------------------------------------
(8,282,925) (661,666) (984,433) (1,219,501) (4,999,865)
-------------------------------------------------------------------------
Cash flows from investing activities
Cash paid for acquisitions and settlement
of notes payable - net (note 6) (16,840,054) - - - -
Cash deposits on acquisitions (note 23(c)) (576,800) (413,904) (7,636,354) - -
Advances for programming library (note 11) (744,000) - - - -
Funds in trust (10,432)
Purchase of property, plant and equipment (2,621,577) - - - -
Investment (note 5) (7,277,600) - - - -
Investing activities from discontinued operations - - (421,374) - (255,418)
Proceeds from disposal of investment (note 5) 582,208 - - - -
-------------------------------------------------------------------------
(27,488,255) (413,904) (8,057,728) - (255,418)
-------------------------------------------------------------------------
Cash flows from financing activities
Bank indebtedness (144,850) - - - -
Proceeds from issuance of debentures (note 13(b)) 4,437,900 - 11,950,000 - -
Costs on issuance of debentures (note 13(a)) - - (1,057,559) - -
Issuance of common shares - 1,224,000 1,200,000 480,000 5,053,000
Share issue costs (3,034,948) (25,935) (25,000) (15,366) (369,337)
Decrease in other liabilities - - - (171,600) (407,800)
Issue of special warrants 20,000,000 - - - -
Issue of equity units 10,000,000 - - - -
Private placement (note 13(b)) 7,396,500 - - - -
Exercises of options and warrants 5,597,377 - 185,000 - -
Subscriptions received (note 14(g)) 2,920,000 - - - -
Repayment of debentures (note 13(a)) (2,494,000) - - - -
-------------------------------------------------------------------------
44,677,979 1,198,065 12,252,441 293,034 4.275,863
-------------------------------------------------------------------------
Foreign exchange effect on cash 83,855 - - - -
-------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents 8,990,654 122,495 3,210,280 (926,467) (979,420)
Cash and cash equivalents -
Beginning of period 3,256,021 76,817 45,741 972,208 1,951,628
-------------------------------------------------------------------------
Cash and cash equivalents -
End of period 12,246,675 199,312 3,256,021 45,741 972,208
=========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE>
travelbyus.com ltd.
Consolidated Statement of Cash Flows ...continued
Supplemental Disclosure of Interest and Non-Cash Investing and Financing
Activities
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
----------------------------- -------------- ----------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental Information
Interest paid 746,875 - 2,137 - -
Interest received 302,810 5,474 4,402 - -
Non-cash investing
activities
Mineral property expenditures
paid by issuing common
shares - - - 72,500 -
Common shares issued in
connection with acquisition
of subsidiaries 39,450,659 - - - -
Common shares issued in
connection with acquisition
of assets (notes 11 and 12) 6,513,381 - - - -
Non-cash financing
activities
Common shares issued for
future services (note 11) 4,407,223 - - - -
Compensation warrants issued
to agents in connection
with private placements
(note 14(a) and (f)) 564,760 - - - 61,535
Compensation warrants issued
to agents in connection
with debenture financing
(note 13(a)) - - 808,112 - -
Compensation special warrants
issued to agents in
connection with private
placements (note 14(e)) 1,613,600 - - - -
Compensation warrants issued
to agents in connection
with asset purchase
(note 12) 131,450 - - - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
1 Nature of operations
travelbyus.com ltd. (formerly LatinGold Inc.)(the "company") is developing
an integrated internet travel organization which provides travel options via
the internet as well as through 1-800 call centres and traditional travel
agencies, primarily to retail customers located in the western United
States. The company also provides advertising services to airlines and
hotels located in the United States, provides retail travel agencies access
to certain travel suppliers under preferred supplier agreements, licenses
television program materials for broadcast, and sells computer data storage
equipment primarily to Canadian corporate customers.
The company was incorporated in 1986 under the Business Corporations Act
(Ontario). The company was a precious metals exploration company until 1999
when it changed its business focus to the travel sector. In April 1999, the
company discontinued its mining activities, and accordingly, its mining
activities have been presented as discontinued operations. The company
changed its name to travelbyus.com ltd. from LatinGold Inc. on June 11,
1999. In 1999, the company changed its year end to September 30.
The company has a limited operating history and the successful
implementation of its business strategy depends on numerous factors
including economic, competitive and other conditions and uncertainties,
including but not limited to the ability to hire and retain qualified
personnel, the ability to continue relationships with suppliers and travel
agents on satisfactory terms and the ability to obtain financing from other
sources if revenues from operations do not grow as expected. Adverse
economic or competitive and other conditions or the inability to obtain
financing if required could affect the company's operations in the future
and impact the company's ability to recover the value of its assets and
satisfy its obligations in the future.
2 Summary of significant accounting policies
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States. A summary of the significant accounting policies is set out below.
Unaudited information
The consolidated balance sheet as at June 30, 2000 and the consolidated
statements of operations and deficit, cash flows and changes in
shareholders' equity for the nine-month periods ended June 30, 2000 and
1999, including the related notes, are unaudited. This unaudited information
reflects all adjustments which are, in the opinion of management, necessary
for a fair statement of the results for the interim periods presented.
Basis of consolidation
The consolidated financial statements include the accounts of the company
and its wholly-owned subsidiaries.
Business combinations
Business combinations have been accounted for under the purchase method of
accounting and therefore include the results of operations of the acquired
business from the date of acquisition. Assets acquired and liabilities
assumed are recorded at their fair values at the date of their acquisition.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
F-49
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Cash and cash equivalents
Cash and cash equivalents consist of balances with banks and investments in
money market instruments with original maturities of less than 90 days.
Inventory and barter credits
Data storage systems are recorded at the lower of cost or estimated net
realizable value. Cost includes direct materials, labour and an allocation
of overhead, and is determined on a first-in, first-out basis.
Media credits are recorded at the lower of carrying value or estimated net
realizable value. Carrying value is determined as cost (the amount paid to
the media company in exchange for the media credits). Where the media
credits represent media availability which expires over time, cost is
amortized on a straight-line basis over the time to expiry. Where the
company incurs costs to prepare the media for use by the customer, the cost
of these services is included in the carrying value of the media credits.
Travel credits are recorded at the lower of cost and estimated net
realizable value. As prescribed by EITF Abstract Issue No. 93-11, cost is
determined as the carrying value of the media credits exchanged for travel
credits on the basis that there is not persuasive evidence of the fair value
of the media credits given up for the travel credits. The company does not
record revenue on the exchange of media credits for travel credits.
Revenue recognition
a) Travel product sales and commissions
Travel sales consist of revenues derived from the sale of travel
products including airline tickets, hotel and vacation property
accommodations, car rentals, vacation packages including cruises and
tours, and volume bonuses and overrides from suppliers of these
products.
Where the company sells airline tickets or provides travel bookings as
an agent, at prices determined by the supplier, commission revenue is
recognized at the time the ticket is issued to the customer, which
generally corresponds to the time the payment is processed, less an
allowance for returns and cancellations based on the company's
historical experience.
Where the company acquires an inventory of travel services from
airlines, hotels, vacation properties, car rental companies and
vacation package providers and the company determines the selling price
of these products, revenue for these services is recognized upon the
customer's scheduled departure date, provided that collection is
reasonably assured. Travel product sales are recorded at the gross
amount collected from the customer only where the company has acquired
an inventory which is non-returnable and non-refundable and bears
general inventory risk, has latitude in establishing pricing, bears
credit risk and is the merchant of record. Where those conditions do
not exist, sales are recorded at the amount paid by the customer net of
the travel product costs.
The company also earns commissions for booking accommodations and
vehicle rentals, and receives certain volume bonuses and overrides from
the travel product suppliers (overrides represent commissions earned on
the basis of volumes). Revenues related to accommodations and vehicle
rentals are recognized
F-50
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
on the customers' scheduled departure dates. Volume bonus and
override commission revenues are recognized as specified in the
contractual arrangement when the specified targets have been
achieved.
b) Marketing program revenues
The company provides retail travel agencies with access to certain
travel product suppliers under preferred supplier agreements. Under
these associate marketing programs, the member agencies are charged
an annual or monthly license fee. The license fees are recognized on
a straight-line basis over the license period, when collectibility is
reasonably assured.
c) Advertising revenues
Advertising revenues are derived from travel product suppliers'
advertising included in printed marketing and promotional materials
prepared by the company and delivered to travel agents and customers.
Advertising revenues are recognized at the time the marketing and
promotional materials are distributed to the travel agents and
customers, when collectibility is reasonably assured. Costs of sales
comprise the direct costs of developing and producing the marketing
and promotional materials.
d) Technology sales
Revenue from the sales of computer data storage equipment is
recognized upon delivery of the equipment, provided collectibility is
reasonably assured.
e) Television programming revenues
Revenues from the license of television program material are
recognized when the license period begins and all of the following
conditions have been met: a) the license fee is known, b) the cost of
the episodes provided under the license agreement is known or
reasonably determinable, c) collectibility of the license fee is
reasonably assured, d) the episodes have been accepted by the
licensee in accordance with the license agreement and e) the episodes
are available for the first telecast.
F-51
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
amortization. Amortization is recorded on a straight-line basis to
amortize the cost of the capital assets over their estimated useful lives.
Amortization rates are as follows:
Automobiles 5 years
Office and computer equipment
and furniture 5 - 7 years
Manufacturing equipment 7 years
Leasehold improvements over term of lease
Goodwill
Goodwill represents the excess of costs over amounts assigned to the net
identifiable assets of acquired entities. The excess is amortized on a
straight-line basis over a period ranging from five to ten years, as
determined by the expected period of benefit from each acquisition.
In addition to the impairment policy for long-lived assets, the company
periodically evaluates whether changes have occurred that would require
revision of the remaining estimated useful life of the goodwill. If such
circumstances arise, the company would use an estimate of the undiscounted
value of the expected future operating cash flows and residual to
determine whether the net carrying amount of the goodwill exceeds the
estimated net recoverable amount.
Other intangibles
Proprietary software rights and the costs of acquiring the right to the
800-i-TRAVEL number are amortized on a straight-line basis over ten years.
Impairment of long-lived assets
The company reviews the carrying amount of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The determination of any impairment includes
a comparison of future operating cash flows anticipated to result from the
use of the asset to the net carrying value of the asset. In the event of a
business combination, any goodwill arising in the transaction is included
in the group of assets for the purpose of the recoverability tests, or is
allocated to the individual assets being tested on a pro rata basis using
the relative fair values of the long-lived assets acquired at the
acquisition date. In instances where goodwill is identified with assets
that are subject to an impairment loss, the carrying value of the goodwill
is eliminated before making any reduction of the carrying amounts of
impaired long-lived assets.
F-52
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Programming library
The costs to acquire television programming are capitalized and amortized
in the same ratio that current gross revenues bear to anticipated total
gross revenues. Estimates of anticipated total gross revenues are reviewed
periodically and revised when necessary to reflect more current
information. Where the carrying value of the unamortized costs exceeds the
estimated net realizable value, the carrying value is written down to the
net realizable value.
Foreign currency translation
Foreign currency transaction gains or losses are included in net earnings
(loss) for the period in which there is an exchange rate change. Assets
and liabilities of operations where the functional currency is other than
the Canadian dollar are translated at the exchange rate at the balance
sheet date. Revenues, costs and expenses of such operations are translated
at the average rate of exchange prevailing during the period. Translation
adjustments are included as a component of other comprehensive income and
charged or credited to accumulated other comprehensive income, a component
of shareholders' equity.
Advertising costs
The company accounts for advertising costs in accordance with AICPA
Statement of Position 93-7, Reporting on Advertising Costs, whereby costs
are generally expensed as incurred except for television and radio
advertisements, which are expensed, including related production costs,
the first time the advertising takes place.
Stock-based compensation
The company accounts for stock-based employee compensation arrangements
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations; accordingly, compensation cost of stock awards is
measured as the excess, if any, of the quoted market price of the
company's stock at the date of the grant over the option exercise price
and is charged to operations over the vesting period.
Income taxes
The company follows the asset and liability method of accounting for
income taxes. Under this method, deferred income tax assets and
liabilities are recognized for the estimated tax consequences attributable
to differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance is provided for deferred income tax assets if it is
more likely than not that the company will not realize the future benefit,
or if the future deductibility is uncertain.
F-53
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Loss per share
Basic loss per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Common shares outstanding include shares issuable for
little or no cash consideration and for which all necessary conditions
have been satisfied. Diluted loss per share is computed by including other
potential common stock from exercise of stock options and warrants in the
weighted average number of common shares outstanding for a period, if
dilutive.
The following table sets forth the computation of loss per share:
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
------------------------------------ ----------------- -----------------------------------
2000 1999
$ $ 1999 1998 1997
(unaudited) (unaudited) $ $ $
<S> <C> <C> <C> <C> <C>
Loss for the period (21,715,088) (1,400,204) (1,772,215) (1,282,999) (10,780,020)
Weighted average number of
shares outstanding
Common shares 65,203,705 31,729,436 31,781,090 19,400,822 15,588,904
Special warrants 5,956,923 - - - -
Basic and diluted loss per
common share (0.33) (0.04) (0.05) (0.07) (0.69)
</TABLE>
New accounting pronouncements
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133, as
subsequently amended, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (October 1, 2000 for the company). FAS
133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. As management of
the company does not currently use derivative instruments, the adoption of
FAS 133 is not expected to have a significant effect on the company's
results of operations or its financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial
Statements, and in March 2000, the SEC issued SAB 101A which provided
certain amendments to SAB 101. The company believes that its current
revenue recognition and reporting policies are consistent with the Staff
views set out in those bulletins.
F-54
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of
APB Opinion No. 25 ("FIN 44"), which clarifies the application of APB 25
for certain issues. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998 or January 12, 2000. The company has
determined that they are in compliance with the guidance contained in this
pronouncement.
On May 8, 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board issued EITF 00-02, Accounting for Website
Development Costs, which covered and included guidelines to account for
costs incurred to develop a website. The guidelines contained therein
focus on determining the nature of website development costs and whether
to capitalize or expense these costs accordingly. The company has expensed
all costs incurred to date to develop its website. Transitional provisions
contained in this EITF 00-02 require application of these guidelines for
fiscal quarters beginning after June 30, 2000. The company will comply
with this policy in accordance with the transitional provisions.
On June 12, 2000, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 00-2, Accounting by Producers or Distributors
of Films ("SOP 00-2"), which provides guidance on generally accepted
accounting principles for films. Films are defined in SOP 00-2 as feature
films, television specials, television series, or similar products that
are sold, licensed, or exhibited, whether produced on film, video tape,
digital or other video recording format. Transitional provisions contained
in this SOP 00-2 require the application of these guidelines for fiscal
years beginning after December 15, 2000. The company will comply with this
policy in accordance with the transitional provisions. The company has not
yet determined the effect, if any, of this new pronouncement.
3 Bank indebtedness
A subsidiary of the company has an operating line of credit available of
$650,000, bearing interest at the bank's prime lending rate plus 2.5%.
Bank indebtedness drawn against this line of credit is payable on demand
and is secured by a general security agreement covering all of the
subsidiary's assets other than real property and Export Development Corp.
insurance coverage on certain accounts receivable as well as by a general
corporate level guarantee. As at June 30, 2000 (unaudited), $591,950 has
been drawn against this facility.
4 Marketable securities
Marketable securities are considered available-for-sale and are stated at
market value. Unrealized holding gains and losses are excluded from
earnings and reported in a separate component of shareholders' equity. At
June 30, 2000 (unaudited), the company held 639,912 (September 30, 1999 -
639,912; December 31, 1998 - 639,912) common shares of Scorpion Minerals
Inc. ("Scorpion"), a company related by virtue of a director in common. At
June 30, 2000 (unaudited), the cost of these marketable securities was
$230,984 (September 30, 1999 - $230,984; December 31, 1998-$230,984).
During the period ended June 30, 2000 (unaudited), the company also
acquired an investment in a short-term mutual fund through the purchase of
Cruise Shoppes America, Ltd. (Note 6(g)). The short-term mutual fund is
considered available-for-sale and is stated at market value which
approximates the cost at June 30, 2000 (unaudited).
F-55
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
5 Balance sheet components
Accounts receivable and prepaid expenses
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Trade receivables 2,763,802 2,756 9,535
Less: Allowance for doubtful accounts (376,230) - -
Other accounts receivable 933,911 37,739 -
----------------------------------------------------------------
3,321,483 40,495 9,535
Prepaid expenses 773,968 10,009 -
----------------------------------------------------------------
4,095,451 50,504 9,535
----------------------------------------------------------------
</TABLE>
Inventory and barter credits
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Data storage systems 797,399 - -
Media credits 60,651 - -
Travel credits 545,857 - -
----------------------------------------------------------------
1,403,907 - -
----------------------------------------------------------------
</TABLE>
Data storage systems comprise three major types of products: disk systems,
optical mediums (CD and DVD servers), and tape back-up products. There are
substantially no raw materials or work in process.
Investment
In connection with the proposed business combination with Aviation Group,
Inc. ("Aviation Group") (note 23), the company has invested $7,277,600
(U.S. $5,000,000) in Aviation Group through the purchase of 500 shares of
non-voting Series B 12% cumulative preferred stock from Aviation Group at
U.S. $10,000 per share liquidation value, the proceeds of which were used,
in part, by Aviation Group to acquire Global Leisure Travel, Inc. ("Global
Leisure"). These shares may be exchanged, conditional upon the completion
of the proposed business combination, for Aviation Group Series C
convertible preferred stock.
During the period, 40 shares of non-voting Series B 12% cumulative
preferred stock sold for proceeds of U.S. $400,000 (approximately Cdn.
$582,208).
F-56
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Accounts payable and accrued liabilities
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Trade accounts payable 3,281,233 203,424 51,028
Accrued interest 365,935 90,000 -
Accrued lease liability 350,000 - -
Accrued payroll 351,284 - -
Accrued professional fees 650,147 - -
Income tax payable 311,114 - -
Other liabilities 905,326 7,249 -
----------------------------------------------------------------
6,215,039 300,673 51,028
================================================================
</TABLE>
6 Acquisitions (unaudited)
All per share prices indicated for the various acquisitions outlined below
reflect the market value of the shares at the date of announcement of the
respective transactions, except where the purchase agreement contains
provisions for guaranteeing the value of total share consideration
subsequent to the completion date. These values have been used to account
for these transactions by the purchase method, with effect from the
completion dates indicated.
a) Mr. Cheaps Travel Ltd. ("Mr. Cheaps Travel") and Gotham Media Group
Ltd. ("Gotham Media Group")
On October 4, 1999, the company acquired all of the outstanding
shares of Mr. Cheaps Travel and Gotham Media Group (companies under
common control and management) for aggregate consideration of
$5,615,850 consisting of $4,395,850 ($4,354,733 (U.S. $3,000,000)
cash and costs of acquisition of $41,117) and 2,000,000 common shares
at $0.61 per share. A finder's fee of 150,000 common shares at $0.61
per share was paid to an officer of the company. The finder's fee has
been accounted for as stock-based compensation and included in
general and administration expense. The company acquired $2,270,000
of assets and assumed $555,000 of liabilities. Goodwill arising from
this acquisition is being amortized over ten years.
Mr. Cheaps Travel is a travel agency specializing in discount and
last minute airfares. Gotham Media Group acquires the rights to
outdoor billboards, radio, television and print advertising which it
exchanges with its airline and hotel clients in return for travel
credits to be applied toward the purchase of travel products. Both of
the companies are based near Portland, Oregon.
b) International Tours Inc., IT Cruise Inc. and GalaxSea Cruises and
Tours, Inc.
On October 13, 1999, the company acquired the travel marketing
operations of International Tours, Inc., the cruise-only marketing
operations of GalaxSea Cruises and Tours, Inc. and all of the shares
of IT Cruise Inc. for aggregate consideration of $3,592,568
consisting of $2,992,568 (U.S. $2,000,000) in cash and
F-57
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
1,000,000 common shares at $0.60 per share. Assets with a fair value
of approximately $202,603 were acquired. Goodwill arising from this
acquisition is being amortized over ten years. All of the companies
are based in Dallas, Texas. International Tours, Inc. maintains a
network of affiliated travel agencies in the United States, and
GalaxSea Cruises and Tours, Inc. maintains a network of affiliated
cruise-only offices.
c) Express Vacations, LLC ("Express Vacations")
On November 1, 1999, the company acquired Express Vacations, a
vacation package wholesaler in Reno, Nevada, for aggregate
consideration of $5,443,284 consisting of $1,528,619 ($1,458,505
(U.S. $1,000,000) cash and costs of acquisition of $70,114),
$1,458,505 (U.S. $1,000,000) in short-term promissory notes which
were paid shortly after closing, 3,462,000 common shares at $0.68 per
share, and a finder's fee of 150,000 common shares at $0.68 per share
which was paid to a third party. The company acquired $2,163,000 of
assets and assumed $2,010,000 of liabilities. Goodwill arising from
this acquisition is being amortized over five years.
The company plans to center its operations at Express Vacations'
offices in Reno.
d) Legacy Storage Systems Corp. ("Legacy")
On December 1, 1999, the company acquired all of the outstanding
common shares of Legacy for aggregate consideration of $1,835,680
consisting of $140,000 in cash and 3,028,000 common shares at $0.56
per share. The company acquired $1,693,053 of assets and assumed
$1,251,626 of liabilities. Goodwill arising from this acquisition is
being amortized over five years. Legacy designs and sells data
storage systems, is controlled by an officer of the company, and is
based in Markham, Ontario.
e) Cheap Seats Inc. ("Cheap Seats")
On January 6, 2000, the company acquired all of the outstanding
shares of Cheap Seats, a Los Angeles based airfare consolidator. The
company acquired $497,000 of assets and $603,000 of liabilities.
Goodwill arising from this acquisition is being amortized over ten
years. The terms of the agreement include total consideration of
$15,383,050 consisting of $7,333,050 ($7,250,000 (U.S. $5,000,000)
cash and costs of acquisition of $83,050) and 5,000,000 common shares
at $1.61 per share. At the time of closing, the company paid
$7,333,050 (U.S. $5,000,000) in cash and the vendors advanced
$739,650 (U.S. $500,000) to Cheap Seats pending resolution of certain
working capital adjustments. Any adjustment arising from the
settlement of this advance at an amount different than the advance
will be accounted for as an adjustment to goodwill. As at June 30,
2000 this amount has been included in amounts due to related parties
as the vendors remain officers of Cheap Seats. Based on discussions
with the vendors, the company estimates that to date $3,700,000 (U.S.
$2,500,000) of the purchase consideration paid, is contingently
returnable in accordance with a formula contained in the purchase
agreement based on Cheap Seats' pre-tax net income for the twelve-
month period ended November 30, 1999. No amount in relation to this
has been recorded in these consolidated financial statements. The
purchase price may also be increased by up to $5,914,400 (U.S.
$4,000,000) based on the increase in certain gross revenues during
the period from October 1, 1999 to September 30, 2002, calculated in
accordance with the terms of the agreement.
F-58
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
f) Bell Travel Systems ("Bell Travel")
On April 3, 2000, the company acquired all of the outstanding shares
of Bell Travel Systems, a travel agent consortium based in Scotts
Valley, California. Under the terms of the agreement, the company
paid aggregate consideration of $5,438,320 consisting of $2,814,200
($2,761,200 (U.S. $1,900,000) in cash and costs of acquisition of
$53,000) and 690,558 common shares at $3.80 per share. The company
acquired $296,071 in assets and assumed no liabilities. The
difference between purchase price and fair value of assets acquired
is allocated to goodwill and is being amortized over ten years.
g) Cruise Shoppes America, Ltd. ("Cruise Shoppes")
On April 4, 2000, the company acquired all of the outstanding shares
of Cruise Shoppes for aggregate consideration of $13,144,600
consisting of $2,668,600 ($2,615,600 (U.S. $1,800,000) in cash and
costs of acquisition of $53,000) and 2,619,000 common shares at $4.00
per share with the number of shares subject to adjustment based on
the trading price of the common shares on July 5, 2000. Subsequent to
June 30, 2000, an additional 2,541,591 common shares were issued
pursuant to the adjustment clause contained in the purchase agreement
to maintain the value of total consideration at $13,091,600. The
company acquired $2,960,235 in assets and $637,377 in liabilities.
Goodwill arising from the acquisition is being amortized over ten
years.
h) Epoch Technology, Inc. ("Epoch")
On May 23, 2000, the company acquired Epoch, a tour wholesale
software development company based in Dallas, Texas. Under the terms
of the agreement, the company paid aggregate consideration of
$15,374,800 consisting of $3,046,100 ($2,999,100 (U.S. $2,000,000) in
cash and costs of acquisition of $47,000) and 3,280,000 common shares
at U.S. $2.50 (approximately Cdn. $3.76) per share. Per the terms of
the purchase agreement the share consideration is subject to
adjustment based on the price of the common shares of the company on
August 22, 2000 up to a maximum of 3,280,000 common shares. On
September 25, 2000 the company issued 3,280,000 additional shares.
The company acquired $2,279,083 in assets consisting primarily of
proprietary software rights (note 12) and $276,636 in liabilities.
Goodwill arising from this acquisition is being amortized over five
years. To complete the acquisition, the company borrowed $2,921,618
(U.S. $1,975,000) from Aviation Group under a 12% note due February
28, 2001, or earlier, in certain events, and granted a security
interest in Epoch stock to Aviation Group to secure the note. This
note payable has been classified as due to related parties. The
security interest is subordinate to the security interest of the
holders of the company's 12.5% senior redeemable debentures. Aviation
Group obtained the funds for this note from a $4,498,600 (U.S.
$3,000,000) investor loan that has been guaranteed by the company.
F-59
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Details of the fair value of net assets acquired and consideration given
for the acquisitions, in aggregate, during the period since September 30,
1999 are as follows (allocations of purchase price to specifically
identifiable net assets are not yet complete and therefore subject to
adjustment in the near term):
<TABLE>
<CAPTION>
$
<S> <C>
Net non-cash assets acquired - at fair market values
Assets acquired 12,361,046
Liabilities assumed (6,060,390)
Less: Cash of acquired operations (1,174,334)
------------
Net non-cash assets acquired 5,126,322
Excess of cost of net assets over assigned value
Goodwill 58,800,746
------------
63,927,068
============
Cash consideration (including costs of acquisition) 24,192,237
Promissory notes 1,458,505
Share capital issued 39,450,660
Less: Cash of acquired operations (1,174,334)
------------
63,927,068
============
</TABLE>
All acquisitions are accounted for using the purchase method and the
results of operations of each entity acquired are included from the date
of acquisition.
The unaudited pro forma consolidated revenues, loss and basic and diluted
loss per share for the nine-month period ended June 30, 2000 are
$17,673,541, ($24,819,825) and ($0.39), respectively, presented as if the
acquisition of Mr. Cheaps Travel and Gotham Media Group, International
Tours Inc., IT Cruise Inc. and GalaxSea Cruises and Tours, Inc., Express
Vacations, Legacy, Cheap Seats, Bell Travel, Cruise Shoppes and Epoch had
occurred on October 1, 1999. This summarized information does not purport
to be indicative of what would have occurred had the acquisitions actually
been made as of such dates or of results which may occur in the future.
The unaudited pro forma consolidated revenues, income and basic and
diluted earnings per share for the nine-month period ended June 30, 1999
are $28,652,269, $(5,551,693) and $(0.13), respectively, presented as if
the acquisition of Mr. Cheaps Travel and Gotham Media Group, International
Tours, Inc., IT Cruise Inc. and GalaxSea Cruises and Tours, Inc., Express
Vacations, Legacy, Cheap Seats, Bell Travel, Cruise Shoppes and Epoch had
occurred on October 1, 1998. This summarized information does not purport
to be indicative of what would have occurred had the acquisitions actually
been made as of such dates or of results which may occur in the future.
F-60
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
7 Cash deposits for acquisitions
During the period ended June 30, 2000 (unaudited), the company advanced a
total of $500,000 to Just Vacations, Inc. ("JVI"). These advances are
unsecured and bear interest at the rate of 10% per annum, and become due
and payable in the event the company does not complete this potential
acquisition (note 23(e)). The balance of cash deposits for acquisitions
relate to various other potential acquisitions being investigated by the
company.
8 Cash in trust
As at June 30, 2000 (unaudited), $31,073 was held by the company's lawyers
in trust in connection with payments required for acquisitions.
As at September 30, 1999, $7,200,000 (U.S. $4,800,000) was held by the
company's lawyers in trust for the company's acquisitions of Mr. Cheaps
Travel, Gotham Media Group, International Tours, Inc., IT Cruise Inc. and
GalaxSea Cruises and Tours, Inc.
9 Security deposits
As at June 30, 2000 (unaudited), letters of credit totalling $667,904
(U.S. $451,500) have been issued to various hotels. These letters of
credit are required as security under certain hotel agreements. During the
period ended June 30, 2000 (unaudited), $nil has been drawn against these
letters of credit. As at June 30, 2000 (unaudited), $656,809 (U.S.
$444,000) has been deposited as security for these letter of credit
agreements.
In addition, $172,993 (U.S. $116,942) represents the amount held as
security for an irrevocable letter of credit issued to the Airline
Reporting Corporation ("ARC") to comply with the applicable regulations
for travel agencies in the United States. The remaining balance of
$113,351 consists of customer deposits held in trust for remittance to
cruise lines.
10 Property, plant and equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------
(Unaudited)
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Automobiles 61,977 5,977 56,000
Office and computer equipment and furniture 3,635,663 229,759 3,405,904
Manufacturing equipment 65,966 7,696 58,270
Leasehold improvements 302,027 15,512 286,515
-----------------------------------------
4,065,633 258,944 3,806,689
-----------------------------------------
</TABLE>
F-61
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Office and computer equipment and furniture 82,771 4,133 78,638
====================================
<CAPTION>
December 31, 1998
------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Office and computer equipment and furniture 79,890 60,712 19,178
=============================================
</TABLE>
11 Programming library
On November 15, 1999, the company acquired 120 episodes of the television
program "The Travel Magazine", except for certain home video rights and
television distribution agency rights, for an aggregate consideration of
$4,997,795 paid by the issuance of 2,855,883 common shares at $1.75 per
share. All programming contained in this library consists of completed
episodes.
Pursuant to an agreement dated October 1, 1999, as amended on January 21,
2000, the company purchased 130 new episodes of "The Travel Magazine" to
be produced over the next 24 months. On closing, $4,735,033 was paid
towards these episodes by the issuance of 1,146,497 common shares at $4.13
per share, with a further U.S. $1,800,000 (approximately Cdn. $2,610,000)
to be paid in cash upon the delivery of 40 new episodes. Upon receipt of
these 40 new episodes, the company has the right to terminate the
arrangement and not pay U.S. $4,500,000 (approximately Cdn. $6,525,000)
cash in respect of the remaining 90 episodes.
No revenue has been earned to June 30, 2000 (unaudited) from this
programming library.
The amount of $4,407,223 has been included as a deduction from
shareholders' equity and $327,810 has been classified as programming
library in respect of nine new episodes received to June 30, 2000
(unaudited). The amount recorded as a deduction from shareholders' equity
will be reclassified as programming library based on the program costs per
episode upon receipt of each episode. The company paid U.S. $300,000
(approximately Cdn. $446,400) with respect to the nine new episodes
received as at June 30, 2000 (unaudited). In addition, the company
advanced U.S. 200,000 (approximately Cdn. $297,600) in respect of the
remaining new episodes which is included in prepaid expenses (unaudited).
F-62
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
12 Other intangibles
<TABLE>
<CAPTION>
June 30, 2000 September 30,
(unaudited) 1999
---------------------------------------------- -------------
Accumulated
Cost amortization Net Net
$ $ $ $
<S> <C> <C> <C> <C>
800-i-TRAVEL 1,357,893 66,973 1,290,920 -
Proprietary software rights 2,100,000 43,726 2,056,274 -
---------------------------------------------------------------
3,457,893 110,699 3,347,194 -
===============================================================
</TABLE>
On December 7, 1999, the company acquired the right to the 800-i-TRAVEL
numbers and a system which utilizes a telephone switching technology that
will route customers' calls to their closest member travel agency or to
the company's call center. The vendor, a U.S. partnership which includes
an officer of the company, was paid 350,000 common shares at $3.46 per
share and warrants to purchase 50,000 common shares at U.S. $1.00 per
share. Warrants are exercisable prior to December 7, 2002 (fair value of
$131,450), provided certain performance criteria are fulfilled. Until such
time that these performance criteria are met, no portion of the warrants
issued may be exercised. Performance criteria are fulfilled if certain
minimum numbers of customer calls to the two 1-800 numbers have been
achieved prior to May 2001 or the average trading price of travelbyus.com
ltd.'s common shares during November 2000, has been at least U.S. $4.00
(approximately Cdn. $5.80) per common share. In addition, the vendors will
receive a royalty of U.S. $0.10 per call for a period of 48 months. In the
event that certain performance criteria are not fulfilled, the vendors may
exercise an automatic right to re-acquire the right to the 800-i-TRAVEL
numbers and system and in the event travelbyus.com determines that it no
longer seeks to utilize these numbers and system, travelbyus.com has the
right to transfer the numbers and switching technology back to the
vendors. In either circumstance, no past amounts paid are refundable to
the company. As at June 30, 2000 (unaudited), the company was in the
process of linking the company's network of member agents to this system.
13 Debentures
a) Senior redeemable debentures and deferred financing costs
As at September 9, 1999, the company issued 12.5% senior redeemable
debentures for gross proceeds of $11,950,000. The debentures earn
interest at 12.5% per annum, payable semi-annually, and mature on
September 9, 2001. The company may repay the debentures at any time.
A senior fixed and floating charge covering all assets of the company
has been granted as security.
Attached to each $1,000 debenture were warrants to purchase 800
common shares at $0.68 per common share. The warrants expire at the
earlier of September 9, 2001 and ten days following notice by the
company of an amended expiry date. The company has the right to amend
the expiry at any time that the daily closing price of the company's
common shares has exceeded $1.36 for a period of ten trading days. If
the company exercises its rights to amend the expiry date, the
company must file a prospectus with the
F-63
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
appropriate securities regulatory authorities to qualify the common
shares issuable on exercise. As at June 30, 2000 (unaudited), the
company has the right to amend the expiry date of the warrants.
The proceeds received on the debentures have been allocated to the
debentures and the warrants based on the relative fair values of the
respective instruments. The debentures were initially recorded at
$6,085,946 and the warrants at $5,864,054. The discount on the
debenture resulted in an effective annual rate of approximately 40%
and is being accreted over the term of the debenture.
Costs related to the issuance of the debentures and warrants amounted
to $1,865,671, which has been allocated to deferred financing costs
and warrants in the amounts of $950,157 and $915,514, respectively,
based on the relative fair values of the two instruments. Included in
costs related to issuance is the amount of $808,112 related to
700,270 share purchase warrants issued to the agents based on an
estimated fair value of $1.154 per warrant. The warrants are to
purchase 700,270 common shares at $0.68 per share and expire on
September 9, 2001.
On March 9, 2000, the company repaid debentures with a face value of
$2,494,000 for aggregate consideration of $2,494,000. The settlement
resulted in an extraordinary loss of $1,068,068 based on a carrying
value for a proportionate share of the debt on the settlement day of
$1,585,355 and a proportionate share of deferred financing costs of
$159,423.
b) Convertible debenture
During June 2000, the company completed a private placement of
2,000,000 common shares at U.S. $2.50 (Cdn. $3.70) per share for
proceeds of U.S. $5,000,000 (Cdn. $7,396,500) from Travel24.com.
Travel24.com also invested U.S. $3,000,000 (Cdn. $4,437,900) in a
convertible, callable, redeemable, secured debenture due on June 16,
2002 with interest payments payable quarterly in arrears at LIBOR
plus 1% until such time that the debenture is paid in full. This
debenture is convertible at the option of the holder, at any time,
for such number of common shares of the company that is determined by
dividing the outstanding principal amount by U.S. $3.00
(approximately Cdn. $4.50).
14 Capital stock
a) On March 14, 1997, the company completed a private placement of
3,100,000 units at $1.63 per unit for proceeds of $4,683,663 (net of
costs of $369,337, excluding cost of compensation warrants). Each
unit consisted of one common share and one half of a common share and
one half of a common share purchase warrant to purchase 1,550,000
common shares at $2.05 per share until March 14, 1998. The agents to
this placement were issued 155,000 common share purchase warrants
exercisable at $2.05 per share until March 14, 1998. All purchase
warrants expired unexercised on March 14, 1998.
b) On May 14, 1998, the company completed a private placement of
4,000,000 common shares at $0.12 per share for proceeds of $464,634
(net of costs of $15,366).
c) During the period ended September 30, 1999, the company completed a
private placement of 20,000,000 common shares at $0.06 per share for
gross proceeds of $1,200,000 (net proceeds $1,175,000).
F-64
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
d) The company has issued warrants to purchase a total of 10,260,270
common shares at $0.68 per share for a period of two years in
connection with the debenture financing (note 13(a)). As of June 30,
2000 (unaudited), 4,100,270 of the warrants were outstanding.
e) On December 21, 1999 (unaudited), the company completed a private
placement of 8,000,000 special warrants at a price of $2.50 per
special warrant for proceeds of $18,463,392 (net of costs of
$1,536,608 excluding cost of compensation warrants), each special
warrant being exchangeable, without additional consideration, into
one common share and one half of a share purchase warrant, each whole
warrant entitling the holder to purchase an additional common share
for a price of $3.50 per share for a period of 15 months. The company
has filed a preliminary prospectus to qualify the common shares and
share purchase warrants issuable upon exercise of the special
warrants offering. Since receipts for a final prospectus qualifying
the issuance of the common shares and share purchase warrants have
not been issued by applicable regulatory authorities within 180 days
of the closing of the special warrant offering, holders of the
outstanding special warrants will be entitled to receive 1.1 common
shares (in lieu of one common share) upon the exercise of each
special warrant. The agents were paid a commission of 7% of the gross
proceeds of the special warrant offering together with compensation
warrants entitling the agents to purchase that number of common
shares equal to 10% of the number of special warrants placed at a
price of $2.50 per share for a period of 15 months from the closing
of the offering.
During April and May of 2000, holders of special warrants exercised
300,000 special warrants into 300,000 common shares and 150,000
common share purchase warrants.
f) In addition, the company completed a private placement of 4,000,000
units at a price of $2.50 per unit for proceeds of $9,231,696 (net of
costs of $768,304, excluding cost of compensation warrants), each
unit consisting of one common share and one half of a share purchase
warrant, each whole warrant entitling the holder to purchase an
additional common share at a price of $3.50 for a period of 15
months. The agent was paid a commission of 7% of gross proceeds
together with warrants to purchase that number of common shares equal
to 7% of the number of units placed at a price of $2.50 per share for
a period of 15 months (280,000 warrants). As of June 30, 2000
(unaudited), 1,818,250 of the warrants at $3.50 per share and 65,000
of the warrants at $2.50 per share were outstanding.
g) During March 2000, the company received advances in the amount of
$2,920,000 (U.S. $2,000,000) from certain investors related to
Aviation Group and Global Leisure (note 23(a)) on the understanding
that these advances would be applied towards a private placement
subscription for which the terms had not been agreed as at June 30,
2000. Subsequent to June 30, 2000 (unaudited), the company agreed to
issue 930,000 common shares at U.S. $2.15 (approximately Cdn. $3.15)
per share to these investors further to the understanding described
above.
h) The ending accumulated other comprehensive income balance of
$(122,801) consists of an accumulated unrealized gain on marketable
securities of $(12,760), and an accumulated unrealized foreign
exchange translation adjustment of $(110,041).
F-65
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
15 Income taxes
The company is subject to U.S. federal and state income taxes in the U.S.
and Canadian federal and provincial taxes in Canada.
The company has non-capital losses for Canadian income tax purposes of
approximately $11,077,000 which are available for carryforward to reduce
future years' taxable income. These income tax losses expire as follows:
$
Year ending September 30, 2001 181,000
2002 -
2003 926,000
2004 1,278,000
2005 1,775,000
2006 1,168,000
Subsequent thereto (unaudited) 5,749,000
-------------
11,077,000
=============
In addition, the company has net capital losses of approximately
$46,700,000 (unaudited) available for application against net taxable
capital gains of future years.
As at June 30, 2000 (unaudited), the company has non-capital losses for
U.S. income tax purposes of approximately U.S. $3,486,000 (Cdn.
$5,230,000) which are available for carryforward to reduce future years'
taxable income of the U.S. companies. The losses expire in 2020.
Net deferred tax assets are as follows:
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards 7,338,200 2,397,200 1,531,200
Net capital loss carryforwards 21,015,000 21,015,000 21,015,000
Share issue costs 375,800 - 122,000
-------------------------------------------------------
28,729,000 23,412,200 22,668,200
Deferred tax asset valuation allowance (28,729,000) (23,412,200) (22,668,200)
-------------------------------------------------------
Net deferred tax assets - - -
-------------------------------------------------------
</TABLE>
Management believes there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance
has been provided.
F-66
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The income tax recovery (provision) for the period ended June 30, 2000
(unaudited) differs from the amount obtained by applying the applicable
statutory income tax rates to loss before income taxes as follows:
<TABLE>
<CAPTION>
June 30, September 30, December 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Combined statutory income tax rate 45% 45% 45%
-------------------------------------------------------
Income tax recovery based on combined statutory rate 9,772,000 744,000 577,000
Effect of combined U.S. and Canadian income tax
rates for the period ended June 30, 2000 (1,182,200) - -
Temporary differences relating to non-deductible
goodwill, intangibles, deferred financing
costs and property, plant and equipment (1,804,000) - -
Non-deductible expenses (1,046,000) - (2,000)
Change in valuation allowance (5,316,800) (744,000) (575,000)
-------------------------------------------------------
423,000 - -
=======================================================
Losses acquired - - -
=======================================================
</TABLE>
16 Commitments and contingencies
a) The company has operating leases for the rental of office premises and
equipment. Payments required under these leases are as follows:
<TABLE>
<CAPTION>
September 30,
June 30, 2000 1999
$ $
(Unaudited)
<S> <C> <C>
2000 367,027 171,449
2001 1,457,780 124,681
2002 1,262,956 118,909
2003 1,039,467 9,522
2004 948,501 -
-----------------------------------
5,075,731 424,561
===================================
</TABLE>
F-67
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The company in turn has expected revenues in accordance with contract
terms on certain sub-lease agreements related to office premises as
follows:
June 30, September 30,
2000 1999
$ $
(Unaudited)
2000 18,129 58,569
2001 72,516 77,628
2002 6,043 77,628
2003 - 6,469
-------------------------------
96,688 220,294
===============================
b) During the period ended June 30, 2000, the company agreed to
guarantee a US $3,000,000 promissory note issued by Aviation Group
Inc. The note bears interest at an annual rate of 12% and is payable
in full on February 28, 2001.
17 Related party transactions
a) During the period ended June 30, 2000 (unaudited), the company paid
$366,941 (September 30, 1999 - $120,050) in consulting fees to
companies controlled by officers and directors.
b) During the period ended June 30, 2000 (unaudited), the company paid
or accrued legal fees totalling $608,542 (September 30, 1999 -
$256,166) to a firm in which a director is a partner.
c) As at June 30, 2000 (unaudited), $374,855 (September 30, 1999 -
$218,684; December 31, 1998 - $2,968) was due to a law firm in which
a director is a partner, and $739,650 is potentially repayable to
officers of a subsidiary company (note 6(e)).
18 Fair value of financial instruments
The fair value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate their carrying value due to
the relatively short term to maturity of these instruments. The fair value
of the marketable securities is based on quoted market values. The fair
value of the redeemable debentures has been determined by discounting the
face value of the debenture and related semi-annual interest payments
using an implicit rate equivalent to debt instruments without
representation of detachable warrants. The fair value of the convertible
debentures approximates the face value.
19 Concentration of credit risk
Financial instruments which potentially subject the company to
concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The company limits its exposure
to credit loss by placing its cash and cash equivalents on deposit with
high credit quality financial institutions. Receivables arising from sales
to customers are generally not significant individually and are not
collateralized; as a result, management continually monitors the financial
condition of its customers to reduce the risk of loss.
F-68
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
20 Segmented information
The company operates within three operating segments: Travel, Technology
and Other. The Travel segment provides a broad range of travel products,
targeted primarily at the leisure customer, including airfare, hotel
rooms, cruise packages, and ground packages. Products and services are
offered through the traditional travel agency base, 1-800 call centers and
the internet. Included in the Travel segment are the operations of the
following subsidiaries: Mr. Cheaps Travel, International Tours Inc.,
GalaxSea Cruises and Tours, Inc., Express Vacations, Cheap Seats, Bell
Travel and Cruise Shoppes.
The Technology segment designs and manufactures electronic data storage
systems and develops internet accessible travel reservations systems.
Included in this segment are the operations of Legacy and Epoch.
The Other segment consists of the advertising and associate marketing
operations of International Tours Inc., GalaxSea Cruises and Tours, Inc.
and Cruise Shoppes.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
For the period and years prior to June 30, 1999, the company had a single
operating segment which encompassed its mining operations which were
discontinued (note 21). As a result of the significant change in the
direction of the company, segmented information for the quarter ended June
30, 1999 (unaudited) and the years ended December 31, 1998 and 1997 would
reflect only corporate expenses.
F-69
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine months period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
Consolidated Travel Technology Other
------------------------- ----------------------- ---------------------------- -----------------------
Continuing Continuing Continuing Continuing
operations operations operations operation for
Nine- for the period Nine- for the period Nine- for the period Nine- the period
month from month from month from month from
period January 1, period January 1, period January 1, period January 1,
ended 1999 to ended 1999 to ended 1999 to ended 1999 to
June 30, September 30, June 30, September 30, June 30, September 30, June 30, September 30,
2000 1999 2000 1999 2000 1999 2000 1999
$ $ $ $
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from
external
customers (1) 12,016,173 - 9,844,756 - 1,223,959 - 947,458 -
==================================================================================================================
Operating
(loss) income
before
amortization
of capital
assets,
goodwill
and other
intangibles (13,866,312) (1,415,714)(13,996,335) (1,415,714) (245,770) - 375,813 -
Amortization
of capital
assets,
goodwill and
other
intangibles (1) 4,009,296 79,009 3,018,541 79,009 508,279 - 482,476 -
------------------------------------------------------------------------------------------------------------------
Operating (loss)
income (17,875,608) (1,494,723)(17,014,876) (1,494,723) (754,049) - (106,663) -
Interest
expense 36,585 - 2,491 - 34,094 - - -
---------------------------------------------------------------------------------------
(17,017,387) (1,494,723) (788,143) - (106,663) -
=======================================================================================
Corporate
interest
expense 3,043,185 284,464
Corporate
interest
income (308,358) (6,972)
Extraordinary
loss from
repayment of
debentures 1,068,068 -
-------------------------
Loss for the
period (21,715,008) (1,772,215)
=========================
Capital
expenditures 2,621,577 - 2,621,577 - - - - -
Additions to
goodwill 58,800,746 - 40,644,175 - 14,766,606 - 3,389,965 -
Total assets (2) 96,148,123 12,465,014 73,810,836 12,465,014 17,820,771 - 4,516,516 -
</TABLE>
(1) Revenue and goodwill are primarily derived from, and capital assets
are substantially employed in the U.S.
(2) For the year ended September 30, 1999, the capital assets were
substantially employed in Canada.
F-70
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
21 Discontinued operations
As described in note 1, the company discontinued its mining activities and
accordingly the results of operations from these operating activities have
been disclosed separately from those of continuing operations for the
periods presented. During the period ended September 30, 1999, the company
discontinued all mining activities and abandoned its South American mineral
property interests. No gain or loss arose on the disposal of assets related
to these discontinued operations. The company had no revenues and no other
income or loss from these discontinued operations other than those already
disclosed in the consolidated statement of operations and deficit for the
periods presented.
The assets and liabilities of the company relate to its continuing
operations.
22 Stock options and warrants
The company has a Stock Option Plan that provides for the granting of
options to purchase common shares to directors, officers, employees and
consultants of the company. The number of common shares reserved for
issuance under the Stock Option Plan shall not exceed 6,500,000 common
shares or a greater number as approved by the shareholders of the company.
Terms of the options shall not be for a period less than one year or longer
than ten years. The option price shall be fixed by the directors of the
company subject to price restrictions imposed by the regulators. All
options were granted at or above market value at the date of grant.
Accordingly, no current or deferred compensation expense has been recorded
in the periods presented.
F-71
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Stock option transactions
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
$
<S> <C> <C>
Balance outstanding - December 31, 1997 1,837,000 2.22
Options granted during the year 1,075,000 0.54
Options expired during the year (1,737,000) 2.21
Options exercisable at end of year 350,000 0.64
Balance outstanding - December 31, 1998 1,175,000 0.70
Options granted during the year 2,725,000 0.65
Options exercised during the year (550,000) 0.34
Options expired during the year (675,000) 1.12
Options exercisable at end of year 350,000 0.64
Balance outstanding - September 30, 1999 2,675,000 0.61
Options granted during the period 3,820,000 3.40
Options exercised during the period (472,200) 0.50
Options expired during the period (87,500) 0.60
Options exercisable at end of period 2,538,800 0.97
Balance outstanding - June 30, 2000 (unaudited) 5,935,300 2.41
</TABLE>
F-72
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The following table summarizes information about options outstanding at
June 30, 2000 (unaudited).
<TABLE>
<CAPTION>
Range of Number
exercise outstanding Weighted average
prices at June 30, remaining
$ 2000 contractual life
<S> <C> <C>
0.12 /1/ 300,000 33 months
0.46 /1/ 451,300 46 months
0.46 /1/ 175,000 3 months
0.55 /2/ 89,000 49 months
0.79 /1/ 600,000 48 months
1.00 /1/ 500,000 49 months
1.65 /1/ 675,000 53 months
2.35 /2/ 165,000 59 months
2.77 /2/ 91,500 59 months
2.80 /2/ 350,000 60 months
3.20 /3/ 200,000 19 months
3.25 /2/ 90,000 59 months
3.30 /2/ 259,000 54 months
3.75 /2/ 50,000 7 months
3.75 /2/ 115,500 58 months
3.80 /2/ 18,000 56 months
3.90 /1/ 100,000 55 months
4.04 /2/ 6,000 55 months
4.08 /2/ 4,500 56 months
4.28 /2/ 1,467,500 55 months
4.29 /2/ 19,500 55 months
4.39 /2/ 7,500 58 months
4.47 /2/ 21,000 57 months
4.50 /2/ 105,000 57 months
4.90 /2/ 75,000 55 months
</TABLE>
/1/ Options vest per one-year period, with 1/2 vesting in six months and
1/2 vesting in the remaining six months.
/2/ Options vest over a three-year period, with 1/3 vesting in each year.
/3/ Options vest at specific dates as follows:
50,000 on May 8, 2000
50,000 on August 6, 2000
50,000 on November 5, 2000
50,000 on February 3, 2001
F-73
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
Warrant transactions
The following table summarizes information about the company's warrant
activity:
<TABLE>
<CAPTION>
Number of
underlying Exercise price
shares $
<S> <C> <C>
Warrants outstanding - December 31, 1997 1,705,000 2.05
Surrendered or expired (1,705,000) 2.05
---------------------------------
Warrants outstanding - December 31, 1998 - -
Issued 10,260,270 0.68
---------------------------------
Warrants outstanding - September 30, 1999 10,260,270 0.68
Issued 11,280,000 1.48 - 3.50
Exercised (6,856,750) 1.48 - 3.50
---------------------------------
Warrants outstanding - June 30, 2000 (unaudited) 14,683,520 0.68 - 3.50
---------------------------------
</TABLE>
Warrants outstanding at June 30, 2000 (unaudited) are due to expire from
March 21, 2001 to December 7, 2002.
Pro forma compensation costs
Had the company determined compensation costs based on fair value at the date of
grant for its awards under the method for determining fair value prescribed by
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" the company's pro forma loss and loss per share would
be as follows:
<TABLE>
<CAPTION>
Period from
January 1,
Nine-month periods ended 1999 to
June 30, September 30, Years ended December 31,
-------------------------------- --------------------------------
2000 1999 1999 1998 1997
$ $ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Loss for the period (21,715,088) (251,430) (1,772,215) (1,282,999) (10,780,020)
Additional
compensation
expense (2,729,885) - (125,113) (206,450) (263,150)
------------------------------------------------------------------------------------
Pro forma net loss (24,444,973) (251,430) (1,897,328) (1,489,449) (11,043,170)
------------------------------------------------------------------------------------
Pro forma basic loss
per common share (0.37) (0.01) (0.05) (0.08) (0.71)
------------------------------------------------------------------------------------
Pro forma diluted loss
per common share (0.37) (0.01) (0.05) (0.08) (0.71)
------------------------------------------------------------------------------------
</TABLE>
F-74
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
The pro forma compensation expense reflected above has been estimated
using the Black Scholes option pricing model. Assumptions used in the
pricing model included:
a) risk-free interest rate of between 5.40% - 5.84%;
b) expected volatility of 90%;
c) expected dividend yield of $nil; and
d) an estimated average life of one to three years.
23 Subsequent events
a) The company entered into a letter of intent on February 28, 2000 (as
amended March 16, 2000, April 18, 2000, April 25, 2000 and May 3, 2000)
to merge with Aviation Group, an aviation services company based in
Dallas, Texas. Aviation Group provides services and products to airline
companies and other aviation firms primarily in the United States. The
completion of the arrangement is subject to receipt of requisite
regulatory approval, including without limitation the approval of an
Ontario, Canada court, the Toronto Stock Exchange and the Canadian
Venture Exchange. When the arrangement is completed, the company will
become an indirect subsidiary of Aviation Group. The arrangement will
result in a change in control of Aviation Group and former
travelbyus.com ltd. shareholders will own directly or indirectly more
than 90% of Aviation Group's outstanding common stock. The proposed
terms of the business combination contemplate a three-stage structure
which includes a bridge financing, a business combination of Aviation
Group and Global Leisure and finally the proposed business combination
of Aviation Group and the company. Through Aviation Group, the company
will acquire 100% of Global Leisure, a provider of discount air and
land vacation packages. Aviation Group has issued U.S. $16,500,000
(approximately Cdn. $23,510,400) of 9% convertible preferred shares and
4,250,000 warrants to Global Leisure debt and equity-holders to acquire
Global Leisure. This arrangement includes a termination clause whereby
if the board of directors of either the company or Aviation Group
decides not to complete the proposed business combination, then that
party must pay a termination fee of U.S. $1,000,000 (approximately Cdn.
$1,451,300) to the other party. In connection with the business
combination of Aviation Group and Global Leisure, a financing
arrangement was completed whereby U.S. $5,000,000 was invested in
Aviation Group by the company through the purchase of 500 shares of
Series B preferred stock from Aviation Group at U.S. $10,000 per share
(paid during March 2000 (note (5)); $2,000,000 invested in Aviation
Group by private investors in the purchase of 750,000 shares of
Aviation Group common stock at $2.67 per share; and approximately
$16,500,000 invested in Aviation Group by private investors in the
purchase of approximately 1,650 units of Aviation Group Series B
preferred stock and Series C warrants, at a price of $10,000 per unit,
each unit consisting of one share and 750 warrants. Aviation Group used
these funds to acquire control of Global Leisure and to service
indebtedness of Global Leisure.
F-75
<PAGE>
travelbyus.com ltd.
Notes to Consolidated Financial Statements
Nine month period ended June 30, 2000 is unaudited
--------------------------------------------------------------------------------
(expressed in Canadian dollars)
b) On July 20, 2000, the company acquired all of the issued and
outstanding shares of Muffin Communications Ltd. for aggregate
consideration of U.S. $7,000,000 (approximately Cdn. $10,355,000)
consisting of U.S. $300,000 (approximately Cdn. $444,000) cash and
1,000,000 common shares at the guaranteed price of U.S. $6.70
(approximately Cdn. $9.91) per common share. Per the terms of the
agreement, the share consideration is subject to adjustment based on
the price of the common shares of the company on December 15, 2000. If
the market value of the stock at December 15, 2000 falls below the
guaranteed price of U.S. $6.70, additional shares will be issued or
cash will be paid to maintain the value of share consideration at U.S.
$6,700,000 (approximately Cdn. $9,911,310). The combination of shares
and/or cash in respect of this adjustment may be determined by the
company.
c) On September 14, 2000, the company acquired all of the issued and
outstanding shares of ProSoft Corporation ("ProSoft") for consideration
of U.S. $3,150,000 (approximately Cdn. $4,660,000) consisting of
1,260,000 common shares at a guaranteed price of U.S. $2.50
(approximately Cdn. $3.70) per share. An additional U.S. $1,050,000
(approximately Cdn. $1,553,000) consisting of 420,000 common shares at
a guaranteed price of U.S. $2.50 (approximately Cdn. $3.70) per share
are contingently issuable subject to the completion of the vendors'
two-year employment contracts. If the employment contracts are
terminated under the terms of the employment agreements or a
resignation is tendered before the two year term, the applicable
affected vendor will not receive his share of the pro rata contingent
common shares. The initial shares to be paid on closing and the 420,000
contingently issuable shares are adjustable based on the price of the
company's shares on the earlier of December 15, 2000 or 90 days after
the SEC declares the Aviation Group Form S-4 registration statement
effective. Also, in connection with this transaction, the company
issued 450,000 options to purchase common shares at a price of $1.70
per share for a period of three years and which vest one-third
annually. ProSoft is a custom software programming company located in
San Diego, California. ProSoft also holds 12% of the outstanding shares
of SiteRabbit.com (note 23(d)).
d) On September 14, 2000, the company acquired the remaining issued and
outstanding shares of SiteRabbit.com, Inc. ("SiteRabbit.com") for
consideration of U.S. $8,894,000 (approximately Cdn. $13,221,000)
consisting of 3,557,712 common shares at a guaranteed price of U.S.
$2.50 (approximately Cdn. $3.70) per share. The number of shares is
adjustable based on the price of the company's shares on the earlier of
December 15, 2000 or 90 days after the SEC declares the Aviation Group
Form S-4 registration statement effective. Also, in connection with
this acquisition, the company issued 669,000 options to purchase common
shares at a price of $1.70 per share for a period of three years. Of
these options, 50% vest immediately. Subsequent to June 30, 2000, the
company advanced SiteRabbit.com U.S. $100,000 (approximate Cdn.
$148,000) to be used for software development and working capital.
SiteRabbit.com predominantly develops and markets Internet based
application service products and is in the development stage.
e) Subsequent to June 30, 2000, the company entered into discussions with
JVI in connection with a proposed management arrangement whereby the
company would manage the business of JVI and provide further working
capital funding to JVI in exchange for the right to receive certain of
the net income, if any, generated by JVI. Currently, JVI is not
believed to be generating positive net income. Accordingly, there is
significant uncertainty as to the collectibility of the cash advances
made to JVI to date, and it is reasonably possible that the company may
not be able to recover these amounts in the near term (note 7). This
management agreement has not as yet been finalized or effected.
f) Subsequent to June 30, 2000, the company entered into an agreement with
HealthyConnect.com Inc. ("HC.com"), a private health care related
internet technology company. Pursuant to the terms of the agreement,
HC.com will issue 1,200,000 common shares to the company upon
confirmation of necessary technical specifications to establish links
between their respective web-sites. The company will issue 1,000,000
common shares in exchange for a further 1,400,000 common shares of
HC.com upon certain conditions. Under the terms of the agreement,
HC.com has an option whereby they may force the company to acquire up
to 1,200,000 common shares of HC.com at U.S. $2.50 (approximately Cdn.
$3.70) per share for total cash consideration of U.S. $3,000,000
(approximately Cdn. $4,400,000), subject to satisfactory due diligence
by and board approval of the company. The completion of these
transactions is subject to the necessary regulatory approvals.
g) The company has entered into a financing and loan commitment with
Doerge Capital Management whereby Doerge Capital Management directly
and through its affiliates ("Doerge") will purchase, at face value,
from the company up to US $1.5 million liquidation value of Series B
preferred stock of Aviation Group, Inc. held by the company and provide
to the company a line of credit for up to US $10 million. The line of
credit bears interest at 12% per annum, is collateralized by a security
interest in substantially all the company's assets, subject to the
security interests relating to the existing debentures, and expires on
October 15, 2001. Doerge may elect to convert any amounts outstanding
on the line of credit, plus accrued and unpaid interest, to common
shares of the company at a conversion price of US $2.00 per share. For
each US $1 million drawn under the financing and loan commitment, the
company will grant to Doerge warrants to acquire 100,000 common shares
exercisable at US $2.00 per share and expiring three years following
their grant. The financing agreement requires the company to use its
best efforts to complete the merger with Aviation Group and restricts
the company from paying dividends or entering into certain other
transactions without the consent of the lender.
h) Subsequent to June 30, 2000, 3,547,500 of the warrants issued in
connection with the debenture financing (note 13a)) were exercised for
gross proceeds of $2,412,300 to the company. The company also issued
1,283,500 options, in addition to those issued in connection with
acquisitions completed after June 30, 2000 outlined above, to purchase
common shares at prices ranging from $1.50 to $2.05 per share for
periods ranging from three to five years. The total number of options
granted by the company now exceeds the maximum number of options
issuable under the company's stock option plan. Accordingly, the
company is required to obtain shareholder and regulatory approval for
an amendment to the plan.
i) Subsequent to June 30, 2000, Aviation Group, Global Leisure and
travelbyus.com entered into a management agreement under which
travelbyus.com assumed responsibility for management of Global
Leisure's business. travelbyus.com provides management and support
services, including office space, utilities, office equipment, staff
support, bookkeeping, accounting, billing, collection, contract
administration and other overhead services. To the extent funds are
available, Global Leisure is required to pay to travelbyus.com a
servicing fee of $55 per paid passenger and a monthly retainer of
$5,000 and to reimburse travelbyus.com for direct advertising and
marketing expenses and long distance, postage and delivery charges
arising from Global Leisure's business. travelbyus.com also assumed
responsibility for Global's working capital deficit upon commencement
of the agreement. This management agreement expires September 1, 2001.
F-76
<PAGE>
Report of PricewaterhouseCoopers LLP Independent Auditors
To the Directors of
Cruise Shoppes America, Ltd.
We have audited the balance sheets of Cruise Shoppes America, Ltd. as at June
30, 1999 and 1998 and the statements of earnings and retained earnings, changes
in shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at June 30, 1999 and 1998 and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
April 12, 2000
F-77
<PAGE>
Cruise Shoppes America, Ltd.
Balance Sheets
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
March 31, June 30, June 30,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 62,676 128,833 127,082
Marketable securities 1,075,127 1,092,096 542,812
Accounts receivable (net of allowance of $nil) 697,826 372,905 511,158
Income taxes receivable - 51,635 34,591
Prepaids and other assets 69,547 11,321 12,342
---------------------------------------------------
Total current assets 1,905,176 1,656,790 1,227,985
Deposit (note 3) 22,727 21,945 20,950
Capital assets (note 5) 85,862 94,480 78,274
---------------------------------------------------
2,013,765 1,773,215 1,327,209
===================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities 20,147 242,306 211,161
Income taxes payable 214,535 - -
Due to related parties (note 7) - 446,952 173,660
Notes payable (note 8) - 18,347 21,347
Deferred income taxes (note 9) 198,908 50,751 116,301
---------------------------------------------------
Total current liabilities 433,590 758,356 522,469
---------------------------------------------------
Shareholders' Equity
Capital stock
Authorized
1,000 common shares without par value
Issued
1,000 shares (1999 - 1,000; 1998 - 1,000) 105,800 105,800 105,800
Paid-in capital 81,786 - -
Accumulated other comprehensive income 69,252 66,462 5,276
Retained earnings 1,323,337 842,597 693,664
---------------------------------------------------
Total shareholders' equity 1,580,175 1,014,859 804,740
---------------------------------------------------
2,013,765 1,773,215 1,327,209
===================================================
Commitments (note 6)
Subsequent events (note 10)
</TABLE>
Approved by the Board of Directors
/s/ Gary Brown Director /s/ Michael J. Wild Director
-------------------------- ------------------------
The accompanying notes are an integral part of the financial statements.
F-78
<PAGE>
Cruise Shoppes America, Ltd.
Statements of Earnings and Retained Earnings
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Nine-month periods ended
March 31, Years ended June 30,
--------------------------- ------------------------------
2000 1999 1999 1998
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Commissions 1,707,853 1,292,160 2,387,490 1,975,581
Advertising revenues 242,363 186,638 241,888 160,439
------------------------------------------------------------------
1,950,216 1,478,798 2,629,378 2,136,020
------------------------------------------------------------------
Expenses
Cost of services revenues 222,974 171,707 222,537 148,555
Selling, general and administrative 365,482 372,711 630,213 581,996
Salaries and commissions 616,853 473,974 1,632,311 1,194,985
------------------------------------------------------------------
1,205,309 1,018,392 2,485,061 1,925,536
------------------------------------------------------------------
Earnings from operations 744,907 460,406 144,317 210,484
------------------------------------------------------------------
Other income (expenses)
Interest income 782 16,804 995 14,061
Dividend income 20,560 - 20,158 13,235
Capital gains 8,433 - 22,895 9,140
Interest expense (2,358) (7,089) (9,305) (2,032)
------------------------------------------------------------------
27,417 9,715 34,743 34,404
------------------------------------------------------------------
Earnings before income taxes 772,324 470,121 179,060 244,888
------------------------------------------------------------------
Provision for (recovery of) income taxes
Current 143,427 411,096 130,077 (18,816)
Deferred 148,157 (242,628) (99,950) 112,903
------------------------------------------------------------------
291,584 168,468 30,127 94,087
------------------------------------------------------------------
Net earnings for the period 480,740 301,653 148,933 150,801
Retained earnings - Beginning of period 842,597 693,664 693,664 542,863
------------------------------------------------------------------
Retained earnings - End of period 1,323,337 995,317 842,597 693,664
==================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-79
<PAGE>
Cruise Shoppes America, Ltd.
Statements of Changes in Shareholders' Equity
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Accumulated
other
Common stock Additional comprehensive Total
-----------------------
Number of paid-in Retained income shareholders'
shares Amount capital earnings (loss) equity
$ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1997 1,000 105,800 - 542,863 (38) 648,625
Comprehensive income
Earnings for the year - - - 150,801 -
Other comprehensive income
Unrealized gain on marketable securities
(net of tax of $3,398) - - - - 5,314
Total comprehensive income 156,115
--------------------------------------------------------------------------------
Balance - June 30, 1998 1,000 105,800 - 693,664 5,276 804,740
Comprehensive income
Earnings for the year - - - 148,933 -
Other comprehensive income
Unrealized gain on marketable securities
(net of tax of $34,400) - - - - 61,186
Total comprehensive income 210,119
--------------------------------------------------------------------------------
Balance - June 30, 1999 1,000 105,800 - 842,597 66,462 1,014,859
Forgiveness of shareholder loan payable - - 81,786 - - 81,786
Comprehensive income
Earnings for the period - - - 480,740 -
Other comprehensive income
Unrealized gain on marketable securities
(net of tax of $1,783) - - - - 2,790
Total comprehensive income 483,530
--------------------------------------------------------------------------------
Balance - March 31, 2000 (Unaudited) 1,000 105,800 81,786 1,323,337 69,252 1,580,175
================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
<PAGE>
Cruise Shoppes America, Ltd.
Statements of Cash Flows
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Nine-month periods ended
March 31, Years ended June 30,
--------------------------------- ----------------------------
2000 1999 1999 1998
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings for the period 480,740 301,653 148,933 150,801
Items not affecting cash
Amortization 18,795 17,849 25,132 21,493
Deferred income taxes (note 9) 148,157 (242,628) (99,950) 112,903
Gain on sale of marketable securities (8,433) - - -
Accounts receivable (324,921) 434,012 138,253 (231,196)
Prepaids and other assets (58,226) (11,613) 1,021 6,511
Accounts payable and accrued liabilities 33,760 489,674 14,101 84,563
Due to related parties (note 7) (365,166) (81,197) 273,292 364,079
--------------------------------------------------------------------
(75,294) 907,750 500,782 509,154
--------------------------------------------------------------------
Cash flows from investing activities
Investment in marketable securities - (785,322) (453,698) (381,787)
Proceeds from sale of marketable securities 20,097 - - -
Purchase of capital assets (10,178) (31,343) (41,338) (25,977)
(Increase) decrease in deposit (782) 950 (995) (20,950)
--------------------------------------------------------------------
9,137 (815,715) (496,031) (428,714)
--------------------------------------------------------------------
Cash flows from financing activities
Repayment of notes payable - (3,000) (3,000) (9,131)
--------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (66,157) 89,035 1,751 71,309
Cash and cash equivalents -
Beginning of period 128,833 127,082 127,082 55,773
---------------------------------------------------------------------
Cash and cash equivalents -
End of period 62,676 216,117 128,833 127,082
====================================================================
Interest paid (2,357) (7,089) 9,305 2,032
====================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-81
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 Nature of operations
Cruise Shoppes America, Ltd. ("the company") is engaged in the marketing
of cruise packages to its network of affiliated retail travel agencies
based throughout North America and is located in Metairie, Louisiana.
Revenues are earned from customers located in the United States. Capital
assets of the company are located in the United States.
2 Summary of significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Revenue recognition
The company's revenue consists primarily of commissions from the sale of
cruise ship vacation packages. The company earns commission revenue from
the sale of these cruise packages which are recognized on the scheduled
departure date of the cruise, provided that collection is reasonably
assured. The company also earns revenue from volume bonuses and override
commission which are recognized as specified in accordance with
contractual arrangements with travel product suppliers.
Advertising revenues are also derived from travel product suppliers'
advertising included in printed marketing and promotional materials
prepared by the company and delivered to travel agents and customers.
Advertising revenues are recognized at the time the marketing and
promotional materials are distributed to the travel agents and customers,
and when collectibility is reasonably assured. Costs of sales comprise the
direct costs of developing and producing the marketing and promotional
materials.
Marketable securities
Marketable securities consisting of mutual fund investments are considered
available-for-sale and are stated at market value. Unrealized holding
gains and losses are excluded from earnings and reported in a separate
component of shareholders' equity.
Capital assets
Capital assets are stated at cost. Amortization is recorded on a straight-
line basis to amortize the cost of the capital assets over their estimated
useful lives. Amortization rates are as follows:
Furniture and fixtures 7 years
Computer equipment and software 3 - 5 years
Leasehold improvements remaining lease term
F-82
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Income taxes
The company follows the asset and liability method for accounting for
income taxes. Under this method, deferred income tax assets and
liabilities are recognized for the estimated tax consequences attributable
to differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
A valuation allowance is provided for deferred income tax assets if it is
more likely than not that the company will not realize the future benefit
or the future deductibility is uncertain.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses for the
period reported. Management believes its estimates to be appropriate;
however, actual results could differ from the amounts estimated.
Cash and cash equivalents
Cash and cash equivalents consist of cash balances with banks and
investments in money market instruments with original maturities of less
than 90 days.
Financial instruments
The carrying values reported on the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities, amounts due to related parties, and notes payable approximate
their fair values due to the short-term nature of those instruments. The
carrying values of marketable securities approximate their fair values as
they are stated at market value.
3 Deposit
The company is required to maintain a certificate of deposit as security
for a letter of credit provided to the Airline Reporting Corporation.
These funds earn interest at 4.75% per annum.
F-83
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
4 Balance sheet components
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Accounts receivable
Due from affiliates - - 150,000
Employee advances 250 - -
Accounts receivable - override commissions 697,576 372,905 223,289
-----------------------------------------------
697,826 372,905 373,289
-----------------------------------------------
Accounts payable and accrued liabilities
Refunds payable to agents (5,088) (127,060) (13,593)
Employee related liabilities (15,059) (115,246) (197,568)
-----------------------------------------------
(20,147) (242,306) (211,161)
===============================================
</TABLE>
5 Capital assets
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------
(Unaudited)
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Furniture and fixtures 121,751 61,055 60,696
Computer equipment and software 75,388 52,112 23,276
Leasehold improvements 2,624 734 1,890
-----------------------------------------------
199,763 113,901 85,862
-----------------------------------------------
<CAPTION>
June 30, 1999
-----------------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Furniture and fixtures 116,244 49,654 66,590
Computer equipment and software 70,717 44,998 25,719
Leasehold improvements 2,624 453 2,171
-----------------------------------------------
189,585 95,105 94,480
===============================================
</TABLE>
F-84
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------
Accumulated
Cost amortization Net
$ $ $
<S> <C> <C> <C>
Furniture and fixtures 84,756 35,812 48,944
Computer equipment and software 60,867 34,083 26,784
Leasehold improvements 2,624 78 2,546
-----------------------------------------------
148,247 69,973 78,274
===============================================
</TABLE>
6 Commitments
a) Operating leases
The company leases office space and equipment under long-term
agreements. As at June 30, 1999, lease commitments through to expiry
are as follows:
$
2001 48,785
2002 41,079
2003 4,735
2004 -
b) Management contracts
The company has entered into a management contract with a director for
a one-year term. Effective November 1, 1999, the company signed a
management contract with a senior officer for $108,000 per year for
years 1 and 2 and $120,000 for year 3. As at June 30, 1999, these
contracts require the company to pay the following amounts:
$
2001 108,000
2002 114,000
2003 60,000
2004 -
The contracts also require the company to pay bonuses based on
specific criteria and assume certain monetary obligations to the
senior officer and director in the event of termination of the
contracts by the company without cause.
F-85
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
7 Related party balances and transactions
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Due (to) from
Charles Brown (related to
controlling shareholder) - 10,000 10,000
Cruise Shoppes Ltd. (controlled by
Charles Brown) - (259,513) (193,482)
Gary Brown (controlling shareholder) - (197,439) 9,822
-----------------------------------------------
- (446,952) (173,660)
===============================================
</TABLE>
During the period ended March 31, 2000 (Unaudited), the controlling
shareholder forgave $81,786 of the outstanding balance owing.
Balances due to the company earn interest at prime rate. No interest is due
on the amounts payable to related parties. The balances have no specific
terms of repayment.
The following transactions occurred with Cruise Shoppes Ltd. during the
respective years and are included in the statement of earnings:
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Net revenues - 33,603 156,375
General administrative expenses - 200,653 38,921
</TABLE>
The transactions are not necessarily on commercial terms or at normal
commercial rates.
8 Notes payable
The notes payable bear no interest and are due on demand.
F-86
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
9 Income taxes
The company is subject to U.S. federal and Louisiana state income taxes in
the U.S.
Net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
March 31,
2000 1999 1998
$ $ $
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets
Expenditures recognized on accrual basis 89,252 86,649 91,110
-----------------------------------------------
Deferred tax liabilities
Revenues recognized on accrual basis 261,203 133,352 202,521
Other 26,957 4,048 4,890
-----------------------------------------------
288,160 137,400 207,411
-----------------------------------------------
Net deferred tax liability 198,908 50,751 116,301
===============================================
</TABLE>
The income tax provision for the periods, differs from the amount obtained
by applying the applicable statutory income tax rates to income before
income taxes as follows:
<TABLE>
<CAPTION>
March 31, June 30,
---------------------------------- -------------------------------
2000 1999 1999 1998
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Combined statutory
income tax rate 38% 38% 38% 38%
Income tax provision
based on statutory rate 293,483 178,646 68,043 93,057
Effect of changes in
graduated income
tax rates 6,951 (10,531) (4,011) 3,968
Deferred income tax
expense (benefit) (8,850) 353 (33,905) (2,938)
----------------------------------------------------------------------
291,584 168,468 30,127 94,087
=======================================================================
</TABLE>
F-87
<PAGE>
Cruise Shoppes America, Ltd.
Notes to Financial Statements
Nine-month periods ended March 31, 2000 and 1999 are unaudited
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The changes in the combined statutory rate across the periods presented
above are a function of graduated income tax rates based on level of
taxable income. No change to enacted rates occurred during these periods.
10 Subsequent events
On April 4, 2000, travelbyus.com ltd. agreed to acquire all of the issued
and outstanding shares of the company for a cost of approximately $9
million. This will be paid in cash and shares of travelbyus.com ltd.
On April 4, 2000, the company also entered into an employment agreement
with Gary Brown for an initial term of two years. This agreement provides
for a special bonus of approximately $468,000, related to 1999 sales, which
may be reduced by any working capital adjustment related to the purchase of
the company by travelbyus.com ltd. These amounts have not been accrued in
these financial statements.
Immediately prior to the agreement noted above, Gary Brown personally
assumed the liability for the notes payable and all liabilities for amounts
due to related parties. These liabilities were credited to shareholders'
equity, net of amounts due from Gary Brown.
F-88
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Epoch Technology, Inc.
Garland, Texas
We have audited the accompanying balance sheets of Epoch Technology, Inc. as of
December 31, 1999 and 1998, and the related statements of operations, changes in
stockholders' deficiency and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Epoch Technology, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company's
limited operating history and limited financial resources raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ HEIN + ASSOCIATES LLP
Hein + Associates LLP
Dallas, Texas
April 19, 2000
F-89
<PAGE>
EPOCH TECHNOLOGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
----------- ----------------------------
2000 1999 1998
----------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,965 $ 22,112 $ --
Trade accounts receivable, no allowance for
doubtful accounts 66,912 25,747 --
Deposits and prepaid expenses 528 -- --
----------- ---------- ------------
Total current assets 119,405 47,859 --
PROPERTY AND EQUIPMENT, net 2,420 2,795 2,432
----------- ---------- ------------
Total assets $121,825 $ 50,654 $ 2,432
=========== ========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 464 $ 670 $ -
Accrued expenses and other liabilities 77,979 486 -
Due related parties 109,745 109,745 109,745
----------- ---------- ------------
Total current liabilities 188,188 110,901 109,745
STOCKHOLDERS' DEFICIENCY:
Common stock, no par value, 200,000 shares
authorized, 75,053 shares issued and
outstanding at March 31, 2000 and
December 31, 1999 and 40,000 at
December 31, 1998 39,053 39,053 4,000
Accumulated deficit (105,416) (99,300) (111,313)
----------- ---------- ------------
Total stockholders' deficiency (66,363) (60,247) (107,313)
----------- ---------- ------------
Total liabilities and stockholders'
deficiency $121,825 $ 50,654 $ 2,432
=========== ========== ============
</TABLE>
F-90
<PAGE>
EPOCH TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
---------------------------- ---------------------------
2000 1999 1999 1998
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
INSTALLATION AND SUPPORT REVENUE $ 57,244 $ -- $ 275,992 $ --
COST OF REVENUE 35,715 -- 71,825 --
--------- --------- --------- ---------
Gross margin 21,529 -- 204,167 --
OPERATING EXPENSES:
Software development -- 5,344 144,000 108,424
General and administrative expenses 27,645 -- 48,154 --
--------- --------- --------- ---------
Total operating expenses 27,645 5,344 192,154 108,424
--------- --------- --------- ---------
NET INCOME (LOSS) $ (6,116) $ (5,344) $ 12,013 $(108,424)
========= ========= ========= =========
</TABLE>
F-91
<PAGE>
EPOCH TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Common Stock Accumulated
----------------------------
Shares Amount Deficit Total
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1998 40,000 $ 4,000 $ (2,889) $ 1,111
Net loss - - (108,424) (108,424)
---------- ---------- ------------ -------------
BALANCES, December 31, 1998 40,000 4,000 (111,313) (107,313)
Shares issued for services 35,053 35,053 - 35,053
Net income - - 12,013 12,013
---------- ---------- ------------ -------------
BALANCES, December 31, 1999 75,053 39,053 (99,300) (60,247)
Net loss (unaudited) - - (6,116) (6,116)
---------- ---------- ------------ -------------
BALANCES, March 31, 2000 (unaudited) 75,053 $ 39,053 $ (105,416) $ (66,363)
========== ========== ============ =============
</TABLE>
F-92
<PAGE>
EPOCH TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31, December 31,
------------------------ ---------------------------
2000 1999 1999 1998
----------- --------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,116) $ (5,344) $ 12,013 $(108,424)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation 375 375 1,504 1,684
Compensation paid with stock -- -- 35,053 --
Change in receivables (41,165) -- (25,747) --
Change in current liabilities 77,287 6,241 1,156 --
Other (528) -- -- --
--------- ---------- --------- ----------
Net cash provided (used) by operating activities 29,853 1,272 23,979 (106,740)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property and equipment -- (1,272) (1,867) (2,205)
CASH FLOWS FROM FINANCING ACTIVITIES -
Advances from stockholders -- -- -- 108,945
--------- ---------- --------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 29,853 -- 22,112 --
CASH AND CASH EQUIVALENTS, beginning of year 22,112 -- -- --
--------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 51,965 $ -- $ 22,112 $ --
========= ========= ========= ==========
</TABLE>
F-93
<PAGE>
EPOCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (the period subsequent to December 31,
1999 is unaudited)
1. Nature of Business
------------------
Epoch Technology, Inc. ("the Company") is engaged in developing, selling,
installing and supporting an advanced reservation system which is Internet
accessible.
2. Summary of Significant Accounting Policies
------------------------------------------
Statement of Cash Flows
-----------------------
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
Recognition of Revenue
----------------------
Revenue is currently recognized in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition, With Respect To Certain Transactions.
Revenue from the sale of computer hardware and software is generally
recognized upon delivery. The Company recognizes revenue from its maintenance
contracts over the life of the contracts. Amounts not recognized are
classified as deferred revenue. License fee revenue is recognized when a non-
cancelable contingency-free license agreement has been signed, the product
has been delivered, fees from the arrangement are fixed or determinable, and
collection is probable.
Earnings (Loss) Per Share
-------------------------
Basic earnings or loss per share ("EPS") is calculated by dividing the income
or loss available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
Computer Software
-----------------
Computer software development costs and other research and development costs
are expensed as incurred. Costs incurred to develop product masters of
computer software, for which technological feasibility has been established,
are capitalized. Capitalized software costs are amortized on a product-by-
product basis each year based on the greater of: (1) the amount computed
using the ratio of current year gross revenues to the sum of current and
anticipated future gross revenues for that product, or (2) five year
straight-line amortization. No software costs had been capitalized by the
Company as of March 31, 2000 or December 31, 1999.
Property and Equipment
----------------------
The Company's property and equipment is stated at cost. Depreciation expense
is computed on the straight-line method over the estimated useful lives of
the assets, which is 3 years.
Income Taxes
------------
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
F-94
<PAGE>
EPOCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(the period subsequent to December 31, 1999 is unaudited)
Comprehensive Income (Loss)
---------------------------
Comprehensive income is defined as all changes in stockholders' equity,
exclusive of transactions with owners, such as capital investments.
Comprehensive income includes net income or loss, changes in certain assets
and liabilities that are reported directly in equity such as translation
adjustments on investments in foreign subsidiaries, and certain changes in
minimum pension liabilities. The Company's comprehensive income (loss) was
equal to its net income (loss) for the years ended December 31, 1999 and
1998.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates.
Unaudited Information
---------------------
The consolidated balance sheet as of March 31, 2000 and the consolidated
statements of operations for the three month periods ended March 31, 2000 and
1999 were taken from the Company's books and records without audit. However,
in the opinion of management, such information includes all adjustments
(consisting only of normal recurring accruals) which are necessary to
properly reflect the consolidated financial position of the Company as of
March 31, 2000 and the results of operations for the three months ended March
31, 2000 and 1999.
Going Concern
-------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company incurred an
operating loss in 1998 and has a stockholders' deficiency at December 31,
1999. The Company had only one customer in 1999. The continuation of the
Company as a going concern is dependent on obtaining additional customers
and/or financing in order to expand the level of operations. The stockholders
funded the previous loss and intend to finance additional losses, should they
occur.
3. Property and Equipment
----------------------
Property and equipment consisted of the following:
March 31, December 31,
--------- ------------------
2000 1999 1998
------- ------- -------
Computer equipment $ 8,872 $ 8,872 $ 7,005
Less accumulated depreciation (6,452) (6,077) (4,573)
------- ------- -------
$ 2,420 $ 2,795 $ 2,432
======= ======= =======
Depreciation expense was $375, $421, $1,504 and $1,684 for the three month
periods ended March 31, 2000 and 1999 and the years ended December 31, 1999
and 1998, respectively.
F-95
<PAGE>
EPOCH TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(the period subsequent to December 31, 1999 is unaudited)
4. Fair Value of Financial Instruments and Concentrations of Credit Risk
---------------------------------------------------------------------
The Company's financial instruments are cash, accounts receivable and
payable, and accrued expenses and other liabilities. Management believes
the fair values of these instruments approximate the carrying values, due
to the short-term nature of the instruments.
Financial instruments that subject the Company to credit risk are cash
equivalents and accounts receivable. At December 31, 1999, 100% of the
Company's accounts receivable was from one customer. The Company does not
ordinarily require collateral from its customers, nor perform credit
evaluations. The Company believes no allowance for doubtful accounts is
necessary at March 31, 2000 or December 31, 1999.
5. Major Customers
---------------
The Company had sales to one customer in 1999 that amounted to 100% of
total sales that year. The Company had no sales in 1998.
6. Related Party Transactions
--------------------------
At March 31, 2000 and December 31, 1998 and 1999, amounts advanced by the
stockholders that remain unpaid totaled $109,745. These advances are non
interest bearing and contain no specific repayment terms.
7. Income Taxes
------------
The Company had no income tax expense in 1999 and 1998 due to taxable
losses and carryforwards. Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. The Company's deferred tax assets and liabilities as
of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Deferred tax assets (primarily net operating losses) $ 25,000 $ 28,000
Deferred tax liabilities -- --
Valuation allowance (25,000) (28,000)
-------- --------
Net deferred tax balance $ -- $ --
======== ========
</TABLE>
***********
F-96
<PAGE>
Report of PricewaterhouseCoopers LLP Independent Auditors
To the Directors of
Express Vacations, LLC
(a Nevada limited liability company)
We have audited the balance sheets of Express Vacations, LLC (a Nevada limited
liability company) as at October 31, 1999, September 30, 1999 and 1998 and
the statements of loss, members' equity and cash flows for the one-month period
ended October 31, 1999, the year ended September 30, 1999 and the period from
August 5, 1998 (date of LLC formation) to September 30, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at October 31, 1999,
September 30, 1999 and 1998 and the results of its operations and its cash flows
for the one-month period ended October 31, 1999, the year ended September 30,
1999 and the period from August 5, 1998 (date of LLC formation) to September 30,
1998 in conformity with accounting principles generally accepted in the United
States.
These financial statements are those of a limited liability company and
accordingly do not reflect any income taxes related to its members.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
November 23, 1999
F-97
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Balance Sheets
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
October 31, September 30,
-----------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents 544,313 1,055,768 1,831,748
Trade accounts receivable (net of allowance - $nil) 559,123 841,429 1,629,730
Prepaid expenses (note 3) 230,577 269,838 -
-----------------------------------------------------------
1,334,013 2,167,035 3,461,478
Capital assets (note 4) 136,121 139,285 7,266
-----------------------------------------------------------
1,470,134 2,306,320 3,468,744
-----------------------------------------------------------
Liabilities and Members' Equity
Current liabilities
Trade accounts payable and accrued liabilities
(note 3) 536,860 539,414 1,019,267
Customer deposits 832,560 1,443,271 2,334,295
-----------------------------------------------------------
1,369,420 1,982,685 3,353,562
Members' Equity (note 5) 100,714 323,635 115,182
-----------------------------------------------------------
1,470,134 2,306,320 3,468,744
-----------------------------------------------------------
</TABLE>
Commitments and contingencies (note 8)
Subsequent event (note 9)
Approved by the Members
/s/ Jon Snyder Member /s/ John Fenyes Member
----------------- -------------------
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Statements of Members' Equity
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
August 5, 1998
One-month (date of LLC
period ended Year ended formation) to
October 31, September 30, September 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Balance - Beginning of period 323,635 115,182 1
Net (loss) earnings for the period (180,302) 2,338,453 100,181
-----------------------------------------------------------
143,333 2,453,635 100,182
Add: Members' contributions - - 15,000
Less: Members' distributions 42,619 2,130,000 -
-----------------------------------------------------------
Balance - End of period 100,714 323,635 115,182
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Statements of Loss
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
August 5, 1998
One-month (date of LLC
period ended Year ended formation) to
October 31, September 30, September 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Revenues 16,856 7,234,577 772,866
-----------------------------------------------------------
Expenses
Cost of services revenues 5,394 2,344,995 228,387
General and administrative 192,771 2,611,046 437,911
Amortization 3,164 40,821 6,387
-----------------------------------------------------------
201,329 4,996,862 672,685
-----------------------------------------------------------
(Loss) earnings from operations (184,473) 2,237,715 100,181
Interest income 4,171 100,738 -
-----------------------------------------------------------
Net (loss) earnings for the period (180,302) 2,338,453 100,181
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Statements of Cash Flows
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
August 5, 1998
One-month (date of LLC
period ended Year ended formation) to
October 31, September 30, September 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) earnings for the period (180,302) 2,338,453 100,181
Item not affecting cash - amortization 3,164 40,821 6,387
Changes in non-cash working capital
Trade accounts receivable 282,306 788,301 (1,629,730)
Prepaid expenses 39,261 (269,838) -
Trade accounts payable and accrued liabilities (2,554) (479,853) 1,019,267
Customer deposits (610,711) (891,024) 2,334,295
--------------------------------------------------------------
(468,836) 1,526,860 1,830,400
--------------------------------------------------------------
Cash flows from investing activities
Purchase of capital assets - (172,840) (13,653)
--------------------------------------------------------------
Cash flows from financing activities
Members' contributions - - 15,000
Members' distributions (42,619) (2,130,000) -
--------------------------------------------------------------
(42,619) (2,130,000) 15,000
--------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (511,455) (775,980) 1,831,747
Cash and cash equivalents - Beginning of period 1,055,768 1,831,748 1
--------------------------------------------------------------
Cash and cash equivalents - End of period 544,313 1,055,768 1,831,748
--------------------------------------------------------------
Interest received 4,171 100,738 -
--------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 Nature of operations
Express Vacations, LLC ("Express") is a call center offering vacation
packages to customers located primarily in the United States. Operations of
Express are based solely from Reno, Nevada. Express was organized pursuant
to the provisions of the Nevada Limited Liability Company Act in the State
of Nevada, U.S.A. on August 5, 1998. Revenues are earned from customers
located in the United States. Capital assets of the company's operations
are located in the United States.
2 Summary of significant accounting policies
Generally accepted accounting principles
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Revenue recognition
The company's revenues consist primarily of commissions from the sale of
travel products including airline tickets, hotel and vacation property
accommodations, car rentals and vacation packages. The company earns
commission revenue from the sale of these travel products which are
recognized on the customer's scheduled departure date, less an allowance
for returns and cancellations based on the company historical experience
and provided that collection is reasonably assured.
Capital assets
Capital assets are stated at cost less accumulated amortization.
Amortization is recorded on a straight-line basis to amortize the cost of
the capital assets over their estimated useful lives as follows:
Furniture and fixtures 7 years
Computer and office equipment 5 years
Leasehold improvements over term of lease
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses for the period reported.
Management believes its estimates to be appropriate; however, actual
results could differ from the amounts estimated.
F-102
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and highly liquid
short-term interest bearing securities with maturities at the date of
purchase of three months or less.
Income taxes
Income earned by Express is allocated to its members for tax purposes;
therefore, no provision for income taxes has been made in these financial
statements.
3 Balance sheet components
<TABLE>
<CAPTION>
October 31, September 30,
-------------------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Prepaid expenses
Deposits with travel suppliers 222,527 261,788 -
Other prepaids 8,050 8,050 -
------------------------------------------------------------------
230,577 269,838 -
------------------------------------------------------------------
October 31, September 30,
-------------------------------------------
1999 1999 1998
$ $ $
Trade accounts payable and accrued liabilities
Trade accounts payable 312,985 346,963 388,162
Accrued liabilities 223,875 192,451 631,105
------------------------------------------------------------------
536,860 539,414 1,019,267
------------------------------------------------------------------
4 Capital assets
October 31, 1999
----------------------------------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and fixtures 47,553 23,059 24,494
Computer and office equipment 122,493 25,341 97,152
Leasehold improvements 16,447 1,972 14,475
----------------------------------------------------------------
186,493 50,372 136,121
----------------------------------------------------------------
</TABLE>
F-103
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
-----------------------------------------------------------------------------
(expressed in U.S. dollars)
September 30, 1999
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and fixtures 47,553 22,685 24,868
Computer and office equipment 122,493 22,747 99,746
Leasehold improvements 16,447 1,776 14,671
--------------------------------------
186,493 47,208 139,285
--------------------------------------
September 30, 1898
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer and office equipment 13,653 6,387 7,266
--------------------------------------
5 Members' Equity
Authorized members' equity consists of an unlimited number of units.
$
Members' initial contribution
30 units 1
-------------
Limitation of liability
Under the terms of an Operating Agreement between the members put in place
in August 1998, two of the three members of the company have been elected
to manage the company ("managers"). Managers shall not be liable for the
return of any contribution of capital of any member or for any profits
thereon. Managers are not liable to the company or members for any act or
omission in connection with the business or affairs of the company unless
such act or omission constitutes gross negligence, intentional misconduct,
fraud or a knowing violation of law.
Members and managers of the company are not individually liable under a
judgement, decree, order of any court or any other manner, for a debt,
obligation, or liability of the company except as otherwise set forth in
Nevada State Regulations.
F-104
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
-----------------------------------------------------------------------------
(expressed in U.S. dollars)
Rights and restrictions of members
Each member's units consisting of their respective interest in the capital
and profits of the company carry the respective right to an allocative
share of the economic benefits of the company, including net profits, net
losses, and distributions, and the right to vote on matters as to which
the Operating Agreement requires or permits members to vote.
Members who are not managers are restricted from borrowing or lending
money on behalf of the company; selling, mortgaging, leasing, disposing of
or encumbering property of the company; selling, assigning, pledging or
mortgaging a member's interest in the company; purchasing any real estate
or equipment on behalf of the company; exercising or representing to any
third party that such member has the right to exercise any of the powers
of the managers in the Operating Agreement.
6 Cost of services revenues
Direct costs are comprised primarily of commissions paid to booking agents
and include fees totalling $1,564 for the one-month period ended October
31, 1999 (year ended September 30, 1999 - $635,714; 1998 - $105,952) paid
to the company's primary air travel service provider, applicable only to
certain bookings made before June 1999.
7 Financial instruments
Fair values of financial instruments
The carrying values reported on the balance sheet for cash and cash
equivalents, trade accounts receivable, trade accounts payable and accrued
liabilities and customer deposits approximate their fair values due to the
short-term nature of those instruments.
Concentration of credit risk
Accounts receivable include approximately $487,000 receivable from one
airline. The balance represents receivables relating to the processing of
credit card sales and does not represent significant credit risk to
Express.
Foreign exchange risk
Substantially all of the company's operations are denominated in U.S.
dollars.
F-105
<PAGE>
Express Vacations, LLC
(a Nevada limited liability company)
Notes to Financial Statements
-----------------------------------------------------------------------------
(expressed in U.S. dollars)
8 Commitments and contingencies
a) Lease commitments
The company leases a telephone system and office space under long-
term agreements. As at October 31, 1999, lease commitments through to
expiry are as follows:
$
2000 154,246
2001 146,546
2002 9,666
b) Letters of credit
Letters of credit totalling $443,000 have been issued to various
hotels by one of the members on behalf of Express. These letters of
credit are required by the hotels as security for block bookings of
hotel rooms. During the period ended October 31, 1999, no amounts
have been drawn against these letters of credit.
c) Commitments
On July 7, 1999, the company entered into a two-year agreement with a
telephone service provider requiring the company to satisfy a minimum
annual commitment. If the company does not reach this annual
commitment, the company would be required to pay an additional
surcharge for its phone services.
9 Subsequent event
On November 1, 1999, Express was acquired by travelbyus.com ltd., a
Canadian public company listed on the Toronto, Winnipeg and Frankfurt
Stock Exchanges.
F-106
<PAGE>
Report of PricewaterhouseCoopers LLP Independent Auditors
To the Directors of
Cheap Seats Inc.
We have audited the balance sheets of Cheap Seats Inc. as at November 30, 1999,
June 30, 1999 and 1998 and the statements of operations and deficit and cash
flows for the period from July 1, 1999 to November 30, 1999 and the years ended
June 30, 1999 and 1998. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. we believe that our audit provides a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at November 30, 1999, June
30, 1999 and 1998 and the results of its operations and its cash flows for the
period from July 1, 1999 to November 30, 1999 and the years ended June 30, 1999
and 1998 in conformity with accounting principles generally accepted in the
United States.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, Canada
January 28, 2000
F-107
<PAGE>
Cheap Seats Inc.
Balance Sheets
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
November 30, June 30, June 30,
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Assets
Current assets
Cash 54,155 40,721 161,491
Trade accounts receivable (net of allowance - $nil)
(note 8) 66,666 231,566 97,076
Income tax recoverable 85,577 82,217 20,678
Payroll tax refundable - - 49,136
Loan to employees 3,876 3,311 -
-------------------------------------------------------
210,274 357,815 328,381
Deposits (note 3) 70,000 70,000 70,000
Capital assets (note 4) 127,407 85,905 91,671
-------------------------------------------------------
407,681 513,720 490,052
=======================================================
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 5) 403,730 496,325 381,105
Current portion of long-term debt 3,951 3,786 3,145
-------------------------------------------------------
407,681 500,111 384,250
Long-term debt 1,409 3,105 6,891
-------------------------------------------------------
409,090 503,216 391,141
-------------------------------------------------------
Shareholders' Deficiency
Capital stock
Authorized
Unlimited number of common shares without
par value
Issued
5,920 shares (June 30, 1999 - 5,920; 1998 -
5,920) 1,000 1,000 1,000
(Deficit) retained earnings (2,409) 9,504 97,911
-------------------------------------------------------
(1,409) 10,504 98,911
-------------------------------------------------------
407,681 513,720 490,052
=======================================================
Commitments (note 7)
</TABLE>
Approved by the Board of Directors
/s/ Robert Beaudet Director /s/ Bill Kerby Director
---------------------- ---------------------
F-108
<PAGE>
Cheap Seats Inc.
Statements of Operations and Deficit
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
July 1,
1999 to
November 30, Years ended June 30,
--------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Net revenues (note 8) 1,881,074 4,163,133 2,858,490
--------------------------------------------------
Expenses
Selling, general and administrative expenses 1,673,443 2,723,621 2,354,795
Officers' compensation 211,739 1,536,239 426,831
Amortization 10,895 20,644 24,759
--------------------------------------------------
1,896,077 4,280,504 2,806,385
--------------------------------------------------
(Loss) earnings from operations (15,003) (117,371) 52,105
Interest income - net (270) 4,141 3,193
--------------------------------------------------
(Loss) earnings before income taxes (15,273) (113,230) 55,298
Provision for (recovery of) income taxes (3,360) (24,823) 46,737
--------------------------------------------------
Net (loss) earnings for the period (11,913) (88,407) 8,561
Retained earnings - Beginning of period 9,504 97,911 89,350
--------------------------------------------------
(Deficit) retained earnings - End of period (2,409) 9,504 97,911
==================================================
</TABLE>
F-109
<PAGE>
Cheap Seats Inc.
Statements of Cash Flows
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
Period from
July 1,
1999 to
November 30, Years ended June 30,
---------------------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) earnings for the year (11,913) (88,407) 8,561
Items not affecting cash
Amortization 10,895 20,644 24,759
Write-off of capital assets - 23,755 -
Net change in non-cash working capital items
Trade accounts receivable 164,900 (134,490) (185,460)
Income tax recoverable (3,360) (61,539) (8,085)
Payroll tax recoverable - 49,136 (49,136)
Loan to employees (565) (3,311) -
Trade accounts payable and accrued liabilities (92,595) 115,220 242,523
-----------------------------------------------------
67,362 (78,992) 33,162
-----------------------------------------------------
Cash flows from investing activities
Purchase of capital assets (52,397) (38,633) (58,770)
-----------------------------------------------------
Cash flows from financing activities
Increase in long-term debt - - 10,036
Repayment of long-term debt (1,531) (3,145) -
-----------------------------------------------------
(1,531) (3,145) 10,036
-----------------------------------------------------
Increase (decrease) in cash 13,434 (120,770) (15,572)
Cash - Beginning of period 40,721 161,491 177,063
-----------------------------------------------------
Cash - End of period 54,155 40,721 161,491
=====================================================
Interest paid 270 816 1,953
=====================================================
Income taxes paid - 36,716 57,035
=====================================================
</TABLE>
F-110
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
-------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 Nature of operations
Cheap Seats Inc. ("the company") is a net airfare consolidator, which
markets to customers throughout the United States. The company has in place
a wide range of net fare ticket contracts with several U.S. and
international carriers. The company currently offers air travel products
through their call centre based in Northridge, California and its website.
Revenues are earned from customers located in the United States. Capital
assets of the company's operations are located in the United States.
2 Summary of significant accounting policies
Generally accepted accounting principles
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
Revenue recognition
The company's revenues include commission revenue on published airfares and
net revenues on non-published and wholesale airfares. Commission revenue
and net revenues on non-published and wholesale airfares are recognized at
the time the ticket is issued to the customer, which generally corresponds
to the time the payment is processed, less an allowance for returns and
cancellation based on the company's historical experience. These net
revenues are recorded as the amount paid by the customer less the amount
payable to the airline for the discounted airfare.
Capital assets
Capital assets are stated at cost. Amortization is recorded on a straight-
line basis to amortize the cost of the capital assets over their estimated
useful lives. Amortization rates are as follows:
Computer software 5 years
Furniture and fixtures 5 years
Computer and office equipment 5 years
Automobile 5 years
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses for the period reported.
Management believes its estimates to be appropriate; however, actual
results could differ from the amounts estimated.
F-111
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
Income taxes
The company follows the asset and liability method for accounting for
income taxes. Under this method, deferred income tax assets and liabilities
are recognized for the estimated tax consequences attributable to
differences between the financial statement carrying values and their
respective income tax basis (temporary differences). The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
A valuation allowance is provided for deferred income tax assets if it is
more likely than not that the company will not realize the future benefit
or the future deductibility is uncertain.
3 Deposits
Airlines Reporting Corporation ("ARC") requires that registered agents
maintained a bond or letter of credit, which they can access in case of
non-payment by the agent. The entire amount relates to funds set aside
pursuant to these requirements. Interest on these funds accrues to the
company.
4 Capital assets
November 30, 1999
-------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer software 35,000 10,696 24,304
Furniture and fixtures 87,058 32,468 54,590
Computer and office equipment 51,889 44,044 7,845
Automobile 50,056 9,388 40,668
--------------------------------------
224,003 96,596 127,407
======================================
June 30, 1999
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Computer software 35,000 5,835 29,165
Furniture and fixtures 39,393 28,939 10,454
Computer and office equipment 47,158 42,768 4,390
Automobile 50,056 8,160 41,896
--------------------------------------
171,607 85,702 85,905
======================================
F-112
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
June 30, 1998
--------------------------------------
Accumulated
Cost amortization Net
$ $ $
Furniture and fixtures 35,760 24,283 11,477
Computer and office equipment 64,431 58,238 6,193
Automobile 105,556 31,555 74,001
--------------------------------------
205,747 114,076 91,671
======================================
Computer software is related to the company's website reservation system.
The company capitalizes certain expenditures on software used in its
operation in accordance with Statement of Position 98-1, "Accounting for
the Cost of Computer Software Developed or Obtained for Internal Use".
5 Balance sheet components
November 30, June 30,
-------------------------
1999 1999 1998
$ $ $
Trade accounts payable 326,134 471,349 333,516
Accrued wages payable 71,956 - 47,589
Other accrued liabilities 5,640 24,976 -
-------------------------------------------
403,730 496,325 381,105
===========================================
6 Financial instruments
Fair values of financial instruments
The carrying values reported on the balance sheet for cash, trade accounts
receivable, income tax recoverable, payroll tax refundable, trade accounts
payable and accrued liabilities and current portion of long-term debt
approximate their fair values due to the short-term to maturity of these
instruments. Deposits and non-current portion of long-term debt bear
interest approximating current market notes.
F-113
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
7 Commitments
The company leases an office space under long-term agreements. As at
November 30, 1999, annual minimum lease commitments through to expiry are
as follows:
$
2000 47,000
2001 61,000
2002 63,000
2003 64,000
8 Related party transactions
For the period from July 1, 1999 to November 30, 1999, the company sold
airline tickets to a related company with a gross ticket value of $224,686.
The trade accounts receivable balance as at November 30, 1999 includes due
from the related company of $6,312.
During the year ended June 30, 1999, the company sold airline tickets to a
related company with a gross ticket value of $389,770 (1998 - $nil). The
accounts receivable as at June 30, 1999 includes the due from the related
company of $59,522 (1998 - $nil).
The related party, Mr. Cheap's Travel, Ltd., is owned by the father of a
co-owner of the company.
Subsequent to June 30, 1999, Cheap Seats Inc. and the related company
became controlled by travelbyus.com ltd., a Canadian public company listed
on the Toronto, Winnipeg and Frankfurt Stock Exchanges.
9 Income taxes
The company is subject to U.S. federal and California state income taxes.
As at November 30, 1999, the company did not have any significant capital
or non-capital losses available for carryforward or other temporary
differences to reduce future years taxable income.
F-114
<PAGE>
Cheap Seats Inc.
Notes to Financial Statements
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
The income tax recoverable/provision for the periods presented, differs
from the amount obtained by applying the applicable statutory income tax
rates to loss/earnings before income taxes as follows:
<TABLE>
<CAPTION>
Period from
July 1,
1999 to
November 30, Years ended June 30,
-----------------------
1999 1999 1998
$ $ $
<S> <C> <C> <C>
Statutory income tax rate 32.81% 32.81% 32.81%
Income tax (recovery) provision based on
statutory rate (5,011) (37,151) 18,143
Non-deductible expenses 1,651 12,328 28,594
---------------------------------------
(3,360) (24,823) 46,737
=======================================
</TABLE>
10 Subsequent event
Effective on December 1, 1999, all of the outstanding shares of the company
were acquired by travelbyus.com ltd., a Canadian public company listed on
the Toronto, Winnipeg and Frankfurt Stock Exchanges.
F-115
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Stockholders
MUFFIN COMMUNICATIONS, LTD.
(An Illinois Corporation)
We have audited the accompanying balance sheets of MUFFIN COMMUNICATIONS, LTD.
(An Illinois Corporation) as of December 31, 1999 and 1998, and the related
statements of income (loss) and retained earnings (accumulated deficit), changes
in stockholder's equity (deficit) and cash flows for the year ended December 31,
1999 and from February 6, 1998 (date of inception) through December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MUFFIN COMMUNICATIONS, LTD. as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the year ended December 31, 1999 and from February 6, 1998 (date of
inception) through December 31, 1998, in conformity with generally accepted
accounting principles in the United States.
/s/ Friduss, Lukee, Schiff & Co., P.C.
FRIDUSS, LUKEE, SCHIFF & CO., P.C.
Certified Public Accountants
Chicago, Illinois
April 26, 2000
F-116
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
BALANCE SHEETS
--------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
A S S E T S
-----------
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS
--------------
Cash $ - $ 175 $ 1,218
Due from Stockholder (Note 4) 2,986 - -
Prepaid Expenses - 1,490 1,433
-------- ------- -------
TOTAL CURRENT ASSETS $ 2,986 $ 1,665 $ 2,651
-------------------- -------- ------- -------
PROPERTY AND EQUIPMENT (Note 2)
----------------------
Equipment $ 11,214 $11,214
Furniture and Fixtures - 9,745 9,745
-------- ------- -------
TOTAL PROPERTY AND
------------------
EQUIPMENT $ - $20,959 $20,959
---------
Less: Accumulated Depreciation - (9,109) (4,356)
-------- ------- -------
NET PROPERTY AND
----------------
EQUIPMENT $ - $11,850 $16,603
--------- -------- ------- -------
TOTAL ASSETS $ 2,986 $13,515 $19,254
------------ ======== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-117
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
BALANCE SHEETS
--------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
----------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES
-------------------
Accounts Payable $ 2,986 $ 3,202 $ 1,660
Due to Stockholder (Note 4) - 34,788 7,949
-------- -------- -------
TOTAL CURRENT LIABILITIES $ 2,986 $ 37,990 $ 9,609
------------------------- -------- -------- -------
STOCKHOLDER'S EQUITY (DEFICIT)
------------------------------
Common Stock - 1,000 Shares Authorized
No Par Value, 100 Shares Issued and
Outstanding $ 100 $ 100 $ 100
Paid in Capital 52,338 - -
Retained Earnings (Accumulated Deficit) (52,438) (24,575) 9,545
-------- -------- -------
TOTAL STOCKHOLDER'S EQUITY
--------------------------
(DEFICIT) $ - $(24,475) $ 9,645
--------- -------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S
-----------------------------------
EQUITY (DEFICIT) $ 2,986 $ 13,515 $19,254
---------------- ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-118
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
STATEMENTS OF INCOME (LOSS) AND
-------------------------------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
---------------------------------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
<TABLE>
<CAPTION>
From
Six Month February 6, 1998
Period Ended Year Ended (Date of Inception)
June 30, December 31, through
2000 1999 December 31,1998
------------- ---------- --------------------
<S> <C> <C> <C>
NET SALES $ - $ - $ 345,000
---------
COST OF SALES - - 288,785
------------- -------- -------- ------------
GROSS PROFIT $ - $ - $ 56,215
------------
SELLING, GENERAL AND
--------------------
ADMINISTRATIVE EXPENSES 18,389 34,120 46,670
----------------------- -------- -------- ------------
(LOSS) INCOME FROM OPERATIONS $(18,389) $(34,120) $ 9,545
-----------------------------
LOSS ON DISPOSAL OF PROPERTY AND
--------------------------------
EQUIPMENT (9,474) - -
--------- -------- -------- ------------
NET (LOSS) INCOME FOR THE PERIOD $(27,863) $(34,120) $ 9,545
--------------------------------
(ACCUMULATED DEFICIT) RETAINED
------------------------------
EARNINGS, BEGINNING OF PERIOD (24,575) 9,545 -
----------------------------- -------- -------- ------------
(ACCUMULATED DEFICIT) RETAINED
------------------------------
EARNINGS, END OF PERIOD $(52,438) $(24,575) $ 9,545
----------------------- ======== ======== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-119
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
-------------------------------------------------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
<TABLE>
<CAPTION>
Common Stock
-----------------
Retained
Number Additional Earnings
Of Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance - February 6, 1998 100 100 $ - $ - $ 100
Net Income - - - 9,545 9,545
------ ------ ---------- --------- ---------
Balance - December 31, 1998 100 100 - $ 9,545 $ 9,645
Net Loss - - - (34,120) (34,120)
------ ------ ---------- --------- ---------
Balance - December 31, 1999 100 100 $ - $ (24,575) $ (24,475)
Capital Contribution of
Balance Due to Stockholder
(Note 4) 52,338 - 52,338
Net Loss - - - (27,863) (27,863)
------ ------ ---------- --------- ---------
Balance - June 30, 2000 100 100 $ 52,338 $ (52,438) $ -
====== ====== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-120
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
STATEMENTS OF CASH FLOWS
------------------------
SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-------------------------------------------------
(EXPRESSED IN U.S. DOLLARS)
---------------------------
<TABLE>
<CAPTION>
From
Six Month February 6, 1998
Period Ended Year Ended (Date of Inception)
June 30, December 31, through
2000 1999 December 31,1998
------------ ------------ ---------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
------------------------------------
Net (Loss) Income $(27,863) $(34,120) $ 9,545
-------- -------- --------
Adjustments to Reconcile Net (Loss) Income
to Net Cash (Used in) Provided By Operating
Activities:
Depreciation $ 2,376 $ 4,753 $ 4,356
Loss on Disposal of Property and
Equipment 9,474 - -
Decrease (Increase) in Prepaid Expenses 1,490 (57) (1,433)
(Decrease) Increase in Accounts Payable (216) 1,542 1,660
-------- -------- --------
TOTAL ADJUSTMENTS $ 13,124 $ 6,238 $ 4,583
----------------- -------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
----------------------------------------
ACTIVITIES $(14,739) $(27,882) $ 14,128
---------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
------------------------------------
Proceeds from Issuance of Common Stock $ - $ - $ 100
Advances (Repayments) Due to Stockholder 14,564 26,839 (13,010)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
----------------------------------------
ACTIVITIES $ 14,564 $ 26,839 $(12,910)
----------- -------- -------- --------
NET (DECREASE) INCREASE IN CASH $ (175) $ (1,043) $ 1,218
-------------------------------
CASH - BEGINNING OF PERIOD 175 1,218 -
-------------------------- -------- -------- --------
CASH - END OF PERIOD $ 175 $ 1,218
-------------------- ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
Cash Paid During the Periods for:
Interest $ - $ 603 $ 2,212
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
---------------------------------------------
AND FINANCING ACTIVITIES:
------------------------
Due from Stockholder $ (2,986) $ - $ -
Equipment - - (11,214)
Furniture and Fixtures - - (9,745)
Due to Stockholder (49,352) - 20,959
Additional Paid in Capital 52,338 - -
-------- -------- --------
$ - $ - $ -
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-121
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
THE SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-----------------------------------------------------
NOTE 1 - NATURE OF ACTIVITIES
--------------------
The Company was formed on February 6, 1998 and is engaged in the
magazine publications industry.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A summary of the Company's significant accounting policies
consistently applied in the preparation of the accompanying financial
statements follows:
ESTIMATES
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment were stated at their fair market value when the
stockholder contributed the assets. The fair market value approximated
cost. Expenditures for repairs and maintenance which did not extend
the useful lives of the assets were charged to expense as incurred.
For financial accounting purposes, depreciation was calculated
primarily on a straight-line basis over the estimated useful lives of
the related assets ranging from 4 to 5 years. The assets and related
accumulated depreciation were relieved for such assets retired or
otherwise disposed of, and any resulting profit or loss was included
in the year of sale or retirement. The property and equipment was
disposed of as of June 30, 2000.
Depreciation expense was $2,376 for the six months ended June 30,
2000, $4,753 for the year ended December 31, 1999 and $4,356 for the
period February 6, 1998 (date of inception) though December 31, 1998.
F-122
<PAGE>
MUFFIN COMMUNICATIONS, LTD.
---------------------------
NOTES TO THE FINANCIAL STATEMENTS
---------------------------------
THE SIX MONTH PERIOD ENDED JUNE 30, 2000 IS UNAUDITED
-----------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
------------------------------------------
INCOME TAXES
------------
There is no provision for federal corporate income taxes because the
stockholder has elected to pay these taxes in accordance with S
Corporation rules of the Internal Revenue Code. A provision for state
replacement tax has not been made due to a current net operating loss.
NOTE 3 - SUBSEQUENT EVENTS
-----------------
The Company's stock was sold to an unrelated party on July 20, 2000.
NOTE 4 - RELATED PARTY TRANSACTIONS
--------------------------
The Company leases office space and an automobile from the sole
stockholder of the Company. There is no signed lease between the
related parties. The Company paid the stockholder for the office space
$3,407 for the six months ended June 30, 2000. The Company paid the
stockholder for the office space $6,128 and $6,093 in 1999 and 1998,
respectively. The Company paid the stockholder for the lease of the
automobile $1,315 for the six months ended June 30, 2000. The Company
paid the stockholder for the lease of the automobile $3,384 and $4,324
in 1999 and 1998, respectively.
The stockholder has advanced to the Company $14,564 during the six
months ended June 30, 2000. The stockholder had advanced to the
Company $26,839 and $7,949 during 1999 and 1998, respectively.
<TABLE>
<CAPTION>
June 30, December 31, December 31,
2000 1999 1998
-------- ------------ ------------
<S> <C> <C> <C>
Due to Stockholder $ - $(34,788) $(7,949)
Due from Stockholder 2,986 - -
------ -------- ---------
$2,986 $(34,788) $(7,949)
====== ======== =========
</TABLE>
At June 30, 2000 the stockholder's loan was reclassified to Additional
Paid-In Capital.
NOTE 5 - MAJOR CUSTOMERS
---------------
100% of the 1998 sales were derived from one customer.
F-123
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Prosoft Corporation
We have audited the accompanying balance sheet of Prosoft Corporation as of
December 31, 1999, and the related statements of income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Prosoft Corporation as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles in
the United States.
/s/ Swenson Advisors, LLP
SWENSON ADVISORS, LLP
An Accountancy Firm
San Diego, California
August 23, 2000
Except for Note 8, as to
which the date is
September 14, 2000.
F-124
<PAGE>
PROSOFT CORPORATION
Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Current assets
Cash $ 120,508
Accounts receivable 209,411
Prepaid expenses 618
-------------
Total current assets 330,537
-------------
Property and equipment, net of depreciation 18,669
-------------
Other assets
Investments 150,000
Deposits 3,819
-------------
153,819
-------------
Total assets $ 503,025
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 76,419
Accrued expenses 178,196
Income taxes payable 79,079
Other current liabilities 2,067
------------
Total current liabilities 335,761
------------
Commitments and contingencies -
Long term debt 6,633
------------
Stockholders' equity
Common stock - no par value, 10,000,000 shares authorized
1,140,000 shares issued and outstanding -
Additional paid-in capital 7,945
Retained earnings 152,686
------------
Total stockholders' equity 160,631
------------
Total liabilities and stockholders' equity $ 503,025
============
</TABLE>
See accompanying notes to financial statements
F-125
<PAGE>
PROSOFT CORPORATION
Statement of Income
For the Year Ended December 31, 1999
Consulting contract revenues $ 1,638,729
------------
Cost of consulting contract revenues:
Salaries and related expenses 458,100
Materials 284,119
------------
Total cost of contract revenues 742,219
------------
Gross profit 896,510
------------
General and administrative expenses:
Salaries and employee benefits 541,922
Computer expenses 22,943
Depreciation and amortization 7,785
Rent 46,058
Interest expense 1,188
Professional fees 20,224
Training 28,524
Telephone and utilities 9,204
Other expenses 59,034
------------
Total general and administrative 736,882
------------
Operating income 159,628
------------
Other income 2,074
------------
Income before income tax provision 161,702
------------
Income tax provision 84,123
------------
Net income $ 77,579
------------
See accompanying notes to financial statements
F-126
<PAGE>
PROSOFT CORPORATION
Statement of Stockholders' Equity
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Additional
Number of Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 336 $ - $ 7,945 $ 75,107 $ 83,052
Stock Split 1,139,664
Net Income - - - 77,579 77,579
----------- ---------- ----------- ----------- -----------
Balance,
December 31, 1998 1,140,000 $ - $ 7,945 $ 152,686 $ 160,631
=========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-127
<PAGE>
PROSOFT CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities
Net Income $ 77,579
Adjustments to reconcile net income to net cash
used by operations:
Depreciation and amortization 7,785
(Increase) decrease in assets
Accounts receivable (2,057)
Prepaid expenses (618)
Increase (decrease) in liabilities
Accounts payable 51,052
Accrued expenses 100,508
---------
Net cash provided by operating activities 234,249
---------
Cash flows from investing activities
Investment in affiliate (150,000)
---------
Net cash used by investing activities (150,000)
Cash flows from financing activities:
Payments on capital lease (1,871)
---------
Net cash used by financing activities (1,871)
---------
Net increase in cash 82,378
Cash and cash equivalents at beginning of year 38,130
---------
Cash and cash equivalents at end of year $ 120,508
=========
</TABLE>
See accompanying notes to financial statements
F-128
<PAGE>
PROSOFT CORPORATION
Notes to the Financial Statements
December 31, 1999
Note 1 - Summary of Organization and Significant Accounting Policies
Organization - ProSoft Corporation (the Company) develops software and
------------
e-business solutions on a contract basis for established and emerging
companies for the aerospace, healthcare and travel industries.
Cash and Cash Equivalents - The Company considers all unrestricted
-------------------------
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents. The carrying value of cash equivalents
approximates fair value.
Concentration of Credit Risk - It is the Company's practice to maintain
----------------------------
its cash and cash equivalents primarily with one major banking
institution. At times, the Company may maintain cash balances at this
institution that exceed the Federal Deposit Insurance Corporation
insurance limit of $100,000 per bank. The Company considers its credit
risk associated with cash and cash equivalents to be minimal.
Substantially all of the Company's revenue is derived from a limited
number of customers, with one major customer providing approximately
66% of all revenues.
Accounts Receivable - Accounts receivable consists primarily of fees
-------------------
relating to time and material consulting contracts. As of December 31,
1999, an allowance for doubtful accounts was not required.
Use of Estimates - The preparation of financial statements in
----------------
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities, at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments - The carrying amounts of cash and
-----------------------------------
cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair market value because of the short maturity of
those instruments.
Equipment - Property and equipment is stated at cost, less accumulated
---------
depreciation and amortization. Depreciation is determined using
straight-line and accelerated methods based on estimated useful lives
of the assets, generally from three to seven years.
Revenue Recognition - The Company recognizes revenue as services are
-------------------
performed in accordance with time and materials consulting contracts.
Stock Split - In December, 1999, each outstanding share of common stock
-----------
was split and converted into approximately 3,404 shares of common
stock.
F-129
<PAGE>
PROSOFT CORPORATION
Notes to the Financial Statements, Continued
Note 2 - Income Taxes
The Company reports income taxes using an asset and liability based
approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases
of assets and liabilities that result in taxable or deductible amounts
in the future. A valuation allowance is established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
Income tax expense is the tax payable or refundable for the period net
of any change in deferred tax assets or liabilities.
There is a deferred tax asset of $3,869. For financial reporting
purposes, the deferred tax asset has been fully offset by a valuation
allowance. The deferred income taxes arise from differences in
financial reporting and income tax accounting methods, principally
depreciation and accrued expenses. The income tax provision consists of
the following:
<TABLE>
<S> <C>
Current:
Federal $ 64,337
State 19,786
--------
84,123
Less: estimated payments 5,044
--------
Income taxes payable $ 79,079
========
Deferred:
Federal $ (2,280)
State (1,589)
--------
(3,869)
Less: valuation allowance 3,869
--------
$ 0
========
</TABLE>
Note 3 - Line of Credit
The Company has a bank line of credit for $10,000. The line of credit
bears interest at 17% and is collateralized by the assets of the
Company and personal guarantees of shareholders of the Company. As of
December 31, 1999, there is no balance due.
Note 4 - Commitments
Currently, the Company has an agreement to lease office space on a
month to month basis. The current monthly rent is approximately $5,415
per month. Rent expense for the year ended December 31, 1999 is
$46,058.
F-130
<PAGE>
PROSOFT CORPORATION
Notes to the Financial Statements, Continued
Note 5 - Capitalized Lease
The Company has a capitalized equipment lease. Future obligations under
this lease are as follows:
<TABLE>
<CAPTION>
Minimum
Lease
For the period ending December 31, Payments
--------
<S> <C>
2000 $ 2,844
2001 2,844
2002 2,844
2003 1,896
-------
Total 10,428
Less amounts representing interest 1,728
-------
Total $ 8,700
=======
</TABLE>
Note 6 - Investments and Related Party Transactions
In November, 1999, the Company entered into an agreement with a company
that develops and markets internet based application service products.
Under this agreement, the Company invested $150,000 for a 13% interest
in the company; subsequent sales of stock have diluted the Company's
ownership to 10%.
The Company also agreed to ultimately provide 4,100 hours of software
development programming for the development of internet based
application software. Through June, 2000, the Company has provided
approximately 3,300 hours of software development programming. The
labor and material costs provided by the Company have been expensed.
Note 7 - Subsequent Events
In July, 2000, the Company agreed to the sale of all the outstanding
shares of the Company to Travelbyus.com in exchange for 1,680,000
shares of travelbyus.com.
A new line of credit was established in June, 2000 for $250,000. The
line of credit bears interest at the prime rate plus 1.75% and expires
June, 2001. The line of credit is collateralized by the assets of the
Company and personal guarantees of shareholders of the Company.
Effective January 1, 2000, the Company has elected S corporation status
under the Internal Revenue Code. Under these provisions, the Company
generally does not pay federal corporate income taxes on its taxable
income. Instead the stockholders are liable for individual federal
income taxes on their respective shares of the Company's taxable
income. The state of California has imposed a franchise tax on S
corporations' taxable income of 1.5%.
Note 8 - Subsequent Event - Acquisition by travelbyus.com (Unaudited)
Prosoft Corporation was acquired by travelbyus.com on September 14,
2000 pursuant to a share purchase agreement. travelbyus.com issued
1,680,000 of its common shares to ProSoft Corporation for all its
outstanding common shares. Of such shares, 1,260,000 common shares were
issued at closing and 420,000 common shares (at a guaranteed price of
U.S. $2.50) will be issued two years following closing provided
certain employment conditions are completed. travelbuys.com executed
certain employment contracts with key members of management of ProSoft
Corporation, including certain stock options as defined in those
contracts. The share purchase agreement also provides that
travelbyus.com is required to issue additional shares, to a maximum of
1,680,000, if certain conditions relating to the travelbyus.com stock
price are not fulfilled.
F-131
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
SiteRabbit.com
We have audited the accompanying consolidated balance sheets of SiteRabbit.com
(a development stage company), a California corporation, as of June 30, 2000,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended June 30, 2000 and 1999,
and the period from inception (July 21, 1997) to June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SiteRabbit.com as of June 30,
2000, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company incurred a net loss of $1,472,507 during the year ended June 30, 2000,
and, as of that date, had a working capital deficiency of $499,517 and
accumulated deficit of $1,806,985. (See Note 12 to the financial statements).
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Swenson Advisors, LLP
SWENSON ADVISORS, LLP
An Accountancy Firm
San Diego, California
August 23, 2000
Except for Note 13 as to which
the date is September 14, 2000.
F-132
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Balance Sheets
June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 15,629 $ 48,852 $ 8,219
Accounts receivable, net 716 63,546 -
Loans receivable from officer 70,771 50,460 26,500
Other current assets 6,104 40,667 2,868
----------- --------- ---------
Total current assets 93,220 203,525 37,587
----------- --------- ---------
Property and equipment, net 154,890 130,945 77,872
----------- --------- ---------
Other assets 21,762 30,426 14,822
----------- --------- ---------
Total assets $ 269,872 $ 364,896 $ 130,281
=========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 110,000 $ 55,000
Accounts payable and accrued expenses 574,225 402,547 -
Other current liabilities - 7,906 3,788
Deferred revenue 9,227 176,921 518,977
Current portion long term debt 9,285 - -
----------- --------- ---------
Total current liabilities 592,737 697,374 577,765
----------- --------- ---------
Long-term debt, less current portion 49,920 - -
----------- --------- ---------
Stockholders' deficit:
Preferred Stock - no par value, 1,000,000 shares authorized - - -
Common stock - no par value, 10,000,000 shares authorized;
426,433, 200,000 and 200,000 shares issued and outstanding
at June 30, 2000, 1999 and 1998, respectively. 2,000 2,000 2,000
Additional paid in capital 1,432,200 - -
Retained deficit (1,806,985) (334,478) (449,484)
----------- --------- ---------
Total stockholders' deficit (372,785) (332,478) (447,484)
=========== ========= =========
Total liabilities and stockholders' deficit $ 269,872 $ 364,896 $ 130,281
=========== ========= =========
</TABLE>
See accompanying notes to the financial statements
F-133
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Statements of Operations
For the Years Ended June 30, 2000 and 1999, and Period From Inception (July 21,
1997) to June 30, 1998
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Revenue $ 432,296 $ 1,125,238 $ 11,811
------------ ------------ -----------
Operating expenses:
Payroll and employee benefits 780,460 474,788 179,234
Selling, general and administrative 573,324 327,116 263,681
Research and development expense 282,200 - -
Membership related costs 195,534 170,072 -
Depreciation and amortization expense 55,598 30,020 12,406
Interest expense 23,991 10,000 5,000
------------ ------------ -----------
Total operating expenses 1,911,107 1,011,996 460,321
------------ ------------ -----------
Operating (loss) income (1,478,811) 113,242 (448,510)
Other income 7,904 3,364 626
------------ ------------ -----------
Income (loss) before income tax provision (1,470,907) 116,606 (447,884)
Income tax provision 1,600 1,600 1,600
------------ ------------ -----------
Net (loss) income $ (1,472,507) $ 115,006 $ (449,484)
============ ============ ===========
</TABLE>
See accompanying notes to the financial statements
F-134
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2000 and 1999, and Period From Inception (July
21, 1997) to June 30, 1998
<TABLE>
<CAPTION>
Common Stock Retained
------------
Number of Paid in Earnings
Shares Amount Capital (Deficit) Total
--------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Inception, July 21, 1997 -
Issuance of common stock 200,000 $ 2,000 $ 2,000
Net loss $ (449,484) (449,484)
------- -------- ----------- ------------ -----------
Balance, June 30, 1998 200,000 2,000 - (449,484) (447,484)
------- -------- ----------- ------------ -----------
Net income 115,006 115,006
------- -------- ----------- ------------ -----------
Balance, June 30, 1999 200,000 2,000 - (334,478) (332,478)
------- -------- ----------- ------------ -----------
Issuance of common stock 226,433 1,432,200 1,432,200
Net loss (1,472,507) (1,472,507)
------- -------- ----------- ------------ -----------
Balance, June 30, 2000 426,433 $ 2,000 $ 1,432,200 $ (1,806,985) $ (372,785)
======= ======== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-135
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000 and 1999, and Period From Inception (July
21, 1997) to June 30, 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,472,507) $ 115,006 $ (449,484)
Adjustments to reconcile net income (loss) to net cash from
operations:
Depreciation and amortization 55,598 30,020 12,406
Research and development costs 282,200
- -
(Increase) decrease in assets:
Accounts receivable 62,830 (63,546)
Other current assets 34,563 (37,799) (2,868)
Other assets 3,198 (16,685) (15,818)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 171,678 402,547
Deferred revenue (167,694) (342,056) 518,977
Other current liabilities (7,906) 4,117 3,788
------------ ---------- ----------
Net cash (used) provided by operating activities (1,038,040) 91,604 67,001
------------ ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (31,003) (82,011) (89,282)
------------ ---------- ----------
Net cash used by investing activities (31,003) (82,011) (89,282)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from note payable 12,000 110,000 55,000
Payments of capital lease (2,929) - -
Payments of note payable (340) (55,000) -
Loan receivable (12,911) (23,960) (26,500)
Proceeds from sale of common stock 1,040,000 - 2,000
------------ ---------- ----------
Net cash provided by financing activities 1,035,820 31,040 30,500
------------ ---------- ----------
Net (decrease) increase in cash and cash equivalents (33,223) 40,633 8,219
Cash and cash equivalents at beginning of period 48,852 8,219 -
------------ ---------- ----------
Cash and cash equivalents at end of period $ 15,629 $ 48,852 $ 8,219
============ ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 7,829 $ 5,000 $ -
============ ========== ==========
Cash paid during the year for income taxes $ 1,600 $ 800 $ -
============ ========== ==========
</TABLE>
See accompanying notes to financial statements
F-136
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
For Years Ended June 30, 2000, 1999 and 1998
Note 1 - Summary of Organization and Significant Accounting Policies
Organization - SiteRabbit.com (the Company) (formerly known as
------------
Corporate Cruise Events, Inc.) was formed in July 1997. The Company was
organized to develop corporate sponsored cruise travel events and to
market internet based application service products. Cruise Vacation
Professionals, Inc., a wholly owned subsidiary of SiteRabbit.com, was
organized in 1997 to sell and distribute travel packages and services.
As of late 1999, the Company predominantly develops and markets
internet based application service products and is in the development
stage.
Corporate Reorganization and Principles of Consolidation - On December
--------------------------------------------------------
15, 1998, SiteRabbit.com became the sole shareholder of Cruise Vacation
Professionals, Inc. when 100,000 shares of SiteRabbit.com were issued
in exchange for all the outstanding shares of Cruise Vacation
Professionals, Inc. This transaction, accounted for at book value in a
manner similar to a pooling of interests, was a stock exchange between
sole stockholders with common ownership of these two entities. The
consolidated financial statements include the accounts of
SiteRabbit.com and Cruise Vacation Professionals, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Cash, Cash Equivalents and Credit Risk - The Company considers all
--------------------------------------
unrestricted highly liquid investments purchased with maturities of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates fair value. The Company maintains its cash
accounts at institutions that are insured by the Federal Deposit
Insurance Corporation. At times, the Company maintains cash balances
that exceed the insurance limit of $100,000 per bank. However, the
Company considers its credit risk associated with cash and cash
equivalents to be minimal.
Estimates - The process of preparing financial statements in conformity
---------
with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues, and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
Depreciation - Property and equipment is stated at cost. Depreciation
------------
is provided using the straight line method over the estimated useful
lives of the assets which range from three to five years.
Fair Value of Financial Instruments - The carrying amounts of cash and
-----------------------------------
cash equivalents, loans receivable, and notes payable approximate fair
market value due to the short maturity of these instruments.
Accounts Receivable - Accounts receivable consist primarily of
-------------------
membership fees payable in installments. As of June 30, 2000, 1999 and
1998, the Company recorded an allowance for doubtful accounts of $0,
$120,000 and $0, respectively.
F-137
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 1 - Summary of Organization and Significant Accounting Policies, continued
Revenue Recognition - Revenue represents commissions received from the
-------------------
sale of corporate charters and the sale of travel club memberships. The
membership fees are amortized over the membership period since the
members receive benefits throughout the period. Commissions relating to
corporate charters are recognized as income when the charter occurs.
Other income includes interest income. As of June 30, 2000, there has
been no revenue from the sale of internet based application service
products.
Costs of Start-Up Activities - According to Statement of Position 98-5,
----------------------------
Reporting on the Costs of Start-Up Activities, organization costs have
been expensed. The effect of this change in accounting principle is
immaterial.
Note 2 - Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Office equipment, furniture, and fixtures $ 154,336 $ 123,333 $ 53,321
Leasehold improvements 13,661 13,661 13,661
Assets acquired under capital lease 50,474 - -
Automobiles 22,300 34,300 22,300
----------------- ------------------ ----------------
240,771 171,294 89,282
Less: accumulated depreciation 85,881 40,349 11,410
----------------- ------------------ ----------------
Property and equipment, net $ 154,890 $ 130,945 $ 77,872
================= ================== ================
</TABLE>
Note 3 - Income Taxes
The Company provides for income taxes using an asset and liability
based approach. Deferred income tax assets and liabilities are recorded
to reflect the tax consequences on future years of temporary
differences of revenue and expense items for financial statement and
income tax purposes. As of June 30, 2000, 1999 and 1998 there are
deferred tax assets of $596,553, $128,909 and 184,638, respectively.
For financial reporting purposes the deferred tax assets have been
fully offset by a valuation allowance.
Components of the deferred tax asset are as follows:
2000 1999 1998
---- ---- ----
Net operating loss carryforward $ 577,813 $ 123,174 $ 179,794
Other, net 18,740 5,735 4,844
---------- --------- ---------
596,553 128,909 184,638
Less valuation allowance 596,553 128,909 184,638
---------- --------- ---------
Deferred tax asset, net $ - $ - $ -
========== ========= =========
F-138
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 3 - Income Taxes, continued
Income tax expense for the years ended June 30, 2000, 1999 and 1998 is
$1,600, which represents the statutory franchise tax. There are no
federal income tax provisions for the years ended June 30, 2000, 1999,
and 1998, respectively.
As of June 30, 2000, the Company had net operating loss (NOL)
carryforwards of approximately $1,452,000 for federal income tax
purposes. Such carryforwards expire in varying amounts through the tax
year 2019. As of June 30, 2000, the Company has state NOL carryforwards
of approximately $1,443,000. These NOL carryforwards expire in varying
amounts through the tax year 2005.
Note 4 - Related Party Transactions
Loans Receivable from an Officer
--------------------------------
The loans receivable are from an officer of the Company and are payable
on demand. Interest accrues at a rate of 8% annually. At June 30, 2000,
1999 and 1998, the balance of loans receivable from an officer was
$70,771, $50,460 and $26,500, respectively. Interest income related to
the loans receivable was $4,197, $3,823 and $593, for the years ended
June 30, 2000, 1999 and 1998, respectively.
Note Payable to an Officer
--------------------------
The note payable is payable on demand and bears interest at Libor plus
2%. The balance at June 30, 1999 was $110,000, including accrued
interest of $10,000. The balance at June 30, 1998 was $55,000,
including accrued interest of $5,000. (See Note 12)
Software Development
--------------------
A stockholder with an 11% ownership interest in the Company provided
computer programming services for the development of application
software. The stockholder has provided approximately 3,300 hours of
software development programming as of June 30, 2000. (See Note 5)
Note 5 - Research and Development Costs
The Company developed the SiteRabbit.com application software under
terms of an agreement for computer programming services with a software
development company that has provided approximately 3,300 hours of
programming services as of June 30, 2000. The value of the programming
services has been recorded as research and development expenses. Under
the computer programming services agreement, a total of 4,100 hours of
programming will be ultimately provided to the Company. The programming
services are valued at the fair market value of such services offered
by the software development company.
F-139
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 6 - Deferred Revenue
As of June 30, 2000 and 1999, the balance in deferred revenue is $9,227
and $176,921, respectively. These amounts are related to the
unrecognized portion of membership fees that are recognized ratably
over the life of the membership contract. The membership contracts are
one year in duration. As of June 30, 1998, deferred revenue totaling
$518,977 related to commissions received for corporate charters that
occurred after June 30, 1998.
Note 7 - Commitments
Office Lease
------------
The Company entered into an agreement to lease office space from an
outside party, commencing December 1, 1998 and ending November 30,
2000. Effective April, 2000, the Company renegotiated the lease to be
payable on a month-to-month basis.
Rent expense for the years ended June 30, 2000, 1999 and 1998, was
$66,240, $40,677 and $19,504, respectively.
Capital Lease
-------------
The Company acquired certain software and consulting services under a
capital lease arrangement. The lease was entered into in January, 2000.
The term of the lease is 60 months at a monthly payment amount of
$1,198. Interest paid on the lease was $3,059 for the year ended June
30, 2000. Principal payments due within one year are $7,815.
Following is a schedule of future minimum lease payments:
For the years ending June 30: Minimum Lease Payments
2001 $14,373
2002 14,373
2003 14,373
2004 14,373
2005 8,383
-------
65,875
Less amounts representing interest 18,330
-------
$47,545
=======
Note 8 - Commission Advance
In January, 1999, the Company was advanced $250,000 in commissions
relating to the sale of future travel events according to an agreement
with a provider of travel package services. The commission advance is
to be repaid as the travel events occur. As of June 30, 2000 and 1999,
the Company has been advanced $202,815 and $250,000, respectively.
In April, 2000 the Company was notified that the agreement would be
terminated. Revenue from all travel events booked through December 31,
2000, will be utilized to reduce the advance. Management of the Company
is negotiating a plan as to the settlement of any commission advance
balance still outstanding as of December 31, 2000.
F-140
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 9 - Statement of Cash Flows
<TABLE>
<CAPTION>
The following are noncash investing and financing activities for the year ended June 30, 2000:
<S> <C>
Capital lease obligation incurred to obtain software and consulting services $ 50,474
=========
Distribution of automobile to stockholder at book value $ 7,400
=========
Conversion of notes payable to common stock $ 110,000
=========
</TABLE>
Note 10 - Common Stock and Warrants
The Company has 7,500 warrants outstanding, as of June 30, 2000, to
directors of the Company. In accordance with the terms of APB No. 25,
the Company records no compensation expense for these warrants. As
required by SFAS No. 123, the Company provides the following disclosure
of hypothetical values for these warrants. The warrants are valued as
of February 25, 2000 and June 13, 2000 at $1.83 per warrant. This value
was estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility of 50.0%;
risk free interest rate of 6.18%; and expected life of 5.0 years. In
addition, a 30.0% discount for lack of marketability was applied to the
value of the underlying securities, and a 35.0% discount for lack of
marketability was applied to the warrants to derive the final value.
Had compensation expense been recorded based on these hypothetical
values, the Company's net loss for the year ended June 30, 2000, would
have increased by $34,125. (See Note 12)
Note 11 - Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
Note payable to a financial institution with monthly principal and
interest payments of $238.99, with interest at 12.7%; collateralized
by an automobile $ 11,660
Less current maturities 1,470
--------
Non-current portion $ 10,190
========
</TABLE>
Maturities of long term debt are as follows:
For the years ending June 30:
2001 $ 1,470
2002 1,669
2003 1,893
2004 2,149
2005 2,438
2006 2,041
-------
$11,660
=======
F-141
<PAGE>
SiteRabbit.com
(A Development Stage Company)
Notes to Financial Statements, Continued
Note 12 - Liquidity and Subsequent Events
Acquisition by Travelbyus.com
-----------------------------
In July 2000, the Company entered into a letter of intent to sell all
the outstanding shares of the Company to travelbyus.com in exchange
for 4,000,000 shares of travelbyus.com. Terms of the sale include the
issuance of 4,900 shares of stock by the Company to certain employees
and consultants at the time of closing.
Conversion of Notes Payable by Stockholders
-------------------------------------------
At June 30, 2000, the Company has a convertible note payable to a
stockholder. The note is payable on June 12, 2001 and bears interest
at Libor plus 2%. The balance at June 30, 2000 and 1999, was $250,000
and $110,000, including accrued interest of $12,061 and $10,000,
respectively. The note can be converted at the option of the
stockholder for up to 25,000 shares of the Company's common stock at a
specified price per share of $10.00. The stockholder elected to
convert the note in August, 2000, in accordance with the terms of the
note.
At June 30, 2000, the Company has two convertible notes payable to
another stockholder in the aggregate amount of $150,000. The notes are
payable in February, 2001 and June, 2001, and bear interest at 9%. The
interest accrued on the notes is $4,125 as of June 30, 2000. The notes
can be converted at the stockholder's option for up to 15,000 shares
of the Company's common stock at a specified price per share of
$10.00. The stockholder elected to convert the full amount of the
notes in August, 2000, in accordance with the terms of the note.
The balance sheet for June 30, 2000 has been restated to reflect the
conversion of the notes payable by the stockholders into 40,000 shares
of common stock.
Exercise of Option and Warrants
-------------------------------
In August, 2000, a stockholder exercised his option to purchase 11,625
shares of common stock at a price of $8.60 per share and exercised his
common stock purchase warrants at a price of $20 for 7,500 shares of
common stock. (See Note 10).
Liquidity
---------
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has an
accumulated deficit of $1,806,985 and negative working capital of
$499,517 as of June 30, 2000. The ability of the Company to continue
as a going concern is dependent on raising additional capital and/or
the acquisition of the Company by Travelbyus.com. Without additional
capital and/or the acquisition by Travelbyus.com there is uncertainty
about the Company's ability to meet its current working capital
requirements and achieve profitability.
Note 13 - Subsequent Event - Acquisition by Travelbyus.com (Unaudited)
SiteRabbit.com was acquired by travelbyus.com on September 14, 2000
pursuant to a share purchase agreement. travelbyus.com issued
3,557,712 of its common shares to SiteRabbit.com for all its
outstanding common shares. The share purchase agreement also provides
that travelbyus.com is required to issue additional shares, to a
maximum of 3,557,712, if certain conditions relating to the
travelbyus.com stock price are not fulfilled within a defined period
as set forth in the purchase agreement. travelbyus.com also executed
employment agreements with certain members of management of
SiteRabbit.com, including stock options that vest over a three year
period as set forth in those agreements.
F-142
<PAGE>
================================================================================
We have not authorized any dealer, sales representative or other person to give
any information or to make any representations other than those that you will
find related to this offer in this prospectus. You should not rely upon any
representations not found in this prospectus. We are not offering any securities
other than the ones described in this prospectus, and we are not offering to
sell or soliciting offers to buy any securities in any states in which these
offers would be unlawful. We cannot assure you that the information contained in
this prospectus will remain accurate after the prospectus has been delivered to
you.
------------
TABLE OF CONTENTS
------------
Page
----
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 9
Forward-Looking Statements................................................ 18
Market for Common Stock................................................... 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 20
Unaudited Pro Forma Consolidated Financial
Information.............................................................. 26
Business.................................................................. 34
Management................................................................ 42
Certain Relationships and Related Transactions............................ 48
Principal Shareholders.................................................... 49
Description of Capital Stock.............................................. 50
Use of Proceeds........................................................... 57
travelbyus.com ltd........................................................ 58
Selling Shareholders...................................................... 80
Plan of Distribution...................................................... 84
Legal Matters............................................................. 86
Experts................................................................... 86
Where You Can Find Additional Information................................. 88
Index to Financial Statements............................................. 89
AVIATION GROUP, INC.
---------------------------
P R O S P E C T U S
---------------------------
November __, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers
The Articles of Incorporation of the Registrant generally limit the
liability of the Registrant's directors and officers to the Registrant and the
shareholders for money damages to the fullest extent permitted from time to time
by the laws of the State of Texas. The Articles of Incorporation also provide
generally for the indemnification of directors and officers, among others,
against judgments, settlements, penalties, fines, and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those or other capacities except in
connection with a proceeding by or in the rights of the Registrant in which the
director was adjudged liable to Aviation Group, Inc. or in connection with any
other proceeding, whether or not involving action in his official capacity, in
which he was adjudged liable on the basis that personal benefit was improperly
received by him. The Registrant has been advised that, in the opinion of the
SEC, any indemnification for liabilities arising under the Securities Act of
1933 is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable.
The Registrant may purchase director and officer liability insurance for
the purpose of providing a source of funds to pay any indemnification described
above.
ITEM 25. Other Expenses of Issuance and Distribution
The estimated expenses of issuance and distribution, other than
underwriting discounts and commissions, expected to be incurred by the
Registrant are as follows:
Registration fee of Securities and Exchange Commission........ $ 3,257
Legal fees.................................................... $35,000
Accounting fees............................................... $20,000
Transfer agent fees........................................... $ 1,000
Printing expense.............................................. $ 5,000
Miscellaneous................................................. $ 5,000
Total......................................................... $69,257
ITEM 26. Recent Sales of Unregistered Securities
In connection with the consummation of its IPO in August 1997, the
Registrant acquired all of the outstanding stock of Casper Air Service, a
Wyoming corporation ("CAS"). The Registrant paid CAS's four shareholders
approximately $1,167,000 in cash and issued them 153,635 shares of Common Stock,
based on the initial public offering price. The sale by the Registrant of its
shares of Common Stock to the two shareholders of CAS receiving shares of the
Registrant's Common Stock was made in reliance on the exemption from
registration under the Securities Act provided by Section 4(2) thereof. The
recipients receiving Common Stock received adequate written disclosures
regarding the Registrant and were represented by legal counsel as part of an
arms length, negotiated acquisition. The recipients were an individual and a
trust, for whom the same individual served as trustee. The Registrant believed
that the individual was sophisticated and knowledgeable in investment and
business matters in general.
In March 1998, the Registrant issued at total of 134,398 shares of Common
Stock in connection with the purchase of all of the outstanding common stock of
Aero Design, Inc. and all of the outstanding ownership interests of Battery
Shop, L.L.C. These entities had only two owners who received adequate written
disclosures regarding the Registrant and were represented by legal counsel as
part of an arms length, negotiated acquisition. The Registrant believed that the
owners were sophisticated and knowledgeable in investment and business matters
in general.
II-1
<PAGE>
In April 1998, the Board of Directors elected to grant an additional 19,000
incentive stock options to officers and employees of the Company and warrants to
purchase 345,000 shares of Common Stock to officers, directors and consultants.
The exercise price on all of the options and warrants was $3.50. In addition to
the new incentive stock options, the Board approved the issuance of 75,000
incentive stock options and warrants to purchase 52,000 shares of Common Stock
in replacement for and cancellation of previously issued options and warrants to
purchase an aggregate of 137,000 shares of Common Stock. These new options were
granted at an exercise price of $3.50 per share, except for options for 50,000
shares granted to Mr. Lee Sanders at an exercise price of $3.85 per share. The
exercise prices on most of these options and warrants have been subsequently
reduced by the Board of Directors. The individuals receiving the options and
warrants were sophisticated and knowledgeable in investment and business matters
in general. Due to their relationship with the Company, the recipients also had
available adequate information regarding the Company. These securities were
issued in reliance upon the exemption from registration under the Securities Act
provided by Sections 4(2) and 3(a)(9) thereof.
In February 1997, the Registrant completed a private offering of $500,000
in aggregate principal amount of 10% bridge notes. Because the Registrant
successfully completed the initial public offering by September 30, 1997, the
terms of the bridge notes required prepayment within five days after the funding
of the public offering and the issuance of common stock as additional
compensation to the holders of the bridge notes. In August 1997, the Registrant
paid the bridge notes in full and issued 43,478 shares of common stock to the
holders. The Registrant sold the bridge notes in reliance upon the exemption
from registration provided by Rules 505 and 506 of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). The shares
of common stock were issued to the holders of the bridge notes in reliance upon
the exemption from registration provided by Section 3(a)(9) of the Securities
Act.
On August 13, 1997, the Louisiana Economic Development Corporation (the
"LEDC") exercised its right to convert to common stock its outstanding note plus
accrued interest in the amount of $369,689. The Registrant issued 82,153 shares
to the LEDC. The common stock was issued to the LEDC in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. The
Registrant considered the LEDC to be a sophisticated and knowledgeable investor.
In late August 1997, the Registrant issued 3,000 shares of common stock to
induce the holders of $433,000 of the Registrant's nonprepayable debt to permit
the Registrant to prepay the debt. These shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act. The
Registrant believed that the debtholders were sophisticated investors and
possessed sufficient information about the Registrant.
For the quarter ended September 30, 1997, the Registrant issued options to
purchase up to 107,000 shares of common stock under the Registrant's 1997 Stock
Option Plan to various directors and executive officers of the Registrant in
consideration for services rendered. These options were issued in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act.
The Registrant considered these directors and executive officers to be
knowledgeable and sophisticated investors possessing sufficient information
about the Registrant.
In connection with the acquisition of Aero Design, Inc. in March 1998, the
Registrant issued 20,000 common stock warrants to RAS Securities, a company
affiliated at that time with a member of the Registrant's Board of Directors.
These securities were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act. The Registrant believed that RAS
Securities was sophisticated and knowledgeable in investment and business
matters in general and possessed sufficient knowledge of the Registrant.
At various times, the holders of the Registrant's convertible notes have
exercised their rights to convert principal and interest payable by the
Registrant into shares of common stock. A total of 216,676 shares of common
stock have been issued pursuant to the exercise of these conversion rights.
These shares were issued in reliance upon the exemption from registration
provided by Section 3(9) of the Securities Act.
In connection with the conversion in March 2000 by holders of $340,600 in
convertible notes, the Registrant guaranteed that any resales of the shares
obtained by these holders would result in proceeds of at least the conversion
price. In early November 2000, five of these holders agreed to accept the
issuance of 60,071 shares of common stock in satisfaction of a total of
approximately $60,000 owed to them under the resale price guaranty. The
Registrant agreed to register these shares for resale under the Securities Act
and promised to protect them from any loss realized from the resale of these new
shares if the net proceeds are less than $1 per share. These recipients are all
existing shareholders and prior noteholders of the Registrant. The Registrant
relied upon the exemption from registration provided by Section 4(2) of the
Securities Act. The Registrant believed these recipients to be sophisticated and
knowledgeable investors possessing sufficient information about the Registrant.
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In 1996, 200,000 warrants with an exercise price of $1.00 per share were
issued as a sales commission to a broker/dealer in connection with a Regulation
D offering. The holders of these warrants have exercised them on a "cashless
basis" to purchase 167,983 shares of common stock through the surrender of
33,217 warrants. These shares were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act. The Registrant
believed that the holders of the warrants were sophisticated and knowledgeable
investors.
In July 1998, a director of the Registrant exercised his warrants to
purchase 32,434 shares of common stock. These shares were issued on a "cashless"
basis in exchange for the surrender of 10,811 warrants. The warrants were
exercisable at $1.00 per share. These shares were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act. The
Registrant believed that the director was sophisticated and had sufficient
knowledge of the Registrant due to his position as a director.
In August 1998, in connection with the acquisition of General
Electrodynamics Corporation, a Texas corporation ("GEC"), the Registrant issued
112,029 shares of common stock. The transaction was a negotiated acquisition
with the seller of GEC represented by legal counsel. These shares were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act. The Registrant believed that the seller of GEC was sophisticated
and knowledgeable in business matters in general and had access to sufficient
information regarding the Registrant.
In October 1998, the Registrant issued to RAS Securities Corp. and one of
the principals of RAS warrants to purchase an aggregate of 100,000 shares of
common stock expiring in October 2003. The Registrant issued the warrants in
consideration for RAS' efforts in obtaining acquisition candidates and raising
capital. Warrant exercise prices range from $3 to $8 per share. The Registrant
relied upon the exemption from registration provided by Section 4(2) of the
Securities Act, and considered both of the recipients to be sophisticated and
knowledgeable investors.
In connection with the Registrant's purchase of Aero Design, Inc. and
Battery Shop, L.L.C., the Registrant (i) promised to pay to the former owners of
those entities a portion of the pre-tax net profits of those entities in excess
of $359,000 for three years, (ii) guaranteed to protect them from any losses of
up to $450,000 realized by them upon the resale of their shares of common stock
issued in connection with the purchase, and (iii) promised to pay to the former
owner a royalty equal to 2 1/2% of the Registrant's net sales from new products
for which the Registrant obtains new PMA licenses developed by Aero Design
through the former owner's efforts. In May 1999, the former owners agreed to
accept the issuance of 153,250 shares of common stock in exchange for a release
and cancellation of the guaranty by the Registrant against any loss on a resale
of their shares of common stock, agreed to accept the issuance of 1,500 shares
of common stock in exchange for any cash profit participation payable for the
year ended March 31, 1999, and agreed to accept the issuance of 500 shares of
common stock in satisfaction of the Registrant's royalty obligation for the year
ended March 31, 1999. All of the foregoing shares were issued to the former
owners in reliance upon the exemptions from registration provided by Section
4(2) or 3(9) of the Securities Act. The former owners are existing shareholders
of the Registrant, are executive officers or directors of Aero Design and active
in Aero Design's business, and are considered by the Registrant to be
sophisticated and knowledgeable investors.
In June 1999, two existing shareholders of the Registrant loaned the
Registrant a total of $600,000. These loans were due December 31, 1999. As
part of the consideration for making the loans, the Registrant issued to the
lenders warrants to purchase a total of 200,000 shares of common stock at an
exercise price of $1.00 per share. The warrants expire on June 30, 2002. In
addition, as compensation for arranging the financing on behalf of the
Registrant, a director received 40,000 shares of the Registrant's common stock.
These securities were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act. The Registrant considered the
lenders and the director to be sophisticated and knowledgeable investors.
In July 1999, the Registrant issued to 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 the Registrant's new hangar lease in
New
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<PAGE>
Iberia, Louisiana. The Registrant relied upon the exemption from registration
provided by Section 4(2) of the Securities Act. The Registrant considered the
LEDC to be a sophisticated and knowledgeable investor.
In January 2000, the Registrant issued 58,500 shares of common stock upon
the "cashless" exercise of 180,000 warrants held by an executive officer of the
Registrant, with 121,500 of these warrants being canceled. The Registrant relied
on the exemption from registration under the Securities Act provided by Section
4(2) thereof. The executive officer of the Registrant was sophisticated and
possessed sufficient knowledge of the Registrant.
On February 23, 2000, the Registrant's Board of Directors approved the
grant to two executive officers of the Registrant of warrants to purchase
250,000 shares of common stock, exercisable at $1.50 per share. The warrants are
not exercisable until the shareholders of the Registrant approve their issuance
and until the earlier of January 1, 2001 or the sale of the Registrant's
operating subsidiaries, other than Global Leisure Travel, Inc. The warrants
expire in February 2005. The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act. These executive
officers of the Registrant were sophisticated and possessed sufficient knowledge
of the Registrant.
On February 23, 2000, the Registrant's Board of Directors approved the
grant to each of three directors of the Registrant of warrants to purchase
50,000 shares, exercisable at $1.50 per share. The warrants are not exercisable
until the shareholders of the Registrant approve their issuance and until the
completion of the proposed arrangement with travelbyus.com ltd. The warrants
expire in February 2005. The Registrant relied on the exemption from
registration provided by Section 4(2) of the Securities Act. These directors of
the Registrant were sophisticated and possessed sufficient knowledge of the
Registrant.
In May 2000, the Registrant 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 the Registrant. The warrants have an exercise price of
$2.125 and expire on May 8, 2005. These warrants were amended to represent the
right to purchase 250,000 shares at $1.50 per share in connection with an
extension of a related loan. The warrants were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act. The
Registrant believed that SW Pelham Fund was a sophisticated and knowledgeable
investor.
In May 2000, in a private placement, the Registrant sold 750,000 shares of
common stock at a price of $2.667 per share, and 1,653 units, each unit
consisting of one share of Series B convertible preferred stock and 750 Series C
warrants, at a price of $10,000 per unit. The Series C warrants have an exercise
price of $3.00 per share and expire at the earlier of March 31, 2000, the second
anniversary of the date the underlying shares of common stock are registered for
resale under the Securities Act or the date on which the Registrant redeems the
warrants. The warrants are not exercisable until their issuance is approved by
the Registrant's shareholders. These securities were issued in reliance upon the
exemption from registration provided by Rule 506 of the Securities Act. The
Registrant believed that these securities were sold only to accredited investors
as that term is defined under Rule 501 of the Securities Act.
In May 2000, in connection with the acquisition of Global Leisure Travel,
Inc. and related financing, the Registrant issued the following:
1. 1,650 shares of Series A convertible preferred stock and Series A warrants
to purchase 750,000 shares of its common stock at an exercise price of
$5.00 per share, issued to certain affiliates of Global Leisure Travel,
Inc. in exchange for the cancellation of their shares of common stock in
Global Leisure and the assignment of Global Leisure debt held by such
affiliates;
2. 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 A and 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, unless the expiration date is
extended by the Registrant. The Series A and Series B warrants are not
exercisable until their issuance is
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<PAGE>
approved by the Registrant's shareholders. Approval by the Registrant's
shareholders of the increase in the number of authorized shares of common stock
is also a condition to exercise of the Series A and Series B warrants. 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) the Securities Act. The Registrant believed that the
recipients of these securities were sophisticated and knowledgeable in business
matters in general and had sufficient access to information about the
Registrant.
In June 1999, the Registrants and GEC settled certain ongoing litigation by
agreeing to pay the plaintiffs $200,000 on or before May 26, 2000. The payment
obligation was secured by a grant of a security interest in 112,000 shares of
the Registrant's common stock. At maturity, in May 2000, the shares were sold in
lieu of foreclosure with the consent of the Registrant to four private
purchasers. The funds received from the foreclosure sale were used to pay the
amount owed to the plaintiffs. These securities were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act. The
Registrant believed that the purchasers were sophisticated and knowledgeable in
business matters in general and possessed sufficient knowledge of the
Registrant.
In August 1999, the Registrant 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. The Registrant believed that the new
director was sophisticated and knowledgeable in business matters in general and
had sufficient knowledge of the Registrant due to his position as a director.
Between September 1999 and February 2000, two executive officers of the
Registrant loaned a total of $305,000 to the Registrant. As part of the
consideration for making the loans, the Registrant 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.
The Registrant considered the executive officers to be sophisticated and
knowledgeable investors.
On August 17, 1999, the Registrant 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. The Registrant considered the director to be a
sophisticated and knowledgeable investor.
In July 2000, the Registrant negotiated an arrangement with one of its
landlords, the Oregon Public Employee Retirement Fund, to accept a note and
shares of common stock in satisfaction of past due rents, operating expenses and
accrued interest totaling approximately $498,000. The note's maturity was
extended to January 31, 2001 as a result of the Registrant's agreement to issue
additional shares. A total of 331,842 shares have been or will be issued. The
Registrant agreed to register the shares for resale under the Securities Act.
Any proceeds received by the Fund from the resale of the shares must be credited
against the note balances. The registrant relied upon the exemption from
registration provided by Section 4(2) of the Securities Act. The Registrant
believed that the Fund was a sophisticated and knowledgeable investor possessing
sufficient information regarding the Registrant.
The Registrant has granted the right to holders of notes payable by the
Registrant's subsidiaries to exchange the debt represented by the notes into
shares of the Registrant's common stock. Notes payable aggregating approximately
$1,054,000 are exchangeable at $1.50 per share into a total of approximately
703,000 shares of common stock. Notes payable aggregating approximately $86,940
are exchangeable at $3.00 per share into a total of approximately 28,980 shares
of common stock. The holders of these notes consist of one bank and eight trade
vendors of the Registrant's subsidiaries. The Registrant relied on the exemption
from registration provided by Section 4(2) of the Securities Act in granting the
exchange rights. The Registrant believed that the holders were sophisticated and
knowledgeable in business matters in general.
ITEM 27. 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) (h)
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<PAGE>
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)
5.1 - Opinion of Jenkens & Gilchrist, a Professional Corporation as to
legality (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)
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)
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<PAGE>
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)
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)
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<PAGE>
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)
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 - Amended and Restated Warrant Agreement dated November 2, 2000 between
Aviation Group, Inc. and SW Pelham Fund, L.P.
10.43 - Form of two Warrant Agreements dated February 23, 2000 between
Aviation Group, Inc. and Richard Morgan or Lee Sanders, each for the
purchase of 250,000 shares of common stock (g)
10.44 - Form of three Warrant Agreements dated February 23, 2000 between
Aviation Group, Inc. and Hank Clements, Charles E. Weed or Gordon
Whitener, each for the purchase of 50,000 shares of common stock (g)
10.45 - Promissory Note dated May 25, 2000 in the principal amount of
$1,975,000 made by travelbyus.com ltd. payable to the order of
Aviation Group, Inc. (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 - Asset Purchase Agreement and Share Purchase Agreement dated October
13, 1999 among International Tours, Inc., Galaxsea Cruises and Tours,
Inc., North American Gaming and Entertainment Corporation,
travelbyus.com ltd., Travelbyus-IT Incorporated and Travelbyus-
Galaxsea Incorporated (h)
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<PAGE>
10.49 - Purchase Agreement dated November 1, 1999 among John Fenyes, The John
and Judy Fenyes Charitable Remainder Unitrust, Jon Snyder, The Jon and
Janet Snyder Charitable Remainder Unitrust, Eldorado Resorts, LLC and
travelbyus.com ltd., regarding Express Vacations, LLC (h)
10.50 - Employment Agreement dated November 1, 1999 between Express Vacations,
LLC and John Fenyes (h)
10.51 - Employment Agreement dated November 1, 1999 between Express Vacations,
Inc. and Jon Snyder (h)
10.52 - Share Purchase Agreement effective as of December 1, 1999 among Robert
Beaudet, travelbyus.com ltd. and Thomas Spagnola, regarding Cheap
Seats, Inc. (h)
10.53 - Share Purchase Agreement dated December 1, 1999 between travelbyus.com
ltd. and John Whyte regarding Legacy Storage Systems Corp. (h)
10.54 - Asset Purchase Agreement dated December 7, 1999 among travelbyus.com
ltd., Express Vacations Inc., John M. Elliott, Charles Farrell, Peter
Adam and Gene Koch (h)
10.55 - Agreement and Plan of Merger dated April 4, 2000 among Cruise Shoppes
America, Ltd., Travelbyus-Cruise Shoppes Inc., travelbyus.com ltd.,
Gary P. Brown and Michael J. Wild (h)
10.56 - Stock Purchase Agreement dated as of May 23, 2000 among Robert J.
Sims, Jr., William Kepke, Dieter M. Bailly, Raymond T. Sims, Mark L.
Sims, Ron Heuer and travelbyus.com ltd. regarding Epoch Technology,
Inc. (h)
10.57 - Share Exchange Agreement dated June 16, 2000 between travelbyus.com
ltd. and Travel24.com AG (h)
10.58 - Promotional Agreement dated May 5, 2000 among travelbyus.com ltd.,
Aviation Group and Genesis Intermedia.com, Inc. (h)
10.59 - Software License Agreement dated April 7, 2000 between travelbyus.com
ltd. and ITA Software, Inc. (h)
10.60 - Management Services Agreement dated as of September 1, 2000 among
travelbyus.com ltd., Global Leisure Travel, Inc., Sunmakers, Inc.,
KWTI Company, Firstar International, Inc., Cruise Alaska Tours, Inc.
and AOI, Inc. (h)
10.61 - Acquisition Agreement dated as of July 20, 2000 between travelbyus.com
ltd. and Michael H. Rosenblum regarding Muffin Communications Ltd. (h)
10.62 - Acquisition Agreement dated as of September 14, 2000 among
travelbyus.com ltd., Gary Saner, J. Michael Rucker, David P. Vasil,
Ralph Schneider, Ron Lindsay, Michael Nagy and Kenneth Seene regarding
ProSoft Corporation (h)
10.63 - Acquisition Agreement dated as of September 14, 2000 among
travelbyus.com ltd., J. Michael London and Sheila London, David Krych,
Krych Management Services, LLC., ProSoft Corporation, Walter Grant,
Ambraw Asphalt Materials, Inc., Robert P. and Teresa M. Hohenstein,
Dan E. and Kay Hornsby, Kenneth M. and Lori A. Kavanaugh, Rosilyn
Mancinelli, Christopher E. McAteer, Joseph Lesko and Michael Gibbore
regarding SiteRabbit.com Inc. (h)
10.64 - Amendment to Management Services Agreement dated as of September 29,
2000 (i)
10.65 - Waiver and Amendment Agreement dated as of November 2, 2000 among
Aviation Group, Inc., SW Pelham Fund, L.P. and Curtis Holdings, Inc
10.66 - Form of Amended and Restated Exchangeable Promissory Note, Resale
Price Indemnity, and First Amendment to Resale Price Indemnity
executed by Aviation Exteriors Portland, Inc. or Aviation Exteriors
Louisiana, Inc. with various trade vendors
10.67 - Form of Exchange Agreement and First Amendment to Exchange Agreement
executed between Aviation Group, Inc. and various trade vendors
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<PAGE>
11.1 - Computation of Net Loss per Common Share (h)
21.1 - List of Subsidiaries of Aviation Group, Inc. (h)
23.1 - Consent of Jenkens & Gilchrist, a Professional Corporation
23.2 - Consents of PricewaterhouseCoopers LLP
23.3 - Consent of Hein + Associates LLP
23.4 - Consent of BDO Seidman, LLP
23.5 - Consent of Ernst & Young LLP
23.6 - Consent of Friduss, Lukee, Schiff & Co., P.C.
23.7 - Consents of Swenson Advisors, LLP
24.1 - Power of Attorney (included on signature page)
_________________________________________
(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 333-40352).
(i) Incorporated by reference to the Form 10-KSB Annual Report for the year
ended June 30, 2000.
ITEM 28. Undertakings
Aviation Group, Inc. hereby undertakes as follows: that prior to any public
reoffering of the securities registered in this registration statement through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
Aviation Group, Inc. undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered in that
statement, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering of those securities.
Aviation Group, Inc. hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
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<PAGE>
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered in that
statement, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering of those securities.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
If any indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of Aviation Group,
Inc. pursuant to the foregoing provisions, or otherwise, Aviation Group, Inc.
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Aviation Group, Inc. of expenses incurred
or paid by a director, officer or controlling person of Aviation Group, Inc. in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Aviation Group, Inc. will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
Aviation Group, Inc. hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form SB-2, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
Aviation Group, Inc. hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Dallas,
State of Texas, on the 8th day of November, 2000.
AVIATION GROUP, INC.
By: /s/ William Kerby
--------------------------------------
William Kerby
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Lee B. Sanders and
Richard L. Morgan or any of them, with full power to act alone, his true and
lawful attorney-in-fact, with full power substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the SEC, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact or
any of them may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William Kerby President, Chief Executive Officer November 8, 2000
-----------------------
William Kerby and Director
/s/ Lee Sanders Chairman of the Board and Director November 8, 2000
-----------------------
Lee Sanders
/s/ Richard L. Morgan Director, Executive Vice President, November 8, 2000
-----------------------
Richard L. Morgan Chief Financial Officer and Chief
Accounting Officer
Director November 8, 2000
-----------------------
Charles Weed
/s/ Gordon Whitener Director November 8, 2000
-----------------------
Gordon Whitener
/s/ Hank Clements Director November 8, 2000
-----------------------
Hank Clements
/s/ John Fenyes Director November 8, 2000
-----------------------
John Fenyes
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