<PAGE> 1
Schedule 14C Information
Information Statement Pursuant to Section 14(C)
of the Securities Exchange Act of 1934
Check the appropriate box:
[x] Preliminary Information Statement
[ ] Confidential, for use of the Commission Only, as permitted by Rule
14c-5(d)(2)
[ ] Definitive Information Statement
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1), 14a-6(i)(1), or 14a-6(j)(2).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of
Grand Adventures Tour & Travel Publishing Corporation (the "Company") will be
held at the offices of the Company, 1120 Capital of Texas Highway, Building 3,
Suite 300, Austin, Texas 78746 on Monday, December 15, 1997, at 10:00 o'clock
A.M., Austin, Texas time, for the following purposes:
1. To consider and act upon a proposal to approve an amendment to the
Restated Certificate of Incorporation of the Company (the "Amendment")
which will effect a reverse split (the "Reverse Split") of the
Company's outstanding shares of Common Stock on the basis of one new
share of Common Stock for each seven outstanding shares of Common
Stock;
2. To consider and act upon a proposal to establish the number of shares
of Common Stock subject to the Company's long-term stock incentive
plan as 450,000; and
3. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
Holders of record of Common Stock at the close of business on November
15, 1997, will be entitled to notice of and to vote at such meeting or any
adjournment thereof. The transfer books of the Company will not be closed.
All Stockholders are cordially invited to attend the Special Meeting
of the Stockholders.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED TO NOT SEND US
A PROXY.
Austin, Texas /s/ Matthew O'Hayer,
November __, 1997 Chief Executive Officer
<PAGE> 3
INFORMATION STATEMENT
GENERAL INFORMATION
This Information Statement is furnished to Stockholders by the
management of Grand Adventures Tour & Travel Publishing Corporation
(hereinafter referred to as the "Company," located at 1120 Capital of Texas
Highway, Building 3, Suite 300, Austin, Texas 78746), in connection with a
Special Meeting of Stockholders of the Company, to be held at 10:00 o'clock
A.M., December 15, 1997, at the offices of the Company located at 1120 Capital
of Texas Highway, Building 3, Suite 300, Austin, Texas 78746, and at any
adjournment thereof.
The close of business on November 15, 1997, has been fixed as the
record date for determination of Stockholders entitled to notice of and to vote
at the Special Meeting. As of such date, there were issued and outstanding
9,522,024 shares of Common Stock, $.0001 par value per share, of the Company
("Common Stock"). Each Stockholder of record on such date is entitled to one
vote for each share of Common Stock then held by such Stockholder.
Brokers and others holding stock in their names, or in the names of
nominees, may be requested to forward copies of the Information Statement to
beneficial owners, and the Company will reimburse them for reasonable direct
and indirect expenses incurred in connection with completing the mailing of
Information Statements to and the solicitation of proxies of beneficial owners
at approved rates.
This Information Statement is first being mailed to Stockholders of
the Company on or about November 21, 1997.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED TO NOT SEND US
A PROXY.
ITEM 1. AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO EFFECT A
ONE-FOR-SEVEN REVERSE STOCK SPLIT OF THE COMPANY'S OUTSTANDING COMMON
STOCK
GENERAL SUMMARY
The Board of Directors of the Company has unanimously approved,
subject to Stockholder approval, a proposed amendment to the Company's Articles
of Incorporation (the "Amendment") which will effect a one-for-seven reverse
stock split (the "Reverse Split") of the Company's outstanding shares of Common
Stock. On September 30, 1997, the Company had 30,000,000 shares of authorized
Common Stock, par value $.0001 per share, of which approximately 9,522,024
shares were issued and outstanding and approximately 5,551,255 shares were
reserved for issuance pursuant
<PAGE> 4
4
to outstanding options, warrants, convertible debentures and other agreements.
Thus, at September 30, 1997, the Company had approximately 14,926,721
authorized shares of Common Stock unissued and not reserved for issuance. Had
the Amendment to effect the Reverse Split been approved and effective as of
September 30, 1997, the Company would have had 30,000,000 authorized shares,
par value $.0001 per share, of Common Stock, approximately 2,153,325 shares of
Common Stock issued and outstanding or reserved for issuance and approximately
27,846,675 authorized shares of Common Stock unissued and not reserved for any
purpose.
The authorized number of shares of the Company's Preferred Stock, no
par value (the "Preferred Stock"), will remain unchanged at 10,000,000 shares.
There are no issued and outstanding shares of Preferred Stock and there are no
shares of Preferred Stock reserved for future issuance.
If the requisite approval of the Company's Stockholders is obtained,
the Amendment to effect the Reverse Split will be effective on the date (the
"Effective Date") that articles of amendment reflecting the Amendment and the
Reverse Split are filed with the Oregon Secretary of State (a copy of the
Articles of Amendment to be filed upon approval of the Amendment are attached
as Annex B to this Information Statement and will be attached to the notice of
the Special Meeting). The Company anticipates that the Effective Date will be
the date of the Special Meeting. Each certificate representing shares of
Common Stock outstanding immediately prior to the Reverse Split (the "Old
Shares") will be deemed automatically, without any action on the part of the
Stockholders, to represent one-seventh the number of shares of Common Stock
after the Reverse Split (the "New Shares"). A Stockholder's proportionate
ownership interest in the Company will remain unchanged by the Reverse Split.
The New Shares issued pursuant to the Reverse Split will be fully paid and
nonassessable. The voting and other rights of the Common Stock will not be
altered by the Amendment or the Reverse Split.
No fractional New Shares will be issued as a result of the Reverse
Split. In lieu thereof, each Stockholder whose Old Shares are not evenly
divisible by seven will receive one additional New Share for the fractional New
Share that such Stockholder would otherwise be entitled to receive as a result
of the Reverse Split. When the Reverse Split becomes effective, Stockholders
will be asked to surrender certificates representing Old Shares in accordance
with the procedures set forth in a letter of transmittal to be sent by the
Company. Upon such surrender, a certificate representing the New Shares will
be issued and forwarded to the Stockholders; however, each certificate
representing Old Shares will continue to be valid and represent New Shares
equal to one-seventh of the number of Old Shares. Persons who hold their
shares in brokerage accounts or "street name" will not be required to take any
further actions to effect the exchange of their certificates.
Purpose of the Reverse Split
The Board of Directors believes that a reverse split is essential to
the Company's continued growth and development. The Reverse Split is expected
to enhance the marketability and acceptance of the Company's Common Stock in
financial markets. It will facilitate different forms of finance, including
the ability to attract potential strategic partners. It should facilitate
possible inclusion on the National Market System (NMS) of the NASDAQ system,
or the American Stock Exchange. In addition, the Reverse Split will
<PAGE> 5
5
result in an increase in the number of unused shares of Common Stock available
for issuance in the future for business combinations, strategic alliances,
equity offerings and other business opportunities. At this time, the Company
knows of no such business combinations, strategic alliances, equity offerings
or other business opportunities. The proposed increase in unused shares will
enable the Company to obtain additional capital resources to pursue the full
implementation of its business plan. The potential increase in price may also
encourage new interest and additional trading in the Common Stock, and may open
new and preferable avenues of finance to the Company, which could reduce any
future dilution from financing activities. Without the reverse split, the
Company's options for any needed finance will be extremely limited. Management
wishes to pursue new avenues of any necessary finance.
Background and Reasons
The Board of Directors believes that the Amendment to effect the
Reverse Split is desirable for several additional reasons. From January 1
through September 30, 1997, the trading range of the Common Stock has ranged
from $0.812 to $1.50 per share. The Reverse Split will have the effect of
reducing the number of outstanding shares of Common Stock without effecting any
material change in the proportionate ownership interest of Common Stockholders
in the Company. The Board believes that the Reverse Split may increase the
trading price for shares of Common Stock and thereby enhance the acceptability
of the Common Stock by a much broader group of investors, including
institutional investors (many of whom will not invest in securities which trade
at a price of $5 or less per share), and the financial community and the
investing public at large. The Company believes to attract the type of
financial support it desires it must have a per share price that is higher than
at present and with fewer outstanding shares.
Additionally, a variety of brokerage house policies and practices tend
to discourage individual brokers within those firms from dealing with lower
priced stocks. Some of these policies and practices pertain to the payment of
brokers' commissions and to time-consuming procedures that make the trading of
lower priced stocks economically unattractive to brokers. In addition, the
structure of trading commissions also tends to have an adverse impact upon
investors in lower price securities because the brokerage commission on a sale
of lower priced stock generally represents a higher percentage of the sales
price than the commission on a relatively higher priced issue. The Company
stock has not been eligible for margin accounts because of low prices per share
and if the price per share increases because of the reverse split, the stock
could become marginable which could increase investor activity and interest.
The proposed Reverse Split should result in a price level for the Common Stock
that will reduce, to some extent, the effect of these policies and practices of
brokerage firms and diminish the adverse impact that minimum trading
commissions may have on the market for the Company's Common Stock.
Management of the Company sought and received expert guidance on the
advisability of a reverse split. It was noted from the experts consulted that a
majority of those companies experienced an increase in share price in proportion
to the decrease of outstanding shares, which was, presumably, among the benefits
that were anticipated from the Reverse Split. However, the Company is aware that
not all companies have maintained their market capitalization after a reverse
<PAGE> 6
6
stock split, and it should be noted that the Board of Directors cannot provide
assurance of the effect on the market price of the Common Stock as a result of
the Reverse Split or any of the other potentially favorable consequences.
Effect of the Reverse Split
The Company has authorized capital stock of 30,000,000 shares of
Common Stock, $.0001 par value per share, and 10,000,000 shares of Preferred
Stock, no par value. The Reverse Split will not affect the number of
authorized shares of Common Stock or Preferred Stock of the Company.
As of September 30, 1997, the number of issued and outstanding Old
Shares was approximately 9,522,024. The following table illustrates the
principal effects of the proposed Reverse Split and decrease in outstanding
Common Stock assuming that no additional shares of Common Stock are issued
prior to the Effective Date as a result of the exercise of any options,
warrants, conversions or other reserved issuances and without giving effect to
the disposition of fractional shares.
<TABLE>
<CAPTION>
Authorized Prior to Authorized After Outstanding Prior Outstanding After
Reverse Split Reverse Split to Reverse Split Reverse Split
<S> <C> <C> <C> <C>
Common Stock 30,000,000 30,000,000 9,522,024 1,360,289
Preferred Stock 10,000,000 10,000,000 0 0
</TABLE>
As of September 30, 1997, the Company had approximately 5,551,255
shares of Common Stock reserved for issuance pursuant to outstanding options,
warrants, convertible debentures and other agreements. Under the terms of the
various plans, warrant agreements, convertible debentures and other agreements,
the number of shares reserved for issuance will be reduced proportionately by a
factor of seven.
The Common Stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934 (the "Exchange Act") and, as a result, the
Company is subject to the periodic reporting and other requirements of the
Exchange Act. The Common Stock is admitted for trading on the NASDAQ Small-Cap
Issues Market. The number of holders of the Common Stock on the Record Date
was approximately 330. The Company does not anticipate that the Reverse Split
will result in a significant reduction in the number of such holders.
Accordingly, the Reverse Split is not expected to affect the registration of
the Common Stock under the Exchange Act or its status as a NASDAQ Electronic
Bulletin Board security.
Federal Income Tax Consequence of the Reverse Split
The Company has not sought and will not seek an opinion of counsel or
a ruling from the
<PAGE> 7
7
Internal Revenue Service regarding the federal income tax consequences of the
Reverse Split. However, the Company believes that because the Reverse Split is
not part of a plan to periodically increase a Stockholder's proportionate
interest in the assets or earnings and profits of the Company, the Reverse
Split will have the following effects. The receipt of Common Stock in the
Reverse Split should not result in any taxable gain or loss to Stockholders for
federal income tax purposes. If the Reverse Split is approved, the tax basis
of Common Stock received as a result of the Reverse Split will be equal, in the
aggregate, to the basis of the shares exchanged for the Common Stock. For tax
purposes, the holding period of the shares immediately prior to the Effective
Date will be included in the holding period of the Common Stock received as a
result of the Reverse Split.
Financial Accounting Consequences
The par value of the Common Stock will remain at $.0001 per share
following the Reverse Split, and the number of shares of Common Stock
outstanding will be reduced. As a consequence, the aggregate par value of the
outstanding Common Stock will be reduced by the product of $.0001 times the
decrease in the number of outstanding shares, while the aggregate capital in
excess of par value attributable to the outstanding Common Stock will be
correspondingly increased for financial accounting purposes. Although it is
currently expected that this increase in capital in excess of par value will
continue to be treated as capital for financial accounting purposes, the Board
of Directors of the Company has the authority to transfer some or all of such
increased capital in excess of par value from its stated capital account to
surplus without further action by the Stockholders. This increase in capital
in excess of par value will not increase the amount available for distribution
to Stockholders.
ITEM 2. PROPOSAL TO ESTABLISH THE NUMBER OF SHARES SUBJECT TO THE COMPANY'S
LONG-TERM STOCK INCENTIVE PLAN AS 450,000.
The Company's Stockholders have previously approved and adopted a
long-term stock incentive plan (the "Plan") which reserved 1,000,000 shares of
the Company's Common Stock for issuance pursuant to stock options. In
connection with the Reverse Split, management of the Company believes that the
Company's best interest would be served by establishing 450,000 as the number
of shares subject to the Plan (after giving effect to the Reverse Stock Split).
Management believes that this number of shares will be capable of providing an
adequate incentive to participants in the Plan without subjecting Stockholders,
both current and future, to undue dilution.
Under the terms of the Plan, which is administered by the Board of
Directors of the Company, key employees, as well as others who contribute
significantly to the Company's profitability, are eligible for a number of
incentive devices in addition to incentive stock options ("ISOs") and
non-qualified stock options ("NSOs"), including reload options ("ROs")
(i.e., the granting of additional options, where an employee exercises an
option with previously owned stock, covering the number of shares tendered as
part of the exercise price), restricted stock awards ("RSAs") (i.e., stock
awarded to an employee that is subject to forfeiture in the event of a
premature termination of employment, failure of the Company to meet certain
performance objectives, or other conditions), performance units ("PUs")
(i.e., share-denominated units credited to the employee's account for delivery
or cash-out at some future date based upon performance criteria to be
determined at the time of the grant), and "tax withholding" (i.e., where the
employee has the option of having the Company withhold shares on exercise of an
award to satisfy tax withholding requirements).
1. An NSO (including for this purpose, an RO), is a right to
purchase a specified number of shares of Common Stock at a fixed option price
over a specified period of time. An optionee will realize no income for federal
income tax purposes upon grant of an NSO under the Plan, but will recognize
income upon the exercise of the NSO in an amount equal to the excess of the
fair market value of the shares received upon exercise over the option price of
such shares. The Company will be entitled to a deduction for federal income tax
purposes in the same year as, and in an amount equal to, the income recognized
by the optionee. The optionee's adjusted basis for the shares of Common Stock
received upon exercise will be the fair market value on the date of exercise.
2. An ISO is a right to purchase a fixed option price, over a
period not to exceed 10 years, a specified number of shares of Common Stock
that complies with section 422A of the Code. An optionee who receives an ISO
under the Plan will recognize no income for federal income tax purposes upon
either the grant or the exercise of the ISO. Income will be taxable to the
optionee upon the sale of the shares acquired. In general, the adjusted basis
for the shares of Common Stock received upon exercise will be the option price
paid with respect to such shares. The Company will not be entitled to a
deduction upon the exercise of an ISO. However, if the shares are sold within a
period which is before the later of two years from the date of the grant of the
ISO or one year from the date of exercise, the optionee will recognize
compensation income in an amount equal to the lesser of the excess of the fair
market value on the date of exercise over the option exercise price, or the
excess of the price received upon sale over the option exercise price, and the
Company would be entitled to corresponding deduction. The amount by which the
fair market value of the shares of Common Stock received upon the exercise of
an ISO exceeds the exercise price is an item of tax adjustment under the Code
and is therefore included in the alternative minimum taxable income.
3. An RSA is Common Stock that is transferred subject to a risk
forfeiture under certain circumstances and restrictions on transfer of
ownership. RSAs may be made with or without cash payment by the employees. An
employee who receives a grant of restricted stock who does not elect to be
taxed at the time of grant will not recognize income upon an award of shares of
Common Stock, and the Company will not be entitled to a deduction until the
termination of the restrictions. Upon such termination, the employee will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at that time (less any amount paid by the employee for such
shares), and the Company will be entitled to a deduction in the same amount.
However the employee may elect to recognize ordinary income in the year the
restricted stock is granted in amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In that
event, the Company will be entitled to a deduction in such year and in the same
amount. Any gain or loss recognized by the employee upon subsequent disposition
of the stock will capital in nature.
4. A PU is a promise by the Company to make payment to the employee
contingent upon the achievement of one or more performance targets. PUs are
payable in cash or shares of Common Stock. For PUs cash plus the fair market
value of any Common Stock received as payment under the Plan will be considered
ordinary income to the employee in the year in which paid, and the Company will
be entitled to a deduction in the same year and in the same amount.
<PAGE> 8
8
At the time of each option grant, the Board of Directors sets the
exercise price of such option at the fair market value of the Common Stock at
the time of such grant (which the Board determines by reference to a number of
factors) and the period of time over which such option vests or becomes
exercisable. To date, all options granted under the Plan have had an exercise
price of $1.00 per share, which will be adjusted to $7.00 upon approval of the
Amendment and the Reverse Split, and have been scheduled to vest over three
years.
The following table sets forth the amount of options received by the
individual and groups identified below (the number of shares set forth below
are not adjusted for the effects of the Reverse Split):
<TABLE>
<CAPTION>
Individual or Group Number of Shares Subject to Options
------------------- -----------------------------------
<S> <C>
Darrell W. Barker, Chief Financial Officer 100,000
All current executive officers, as a group 100,000
All current directors who are not executive
officers, as a group 0
Associates of directors or executive officers 0
Each person who has received at least 5% of all
options issued to date :
Darrell W. Barker 100,000
Patricia H. Macchi 50,000
Joe Brummer 50,000
Shannan Rivers 50,000
All employees, including all directors who are not 739,666
executive officers, as a group
</TABLE>
There are not currently any options to be received or scheduled to be
received by any executive officer, or any person or group identified in the
foregoing table.
OTHER BUSINESS
Management does not know of any matters to be acted upon at the
Special Meeting other than those described above.
<PAGE> 9
9
DISSENTERS' RIGHT OF APPRAISAL
The Company does not believe that the Company's Stockholders will have
dissenters' rights as a result of any of the matters proposed to be considered
by the Company's Stockholders at the Special Meeting.
VOTE REQUIRED FOR APPROVAL
Approval of the proposed amendment to the Articles of Incorporation to
effect the reverse split of stock will require the affirmative vote of holders
of a majority of the Common Stock outstanding as of the record date for the
Special Meeting. All other matters, if any, will be decided by the affirmative
vote of holders of a majority of the shares represented in person or by proxy
and entitled to vote at the Special Meeting. Since all other matters to be
considered at the Special Meeting require the affirmative vote of a given
percentage of shares outstanding or present at the meeting, abstentions will
have the effect of a vote against any matter. Broker nonvotes are counted for
purposes of determining the presence or absence of a quorum, but are not counted
for purposes of determining the number of votes cast for or against the
particular proposal for which authorization to vote was withheld. A broker
nonvote will therefore have the effect of a vote against the proposal to approve
the proposed amendment (which requires an affirmative vote of a
majority of shares outstanding), but will have no effect with respect to the
other proposals to be considered (which require only the affirmative vote of a
majority of shares represented and voting on the proposal in question). Votes
will be tabulated by the Company.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of September 30, 1997, the name and
shareholdings, including options to acquire the Common Stock, of each person
who owns of record, or was known by the Company to own beneficially, 5% or more
of the shares of the Common Stock currently issued and outstanding; the name
and shareholdings, including options to acquire the Common Stock, of each
director and certain of the executive officers of the Company; and the
shareholdings of all executive officers and directors as a group. The address
of each of the individuals listed below (with the exception of Mark T. Waller)
is the address of the Company. Mr. Waller's address is 1820 North Shore Road,
Lake Oswego, Oregon 97034.
<TABLE>
<CAPTION>
Nature of Number of Percentage of
Name of Person or Group Ownership Shares Owned Ownership
<S> <C> <C> <C>
Matthew O'Hayer Direct 3,904,000 41.2%
Joseph S. "Jay" Juba Direct 1,100,000 11.6%
Fernando Cruz Silva Direct 310,000 3.3%
</TABLE>
<PAGE> 10
10
<TABLE>
<S> <C> <C> <C>
Robert Sandner Direct 800,000 8.4%
Mark T. Waller Direct 193,699 2.0%
Options 800,000 7.8%
All executive officers Direct 6,307,699 64.4%
and directors as a group Options 945,000 9.3%
(eight persons)
TOTAL 7,242,699 75.2%
</TABLE>
FINANCIAL INFORMATION
The Company's financial statements appear as Annex A to this
Information Statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial information set forth in the following discussion should
be read in conjunction with, and qualified in its entirety by, the financial
statements of the Company included elsewhere herein.
On December 1, 1994, IMS, a subsidiary of BEI Holdings, Inc. ("BEI"),
acquired from an unrelated third party, in consideration of the assumption of
$144,394 in liabilities, the net assets that have resulted in the hotel and
resort operations of the Company. BEI formed Airfair as a subsidiary on January
5, 1996, in which to consolidate its interline industry activities. On January
13, 1996, effective December 31, 1995, Airfair acquired certain assets and
assumed certain liabilities that became the cruise and Magazine divisions of
Airfair in consideration of the assumption of $593,791 in liabilities.
Following the organization of Airfair, IMS transferred the hotel and resort
division to Airfair, effective January 1, 1996. Effective October 10, 1996,
Airfair merged into a newly created, wholly-owned subsidiary of the Company.
Airfair became the surviving operating corporation, albeit a wholly owned
subsidiary of the Company following the merger. In view of the foregoing
acquisitions and merger and its new management team, operating strategies,
expansion plans, resources, and other factors, management does not believe that
a discussion of the operations of the Company prior to the merger would
be meaningful. Effective January 1, 1997, the Company combined the operations
of the hotel and resort divisions together with the cruise and escorted tour
divisions into a single division called "Interline Travel Reps."
<PAGE> 11
11
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The Company had a negative working capital of $828,743 as of September
30,1997, as compared to a negative working capital of $1,101,503 at September
30, 1996. The primary causes for this deficit in working capital was the loss
from operations of $452,240 for the twelve-month interim period from September
1996 to September 1997 and monthly debt service that had reached approximately
$20,000 per month. The Company ended the third quarter with $2,612,066 in
current liabilities as compared to $2,338,633 for the prior year comparable
quarter. This increase in current liabilities was a result of the Company's
inability to generate enough cash funds during the year to adequately sustain
the Company's acquisitions and management's desire to grow sales through
increasing the number of issues, size, distribution and quality of the
Magazine. The largest components of current liabilities are accounts payable of
$343,434 (of which $277,171 are greater than 90 days past due); accrued
expenses and negative cash balances of $482,964; current portion of notes
payable of $337,339, and deferred revenues relating to hotels, cruises and
tours and magazine subscriptions of $1,448,329. A large portion of accounts
payable are made up of amounts due for telephone services and the publication
of the Magazine. The Company has been diligently working with its primary
vendors to work out payment schedules. During the quarter ended September, 30,
1997, one of the Company's vendors agreed to convert its trade payable balance
to note payable. Accrued expenses of $482,964 are comprised mainly of payroll,
vacation, commissions, note interest, negative cash balances, and general
administrative expenses. Deferred revenues for hotels and cruises represent the
moneys received from passengers that are deferred for revenue recognition
purposes until the passenger has completed travel. These deferred liabilities
are very short-term in nature due to the short time from between booking date
and travel date. Amounts deferred for hotels were $501,754 and for cruises
$827,581 at September 30, 1997. Deferred subscription revenue of $118,994
represents subscription moneys received but not earned at quarter end. Magazine
subscriptions are normally paid in full in advance for the one- or two-year
subscription period. Revenue is earned on a prorata basis as the magazines are
printed and shipped to the subscribers.
Total notes payable of $1,140,818 are detailed in Note 7 of the
financial statements. The holder of the acquisition notes agreed to a
substantially discounted payoff on these notes in April, 1997. The Company
completely extinguished this debt through the payment of $75,000 in cash in
April, 1997. The discount amounted to a reduction of $224,792 in the debt
balance and an equal reduction in the amount of goodwill created in the
acquisition. The Company obtained an additional $500,000 in financing during
the quarter ended June 30, 1997 through the issuance of convertible debentures
due April, 2000. These debentures bear a 7% annual interest rate due on each
anniversary. The Company may pay the interest due with shares of the Company's
common stock at the rate of one share for each $0.50 of interest due. The
holders of the debentures may convert the unpaid principal into shares of the
<PAGE> 12
12
Company's common stock at a conversion price of $0.25 per share. These
debentures were issued with warrants which entitle the holders thereof to
purchase 1,000,000 shares of the Company's common stock at a exercise price of
$1.00 per share. As a result of the Reverse Stock Split, these warrants will
entitle the holders thereof to acquire an aggregate of 114,285 shares of Common
Stock a per share exercise price of $7.00. During the quarter, Company
negotiations with one printing vendor led to its conversion of an account
payable into a note payable over the next 12 months. The Company also negotiated
an agreement with the holder of an existing note to lend an additional $80,000
so as to permit the Company to publish one issue of the Magazine. Of the total
of $1,140,818 in notes, the current portion amounts to $337,339 and the
long-term portion equals $803,480.
Included in other liabilities of the previous quarter besides the long
term debt was a deferred discount of $54,644 that was received as a service
discount from the Company's long distance telephone carrier in 1996 upon the
execution of a long term agreement. The agreement required the Company to use a
minimum of $240,000 in annual long distance services for a period of three
years. If the Company failed to utilize the required minimum usage, the
discount was to be forfeited. The Company renegotiated this agreement during
the current quarter and the deferred discount was forgiven and became fully
earned.
The Company had $2,239,574 in total assets at September 30, 1997
compared to assets of $1,915,169 at the end of September 30, 1996.
Substantially all of the balance in the cash account of $190,870 consists of
escrow deposits required by the Company's previous and current banks as a
reserve for charge backs against the Company's Visa/MasterCard credit card
processing. The Company has ceased processing Visa/MasterCard charges through
its previous processor, who has agreed to return all unused escrow funds to the
Company by May, 1998. The Company has had a history of minimal charge backs.
The Company contracted with a another credit card processor, as of July 1,
1997, to continue credit card processing. The new processor is requiring a
six-month rolling reserve of 5% of monthly credit card receipts. Approximately
70% of the Company's hotel and resort sales are generated through credit cards.
The accounts receivable of $76,254 is comprised primarily of advertising
revenue from vendors that advertised in the Magazine and updates. Prepaid tour
cost and prepaid cruise cost of $575,744 and $810,321, respectfully, represent
funds paid to hotels and cruise lines as of September, 1997, for travel dates
that occur after that date. These prepaid items relate directly to the
previously discussed deferred revenues and are also very short-term in nature.
Goodwill consist of the excess of purchase price over net assets acquired
during the aforementioned acquisitions. However, goodwill associated with the
cruise and magazine divisions was reduced by $224,963 during the quarter due to
a reduced lump sum settlement of the notes due the prior owners of the acquired
assets.
<PAGE> 13
13
RESULTS OF OPERATIONS
Overall Operating Results
The Company had net income for the quarter ended September 30, 1997 of
$72,779 as compared to a loss of $55,103 for the previous six months of 1997.
The primary cause for the third quarter gain was an increase in sales of
$224,069 over the previous quarter as well as recognizing the deferred discount
from the long distance carrier. The Company also repriced the hotel rooms it
purchased from IMS in accordance with the Marketing Agreement (See Note 7 Due to
Affiliate of the financial statements and "CERTAIN TRANSACTIONS.") The Company
had previously estimated the cost of these room purchases until adequate data
was available in order to properly cost out this contractual agreement. The
result of the recalculation was that the Company had overpaid IMS approximately
$159,000 for the purchase of these utilized hotel rooms and therefore had
overstated cost of goods sold. The Company has changed the room cost in the
reservation system for future purchases. The following schedule reflects the
effects of this repricing applied to the periods in which incurred:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Quarterly Net Adjustment for Allocation of Cost Quarterly Net
Income (Loss Reduction of cost Reduction to Income (Loss)
as Reported on Repriced Rooms Period Incurred as Adjusted
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1996 $(163,546) 18,353 $ (145,193)
June 30, 1996 11,316 15,383 26,699
September 30, 1996 (250,509) 17,439 (233,070)
December 31, 1996 (469,916) 8,418 (461,498)
- -------------------------------------------------------------------------------------------
Total 1996 $(872,655) $ 0 $ 59,593 $ (813,062)
- -------------------------------------------------------------------------------------------
March 31, 1997 $ (75,323) 26,933 $ (48,390)
June 30, 1997 20,220 34,148 54,368
September 30, 1997 72,779 (159,835) 39,161 (47,895)
- -------------------------------------------------------------------------------------------
Total 9 Months 1997 $ 17,676 $(159,835) $ 100,242 $ (41,917)
- -------------------------------------------------------------------------------------------
Total Adjustment $(159,835) 159,835
===========================================================================================
</TABLE>
<PAGE> 14
For the nine months ended September 30, 1997 the Company had a net loss of
$41,917 as adjusted for the above repricing as compared to a net loss $351,564
for the comparable period of 1996. The decreased loss in 1997 is the result of
an increase in sales of approximately $1,100,000 over the 1996 period as well a
reduction in operating expenses of approximately $245,000 over the same period.
The increase in sales is primarily attributed to repeat customer sales, a
larger property portfolio and an additional year of experience in the cruise
market. The funding of publications has come primarily from funding provided
by the debt instruments mentioned previously. Management set a goal in the
latter part of 1996 of increasing sales through increasing the size, quality
and distribution of the Magazine. The Magazine's production schedule was to be
increased to every two months as opposed to every three months before the
Company's acquisition of the Magazine. The Magazine also produces an update
brochure promoting hotel and cruise specials for bulk distribution through
Airport offices. Management believes that increased circulation will increase
the value of the publications to both advertisers and subscribers. The Company
intends for the Magazine Division to increase revenue from either or both of
advertising or subscriptions to the point where the Magazine Division will at
least break even in 1998.
Revenue
Gross revenue for the quarter ended September 30, 1997, was $3,607,327 an
increase of $224,069 over the June, 1997 quarter revenues of $3,383,258. Hotel
sales of $1,105,218 for the current quarter represent a 16% decrease for
<PAGE> 15
the September, 1997 quarter compared to $1,324,238 for the June quarter. The
decrease in hotel sales was primarily caused by the unavailability of rooms
during the quarter at one of the Company's primary resort locations (Cancun),
which is attributed to overwhelming retail demand for hotel/resort space in
that market. However, the Marketing Division has substantially increased the
number of properties available to the interline market during the year. Gross
cruise and tour revenue equaled $2,317,601 for the 1997 September quarter, an
increase of $364,983 over the second quarter. The Company recognizes hotel and
cruise revenues on a "booked, paid, traveled" basis, (i.e. revenue is not
earned until the passenger has completed travel).
Gross revenue for the nine months ended September 30, 1997 increased
$1,086,623 over the comparable nine months of 1996. Cruise and tour revenues
accounted for $955,610 of this increase, while hotels increased $86,949 over
this time frame. Management believes that these increases are attributable to
an increased presence in the marketplace.
Cost of Goods Sold
Hotel cost has been restated in the following schedule to reflect the
effects of repricing of the IMS rooms aforementioned:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Allocation of cost Adjusted
Adjustment for -----------------------------
Hotel Revenue Hotel Cost Reduction of cost Reduction to Room
As Reported As Reported on Repriced Rooms Period Incurred Cost
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 1996 $ 915,177 710,827 (18,353) $692,474
June 30, 1996 1,264,958 963,240 (15,383) 947,857
September 30, 1996 1,206,751 933,536 (17,439) 916,097
December 31, 1996 862,568 665,949 (8,418) 657,531
Total 1996 $4,249,454 $3,273,552 $0 $ (59,593) $3,213,959
March 31, 1997 $1,044,379 813,848 (26,933) $786,915
June 30, 1997 1,324,238 1,018,773 (34,148) 984,625
September 30, 1997 1,105,218 159,835 (39,161) 808,274
- -------------------------------------------------------------------------------------------------------
Total 9 months 1997 $3,473,835 2,520,221 $159,835 $(100,242) $2,579,814
- -------------------------------------------------------------------------------------------------------
Total Adjustment 159,835 (159,835)
=======================================================================================================
</TABLE>
<PAGE> 16
16
The Marketing Division had adjusted cost of sales of $808,274 on sales
of $1,105,218 for the current quarter producing a gross margin of $296,944, or
26.8% of sales. The comparable second quarter hotel cost of sales were $984,625
generating a gross margin of $339,613, or 25.6% on sales of $1,324,238. The
cruise division generated a gross margin of $239,322 or 10.3% on sales of
$2,317,601 for the quarter ended September 30, 1997. This compares to the
prior quarterly margin of $232,362 or 11.9% on sales of $1,952,618. Average
margins on cruises can range from 10% to 18% depending on cruise line space
availability.
The adjusted margin for hotel sales for the nine months ended September 30,
1997, was $894,021 or 25.7% of sales. Cruise and tour gross margin for the
same period was $643,749 or 11.3% of sales. The comparable 1996 margin for
hotels was $830,458 or 24.5% of hotel sales. Cruises in 1996 produced a
$599,648 margin or 12.5% of sales. The larger 1996 cruise margin percentage is
attributable result of one unusual under-booked cruise in June 1996 on which
the Company was able to acquire births and then sell to produce a margin of
approximately $84,000 on sales of approximately $110,000.
Operating Expenses
Operating expenses for the quarter ended September 30, 1997 were $622,744,
as compared to $436,573 for the second quarter. The increase was caused by
increased computer programming cost for modifications to the reservation
system, commissions incurred for the relatively new Germany and Canada
operations which receive 60% of the margins on their production (in
recognitions of their obligations to bear their operating costs), an increase
of 1% in the discount fee charged by the new credit card processors, increased
travel to industry trade and vendor meetings, and increased expenses associated
with disseminating advertising material to the airline employees such as the
weekly fax communications, printing expenses of the Germany Guide and the
Suntrust brochure. The Suntrust brochure was a concept where the Company agreed
with Suntrust bank to market selected Company properties to the credit card
holders of the bank. The project was abandoned after a poor response rate.
Contracts were negotiated during the year with separate travel operators in
Germany and Canada where they are able to sell the Company's properties to
their respective markets. These operations are expected to significantly
increase Company sales over time. The Company is in the process of negotiating
with operators in Mexico and Japan for similar agreements.
The largest expense item for the Company is wages, which equaled $803,436
for the nine months ended September 30, 1997 as compared to $913,837 for the
previous year, a decrease of $110,401. The Company reduced salary expenses as
of January 1, 1997 through the reduction of personnel and attrition. Another
major expense area is management fees. Airfair entered into a management
agreement with BEI and IMS effective March 1, 1996, see, "CERTAIN
<PAGE> 17
TRANSACTIONS." Under this agreement, BEI permits Airfair to use office space
and certain equipment leased by BEI, and BEI and IMS provide Airfair insurance,
payroll services, office supplies and other minor office services. IMS and BEI
charge Airfair a management fee equal to 0.5% of Airfair's gross revenue per
month for these services. In addition, pursuant to the terms of the Management
Agreement, IMS, BEI, and Airfair agreed that Airfair would reimburse BEI for a
portion of the direct payroll expenses of certain members of management who
serve BEI, IMS, and Airfair (the "Shared Management Members"). The proportion
is intended to correspond with the amount of time expended by the Shared
Management Members on the business matters of Airfair. These management fees
and the payroll reimbursements for Shared Management Members totaled $168,419
for the nine months ended September 30, 1997, as compared to a $15,975 for the
nine months of 1996. Prior to the management agreement, all general and
administrative expenses of BEI were allocated to Airfair and IMS on a ratio
basis. In February 1996, BEI incurred a large one-time gain which exceeded its
expenses. As such, both Airfair and IMS were the beneficiaries of an expense
credit for that month. Airfair's portion of that allocation was a credit of
approximately $142,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a significant accumulated deficit and the Company's
auditors for fiscal year 1996 included in their audit opinions a qualification
regarding the Company's ability to continue as a going concern. Historically,
the Company has had insufficient cash reserves to satisfactorily implement its
business strategy and otherwise operate effectively. This has forced the
Company to publish and distribute its information on an inconsistent basis,
defer payment of certain expenses and otherwise limit its efforts to promote
sales growth. As most travel by interliners takes place when there are empty
seats on airlines, travel volume tends to decrease when the retail travel
industry experiences high traffic volume. Accordingly, generally high retail
travel volumes from the middle of November through January usually results in
low interline travel volume. As a result the Company normally sees much lower
travel sales during the fourth quarter of the year and their can be no
assurances that the Company will be able to generate an operating profit for
the quarter.
Since Airfair's inception, it has financed its business growth through
internally generated revenue, borrowings from its former sole stockholder, BEI,
and borrowings from new stockholders subsequent to its spin-off from BEI. In
September, 1996, the Company borrowed $400,000 from seven shareholders ("bridge
loans") that were collateralized with 130,868 shares of equity securities that
are owned by BEI. BEI executed a Security Pledge Agreement in favor of the
lenders. Thereafter, management has taken a different strategy in raising and
conserving funds needed for operations in 1997 and thereafter. Since January 1,
1997, management has reduced expenses by approximately $27,000 per month
<PAGE> 18
through a reduction in nonessential personnel, changing to a lower priced
package delivery service, obtaining more services such as small printing jobs
on a trade basis and reducing any other expenses that are not considered
absolutely necessary to the ongoing needs of the operation.
During the prior quarter, the Company raised funds through additional
long-term borrowings. The bridge loans were restructured in a transaction
whereby the loan-holders agreed to the release of the pledged equity securities
in exchange for the following: (1) payment of all accrued interest through
April 10, 1997, which was paid in the amount of approximately $29,000, (2) the
loan broker received a fee of $20,000, (3) 40,000 Company common stock warrants
were issued to the loan broker and 20,000 stock warrants were issued to a
principal of the loan broker, all exercisable at $1.00 per share, (4) the
bridge loans were converted to 3-year notes bearing 12% annual interest, with
principal and interest payable monthly, beginning in May, 1997, the outstanding
principal balance is convertible (at note holders' option) into Company common
stock at $.50 per share, and no prepayment penalties. Also in April and May,
1997, the Company raised an additional $500,000 from ten investors through the
issuance of three-year convertible debentures. The debentures carry an annual
interest rate of 7%. Interest and principal are due and payable in annual
installments on each anniversary. At the option of the Company, interest
payments due prior to the maturity date may be made in shares of common stock
of the Company at the rate one share for each $0.50 of interest accrued and
payable. The debenture holder has the right at any time prior to maturity to
convert all or any portion of the then outstanding principal balance into fully
paid and non-assessable shares of common stock of the Company at a conversion
price of $0.25 per share of such outstanding principal amount, subject to
adjustment from time to time as provided for in the debenture.
The Company also extinguished (in April, 1997) the $299,963 of notes
payable that were incurred in connection with the acquisition of the cruise and
magazine division for a cash settlement of $75,000 (See Financial Condition and
Changes in Financial Condition above). During the previous quarter, the Company
also negotiated the conversion of five accounts payable vendors into notes
payable with various terms and conditions (see Note 7 to the financial
statements ). The remaining unpaid balance of these vendor notes was $121,933
at September 30,1997. During the current quarter, the Company borrowed an
additional $80,000 from one of its existing note holders. This note was repaid
subsequent to the end of the quarter. Management has and is continuing to
negotiate with its accounts payable vendors in order to work out acceptable
payment schedules for all parties.
As a result of the transactions described in the preceding paragraph,
management believes that its existing working capital levels, supplemented by
cash expected to be generated by existing operations and cash generated through
<PAGE> 19
stock sales or other financing arrangements, will be sufficient to fund the
Company's needs over the foreseeable future. The Company is in the process of
securing an additional $500,000 bridge loan with an anticipated October 1997
closing date. These funds will be utilized for publications, operating expenses
and some offering expenses in anticipation of a public offering prior to the
end of 1997. Management's belief is based on a number of assumptions including,
without limitation, that increased gross sales will result from increased
distribution (both in terms of frequency and number of issues) of the Company's
publications and that the Company can continue to operate effectively at
reduced levels of operating expenses. There can be no assurance that the
foregoing assumptions and the other assumptions relied upon by management will
prove accurate and any such inaccuracy may cause the Company to need working
capital. Moreover, there are no assurances that the Company will be able to
procure any such capital should it be needed and any such inability may have an
adverse effect on the Company's business, financial condition and future
operating results.
INFLATION
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future because of the short time frame between reservation
bookings and the dates of travel.
FORWARD-LOOKING INFORMATION
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange
Commission. Words or phases "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project or projected", or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 ("the Reform
Act"). The Company wishes to ensure that such statements are accompanied by
meaningful cautionary statements, so as to maximize to the fullest extent
possible the protections of the safe harbor established in the Reform Act.
Accordingly, such statements are qualified in their entirety by reference to
and are accompanied by the following discussion of certain important factors
that could cause actual results to differ materially from such forward-looking
statements.
Management is currently unaware of any trends or conditions other than
those previously mentioned in this management's discussion and analysis that
<PAGE> 20
could have a material adverse effect on the Company's consolidated financial
position, future results of operations, or liquidity.
However, investors should also be aware of factors that could have a
negative impact on the Company's prospects and the consistency of progress in
the areas of revenue generation, liquidity, and generation of capital
resources. These include: (i) variations in the mix of hotel, cruise, and
magazine revenues, (ii) possible inability to attract investors for its equity
securities or otherwise raise adequate funds from any source should the Company
seek to do so, (iii) increased governmental regulation, (iv) increased
competition, (v) unfavorable outcomes to litigation involving the Company or to
which the Company may become a party in the future and, (vi) a very competitive
and rapidly changing operating environment. Furthermore, reference is also made
to other sections of this report that include factors that could adversely
impact the Company's business and financial performance.
The risks identified here are not all inclusive. New risk factors emerge
from time to time and it is not possible for Management to predict all of such
risk factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor or combination of factors
may cause actual results to differ materially from those contained in any
forward-looking statements. Accordingly, forward-looking statements should not
be relied upon as a prediction of actual results.
The date of this Information Statement is November__, 1997.
<PAGE> 21
ANNEX A
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets at September 30, 1997 and 1996 A-2
Consolidated Statements of Operations for the three months ended
September 30, 1997 and 1996 A-3
Consolidated Statements of Operations for the nine months ended
September 30, 1997 and 1996 A-4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 A-5
Notes to Financial Statements for the nine months ended September 30, 1997 A-6
Report of Independent Certified Public Accountants (Isler)
for the Period from November 1, 1995 through October 9, 1996 A-13
Report of Independent Certified Public Accountants (Andersen, Andersen & Strong) A-14
Consolidated Balance Sheets at December 31, 1996 and 1995 A-15
Consolidated Statements of Operations for the Two Years ended
December 31, 1996 and 1995 A-16
Consolidated Statement of Stockholders' Equity for the Two Years ended
December 31, 1996 and 1995 A-17
Consolidated Statements of Cash Flows for the Two Years ended
December 31, 1996 and 1995 A-18
Notes to Consolidated Financial Statements A-19
</TABLE>
A-1
<PAGE> 22
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents - restricted (Note 2) $ 190,870 $ 12,358
Accounts receivable, net of allowance for
doubtful accounts of $8,810 in 1997 (Note 2) 76,254 20,422
Due from affiliate (Note 6) 140,134 --
Prepaid expenses (Note 2) -- --
Prepaid hotel cost (Note 2) 565,744 335,051
Prepaid cruise and tour cost (Note 2) 810,321 869,299
------------- -------------
Total Current Assets 1,783,323 1,237,130
------------- -------------
PROPERTY AND EQUIPMENT, AT COST, NET OF
accumulated depreciation (Notes 2 and 3) 49,300 49,660
------------- -------------
OTHER ASSETS
Deferred charges and other assets 26,113 --
Intangible assets, net of accumulated
amortization (Notes 2 and 5) 380,838 628,379
------------- -------------
$ 2,239,574 $ 1,915,169
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 343,434 $ 4,878
Other current liabilities 482,964 103,259
Current portion of long-term debt (Note 7) 337,339 120,396
Due to affiliate (Note 6) -- 568,540
Deferred hotel revenue (Note 2) 501,754 400,501
Deferred cruise and tour revenue (Note 2) 827,581 1,043,899
Deferred subscription revenue 118,994 97,162
------------- -------------
Total Current Liabilities 2,612,066 2,338,633
------------- -------------
OTHER LIABILITIES
Long-term debt (Note 7) 803,480 300,267
Deferred discount (Note 9) -- --
------------- -------------
Total Other Liabilities 803,480 300,267
------------- -------------
STOCKHOLDERS' (DEFICIT)
Preferred stock, no par value; authorized
10,000,000 shares; none issued and outstanding -- --
Common stock $.0001 par value; authorized
30,000,000 shares; issued and outstanding
9,522,024 and 9,100,000 shares in 1997 and 1996,
respectively (Note 11) 952 1,000
Additional paid-in capital (deficit) 598,208 54,000
Accumulated deficit (1,775,131) (778,731)
------------- -------------
Total Stockholders' (Deficit) (1,175,971) (723,731)
------------- -------------
$ 2,239,574 $ 1,915,169
============= =============
</TABLE>
A-2
<PAGE> 23
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------ -------------
<S> <C> <C>
REVENUES
Hotel revenue $ 1,105,218 $1,206,751
Cruise and tour revenue 2,317,601 1,795,151
Magazine subscription and advertising revenue 178,771 43,122
Merchandise and other revenue 5,737 11,498
----------- ----------
Total Revenues 3,607,327 3,056,523
----------- ----------
COST OF SALES
Hotel cost 687,600 933,536
Cruise and tour cost 2,078,279 1,610,736
Magazine publishing cost 145,924 168,826
Merchandise cost -- --
----------- ----------
Total Cost of Sales 2,911,803 2,713,097
----------- ----------
Gross Profit 695,524 343,426
OPERATING EXPENSES
Selling, general and administrative expenses 305,430 224,568
Wages 307,805 345,363
Depreciation and amortization 9,509 24,004
----------- ----------
Total Operating Expenses 622,744 593,935
----------- ----------
Net Income Before Income Taxes 72,779 (250,509)
Income Tax Expense -- --
Net Income $ 72,779 $ (250,509)
=========== ==========
Net Income Per Common Share (Note 2) $ 0.01 $ (0.03)
=========== ==========
Weighted Average Common Shares Outstanding 11,422,869 9,100,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-3
<PAGE> 24
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
REVENUES
Hotel revenue $ 3,473,835 $ 3,386,886
Cruise and tour revenue 5,722,149 4,766,539
Magazine subscription and advertising revenue 340,276 273,741
Merchandise and other revenue 14,013 36,483
------------- -------------
Total Revenues 9,550,273 8,463,650
------------- -------------
COST OF SALES
Hotel cost 2,520,221 2,607,603
Cruise and tour cost 5,078,400 4,166,891
Magazine publishing cost 396,201 307,946
Merchandise cost -- 1,556
------------- -------------
Total Cost of Sales 7,994,822 7,083,995
------------- -------------
Gross Profit 1,555,451 1,379,655
OPERATING EXPENSES
Selling, general and administrative expenses 704,360 817,814
Wages 803,436 913,837
Depreciation and amortization 29,978 50,743
------------- -------------
Total Operating Expenses 1,537,774 1,782,394
------------- -------------
Net Loss Before Income Taxes 17,676 (402,739)
Income Tax Expense -- --
Net (Loss) $ 17,676 $ (402,739)
============= =============
Net (Loss) Per Common Share (Note 2) $ 0.00 $ (0.04)
============= =============
Weighted Average Common Shares Outstanding 11,422,869 9,100,000
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-4
<PAGE> 25
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ 17,676 $ (402,739)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization 29,978 24,026
Provision for losses on accounts receivable 0 0
Changes in operating assets and liabilities:
Accounts receivable (56,343) (20,422)
Prepaid expenses 0 0
Prepaid hotel cost (313,400) (307,966)
Prepaid cruise and tour cost (231,406) (869,299)
Accounts payable (235,554) (1,909)
Accrued expenses 303,096 103,259
Receivable from affiliates and other (254,460) 92,928
Deferred hotel revenue 115,902 359,377
Deferred cruise and tour revenue 203,866 1,043,899
Deferred subscription revenue 13,934 97,162
Deferred discount (54,644) 0
------------- -------------
Net Cash Provided (Used) by Operating Activities (461,355) 118,316
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions 224,963 (575,128)
Purchase of property and equipment 0 (17,000)
Proceeds from sale of equipment 0 10,507
------------- -------------
Net Cash Provided (Used) by Investing Activities 224,963 (581,621)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 0 55,000
Proceeds from notes payable 786,892 459,769
Repayments of notes payable (402,869) (39,106)
------------- -------------
Net Cash Provided by Financing Activities 384,022 475,663
------------- -------------
Net Increase (Decrease) in Cash 147,630 12,358
Cash at Beginning of Period 43,240 0
Cash at End of Period $ 190,870 $ 12,358
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest $ 65,288 $ 28,732
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-5
<PAGE> 26
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
1. BUSINESS ACTIVITIES
The Company serves a portion of the travel industry known as "interliners".
Interliners are the active employees and retirees of the airline industry, who
may fly on many carriers for free or at a very significantly reduced fare,
along with their families and the friends to whom they pass along their
allotments of no-cost or low-cost flying privileges. Interliners are generally
able to procure hotel or resort accommodations in destination locations, berths
on cruise ships and other travel products at rates representing a courtesy of
up to 50% off of established rates, primarily because interliners have a high
propensity to travel and tend to travel during off-peak periods when "stand-by"
space is available at hotels and resorts and on cruise ships. These factors
have led the travel industry to view interline bookings as incremental revenue
that supplements normal marketing revenue.
The Company serves both interline travelers and operators (hotels, resort,
cruise lines and others) segments of the interline industry through two
distinct business units: Interline Adventures, a publication formerly titled
Airfair Magazine and Interline TravelReps, which markets hotel-resort space to
interliners and specializes in Mexican and Caribbean locations: and cruise and
escorted tour packages.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Travel revenue is recognized on a "booked, paid, traveled" basis. This means
that all client funds received and all funds paid to travel suppliers prior to
the travel date are deferred for income recognition until such time as the
client has traveled and the Company has completed its commitment to the client
and the travel suppliers. Subscription sales are deferred for income
recognition until magazines are delivered to subscribers. (See Note 8.)
The assets "Prepaid Hotel Cost" and "Prepaid Cruise and Tour Cost" represent
expenses paid for tours and cruises which have been booked but not yet taken by
the customer. The liabilities "Deferred Hotel Revenue" and "Deferred Cruise and
Tour Revenue" represent payments received for tours and cruises booked but not
recognized as revenue until the customer completes the tour or cruise.
Cash and Cash Equivalents
Substantially all of the balance in the cash account consists of escrow
deposits required by Bank One (the previous processor) and Humboldt Bank (the
current processor) as a reserve for credit card processing. The Company agreed
to establish an escrow balance of 5% of Visa/Mastercard charges until a six
month rolling reserve is established with Humboldt Bank. The prior Bank One
reserve was partially released in October, 1997. The remaining $50,000 of that
reserve will be reviewed by the bank on a month to month basis and funds will
be returned to the Company on a gradual basis until fully released by March,
1998. The new reserve with Humboldt Bank was approximately $78,000 at September
30, 1997.
The Company considers all highly liquid instruments purchased with a maturity
at the time of purchase of less than three months to be cash equivalents.
Allowance for Uncollectible Accounts
The Company provides an allowance for accounts receivable which are doubtful of
collection. The allowance is based upon management's periodic analysis of
receivables, evaluation of current economic conditions, and other pertinent
factors. Ultimate losses may vary from the current estimates and, as additions
to the allowance become necessary, they are charged against earnings in the
period in which they become known. Losses are charged and recoveries are
credited to the allowance.
Income (Loss) Per Share
The computation of primary income (loss) per share of common stock is based on
the weighted average number of common shares outstanding during the period plus
(in periods in which they have a dilutive effect) the effect of common shares
contingently issuable from stock options and exercise of warrants.
A-6
<PAGE> 27
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method for financial statement purposes. Estimated useful lives
range from 5 to 7 years. Intangibles, consisting of "excess of cost over net
assets acquired" and non-compete covenants are stated at cost and are being
amortized over 40-year and 3-year periods, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary Airfair Publishing Company, Inc. All intercompany
transactions have been eliminated.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of certain assets and
liabilities for financial and tax reporting. The deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.123, Accounting for Stock-Based Compensation.
The Company currently accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Since the Company is not required to adopt the
fair value based recognition provisions prescribed under SFAS No. 123, it has
elected to comply with the disclosure requirements set forth in the Statement,
which includes disclosing pro forma net income as if the fair value based
method of accounting had been applied. (See Note 14.)
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Property and equipment $ 93,795 $ 75,795
Less accumulated depreciation (44,495) (26,135)
-------- --------
Net property and equipment $ 49,300 $ 49,660
======== ========
</TABLE>
Depreciation expense for the quarters ending September 30, 1997 and 1996 was
$4,590 and $4,590, respectively. Depreciation expense for the nine months
ending September 30, 1997 and 1996 was $13,770 and $12,190, respectively.
A-7
<PAGE> 28
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS
On December 1, 1994, Inventory Merchandising Services, Inc. (IMS) (a wholly
owned subsidiary of Barter Exchange, Inc. (BEI)), acquired the net assets of a
business owned by Lou and Claudia Nackos (Nackos) for the assumption of certain
liabilities in the amount of $144,394. This resulted in a new operating
division called Interline Travel (Interline).
Assets acquired from Nackos consist of the following:
<TABLE>
<S> <C>
Cash $ 814
Excess of cost over net assets acquired 74,278
Furniture and fixtures 69,302
--------
Total assets acquired $144,394
========
</TABLE>
Airfair Publishing, Inc. (Airfair) is a Delaware corporation formed on January
6, 1996. Immediately subsequent to incorporation of Airfair, the assets and
liabilities of Interline were transferred by IMS into Airfair. Additionally,
existing shareholders of BEI received four shares of Airfair for each share
held in BEI, resulting in 8,500,000 shares issued. An additional 600,000 shares
were authorized by the Board of Directors and issued to two shareholders,
resulting in a total of 9,100,00 shares issued pursuant to the spin-off of the
Interline division in IMS to Airfair. Capital of $30,000 was contributed to
Airfair by BEI.
On January 13, 1996, (Closing Date) [effective December 31, 1995 (Effective
Date)] Airfair acquired certain assets and assumed certain liabilities of
Interline Representatives Ltd. and Airfair Publishing Corp. (IRL/APC) for
$593,791.
Assets acquired from IRL/APC consist of the following:
<TABLE>
<S> <C>
Furniture and equipment $ 35,000
Covenant-not-to compete 30,000
Excess of cost over net assets acquired 528,791
--------
Total assets acquired $593,791
========
</TABLE>
Liabilities (unadjusted) assumed from IRL/APC consist of the following:
<TABLE>
<S> <C>
Subscription, prepaid advertising, and tour ledger $204,326
Net assets acquired $389,465
</TABLE>
Payment for the net assets acquired from IRL/APC is as follows:
<TABLE>
<S> <C>
Cash $ 30,000
Note payable #1 (see below) 201,879
Note payable #2 (see below) 157,586
--------
Total payments (unadjusted) $389,465
========
</TABLE>
Both of the promissory notes described above, had identical terms (except as
specified) as follows: The annual interest rate on unpaid principal is 12% per
annum. Interest only will be due on the unpaid balance on January 31, 1996,
February 29, 1996, and March 31, 1996. Thereafter, principal and interest shall
be due and payable in monthly installments of $5,593 on Note #1 and $4,366 on
Note #2, each payable on the last day of each month, beginning April 30, 1996,
until December 31, 1999, when the entire principal and accrued interest
remaining unpaid, shall be due and payable in full. These notes were settled in
full with a cash payment of $75,000 in April, 1997, when the remaining unpaid
balance was $299,963. The difference between the unpaid balance and the
settlement of $224,963 was credited to Goodwill which was created at
acquisition.
The purchase method of accounting was used to account for the above
transactions.
Effective July 19, 1996, Riley Investments, Inc. (Riley) and Airfair executed
an Agreement that provided for the merger of MergerCo, a newly-created,
wholly-owned subsidiary of Riley, with and into Airfair, which became the
surviving corporation, and the conversion of the issued and outstanding Airfair
stock into shares of Riley stock on the basis of one share of Riley stock for
each share of Airfair stock outstanding on the Effective date. On October 7,
1996, articles of amendment were filed on behalf of Riley wherein the name was
changed to Grand Adventures Tour & Travel Publishing Corporation (the Company)
with authority to issue 10,000,000, no par, preferred shares and 30,000,000
common shares with a par value of $.0001. The transaction was accounted for as
a reverse acquisition.
A-8
<PAGE> 29
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets at September 30, 1997 and 1996 are as follows:
As explained in Note 4 to the financial statements, on December 31, 1994, IMS
acquired the net assets of a business owned by Nackos (referred to herein as
Interline) and assumed certain liabilities. Of the $144,394 total purchase
price, $74,278 represented the excess of the cost over the fair value of net
assets acquired. The excess of cost over net assets acquired is amortized on a
straight-line basis over 40 years.
As explained in Note 4 to the financial statements, on January 13, 1996,
(Closing Date) [effective December 31, 1995 (Effective Date)] Airfair acquired
certain assets and assumed certain liabilities of Interline Representatives
Ltd. and Airfair Publishing Corp. (IRL/APC) . Of the $593,791 total purchase
price, $528,791 represented the excess of the cost over the fair value of net
assets acquired and $30,000 represented a covenant-not-to compete. Also
amortizable are $16,336 of additional legal and acquisition costs. The excess
of cost over net assets acquired is amortized on a straight-line basis over 40
years and the covenant is amortized over 3 years. Also, as explained in Note 4,
Goodwill was reduced by $224,963 upon the reduced settlement of the debt
incurred in the acquisition.
At September 30, 1997 and 1996, the unamortized cost consists of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cost $ 424,442 $ 649,405
Less accumulated amortization (43,604) (21,026)
--------- ---------
</TABLE>
Net $380,838 $628,379 Amortization expense for the quarters ended
September 30, 1997 and 1996, was $4,919 and $6,370, respectively. Amortization
expense for the nine months ended September 30, 1997 and 1996, was $16,208 and
$19,015, respectively.
6. DUE TO AFFILIATE
The Company entered into a Management Services Agreement with BEI and IMS
whereby BEI agreed to permit the Company to use office space and certain
computer and telephone equipment leased by the Company, BEI and IMS agreed to
provide to the Company certain services including accounting, payroll,
services, and the services of certain executive officers and personnel who
perform services for Airfair, BEI, and IMS. The Company agreed to pay to BEI
and IMS, collectively, a cash sum equal to 1/2% of the Company's gross cash
receipts during any month in which the Agreement remains in effect.
The Company and IMS have also entered into an Inventory Marketing Agreement
whereby the Company sells certain IMS inventories. The Company is required to
make monthly payments to IMS equaling (i) the cash value of the inventory sold
plus (ii) 25% of the collected revenue generated from such sales less such cash
value. At September 30, 1997, BEI/IMS owed the Company $140,134. At September
30, 1996, the Company owed BEI/IMS $568,540.
A-9
<PAGE> 30
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
At September 30, 1997 and 1996 long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Notes payable to shareholders, due April 30, 2000 including accrued
interest at 12% per annum payable in, in monthly installments, convertible
into common stock at a conversion price of $0.50 principal amount for each
share $ 352,633 $ --
Note payable at $1,163 per month, including interest at 14% per annum,
convertible into common stock at the conversion price of $1.00 principal
amount for each share of common stock, subordinated to senior indebtedness 44,529 --
Note payable with a repayment schedule based on the release of bank
credit card escrow funds, including interest at 6% per annum, maturity date
is April 16, 1998 116,354 --
Note payable (acquisition of IRL/APC - see Note 4) at $5,593 per month,
including interest at 12% per annum, collateralized by assets acquired 0 179,916
Note payable (acquisition of IRL/APC - see Note 4) at $4,366 per month,
including interest at 12% per annum, collateralized by assets acquired 0 140,747
Note payable with interest payments only for 12 months with interest at
12% per annum. Maturity date of August, 1997 0 100,000
Convertible debentures due April, 2000 7% interest only due on each
anniversary with principal due at maturity, interest may be paid in shares
of common stock at the option of the Company at the rate one share for each
$0.50 of interest due, unpaid principal is convertible into common stock
at a conversion price of $0.25 per share 500,000 --
Note payable at $1,000 per month for six months beginning April 25,1997,
then $1,500 per month for six months, the $2,000 per month until paid in full,
with interest at 8% per annum 48,502 --
Note payable at $4,246 per month beginning April, 1997, with interest at
6% per annum 23,021 --
Note payable at $1,154 per month beginning April, 1997, with interest at
10% per annum, maturity date of March, 1999, unpaid balance can be converted
into common stock at $0.50 per share 19,209 --
Note payable at $1,000 per month beginning May 15,1997 remaining unpaid
balance due June 15, 1998, interest at 9% per annum 23,167 --
Note payable at $556 per month beginning August 5, 1997 with interest at
8% per annum, maturity date of August 5, 1998 5,368
Note payable at $300.00 per month beginning June 15, 1997 for 35 months
at 10% interest per annum 8,035
----------- -----------
1,140,818 420,663
Less current portion (337,339) (120,396)
----------- -----------
Total $ 803,480 $ 300,267
=========== ===========
</TABLE>
A-10
<PAGE> 31
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEFERRED SUBSCRIPTION REVENUE
Subscription sales are deferred as unearned income at the time of sale.
Magazine customers normally pay for a one-year or two-year subscription in
advance. As magazines are delivered to subscribers, the proportionate share of
the subscription price is taken into revenue. Magazine subscription selling
expenses are deferred and charged to operations over the same period as the
related subscription income is earned.
9. DEFERRED DISCOUNT
In April of 1996, the Company entered into an agreement with a telephone
long-distance service provider wherein the Company receives a discount (credit)
against its telephone charges provided that its annual volume of telephone
usage is equal to at least $240,000 for a period of three years. If the Company
fails to meet the minimum usage requirement, the discount will be forfeited.
The discount credit balance as of June 30, 1997 is $54,644. The Company
renegotiated this contract during the current quarter and as a result this
discount became earned and was recognized during this period.
10. INCOME TAXES
The Company had no provision for income taxes at September 30, 1997 and 1996.
There are no reconciling items between the statutory U.S. federal rate and
effective rates for the quarters ended September 30, 1997 and 1996.
At September 30, 1997, Interline has a net operating loss carryforward totaling
approximately $880,000 that may be offset against future taxable income. If not
used, the carryforward will expire in 2011.
11. COMMON STOCK
Riley Investments, Inc. was incorporated as Pace Group International, Inc.,
("Pace") in October, 1987 under the laws of the State of Oregon. On September
20, 1995, the stockholders approved a name change of the Company to Riley
Investments, Inc. As of November 1, 1995, after the effects of the transaction
described below, the Company had no operating assets and was dormant.
On May 23, 1995, the Chairman of the Board, Edwin T. Cornelius, Jr.
("Cornelius"), the Secretary/Treasurer, Joanne Cornelius, and two sons of Mr.
and Mrs. Cornelius entered into an option agreement to sell 2,905,486 common
shares of Pace they owned to Bridgeworks Capital. The above shareholders,
together with another shareholder who was also the son of Mr. and Mrs.
Cornelius, owned an aggregate of 3,984,000 common shares of Pace. The option
agreement, among other provisions, was subject to shareholder approval of a
1-for-15 reverse stock split of the outstanding shares of Pace common stock and
an exchange of substantially all net assets of Pace, including its ownership of
100% of the outstanding common stock of Pace International Research, Inc., for
notes payable and unpaid accrued interest thereon owed to Cornelius which
approximated $422,000 as of October 31, 1995. The above transaction was
approved by the shareholders on September 20, 1995 and became effective
November 1, 1995.
Prior to the consummation of the option agreement, Cornelius also transferred
450,000 shares of Pace common stock to two investors who had previously
advanced the Company $525,000 in 1987 pursuant to profit-sharing agreements.
Under the term of those profit-sharing agreements, the investors were to be
paid in full from certain Pace profits. As of October 31, 1995, those investors
had not been repaid for their advances.
The remaining Pace common stock owned by the Cornelius family, which aggregated
628,514 shares, were returned to the Company and 588,674 shares were canceled
as of December 31, 1996.
Airfair Publishing, Inc. (Airfair) is a Delaware corporation formed on January
6, 1996. Immediately Subsequent to incorporation of Airfair on January 6, 1996,
the existing shareholders of BEI received four shares of Airfair for each share
held in BEI, resulting in 8,500,000 shares issued. An additional 600,000 shares
were authorized by the Board of Directors and issued to two shareholders,
resulting in a total of 9,100,000 shares issued pursuant to the spin-off of the
Interline division in IMS to Airfair. (See Note 4.) Capital of $30,000 was
contributed to Airfair by BEI.
In September of 1996, 25,000 shares of common stock were issued for $25,000.
A-11
<PAGE> 32
33
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective July 19, 1996, Riley and Airfair executed an Agreement that provided
for the merger of MergerCo, a newly-created, wholly-owned subsidiary of Riley,
with and into Airfair, which became the surviving corporation, and the
conversion of the issued and outstanding Airfair stock into shares of Riley
stock on the basis of one share of Riley stock for each share of Airfair stock
outstanding on the Effective date. Airfair shares outstanding on the Effective
date totaled 9,125,000. On October 7, 1996, articles of amendment were filed on
behalf of Riley wherein the name was changed to Grand Adventures Tour & Travel
Publishing Corporation with authority to issue 10,000,000, no par, preferred
shares and 30,000,000 common shares with a par value of $.0001. Existing
shareholders in Riley at the date of conversion held 384,024 shares.
12. LEASING ARRANGEMENTS
As part of the Management Services Agreement with BEI (see Note 6), the Company
is allowed access and use of (i) approximately 8,000 square feet of space
leased by BEI and (ii) all common areas within the building to which BEI is
permitted access. The fees for usage are included in the management services
fee calculation under the Management Services Agreement.
13. SUBSEQUENT EVENTS
Subsequent to the end of the September 30,1997 quarter, the Company raised an
additional $100,000 through short-term borrowings from an existing
shareholder/noteholder. The prior credit card processor also released
approximately $50,000 from the escrow reserve being held as security. The
Company is also in negotiations with an Underwriter to provide for a $500,000
bridge loan pending a public offering to raise approximately $4,900,000 before
discounts and offering fees. The Company anticipates that the bridge loan will
be completed before the end of October, 1997 and the offering will be finalized
prior to the end of December, 1997. In connection with the bridge financing,
the Company is offering the noteholders the right to purchase up to 500,000
shares of stock at a price of $0.0001 per share. If the bridge loan is
consummated the Company will have a charge against earnings for the difference
in the fair market value of the stock and the discounted value offered to the
noteholders.
14. STOCK OPTION PLAN
The Company has a long-term stock incentive plan (LTSIP) that authorizes an
aggregate of 1,000,000 shares of common stock for future grants. Options to
purchase shares of Airfair common stock granted under the previous Airfair
stock option plan were exchanged for comparable options granted under the LTSIP
for an equivalent number of shares pursuant to the terms of the Merger as
explained in Note 4 to the financial statements. The exercise price of each
employee option is $1.00. An option's maximum term is five years. Employee
options were granted on August 1, 1996, and February 1, 1997, and vest in
three years. The fair value of each option grant is estimated on the grant
date using an option-pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rate of 6%, and
expected lives of 5 years for the options.
A summary of the status of the Company's outstanding stock options as of
September 30, 1997 is presented below:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
- --------------------------------------- -----------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices 9/30/97 Life Exercise Price at 9/30/97 Exercise Price
- --------------- ------- ---- -------------- ---------- --------------
<C> <C> <C> <C> <C> <C>
$1.00 361,000 4 years $1.00 101,667 $1.00
1.00 449,000 4 years 1.00 110,000 1.00
--------- ---------
810,000 211,667
========= =========
</TABLE>
A-12
<PAGE> 33
Independent Auditor's Report
April 28, 1997
The Board of Director
Riley Investments, Inc.
Lake Oswego, Oregon
We have audited the accompanying balance sheet of Riley Investments,
Inc. as of October 9, 1996, and the related statement of operations,
stockholders' equity, and cash flows for the period from November 1, 1995
through October 9, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 Riley Investments,
Inc. at October 9, 1996, and the results of its operations and its cash flows
for the period from November 1, 1995 through October 9, 1996 in conformity with
generally accepted accounting principles.
Isler & Co., L.L.C.
Portland, Oregon
A-13
<PAGE> 34
To The Board of Directors
of Grand Adventures Tour & Travel Publishing Corporation and Subsidiary
Austin, Texas
We have audited the accompanying consolidated balance sheets of Grand
Adventures Tour & Travel Publishing Corporation (formerly Riley Investments,
Inc.) for the period November 1, 1996 through December 31, 1996, and its
subsidiary (Airfair Publishing, Inc.) for the years ended December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the periods 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 did
not audit the financial statements of Grand Adventures Tour & Travel Publishing
Corporation (formerly Riley Investments, Inc.), whose financial statements are
immaterial in relation to the consolidated financial statements, for the years
ended October 31, 1996 and 1995. Those statements were examined by other
auditors whose reports have been furnished to us and our opinion expressed
herein, insofar as it relates to the amounts included for Grand Adventures Tour
& Travel Publishing Corporation, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 financial position of Grand Adventures
Tour & Travel Publishing Corporation and subsidiary as of December 31, 1996 and
1995, and the results of their operations for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that 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 15. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Andersen Andersen & Strong, L.C.
April 4, 1997
(except for Note 15, as to which the date is May 1, 1997)
Salt Lake City, Utah
A-14
<PAGE> 35
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
===============================================================================
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents - restricted (Note 2) $ 43,240 $ --
Accounts receivable, net of allowance for
doubtful accounts of $8,810 in 1996 (Note 2) 19,911 --
Prepaid hotel cost (Note 2) 252,344 27,085
Prepaid cruise and tour cost (Note 2) 578,915 --
------------- -------------
Total Current Assets 894,410 27,085
------------- -------------
PROPERTY AND EQUIPMENT, AT COST, NET OF
accumulated depreciation (Notes 2 and 3) 63,070 48,179
------------- -------------
OTHER ASSETS
Intangible assets, net of accumulated
amortization (Notes 2 and 5) 622,009 72,266
------------- -------------
$ 1,579,489 $ 147,530
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 578,988 $ 6,787
Other current liabilities 179,868 --
Due to affiliate (Note 6) 88,213 475,611
Current portion of long-term debt (Note 7) 502,573 --
Deferred hotel revenue (Note 2) 385,852 41,124
Deferred cruise and tour revenue (Note 2) 623,715 --
Deferred subscription revenue 105,060 --
------------- -------------
Total Current Liabilities 2,464,269 523,522
------------- -------------
OTHER LIABILITIES
Long-term debt (Note 7) 254,223 --
Deferred discount (Note 9) 54,644 --
------------- -------------
Total Other Liabilities 308,867 --
------------- -------------
STOCKHOLDERS' (DEFICIT)
Preferred stock, no par value; authorized
10,000,000 shares; none issued and outstanding -- --
Common stock $.0001 par value; authorized
30,000,000 shares; issued and outstanding
9,509,024 and 9,100,000 shares in 1996 and 1995,
respectively (Note 11) 951 9,100
Additional paid-in capital (deficit) 598,209 (9,100)
Accumulated deficit (1,792,807) (375,992)
------------- -------------
Total Stockholders' (Deficit) (1,193,647) (375,992)
------------- -------------
$ 1,579,489 $ 147,530
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-15
<PAGE> 36
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 1996 AND 1995
===============================================================================
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
REVENUES
Hotel revenue $ 4,249,454 $ 2,289,018
Cruise and tour revenue 6,339,179 --
Magazine subscription and advertising revenue 374,789 --
Merchandise and other revenue 39,904 37,874
------------ ------------
Total Revenues 11,003,326 2,326,892
------------ ------------
COST OF SALES
Hotel cost 3,273,552 1,751,919
Cruise and tour cost 5,562,876 --
Magazine publishing cost 75,120 --
Merchandise cost 2,340 13,822
------------ ------------
Total Cost of Sales 8,913,888 1,765,741
------------ ------------
Gross Profit 2,089,438 561,151
OPERATING EXPENSES
Selling, general and administrative expenses 1,816,025 530,488
Wages 1,111,081 342,544
Depreciation and amortization 34,987 52,863
------------ ------------
Total Operating Expenses 2,962,093 925,895
------------ ------------
Net Loss Before Income Taxes (872,655) (364,744)
Income Tax Expense -- --
Net (Loss) $ (872,655) $ (364,744)
============ ============
Net (Loss) Per Common Share (Note 2) $ (0.09) $ (0.04)
============ ============
Weighted Average Common Shares Outstanding 9,530,007 9,100,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-16
<PAGE> 37
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1996 AND 1995
===============================================================================
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
GRAND ADVENTURES TOUR & TRAVEL
PUBLISHING CORPORATION (FORMERLY
RILEY INVESTMENTS, INC.)
BALANCE AT OCTOBER 31, 1994 5,800,531 $ 580 $ 543,580 $ (764,168) $ (220,008)
Net loss -- -- -- (133,220) (133,220)
----------- ----------- ----------- ----------- -----------
BALANCE AT OCTOBER 31, 1995 5,800,531 $ 580 543,580 (897,388) (353,228)
Cancellation of shares (588,674) (59) 59 -- --
Effect of 1-for-15 reverse stock
split (exclusive of fractional shares) (4,827,833) (483) 483 -- --
Airfair shares converted to shares in
the Company 9,125,000 913 54,087 -- 55,000
Net income (prior to merger) -- -- -- 353,228 353,228
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 9,509,024 $ 951 $ 598,209 $ (544,160) $ 55,000
=========== =========== =========== =========== ===========
AIRFAIR PUBLISHING, INC
BALANCE DECEMBER 31, 1994 -- $ -- $ -- $ (11,248) $ (11,248)
Issuance of shares pursuant to
spin-off of Airfair from IMS 9,100,000 9,100 (9,100) -- --
Net loss -- -- -- (364,744) (364,744)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 9,100,000 9,100 (9,100) (375,992) (375,992)
Contribution of capital -- -- 30,000 -- 30,000
Issuance of common shares
($1.00 per share) 25,000 25 24,975 -- 25,000
Exchange of Airfair shares
for shares in the Company (9,125,000) (9,125) (45,875) -- (55,000)
Net loss -- -- -- (872,655) (872,655)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 -- $ -- $ -- $(1,248,647) $(1,248,647)
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCES AT
DECEMBER 31, 1996 9,509,024 $ 951 $ 598,209 $(1,792,807) $(1,193,647)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-17
<PAGE> 38
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (872,655) $ (364,744)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization 34,987 21,355
Provision for losses on accounts receivable 8,810 --
Changes in operating assets and liabilities:
Accounts receivable (28,720) --
Prepaid hotel cost (225,260) (14,015)
Prepaid cruise and tour cost (578,915) --
Accounts payable 629,710 --
Accrued expenses 122,307 (137,607)
Payroll taxes payable 52 --
Payable to affiliates and other (387,397) 491,874
Deferred hotel revenue 344,728 3,137
Deferred cruise and tour revenue 623,715 --
Deferred subscription revenue 105,060 --
Deferred discount 54,643 --
----------- -----------
Net Cash Provided (Used) by Operating Activities (168,935) --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions (575,128) --
Purchase of property and equipment (35,000) --
Proceeds from sale of equipment 10,507 --
----------- -----------
Net Cash Provided (Used) by Investing Activities (599,621) --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 55,000 --
Proceeds from notes payable 909,465 --
Repayments of notes payable (152,669) --
----------- -----------
Net Cash Provided by Financing Activities 811,796 --
----------- -----------
Net Increase (Decrease) in Cash 43,240 --
Cash at Beginning of Period -- --
Cash at End of Period $ 43,240 $ --
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 38,402 $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-18
<PAGE> 39
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
===============================================================================
1. BUSINESS ACTIVITIES
The Company serves a portion of the travel industry known as "interliners".
Interliners are the active employees and retirees of the airline industry, who
may fly on many carriers for free or at a very significantly reduced fare,
along with their families and the friends to whom they pass along their
allotments of no-cost or low-cost flying privileges. Interliners are generally
able to procure hotel or resort accommodations in destination locations, berths
on cruise ships and other travel products at rates representing a courtesy of
up to 50% off of established rates, primarily because interliners have a high
propensity to travel and tend to travel during off-peak periods when "stand-by"
space is available at hotels and resorts and on cruise ships. These factors
have led the travel industry to view interline bookings as incremental revenue
that supplements normal marketing revenue.
The Company serves both interline travelers and operators (hotels, resort,
cruise lines and others) segments of the interline industry through three
distinct business units: Interline Adventures, a publication formerly titled
Airfair Magazine: Interline Travel, which markets hotel-resort space to
interliners and specializes in Mexican and Caribbean locations: and Interline
Representatives, Ltd., which markets cruise and escorted tour packages to
interliners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Travel revenue is recognized on a "booked, paid, traveled" basis. This means
that all client funds received and all funds paid to travel suppliers prior to
the travel date are deferred for income recognition until such time as the
client has traveled and the Company has completed its commitment to the client
and the travel suppliers. Subscription sales are deferred for income
recognition until magazines are delivered to subscribers. (See Note 8.)
The assets "Prepaid Hotel Cost" and "Prepaid Cruise and Tour Cost" represent
expenses paid for tours and cruises which have been booked but not yet taken by
the customer. The liabilities "Deferred Hotel Revenue" and "Deferred Cruise and
Tour Revenue" represent payments received for tours and cruises booked but not
recognized as revenue until the customer completes the tour or cruise.
Cash and Cash Equivalents
Substantially all of the balance in the cash account consists of an escrow
deposit required by Bank One as a reserve for credit card processing. The
Company has agreed to establish an escrow balance of $125,000 to be funded by
depositing amounts equal to 5% of the prior week's gross sales deposit activity
on a weekly basis commencing September 9, 1996, for a six week period.
Commencing the 7th week, the Company agreed to deposit $5,000 per week for a
4-week period, and commencing the 11th week, a deposit of $10,000 per week
until the reserve is fully funded. As of December 31, 1996, the Company had
funded the escrow account to a balance of $42,876, and as of the date of the
audit report, the balance in the account is $105,376.
A-19
<PAGE> 40
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)-
Cash and Cash Equivalents (continued)
The Company considers all highly liquid instruments purchased with a maturity
at the time of purchase of less than three months to be cash equivalents.
Allowance for Uncollectible Accounts
The Company provides an allowance for accounts receivable which are doubtful of
collection. The allowance is based upon management's periodic analysis of
receivables, evaluation of current economic conditions, and other pertinent
factors. Ultimate losses may vary from the current estimates and, as additions
to the allowance become necessary, they are charged against earnings in the
period in which they become known. Losses are charged and recoveries are
credited to the allowance.
Income (Loss) Per Share
The computation of primary income (loss) per share of common stock is based on
the weighted average number of common shares outstanding during the period plus
(in periods in which they have a dilutive effect) the effect of common shares
contingently issuable from stock options and exercise of warrants.
Depreciation and Amortization
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method for financial statement purposes. Estimated useful lives
range from 5 to 7 years. Intangibles, consisting of "excess of cost over net
assets acquired" and non-compete covenants are stated at cost and are being
amortized over 40-year and 3-year periods, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary Airfair Publishing Company, Inc. All intercompany
transactions have been eliminated.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of certain assets and
liabilities for financial and tax reporting. The deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
A-20
<PAGE> 41
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)-
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No.123, Accounting for Stock-Based Compensation.
The Company currently accounts for its stock-based compensation plans using the
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. Since the Company is not required to adopt the
fair value based recognition provisions prescribed under SFAS No. 123, it has
elected to comply with the disclosure requirements set forth in the Statement,
which includes disclosing pro forma net income as if the fair value based
method of accounting had been applied. (See Note 14.)
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial statements in
accordance with generally accepted accounting principles. Those estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were assumed in
preparing the financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Property and equipment $ 93,795 $ 69,302
Less accumulated depreciation (30,725) (21,123)
-------- --------
Net property and equipment $ 63,070 $ 48,179
======== ========
</TABLE>
Depreciation expense for the years ending December 31, 1996 and 1995 was $9,601
and $19,498, respectively.
4. ACQUISITIONS
On December 1, 1994, Inventory Merchandising Services, Inc. (IMS) (a wholly
owned subsidiary of Barter Exchange, Inc. (BEI)), acquired the net assets of a
business owned by Lou and Claudia Nackos (Nackos) for the assumption of certain
liabilities in the amount of $144,394. This resulted in a new operating
division called Interline Travel (Interline).
A-21
<PAGE> 42
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
4. ACQUISITIONS (Continued)-
Assets acquired from Nackos consist of the following:
<TABLE>
<S> <C>
Cash $ 814
Excess of cost over net assets acquired 74,278
Furniture and fixtures 69,302
--------
Total assets acquired $144,394
========
</TABLE>
Airfair Publishing, Inc. (Airfair) is a Delaware corporation formed on January
6, 1996. Immediately subsequent to incorporation of Airfair, the assets and
liabilities of Interline were transferred by IMS into Airfair. Additionally,
existing shareholders of BEI received four shares of Airfair for each share
held in BEI, resulting in 8,500,000 shares issued. An additional 600,000 shares
were authorized by the Board of Directors and issued to two shareholders,
resulting in a total of 9,100,00 shares issued pursuant to the spin-off of the
Interline division in IMS to Airfair. Capital of $30,000 was contributed to
Airfair by BEI.
On January 13, 1996, (Closing Date) [effective December 31, 1995 (Effective
Date)] Airfair acquired certain assets and assumed certain liabilities of
Interline Representatives Ltd. and Airfair Publishing Corp. (IRL/APC) for
$593,791.
Assets acquired from IRL/APC consist of the following:
<TABLE>
<S> <C>
Furniture and equipment $ 35,000
Covenant-not-to compete 30,000
Excess of cost over net assets acquired 528,791
--------
Total assets acquired $593,791
========
Liabilities (unadjusted) assumed from IRL/APC consist of the following:
Subscription, prepaid advertising, and tour ledger $204,326
--------
Net assets acquired $389,465
========
Payment for the net assets acquired from IRL/APC is as follows:
Cash $ 30,000
Note payable #1 (see below) 201,879
Note payable #2 (see below) 157,586
--------
Total payments (unadjusted) $389,465
========
</TABLE>
A-22
<PAGE> 43
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
4. ACQUISITIONS (Continued)-
Both of the promissory notes described above, have identical terms (except as
specified) as follows: The annual interest rate on unpaid principal is 12% per
annum. Interest only will be due on the unpaid balance on January 31, 1996,
February 29, 1996, and March 31, 1996. Thereafter, principal and interest shall
be due and payable in monthly installments of $5,593 on Note #1 and $4,366 on
Note #2, each payable on the last day of each month, beginning April 30, 1996,
until December 31, 1999, when the entire principal and accrued interest
remaining unpaid, shall be due and payable in full.
The purchase method of accounting was used to account for the above
transactions.
The following unaudited pro forma information has been prepared assuming that
the above acquisitions had occurred at the beginning of 1995. Permitted pro
forma adjustments include only the effects of events directly attributable to a
transaction that are factually supportable and expected to have a continuing
impact. Pro forma adjustments reflecting anticipated "efficiencies" in
operation resulting from a transaction are, under most circumstances, not
permitted. As a result of the limitations imposed with regard to the types of
permitted pro forma adjustments, the Company believes that this unaudited pro
forma information is not indicative of future results of operations, nor the
results of historical operations had the above acquisitions been consummated as
of the assumed date.
<TABLE>
<CAPTION>
Unaudited
1995
-----------
<S> <C>
Revenues $ 9,077,000
Gross profit 1,825,000
Net (loss) (414,000)
Net (loss) per weighted average
common share (.04)
</TABLE>
Effective July 19, 1996, Riley Investments, Inc. (Riley) and Airfair executed
an Agreement that provided for the merger of MergerCo, a newly-created,
wholly-owned subsidiary of Riley, with and into Airfair, which became the
surviving corporation, and the conversion of the issued and outstanding Airfair
stock into shares of Riley stock on the basis of one share of Riley stock for
each share of Airfair stock outstanding on the Effective date. On October 7,
1996, articles of amendment were filed on behalf of Riley wherein the name was
changed to Grand Adventures Tour & Travel Publishing Corporation (the Company)
with authority to issue 10,000,000, no par, preferred shares and 30,000,000
common shares with a par value of $.0001. The transaction was accounted for as
a reverse acquisition.
A-23
<PAGE> 44
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
5. INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1995 are as follows:
As explained in Note 4 to the financial statements, on December 31, 1994, IMS
acquired the net assets of a business owned by Nackos (referred to herein as
Interline) and assumed certain liabilities. Of the $144,394 total purchase
price, $74,278 represented the excess of the cost over the fair value of net
assets acquired. The excess of cost over net assets acquired is amortized on a
straight-line basis over 40 years.
As explained in Note 4 to the financial statements, on January 13, 1996,
(Closing Date) [effective December 31, 1995 (Effective Date)] Airfair acquired
certain assets and assumed certain liabilities of Interline Representatives
Ltd. and Airfair Publishing Corp. (IRL/APC) . Of the $593,791 total purchase
price, $528,791 represented the excess of the cost over the fair value of net
assets acquired and $30,000 represented a covenant-not-to compete. Also
amortizable are $16,336 of additional legal and acquisition costs. The excess
of cost over net assets acquired is amortized on a straight-line basis over 40
years and the covenant is amortized over 3 years.
At December 31, 1996 and 1995, the unamortized cost consists of the following:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Cost $ 649,405 $ 74,278
Less accumulated amortization (27,396) (2,012)
--------- --------
Net $ 622,009 $ 72,266
========= ========
</TABLE>
Amortization expense for the years ended December 31, 1996 and 1995, was
$25,386 and $1,857, respectively.
6. DUE TO AFFILIATE
The Company entered into a Management Services Agreement with BEI and IMS
whereby BEI agreed to permit the Company to use office space and certain
computer and telephone equipment leased by the Company, BEI and IMS agreed to
provide to the Company certain services including accounting, payroll,
services, and the services of certain executive officers and personnel who
perform services for Airfair, BEI, and IMS. The Company agreed to pay to BEI
and IMS, collectively, a cash sum equal to 1/2% of the Company's gross cash
receipts during any month in which the Agreement remains in effect.
The Company and IMS have also entered into an Inventory Marketing Agreement
whereby the Company sells certain IMS inventories. The Company is required to
make monthly payments to IMS equaling (i) the cash value of the inventory sold
plus (ii) 25% of the collected revenue generated from such sales less such cash
value.
A-24
<PAGE> 45
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
6. DUE TO AFFILIATE (Continued)
In order to provide short-term financing for the Company's operations, BEI has
advanced certain amounts to the Company for the above services. At December 31,
1996 and 1995, the Company owed BEI $88,213 and $475,611, respectively.
7. LONG-TERM DEBT
At December 31, 1996 and 1995 long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes payable to shareholders, due September 30, 1997
including accrued interest at 14% per annum,
collateralized by marketable securities and other
property pursuant to a Security-Agreement Pledge
executed by BEI in favor of the lenders $ 400,000 $ --
Note payable at $1,163 per month, including
interest at 14% per annum, convertible into
common stock at the conversion price of $1.00
principal amount for each share of common
stock, subordinated to senior indebtedness 50,000 --
Note payable (acquisition of IRL/APC - see Note
4) at $5,593 per month, including interest at
12% per annum, collateralized by assets acquired 172,300 --
Note payable (acquisition of IRL/APC - see Note
4) at $4,366 per month, including interest at
12% per annum, collateralized by assets acquired 134,496 --
---------- ----------
756,796 --
Less current portion (502,573) --
---------- ----------
Total $ 254,223 $ --
========== ==========
</TABLE>
A-25
<PAGE> 46
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. LONG-TERM DEBT (Continued)-
The annual maturities of long-term debt for the next five years are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Amount
------------ ------
<S> <C> <C>
1997 $502,573
1998 108,048
1999 121,944
2000 11,274
2001 12,957
--------
Total $756,796
========
</TABLE>
8. DEFERRED SUBSCRIPTION REVENUE
Subscription sales are deferred as unearned income at the time of sale.
Magazine customers normally pay for a one-year or two-year subscription in
advance. As magazines are delivered to subscribers, the proportionate share of
the subscription price is taken into revenue. Magazine subscription selling
expenses are deferred and charged to operations over the same period as the
related subscription income is earned.
9. DEFERRED DISCOUNT
In April of 1996, the Company entered into an agreement with a telephone
long-distance service provider wherein the Company receives a discount (credit)
against its telephone charges provided that its annual volume of telephone
usage is equal to at least $240,000 for a period of three years. If the Company
fails to meet the minimum usage requirement, the discount will be forfeited.
The discount credit balance as of December 31, 1996 is $54,644.
10 . INCOME TAXES
The components of the provision for income taxes at December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current tax expense $ -- $ --
Deferred tax expense -- --
--------- ---------
Income tax expense $ -- $ --
========= =========
</TABLE>
A-26
<PAGE> 47
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
10. INCOME TAXES (Continued)-
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 2,995 $ --
Net operating loss carryforwards 299,517 --
----------- -----------
Gross deferred tax assets 302,512 --
Valuation allowance (290,770) --
----------- -----------
Total deferred tax assets 11,742 --
----------- -----------
Deferred tax liabilities:
Fixed assets 4,513 --
Intangible assets 7,229 --
----------- -----------
Total deferred tax liabilities 11,742 --
----------- -----------
Net deferred tax asset (liability) $ -- $ --
=========== ===========
</TABLE>
There are no reconciling items between the statutory U.S. federal rate and
effective rates for the years ended December 31, 1996 and 1995.
At December 31, 1996, Interline has a net operating loss carryforward totaling
approximately $880,000 that may be offset against future taxable income. If not
used, the carryforward will expire in 2011.
11. COMMON STOCK
Riley Investments, Inc. was incorporated as Pace Group International, Inc.,
("Pace") in October, 1987 under the laws of the State of Oregon. On September
20, 1995, the stockholders approved a name change of the Company to Riley
Investments, Inc. As of November 1, 1995, after the effects of the transaction
described below, the Company had no operating assets and was dormant.
On May 23, 1995, the Chairman of the Board, Edwin T. Cornelius, Jr.
("Cornelius"), the Secretary/Treasurer, Joanne Cornelius, and two sons of Mr.
and Mrs. Cornelius entered into an option agreement to sell 2,905,486 common
shares of Pace they owned to Bridgeworks Capital. The above shareholders,
together with another shareholder who was also the son of Mr. and Mrs.
Cornelius, owned an aggregate of 3,984,000 common shares of Pace. The option
agreement, among other provisions, was subject to shareholder approval of a
1-for-15 reverse stock split of the outstanding shares of Pace common stock and
an exchange of substantially all net assets of Pace, including its ownership of
100% of the outstanding common stock of Pace International
A-27
<PAGE> 48
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
11. COMMON STOCK (Continued)-
Research, Inc., for notes payable and unpaid accrued interest thereon owed to
Cornelius which approximated $422,000 as of October 31, 1995. The above
transaction was approved by the shareholders on September 20, 1995 and became
effective November 1, 1995.
Prior to the consummation of the option agreement, Cornelius also transferred
450,000 shares of Pace common stock to two investors who had previously
advanced the Company $525,000 in 1987 pursuant to profit-sharing agreements.
Under the term of those profit-sharing agreements, the investors were to be
paid in full from certain Pace profits. As of October 31, 1995, those investors
had not been repaid for their advances.
The remaining Pace common stock owned by the Cornelius family, which aggregated
628,514 shares, were returned to the Company and 588,674 shares were canceled
as of December 31, 1996.
Airfair Publishing, Inc. (Airfair) is a Delaware corporation formed on January
6, 1996. Immediately Subsequent to incorporation of Airfair on January 6, 1996,
the existing shareholders of BEI received four shares of Airfair for each share
held in BEI, resulting in 8,500,000 shares issued. An additional 600,000 shares
were authorized by the Board of Directors and issued to two shareholders,
resulting in a total of 9,100,000 shares issued pursuant to the spin-off of the
Interline division in IMS to Airfair. (See Note 4.) Capital of $30,000 was
contributed to Airfair by BEI.
In September of 1996, 25,000 shares of common stock were issued for $25,000.
Effective July 19, 1996, Riley and Airfair executed an Agreement that provided
for the merger of MergerCo, a newly-created, wholly-owned subsidiary of Riley,
with and into Airfair, which became the surviving corporation, and the
conversion of the issued and outstanding Airfair stock into shares of Riley
stock on the basis of one share of Riley stock for each share of Airfair stock
outstanding on the Effective date. Airfair shares outstanding on the Effective
date totaled 9,125,000. On October 7, 1996, articles of amendment were filed on
behalf of Riley wherein the name was changed to Grand Adventures Tour & Travel
Publishing Corporation with authority to issue 10,000,000, no par, preferred
shares and 30,000,000 common shares with a par value of $.0001.
Existing shareholders in Riley at the date of conversion held 384,024 shares.
12. LEASING ARRANGEMENTS
As part of the Management Services Agreement with BEI (see Note 6), the Company
is allowed access and use of (i) approximately 8,000 square feet of space
leased by BEI and (ii) all common areas within the building to which BEI is
permitted access. The fees for usage are included in the management services
fee calculation under the Management Services Agreement.
A-28
<PAGE> 49
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
13. SUBSEQUENT EVENTS
On February 13, 1997, the Company borrowed $40,000, payable to a trust
established by a stockholder of the company. Interest accrues at the rate of
12% per annum. Payments shall be due from time to time as follows: (i)
immediately after ascertaining that any check received in payment of any
Pledged Account, as designated in the Pledge Agreement, the Company shall make
a payment in the amount of such check; (ii) immediately after the Company
utilizes any credit issued by any advertiser in payment of any Pledged Account,
the Company shall make a payment in the amount of such utilization; and (iii)
on May 15, 1997 (the maturity date), the Company shall pay the entire unpaid
principal and interest. The promissory note is secured by (i) the secured
interest granted in the Pledged Accounts and intangible assets, and (ii) the
security interests granted in certain marketable securities and warrants
pursuant to the provisions of the Security Agreement-Pledge executed by the
Company and BEI Holdings, Inc. in favor of the lender.
On January 31, 1997, an account payable in the amount of $36,906 was converted
into a note payable with the following terms: Nine Monthly payments of $4,246,
including interest at 6% per annum. (Also, see Note 15.)
14. STOCK OPTION PLAN
The Company has a long-term stock incentive plan (LTSIP) that authorizes an
aggregate of 1,000,000 shares of common stock for future grants. Options to
purchase shares of Airfair common stock granted under the previous Airfair
stock option plan were exchanged for comparable options granted under the LTSIP
for an equivalent number of shares pursuant to the terms of the Merger as
explained in Note 4 to the financial statements. Under the plan, the exercise
price of each employee option is $1.00 and the exercise price of options
granted to shareholders range from $.50 to $1.00. An option's maximum term is
five years. Employee options were granted on August 1, 1996 and vest in three
years. Other options are fully vested. The fair value of each option grant is
estimated on the grant date using an option-pricing model with the following
weighted-average assumptions used for grants in 1996: risk-free interest rate
of 6%, and expected lives of 5 years for the options.
A summary of the status of the Company's stock option plan as of December 31,
1996, and the changes during the year ending December 31, 1996 is presented
below:
A-29
<PAGE> 50
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
14. STOCK OPTION PLAN (Continued)-
<TABLE>
<CAPTION>
Weighted Average
Fixed Options Shares Exercise Price
- ----------------------------------------------------------- ----------------
<S> <C> <C>
Balance - January 1, 1996 -- $ --
Granted - Stockholders 1,014,466 0.94
Granted - Employees 305,000 1.00
Exercised -- --
Forfeited -- --
----------
Balance, - December 31, 1996 1,319,466
==========
Exercisable at December 31, 1996 1,116,133
Weighted-average fair value of options
granted during the year $ .38
==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
- --------------------------------------- -----------------------------------------
Weighted-
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices 12/31/96 Life Exercise Price at 12/31/96 Exercise Price
- --------------- -------- ----------- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C>
$1.00 1,014,466 4 years $ .94 1,014,466 $ .94
1.00 305,000 4 years 1.00 101,667 1.00
--------- ---------
1,319,466 1,116,133
========= =========
</TABLE>
If the Company had used the fair value based method of accounting for its
employee stock option plan, as prescribed by Statement of Financial Accounting
Standard No. 123, compensation cost in net loss for the year ended December 31,
1996 would have increased by $38,400, resulting in a net loss of $911,055, net
of tax, and a loss per common share of $.10.
15. GOING-CONCERN
As shown is the accompanying financial statements, the Company incurred net
losses during the years ended December 31, 1996 and 1995 of $872,655 and
$364,744, respectfully, and as of December 31, 1996 and 1995, current
liabilities exceeded its current assets by $1,569,859 and $496,437,
respectively. Those factors could create an uncertainty about the Company's
ability to continue as a going concern. Since January 1, 1997, management has
reduced expenses by approximately $40,000 per month through a reduction in
nonessential personnel, changing to a lower priced package delivery service,
obtaining more services such as small printing jobs on a trade basis and
reducing any other expenses that are not considered absolutely necessary to the
A-30
<PAGE> 51
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
15. GOING CONCERN (Continued)-
ongoing needs of the operation. Subsequent to the date of the audit report, the
Company raised funds through additional long-term borrowings. Loans to
shareholders in the amount of $400,000 (see Note 7) were restructured whereby,
the loan holders agreed to release the equity securities held as collateral
pursuant to a Security-Agreement Pledge executed by BEI in favor of the
loanholders in exchange for the following conditions: (1) payment of all
accrued interest as of April 10, 1997 (which amounted to approximately
$29,000), (2) the loan broker (Avonwood Capital) is to receive a fee of
$20,000, (3) 40,000 Company common stock warrants to be issued to Avonwood
Capital and 20,000 stock warrants to Stan Moyer (a principal of Avonwood), all
exercisable at $1.00 per share, (4) conversion of the existing $400,000 notes
to new 3 year notes at a 12% annual interest rate, with principal and interest
payable monthly, beginning in May, 1997, (5) the outstanding principal balance
is convertible (at the note holders' option) to Company common stock at $.50
per share, and (6) no prepayment penalties.
With the release of the equity securities, the Company obtained a margin loan
of $185,000 with the equity securities as collateral with the Principal
Financial Group in April, 1997. Also in April, 1997, the Company raised an
additional $500,000 from ten investors through the issuance of three-year
convertible debentures. The debentures carry an annual interest rate of 7%.
Interest and principal are due and payable in annual installments on each
anniversary. At the option of the Company, interest payments due prior to the
maturity date may be made in shares of common stock of the Company at the rate
one share for each $.50 of interest accrued and payable. The debenture holder
has the right at any time prior to maturity, to convert all or any portion of
the then outstanding principal balance into fully paid and non-assessable
shares of common stock of the Company at a conversion price of $.25 per share
of such outstanding principal amount, subject to adjustment from time to time
as provided for in the debenture. The Company also extinguished in April, 1997,
the $306,796 of notes payable that were incurred in connection with the
acquisition of the cruise and magazine division for a cash settlement of
$75,000. With these cash resources, the Company has been able to expand the
distribution and number of publications advertising the Company's hotel and
cruise and tour packages which management believes should substantially
increase sales in both areas. Management has, and is continuing to negotiate
with its accounts payable vendors in order to work out acceptable payment
schedules for all parties.
Management believes that its working capital after accomplishing the above
financing arrangement, together with cash generated from existing operations
will be sufficient to satisfy anticipated sales growth. There can be no
assurance that even with the provided financing that the Company will not
encounter adverse effects on its business, financial conditions or results of
operations in the future. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
A-31
<PAGE> 52
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
GRAND ADVENTURES TOUR & TRAVEL
PUBLISHING CORPORATION
Pursuant to ORS 60.444, the undersigned corporation hereby submits for
filing the following Articles of Amendment to its Articles of Incorporation:
1. Name of Corporation. The name of the corporation is Grand
Adventures Tour & Travel Publishing Corporation.
2. Amendment. Section VII of the Articles of Incorporation was
amended and restated to appear in its entirety as set forth below:
SECTION VII. REVERSE STOCK SPLIT. The number of the
corporation's issued and outstanding shares of common stock
shall be reduced from 9,522,024 to 1,360,289, more or less, by
exchanging one share of common stock outstanding immediately
prior to the reverse split for seven shares of Common Stock
after the reverse split. Each certificate representing shares
of Common Stock outstanding immediately prior to the reverse
split (the "Old Shares") will be deemed automatically, without
any action on the part of the Shareholders, to represent
one-seventh the number of shares of Common Stock after the
reverse split (the "New Shares"). No fractional New Shares
will be issued as a result of the reverse split. In lieu
thereof, each Stockholder whose Old Shares are not evenly
divisible by seven will receive one additional New Share for
the fractional New Share that such Stockholder would otherwise
be entitled to receive as a result of the reverse split.
3. Approval. The foregoing amendment and the reverse split
effected thereby was approved by a vote of the corporation's shareholders on
December 15, 1997. On the record date of November 15, 1997, there were a total
of 9,522,024 shares of common stock outstanding and entitled to vote. _____
shares of common stock were voted in favor of the amendment and ____ shares
were voted against the amendment.
4. Procedure for Effecting the Reverse Split. Upon the effective
date of this Amendment, each certificate representing shares of Common Stock
outstanding immediately prior to the reverse split (the "Old Shares") will be
deemed automatically, without any action on the part of the Shareholders, to
represent one-seventh the number of shares of Common Stock after the reverse
split (the "New Shares"). No fractional New Shares will be issued as a result
of the reverse split. In lieu thereof, each Stockholder
<PAGE> 53
whose Old Shares are not evenly divisible by seven will receive one additional
New Share for the fractional New Share that such Stockholder would otherwise be
entitled to receive as a result of the reverse split. When these Articles of
Amendment are filed, Shareholders will be asked to surrender certificates
representing Old Shares and upon such surrender, a certificate representing the
New Shares will be issued and forwarded to the Shareholders; however, each
certificate representing Old Shares will continue to be valid and represent New
Shares equal to one-seventh of the number of Old Shares. Persons who hold their
shares in brokerage accounts or "street name" will not be required to take any
further actions to effect the exchange of their certificates.
GRAND ADVENTURES TOUR &
TRAVEL PUBLISHING CORPORATION
---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Title
Person to contact about this filing:
Vince Mouer
Kuperman, Orr, Mouer & Albers
A Professional Corporation
100 Congress Avenue
Suite 1400
Austin, Texas 78701
(512) 322-8038
B-2
